What lies ahead?

The road regulatory authority should have advisory, regulatory and development oversight, writes Vikash Kumar Sharda.

The Indian infrastructure sector has been snowed under unfavourable macroeconomic variables and project level stress over the past couple of years. The slowing economy had an adverse impact on the transportation sector, particularly the projects in the early ramp-up stage. Road projects continue to be plagued by land acquisition delays, environment approvals, execution challenges, financial stress, contract management issues and less than expected traffic. This has resulted in weak sentiment towards investment in this sector, in addition to the constraints faced by the developers in their ability to raise equity. This also puts additional pressure on the project financials which have scheduled obligations towards lenders in the form of principal and interest payment.

Lenders in turn are in a difficult position with their inability to accommodate multiple restructuring of the same debt facility. All the above-mentioned factors have resulted in lukewarm response to bids by private developers in the highways sector. This is evident from the fact that in YTDFY14 ~20, road projects worth Rs 27,000 crore offered by the National Highways Authority of India (NHAI) on toll and annuity have failed to receive any bids from the private sector.

The Government, on its part, has attempted to reverse the weak sentiment through clearance of the Land Acquisition Bill and setting up of the Cabinet Committee on Infrastructure. This raised some hopes of the stage being set for some turnaround. However, the sector has not witnessed any major improvement so far in spite of these initiatives.

It can be claimed that the roads and highways sector is the most mature sector among all infrastructure sectors in India. On one hand, the contract structures are well understood in the minds of the stakeholders. On the other, there seems to be no full accountability on the part of the concessionaire with respect to meeting all or part of the obligations. This often results in less than expected standard of enforcement of performance obligations. Historically, the federal set-up in India involves multiple jurisdictions by Centre and state, through agencies like the Ministry of Road Transport and Highways (MORTH), NHAI, PWD, etc., on critical aspects of the project. An added concern here is that not all NHAI projects have the support of the state through the state support agreement.

This has resulted in a situation where the NHAI is unable to keep up to its commitment with regards to support from all government agencies.

Another issue of pertinence is the monitoring of quality of road assets which is a direct outcome of adherence to performance standards by the concessionaire. In order to monitor the performance of the concessionaire, the concession agreement provides for appointment of an independent engineer who is expected to ensure that the private developer meets the required obligations with respect to the project and appraises the same to the concessioning authority. However, there is a likelihood of a conflict as the concessioning authority is also the implementing body with significant obligations towards the project like statutory clearances, land acquisition, etc. With the contract structures not providing for independent assessment of the performance of the authority across various parameters, there is likely to be a question mark on accountability of the authority.

In order to address these issues and bring about better accountability and contract management, the Government of India has proposed setting up of an Independent Road Regulatory Authority. Whether the issues above can best be addressed by setting up an independent road regulatory is still under debate.

The Draft Regulatory Authority for Highways in India Bill (RAHI), 2013 (the Bill is not publicly available at the time of writing this article and the assessment here is based on various news reports), prepared by the MORTH was released in November 2013. The proposed Bill has raised various issues which include the possibility of a dual role to the regulator involving both quasi-judicial functions (like Appellate Tribunal constituted under the AERA Act, 2008) and also that of advisory and development. Jurisdiction pertaining to tariff fixation and tolling mechanism, etc., are likely to be included as well.

Some of the key points discussed in the draft Bill highlight that the regulatory authority is proposed to have jurisdiction on national highways and any other road under the administrative control of the MORTH. At this point in time, state roads and highways have been excluded from the road regulatory purview. There is a big question if we should have a regulatory authority having limited jurisdiction on national highways only.

Adjudicatory powers to the proposed regulator in areas such as contract dispute resolution, enforcement of contractual provisions and renegotiation of future contracts are a continuous demand of the industry. However, whether it will play a role of truly fair arbitrator between public and industry interests is difficult to gauge in the current scenario.

On the other hand, contract dispute resolution is already covered in the concession agreement. Therefore, it is believed that streamlining existing provisions is the need of the hour and setting up a different authority will further impact the development in the sector from this perspective.

The draft Bill has also suggested that the proposed regulator should be given toll adjudication powers similar to the energy sector and the airports sector.

The CERC and the various SERCs are the two main regulatory bodies that govern the power sector while AERA is the regulatory body for the airports sector. So far these bodies have an established arrangement for tariff fixation, fair competition, transparency, and for providing a level-playing field for all players in the sector.

In addition to this, the key functions of the proposed regulatory authority are likely to include recognising market uncertainties, service standards, toll policy and modifications, regulation of service quality, assessment of concessionaire claims, collection and dissemination of sector information, service-level benchmarks and monitoring compliance of concession agreements, and monitoring financial health of projects.

So far, all the key functions discussed in the draft Bill indicate that the regulatory authority will have more of an advisory role and its role towards development of the sector is ignored at this stage. We believe that the road regulatory authority should have a blend of advisory, regulatory and development role. The role of this authority cannot be similar to that of tariff authorities in other sectors like CERC, SERC, TAMP, AERA, etc., as road assets are more standardised with little differences between projects as compared to other assets in sectors like ports, power, airports, etc. Moreover, road sector developers interact directly with the ultimate customer unlike other infrastructure sectors like ports and airports. Hence, there is a need for standardisation of tariffs so that it does not create confusion in the minds of the users. On the other hand, tariffs in power, ports and airports sectors need not be standardised as projects can possess inherent dissimilarities.

With all the above factors, it has become very critical for the government to clearly demarcate the key functions between the NHAI, RAHI and MORTH. An independent assessment of the performance of these bodies across various parameters is imminent for the efficient functioning of the sector.