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Construction : Exclusive Report | November 2012 | Source : Construction Update

NHBF calls for better project planning in road sector

National Highways Builders Federation (NHBF) is an apex organization of all contractors or builders of national highways, state highways and bridges in the organized sector and it aims to promote the interest of the industry through various activities.

"The risk profile of road projects has increased considerably due to issues relating to land acquisition problems, increased traffic risk, changes in the scope of projects and cost overruns, among others"

M MURALI, Director General, National Highways Builders Federation (NHBF) shares his views with Raja Iyer, Research Analyst on issues plaguing road sector and suggests policy steps that government must take to boost investment in the sector. Edited Excerpts...

Owing to lack of encouraging response from private contractors, government plans to trim its target for highway project award during 2012-13. What are the causes of lukewarm response from private contractors?
Raising funds for road projects is set to become tougher for developers. The Ministry of Finance recently suggested that all public sector banks disburse loan for road projects only after ensuring that 100 percent 'right-of-way' has been acquired by the National Highways Authority of India or state governments.

As per the Centre's policy initiatives for attracting private investments to the road sector, the 'right-of-way' needs to be made available to concessionaires free from all encumbrances. However, on the ground, that is not often the case. In most of such cases though, the banks till now had no hesitation in financing the projects.

Another suggestion of the Ministry of Finance to PSBs that could have an adverse impact on the road sector relates to contribution of promoters in the special purpose vehicles that are set up for implementing projects. At present, promoters are allowed to bring their share of contribution in SPVs in phases. The Ministry of Finance has proposed that PSBs should seek minimum 50 percent upfront contribution from promoters in SPVs. Such a measure, if initiated, is bound to burden promoters with higher risks, particularly if the project gets stalled due to any reason.

The response of the private sector to BOT road projects in the current financial year so far has been subdued as compared to the overwhelming response received in 2011-12. The main reason cited for the lack of interest is lack of availability of finance. Many banks have already reached the sectoral ceiling prescribed by the Reserve Bank of India. Delays in land acquisition and obtaining environmental and forest clearances are also slowing down the sector. In 2011-12, a record length of 7,957 km. of roads was awarded for strengthening, up gradation and improvement.

Critical materials for road construction are bitumen, cement, steel and stone metal or aggregates required for road construction, except bitumen, all the other input materials have competing demands from other sectors. It is likely that there would be a huge pressure on availability of stone aggregates and bitumen.

Stone quarrying and extraction is one of the area where attention of the Government is lagging behind which may lead to serious repercussions in road building constraints owing to (i) possible quarrying and mining regulations being stringent; and (ii) capacity of crushing plants. (iii) Frequent change in the policy of Mining, environmental issues. (iv) Policies of various state Government on permitting the extraction of aggregates (v) various court ruling on mining. Road builders were not in a position unless the availability of the aggregates be resolved on a priority basis, otherwise it will not only impact on future of road sector but will have a larger impact on ongoing road projects.

What steps should the government take to attract private bidders for road projects?
The Twelfth Plan has aggressive investment targets with at least 50 percent of the investment proposed to be contributed by the private sector. At present, the private sector is finding it difficult to raise funds, especially debt for infrastructure. Funding needs to be facilitated and is an immediate action area for the government.

The government has taken some positive steps in this direction. In June 2012, the RBI allowed Indian companies in the infrastructure sector to avail of External Commercial Borrowings (ECBs) of up to $10 billion for repayment of outstanding rupee loans as well as for fresh projects (with certain conditions). Setting up of Infrastructure Debt Funds (IDFs) and reduction in Withholding Tax are some other positive measures that are expected to facilitate the flow of long-term debt into infrastructure projects.

The Twelfth Plan period has begun and there is a need for the government to take some additional steps that will stimulate funding in the short term to enable achievement of the Plan's investment goals. The government may initiate this by infusing additional capital in major public sector banks. Infrastructure bonds will be given an additional boost by increasing the tax exemption limit for them to Rs 100,000. Furthermore, decisions pertaining to inclusion of lending to the infrastructure under the priority sector, exempting infrastructure lending from SLR or CRR requirements, introduction of the General Anti Avoidance Rules (GAAR), and additional tax incentives for project developers and EPC companies are expected to be undertaken on a priority basis.

These will to some extent allay the fears of the investor community and open up additional sources of funds, particularly foreign ones. Policy and regulatory reforms in the infrastructure sector as well as in financial markets have a long-term effect on availability of funds, since they create a conducive environment for investors. These need to be fast-tracked and will go long way in creating a mature financial market for investment in infrastructure.

Do you think there are flaws in the PPP framework adopted by government for highway sector? If so, what are the flaws and how can they is remedied?
Land acquisition is one such issue that requires immediate action for the objectives of the Twelfth Plan being achieved. According to estimates, based on an analysis of a sample of BOT road projects, around 70 percent are facing inordinate delays in implementation owing to issues related to acquisition of land from the relevant authorities.

The contractual obligations under PPP require that around 80 percent of the land needs to be made available to the Concessionaire before the initiation of construction and the balance within 90 days from the appointed date. Government has not been able to provide the land in many cases, which has delayed construction and led to time and cost overruns.

Clearances from various ministries and departments further add to the delay. Since there is no single-window mechanism, considerable time is wasted in receiving clearances from multiple agencies.

The environment-related matters, clearances to be sought from five different agencies including the Ministry of Environment and Forests and the Central Pollution Control Board - clearances for Wild Life require the prior approval of the Supreme Court (SC). Cases are referred to the State Board of Wildlife (SBWL) and the National Board of Wildlife (NBWL), based on their recommendation. After receiving the SC's approval, proposals are processed by a state government for clearance relating to forests. This complex clearance mechanism delays many projects and needs to be simplified at the earliest.

In PPP contracts, the main cause of dispute is non-availability of land. This often gives rise to disputes between the NHAI and contractors, and the present dispute-resolution process is not fair and is often skewed toward the authority. Therefore, most such arbitration judgments are not accepted and go to court.

Financing has lately emerged as the major constraint for the road sector. Domestic banks are close to their exposure limits on lending to the infrastructure sector. Loans fund around 70-80 percent of investment and this situation has reduced the availability of loans. The refinancing option through IIFCL has not gained popularity, leaving limited access to low-cost funds, even after improved risk profiles after projects are commissioned. Therefore, availability of funds is another bottleneck for road projects.

The risk profile of road projects has increased considerably due to issues relating to land acquisition problems, increased traffic risk, changes in the scope of projects and cost overruns, among others. This is necessitating financing through longer-term loans of typically 18û20 years. Banks are not willing to sanction such long-term loans because of asset-liability mismatches. The limited growth of refinancing through IIFCL is not offsetting this gap. Furthermore, weak capital markets have made raising equity finance for road projects more difficult. Currently, financial markets are not conducive for making investments in infrastructure. Therefore, urgent measures are required to meet targets.

The approach of the sponsoring agency to project planning or pre-tendering activities is partially to blame for roadblocks in land acquisition and environmental clearance. In the rush to award projects, the authorities often side-step crucial procedures such as land acquisition and project planning. There have been instances where the sponsoring agency has issued a Letter of Allotment to a shortlisted developer without even acquiring 80percent of the land required.

Similarly, incomplete documents submitted to the Ministry of Environment and Forest for environmental clearance further delay the approval process. This is the upshot of the way sponsoring agencies approach project planning and pre-tendering activities through the PPP or other modes.

There are broadly two issues related to project planning, which are plaguing the Road sector. First, poor project planning and engineering design in the tendering phase contributes to delays in projects. All stakeholders are not involved at the initial planning stage of a project. This often results in inadequate assessment of the risks involved and mutual interdependence required executing a project. Moreover, the quality of planning and engineering design is generally poor and lacks attention to detail, which creates problems including changes in the scope of a project and variations during its execution, which leads to disputes and delays. This is primarily because the selection criteria for hiring consultants are often skewed toward the lowest bid, which may not reflect their actual capacity to deliver projects. This results in poor planning and designs. Projects are also rendered unviable because the cost estimates at which they were launched become obsolete by the time they are tendered and/or awarded.

Secondly, this mindset is specifically manifested in procurement of PPP contracts, which are frequently processed in the same manner as EPC contracts. Most of the projects offered for bidding are inadequately structured and unsuitable for a PPP model. The risk allocation among sponsoring agency and the developer is not appropriate, which makes it difficult to attract sound developers for bidding. Therefore, although most of the infrastructure sectors have model documents for PPP, there is a need to reform contracts to factor in actual time periods and avoid delays.

For instance, RFP documents stipulate one month as the maximum time between issuance of a Letter of Award to signing of a Concession Agreement. However, the average time taken is around two months in 80percent of road projects. This is primarily due to the fact that time taken to form an SPV is around two months. Hence the procedural delay.

Similarly, the average time taken from the date of a Concession Agreement to the appointed date is almost 10û12 months for almost 85percent of the projects, as compared to the stipulated 6 months in the Model Concession Documents23. The primary cause for such delays includes land acquisition, forest and environmental clearances, approval from the railways; etc. There is therefore an urgent need to address these project- planning bottlenecks. Implementation of such measures would streamline the process and result in reduced time and cost overruns.

(Suggested remedial measures can be seen in the below table)

In order to overcome financing hurdles faced by highway developers, some suggest regulators to increase cap on bank lending to the sector? Besides bank credit, do you feel government must liberalize external commercial borrowing (ECB), FDI and other norms for raising funds?
Funding is another major roadblock in implementation of infrastructure projects. There is increasing reliance on the private sector for developing and maintaining infrastructure. The private sector, however, needs funds to develop infrastructure projects that are capital intensive and have a high gestation period. Typically, private investments in infrastructure projects are mainly in the form of debt raised by developers.

Presently, most large developers or EPC contractors have over-leveraged their balance sheets to raise debt and their cash flow does not permit them raise fresh debt to fund new projects. Therefore, the projects awarded recently are witnessing delay in achieving financial closure.

Financing of the road projects is requires huge funding. This problem is further compounded with most commercial banks and financial institutions having reached their exposure limits for funding infrastructure. Their ability to lend is further constrained by the slow mobilization of deposit, as compared to the growth in credit and the asset-liability mismatch in commercial banks.

Equity markets are also not favorable for financing projects because of uncertainties in the global economy and due to present regulatory requirements limiting exit options, which hinder equity infusion. Most infrastructure companies have diluted their equity in public markets and their ability to further dilute through equity infusion from other investors is restricted due to contract restrictions.

On the whole, challenges relating to funding are unlikely to be resolved in the short term and we may not see the same rate of expansion in the coming two or three years as we have seen in the past. The Government may need to seriously begin thinking of solutions that can effectively address funding issues.

Take following steps to facilitate long-term finance for project developers and concessionaires:

  • ease flow of long-term finance;
  • develop secondary corporate bond markets to increase liquidity;
  • introduce new instruments like take-out and mezzanine financing;
  • encourage new players like insurance cos. pension funds and other FIs to participate in the long-term debt markets and financing of road Infrastructure projects; and
  • promote credit enhancement services by specialized credit guarantee firms such as monocline insurance providers.

One of the hurdles faced by road developers is land acquisition. How do you expect the land acquisition bill, if passed in the present form, would impact highway projects?
As is evident from the previous sections, India's infrastructure sector is in dire need of immediate interventions to remove roadblocks and accelerate Road development and implementation of projects. These interventions would need to range from policy actions, regulatory changes and pushing the reforms agenda, which would create a conducive environment for attracting investments to the sector.

Delay in land acquisition is the single largest reason for delays in project implementation.The introduction of the LARR may smoothen the process of acquisition and reduce the incidence of disputes or litigation, but it is likely to increase the cost of acquiring land.

The Government is however expected to follow up with policies or guidelines on land acquisition for project authorities or sponsoring agencies. It is also expected to issue guidelines that all infrastructure projects will only be awarded when 90percent of the required land has been acquired and at least 70percent is contiguous. The guidelines mentioned above will also apply to Right of Way (RoW)-for road projects transmission lines, etc.

Such guidelines will have a two-fold effect. They will reduce the tendency of agencies to launch bidding in the administrative rush or under political pressure. They will also goad them to be more rigorous during their project planning and diligence process before initiating the bidding process.

The Government has taken a positive step to resolve land issues by relaxing land transfer regulations for government-owned lands. It had made it mandatory for specific approval of the Cabinet being sought before leasing, license or transferring land. This led to long delays in concessions being awarded for infrastructure projects. The Government's recent initiative is therefore encouraging, since the likelihood of projects getting delayed due to procedural issue should now be resolved and complement the guidelines mentioned above.

The Government of India is planning to introduce a new bill, the Land Acquisition and Rehabilitation & Resettlement Bill (LARR), to resolve disputes relating to land acquisition. This Bill may ease the process of land acquisition and reduce the number of litigations due to the Government's detailed and improved provisions for compensation and rehabilitation, but this will also substantially increase the cost of acquiring land. This could be detrimental to private investments in the long term, since the viability of projects may be affected. Moreover, there is ambiguity over the term "public purpose," that may hinder land acquisition by the Government in the case of infrastructure or PPP projects.

Which one according to you should be the preferred mode for highway project award - item rate contract or EPC model?
The most favoured mode of execution of road contracts is the Engineering, Procurement and Construction (EPC) mode. Under the EPC contracts, the Government paid the contractor on the basis of measurement of work, which was susceptible to escalation in prices leading to substantial increase in cost of the project. Any change in the design and the cost of input was paid by the government. The current model does not mandate the contractor to maintain the road. The notable drawbacks are the delay in completion and poor quality as the private builder has no long term stake in the projects. Also, the possibility of disputes and claims increase manifold.

The EPC mode was considered to be more expensive and prone to escalation, and bereft of economic incentives. However, the fact of the matter was that the EPC model was not EPC in the true sense of the term, but was basically an item-based construction contract, where the Government retained a major portion of the obligations, including estimates of the work to be done by the contractor.

While the draft bidding norms for EPC projects suggested defect liability period of one year, road ministry wants it to be raised to 3-4 years in order to increase accountability of contractors. Can we have your views on that?
By imposing defect liability period of 5 years in the New EPC contracts would lead to a significant escalation in the total project cost due to holding back 10 per cent of the project cost for that period under this clause.

The Government version of that a shorter defect liability period would result in construction of poor quality roads will be defeated if the Government would not take appropriate measures for curbing the over loaded vehicles plying in our highways.

Overloaded trucks have been a menace on the Indian roads for some time now, contributing to thousands of deaths every year. This problem is not helped by the condition of many of the country's crumbling roads, but it is indisputable that without truck-overloading in India travelling around the country would be a much safer business.

The Government has taken a hard stance on this issue by imposing a blanket ban on vehicle overloading in India on highways across the entire country and yet measures have not been enough to stop drivers repeatedly defying restrictions.

Until this ban overloaded vehicles plying in the highways put on order this clause may lead to disputes in future.

The model request for qualification (RFQ) document considers only the technical score of the lead member in a consortium that bids for highway projects. Do you feel this encourages "name lending"?
The intention of the bidder to have a consortium /joint venture is not only enhance his technical score by collaborating with another company, but also utilize their experience, technical capability, resources like machinery, manpower and finances.

The clause of considering the technical score of the lead member will be a deterrent for the other aspects.

What according to you are the other issues plaguing India's highway sector? How can they be remedied?
Development of road sector would depend on the investment climate prevailing in the sector and the country. This would encompass factors like ease of being able to compete and win jobs, licensing and other clearances required, working environment like security (law and order) conditions, timely payments, availability of input resources, contract management and dispute resolution, subsidies and fiscal concessions, and profitability. Medium- to long-term planning by the Government with assured financing will encourage the road construction industry to develop, with the private players gaining confidence to take risks to set up new businesses or move in from other sectors.

Improving Dispute Resolution and Contract Management is extremely important from the point of view of profitability. Profitability in the road sector among all sectors is possibly the lowest due to non-transparency and poor governance, which often leads to compromise in quality. Informal sources indicate that this is one of the prime reasons for entering into litigation by contractors to make up for the losses or scant profits. This is also probably discouraging some of the better Indian and foreign contractors from taking up item rate road contracts.

Timely resolution of disputes during contract execution will go a long way in reducing delays in time and increases in cost. One option could be to institutionalize the arbitration process by setting up Road Appellate Tribunals at central and state levels. These should be independent from the implementing agencies as well as any form of regulator which the government might later decide to bring into the sector. Any disputes not resolved by the Dispute Resolution Board/Adjudicator (DRB) system provided in the contract could be referred to these Tribunals (having a fixed constitution of arbitrators specialized in contract law) and their decisions should be considered final. The existing provision of referral to an arbitration panel (made up of persons named by the contractor and client) is more time consuming and possibly results in dissatisfaction and consequent appeal in higher courts of law. Another strong suggestion is that in a sequential process of dispute resolution the decision of the previous process in the sequence should be implemented till the next higher process either reverses or changes the award. This should be applicable to both contractors/consultants and implementing agencies.

Another suggestion is for the employer, engineer and contractor to sit together when works begin, to clearly interpret the contract and come up with a set of bulleted guidelines clarifying their respective roles, responsibilities and approval powers. Here, it is strongly recommended that all road agencies should have some expert in contractual law to advise them to ensure correct interpretation of the contract, as well as issue notices and approvals as per the contract's provisions. This will help give the field level project officer some confidence in taking ownership of DRB awards and complying with them without pushing the decision making further upwards.

ANNEXURE-I

National Highways Builders Federation has suggested the following action plan to NHAI for implementing the critical milestones:

Time Schedule for compliance of Authority's Obligations for implementation of BOT Highways : Feasibility Stage to Appointed Date

 

 

 

 

Obligation

Feasibility Stage

RFQ Stage (Invitation of RFQ till short listing)

RFQ Stage (Issue of RFP till Receipt of Bids)

Issuance of Letter of Award

Signing of Concession Agreement

Financial Closure & Appointed Date

Time Duration Activity

Open

45 days

45 days

15 days

45 days

90 days

90 days

Cumulative Period

 

Open

45 days

90 days

105 days

150 days

240 days

330 days

Land Acquisition

Publish 3a

3A1 shall be ready

Publish 3A1 and 3D1 shall be ready

Publish 3D1

3G1 shall be completed

3H shall be completed

Environmental Clearance

Obtain approval of TOR from MOEF

EIA and SIA Reports shall be ready

 

Complete Public Hearing process

Obtain State Environmental Clearance (PCB)

Submit application for MOEF Clearance

Obtain Environmental Clearance from MOEF

Reserve/Protected Forest Clearance

Reserve/ Protected Forest Proposals shall be ready

Obtain approval from State Forest Department

Submit application for MOEF Clearance

Approval from Forest Department of MOEF

Obtain Environmental Clearance from MOEF

 

Wild Life Forest Clearance

Proposal of Forest land Diversion shall be ready

Obtain approval from State Chief Wild Life Warden

Obtain approval from National Wild Life Board

Obtain approval from Supreme Court

Obtain approval from Forest Dept. of MOEF

Obtain approval of Stage I clearance from Ministry

 

Utility Shifting Plans

Prepare Utility Shifting Plans

Request State Departments for Estimates

 

Obtaining Departmental Estimates

Ensure all clearances for Removal of Utility Shifting

Tree Cutting

Prepare
Schedule of Trees to be cut

Complete the process for joint verification of Tree enumeration

Deposit requisite fund with the Revenue Department

Ensure all clearances for Cutting and removal of spalls

BEFORE FLOATING THE ENQUIRY / BEFORE ISSUANCE OF THE LOA

  • Land Acquisition to be completed.
  • NHAI to approve and deposit the amounts for shifting of utilities to the concerned departments and forest department for cutting of trees.
  • Reserved or Private Forest Clearance including Wildlife.
  • MOEF Clearance for the Project including Soil/Rubble quarries.
  • MoU to be completed with Railway Authorities for ROBÆs.

THE FOLLOWING ACTIVITIES CAN BE DONE IN BETWEEN THE CONCESSION AGREEMENT AND APPOINTED DATE:

  • Shifting of Utilities and Tree Cutting
  • Appointment of Independent Engineer (IE)
  • In absence of IE, approval of mix designs, design of pavements/structures/bridges etc., nearby IIT/NIT to be nominated.
  • If Land Acquisition has been completed, the Concessionaire can perform the Topo Survey, Soil Investigations, Design of the
  • Roads/Structures/Major & Minor Bridges, RoB's.
  • Performance of the above activities at site, we may understand the ground situation from the local villagers/land owners for any obstructions/stopping of the works.
  • Concessionaire shall apply to various departments for permits/licences for installation of Plants at site. NHAI's full co-operation or follow up with the respective authorities to get the approvals in time.

ADMINISTRATION OF THE CONCESSION AGREEMENT:

  • Appointment of the Independent Engineer
  • Finalisation of the Change of Scope works on war footing basis.
  • Follow-up with the Railway Authorities for approval of ROB's Designs/Construction Activities.

(OR) Incorporation of Separate/Individual Milestones for the following activities under the Concession Agreement:

  • Land Acquisition
  • Utility Shifting
  • Trees Cutting
  • MOEF Clearances
  • Reserve/Private Forest Clearances
  • ROB's
  • Appointment of Independent Engineer

 
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