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.

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

Budget 2022: Ushering a Golden Era in the Indian Infrastructure Landscape

This Budget seeks to lay the foundation and give a blueprint to steer the economy over the AmritKaal of the next 25 years – from India at 75 to India at 100. It continues to build on the vision drawn in the Budget of 2021-22. Its fundamental tenets, which included transparency of financial statement and fiscal position, reflect the government’s intent, strengths, and challenges. This continues to guide us. – Smt. Nirmala Sitaraman

The Union Budget of 2022-2023 that estimates India’s economic growth at 9.2% amidst the Omicron wave entered with a strong statement into the AmritKaal, that ushers India@100 with its goal at a macroeconomic level growth. It focusses to promote public and private investments, development backed by technology, digital economy, fintech, energy and climate action. Building on the Budget of 2021-2022, this Budget of 2022-2023 acknowledges strengthening of health infrastructure, Productivity Linked Incentive for achieving the vision of AtmaNirbhar Bharat, commencement of activities of the National Bank for Financing Infrastructure and Development (NaBFID) and National Asset Reconstruction Company and continues to provide a blueprint for India@100 along with a multi-modal approach guided by PM GatiShakti.

PM GatiShakti

Propelled by seven engines, namely, Roads, Railways, Airports, Ports, Mass Transport, Waterways, and Logistics Infrastructure and supported by Energy Transmission, IT Communication, Bulk Water & Sewerage, Social Infrastructure, Clean Energy and Public Private Partnership (PPP), PM GatiShakti is aimed to steer sustainable development, economic transformation, seamless multimodal connectivity and logistics efficiency comprising the State Government infrastructure and National Infrastructure Pipeline.  

Roads: Expansion of National Highways network by 25,000 km in 2022-23 along with mobilization of 20,000 crore

Seamless Multimodal Movement and Logistics: Unified Logistics Interface Platform (ULIP) for data exchange to improve the logistics scenario in India by adopting a unified and integrated view of the Indian logistics value chain. Further boost has been facilitated through implementation of Multimodal Logistics Parks at four locations through PPP mode.

Railways: Introduction of 400 new Vande Bharat trains, 100 PM Gati Shakti cargo terminals in the next three years, bringing 2,000 km of network under the indigenous world class technology Kavach, along with redevelopment and modernization of the stations, integration of Postal and Railways networks, aiding local business and supply chain through ‘One Station-One Product’ concept are a few measures to ensure next generation of energy efficient trains, better passenger experience and seamless movement.

Connectivity: Multimodal connectivity between mass urban transport and railway stations is envisaged. Innovative solutions such as National Ropeways Development Programme on PPP mode has found a place in the Budget wherein 8 ropeway projects for a length of 60 km will be awarded.

Inclusive Development

Financing startups for agriculture and rural enterprise through a fund with blended capital raised under the co-investment model, facilitated through NABARD has been provided. River linking projects and finalization of Detailed Project Report for linking of 5 rivers has also been contemplated.

Extension of Emergency Credit Line Guarantee Scheme up to March 2023 and expansion of its guarantee cover by 50,000 crores to total cover of 5 lakh crores in order to aid the MSME sector with additional credit has been put forward. 

Infusion of funds in the Credit Guarantee Trust for Micro and Small Enterprises scheme and an outlay of 6,000 crore in the Raising and Accelerating MSME Performance (RAMP) programme shall assist in additional credit, employment opportunities and infusing competitiveness, efficiency and resilience in the MSME sector. Allocation of 48,000 crores for affordable housing covering 80 lakh houses along with reduction of time required for approvals related to land and construction is a step to ensure housing for all.

Under the Prime Minister’s Development Initiative for North-East, PM-DevINE, scheme, an initial allocation of 1,500 crore has been presented for funding infrastructure and social development projects such as roads and ropeways. The Budget also proposes construction of village infrastructure, tourist centres, road connectivity and provisioning of decentralized renewable energy.

Productivity Enhancement & Investment, Sunrise Opportunities, Energy Transition, and Climate Action

Bosting ease of doing business, expanding the scope of single window portal for all green clearances, urban development especially of 2 and 3 tier cities, modernization of building byelaws, implementation of Town Planning Schemes (TPS), and Transit Oriented Development (TOD) are a few other measures proposed by the Budget. 

In order to promote clean and sustainable mobility emphasis on clean tech and governance solutions, special mobility zones with zero fossil-fuel policy, and EV vehicles is given.

Impetus has been given to government procurement by introducing reforms such as use of transparent quality criteria, payment of 75 per cent of running bills within 10 days, settlement  through conciliation, end-to-end online e-Bill System, and use of surety bonds instead of bank guarantee. 

The Budget has also used PPP as the mode for laying optical fibre in all villages to enable access to affordable broadband and mobile service especially since 5G mobile services shall be rolled out. 

Amendments to the Insolvency and Bankruptcy Code to enhance the efficacy of the resolution process and introducing a new legislation to replace the Special Economic Zones Act in to ensure optimal usage of available infrastructure and competitiveness is of the exports are a few suggested legislative reforms. 

Allocation of 19,500 crore in the Solar sector, introducing four pilot projects for coal gasification and conversion of coal into required chemicals, transition to circular economy and carbon neutral economy are steps in the direction of combating climate change.

Financing of Investments

Promotion of green infrastructure through issue of sovereign Green Bonds, setting up of International Arbitration Centre in the GIFT City, inclusion of 107 Data Centres and Energy Storage Systems within the umbrella of Infrastructure, promotion of thematic funds for blended finance with 20% Government share are a few measures introduced by the Budget to embolden its objective of financing of investments. The financial viability of the Infrastructure projects has by adopting global best practices, innovative ways of financing, and balanced risk allocation has been proposed.

CapEx Coupled with Infrastructure Spearheads Budget 2022

The Budget ensures capacity building for Infrastructure projects. It aims to provide seamless connectivity, logistics synergy and convenience for the commuters along with reducing congestion and promoting tourism. The Budget promotes innovative ways of financing, reduces logistics cost and time and aims to improve international competitiveness.

Along with its proposed reforms and allocation of funds, it can be said that the Infrastructure coupled with capital expenditure will be spearheading the Budget. We hope to see contracts awarded to EPC Contractors and PPP Projects for rail development. Expansion of expressway through EPC/PPP model will undoubtably usher concession to private players and EPC Contractors. Overall, the Infrastructure development through PPP mode has been propagated by the Budget right from village infrastructure, urban planning, projects in the Northeast region to Solar projects and green infrastructure projects.

Moreover, reforms in legislation and policies such as the procurement policy is a stride towards economic development and building the nation. Finally the Budget also provides for issuance of Surety Bond to the Developers/Contractors in the place of Performance Bank Guarantee (PBG) which will ease the financial burden of the Concessionaire/Developer/Contractors in obtaining the said PBG from the Banks by depositing of 100% Margin Money.

Image Credits: Photo by Ivan Bandura on Unsplash

Building on the Budget of 2021-2022, this Budget of 2022-2023 acknowledges strengthening of health infrastructure, Productivity Linked Incentive for achieving the vision of AtmaNirbhar Bharat, commencement of activities of the National Bank for Financing Infrastructure and Development (NaBFID) and National Asset Reconstruction Company and continues to provide a blueprint for India@100 along with a multi-modal approach guided by PM GatiShakti.

Related Posts

POST A COMMENT

Public Procurement Reforms: Light at the End of the Tunnel

The imperatives of a growing and liberalized economy impel objectivity and transparency in the decision-making process. A substantial amount is spent by the Government in procuring several goods and services in order to discharge the duties and responsibilities of the assigned work. This drives the need for uniform, systematic, efficient, and cost-effective solutions in accordance with the applicable rules and regulations. The need of the hour propelled the release of guidelines for reforms in public procurement and project management, General Instructions on Procurement and Project Management, by the Ministry of Finance (hereinafter referred to as the “Procurement Guidelines”). 

Incorporating innovative rules to facilitate faster, efficient, and transparent execution of projects remains the predominant objective of the Procurement Guidelines. The Procurement Guidelines attempt to empower executing agencies to make prompt and efficient decisions in accordance with public interest, probity, and fairness. Since the challenge lies in executing the projects within the stipulated time and cost without compromising on the quality, the role of these Procurement Guidelines is paramount

 

Overview of the Procurement and Project Management Guidelines

 

The Procurement Guidelines stipulate a presentation of the findings of the project feasibility study or the preliminary project report to the designated competent authority to provide an assessment of the overall situation and risk mitigation methods. These discussions may also become a part of the Detailed Project Report (DPR) wherein the field units of the public authority shall be a part of the DPR preparation process. The involvement of field units of the public authority is essential in the endeavour for appropriate solutions since these field units are custodians of legacy data of a particular geographical region.

The Procurement Guidelines provide that the availability of minimum necessary encumbrance free land should be ensured before awarding the contract. Ascertaining the same will be done on a case-to-case basis or based on the general guidelines issued by the concerned authority. The Procurement Guidelines prescribe expedition of the process for obtaining statutory and other clearances and monitoring of the progress in obtaining clearances by the public authority. Avoidance of delay in execution of work and deviation in quantities of items of work is prevented by ensuring the availability of approved architectural and structural drawings prior to the invitation of tenders. A pre-notice inviting tender conference is proposed to obtain industry inputs. The empanelment of contractors in a fair, equitable and online manner for specific goods and services that are required regularly is also prescribed.

Several reforms have been set forth in the tender document which is salient in governing the relationship between the parties. The need for clarity in clauses that do not give scope for multiple interpretations has been proposed with emphasis on provisions pertaining to milestones, approvals, price variation, quality assurance plan, technical eligibility, and financial eligibility criteria. The contractors shall receive payment at every stage in proportion to the quantum of work done. The Procurement Guidelines have initiated payment of interest in case of delayed payments of bills submitted by the contractor backed by an online system for monitoring to identify and avoid unwarranted delays. Moreover, the efficiency of procurement is enhanced by making online tendering a default method for bidding projects.

Technology backed solutions have been proposed for periodic review of the projects. Use of project management systems for recording delays on a real-time basis, capturing the progress, quality of work, site records and photographs including geotagging have been proposed. The need to clearly define the role of Project Management in the contract has been stressed upon.

In cases of a single bid in the tender, certain conditions have been stipulated to prevent the cost of rebidding and banish the notion of rebidding being a safe course of action since rebidding leads to further costs and delays. As far as the procurement was advertised with sufficient time to submit the bids, qualification criteria were not unduly restrictive and reasonable prices in comparison to market values have been quoted, single bids are considered valid.

A graded authority structure has been proposed to grant an extension of time. Framing of methods such as single or limited tenders for part completed contracts wherein 20% of the work has been billed by the contractor who has abandoned the project has been introduced. This will reduce the inconveniences, loss of amenities, time and cost due to half-completed work. The Procurement Guidelines mandate EPC contracts to mention broad technical specifications with the freedom to the contractor to optimize the design. The incorporation of conditions in the tender documents for procurement of consultancy services and fixed budget-based selection has also been presented.

Quality cum Cost Based Selection (QCBS) for procurement of works and non-consultancy services where the value of procurement does not exceed Rs. 10 crores and has been declared as a Quality Oriented Procurement, is set forth as an alternative method of procurement. In the case of QCBS, the maximum weightage given to non-financial parameters should not exceed 30%. Weightage for timely completion of similar projects in the past may also be considered in the tender documents along with fulfilment of mandatory criteria for evaluation of bid and joint ventures may be allowed subject to adequate safeguards.

Acknowledging the adverse implications of litigation on timelines and overall project cost in form of heavy damages or additional interest cost, the Procurement Guidelines demand a critical review of the award by a special board or committee. This board or committee should consider legal merits, probability of success, costs and must be satisfied that an appeal is likely to be more beneficial. An appeal should be recommended only upon application of mind on the facts and circumstances of the case and analyzing the chances of success. The Procurement Guidelines stipulate compliance to Rule 227A of the General Financial Rules, 2017 (GFRs) according to which the Department/Ministry that has challenged the arbitral award has to pay 75% of the arbitral award including interest to the contractor or concessionaire against a bank guarantee. The payment should be made into the designated escrow account. Personal accountability shall arise in case of non-compliance to Rule 227A of GFRs to the extent of additional interest in the event the final court order is not in favour of the procuring entity.

 

A Step in the Right Direction

Transparency should trickle down into public procurement in order to facilitate competition, fairness and elimination of arbitrariness in the system. The Procurement Guidelines stipulate several appreciative reforms. The release of payment to the contractor in commensuration of the completed work will provide liquidity to the cash-strapped contractors. Review of work at various stages of contracts leads to an assessment of delay in execution of work by the concerned stakeholder and serves as a record in case of a dispute. Right of way for projects remains a major concern since minimum necessary encumbrance free land shall be determined on a case-to-case basis or general guidelines which may lead to further delays owing to peculiarities or absence of guidelines. Despite conditions being laid down to deal with situations of a single bid, the same may not promote a competitive bid. Alternative solutions such as the Swiss Challenge method may be used in order to prevent monopoly. It is pertinent to note that the L1 approach as the chief criterion to award the project has been eliminated thereby emphasizing the quality of work. While releasing 75% of the award for projects stuck in disputes is a welcome step, a proper mechanism to realize the advantages of the same must be established without which the contractor would be burdened with poorly negotiated bank guarantees and be required to open an escrow account in case of EPC projects. Nevertheless, a robust system instils confidence in the prospective tenderers to formulate competitive tenders. Undoubtedly, the concentrated efforts are a step in the direction of economic development, removal of unwarranted roadblocks and addressing the plaguing problems in public projects.P

Image Credits: Photo by Ivan Bandura on Unsplash

Transparency should trickle down into public procurement in order to facilitate competition, fairness and elimination of arbitrariness in the system. The Guidelines stipulate several appreciative reforms. The release of payment to the contractor in commensuration of the completed work will provide liquidity to the cash-strapped contractors. Review of work at various stages of contracts leads to an assessment of delay in execution of work by the concerned stakeholder and serves as a record in case of dispute.

Related Posts

POST A COMMENT

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.

Related Posts

POST A COMMENT

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.

Related Posts

POST A COMMENT