 "Has the stage been set for revival of infra projects?")
With private investments losing steam in infrastructure, the National Democratic Alliance government-appointed committee headed by former finance secretary Vijay Kelkar to overhaul public-private partnership projects has laid out several radical measures which, if implemented, could spur investments in the sector.
Of the 1,255 projects announced under PPP mode, 72 have been terminated, and developers are looking for an exit in several others. Further, the committee's report notes that the target set in the 12th Five-year Plan (2012-2017) of Rs 557,500 crore (at current prices) in infrastructure investment may be hard to achieve. Going by trends so far, actual investments may fall short by approximately 30 per cent.
To draw in private investors, the Kelkar committee delves deep into risk sharing and dispute resolution, the two most important issues that have hurt PPPs across sectors. Both of these pose contractual as well as policy challenges.
As far as risk sharing is concerned, the report says the problem starts with the model bidding documents. "Failure to assess project-specific risks and adoption of the 'one-size-fits-all' approach by implementing agencies have resulted in project implementation hurdles," it says.
Based on a study of a PPP project in China, the report identifies 37 risks ranging from uncompetitive tender to insufficient financial audit and then puts them in four categories based on who is bearing the risk: the government, private sector companies, both parties equally or both parties in differing ratios.
The allocation of these risks to parties, the report suggests, should be based on their ability to withstand it and other project-specific details.
So, while foreign exchange and demand risks are to be borne by both parties equally, those relating to financial, construction and cost overruns are mostly to be faced by the private sector. Such a classification of risks is not only prudent but can act as a beacon of light to implementation authorities if clearly adopted by the government. Besides, the committee also makes a case for ex-ante provisioning of renegotiation framework in the bid documents.
Since in a number of PPP projects-the Airport Express metro line in Delhi and the Delhi-Gurgaon Expressway, for example- disputes have resulted in one party taking over the project, the committee has also attempted to amend the dispute resolution issue.
The committee says PPP contracts should have clearly articulated dispute resolution structures with enough room to restructure the contract within the commercial and financial boundaries of the project and backed by sector-specific monitoring and regulatory committees.
More than anything else this underscores the point that contracts may eventually not keep up with unforeseen disputes.
The report also says that judgments, or courts orders, which have material adverse effect be allowed to be interpreted as change in law and the provisions of concession agreements be made applicable to such changes in law.
While this proposal in itself may be welcomed by the industry, considering that judiciary pronouncements do set legal frameworks, such a move will leave the scope of increasing user charges since project developers can set higher tariffs in case of court orders also.
The report also defines the principles of what constitutes "actionable stress" in infrastructure assets developed under the PPP model.
The heart of the matter
The most path-breaking suggestion, however, is a two-tier framework of dispute resolution with Infrastructure PPP Project Review Committee and Infrastructure PPP Adjudicatory Tribunal.
Once a stakeholder files a reference before the tribunal, and it takes cognisance of it, no party or stakeholder would be allowed to approach any court of law, and all courts shall refrain from adjudicating upon any proceedings initiated that are related to the project in question.
The committee has proposed enactment of a law under Article 323B of the Constitution under which Infrastructure PPP Project Review Committee and Infrastructure PPP Adjudicatory Tribunal should be empowered to determine whether there is such a change in the economic foundation or economic viability of a project which requires any intervention amongst options contemplated in that statute.
The law will also lay down the guiding principles on the basis of which Infrastructure PPP Project Review Committee and Infrastructure PPP Adjudicatory Tribunal will exercise their functions. In case a substantial question of law is involved, the matter should be directly heard by the tribunal.
"The current mechanism is not independent and even the decision is not binding. There are instances where the concessionaires, being unsatisfied by the decision, go back to the courts and pursue the litigation. So the need of the hour is to set up Independent mechanism for speedy redressal of disputes as suggested by the committee," says a sector expert who doesn't want to be named.
Within the infrastructure sector, a case is being made for evolving the market to a level where project developers and operators are distinct entities, each deriving separate value from a project. For this, the panel has recommended developing operations and management operators to take on completed projects.
Creating a framework for allowing complete exit of original promoters from a project after a certain period could provide this flexibility.
In the road sector, for instance, the government has already relaxed the exit clause for developers to enable concessionaires to monetise their entire equity investment after commissioning, subject to approval from lenders and bid for new projects.
In May 2015, the Cabinet Committee on Economic Affairs permitted 100 per cent equity divestment after two years of completion of construction across all concessions signed prior to 2009. The National Highways Authority of India is required to approve changes in ownership within a definite time frame.
While the government is yet to take a view on the Kelkar committee report, experts says, its suggestions, especially on dispute resolution, if adopted, could go a long way in reviving investments.
Of the 1,255 projects announced under PPP mode, 72 have been terminated, and developers are looking for an exit in several others. Further, the committee's report notes that the target set in the 12th Five-year Plan (2012-2017) of Rs 557,500 crore (at current prices) in infrastructure investment may be hard to achieve. Going by trends so far, actual investments may fall short by approximately 30 per cent.
To draw in private investors, the Kelkar committee delves deep into risk sharing and dispute resolution, the two most important issues that have hurt PPPs across sectors. Both of these pose contractual as well as policy challenges.
As far as risk sharing is concerned, the report says the problem starts with the model bidding documents. "Failure to assess project-specific risks and adoption of the 'one-size-fits-all' approach by implementing agencies have resulted in project implementation hurdles," it says.
Based on a study of a PPP project in China, the report identifies 37 risks ranging from uncompetitive tender to insufficient financial audit and then puts them in four categories based on who is bearing the risk: the government, private sector companies, both parties equally or both parties in differing ratios.
The allocation of these risks to parties, the report suggests, should be based on their ability to withstand it and other project-specific details.
So, while foreign exchange and demand risks are to be borne by both parties equally, those relating to financial, construction and cost overruns are mostly to be faced by the private sector. Such a classification of risks is not only prudent but can act as a beacon of light to implementation authorities if clearly adopted by the government. Besides, the committee also makes a case for ex-ante provisioning of renegotiation framework in the bid documents.
Since in a number of PPP projects-the Airport Express metro line in Delhi and the Delhi-Gurgaon Expressway, for example- disputes have resulted in one party taking over the project, the committee has also attempted to amend the dispute resolution issue.
The committee says PPP contracts should have clearly articulated dispute resolution structures with enough room to restructure the contract within the commercial and financial boundaries of the project and backed by sector-specific monitoring and regulatory committees.
More than anything else this underscores the point that contracts may eventually not keep up with unforeseen disputes.
The report also says that judgments, or courts orders, which have material adverse effect be allowed to be interpreted as change in law and the provisions of concession agreements be made applicable to such changes in law.
While this proposal in itself may be welcomed by the industry, considering that judiciary pronouncements do set legal frameworks, such a move will leave the scope of increasing user charges since project developers can set higher tariffs in case of court orders also.
The report also defines the principles of what constitutes "actionable stress" in infrastructure assets developed under the PPP model.
The heart of the matter
The most path-breaking suggestion, however, is a two-tier framework of dispute resolution with Infrastructure PPP Project Review Committee and Infrastructure PPP Adjudicatory Tribunal.
Once a stakeholder files a reference before the tribunal, and it takes cognisance of it, no party or stakeholder would be allowed to approach any court of law, and all courts shall refrain from adjudicating upon any proceedings initiated that are related to the project in question.
The committee has proposed enactment of a law under Article 323B of the Constitution under which Infrastructure PPP Project Review Committee and Infrastructure PPP Adjudicatory Tribunal should be empowered to determine whether there is such a change in the economic foundation or economic viability of a project which requires any intervention amongst options contemplated in that statute.
The law will also lay down the guiding principles on the basis of which Infrastructure PPP Project Review Committee and Infrastructure PPP Adjudicatory Tribunal will exercise their functions. In case a substantial question of law is involved, the matter should be directly heard by the tribunal.
"The current mechanism is not independent and even the decision is not binding. There are instances where the concessionaires, being unsatisfied by the decision, go back to the courts and pursue the litigation. So the need of the hour is to set up Independent mechanism for speedy redressal of disputes as suggested by the committee," says a sector expert who doesn't want to be named.
Within the infrastructure sector, a case is being made for evolving the market to a level where project developers and operators are distinct entities, each deriving separate value from a project. For this, the panel has recommended developing operations and management operators to take on completed projects.
Creating a framework for allowing complete exit of original promoters from a project after a certain period could provide this flexibility.
In the road sector, for instance, the government has already relaxed the exit clause for developers to enable concessionaires to monetise their entire equity investment after commissioning, subject to approval from lenders and bid for new projects.
In May 2015, the Cabinet Committee on Economic Affairs permitted 100 per cent equity divestment after two years of completion of construction across all concessions signed prior to 2009. The National Highways Authority of India is required to approve changes in ownership within a definite time frame.
While the government is yet to take a view on the Kelkar committee report, experts says, its suggestions, especially on dispute resolution, if adopted, could go a long way in reviving investments.
Vijay C Roy contributed to this report