Rectifying the Parallel Regime of RERA & WB-HIRA

The Supreme Court issued an important verdict on May 4, 2021, when it declared that the West Bengal Housing Industry Regulatory Act, 2017 (WB-HIRA) is “repugnant” to the Parliamentary law of Real Estate (Regulation and Development) Act, 2016 (RERA). The state law created a “parallel regime” and encroached upon the identical Central law RERA, 2016, enacted the year before, and was in direct conflict with the central legislation by lacking necessary safeguards to protect consumers.

Background

The Bench of Justices D. Y. Chandrachud and M. R. Shah in Writ Petition (C) No. 116 of 2019 [Forum for People’s Collective Efforts (FPCE) & Anr. vs. State of West Bengal & Anr.], in its 190-page judgment, struck down as unconstitutional West Bengal State law WB-HIRA meant to protect home buyers, enacted in 2017, a year after the Centre passed the RERA, stating that if Parliament had passed legislation, it was not open for states to enact similar statute.

Before Parliament enacted the RERA in 2016, state legislatures had enacted several laws to regulate the relationship between promoters and purchasers of real estate. Before the WB-HIRA, one of the laws the state legislature had enacted was the West Bengal (Regulation of Promotion of Construction and Transfer by Promoters) Act, 1993 (the “WB 1993 Act”). Upon receiving the assent of the President, the Act was published in the Calcutta Gazette, Extraordinary on March 9, 1994.

In the State of West Bengal, the Real Estate (Regulation and Development) Bill, 2016 (the “RERA Bill 2016”) was introduced and draft rules under the RERA were framed on August 18, 2016, but no further progress was made in that regard. On August 16, 2017, the motion to pass the WB-HIRA Bill was adopted in the State Legislative Assembly. The Housing Industry Regulatory Authority was established under Section 20 of the West Bengal Housing Industry Regulatory Act, 2017 to regulate and promote the housing sector, to ensure the sale of plots, apartments or buildings, as the case may be, or sale of real estate projects in an efficient and transparent manner, to protect the interests of consumers in the real estate sector and to establish a mechanism for speedy dispute redressal and for matters connected therewith or incidental thereto. The State enactment received the assent of the Governor of West Bengal and was published in the Official Gazette on October 17, 2017, and came into effect from June 1, 2018.

The WB-HIRA repealed the WB 1993 Act. The remaining provisions of WB-HIRA were enforced by a notification dated March 29, 2018, issued by the Governor of the State of West Bengal in exercise of the power conferred by sub-section (3) of section 1 of WB-HIRA. Thereafter, on June 8, 2018, the State of West Bengal framed rules under WB-HIRA.

Because the Supreme Court declared the provisions of WB-HIRA to be invalid and struck them down in the current judgment, there will be no revival of the provisions of the WB 1993 Act, which were repealed upon the enactment of WB-HIRA, because the provisions of the WB 1993 Act are repugnant to the corresponding provisions of the RERA, which were impliedly repealed upon the enactment of the RERA in 2016.

The State Legislature has encroached upon the legislative authority of Parliament and this exercise conducted by the State Legislature is unconstitutional. The valuable safeguards introduced by Parliament in the public interest and certain remedies created by Parliament were absent in WB-HIRA.

Inconsistencies with RERA

RERA is a complete and exhaustive code which regulates the contractual relationship between a builder/promoter and a buyer/consumer in the real estate sector and provides remedial measures. RERA regulates the rights and obligations between promoters and buyers of real estate, in addition to the provisions of the Indian Contract Act, 1872. The enactment, in ensuring the actual transfer of property to the buyer, furthers the objects of the Transfer of Property Act, 1882. It provides for the enforcement of contracts through remedial measures that are in addition to the remedies provided in the Consumer Protection Act, 1986 and its successor legislation of 2019. RERA, in other words, is a special statute governing the real estate sector, encompassing rights and obligations found in different central enactments.

WB-HIRA covers the identical field of regulating the contractual behaviour of promoters and buyers in real estate projects. The State law is a ‘copy and paste’ replica of the central legislation (except for certain provisions which are inconsistent with RERA) and covers the field which is occupied by the central enactment. WB-HIRA is a “virtual replica” of the Central Law. A significant and even overwhelmingly large part of WB-HIRA overlaps with the provisions of RERA, but it does not complement the central law by fortifying the rights, obligations, and remedies.

The important provisions of WB-HIRA which are inconsistent with RERA are mentioned herein below:

  1. Force majeure events – The RERA restricts force majeure events to fire, cyclone, drought, flood, war, earthquake, or any other natural calamity that hinders the development of the projects, while WB-HIRA includes “any other circumstances as may be prescribed” as an added eventuality.
  2. Planning Area – The RERA specifies that only the projects that fall within the planning areas are subject to the RERA. According to Section 2 (zh) of the RERA, a “planning area” is a planning area or a development area, a local planning area, a regional development plan area, any other area specified as such by the appropriate government or any competent authority, while the WB-HIRA does not define the term “planning area”.
  3. Garage Area – RERA defines a garage as being ‘a place within a project having a roof and walls on three sides for parking any vehicle. It does not include uncovered parking spaces such as open parking areas. On the other hand, WB-HIRA has no such restrictions in defining garage or parking spaces and only mentions spaces as sanctioned by the competent authority.
  4. Compounding of Offences – If any person is found to have violated the RERA, they can be punished under the provision in the Code of Criminal Procedure, 1973 while WB-HIRA does not have provision for the compounding of offences.

Apart from the above, the subject of the provisions of the state enactment is identical, the content is identical. In essence and substance, WB-HIRA has enacted a parallel mechanism and parallel regime which the RERA already entails. In other words, the State legislature has enacted legislation on the same subject matter as the central enactment. Not only is the subject matter identical, but the statutory provisions of WB-HIRA are nearly identical to those of RERA.

WB-HIRA, since its enforcement in the State of West Bengal, would have been applied to building projects and implemented by the authorities constituted under the law in the state. In order to avoid uncertainty and disruption in respect of actions taken in the past, recourse to the jurisdiction of this Court under Article 142 was necessary. The Court, as such, exercised its extraordinary powers under Article 142 and gave effect to its judgment striking down the provisions of WB-HIRA prospective. The Court directed that the striking down of WB-HIRA will not affect the registrations, sanctions, and permissions previously granted under the legislation prior to the date of this judgment.

Down the Road

After the repeal of the WB-HIRA, the Government of West Bengal, Housing Department, by its Notification dated July 27, 2021, framed the West Bengal Real Estate (Regulation and Development) Rules, 2021, and the rules will come into force from the date of their publication in the Official Gazette. Thereafter, by another Notification dated July 29, 2021, the Government of West Bengal, Housing Department established an Authority known as the West Bengal Real Estate Regulatory Authority with immediate effect to exercise the powers conferred on it and to perform the functions assigned to it under the RERA throughout the State of West Bengal. With a further notification dated July 30, 2021, the Government of West Bengal, Housing Department, established an Appellate Tribunal known as the West Bengal Real Estate Appellate Tribunal with immediate effect. It is a sad plight that though the authorities have been established by several notifications dated July 29, 2021 and July 30, 2021, respectively, the positions of Chairperson, Members of the Regulatory Authority, Judicial Member, and Administrative Member of the Appellate Authority are still vacant. By a notice dated July 7, 2022, the Search Committee constituted under the West Bengal Real Estate (Regulation and Development) Rules, 2021, invited eligible and willing persons for the above-mentioned position.

A time-bound and proper implementation of the real estate regulatory law RERA in the state is required. Lack of implementation of RERA has left home buyers in the lurch as neither new complaints can be filed against builders nor existing complaints already filed before the erstwhile WB-HIRA can be continued and home buyers are being subjected to even more ruthless exploitation by builders since there is no mechanism in the state at present for redressal of home buyers’ grievances.

WB-HIRA is a “virtual replica” of the Central Law. A significant and even overwhelmingly large part of WB-HIRA overlaps with the provisions of RERA, but it does not complement the central law by fortifying the rights, obligations, and remedies.

Related Posts

POST A COMMENT

Organizing the Unorganised: The Indian Construction Industry

The Indian construction industry has been a propellor of economic growth and foreign direct investment in India. It is expected to register a CAGR greater than 10% during 2022 – 2027, while also contributing approximately 13% to our country’s GDP by 2025. In acknowledgement of the sector’s significant contribution to the country’s development, the Indian government has also stepped up its support in form of policies such as establishing the National Bank for Financing Infrastructure and Development (NaBFID) which works towards funding construction and infrastructure projects in India. 

Unregulated Indian Construction Industry: Cause for Concerns

Following are some of the key factors that contribute to a general lack of optimization and chaos in the sector: 

 

One-Sided Construction Contract

 

Construction contracts have been defined by Indian Accounting Standard[1] as “a contract specifically negotiated for the construction of an asset or a combination of assets that are closely interrelated or interdependent in terms of their design, technology and function or their ultimate purpose or use. It also includes agreements for real estate development to provide services together with construction materials in order to perform the contractual obligation to deliver the real estate to the buyer.” 

There are multiple parties involved in a construction contract, such as an employer, contractor, sub-contractor , vendor, project manager, independent engineer/s , Project Management Consultant (PMC) and others. Among these parties, employer, contractor, independent engineer/s and the PMC play a crucial role.

Numerous institutions, such as the International Federation of Consulting Engineers (“FIDIC”), the Institute of Civil Engineers (ICE), and the Association of Consultant Engineers (ACE) have drafted standard forms of construction contracts. However, common parlance witnessed across the industry is that they do not adhere to/do not want to adhere to such set standards. The employers and contractors draft the construction contracts which cater to their specific requirements. Further, numerous government organisations involved in the construction industry draft contracts that suit their specific needs, exposing a glaring lack of uniformity and fairness with respect to the terms and conditions of the contract.

Under the construction contracts, numerous unfair terms can be seen –

 
No-claim provision:

The provision stipulates that in circumstances of extension of time clauses under the contract, any claims of compensation made by the contractor towards the employer for causing disruption and delay leading to such extension are prohibited.

In the case of R.L Kalathia vs. The State of Gujrat (2011) 2 SCC 400 the Supreme Court observed that,

“(i) Merely because the contractor has issued “No Due Certificate“, if there is an acceptable claim, the court cannot reject the same on the ground of issuance of “No Due Certificate“.

(ii) In as much as it is common that unless a discharge certificate is given in advance by the contractor, payment of bills is generally delayed, hence such a clause in the contract would not be an absolute bar to a contractor raising claims which are genuine at a later date even after submission of such a “No-claim Certificate“.

A similar observation was afforded by the Supreme Court in Union of India vs Master Construction Company (2011) SCC 12 349, wherein it was held that if the claimant successfully establishes that the “no claim certificate” had been obtained by fraud/ coercion, then the Court shall have to determine whether the contention is prima facie credible. If not, then it shall be not necessary to send it for arbitration.

The issue has been further clarified in the case of Payan Reena Saminathan vs Pana Lana Palanippa Civil Appeal No. 7970 of 2010, “the receipt given by the appellants and accepted by the respondent, and acted upon by both parties, proves conclusively that all the parties agreed to a settlement of all their existing disputes by the agreement formulated in the receipt. It is a clear example of what used to be well known as common law pleading as ” Accord and Satisfaction ” by substituted agreement. No matter what the respective rights of the parties were, they were abandoned in consideration of the acceptance of all of the new agreement. The consequence is that when such an accord and satisfaction takes place the prior rights of the parties are extinguished. They have in fact been exchanged for the new rights, and the new agreement becomes a new departure , and the rights of all the parties are fully represented by it.”

 
Time bar clauses:

The provisions stipulate difficult time periods under which damages and relief enshrined under the contract can be claimed by the contractor towards the employer.

In the case of Muni Lal vs The Oriental Fire and General Insurance Company Limited (1996) 1 SCC 90, the Apex Court clearly held that, “ ….. It is true, as rightly pointed out by Shri Rakesh Khanna, that Section 28 of the Contract Act prohibits the prescription of a shorter limitation than the one prescribed in the Limitation Act. An agreement which provides that a suit should be brought for the breach of any of the terms of the agreement within a time period shorter than the period of limitation prescribed by law is void to that extent.

The Courts have, from time to time, reached to the conclusion that any agreement which seeks to curtail the period of limitation of a party to enforce their right, if shorter than as prescribed by law, then such an agreement shall stand void on account of Section 28 of the Indian Contracts Act.

 
One-sided arbitration clause:

The arbitration clause under these contracts is one-sided since it enables the employer to appoint the sole arbitrator and the panel of arbitrators without a say from the contractor. There is also no uniformity in deciding which arbitration forum/institution one should choose (like SIAC of Singapore ).

In the case of Emmsons International Ltd. Metal Distributors, the Delhi High Court held that when an arbitration clause is conceptualised to deprive the other party of local courts/tribunals or initiate arbitration, then it shall run in violation of section 28 of the Indian Contract Act, which establishes that agreements that restrain legal proceedings are illegal and cannot be enforceable.

However, in the case of Fuerst Day Lawson Ltd. v. Jindal Exports Ltd., (2001) 6 SCC 356, the Supreme Court upheld the validity of a one-sided arbitration clause that allowed only one party to initiate arbitration in the UK. The judgement has been interpreted as per the English laws, hence the validity of such agreements still lies in the grey area at present in India.

At present, it can only be concluded that one-sided arbitration agreements are not completely invalid in India unless and until their terms and conditions are prima facie against public policy. One such example is the appointment of a sole arbitrator by the employer which has been invalidated by the Supreme Court.

 
Non-payment of Award:

In the majority of contracts in the industry, the authority fails to honour the award passed by the arbitration tribunal and it takes years for the contractor to realise the award. But the contractor has to spend a huge amount of money towards conducting arbitration proceedings and realising the award.

 
Exclusion clauses:

Under such clauses, the employers evade their liability for the delays caused on their part and further exclude them from the damages caused due to the delays on their part.

 
Variation/Additional Works:

In some of the construction contracts, the variation/additional works have not been properly addressed, which has lead not only to a delay in the completion of the project but also to payment for these additional/variation works. There is no lack of formula to decide whether the particular work falls under variation/additional work till it is decided how the other project will proceed.

 
Negative scope of work:

Some of the earlier concession agreements do not provide the formula for arriving at the value of negative scope. In one of the concession agreements, the concessionaire has been asked to pay 80 % of the sums saved in respect of the negative scope of work, but the term “sum saved“ had not been defined under the concession agreement, which led to the dispute. However, this has been addressed in the subsequent concession agreement. But the dispute continues irrespective of the earlier concession agreement.

In Executive Engineer vs Gangaram Chhapolia (1984)3 SCC 627, the Apex Court observed that “ The general rule that the grammatical and ordinary sense of the contract is to be adhered to unless such adherence would lead to such manifest absurdity or such repugnance or inconsistency, applies also to building and construction contracts. The meaning and intention of the parties have to be gathered from the language used. “

The Supreme Court’s decision in S. Harcharan Sinoh vs Union of India 1990 SCC (4) 647 observed that the validity of the additional work shall depend upon the reasonability and limits placed on the quantity of such work which the aggrieved party is required to execute. For this purpose, consideration can be placed on the prevalent industry practices, correspondence between the relevant stakeholders and authorities.

 

Delays in Payments

According to a report released by the Ministry of Statistics and Programme Implementation in March 2022, 425 projects out of 1579 projects have reported cost overruns of approximately 4.83 Lakh Crores and 664 projects have been delayed. According to the report, “The total original cost of implementation of the 1,579 projects was Rs 21,95,196.72 crore and their anticipated completion cost is likely to be Rs 26,78,365.62 crore, which reflects overall cost overruns of Rs 4,83,168.90 crore (22.01 per cent of the original cost).”

Delayed payments plague the construction industry worldwide. Such delays happen at every stage of the construction project, including progress payments, milestone payments, return of retention money, performance guarantee fees, etc, resulting in cost and time overruns of the project, increased disputes, cash flow issues and bankruptcy.

The cash flow in the construction project plays a pertinent role for the contractor[2] since it allows efficient and timely payment to all the labourers and other stakeholders in the project. Section 55 of the Indian Contract Act provides that when one party to the contract promises to fulfil the terms and conditions of the agreement on or before the specified time but fails to do so, the other party is entitled to claim damages for the loss suffered by them. Further, Section 73 of the Indian Contract Act envisages that the party who has suffered damages because of the inability of the other party to fulfil the necessary obligations is entitled to be duly compensated.

So, if there is a delay in payments by the employer, the employee or contractor can recover the money under these provisions. It is necessary that the contractor should record all the delays in the payment incurred by the employer during the course of the construction so that it would be easier to prove the actual loss when claiming the damages.

Section 73 and 74 provide for compensations relating to breach of contracts. Section 73 lays down the route to recover actual damages resulting from the loss or damage caused by the breach of the contract. Section 74 provides for the recovery of money stipulated as payments in the contract due to a breach. Delay in payments may be anticipated by the parties while drawing up the contract and relevant provisions for such delay may be included at the time of entering the contract. In such situations, delay in payments shall be considered a contractual breach and the same can be recovered by the parties under Section 74. In case of any uncertainty in calculating the amount of loss suffered, the aggrieved party shall prove the loss suffered and the Court shall decide the compensation.

 

Construction laws: An International Perspective

The rising pertinence of the construction industry has been noted by numerous countries and in response, they have established efficient legislations to govern the sector. Such legislations have efficiently addressed the issues of delays in payments and unfair terms in construction contracts.

 

United Kingdom

The United Kingdom, after Sir Michael Latham’s report titled “Constructing the Team.”, rolled out the UK’s construction laws by enacting “Housing Grant, Regeneration and Construction Law (HGCRA) 1996”. The Act drew commendations from the construction industry due to its efficient features-

  1. The Act classified construction contracts under a separate category of contracts.
  2. It mandates provisions for time-bound payment schedules under all construction contracts.
  3. Enlists contractors and sub-contractors with the ability to claim interest, suspended performance and even terminate contracts if the employer delays or fails to pay. 
  4. Conditional payment clauses have been prohibited under construction contracts.
  5. The act establishes “default periods of payment” which are to be followed in circumstances where it is not specified under the construction contract.

All construction in the United Kingdom is governed by the Building Act of 1984 and the Building Regulations of 2010, which provide for building regulations, situations which call for exemptions from such regulations, regulations relating to documentation, monitoring of construction work, and other provisions relating to drainage, yards, passages and others.

The Scheme for Construction Contracts (England and Wales) Regulations 1998, contain provisions relating to adjudication (notice of adjudication, appointment of adjudicator, powers of the adjudicator) and payments (dates of payment, notice of amount to be paid).

The Health and Safety at Work Act 1974 establishes the duties of employers towards their employees and the general public, the duties of employees at work and other such regulations.

The Construction (Design and Management) Regulations 2015 is a subset of the Health and Safety aspect which applies exclusively to the construction sector. It includes the duty of the client towards managing the project and the duties of the designers, contractors and other stakeholders with relation to health and safety. This legislation establishes the general requirements at the construction site including the fresh air, lighting, stability of structures, excavations, explosions etc.

The Control of Substances Hazardous to Health Regulations 2002 lays down the duties of employers to provide safety measures relating to hazardous substances at work.

 

Singapore

Singapore is another example of a country that has efficiently regulated its construction industry. [3]The Singapore Building and Construction Industry Security of Payment Act 2004 comprehensively addresses the issue of delayed payments under Section 8, wherein the payment is to be made to the contractor within 14 days. Further, the Act, under Section 9, bans conditional clauses of “pay when paid” under construction contracts. Singapore has also established a successful institution like SICA to address the disputes/difference in the contract within stipulated time. Most of the industries in Asia agree to redress their disputes through SICA, and it works well.

 

Other Countries

Further, countries such as New Zealand and Western Australia have drafted the Construction Contract Act 2002 and Construction Contract Act 2004 under which the payment to the contractor should be within the time period of 20 days and 10 days. Such legislation further bans conditional payment clauses under construction contracts.

 

Conclusion

A central construction legislation which addresses all the abovementioned issues is the key to unlocking the full potential of the sector in India. Further, the setting up of a regulatory authority, for instance like TRAI or IRDEA, to identify opportunities for growth, streamline dispute resolution, etc. is also the need of the hour. 

India’s lack of specific regulations for the construction industry brings forth numerous problems for the stakeholders. To start with, the average time period to resolve construction disputes is around 7-8 years. [4]The majority of such disputes revolve around delayed payment and unfair terms under construction contracts. Therefore, apart from implementing a central law, it is also prudent to acknowledge that documentation and other paper work should also be standardised across the sector as per industry best practices.

Countries such as the United Kingdom have witnessed an increased rate of productivity in the sector after implementing construction laws. The UK’s construction industry witnessed a 30% rise in production, and the rates for construction disputes also drastically dropped.[5]

Enough evidence is present before the Indian legislators to take cogent steps towards drafting a specific legislation for the Indian construction industry. It’s time to break ground!

References:

[1] https://www.mca.gov.in/Ministry/pdf/Ind_AS11.pdf

[2] https://ijpiel.com/index.php/2021/05/06/does-india-need-a-construction-law/

[3] https://sso.agc.gov.sg/Act/BCISPA2004?WholeDoc=1

[4] https://economictimes.indiatimes.com/small-biz/legal/rics-introduces-dispute-resolution-service-services-in-india/articleshow/78165537.cms

[5] https://ijpiel.com/index.php/2021/05/06/does-india-need-a-construction-law/

Photo by: Shivendu Shukla on Unsplash

India’s lack of specific regulations for construction industry brings forth numerous troubles for the stakeholders. To start with, the average time period to resolve construction disputes is around 7-8 years. The majority of such disputes revolve around delayed payment and unfair terms under construction contracts. Therefore, apart from implementing a central law, it is also prudent to acknowledge that documentation and other paperwork should also be standardized across the sector as per the industry best practices. 

Related Posts

POST A COMMENT

Anatomy of Risks in PPP Projects in India and How to Mitigate Them?

The infrastructure space has always been a capital-intensive sector. Particularly for a developing country such as India, the unique financing and project implementation models that Public-Private Partnerships (“PPP”) represent is considerable for enabling the construction of large-scale public infrastructure projects with significant long-term economic value and ensuring necessary infrastructure development is undertaken in the country.

However, considering the long timelines, involvement of multiple stakeholders, and significant capital expenditure in infrastructure projects, there are significant risks associated with them that are likely to emerge at any phase of the project. So far, in India, PPP seems to be the only viable model for the implementation of public infrastructure projects in an otherwise cash-strapped economy.

In this article, we will briefly discuss the broad phases of any PPP project, associated risks and the suggested risk mitigation measures.

Phases of a PPP Project

The broad phases of a PPP project are as below:

Phases of PPP ProjectEach of these phases is critical for ensuring the long-term success of viable PPP projects. In brief, the following activities are undertaken in each of these phases.

  1. Phase 1 (PPP Bidding Phase): Subsequent to the requisite feasibility studies by the government, the potential PPP project is given the go-ahead, commencing the bidding phase. As a first step to the bidding process, the authority issues an Expression of Interest (“EOI”) and/or a Request for Quote (“RFQ”) and/or a Request for Proposal (“RFP”), followed by the preparation of a Concession Agreement (“CA”). The highest bidder is chosen, the project is awarded to the successful bidder and the CA is executed thereafter. Post the issuance of the Letter of Award to the successful bidder, several procedures are to be followed, such as achieving financial closure, undertaking technical planning and design, obtaining necessary permits and approvals, and establishing a proper team for implementing the project.
  2. Phase 2 (PPP Development Phase): The next phase is the construction phase, where the project is implemented. After the construction of the facilities is completed, the authority inspects. If the inspection is satisfactory, it declares the project ready for operation and sets the commercial operation date (“COD”).
  3. Phase 3 (PPP Operation & Maintenance): Following the COD declaration, this phase designates a project in operation, which includes maintenance during the operation phase.

 

Risks and Their Mitigation Mechanisms

The most common and significant risks in PPP are:

  1. Delays in land acquisition or rights of way – This is one of the most critical risks in every PPP project. When the land acquisition processes fail, timely access to sites and other subsequent formalities stand compromised leading to unwarranted delays in the development project.
  2. Delays in obtaining relevant approvals/permits – Prior to large scale construction projects being commenced, there is a requirement to obtain different types of permits and approvals for commencing such activities, such as environmental clearance, permits for moving civic activities to other locations, etc.
  3. Design Risk – Usually means a faulty design that does not meet predetermined parameters of the facility, requiring changes, resulting in time and cost overruns.
  4. Inflation Risk – Inflation leads to an overall increase in the price of raw materials, transportation costs and general costs of services. This is aggravated by undue delays in projects translating to an increase in the overall project cost.
  5. Revenue/Demand Risk – This is where the forecasted revenue for the project and/or the potential that can be generated has been improperly projected or based on outdated data, thereby affecting the viability of the project.
  6. Construction/Completion Risk/Time and Cost Overruns Risk – One of the major risks in PPP project that causes delays in achieving COD is delays in construction and eventual completion.
  7. Financial Risk – Difficulty in raising project finances or raising very expensive financing that may not be feasible in the long run. Read a detailed analysis of the Project Cost in Infrastructure Projects. 
  8. Operational Risk – Inefficiencies in operating costs, lead to higher operating costs, arresting leakage of revenue.
  9. Political/Regulatory Risk – Changes in political and/or regulatory regimes that result in project devaluation, lower revenues or faulty project implementation.
  10. Performance/Default/Termination Risk – When the private contractor or consortium is responsible for investing funds in the project’s execution and becomes insolvent or undertakes faulty construction and erection of facilities due to lack of expertise on the part of the private contractor.
  11. Asset Value/Technology Obsolescence Risk – Occurs when the technology is not a proven one or when the asset value decreases significantly owing to policy or regulatory changes.
  12. Social and Environmental Risks – The project affects the local environment in the region of construction or has a significantly adverse collateral impact on the local population in the region, thereby creating obstacles in the implementation of the project or increasing time and cost overruns.
  13. Absence of renegotiation clause in CA – This is one of the oldest demands of many concessionaires in any PPP project in India, which is yet to be addressed by the authorities. As CA is valid for a longer duration, sometimes lasting 30 years, no concessionaire is in a position to perceive risk which may affect the project during the length of the entire concession period. The authorities should provide the necessary mechanisms for renegotiation of long-term PPP contracts.

Now we shall examine a few case studies that would demonstrate any combination of the above set of risk factors.

Case Study 1: Delhi – Gurgaon Expressway[1]

The National Highways Authority of India (“NHAI”) was entrusted with the task of executing the golden quadrilateral project wherein the four metro cities were sought to be connected. The Delhi-Gurgaon Expressway stretch of the golden quadrilateral project was to be executed via the Build, Operate and Transfer (“BOT”) method and was awarded to a consortium of Jaiprakash Industries Ltd. and DS Constructions Ltd. Right from the start, there were several issues with the execution of the project. They’re discussed as below.

  1. Land acquisition – NHAI was responsible for granting the right of way to the concessionaire, which was delayed significantly, leading to a delay in developing and a consequential delay in commissioning the project.

Mitigation mechanism: NHAI should not bid out any project until 90 % of the land is acquired and subsequent possession is taken over.

  1. Approvals – The obtaining of permits/approvals is another important risk to be addressed. NHAI shall assist the bidder in facilitating the said approval within the stipulated time as envisaged in the CA.

Mitigation mechanism: To speed-up the process, the government could have constituted a single authority that the concessionaire could approach to expeditiously obtain all the required permits/approvals.

  1. Design & Social Risk – Such large-scale projects possess the capability of displacing and affecting multiple lives and families.

Mitigation mechanism: Large-scale public consultations involving affected families and relevant government agencies should have been conducted prior to the commencement of the project, to mitigate their concerns and ascertain viable steps forward.

  1. Technology Risk – NHAI generally relied on older traffic studies to predict the volume of traffic to arrive at bid numbers. This was a gross underestimation of the eventual flow of traffic, leading to an improper estimation of traffic numbers.

Mitigation mechanism: NHAI should use the latest technology and traffic studies to finalise the bid numbers.

Case Study 2: Vadodara Halol Toll Road[2]

The Vadodara Halol Toll Road was one of the first projects involving the widening of state highways and commenced under the aegis of the Government of Gujarat. The Infrastructure Leasing and Financial Services (“IL&FS”) was roped in by the Government of Gujarat to develop the road project. A special purpose vehicle (“SPV”) was incorporated for this purpose and the project was developed using the Build, Own, Operate and Transfer (“BOOT”) model. Considering that the World Bank was one of the investors in this project, high standards of execution and implementation were followed, and this project turned out to be an example of best practises followed to mitigate various types of risks. The same is discussed below, along with a few mitigation strategies where appropriate.

  1. Environmental and Social Risk: One of the significant plus points of this project was the extensive environmental and social impact assessment that was undertaken during the project development phase itself. As per initial reports, around 300 families would have been affected by the initial plan of the project. However, intense public consultations were held at the development stage of the project and bypasses and various alternatives were introduced and the number of affected households was eventually reduced to 10. The project also complied with the environmental and social norms by creating wetlands, reducing emissions, constructing pedestrian subways, planting 550 trees across the sides of the roads, creating noise barriers at sensitive receptors and deepening the waterbodies in some villages along the project site.
  2. Policy Risk: The drop in revenues because of eventual changes in government policies certainly affected the concessionaire’s ability to recover their investment from the project.

Mitigation mechanism: Robust consultations and even ongoing consultations with several government departments and agencies to ensure government incentives to increase road traffic in this area might have been useful in mitigating this policy risk and enabling the project to recoup its initial investments.

  1. Financial Innovation / Risk: This is one of the first projects where innovative financing mechanisms were adopted such as the use of Deep Discount Bonds with the option of take-out financing, cumulative convertible preference shares and long-term loans from IL&FS. The project created several such examples of innovative financing, which were eventually replicated in other projects in the infrastructure industry.

Conclusion

In light of the discussed range of risks that one may encounter during the entire lifecycle of PPP projects and their potential impact; it is pertinent that the authorities approach every PPP project in every sector as a partnership and weighs the inputs of all the relevant stakeholders. If the government proactively strategizes to remove the unidirectional nature of PPP CAs in India, and both the private partner and the authorities work in resonance, the current risks plaguing the PPP project will be resolved, resulting in an active involvement and interest from the private sector in participating in PPP projects in India.

References:

[1] See “Case Study 8: Delhi Gurgaon Expressway” in Public Private Partnerships in India – A Compendium of Case Studies, available at https://www.pppinindia.gov.in/toolkit/pdf/case_studies.pdf. Last visited on November 1, 2021

[2] See “Case Study 6: Vadodara Halol Toll Road” in Public Private Partnerships in India – A Compendium of Case Studies, available at https://www.pppinindia.gov.in/toolkit/pdf/case_studies.pdf. Last visited on November 1, 2021

Image Credits:

Photo by Lance Anderson on Unsplash

Considering the long timelines, involvement of multiple stakeholders, and significant capital expenditure in infrastructure projects, there are significant risks associated with them that are likely to emerge at any phase of the project. So far, in India, PPP seems to be the only viable model for the implementation of public infrastructure projects in an otherwise cash-strapped economy.

Related Posts

POST A COMMENT