Winning the war on infrastructure delays

Author: | Published: 1 Oct 2011
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The Indian government is striving to shrug off its country’s unwanted reputation for infrastructure project delays and inefficient regulations. As part of its proposed five-year plan starting from 2012, it has announced it will spend US$1 trillion in an attempt to bring Indian roads, ports and airports up to international standards. This mission statement has been well received by investors and industry participants, though significant hurdles remain.

Rampant delays in infrastructure projects plague the country, with inefficient regulation an oft-cited culprit. Some of the causes for these delays can be traced to problems arising from land acquisition, licences, consents, permits, labour issues and problems with security.

For example, the Land Acquisition Act allows the government to purchase land from its owner for public purpose and then pay compensation. But resistance by landowners to the acquisition of their land often causes delays. Khaitan & Co partner Amitabh Sharma says: “The main reasons for this resistance are that the current laws do not address the adequacy of compensation with regards to market rate, and resettlement and rehabilitation issues.”

Given the primarily agrarian nature of land use in India, resistance to land acquisition by landowners should be expected, argues one corporate counsel at a domestic infrastructure company. “This has the potential of delaying project commencement because landowners often challenge the land acquisition in a court of law after the project is granted,” he says.

The government is aware of this issue and has previously attempted measures to streamline processes and eliminate conflicts and uncertainty. For example, in 2007, it introduced a Bill to amend the Land Acquisition Act and the Resettlement and Rehabilitation Act. Unfortunately, these Bills lapsed as they could not be passed by both houses of parliament. “But the government has now constituted a working group,” says Sharma, “to draft a single comprehensive legislation to address compensation, resettlement and rehabilitation issues.”

Red tape

Infrastructure projects also typically require a myriad of consents and approvals, including considerations under environment laws, pollution control laws, labour laws, and building construction approvals. This all adds up to more red tape, says Sharma. “These multiple licences are granted by the appropriate state and central government departments, which cause delays in the implementation of projects.”

However, states such as Andhra Pradesh, Gujarat, Maharashtra and Tamil Nadu have proactively taken policy measures to address these delays by introducing a single window clearance mechanism for different infrastructure projects.

Amitabh Sharma, Khaitan & Co

The government also takes special notice of certain high profile transactions, says Sharma. “In cases of ultra mega power projects, the Ministry of Power facilitates land acquisition and securing key clearances, such as environmental clearance and fuel (coal linkages), before the bids are invited.” In such cases, the state or central government will also render assistance to the project developer over the resettlement and rehabilitation of project-affected persons.

Yet another cause of delay arises when infrastructure projects are awarded as a result of an international competitive bidding process involving foreign players and investors. “In cases where the bidding process, or award of bid, or disqualification of a bidder, is challenged in a court of law,” says Sharma, “the slow and delayed legal proceedings in such cases cause hindrance in the completion of the project. Additionally, disputes might arise between project owner and contractors causing even more impediments.”

Counsel in the infrastructure space are keen to advise investors that they need to fully understand India’s operating business environment before they consider jumping on the infrastructure bandwagon. “Legal implications can have a major impact on the success of an investment,” says one corporate counsel at a domestic construction company. “But, for prepared investors, this sector can turn out to be a window of opportunity. Reasonable solutions to legal hurdles faced by infrastructure companies can be overcome with efficient legal planning.”

State and central governments are launching various initiatives in order to address crippling delays with infrastructure projects. The Ministry of Environment and Forests, for example, has put in place a robust but detailed mechanism for the granting of environmental clearance for infrastructure projects.

Several dedicated infrastructure committees headed by the Prime Minister of India have also been created. These include the Public Private Partnership Appraisal Committee, to streamline and simplify the appraisal and approval process for PPP projects, and the Cabinet Committee on Infrastructure, to approve and review policies and projects across infrastructure sectors. The latter also deliberates on financial, institutional and legal measures required to enhance investment in infrastructure sectors.

Larsen & Toubro’s financial services business chief legal adviser Raji Vishwanathan is sceptical on whether the above initiatives go far enough. ”In spite of all of these efforts, there have been reports that say that more than 50% of centrally-funded infrastructure projects are getting delayed. The government has taken notice of this and has decided to set up a Central Sector Projects Coordination Committee for monitoring the implementation of central sector projects that cost more than INR1.5 billion (US$34 million).”

Vishwanathan is not alone in recognising the challenges ahead. The development of India’s infrastructure sector is a monumental endeavour by the country’s government. While encouraged by the above efforts and measures taken by the government, lawyers warn that there is plenty more work to be done.

India: Project success rates
Sector % No. of Rated Projects/ Programs
Energy 77.78 18
Finance 71.43 7
Public sector management 33.33 3
Transport and ICT 45.45 11
Water supply and other municipal
infrastructure and services 66.67 3
Multi-sector 66.67 3
Total 64.44 45
Source: Asian Development Bank India Fact Sheet, 2011