Potholes discovered in public-private road projects

By Akshay Jaitly, Dinesh Pardasani and Mrinal Ojha, Trilegal
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While the National Highways Authority of India (NHAI) is aiming for better road infrastructure in India through the public-private partnership (PPP) route, the process for the appointment of private partners has recently developed potholes.

Akshay Jaitly Partner Trilegal
Akshay Jaitly
Partner
Trilegal

In an attempt to ensure that road projects are developed by the most well qualified industry players, the model request for qualification (RFQ) issued by the Planning Commission of India on 5 December, 2007, introduced a points-based system to select bidders qualifying for the request for proposal (RFP) stage. The RFQ permits the selection of five or six applicants who would pre-qualify on the basis of their aggregate experience scores.

Indian road developers cried foul, alleging that this criterion favoured the more experienced overseas infrastructure companies, was anti-competitive and would result in cartelization.

The National Highways Builders Federation, a body representing the interests of highway developers, including Indian major infrastructure players like L&T, GVK and GMR, went to court in January this year challenging the bidding norms.

Additional eligibility criteria

Instead of making suitable changes to the existing eligibility criteria, the government of India introduced additional eligibility conditions through a notification on 5 September for RFQs already issued by the NHAI for 53 road projects.

Dinesh Pardasani Senior associate Trilegal
Dinesh Pardasani
Senior associate
Trilegal

Under the additional criteria, the bidder (or its constituents or associates) will no longer be eligible to bid, either by itself or as member of a consortium, during a period of two months preceding the bid due date if it is: a) pre-qualified and shortlisted by the NHAI for the RFP stage in eight or more projects; b) declared by the NHAI as the selected bidder for four or more projects; or c) unable to achieve financial closure for two or more projects within the time period specified in the respective concession agreements.

The notification allows a bidder to withdraw from a project within one week of receiving the pre-qualification and short-listing notice for the bid stage from NHAI. Upon withdrawal, the project will not be included for the purposes of determining eligibility in accordance with the above criteria.

For 14 road projects at the RFP stage, the Ministry of Shipping, Road Transport and Highways recently issued directives to bidders qualified for more than eight projects, to decide which eight projects they wish to bid for.

A lack of clarity

In addition to causing logistical problem for bidders, the notification has failed to take into account the fact that bidders have already incurred development costs on their bids. As expected, legal challenges have been made, which could further set back many projects, some of which have already been delayed. Further, various ambiguities remain within the notification.

NHAI concession agreements allow 180 days to achieve financial closure, extendable by another 180 days upon the payment of a penalty. However, it is not clear whether the “unable to achieve financial close” criterion will be considered for the extended period.

In addition, it is unclear whether a bidder declared successful for more than four projects will have the opportunity to select the four projects it is eligible to develop.

Mrinal Ojha Senior associate Trilegal
Mrinal Ojha
Senior associate
Trilegal

If the bid due date for a project is extended after a bidder notifies its intention to withdraw from such a project, it is not clear if the bidder will still be allowed to bid on it, during the two months preceding the new bid due date.

Furthermore, bidders are, at times, part of different consortiums for different projects. The restrictions may cause disputes between consortium members if one member decides to withdraw.

Lastly, the biggest indicator that the notification has failed to achieve its believed objectives is that some projects are left in the lurch with the selected bidders withdrawing to remain qualified for more lucrative projects.

Rationality and transparency

On the one hand, NHAI is targeting the award of projects worth Rs700 billion by January 2009, while on the other hand the notification has opened up the possibility of litigation on the feasibility, interpretation and mechanics of the new eligibility criteria, in addition to negatively affecting the perception of India as a destination for investment in PPP projects.

The Government of India and NHAI would be well advised to step in immediately and clarify the criteria within the bidding process, to ensure that the procedure is both rational and transparent, promotes maximum competition and the participation of the best qualified Indian and international road developers.

Saket Shukla and Akshay Jaitly are partners, and Dinesh Pardasani and Mrinal Ojha are senior associates at Trilegal in Delhi. The firm has offices in Delhi, Mumbai, Bangalore and Hyderabad and has over 80 lawyers, some of whom have experience with law firms in the United States, the United Kingdom and Japan.

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