Rescheduling is prejudicial to the exchequer

As someone who has withstood the pressure from the infrastructure sector on the question of whether contract renegotiation should be adopted as a norm, Gajendra Haldea, Adviser to the Deputy Chairman of the Planning Commission of India minces no words. As the ink is barely dry on the Dispute Resolution Bill drafted by him and his team, he tells Shashidhar Nanjundaiah why it should not be exclusive to PPP.

When can the dispute resolution expect to see the light of day?
The bill, prepared on the instruction of the prime minister, has arisen out of widespread concern and representation made to the government about the present status of dispute resolution.

The delays in judicial pronouncements and arbitration as it stands today do not help resolve issues quickly. It is considered very expensive, sometimes open to doubt about the process itself and very often challenges in the courts, so you´re back to square one. Therefore for any credible investor, dispute resolution can be a nightmare there are many cases relating to foreign companies pending for years and years, which are actually quoted at various international forums, dampening an investor´s enthusiasm about the prevailing situation in India. Many private participants often build dispute costs into their bids, so in the end, it is not they who suffer, but the governmentùor, indeed, the exchequer.

Didn´t the Prime Minister specifically want a Bill for PPP projects??
It is not confined to PPP alone. While PPP will be an important aspect of bill, it applies equally to any public contract.

Is there a specific mention of PPP?
The Bill is about public contracts, and PPP is public contract, where disputes are similar to each other. PPP is a recent phenomenon and not many PPP disputes have arisen so far, but it is also reflective of the care taken to standardise model contracts including RFPs and RFQs, minimising the potential for disputes.

In the cases of Delhi and Mumbai airports, one of the unsuccessful bidders challenged the evaluation, short listing and selection process.

We then created model bidding documents and for past five years. Over the five years since, a few hundred projects have been bid out and we haven´t witnessed any disputes so far. So disputes have been fewer in PPP projects, but several scores of thousands of crores of rupees are stuck from disputes in highway ´cash contracts´, and contractors are stranded because of working capital problems.

Do you think the Bill might deter disputes or make disputes come out more in the open and discourage across-the-table resolution?
Nobody likes to go to court if there is a chance to sit across the table and settle matters. In a recent round table discussion we conducted, infrastructure investors said the opposite that the trend of going the arbitration way seems to have spurted in recent years…

That could be in the case of ´cash contracts´ rather than PPP projects. Disputes can be a symptom of two underlying factors that the contract itself is ambiguous, or the government is not responsive enough to the contractor (such as land or clearances). Often, government agencies may not be fulfilling their contractual obligations because of apathy, inefficiency, incapacity, lack of understanding, or corruption. So we need a mechanism to air grievances and be heard in a fair manner.

An arbitrator is typically not a technical expert, and the industry alleges that delays in resolution are also caused because the arbitrator takes longer to understand issues. Does the Bill direct a change in the qualification of arbitrators?
A contract by definition is a legal document, not a technical document. So the rights and obligations which are in dispute are contractual in nature, while an arbitrator may need some amount of technical understanding or technical support or explanation by technical experts, primarily it is adjudication of rights and obligations, therefore it is a more quasi-judicial activity than a determination of technical matters.

It would be a concern if you have a floating population of arbitrators, who come and go without acquiring any sector knowledge, so it is a good idea to create a pool of arbitrators, who will then acquire specialisation and expertise in different ways.

The highways sector seems to be bearing the brunt of disputes because of contractual breaches or viability issues and this is happening despite the existence of the most acclaimed Model Concession Agreement there is. Why?
Again, I don´t think there are many disputes in PPP on highways. Most of the disputes relate to item rate construction contract. In an item rate contract there is discretion on day-to-day function, leading to disputes. The developed world moved away from this kind of contract 50 years ago. Now that the cabinet has approved a modernised system of procurement, cash contracts, too, need to follow that system. Without doubt, the number and nature of dispute will be far manageable then.

You have been a champion of PPP, but with what is going on in highways sector, where major players are pulled out of the biggest milestone projects, do you see this as a mere speed breaker in the process of learning or do you think that we need to rethink?
Let me give you an example, you definitely heard of the subprime housing crisis in US. Greed and excessive lending failed the otherwise well-intentioned activity.

The problem I have with that comparison is, why isn´t there a mechanism in our system, especially since public interest in involved in PPP?
There is a mechanism in our system, and people did not follow itùas in the case of the subprime crisis. When the mood is exuberant, people don´t listen to caution and rationality.

For example, we had advised NHAI not to pre-qualify and shortlist more than six or seven [bidding] companiesthis is a part of the government approved model document. But the highway bidders, not wanting to be left out, lobbied aggressively and got that clause scrapped for the highway sector. The government, for some reason, saw merit in it.

Theoretically don´t you think that this will raise the so-called crony capitalism issue?
Quite the opposite. In the US, which we consider quite evolved in matters of competition, market regulation and procurement practices, the Congress has passed a law not to shortlist more than five. We have chosen to ignore that benchmark.

But GMR, GMK and others exited after bidding unrealistically. Are you for or against the decision now to allow them to defer their payments?
My personal view is that it is against the provision in the contract, prejudicial to public exchequer. There are clauses within the existing contract that provide relief: If, because of the fault of NHAI the concessionaire cannot meet O&M expenses, NHAI can provide a loan. Rescheduling is similar to writing a loan.

Changing bid conditions post-award in an effort to salvage a handful of projects will create an unstable bidding environment and may be unfair to hundreds of other projects.

This can be seen as a form of contract renegotiation?
We have not recommended a clause [for renegotiation], but in the case of unforeseeable situations (eg, total lack of domestic coal supply for a committed power plant), the contract should provide guiding principles and govern renegotiation. We have recommended an expert body that lay them down, after detailed discussion of the conditions.