PPP problems

Sumeet Kachwaha and Dharmendra Rautray analyse five key infrastructure construction issues in India

Given the infrastructure gap and resource crunch in India, the country has adopted the public private partnership (PPP) model and now has one of the world’s largest PPP markets. However, due to inefficient and inequitable allocation of risk among stakeholders, the PPP model has lost its lustre. The major problems plaguing construction projects following the PPP model are as follows.

Land acquisition. Land acquisition delays continue to be the single most important factor causing roadblocks for major projects in India. In its enthusiasm, the government has at times placed projects for bidding when less than 10% of the required land has been available. Even in cases where land acquisition had been completed and compensation paid to land owners, the actual handing over of possession to project owners would frequently get stuck due to political or allied reasons.

Environmental and forest clearance. The inability to secure mandatory environmental clearances has severely affected the financial model for most PPP projects in India, especially in the roads sector. The procedure to obtain approval under the forest protection statutes is cumbersome and time consuming. Permission to fell trees is for a stipulated time period and must be renewed upon expiry, resulting in additional delays.

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Lack of independence of independent engineer/consultant. Independent engineers play a pivotal role in ensuring the timely completion of projects and taking construction-related decisions. Although the impartiality and independence of the engineer is embedded in the model agreements, in practice the actions of the independent engineer may be bereft of such ideals. The independent engineer entity enters into an agreement with the employer to which the contractor is not a party. The terms of this agreement may impair the impartiality and independence of the engineer and cause a shift in the allegiance in favour of the employer. With an eye for repeat appointments, the independent engineer’s partiality may be reflected in crucial decision-making during the construction stages. In many cases, especially while determining issues relating to extension of time, independent engineers have been seen to abdicate their decision-making power to the employer and allow themselves to be guided by the internal determination of the employer.

Shifting of obstructing utilities. Projects are normally awarded with public utilities such as electricity poles, water pipelines, telephone cables, sewerage drains etc. still on the work site. Although the parties identify such hindrances and obstructions during site survey, the contract imposes an obligation on the contractor to coordinate with the relevant authorities owning the utilities. These authorities take abnormally long periods of time to remove the utility from the construction site. Such delays impede and derail the work programme, and have a serious impact on the financial model. The relief provided to the contractor for such delays under the contract is very limited and does not adequately compensate the contractor. The contractor is often also faced with a situation where the state government, under whose jurisdiction the project lies, delays the execution of the state support agreement.

Absence of adjudication process during construction stages. It is common in construction projects for disputes to arise between the employer and the contractor during the construction stages. However, effective resolution of disputes with provision of immediate or interim relief to the contractor is the key to ensuring that the project remains on track and economically viable. More often than not the dispute resolution mechanism (usually through ad hoc arbitration conducted by retired judges) is cumbersome and inefficient. Enforcement of the award can take another few years. All this can have an irreversible impact on the financial model of the project. Hence, the need for having the process of adjudication that has been adopted in many jurisdictions including the UK, Malaysia and Australia.

The adjudication process entails appointment of a named adjudicator in the parties’ contract or selection of the adjudicator by a nominating authority. The disputes arising during the ongoing project are referred to the adjudicator, who must then decide on it within a stipulated time period. The decision of the adjudicator is binding but is not final until final determination by the arbitral tribunal. The need to provide immediate relief to the contractor (with certain safeguards), notwithstanding the pending challenge would ensure that the project does not become financially unviable in the event of a dispute.

To win back the confidence of the private players, the least the government can do is to not award projects until all pre-construction approvals are in place and the possession of the construction site is made available to the contractor free from encumbrances and obstructions. Further, there is urgent need to address reforms in construction disputes including introduction of a mechanism for interim relief.

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The authors are partners at Kachwaha & Partners, a New Delhi-based firm with a special focus on infrastructure, projects and dispute resolution (www.kaplegal.com).