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.

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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.

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

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

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

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

Phases of a PPP Project

The broad phases of a PPP project are as below:

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

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

 

Risks and Their Mitigation Mechanisms

The most common and significant risks in PPP are:

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

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

Case Study 1: Delhi – Gurgaon Expressway[1]

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

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

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

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

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

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

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

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

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

Case Study 2: Vadodara Halol Toll Road[2]

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

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

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

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

Conclusion

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

References:

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

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

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Photo by Lance Anderson on Unsplash

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

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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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