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Making exits viable

Only after a public-private project is commissioned and established should a company be allowed to exit

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Jyoti Mukul
Last Updated : Aug 17 2014 | 9:35 PM IST
Private project developers investing under contracts with the government might not necessarily benefit from continuing operations, especially if they want to exit the arrangement but are stuck in legalities.

At such times, contracts could become troublesome, more so if the aspect of promoters quitting is ambiguous.

In the past two years, the roads, petroleum and ports sectors have seen companies approach the government with requests to quit contracts signed with government departments. Companies such as GVK and GMR have projects in the roads sector that they want to quit, as project costs have risen during the period when clearances were awaited.

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Similarly, Reliance Infrastructure served a notice on Delhi Metro Rail Corporation to terminate a contract signed with it for Delhi Airport Metro Express Line, after running the operations for about a year.

The operations were passed on to Delhi Metro Rail Corporation, but arbitration on the project being abandoned is still underway. In the petroleum sector, about a dozen oil & gas blocks given under the New Exploration and Licensing Policy (NELP) are on the government's table, with requests from companies that they be allowed to quit.

As a government official involved with decision-making on infrastructure puts it, contracts cannot be kept open-ended, as these are cast in stones. But at same time, "the government has to be fair, as contracts lasting for as long as 30-40 years might have some conditions that need to be renegotiated".

For national highway contracts signed before 2009, concessionaires weren't allowed complete exits.

They had to maintain at least 51 per cent equity in a project during the construction period, at least 33 per cent till three years after the commissioning and, subsequently, 26 per cent. Realising the need to have a more liberal regime for exits in place, the National Highways Authority of India (NHAI), in January 2014, notified a new exit policy for highway projects in distress and for which lenders wanted to replace operators.

Similarly, for projects whose concessionaires sought exits, a policy was notified in June last year. This allowed a complete exit after two years of a project being commissioned, as long as majority stake was maintained during the construction period. Now, the move is to allow complete exits to companies after the commissioning of projects.

Similarly, an exit policy for private contractors in major ports is also in the works. The ministry of petroleum & natural gas, too, is considering coming out with an exit policy. Under NELP contracts, companies have to adhere to a minimum work programme, which is time-bound.

If this condition isn't met, a penalty is imposed. Blocks can be surrendered if the companies do not find these prospective enough, but only after meeting the minimum-work-programme stipulations. Though companies may surrender or sell their stake to others (such as when Reliance Industries sold 30 per cent in 21 blocks to BP after seeking government permission), there is no exit route for companies seeking to quit, due to lack of clearances from government bodies. The new policy seeks to allow exits to such companies, after grating exemption from the penalty on account of not meeting the minimum-work-programme stipulations.

If companies abandon projects in the roads sector, NHAI encashes the bid security (one per cent of the project cost) if the appointed day, or the day when funds have been tied up, is yet to be reached. In case this isn't the case, the bid security and performance security equivalent of five per cent of the project cost are encashed. But this happens only if the exit is not "harmonious", which means the private sector is at fault. A harmonious exit is allowed if pending government clearances are the reasons why the project didn't take off.

When private investment in government-awarded projects or blocks took off, the need for such exits wasn't felt.

Vishwas Udgirkar, senior director, Deloitte, says earlier, there were restrictive clauses in contracts, but new contracts were more liberal. He is, however, cautious about permitting exits. "It can be argued if exits are permitted, why have bidding criteria at all? Contracts are awarded based on the financial strength of promoters; in sectors such as airports, tie ups with international companies with operational experience was required."

Many companies are good at construction but do not want to continue with operations once the project is complete, though they came in through the build-operate-transfer mode. Exits may free capital for such companies and help them deleverage balance sheets that are overexposed to debt. A largely held view in the government and private sectors is encashing the value created by companies through project construction should be allowed by permitting exits only if the next operator who takes over the concession (agreement for a project and asset) for the rest of the lease period is competent.

Udgirkar questions the value creation opportunity here. Projects, he says, are created to build facilities for citizen, not for asset creation by companies. He cites the example of the 2G telecom spectrum auction, in which certain companies received bandwidth, but exited soon. "Only once a project is commissioned and established should a company be allowed to exit and sell to someone who meets the original bidding criteria," says Udgirkar.

Problems during the concession (contract) period crop up if the economy is in a downturn and to deal with such situations, contracts should have standard clauses.

According to Udgirkar, lenders should not blame anyone, as they are responsible for appraising a project. "In the event of an exit, the contract should place responsibility on all three stakeholders - the private company, the government and lenders."

While a good contract should have enabling provisions for unforeseen circumstances, including exits, there could be reluctance on the part of officials to apply these for fear of being seen as favouring private entities.

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First Published: Aug 17 2014 | 9:35 PM IST

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