Is there a need for a roads and highways regulator?

By Shruti Sahu and Pia Singh, Trilegal
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Recent media reports suggest that India’s Ministry of Road Transport and Highways (MORTH) is once again considering establishing an independent roads and highways regulator. The Planning Commission’s working group report on the central roads sector for the twelfth five-year plan (2012-2017) first highlighted the need for such a regulatory authority. The proposed functions of the regulator were to include: (a) tariff determination; (b) regulation of service quality; (c) monitoring compliance with concession agreements and assessment of concessionaire claims; and (d) collection and dissemination of sector information.

This article outlines the current institutional framework of the sector, which is already battling regulatory overlaps, the proposed role of the regulator and what this might mean for the highways sector on the whole.

Responsibility shared

The government of India (GOI) is responsible for the development and maintenance of national highways, and various state governments are responsible for state highways, major district roads and village roads. The GOI can delegate its functions in relation to development or operation of specific national highways to state governments, subject to certain restrictions.

Shruti Sahu
Shruti Sahu

The MORTH and the National Highways Authority of India (NHAI) currently share responsibility for the development and maintenance of national highways covering almost 77,000 kilometres. Additionally, the NHAI is responsible for implementing the National Highways Development Programme (NHDP), which is a GOI initiative to upgrade and strengthen national highways in phases.

Projects under the NHDP were earlier awarded as item rate cash contracts and are now executed in public-private partnership (PPP) mode. For PPP projects, the NHAI typically adopts a two-stage bidding process for selection of private developers based on model documents drafted by the Planning Commission and blessed by the Ministry of Finance.

Other key players that have a significant role in the sector include the Ministry of Environment and Forests, the central and state pollution control boards, the Ministry of Railways and the Registrar of Companies. These entities grant clearances and consents imperative for the development and operation of national highways.

Where are we now?

Some of the persistent issues plaguing private-sector players in the road sector include: land acquisitions hurdles; protracted procedures for obtaining environmental and forest clearances; limited availability of project finance; litigation; construction delays; and traffic projection uncertainties. Another issue is that the current draft of the model concession agreement is tipped in favour of the NHAI.

All of this affects the risk-reward profile of road sector projects in the minds of private-sector players and financiers. The biggest challenge facing the MORTH and NHAI at this juncture is to rekindle quickly waning private investor interest.

Pia Singh
Pia Singh

Historically, independent regulatory bodies have been introduced in sectors dominated by the public sector which are opened up to private operators, or to oversee the functioning of private players and prevent anti-competitive practices. At first glance, the proposed role of the roads and highways regulator seems similar to that of the Airports Economic Regulatory Authority of India.

The NHAI already wears multiple hats as executor, administrator and regulator of highway projects. Its functions include: surveying, developing and managing highways; developing value-added services such as hotels and restaurants along highways; advising the GOI on matters relating to highways including drawing up highway schemes; and collecting fees/tolls on behalf of the GOI. The NHAI also tends all PPP highway projects from cradle to grave, i.e. from the signing of concession agreements to the amicable resolution procedure.

The question that arises is: given that the MORTH and NHAI are currently responsible for these functions and have not been successful, how will a new regulator be a game changer? The highways sector is certainly in need of radical reform. However, such reform may not be achieved by introducing another layer of macro-supervision as this would not adequately address the many issues and weaknesses plaguing the sector.

In context of the highways sector, the NHAI has been operating since 1995 and by now there should be a rule book (legal and regulatory) based on what works. Effective regulation of a sector can only be achieved when each participant’s rights and obligations are clearly defined and the consequences of failure to comply with one’s obligations are clearly set out (particularly insofar as the MORTH’s or NHAI’s failure to meet its obligations is concerned).

Further emphasis on safety, technology and skilled human resources could help. Eventually, however, if more than 60% of investment in road infrastructure is expected from the private sector, a lot more needs to be done – establishing a regulator cannot be the stock-in-trade solution.

Trilegal is a full-service law firm with offices in Delhi, Mumbai, Bangalore and Hyderabad. Shruti Sahu is a counsel at Trilegal and Pia Singh is a senior associate at the firm.

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