Governance structures :
A crucial prerequisite

By Hemant Sahai and
Sunei Kapur,
HSA Advocates

Dedicated industrial corridors, by their very nature, straddle states. What type of special legislation would be required by state governments when it comes to such projects?

It is correct that the industrial corridors (i.e. industrial nodes/cities connected through various transport modes such as rail, road, port and/or airport) will cut across multiple states however it is unlikely that any of the industrial cities/zones will cut across state boundaries. Therefore, it is expected that such industrial cities will be located within the boundaries of the respective states, connected together with the intrastate transport backbone. While the “corridors” across the States will be governed by Central legislation, areas of an industrial city will not be spread across multiple states and therefore, planning, development and operation of these cities will be governed by the respective state legislation.

For implementing such projects, the key challenge is to cre­ate a unified authority within each identified state, having legal powers over master planning, project develop­ment and execution, including powers to award projects to private developers. This Authority is required to take policy decisions and delegate the execution and implementa­tion of the components to diverse special purpose vehicles either under a public-private partnership framework or EPC mode or otherwise.

Article 243Q of the Constitution of India mandates the creation of elected urban local bodies (ULBs), but also allows the State Governments to entrust the administration of urban areas to bodies other than ULBs. Not all, but various states legislations dealing with town plan­ning and industrial regions provide for such delegation of powers and functions to an entity other than ULBs and development authorities. In fact, the existing legislations of states like Gujarat, Maharashtra, Haryana (which we had examined as part of our legal advisory role with DMIC) already provide for a robust framework for constituting a separate entity which can be entrusted with the legal powers over master planning, project develop­ment, administration and award to private investors. For example, in case of Gujarat, there is a special legislation “the Gujarat Special Investment Region Act” dealing with development of notified investment regions/industrial townships, based on which Rajasthan has also prepared a special legislation, which is in the process of being notified. In some states (such as Uttar Pradesh, Rajasthan, for instance) legislative amendments and new legislation were required. As far as CBIC is concerned, we are still reviewing the legislative framework of Tamil Nadu, Karnataka and Andhra Pradesh, but based on our preliminary studies, it appears that legislative amendments may be required.

It could be the case that there is state-to-state variation in policies governing the same issue. For projects like industrial corridors, is there any need to evolve “common” legislation?

As discussed above, planning, development and operation of each of these industrial cities are within the jurisdiction of the respective states and there are variations in existing legislations of each state, dealing with urban planning, development and administration. Similarly, variations in policy too are to be expected. The first step would be to bring about uniformity in policy as well as legislation, such that the enabling frameworks are available in each of the participating states.

While there cannot be a common legislation governing the development of industrial cities located in various states, the legal and commercial principles for facilitating implementation of such projects can be common in the respective state legislations. There are precedent legislations such as Indian Stamp Act or Industrial Disputes Act (subject-matter of which fall in concurrent list) which are adopted by every State, with some minor amendments. The GoI has earlier drafted model legislation and urged states to adopt such model legislation, for example legislation for regulating groundwater use.

When we say HSA Advocates would be preparing the legal and regulatory framework for the Chennai-Bengaluru Industrial Corridor, what aspects would be covered?

Our mandate is to prepare the legal, regulatory as well as contractual framework that will govern the relationship between the GoI and the state governments, and below that, for the execution and implementation of the diverse projects constituting the industrial cities. The scope includes developing governance and development models, and based on these models designing the transaction documents for providing the powers and functions of city node SPVs for each industrial city which will be responsible for planning, development, operation and maintenance of their respective cities. The powers and functions of these SPVs will include the powers to design and enforce master plan, development plans, rules and regulations; to undertake infrastructure development through PPP and EPC frameworks; designing and implementing financing models for infrastructure development; framework to manage the cities; and to collect user charges from the users and beneficiaries.

For the five (or so) industrial corridors that the government has proposed, we understand that there would be one implementing agency each. What would be the typical ownership structure of these special purpose vehicles? [Would the Centre and state governments both have equity stake; what about multilateral funding agencies…]

Based on the DMIC precedent, it is expected that for each corridor, there will be city node SPV formed by GOI and the state government responsible for planning, development and operation of the city. The SPV will be jointly owned by the GOI and state government. Based on our experience of DMIC projects, we do not envisage equity stake by any other entity in the city node SPV, however, there may be multiple SPVs formed under the city node SPV for specific projects such as power and water supply, connectivity projects, ICT infrastructure, where the investment may be invited from the funding agencies or any other private investors.

Do industrial corridors have a special legislation for land acquisition (and compensation)? [e.g. NHAI acquires land, as we understand, under its own separate Act]

There is no special land acquisition legislations for the industrial corridor projects.

Do you envisage deployment of the PPP model for specific sub-projects within the CBIC? What would be the highlights of the legal framework governing such concession agreements?

In our view, significant private capital will be required to develop the industrial corridors and the private capital can be attracted through PPP initiatives. For PPP projects to suc­ceed, precise and predictable policy and regulatory frameworks are required.

International experience shows that reg­ulation by contract is typically robust and predictable, provided the contractual framework is sophisticated and designed to balance and appropriately allocate technical and commercial risks. To increase bankability and financial viability of projects, private developers will require greater flexibility to raise equity, including the ability to dilute ownership and opportunities to exit completely from the project in a predictable manner in favour of long-term investors that are not willing to take development risk but are willing to take operational risk, such as pension funds. Infrastructure financing in India today remains skewed in favour of commercial banks, whereas global expe­rience shows a clear distinction between investors during the development and construction phase and investors during the operation phase.

Also, the commercial and financial models for development and financing of the infrastructure projects will be based on “user charges” recov­erable by the private developer. This will require designing concession frame­work conferring sustain­able authority on a private developer to recover user charges from private users of the infrastructure.

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