'Indian economy has fared decently'

'Indian economy has fared decently'

Ramesh Vaidyanathan is Managing Partner, Advaya Legal,  a full-service commercial law firm. Previously as a part of the infrastructure major GVK Group, he was the General Counsel for Mumbai Airport. In an interview with Furquan Moharkan of Deccan Herald, Vaidyanathan says that funding contraints, revenue uncertainity, delays in clearances, lengthy dispute resolution processes, land acquisition and environmental clearance are the probable reasons because of which the infrastructure sector has attracted very few bids.

 
Can you provide us with a brief insight into the entire problem?
Infrastructure projects in India have been facing challenges on multiple fronts. The fundamental problem has been with the misplaced allocation of risk under the concession documents. Private parties have been saddled with legal, regulatory, tax and land availability risks, which are beyond their control. These risks should ideally be in the hands of government agencies that have control over it. The approach of the concessioning authorities at the central and state levels in this regard has been short-sighted and unimaginative.      

Why is it that projects are failing to attract bids?
Prominent reasons for the failure to attract bids could be:
Funding Constraints: In the BOT model, developers fund the project and warn returns from toll collection for the duration of the project. The capital is locked in for a long period of time with the risk of revenue not adequately spread out. Typically, most investment models have placed the financial burden on developers, which has been a major discouraging factor for them.

Revenue Uncertainty: Since these projects are long-drawn, it becomes increasingly difficult for investors to assess their revenues out of such projects. Also, as their capital remains locked in, they have no option to exit and invest in other projects.

Delay in clearances: Obtaining government approvals are not only time-consuming, but also expensive.

Lengthy dispute resolution process: There are more than 100 pending arbitration disputes between NHAI and developers involving Rs. 25,000 crore. Keeping aside litigation, even arbitrations take years to conclude. Poorly defined arbitration clauses and inability to identify the defaulting party in terms of the contractual obligations lead to a costly and delayed dispute resolution process. Proactive and business-oriented mediation of disputes is critical where the government approaches the dispute with a ‘win-win’ mindset.

Land Acquisition and Environmental Clearance: The cumbersome process of land acquisition and obtaining environmental clearance, are major obstacles. The fact that land is a state issue adds further complexity to the logjam.

What can the government do to attract more bids?
The recently introduced hybrid annuity model is a welcome move by the government to reinstate the investors’ interest in road development projects across India.
De-risking the investors through this model is expected to be a game changer. Further, the right of disinvestment given to them after two years of completion of construction will certainly be an added incentive for the investors.

The government should provide for a proactive and transparent mechanism that would encourage the developers to invest in infrastructure projects. The government must ensure that the approval process is efficient and time-bound. A balanced concession document will also go a long way in attracting high quality investors to infra projects.
 
On the road sector, the government has introduced several investment models such as the Engineering Procurement Constructing (EPC) model, Build-Operate-Transfer (BOT) model, and the recently introduced hybrid annuity model to woo private players. The hybrid annuity model is designed to de-risk investments and revive interest in these road-building projects.

What are the basic reasons behind so many disputes arising in infra-related projects?
As already mentioned, lopsided risk allocation in the bid documents and the project agreements is the major culprit. The seeds for the dispute are sown at the project definition stage itself. The scope of work is sometimes vague and open to interpretation.

The request for proposal and the response to the bidders’ queries are sometimes contradictory and they are all eventually bunched together to form the concession agreement that speaks in different voices. Milestones are set for project condition and penalties/termination threatened when the site access is still not provided to the developer. Some of these factors have contributed to the deadlock in project execution and resultant disputes.        

By when is the situation expected to improve?
The need of the hour is a business-oriented and consistent approach. In the road sector, the hybrid annuity model has been widely applauded by private players and the sharing of project risk between the government and the developer will certainly revive investor interest. Infrastructure-building is expected to gather momentum in the next 12-18 months, but high profile international players will only come with institutional reforms.  

Given the fact that the world economy is already in doldrums, how do you think this is going to impact the Indian economy?
Despite a decrease in the infrastructure output, the Indian economy has fared decently in comparison with some other countries. The economic situation is ideally suited to build critical infrastructure through a combination of public and private sector funding.

Are there any rescue measures that you suggest the industry to come up with?
It is not the job of the industry to undertake any rescue operation. The industry will welcome any initiative on the part of the government to facilitate infrastructure investment.

Are there any rescue measures that you suggest the government to come out with?
The government can provide supplementary grants to cash starved infrastructure projects to reduce capital costs.

Infrastructure projects typically involve long gestation periods, hence financial institutions such as the India Infrastructure Finance Corporation (IIFCL) should disburse longer-term loans for financing these projects. They should put in place investor-friendly processes to avail such loans.

NHAI should actively determine the eligibility of projects to receive funding support and allocate funds to complete such projects in a transparent manner.
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