Getting Chinese contractors a bigger piece of India’s infrastructure pie

Ever since India doubled its proposed infrastructure spending under the Twelfth Five Year Plan from US$500 billion to US$1 trillion, it has been clear that large-scale Chinese participation would be required for India to realise its aggressive infrastructure goals.

Despite this, the experience of Chinese engineering, procurement and construction (EPC) contractors in India has been far from rosy. Since most government construction contracts and large private contracts are awarded through a tendering process, the Chinese companies have had to pitch battle against deeply entrenched competitors that are familiar with the bewildering red tape that India’s bureaucracy is known for. In addition to this, most tenders in certain industries have historically evolved to favour a certain contractor, or those from a certain country. The murky lobbying process prevalent in India has thrown up certain shocking outcomes in terms of expensive and outdated technologies being preferred to more modern and efficient ones. All this has made it rather difficult for Chinese EPC contractors to gain a foothold in the Indian market.

Panacea project

However, a latest step taken by the Indian government to encourage private and foreign participation in national highway projects this year might be the panacea that Chinese EPC contractors have been waiting for.

On 21 June 2013, the Cabinet Committee on Economic Affairs (CCEA) approved a proposal to facilitate the unhindered substitution of a concessionaire in ongoing and completed national highway projects, after obtaining the consent of lenders and the National Highway Authority of India (NHAI). This scheme has been called the substitution of concessionaire in ongoing and completed national highway projects.

Under the scheme, the consortium members of existing concessionaires will be permitted to divest their entire equity stake in: i) projects that have achieved the appointed date (financial closure); and ii) projects to be bid out in future, as per the prescribed mechanism.

The decision has been prompted by the flagging interest among potential bidders to participate in highway projects on a public-private partnership (PPP) basis, and the difficulties that have been faced by such projects in achieving financial closure. The substitution of the concessionaire will have to be effected by the lenders after obtaining the consent of the NHAI. Additionally, the lead substituting entity will have to maintain a minimum equity stake of 51% in the concessionaire, post substitution.

Santosh Pai and Raunak are partners at D H Law Associates. D H Law Associates is the only full-service Indian law firm with an active China practice since 2010