CIRC in MEDIA - June 2013

Going down the wrong road
The Hindu-Business Line, June 12, 2013

A roads regulator is not necessary to sort out PPP-related contractual issues.

According to some, the idea of a road regulator does not make sense. On the other hand, we do need an exclusive body to deal with problems in all types of Public Private Partnership (PPP) contracts, which include roads.

The Finance Minister in his Budget speech early this year, inter alia, proposed a regulator for the road sector, mainly for three reasons: financial stress faced by the developers; contract management and renegotiation to sort out the problems of existing contracts; and enhanced construction risk. Indeed, all three issues impact the growth of highways in the country and need to be tackled, and the Ministry of Road Transport and Highways is pushing the idea, with the support of the private sector. But they are unable to answer the fundamental question: Do we need an exclusive regulatory authority for dealing with them or find solutions through other means?

First, no country in the world has a road regulator, so why do we need one? An economic regulator is required where there are market failures. In the case of the highways, it is a government failure and not a market failure. There are many developers in this highly competitive field. Roads exist in a reasonably developed transport market, with competition from railways, coastal and inland shipping, and to some extent airlines.

The toll factor

The only issue of regulation in the highways sector is that of tolls, which does not call for independent regulation. At the moment toll rates are determined by the Government which implements it in an opaque manner, without public participation.

People are questioning the toll rates and want to know on what basis they are determined, and, in cases where the developer has recovered his investment, when it will end. Maintenance is another story, with many highways in bad condition.

However, we do not require a regulator for this; the National Highways Authority of India (NHAI) can do the job with supervision by the Competition Commission of India.

Second, economic regulation all over the world is done in two ways: one by law such as in the telecom and electricity sectors, and the other by contract. In the case of the highways, all projects are awarded as a bilateral contract with clearly defined rules on the basis of an excellent model concession agreement (MCA) drawn up by the Planning Commission.

So the Government has to address the problems with contracts -- a legal matter, which cannot be done by a regulator because the conditions are already cast in stone, unless renegotiated. Closely related to this is the third issue of contract execution difficulties, which include construction risks; that is also the main cause of financial stress.

As far as environmental, forest and land acquisition issues are concerned, the Road Transport Ministry can do little but persuade the relevant agencies to help.

Already, for linear projects such as roads, railways and so on, the green issues have been made flexible. An exclusive regulator can do nothing about it and cannot prevent the NHAI or the Ministry from discharging their sovereign roles. Many highway projects have been delayed due to externalities over which there is no control, and some developers have terminated their contracts due to inordinate delays.

Core issues

Disputes and delays, including abandonment, are the core issues affecting the highways development programme. It is estimated that Rs 10,000 crore is the disputed amount in all pending claims.

The MCA and the contracts provide for an easy dispute settlement process, with the help of Dispute Review Boards (DRB) and Arbitration Tribunals. However, because of unnecessary litigation the arrangement has not led to permanent solutions. The B.K. Chaturvedi Committee report of 2010 had suggested several cogent recommendations for an effective dispute resolution system and a one-time settlement for claims below Rs 10 crore. It had also suggested that the NHAI withdraw frivolous appeals in civil courts, where the DRB and the tribunal had given unanimous decisions.

On April 26, it was reported that the NHAI would settle many of the claims through a systematic process.

A committee headed by the Chief General Manager (Technical) of NHAI would do the legwork and refer its findings to a high-powered advisory committee comprising the former Roads Secretary A.K. Upadhyay, former Chief Justice of the Delhi High Court Rekha Sharma, and former Director General, Road Development, A.V. Sinha, whose decisions would be binding on the Government.

Fresh terms

One wonders whether this two-tier process will be able to suggest fresh terms, because several developers would like to renegotiate their contracts. Many feel this should not be allowed because the developers had bid for the contracts on certain conditions and had calculated their risks accordingly. But the downside needs to be taken care of prudently.

If there are systemic issues in all highways contracts, the Government can deal with them in a wholesale manner, and also amend the MCA.

But if there are varying issues in several contracts, then it is a difficult task but it will still need to be dealt with and issues settled rather than allowed to fester.

Omno Ruhl, director of the World Bank in New Delhi, says that for all long-term PPP contracts globally there have been renegotiations.

In the area of roads, nearly 55 per cent of the contracts have been renegotiated. This has emerged in a study of 1,000 PPP contracts across the world during 1985-2000, which showed that 30 per cent of the contracts, which included water and sanitation projects (75 per cent), were renegotiated.

On the other hand, India’s Economic Affairs Secretary Arvind Mayaram, who is au fait with the current muddy Indian scenario, says that private firms must not be bailed out, otherwise the Government will be accused of crony capitalism.

Indeed, there is a case for a regulatory and dispute settlement board for PPPs, which can work across all PPP contracts, including roads. The Planning Commission has suggested such a body.

But, it should be in the hands of young professionals or judges and civil servants with some understanding of law and economics, and not retired judges and babus.

(The author is Secretary-General, CUTS International)

This article can also be viewed at: