Crony capitulation

Government must not change road contracts ex post facto

The Union Cabinet on Tuesday gave its "in-principle" approval to a proposal from the ministry of road transport and highways to postpone the payment of premium by developers of 39 highway projects facing financial stress. Developers pay a premium to the National Highways Authority of India in return for the rights to build and operate a project. In an open auction, the project is awarded to the developer who agrees to pay the highest premium. The in-principle approval means the issue is not yet closed and will be discussed further. The proposal was opposed by the Planning Commission as well as the finance ministry on the grounds that it would open a fresh can of worms: once this concession has been granted, the government will be inundated with demands from the promoters of other infrastructure projects for similar relief.

The naysayers' arguments make sense. While the rush to give a fresh impetus to stuck infrastructure projects is understandable, changing the terms of a contract ex post facto is fraught with grave risks. It will send out the message that the government is ready to soften the terms even after the contract has been signed, and companies will bid aggressively to bag projects and then lobby the government for relief. This will set a dangerous precedent, and open the floodgates to crony capitalism of the worst kind. If the government offers such adjustment to one set of developers, how can it refuse others? There can be no reward for inefficiency. In this particular case, if the premium is too high, the developer should be made to exit the project and it should subsequently be rebid.

The pitfalls of such course correction are already visible. The Central Electricity Regulatory Commission had in September asked five states that buy power from the Mundra ultra-mega power project of Tata Power and another plant of Adani Power to consider the possibility of an increase in tariffs because the cost of imported coal for power producers was higher than the initial calculations. The additional burden would be 45 to 55 paise a unit. Power distribution companies in Punjab and Haryana have protested the move on the ground that this would burden them as well as the consumers, and if this contract is amended, all other power-purchase agreements may have to be similarly reopened. This violates the sanctity of the original contract - a valid argument. If the contract is amended, what stops other power plants from demanding a similar tariff increase on any ground?

The country has already been witness to such ex post facto changes. The Airports Economic Regulatory Authority allowed Delhi International Airport, a consortium led by GMR Group, to charge all passengers an airport development fee to bridge the gap between projected and actual development cost and a user development fee to help recover the cost of operating the airport. The developer miscalculated the projected cost as well as revenue at the time of bidding, and the price for that is being paid by passengers. It is important to end such practices as early as possible.