As the world’s second most populous country, India accounts for 17.5% of the world’s population. And it is rapidly catching up with the number one, China. On an annual basis, India’s population growth rate of 1.2% is more than double that of its Asian neighbour.
But while population growth is largely seen as a means of economic development, it comes with costs. The burden on cities and infrastructure of a rapidly-growing population must be addressed if the country is to reach its full potential. The need is such that the infrastructure question was a cornerstone of this year’s election. The Bharatiya Janata Party, led by returning Prime Minister Narendra Modi, pledged $1.44trn towards infrastructure – a stark contrast to its main opponent, the Congress Party, which instead focused on alleviating poverty and job creation.
These projects hand the legal teams dealing with them distinctly local challenges. Often spanning years – and sometimes decades – helping to guide these projects to fruition requires a different kind of legal management. And for the counsel that can thrive in this space, it provides the opportunity to play a vital role in the ongoing development of an emerging economic superpower.
National importance
According to the state-backed trust, the India Brand Equity Foundation, India requires over $777.73bn worth of investment in infrastructure by 2022 to achieve sustainable development. Despite its potential, in 2018, India ranked at 44 out of 160 countries in the World Bank’s Logistics Performance Index, a measure of countries’ effectiveness in categories such as trade and transport infrastructure, and competence of logistics services.
The issue of electrification, for example, is one of the foremost priorities for national infrastructure, especially for India’s 263 million farmers – those least likely to be connected to the grid and one of the country’s most significant voting blocs. A scheme to electrify all households in India by December 2018 garnered much attention when it was announced in September 2017. This was no small undertaking: government estimated that 40 million households were without power. The goal was deemed by the Prime Minister’s Office as satisfied in December 2018, though the target was trimmed to encompass only those households who had applied for the scheme – some 25 million.
‘Most of the countries who have experienced GDP growth have been coupled, historically, with increases in electrification. You have to provide power for industries to run and for people to be employed,’ notes Tejal Patil, general counsel (GC) for South Asia at General Electric (GE). Patil has advised many areas of GE’s business and has seen how infrastructure impacts conditions on the ground.
‘The power sector is huge in India because of the size of the population, as is the case with industries like aviation and healthcare. A lot of what is being generated here is being consumed domestically and that’s the enabler for GE – it plays a crucial role as enabler in critical growth sectors, which is really exciting.’
‘The government being interested in infrastructure is the best thing to happen to all construction companies and that’s why so many international companies have come into the markets,’ notes Rashmi Kathpalia, legal head at TechnipFMC India.
‘When you are working on real Indian projects, you feel like you are contributing to the development of the country – because the country is nothing without its infrastructure.’
Grappling with government
It is critical that projects are awarded to contractors with the ability to deliver them to prescribed timelines and budgets. In that respect, the government has a huge role to play in ensuring India’s vision of a modern economy is realised. As a contract partner, it is in the government’s interest to be constructive.
For TechnipFMC, a recent example is the award of contracts for two fertiliser plants in Jharkhand. Enormous undertakings, the plants are designed to produce 2,200 tonnes of ammonia and 3,850 tonnes of urea per day – two products in high domestic demand.
‘These projects have been promoted by the Prime Minister’s Office. There was a public sector consortium entity created for the bidding and, because it comes with the promotion of the Prime Minister’s Office itself, negotiations are very fast,’ says Kathpalia.
‘Government tenders can oftentimes take very long and the timelines required can become very difficult to achieve. Very often what happens is that it is delayed for some reason, oftentimes leaving the contractor helpless. But if the prime minister is interested, it becomes a lot easier for the whole process to conclude, so finances keep coming in with each phase.’
This is echoed in Patil’s experiences at GE, when it comes to energy projects, though she admits that having over 60% of the company’s work coming from the government has its challenges. ‘There are pluses and minuses. One part of this is the entire government process. It is a public tender process that leaves little or no room for negotiation [on terms]. It’s not really a private contract, so from a legal standpoint it’s more about managing the risk than negotiating a beneficial position. If all the bidders meet the technical specifications, then the one with the lowest price wins.
‘As the government is interested in infrastructure development, the size of these projects ensure focus. So, if you have obstacles or difficulties during the project execution, they can be addressed at the highest level, since the government too becomes a driving force to ensure successful completion.’
Legal engineering
When a large construction company closes a deal with the government to deliver a critical infrastructure project, the agreement between the two parties is often a far different creature to a typical B2B contract. The in-house teams drafting and negotiating such agreements need to have a firm grasp on the operational requirements of the project.
‘When you are working on real Indian projects, you feel like you are contributing to the development of the country.’
Kathpalia comments: ‘We have to understand how robust the project execution team is to undertake that task. Our exposure is not just in terms of the price – each contract comes with a particular timeline. If our team is not going to properly assess the number of man hours required, or the price, or procurement requirements, then we would be completely out of pocket.
‘If you look at the bigger picture, when we assess the contract and price the contract, when we understand the risks within the contract, legal is not just understanding what the contract says, legal has to understand from the risk and the project execution department what the exposure is.’
GE’s Patil voices a similar sentiment: ‘You cannot review these contracts in a vacuum. If a lawyer reviews contracts in isolation, sitting at a desk, you’re never going to be able to assess the true risk.’
Building – and maintaining – bridges
For companies delivering enormous infrastructure projects, the list of potential clients is short. Most work will come from the government directly, but even in instances where a company like Tata Steel, GE or TechnipFMC will be contracting with other private entities, there are few players in the market. As such, relationships are key and disputes must be approached carefully.
‘Traditionally, India is a litigious country and the process of dispensation through the legal system is slow. Most companies will be straddled with a number of cases,’ says Dipali Talwar, former group GC of Tata Steel, who also spent several years at Pfizer.
‘The requisite skills for in-house counsel would be their ability to take a proactive call on risk and foresight to ensure no dispute arises in the future. Counsel must excel in applying judgement on current legal trends, impending legislation, and the business process and agenda of the corporation they are part of.’
Another wrinkle in the disputes issue is the complexity and long-term nature of these projects. ‘When the going is good, everything is good,’ says Kathpalia. ‘It’s only at the end of the project that you realise you are out of pocket, or have been short-changed and want to raise the claim, whether it’s against the owner, your consortium partner or a sub-contractor. This means the team has to be engaged and ensure we are operating partners throughout the lifecycle of the project.’
Because the industry runs on low-volume, high-value, project-based contracts, there are very few bridges available to be built and burned. Fortunately, this reality is widely accepted.
‘Most sectors are small and close knit, so it’s important to find a way to collaborate and have meaningful dialogue with relevant stakeholders – be it the government, competitors, vendors, channel partners or customers,’ says Talwar. ‘It is often not worth the cost or the time to enter into formal disputes.’
‘The organisations are used to supplier disputes,’ adds Patil. ‘Even if you have a dispute, it doesn’t prevent you from getting the next order, because they understand that it can sometimes happen in large contracts. The public sector undertakings in India don’t like to settle claims during execution – account reconciliation is usually at the end of the project. It may be OK for a large corporation like ours, but from a cash-flow perspective, for a smaller company, it gets challenging if the payments aren’t made in time.’
Given the cost associated with pursuing disputes in this industry and the need to protect vital relationships, the focus must necessarily shift from reacting to disputes to preventing them in the first place. Kathpalia observes: ‘While there are many companies that will put some amount towards disputes expenses, we rely more on our execution: that our execution should be so masterful that we should not have to go into claims at the end of the project. So far we do not have any litigation or arbitration pending as far as our projects are concerned.’
Arbitration
One less adversarial method of resolution is, of course, arbitration – an increasingly popular approach in project disputes. But the usefulness of arbitration clauses relies on national willingness to enforce remedies. As such, India, like many countries, is beefing up its capacity to support effective arbitration.
A judicial committee convened in 2017 highlighted the barriers developing of arbitration in India: namely the time taken for such proceedings to progress through the courts and what was called ‘an excess of judicial involvement’. The committee recommended reform of arbitration in India with a view to establishing the country as a globally competitive arbitration destination. These recommendations resulted in amendments to the Arbitration and Conciliation Act 1996.
Among the changes were the establishment of the independent Indian Council of Arbitration to promote arbitration and alternative dispute resolution, and the introduction of time limits for submissions before arbitral tribunals.
‘Arbitration is growing. There are about three new arbitration centres which have been established in the last few years. You have the Delhi Arbitration Centre, the Mumbai Arbitration Centre and a couple of private arbitration centres, and they’re expanding, with many retired judges and lawyers on their panels. Where there is still a bit of a gap is technical expertise,’ says Patil.
‘For disputes of this nature, you need a technical person on the panel. Major disputes tend to use what we call ad hoc arbitration, where one party appoints one arbitrator, the other party appoints a second and then a
third, who is chairman of the panel, is appointed by both. These usually tend to be retired judges of the Supreme Court, High Court or eminent jurists.’
These ad hoc arbitrations – as opposed to institutional arbitrations held in the kinds of large centres now opening – are still the preference in India, despite a finding by PwC and Queen Mary University of London in 2008 that 86% of global arbitral awards in the preceding ten years had been from arbitral institutions. The committee was sceptical of ad hoc arbitrations in its 2017 report, citing the time taken for such arbitrations to conclude and high costs. But with a concerted effort by the Indian government to make institutional arbitration a credible option, this may change.
‘The positive change we’re seeing is the government moving towards institutional arbitration in its contracts. In the past, there were contracts stipulating a single arbitrator, who would be a government employee,’ says Patil. ‘These three centres are growing. We have not used them, but we are looking into their services as more government contracts are incorporating them now.’
For many in-house counsel, such developments cannot come a moment too soon. Building 21st century infrastructure is going to need the best companies to be confident that building in India is a safe bet. LB
Alex Speirs is editor-in-chief of GC
Greg Hall is managing editor at GC
Catherine Wycherley is features writer at GC