The Great Indian Asset Monetisation Dream: Infrastructure Investment Trusts

The Indian government in recent years has introduced a spate of initiatives with the sole objective of improving India’s infrastructure. Some of the initiatives introduced are the National Infrastructure Pipeline,[1] National Monetisation Pipeline,[2] PM Gati Shakti – National Master Plan for Multimodal Connectivity,[3] Bharatmala Pariyojana,[4] the increased impetus on the use of electric vehicles, and robust electric vehicle charging infrastructure,[5] just to name a few.

Although all of the above schemes are equally important, one key initiative that will unlock the potential of others is the National Monetisation Plan, which involves the monetisation of India’s public infrastructure assets, so as to fund various other infrastructure initiatives. As of April 2022, the government has generated INR 96,000 crores under the scheme, exceeding the target of INR 88,000 Crore set for FY22.[6]

India has over 58,97,671 kilometres of the road network,[7] with 12 major ports and 212 non-major ports,[8] total trackage of 1,26,366 kilometres of railways,[9] a total of 136 airports under the ownership of the Airports Authority of India,[10] and a total of 20,236 kilometres of navigable inland waterways.[11] This is besides the length of water and sewerage networks owned by several state governments, and other existing public utilities that constitute public infrastructure owned by the government or the Public Sector Undertakings (“PSUs”). Hence, it is pertinent that these public infrastructures at the disposal of the Indian government are optimally monetised. According to a recent announcement by the Government of India, a total of INR 6 trillion in public assets are sought to be monetised by leasing the assets to private operators for a fixed term, unlocking a value of INR 111 trillion.[12]

 

Asset Monetization: The Apprehensions and Options

Most countries are sceptical about fully privatising their public infrastructure assets, although this is not necessarily unheard of in the past.[13] Asset monetisation in the context of the infrastructure sector in India involves the limited offer of public infrastructure to institutional investors and other private sector investors, through certain structured mechanisms in order to generate more value from the same assets.[14] Some mechanisms include the Toll Operate Transfer (“TOT”) model, which awards concessions for completed road projects to entities that have experience running toll roads. Here the concessionaire (a private entity) shall win the right to operate and maintain the road and collect toll from the roads for a particular period in consideration of a lump sum amount paid to the government or the PSU. The government shall, in turn, use this money to fund other infrastructure projects.

Another model for monetizing public infrastructure assets is the use of infrastructure investment trusts (“InvITs”) and real estate investment trusts (“REITs”), in which the underlying infrastructure or real estate assets are transferred to a trust, which then operates similarly to a mutual fund, attracting investors while securitizing the proceeds from the underlying infrastructure or real estate assets. For the purpose of this article, we shall focus on InvITs.

 

InvITs: Structure, Advantages and Risks

 
 
InvITs: Structure, Advantages, and Risks
InvITs:
Structure, Advantages, and Risks

 

 

Advantages of InvITs

 
  • Long, stable and predictable cash flows: The SEBI (Infrastructure Investment Trust) Regulations, 2014 (“InvIT Regulations”) and its attendant notifications mandate that 90% of the cash flows from the underlying infrastructure assets shall be distributed to the investors of the InvIT Net Distributable Cash Flows (“NDCFs”). Some of the concession agreements governing the underlying infrastructure assets have long concession periods of 15 to 20 years, sometimes even 50 or 60 years. If the InvIT is well managed, then there would be an assured 50 to 60 years of stable and predictable cash flows, depending on the tenure of the underlying concession agreement.
  • Infusion of Public Funds: Traditionally infrastructure projects have only attracted funding from syndicated banks, investments from developers, and the government. With this unique model, not only are institutional investors allowed an opportunity to invest money into these projects, but the general public can also own a stake in the development of the infrastructure sector by holding units in InvITs.
  • The professionalisation of Infrastructure Management: The InvIT Regulations mandate a minimum number of years of experience in handling certain volumes of transactions or projects for the key stakeholders of an InvIT, such as the Sponsor, the Trustee, the Investment Manager, the Project Manager, and even the auditors.
  • High-Quality Underlying Assets: The InvIT regulations have very specific norms on what kind of infrastructure assets can be rolled over into the InvIT framework. The regulations specify that only those projects that have started generating revenues after completion of construction or achieved commercial operations date (“COD”) or at the pre-COD stage of the project with almost 80% of the construction work complete, or those projects that have received all requisite approvals and certifications (non-PPP projects), can be rolled over into the InvIT framework.
  • Special Tax Recognition: The Finance Act, 2014, added a new definition of “Business Trust,” which applies to InvITs and REITs, under which these types of entities enjoy certain benefits. The most recent amendment in the Finance Act of 2020 included unlisted InvITs and REITs under the umbrella of business trusts. Prior to the above amendment, only listed InvITs and REITs enjoyed this recognition. Some of these advantages include the pass-through mechanism, wherein any dividends earned from an InvIT are not taxed at the InvIT level, but in the hands of the unit holder. Similarly, interests from debt provided to the underlying infrastructure assets are also taxed only at the level of the unitholders, thus avoiding double taxation. There is also a push by Niti Aayog to introduce Section 54EC capital gains exemption status under the Income Tax Act, 1961, to InvIT units,[15] similar to the bonds issued by the National Highway Authority of India, Power Finance Corporation Limited, Indian Railways Finance Corporation Limited, and Rural Electrification Corporation Limited.

 

Risks of InvITs

 
  • Regulatory Risks: The concept of InvITs is very unique to India, and therefore SEBI’s InvIT Regulations are one of a kind in the world. Since the introduction of the InvIT Regulations in 2014, there have been regular changes to the laws so as to make them effective for on-the-ground rollouts of InvITs. Some risks connected with these changes still need to be accounted for.
  • Credit Rating Risks: Many credit rating agencies have difficulty appropriately valuing the returns that can be generated from the underlying infrastructure assets. Since the disaster of IL&FS, there have been several attempts to introduce different rating methodologies that apply uniquely to the infrastructure sector, as opposed to the standard rating processes that are used for manufacturing and other service industries. In fact, vide its July 2021 circular, SEBI introduced the “expected loss” model for rating infrastructure assets. As this is an evolving sector, considerable revisions can be expected in the methodology of rating infrastructure assets, which can pose a potential risk.
  • Operational Risks: The pandemic has been the biggest disruptor of the infrastructure sector in recent times. Similar force majeure incidents, along with other risks associated with the operation of assets, such as erratic usage of the operating assets, for example, inadequate traffic in a road project or increased operational costs due to lack of availability of raw materials in solar-powered power generation and transmission plant leading to increased operational costs in the subsequent supply-chain and many similar issues can decrease the value provided by the underlying infrastructure assets.
 

InvITs in India – The Scenario Thus Far

India is witnessing a boom in the number of InvITs that are getting established. Currently, there are 18 InvITs registered with the SEBI. With increased impetus provided to the National Monetisation Pipeline, the NHAI has offered 3 additional road projects totalling 247 kms to its InvIT, attracting international pension funds such as the Canada Pension Plan Investment Board and the Ontario Teacher’s Pension Plan Board as anchor investors.[16] The profitable returns provided by the initially established InvITs, such as the India Grid Trust and IRB InvIT, touched 56% and 83% in 2021.[17] Therefore, it is not surprising that there is an increased interest in investing in infrastructure development by such pension funds and sovereign funds. For example, the Canada Pension Plan Investment Board and the Ontario Teachers’ Pension Plan each took 25% equity in the INR 6,000 crore issue of NHAI’s InvIT as anchor investors.[18] Similarly, the private InvIT, IRB Infrastructure Trust, recently completed INR 243 crores worth of fund raising with IRB holding 51% and the Singapore-based sovereign fund GIC holding 49% in the InvIT.[19] Other InvITs looking to raise funds include the Canadian pension fund CDPQ-owned Indian Highways Concessions Trust[20] and Tata Powers intending to reduce debt from its renewable energies business by hiving off the same into an InvIT.[21] The railways sector, similarly, has a mandate to monetise its assets via the InvIT route.[22]

All of these are indicative of increased activity in the infrastructure funding space via InvITs. The Government of India’s push for increased asset monetisation, combined with the regulatory body, SEBI’s proactive approach to reducing the risks associated with investments in InvITs, is providing more assurances to foreign investors. However, the returns provided by the initially established InvITs in the country have proven to be a decisive attraction factor for investors.

Refernces:

[1] https://dea.gov.in/sites/default/files/Report%20of%20the%20Task%20Force%20National%20Infrastructure%20Pipeline%20%28NIP%29%20-%20volume-i_1.pdf

[2] https://www.niti.gov.in/national-monetisation-pipeline

[3] https://www.india.gov.in/spotlight/pm-gati-shakti-national-master-plan-multi-modal-connectivity

[4] https://www.india.gov.in/spotlight/bharatmala-pariyojana-stepping-stone-towards-new-india

[5] https://www.niti.gov.in/e-mobility-national-mission-transformative-mobility-and-battery-storage

[6] https://economictimes.indiatimes.com/news/economy/policy/asset-monetisation-government-beats-fy22-target-with-rs-96000-crore/articleshow/90807193.cms

[7] See generally, Morth’s Basic Road Statistics of India, 2016-17, available at https://morth.nic.in/sites/default/files/Basic%20_Road_Statics_of_India.pdf, Last visited on July 15, 2022

[8] See generally https://www.statista.com/statistics/686447/india-total-number-of-ports/, Last visited on July 15, 2022

[9] See generally the website of Indian Railways Civil Engineering Portal, https://ircep.gov.in/AboutUs.html, Last visited on July 15, 2022

[10]

See generally https://pib.gov.in/PressReleaseIframePage.aspx?PRID=1779817, Last visited on July 15, 2022

[11] See generally https://iwai.nic.in/waterways/new-waterways/106-new-waterways, Last visited on July 15, 2022

[12] See https://www.ideasforindia.in/topics/macroeconomics/india-s-asset-monetisation-plan.html#:~:text=In%20August%202021%2C%20Government%20of,used%20for%20new%20infrastructure%20investment. Last visited on July 15, 2022

[13] The Australian model of the Asset Recycling Initiative which involved the sale of public assets for funding public infrastructure projects was one such endeavour. See https://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Library/pubs/rp/BudgetReview201415/InfrastructureGrowth. Last visited on July 19, 2022.

[14] See https://www.business-standard.com/about/what-is-asset-monetisation#collapse . Last visited on July 19, 2022

[15] See generally https://www.business-standard.com/article/economy-policy/niti-aayog-suggests-tax-incentives-for-investment-in-invits-121083000870_1.html. Last visited on July 22, 2022.

[16] See https://www.business-standard.com/article/current-affairs/nhai-offers-three-additional-roads-to-its-invit-totalling-247-km-122060300921_1.html

[17] See https://economictimes.indiatimes.com/markets/stocks/news/with-invits-get-returns-of-8-10-and-good-diversification/articleshow/85468305.cms

[18] See https://www.business-standard.com/article/markets/cppib-and-ontario-teachers-pension-plan-bag-nhai-s-maiden-invit-121110301236_1.html and https://www.business-standard.com/article/current-affairs/nhai-offers-three-additional-roads-to-its-invit-totalling-247-km-122060300921_1.html. Last visited on July 20, 2022.

[19] See https://www.business-standard.com/article/companies/private-invit-irb-infrastructure-trust-completes-rs-243-crore-fundraising-122042200552_1.html. Last visited on July 20, 2022.

[20] See https://www.business-standard.com/article/companies/indian-highway-concessions-looks-to-raise-rs-910-cr-via-private-placement-122061300932_1.html. Last visited on July 20, 2022.

[21] See https://www.business-standard.com/article/companies/tata-power-s-plan-to-reduce-debt-through-invit-gets-delayed-122041200035_1.html. Last visited on July 20, 2022

[22] See https://www.business-standard.com/article/economy-policy/centre-may-noty-be-able-to-monetise-railways-rs-18-000-cr-assets-via-invit-122070600307_1.html. Last visited on July 20, 2022.

Image Credits: Photo by Fivesouls Faisol

The Government of India’s push for increased asset monetisation, combined with the regulatory body, SEBI’s proactive approach to reducing the risks associated with investments in InvITs, is providing more assurances to foreign investors. However, the returns provided by the initially established InvITs in the country have proven to be a decisive attraction factor for investors.

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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. 

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The Ins and Outs: Mines and Minerals Development and Regulation

India is well endowed with natural resources, particularly minerals, which serve as raw materials for many industries, paving the way for rapid industrialisation and infrastructural development. This, in turn, is set to facilitate the economy’s ascent along the road of sustained growth and a five trillion-dollar economy. In order to realise the mineral wealth of the country, extensive amendments have been made to the Mines and Minerals (Development and Amendment) Act, 1957 (‘MMDR Act’) by the MMDR Amendment Act, 2021 and the corresponding Rules with the objectives of generating employment and investment in the mining sector, increasing revenue to the States, improving the production and time-bound operationalisation of mines, etc. 

Further, to facilitate State Governments in identifying more blocks for auction and increase the availability of minerals across the country, the Ministry of Mines had introduced a series of amendments to ramp up the auction of mineral blocks for composite licencing.  To this effect, recently, the Government notified the Mineral (Auction) Amendment Rules, 2022 that allowed global positioning system for the identification and demarcation of the area where a composite licence is proposed to be granted. The Union Cabinet had also approved the amendment to the Second Schedule of the MMDR Act in March, 2022 to specify the royalty rates of certain minerals, including potash, emerald and platinum group of metals to ensure better participation in the auction of Mines.

This Article studies the series of amendments made to the MMDR Act and related Rules while analysing their impact on the developmental activities of the sector.

Analysis of the Amendments

 

Removal of the Distinction Between Captive and Non-captive Mines

Earlier, the Act empowered the central government to reserve any mine (other than coal, lignite, and atomic minerals) as a captive mine which would be used for a specific purpose only. The present Amendment removes this distinction between captive and non-captive mines. Now, the mines will not be limited to just a specific purpose/industry/sector. Thus, no mine will be reserved for a particular end-use. All future auctions will be without any end-use restrictions. The amendment would “facilitate an increase in production and supply of minerals, ensure economies of scale in mineral production, stabilise prices of ore in the market and bring additional revenue to the States…”

 

Sale of Minerals by Captive Mines

Earlier, as per the Act, the ores extracted from captive mines were only used by captive industries. The present Amendment provides that captive mines (other than atomic minerals) may sell up to 50% of their annual mineral production in the open market after meeting their own needs. The central government may increase this threshold through a notification. The lessee will have to pay additional charges for minerals sold in the open market. The sale of minerals by captive plants will aid and expedite growth in mineral production and supply, leading to commercial viability in mineral production and, as a result, additional revenue for the states. 

Transfer of Statutory Clearances

Earlier, the Act provided that upon expiry of a mining lease (other than coal, lignite, and atomic minerals), mines are leased to new parties through auction. The statutory clearances issued to the previous lessee are transferred to the new lessee for a period of two years. The new lessee is required to obtain fresh clearances within two years. The present Amendment replaces this provision and instead provides that transferred statutory clearances will be valid throughout the lease period of the new lessee. This amendment ensures continuity of mining operations, even with the change of the lessee and helps to avoid the repetitive process of obtaining clearances again for the same mine, which would facilitate the early commencement of the mining operations. 

 

Auction by the Central Government in Certain Cases

Under the Act, states conduct the auction of mineral concessions (other than coal, lignite, and atomic minerals). Mineral concessions include mining leases and prospecting license-cum-mining leases. The present Amendment empowers the central government to specify a time period for completion of the auction process in consultation with the state government. If the state government is unable to complete the auction process within this period, the auctions may be conducted by the central government. This amendment ensures that no mine is left idle and increases mining in the country.

 

Allocation of Mines with Expired Leases

The Amendment adds that mines (other than coal, lignite, and atomic minerals) whose lease has expired may be allocated to a government company in certain cases. This will be applicable if the auction process for granting a new lease has not been completed, or the new lease has been terminated within a year of the auction. The state government may grant a lease for such a mine to a government company for a period of up to 10 years or until the selection of a new lessee, whichever is earlier. This Amendment increases revenue for the states.

 

Lapse and Extension of Mining Lease

The erstwhile Act provided that where the mining operation is not commenced by the lessee within 2 years of the grant of a lease or the mining operation has been discontinued for two years, the mining lease shall be deemed to have expired for such period. The new amendment substituted the earlier provisions of Section 4A with a new provision stating that the mining lease will not lapse at the end of the said period if a concession is granted by the State Government upon an application by the lessee. It also provides for the extension of the mining lease by declaring that the State Government can extend the threshold period of lapse of the lease only once and up to one year. This ensures continuity in mining operations.

 

Removal of Non-Exclusive License Regime

In the earlier act, companies had a non-exclusive licence for the reconnaissance of the area to find out mineral potential. The amendment removes the non-exclusive licence permit.

 

Simplification of Exploration Regime

As per the new amendment:

  • Mineral Blocks for Composite Licences can be auctioned at the G4 level of exploration instead of the G3 level as per the earlier standard.
  • Mineral Blocks for surficial minerals can be auctioned for the grant of a mining lease at G3 level instead of G2 level.
  • Private entities may be notified under Section 4(1) of the Act to conduct exploration.

 

Transfer of Mineral Concessions

Restrictions on the transfer of mineral concessions have been removed and now mineral concessions can be transferred without any transfer charge.

 

District Mineral Foundation (DMF)

It is a non-profit body established to work for the interest and benefit of people and areas affected by mining or mining-related operations. State governments were tasked with establishing DMFs in each mining district of their respective states, as well as prescribing the composition and operation of DMFs, including the use of funds. The new Amendment Act, 2021, empowers the Central Government to direct the composition and utilisation of the funds from the District Mineral Foundation. This ensures the optimization of funds for the development of mining areas. 

 

Conclusion 

Present amendments in the Mines and Minerals (Development and Amendment) Act, 1957 (‘MMDR Act’) and the corresponding Rules do nullify several restrictive and covert provisions that existed in the erstwhile Act of 1957. The new regime will be instrumental in increasing mineral production, improving the ease of doing business in the country, and increasing mineral production’s contribution to GDP.

The amendments have also successfully capacitated the State governments to notify 40 mineral blocks of G4 level of exploration for grant of composite license, out of which 6 mineral blocks have been successfully auctioned, as of April 2022.  [1]

However, like any other public policy and legislation, implementation of the Act and Rules with proper coordination among central and state governments is the key to achieving reforms in the mining sector and sustainable development. 

References: 

[1] https://pib.gov.in/PressReleasePage.aspx?PRID=1814233#:~:text=The%20Mineral%20(Auction)%20Amendment%20Rules%2C%202022%20were%20notified%20on,to%20be%20granted%20through%20auction.

 

Image Credits: Image by Анатолий Стафичук from Pixabay

Present amendments in the Mines and Minerals (Development and Amendment) Act, 1957 and the corresponding Rules do nullify several restrictive and covert provisions that existed in the erstwhile Act of 1957. The new regime shall be instrumental in boosting mineral production, improving the ease of doing business in the country and increasing contribution of mineral production to Gross Domestic Product (GDP).

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Critical Challenges in the Logistics Sector and a Way Forward

The Indian logistics sector has been on a path of steady and robust growth for the past few years, owing to the rising retail and manufacturing ecosystem in the country. According to the notification[1] of the Ministry of Finance, logistics infrastructure includes “Multimodal Logistics Park comprising Inland Container Depot (ICD) with minimum investment of Rs 50 crore and minimum area of 10 acre“. The importance of the logistics industry is not only paramount to maintain the economic ecosystem of the country, but also balance the national and international trade.

Introduction to the Logistics Sector

In practicality, the industry has broadened to include transportation and warehousing, protective packaging, material handling, order processing, marketing, customer service, distribution, value-added services, payment collection, packaging, documentation, customer brokerage facilities, kitting, repair management and reconfiguration and also reverse logistics. Ergo, all activities in the logistics supply chain.

Illustration I: Basic Logistics Supply Chain Process


 

The Importance of the Logistics Sector and the Role of Logistics Lawyers

 

As per the data published by Indian Investment Grid[2], an initiative of the Ministry of Commerce and Industry, the Indian logistics sector was valued at USD 160 billion in 2019, and by the end of 2022, it is expected to be valued at USD 215 Billion.. As per the World Bank’s Logistics Performance Index, India’s rank has escalated from 54 in 2014 to 44 in 2018. .

Further, in 2021 India’s logistics sector was valued at $160 billion that employed over 22 million people directly. It is expected to grow at a CAGR of 10 per cent to $215 billion by 2022.[3] Consequently, the logistics industry provides an overall positive scope and opportunity to the Indian economy as well as India’s infrastructure sector.

Since the logistics industry is vast, the role of logistics lawyers and infrastructure lawyers too is dynamic in nature. It ranges from carrying out due diligence, feasibility studies, regulatory approvals, drafting important project and transaction documents, contract management, risk management, regulatory-commercial-financial advice to dispute resolution and handling and advising in litigation.

 

Challenges in the Logistics Sector

 

One of the foremost challenges that the logistics sector faces today arise due to poor infrastructure. Physical infrastructure impacts transportation which facilitates logistics. The country faces challenges in port and roadways infrastructure which directly impacts the transportation of goods. Fuel costs and policy changes directly impact the logistics sector, since the higher the costs of fuel, the higher are the transportation and freight costs which would directly impact the logistic companies and businesses to stay afloat. The economic and socio-political changes in policy would also result in inflation of prices, and in turn, affect costs and disrupt the supply chain. Although the logistics industry has shifted to a more technological friendly environment over the past few years, the industry still faces challenges in safeguarding the documentation, which would be paramount in substantiating claims at the time of arbitrations and litigations. Lack of accurate data at the time of documentation along with several manual processes further aggravate this problem.

The ongoing pandemic has led to several policy changes such as perpetual and partial lockdowns which have directly affected the workers and the labourers of the nation, resulting in delay and/or stoppage of work. This is one of the causes of time overruns and an important cause of disruption in the supply chain. Furthermore, other challenges in the logistic sector involve several compliances that need to be followed in a timely manner, along with maintaining import and export licensing. Other legal issues involve insurance policies, bank guarantees and traversing through taxation compliances and implications.

Some of the challenges faced by the logistics sector are displayed below:

Illustration II: Challenges in the Logistics Infrastructure Industry in India

A vast majority of India’s trade is facilitated by the shipping industry. Furthermore, it is also known that the Government intends to encourage public-private partnerships in the shipping sector and help the local shipping industry with financing ship acquisitions [4]. Therefore, the shipping logistics sector has a promising outlook in the Indian economic ecosystem in the coming future

Commercial disputes in shipping logistics are adjudicated under civil courts with pecuniary jurisdiction and high courts with admiralty jurisdiction. Furthermore, there are established special commercial courts under the Commercial Courts Act, 2015 which deal with subject matters of commercial logistics disputes ranging from admiralty and maritime disputes,  issues related to the sale of goods, and those related to import-export, carriage of goods etc. However, prior to approaching the courts, mediation is mandated. Procedurally, along with the pre-institution mediation and settlement, the Commercial Courts Act, 2015 brings along a firm and time-bound approach into the maritime and logistics legal procedures. In the case of M/s SCG Contracts India Pvt. Ltd v. K.S. Chamankar Infrastructure Pvt. Ltd. & Ors[5], the importance of the timely process was asserted wherein the Supreme Court held that interim applications for rejection of statement of claims or plaint will not pause the 120-day deadline process. Certain challenges in litigations and disputes also relate to jurisdiction, cause of action and limitation barred suits.

The Indian Carriage of Goods by Sea Act, 1925 applies to outward cargo i.e., ships carrying cargo from India to foreign ports. The Multimodal Transportation of Goods Act, 1993 applies to multimodal transportation of cargo from one place in India to a place outside India using more than two means of transport. For cargo claims, the Indian Bills of Lading Act, 1856 is applicable. The Specific Relief Act, of 1963 deals with the specific performance of contracts from an equitable remedy standpoint. Other contractual obligations, disputes and damages arising out of breach of contract would be dealt with by the Indian Contract Act, 1872.

As per a report released by RedCore, the Indian Road Logistics market is said to reach about 330 billion by the year 2025[6]. The Ministry of Road Transport and Highways (“MORTH”) and the National Highways Authority of India (“NHAI”) are entrusted with the task of formulating and administering policies on road transport and freight. Whereas, the Carriage by Road Act, 2007 provides for the regulation of common carriers of goods by road. The Carriage by Road Rules, 2011, stipulates conditions for the grant of registration which applicants must comply with. Some of the challenges that the road transport sector faces are lack of road infrastructure, poor network connectivity and unorganized players with high levels of competition.

 

Case Study: The Ever Given, the Cargo Ship Stuck in the Suez

 

It is known that in the year 2020, more than 50 ships per day on average passed through the 190-km-long waterway of the Suez Canal, which accounted for around 12% of international trade. One of the ships during the time was ‘The Ever Given’. It is estimated that about 90 % of the world’s trade is transported by sea. Ever Given was stuck in the Suez Canal for a period of 6 days. It is estimated that more than $9 billion worth of goods pass through the 190 km waterway each day, amounting to around $400 million per hour. Therefore 6 days of the Ever Given being stuck in the Suez Canal caused cascading havoc to global trade and the logistics supply chain. 

Another instance of how the Ever Given stuck in the Suez affected the global logistics supply chain is the hindrance of trade between Asian and European nations in the following year. It is a known fact that waterways are one of the important mediums for transportation and trade between Asia and Europe. Cotton is regularly supplied from India to Europe by the Suez Canal, similar to the movement of petroleum along the Suez from the Middle East. This directly impacted the supply chain as it resulted in problems with warehousing.

 

A Way Forward for the Logistics Sector

 

As it is noted by the above case study, not having sufficient means of warehousing results in a higher possibility of facing challenges resulting in the disruption of the logistics supply chain. Force Majeure events such as the pandemic have unveiled the need for more warehouses to combat this situation. Furthermore, the GST regime of the Indian Government in recent years has brought about a positive impact to the logistics industry by enabling quicker transportation due to the uniform rate of taxes in all states of India and unhindered transit of goods by the abolition of entry levies. The need of the hour is to develop adequate warehousing infrastructure in the fringe areas of major metropolitan trade hubs of the country and in high commerce corridors. To combat other legal challenges, it is suggested that there should be an organized inventory of all logistics and supply chain documentation for the purpose of claim substantiation which will be necessary at the time of arbitrations and bilateral disputes. Furthermore, moving forward to a technology-driven documentation approach would highly impact the logistic sector by avoiding transit delays and untimely deliveries caused due to improper documentation.

References:

 

[1] Ministry of Finance, Department of Economic Affairs, Notification.No.13/1/2017-INF dated 26th April 2021

[2] Invest in logistics sector in India, National Infrastructure Pipeline, India Investment Grid, https://indiainvestmentgrid.gov.in/sectors/logistics (last visited Nov 25, 2021

[3] https://www.thehindubusinessline.com/opinion/impact-of-logistics-industry-on-economic-growth-amidst-a-pandemic/article36139749.ece

[4]  [4] https://www.thehindubusinessline.com/economy/logistics/budget-gives-a-leg-up-to-ship-leasing-from-international-financial-services-centre/article64962397.ece

[5] M/s SCG Contracts India Pvt. Ltd v. K.S. Chamankar Infrastructure Pvt. Ltd. & Ors. C.A. No. 1638 of 2019

[6] https://www.pgurus.com/indias-road-logistics-market-to-see-a-surge-expected-to-reach-330-bn-by-2025/

 

Image Credits: Image by fancycrave1 from Pixabay 

The need of the hour is to develop adequate warehousing infrastructure in the fringe areas of major metropolitan trade hubs of the country and in high commerce corridors. To combat other legal challenges, it is suggested that there should be an organized inventory of all logistics and supply chain documentation for the purpose of claim substantiation which will be necessary at the time of arbitrations and bilateral disputes. 

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Government Incentives for Infrastructure Development

India is emerging to become a global leader in investing in world-class infrastructure projects, in view of concrete plans set out in the 2021 Budget. With unwavering growth in the Indian stock market witnessed by indexes touching unprecedented highs, the Indian infrastructure sector is filled with signs of optimism as the country reels out from the effects of the pandemic. Current trends suggest a boost in infrastructure spending that shall also facilitate infusion of overseas capita for investments in other sectors and an availability of credit for infrastructure projects.

The government’s National Infrastructure Plan for 2019 to 2025 has already supported more than 9000 projects having a total project cost surpassing USD 1949 billion.[1] The National Infrastructure Pipeline is a live database of infrastructure projects and provides attractive investment opportunities in projects worth more than INR 100 crores in sectors including Transport, Logistics, Energy, Water and Sanitation, Communication, Social and Commercial Infrastructure.[2]

 

Apart from this, opportunities are available through the government’s ‘India Investment Grid’ (IIG) for investing in stressed assets to allow the purchase of viable stressed assets which have the potential for being turned around.[3] IIG also facilitates Corporate Social Responsibility opportunities for businesses to invest in infrastructure building in the education, healthcare sectors and for poverty alleviation as part of their CSR spending.[4]

These investment opportunities are coupled with a bold move towards introducing National Bank for Financing Infrastructure and Development Act, 2021. The long-overdue initiative establishes a government-owned Development Finance Institution (DFI) for extending long-term affordable debt financing to infrastructure projects. The DFI is set to receive initial funding from the government and is projected to have a lending capability of a minimum of INR 5 trillion by 2024-25. The appointment of the veteran banker, Mr. K V Kamath as the chairperson of the newly set up INR 20,000 crore DFI- National Bank for Financing Infrastructure and Development, falls in alignment with the developmental and financial objectives of DFI.

The INR 40, 000 crore National Investment and Infrastructure Fund (NIIF) anchored by the Government of India in 2015 is also gaining momentum through its funds namely, Master Fund, Fund of Funds and Strategic Opportunities Fund each with a designated purpose.

 

Impetus has been given to the domestic manufacturing ecosystem through the Atmanirbhar Bharat initiative, especially to Micro, Small and Medium Enterprises (MSMEs) aiming to facilitate local manufacturing. As a further boost to the initiative, the government intends to achieve a turnover of US$ 25 billion including export of US$ 5 billion in aerospace and defense goods and services by 2025[5]. An increase in the capital expenditure will augment the procurement of weapons, aircraft, warships, and other military hardware. Posing as a lucrative market for defense companies, India gives orders worth US$ 100 billion a year for defense procurement.[6] Therefore, the Finance Ministry has permitted Foreign Direct Investment (FDI) in the defense for sector up to 74 percent under the automatic route leading to access of modern technology, strategic partnerships between foreign manufactures and defense equipment manufacturers in India. It also promotes active utilization of the Technology of Funds scheme that supports MSMEs in catering to the requirements of technological development in the defense sector.  

 

With a capital infusion of INR 1,000 crores to Solar Energy Corporation of India, there is a likely surge in large-scale solar installations, grid-connected projects, solar plants, and solar parks along with a phased manufacturing plan for solar cells, solar panels, and domestic production of solar inverters and solar lanterns.

 

The Government of India has also earmarked areas including highways, railways, power grids, and airports to monetize public infrastructure for financing new public projects. Statutory authorities have already begun setting up infrastructure investment trusts (InvIT) which will hold the public infrastructure assets for national as well as international institutional investors. Another avenue under consideration for obtaining public investment into infrastructure projects is issuance of tax-efficient zero-coupon bonds by infrastructure debt funds.

 

Major tenders worth more than INR 20 billion are expected to be issued in the coming financial year for public-private partnership in the management and operations of ports.

 

The logistics sector serves national trade, international trade, MSMEs, and start-ups. The launch of INR 100 crore Gati Shakti National Master Plan for Multi-Modal Connectivity has heralded new possibilities. This digital platform will incorporate the infrastructure schemes of various Ministries and State Governments like Bharatmala, Sagarmala, inland waterways, dry/land ports, UDAN etc; Economic Zones like textile clusters, pharmaceutical clusters, defense corridors, electronic parks, industrial corridors, fishing clusters, Agri zones will be covered to improve connectivity and make Indian businesses more competitive[7]. The National Logistics Policy is expected to promote seamless movement of goods through a focus on digitization, process re-engineering, multi-modal transport, EXIM trade, etc.[8] It is designed to streamline rules and address supply-side constraints, leading to lower logistics costs, the boost of trade, enhancement of Logistics Performance Index and greater competitiveness for Indian products worldwide.

 

In the power sector, apart from an INR 3 trillion outlay planned over the coming five years for revamping the power distribution scheme by providing distribution companies with financial assistance for developing a smart-metering infrastructure, the government is also in the advanced stages of launching a National Hydrogen Mission which may provide an opportunity for corporations in the power sector to engage in the export of green hydrogen and green ammonia while also meeting the domestic demand.

 

These dynamic initiatives clubbed with the use of India’s IT capabilities by creating monitoring mechanisms such as a dashboard to track the progress of publicly monetized infrastructure projects have created attractive opportunities for infrastructure companies to mobilize their assets into the establishment of new development projects.

 

Fox Mandal’s Infrastructure, Project Finance, and Energy Teams deliver unmatched expert services in wide-ranging areas of public infrastructure, inclusive of but not limited to ; transaction assistance for infrastructure projects, services of review, compliance, submitting tender documents, structuring and reviewing concession agreements, incorporation of Special Purpose Vehicles (SPVs), procuring relevant licenses and approvals, regulatory clearance facilitation, dispute resolution, strategy planning, and infrastructure contract bidding management.

 

As a commendation for the services rendered by Fox Mandal, the Firm featured in 2021 Legal 500 Rankings for its Projects & Energy Practice vertical.  

 

References: 

[1] https://indiainvestmentgrid.gov.in/national-infrastructure-pipeline

[2] https://indiainvestmentgrid.gov.in/opportunities/nip-projects/transport and https://indiainvestmentgrid.gov.in/national-infrastructure-pipeline

[3] https://indiainvestmentgrid.gov.in/opportunities/stressed-assets/transport?subSector=112%2C37%2C110%2C108%2C109%2C107%2C106%2C111%2C113

[4] https://indiainvestmentgrid.gov.in/opportunities/csr-projects?sector=29%2C10&subSector=97%2C99%2C157%2C94%2C100%2C93%2C102%2C105%2C96%2C95%2C103%2C104%2C98%2C112%2C37%2C110%2C108%2C109%2C107%2C106%2C111%2C113

[5] https://www.investindia.gov.in/sector/defence-manufacturing

[6] https://www.business-standard.com/article/economy-policy/higher-fdi-in-defence-sector-to-attract-mncs-give-make-in-india-a-boost-120051900698_1.html

[7] https://pib.gov.in/PressReleaseIframePage.aspx?PRID=1763638

[8] https://www.thehindubusinessline.com/opinion/logistics-and-supply-chain-trends-for-2021/article36366467.ece

 

Image Credits: 

Photo by David Rodrigo on Unsplash

These dynamic initiatives clubbed with the use of India’s IT capabilities by creating monitoring mechanisms such as a dashboard to track the progress of publicly monetized infrastructure projects have created attractive opportunities for infrastructure companies to mobilize their assets into the establishment of new development projects.

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Project Cost in Infrastructure Projects: Concept, Challenges and Way Forward

The IMF and Central Statistic Organization had dubbed the Indian economy as the fastest growing economy back in 2019. Moving forward, in 2021 despite the havoc wrecked by the pandemic on advanced economies across the globe, the IMF has kept India’s growth forecast unchanged at 9.5%. In order to sustain India’s growth momentum, the development of country’s infrastructure sector is cogent. The National Infrastructure Pipeline has been the focus of current policies, with an unprecedented increase in capital expenditure allocation for FY 2021-22 by 34.5% to INR 5.5 lakh crore to propel infrastructure creation. However, the April-June 2021 report of The Ministry of Statistics states that 470 projects sanctioned by the centre suffered from a cost overrun of 61.5 percent, that is Rs 4,46,169.37 crore[1].

Project cost remains the central concern for any seminal discussion on infrastructural projects in India or around the world. This is the nebulous point where a host of stakeholders would converge to dispute, disagree, or litigate. This article aims to discuss the concept of project cost and its various implications for the different stakeholders involved.

Introduction to Infrastructure and Projects

 

Costs that are reasonably incurred for the acquisition and construction of infrastructure are referred to as infrastructure costs. Hence, Project cost could mean the total cost of an infrastructure project.  In India, there is no clear definition of the term infrastructure. However, on 1st March 2012, the Cabinet Committee on Infrastructure approved the framework to include a harmonised master list of sub-sectors to guide all the agencies responsible for supporting infrastructure in India. These sub-sectors include transports and logistics, energy, water and sanitation, communication, and social infrastructure. Out of the plethora of these sub-sectors, during the fiscals of 2020-2025, it is expected that sub-sectors such as Energy (24%), Roads (19%), Railways (13%) and Urban (16%) shall constitute 70%of the projected capital expenditure in infrastructure in India[2]. The total capital expenditure as per the report is expected to be 102 lakh crore Indian rupees. Furthermore, in India, the current investment in infrastructure is USD 3.9 Trillion, and the required investment is USD 4.5 Trillion, leaving a gap of USD 526 Billion[3]. Therefore, the energy and infrastructure sector are instrumental in generating tremendous employment opportunities and drive a substantial increase in GDP per annum in India as well as countries all over the world.

 

Structure of Project Finance Transactions

 

The main parties involved in a project finance transaction structure are (i) The Authority or the Government (ii) The Private Party Investors/Developers, Sponsors or Promotors and (iii) the Lenders. These three parties are key players responsible for the determination of project costs in infrastructure and construction projects. The principal point of convergence for these three players is the project company (i.e., also known as special purpose vehicle) set up by the private party investors under which the infrastructure project is formed and under which the project exists in the concession agreement. The project cost is mainly estimated by the private party and the lenders who would finance in the form of equity and debt. The typical financial structure for infrastructure projects has a debt-to-equity ratio of 75:25. However, the ratio may vary depending upon the risks involved.

                Illustration I: Key parties that influence the project cost of an infrastructure project

                                                                                                                     

 

Risks that affect the Determination of Project Cost

 

Every project has certain risks attached to its completion. These risks influence the determination of project costs by the authority, the private parties and the lenders. The risks, in turn, then affect the total cost of the project. The risks affecting the three parties are explained below:

 

                                Illustration II: Risks that affect the determination of project cost

    

 Risk for Authority

Risk for Private Party
Investors

Risk for Lender

Technical or physical risks

Economic or market risks

Economic or market risks

Risk relating to land acquisition

Construction and completion risk – cost overrun/time
overrun/delays

Financing risks

For eg. Technical or physical risks may include risks
associated with technology during
construction and operation as well as social and environmental risks.

For eg. Economic or
market risks may include input and output price variations, variation in
demand, debt/equity financing as well as counterparty risks.

For eg. Economic or
market risks may include input and output price variations, variation in
demand, debt/equity financing as well as counterparty risks.

The other risks that affect the cost of the project are contractual and legal risks, resource and raw material availability risks, demand risks, design risks, force majeure, property damage, permits, licenses, authorization, supply risk, social and environmental risks.

 

The Major Risks affecting Project Cost in India: Cost Overrun and Time Overrun

 

Out of the myriad of risks affecting project cost, the major risks in India are the risks associated with cost and time overruns. As many as 525 infrastructure projects were hit by time overruns, and as many as 470 infrastructure projects, each worth Rs 150 crore or more, were hit by cost overruns of over Rs 4.38 Trillion owing to delays, according to a report by the Ministry of Statistics, cited previously[4] The main causes for time overruns are delay in obtaining forest and environmental clearances, delay in land acquisition,  and lack of infrastructure support.  As per the report, there are other reasons like delay in project financing, delay in finalisation of detailed engineering, alteration in scope, delay in ordering and equipment supply, law, geological issues, contractual complications and delay in tendering.

 

The Key Elements of Project Cost

 

The elements of ‘costing’ include variables such as raw materials, labour, and expenses. Thus, for infrastructure projects as well, at the time of estimation of cost, these variables would come into play. The factors affecting cost for a public-private partnership project could be the following:

 

                        Illustration III: Factors affecting Cost of Projects: PPP model projects

FACTORS AFFECTING COST OF PROJECTS : PPP MODEL PROJECTS

Materials

Labour

Consultants

Contractor

Client

External
Factors

Dispute
Resolution

Costs and delays
associated with procurement and delivery of materials, import costs

Availability or non –
availability of skilled labour.

Recurring changes in
design

Poor site management
and supervision

Change orders

Force Majeure events
and weather changes.

International dispute
resolution in outside jurisdictions[1]

Unavailability of raw
materials

Poor management of
labour

Delay in approvals and
inspections

Inept subcontractors

Political and policy
changes such as MII[2]

Approvals from
authorities

Costly and time-consuming
domestic litigation

Wastage and theft of
materials – 13 to 14 million construction waste (FY 2000-2001)[3]

Increasing cost of
labour

Inaccuracy in design,
costs associated with knowledge transfer

Poor planning,
scheduling and cash flow management by Contractors

Poor communication for
quality and cost

Accidents

High legal costs and high
arbitrators fees[4].
Non-realisation of arbitral awards and court decree amounts.

 

 

Case Study: The Mumbai Monorail – An EPC Contract Model

 

Time and cost overruns in projects lead to disputes and arbitrations. A suitable example is the  Mumbai Monorail which has entered disputes and arbitration between the Contractor and the Authority over its project cost[9]. The development authority MMRDA entered into a contract with L&T Scomi Engineering for the construction of the Mumbai Monorail project. The original project cost between the Private Party Investors and the Authority was estimated to be Rs 2,700 crore, after which disputes arose. The Authority had claims against the Contractor for not completing the project task on time. The arguments of the Contractor pertained to the cost escalations caused by delays due to the fault of the Authority.  In 2019, the Bombay High Court appointed an arbitrator to settle the dispute. Currently, the dispute is still in the arbitration stage. Furthermore, post-December 2018, the MMRDA had taken over the Operation and Maintenance of the Mumbai Monorail project from L&T Scomi Engineering. Due to the Make in India policy, the tenders for manufacturing of the Mumbai Monorail were altered to encourage manufacturers and Indian technology partners to participate and fulfil the demands of manufacturing the additional monorail rakes[10]. Among other issues currently plaguing the Mumbai Monorail project, such as unavailability of a sufficient number of rakes to keep the services running and an inadequate number of spare parts, the widening deficit between revenue and O&M costs, remains primary.   

   

Way Forward

 

As per the report by the Ministry of Statistics cited above, the reason for cost and time overruns can be largely attributed to the state-wise lockdown due to the COVID-19 pandemic, which has been causing great hindrance to the implementation of infrastructure projects. Time and cost overruns in projects lead to disputes and arbitrations. Furthermore, in the procurement stage of projects, biddings in India happen with the project sponsor underbidding for the project so as to survive the competitive market. However, the underbidding combined with lack of margin included in the overall costs by contractors or sponsors often overlook inevitable hidden and unforeseeable costs which in turn enhance the final costs of the project. For instance, the Mumbai-Monorail project is a classic example of cost overrun. The solution would be to have a clear understanding of the project agreements, risks involved in the project particularly the conditions of force majeure, an objective evaluation of project cost while bidding taking into account uncertainties relating to raw material procurement, labour laws, land acquisition and risks related to cost and time overruns due to decisions of the awarding authority or public policy or any of the factors described above. The compensation clauses should be coherent and unambiguous, and in line with actual project cost incurred in the project leaving less scope for future disputes and arbitrations. Furthermore, it would be useful for the contractors / concessionaires , while making claims in an infrastructure project, to do it in a timely manner while maintaining clear and systematic evidentiary documentation, to substantiate the claims that may have arisen during the course of the project.

References: 

[1] http://www.cspm.gov.in/english/flr/FR_Mar_2021.pdf

[2] Finance Minister Smt. Nirmala Sitharaman releases Report of the Task Force on National Infrastructure Pipeline for 2019-2025, dated 31 December 2019, Press Information Bureau, pib.gov.in (2019), https://pib.gov.in/Pressreleaseshare.aspx?PRID=1598055 (last visited Sep 17, 2021).

[3] Forecasting Infrastructure Investment Needs and gaps, Global Infrastructure Outlook – A G20 INITIATIVE, https://outlook.gihub.org/ (last visited Sep 17, 2021).

[4] 422nd Flash Report on Central Sector Projects (Rs.150 Crore and Above), March 2021, Ministry of Statistics and Programme Implementation Infrastructure and Project Monitoring Division (2021), Available at: http://www.cspm.gov.in/english/flr/FR_Mar_2021.pdf (last visited Sep 17, 2021)

[5] Joseph Mante, Issaka Ndekugri & Nii Ankrah, Resolution of Disputes Arising From Major Infrastructure Projects In Developing Countries Fraunhofer, https://www.irbnet.de/daten/iconda/CIB_DC24504.pdf (last visited Sep 17, 2021).

[6] Make in India Initiative, Government of India.

[7] Sandeep Shrivastava and Abdol Chini M.E. Rinker Sr., Construction Materials and C&D Waste in India, School of Building Construction University of Florida, USA, https://www.irbnet.de/daten/iconda/CIB14286.pdf (last visited Sep 17, 2021).

[8] Amendments to the Arbitration and Conciliation Act, 1996, August 2014, Law Commission of India, Report No.246.

[9] Larsen and Toubro Limited Scomi Engineering BHD vs. Mumbai Metropolitan Region Development Authority MANU 2018 SC 1151, Arbitration Petition (C) No. 28 OF 2017.

[10]Adimulam, S. (2021, March 2). Mumbai: Monorail rakes will be made in India. Mumbai. Retrieved September 17, 2021, from https://www.freepressjournal.in/mumbai/mumbai-monorail-rakes-will-be-made-in-india.

 

 

Image Credits: Photo by Wade Austin Ellis on Unsplash

The solution would be to have a clear understanding of the project agreements, risks involved in the project particularly the conditions of force majeure, an objective evaluation of project cost while bidding taking into account uncertainties relating to raw material procurement, labour laws, land acquisition and risks related to cost and time overruns due to decisions of the awarding authority or public policy or any of the factors described above.

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