Policy: A welcome move, but

We should guard against the risk of viewing the mere constitution of a regulator as a panacea for all the problems facing the sector, writes S Nandakumar.

The announcement in the Union Budget 2013-14 regarding constitution of a regulatory authority for the roads sector is welcome and addresses a long felt need. Insofar as the regulator can be constituted quickly and armed with independent powers, it has the potential to address a number of problems plaguing India’s highways development programme. If the regulator can facilitate expeditious dispute resolution and ensure fair and practical interpretation of several concession provisions, it can have a salutary effect on the credit quality of many road projects.

Given the state of play in the road sector – seemingly interminable delays in project completion, intra-governmental squabbles on permitting issues, developers walking away from concessions, user resistance to pay tolls and investor apathy including difficulties in securing bank finance – the proposal to set up an independent regulator has not come a day too soon. Anecdotally, over Rs 100 billion is reportedly locked up in various stages of the dispute resolution mechanism. This is an enormous strain on the working capital cycle of a capital-starved sector and one of the primary expectations is that the regulator would be to find mechanisms for expeditious resolution of these disputes.

It is indeed surprising that for a sector that has witnessed such enormous growth over the last ten years or so, India’s fairly successful highways development programme has embraced the public-private partnership (PPP) model with no overarching regulatory framework to govern its functioning. The present "regulation by contract" where each contract (or, the concession agreement, which itself has evolved over time through a process of trial and error) specifies the roles and obligations of the parties involved – chiefly the public authority and the private concessionaire – has served us reasonably well so far but as the programme expands, is clearly exposed to severe limitations. Interestingly, many developed countries have adopted this model for PPP projects in roads but they benefit from well-defined market structures and robust legal systems. Presently, the National Highways Authority of India (NHAI), a specialised state road development corporation or a government department at the central (Ministry of Road Transport) or state (Public Works Department) levels acts as the agency responsible for framing the rules of the game, monitoring individual projects in its capacity as the concession grantor, besides being responsible for overall programme implementation. This leads to the somewhat undesirable situation where the same public authority is called upon to play conflicting roles.

Need for regulation

The Planning Commission, which has historically driven the contractual framework for the roads sector, has proposed that the key functions of the regulator should include: Tariff setting, Regulation of Service Quality, Assessment of Concessionaire Claims, Collection and Dissemination of Sector Information, Service-Level Benchmarks, and Monitoring Compliance of Concession Agreements.

Many highway development projects tend to assume the character of natural monopolies, leading to situations where the users’ interests (be it unreasonable toll rates in relation to the time savings or poor condition of the road) could be compromised. The regulator could intervene to check possible abuse of monopolistic power. Likewise, it can seek to assure protection of investors’ interests by introducing clarity and certainty with respect to rate-setting mechanisms, service standards expected, capital expenditure to be committed and, most importantly, having a forum to resolve disputes in respect of the above as and when they arise. The function of effectively measuring the performance of the private concessionaire’s obligations can also be discharged by the regulator.

Road projects, like many other infrastructure assets, represent the provision of an essential public service and the role of an independent regulator becomes paramount in balancing the often contradictory needs of the private sector’s desire to earn a reasonable return on its investments versus the public’s expectation of high quality service at a fair price.

Empirical studies in international markets – Latin America, for example, and Chile, in particular – have demonstrated that the presence of a regulator can foster greater investor confidence in the sector by ensuring predictability and certainty.

Notwithstanding the myriad problems, it is fair to say that India’s experience with the introduction of a regulator in Telecom, Power and, in more recent times, Airports, has had a salutary effect on balancing the often contradictory demands and expectations of different stakeholders while ensuring that the sectors continue to attract the massive doses of capital necessary for bridging India’s infrastructure deficit, while providing better service levels. And, there is every reason to believe that the roads sector, too, can benefit from an independent regulator even as the government plans for a whopping Rs 2.5 trillion investment over the next five years.

That being said, we should guard against the risk of viewing the mere constitution of a regulator as a panacea for all the problems facing the sector. Careful attention also needs to be paid to ensuring that the proposed regulator is sufficiently independent (free from political interference, functioning outside the government machinery with its own sources of funding, independent of budgetary appropriations), staffed with persons possessing the requisite expertise and adequately empowered to discharge a clearly articulated mandate.