The Viewpoint A Shot in the Arm  Reforms for the Highways Sector

The Viewpoint A Shot in the Arm Reforms for the Highways Sector

Bar & Bench

Bar & Bench brings to you the twenty eighth article on ‘The Viewpoint’ series with its Knowledge Partner J.Sagar Associates. JSA Partner Vishnu Sudarsan and Associate Kartikeya GS discuss the alarming number of arbitral disputes pending against National Highways Authority of India (NHAI) in tribunals and various courts and the increasing inefficiency and unsuitability of the existing dispute resolution mechanism in the NHAI concessions and the various reforms needed in the Highways sector.

By Vishnu Sudarsan and Kartikeya GS

The Numbers Game

The National Highways Authority of India (NHAI) appears to have its glass filled to the point of overflowing. Reports highlight that there are 1,635 arbitral claims pending against NHAI in tribunals and various courts, the value of which has been pegged at Rs. 11,084 crore.[1] The Second Report of the BK Chaturvedi Committee, published in 2010, reported 1,250 pending arbitral claims. These figures, besides their worrying enormity, throw into stark relief the increasing inefficiency and unsuitability of the existing dispute resolution mechanism in the NHAI concessions. The Second Report of the BK Chaturvedi Committee and the newspaper report highlight the weakness of the existing dispute resolution, which in turn is adversely affecting the smooth implementation of the highway projects. This worrying state of affairs calls for the adoption of new mechanisms of dispute resolution.

Extant Mechanisms

Since the liberalization of the Indian economy in 1991, there have developed three primary regulatory mechanisms for infrastructure concessions – (a) the contractual model of regulation wherein the rights and obligations of the parties, including performance standards and monitoring, dispute resolution and payment mechanisms are determined by way of a contract (such as in water, solid-waste management); (b) the economic model of regulation, wherein the performance standards, entry into the market, tariffs, dispute resolution and other issues are overseen by a sectoral regulator (such as electricity); and (c) the hybrid model of regulation in which licensing functions are not vested with the regulator and a separate independent regulator regulates tariffs, quality of service and other related issues while dispute resolution is administered by an appellate body (such as telecom and broadcasting).

Based on the above models of regulation, diverse formats of dispute resolution mechanism have also been evolved in the Indian infrastructure sector. These range from in situ mechanisms (such as mutual discussion, mediation, arbitration, etc.) to ex situ mechanisms (such as sectoral regulators, the ordinary courts of law, etc.). The water, highways and solid-waste management sectors have favoured in situ mechanisms (with provision for later recourse to the courts) while the electricity and telecom sectors have evolved frameworks with sectoral regulators taking the forefront in the resolution of disputes.

The primary concession models adopted by NHAI are the Build-Operate-and-Transfer (BOT) model and the Engineering-Procurement-and-Construction (EPC) model. Each of these has an in-built dispute resolution mechanism. An outline of each model is presented below:

In either, case, if the arbitral award is unacceptable to either party, the same can be challenged in a court of law in accordance with the Arbitration & Conciliation Act, 1996. The noticeable difference between the dispute resolution mechanisms of the two models is the presence of the DRB – the BOT model calls for another round of mediation where the EPC model refers the dispute to the DRB. The grounds for referral to arbitration are, consequently, different, for under the EPC model, it is dissatisfaction with the DRBs decision that leads to arbitration while in the BOT model it is the inability to resolve the dispute by way of mediation that leads to arbitration.

The Ministry of Road Transport and Highways (MoRTH) recently announced a new model concession contract for bidding out project on an EPC basis. 30% of all new projects are expected to be awarded on this model. The dispute resolution mechanism under this model involves a reference of all disputes directly to the DRB (without any recourse to mediation). Disputes with regard to maintenance are referred directly to arbitration. The DRB comprises three members – each party appoints one member and these two members in turn appoint the third. If either party is dissatisfied by the recommendations of the DRB or if the recommendations are not issued within the stipulated period, the dispute is referred to arbitration.

The Dispute Resolution Boards – A Report Card

The major changes in the dispute resolution mechanism envisaged in the new EPC model is the doing away with of mediation – now, all disputes are directly referred to the DRB without any prior obligation on the parties to try and settle their disputes by way of mediation or other informal inter-party negotiations. The DRB, thus, becomes the first tier of dispute resolution under the new EPC model.

However, it is of concern to note that a World Bank study[2] on the operation of dispute resolution mechanisms for civil works in India concluded that the operation of DRBs had been ineffective. The DRBs took far longer than contractually mandated to make their recommendations. Even after the recommendations were issued, they suffered from an alarmingly high rate of rejection (see chart below).

However, it was also seen that the efficacy of the DRBs depended to a large extent on the intent of the contract personnel to manage the contract professionally and efficiently. Where the DRBs had been established on time, site visits conducted regularly, and disputes referred by the parties at the earliest, the results were positive, with the projects being completed on time and the disputes, being effectively resolved.

Acceptance and Rejection of DRB Recommendations

(Source: World Bank)

Dispute Resolution in the Telecom and Electricity Sectors

In the electricity sector, an independent regulatory body (the state electricity regulatory commissions and the Central Electricity Regulatory Commission) is vested with the power to adjudicate any disputes or refer any dispute to arbitration. All orders passed by the regulator are subject to appeal before an independent expert appellate body, the Appellate Tribunal for Electricity. Orders of this Tribunal are appealable by way of a civil appeal before the Supreme Court.

In the telecom sector, an independent regulatory body (the Telecom Regulatory Authority of India) is vested with the power to regulate performance standards and determine tariffs. An independent appellate body, Telecom Disputes Settlement and Appellate Tribunal (TDSAT), adjudicates appeals preferred against any decision, direction or order of the Telecom Regulatory Authority of India or any dispute between licensor and licensee, between two or more service providers or between a service provider and a group of consumers. Orders of TDSAT are appealable by way of a civil appeal before the Supreme Court.

The advantage of these mechanisms is that the regulator is comprised of sector focussed technical, financial, legal and other experts who are in the best position to decide most complex issues and, as result, courts of law do not ordinarily interfere with such expert adjudication. Further, both the Appellate Tribunal for Electricity and TDSAT are bound to make decisions within statutorily fixed periods of time, failing which they must record in writing their reasons for the not doing so.

The rate of disposal of cases in these sectors is the strongest commendation of the efficacy of these dispute resolution mechanisms. TDSAT has disposed off 3760 out of the 4791 matters that have come before it, an efficiency rate of almost 79%. On the other hand, the Appellate Tribunal for Electricity has (as of October 30, 2011) disposed off 2464 of the 3218 cases before it, an efficiency rate of about 76%.

Conclusion – “To change old rules for true inventions”

The national highways sector, once the crowning jewel in India’s infrastructural growth, has floundered in recent years as a result of waning enthusiasm in the markets, institutional hubris and snail-paced dispute resolution mechanisms. If the goal of a robust network of roads inter-linking the subcontinent is to be realized, it is past time that the authorities sit up and take some decisive action.

In this regard, perhaps the models that have shown marked success in the electricity and telecom sectors may be adopted or adapted to the highways sector. An independent regulator ought to be put in place for resolution of disputes. It is noteworthy that both the EPC and the BOT models have provisions for the referral of disputes to a statutory regulatory authority or commission with power to adjudicate disputes between the parties. However, until now, no such regulator has been instituted despite the obvious failings of the present mechanisms. MoRTH should take heed and set the stage for an independent technical body for resolution of disputes.

In the ultimate analysis, swift and decisive action will ensure resurgence in the sector and pave the way for a vigorous and sustainable growth.

Vishnu Sudarsan (pictured left) is a  Partner and Kartikeya GS is an Associate with JSA. Views of the authors are personal.

[1] Mihir Mishra, “Rs. 11,084-cr arbitration claims on NHAI,” Business Standard, April 26, 2011.

[2] World Bank Procurement Services Unit, South Asia Region, Study of the Operation of Dispute Resolution Mechanisms for Civil Works in India, (2007).

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