Indian Contracts & Risks - Time to Relook

Experience on

Infrastructure Contracts

S C Sharma

Former Director General (Roads) & Special Secretary

Ministry of Road Transport & Highways

3rd December 2016, New Delhi

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Contracts & Risks

Indian Contracts & Risks

Risk Control approaches

Identify and Remove sources of Risk, Mitigate, Transfer

OR Absorb Risk consequences and losses

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Infrastructure construction projects have a history of

problems

Generally, of high risk nature, which affects project

objectives -

Quality, Time, Cost

Response - Reactive

Item Rate Contracts-Employer’s risks are high

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Risks

Known and Controllable

Design: Inaccuracies in Survey, Design and Estimation

Errors in items of reference for setting out

Delay in Drawings, Design Changes,

Change of Scope

Right of Way

Delay in acquisition and giving access to the Site

Requirement of Additional Land due to changes

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Environmental Clearance

Concerns of stake holders , Inadequate EMP

Approvals, ROBs, Utilities, Unsuitable ground conditions

Unpredictable Risks

Unforeseeable Physical conditions,

Exceptionally adverse climate conditions,

Unforeseeable shortages of personnel, goods

Force Majeure

Non-political, Indirect political, Political Event

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Public Procurement- Annual

Public Sector procurement – 8 lakh crore*

Government procurement – 2.5 to 3 lakh crore*

* not updated

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State of Procurement

As per OECD Matrix of items for quick assessment of

the state of procurement practices in a country, India

may be lagging behind on many of the items such as:

Legislative framework

Model documents

Standardisation of Conditions of Contract

Procedures of Contracting

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State of Procurement

Planning and integration with budget

Timely procurement and payments

Conflict of Interest

Quality control and performance evaluation

Contract administration

Dispute resolution, Appeals, etc.

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Institutional framework for procurement is weak:

Transparency, Accountability,

Efficiency,

Economy, Competition

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Public Perception

Public perception about the quality, credibility and probity of public procurement is generally poor.

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Time and cost Overrun- Trend Analysis (MOS&PI)- 16 Sectors - Oct 2015

Out of 782 projects:

TOR in 215 projects range 1-261 months

COR in 224 projects 86.88%

Original cost – Rs.2.36 lakh crore

Anticipated cost – Rs.4.42 lakh crore

Railways – 160/296 – COR 154.8% *

RT& Highways- 13/160 – COR 56.1% *

* Not updated.

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Performance Audit of PPP projects – NH

CAG, Dec 2014, 94 projects

Change in Scope in 23 projects – Increased cost by Rs.856.80 cr. Of this Rs.662.5 cr due to deficient DPR/FR

In 25 projects TPC worked out by Concessionaire was higher by 50%

Delay in handing over land in 63 projects

Delay in obtaining approval of ROBs,

Environmental clearance

5 projects completed in time out of 60 projects.

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2014-2015 NHAI

113 Arbitration and 83 court cases involving

Rs.22,426 cr and Euro 3.5 lakh pending against

Authority

Capital works in progress Rs.1.41 lakh cr.

EPC Projects under implementation Rs. 29,648 cr.

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Railways- CAG Report 2015

Out of 442 ongoing projects targets for completion

fixed for only 156 projects.

Time overrun upto 16 years.

Cost overrun Rs.1.07 lakh crore.

75 projects were ongoing for more than 15 yrs.

Cost of 442 ongoing projects revised from Rs.1.55

lakh crore to Rs. 2.62 lakh crore.

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Railways

Delays due to

Failure to ensure completion of preliminaries before award of the works.

Delay in preparation/ sanction of estimate/ Inaccuracies in estimates.

Delay in land acquisition

Deficient planning

73 percent of the arbitration cases decided against Railways.

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Risk Allocation

Private sector’s capacity to take risk under- estimated.

The principle is that risk is owned and managed by the Party best able to deal with it effectively.

Risk allocation between Parties depends on the type of

Contract

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Responsibilities of Parties & Risk sharing

Design Bid Build

Dual Responsibility

Allocation of Risks – Employer H

Design Build

Single Point Responsibility

Allocation of Risks – Employer M

EPC/Turnkey

Single Point Responsibility

Allocation of Risks – Employer L

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Change from Item Rate to EPC

Public procurement has to embrace new forms of

global best practices and newer forms of procurement.

The Committee on Infrastructure, chaired by the

Prime Minister, had decided in 2006 that the NH

Projects should be done on EPC basis.

The Cabinet approved construction of the Railway

freight corridor only on EPC basis.

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Public Procurement Committee

Way Forward and Recommendations

For accelerating the reform of public procurement:

1. Declare the public procurement policy for promoting transparency, competition, efficiency, economy and probity.

2. Set up an institutional framework as the Department of Public Procurement to build institution capacity, laying down rules, regulations, procedures, standardised documents and to establish an oversight framework for achieving the objectives

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3. Enact a Public Procurement Law

4. Public Procurement Portal

5. Procurement of Works

Item –Rate Contract responsible for endemic time and cost over-runs should be phased out.

EPC (LS/Turnkey) contract system should be adopted for all projects other than small or exempted works.

Multiplicity of tender and contract documents used by different Ministries and PSEs cause avoidable confusion, risks, disputes and costs.

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6. Department of Public Procurement should bring out standard bid documents and processes should be streamlined and standardised for all ministries.

7. Procurement rules for services. Suitable templates developed for procurement of different types of services

8. Mandate that procurement by PSEs should be based on competitive bidding and Public Procurement Policy

9. Capacity Building- Training Need Assessment and calendar of training for procurement officials. Set up an Institute of Public procurement

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Thanks

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