 "Saving PPP projects")
Last week, when Finance Secretary Arvind Mayaram said the proposed '3P India' would go into issues relating to regulation, structuring and management of contracts for public-private partnerships (PPPs), he was probably clubbing the entire gamut of problems concerning PPP under one umbrella.
Mayaram has been involved with the framing of PPP policy ever since it has been talked about in the government circles, but there have been problems with one-size fit model, tried out many times earlier across sectors without much success. "The generic reason for failure of some of the big-ticket PPP contracts or non-PPP government and private company contracts is lack of proper balancing of risk factors," says Vikram Nankani, partner and head, litigation and dispute resolution, Economic Laws Practice.
In any PPP contract, the biggest risk is the expected revenue flow, especially if contracts are structured in a way that disallows flexibility. Tariffs or user charges are, therefore, at the bottom of most disputes, besides delays in land acquisition and green clearances.
Ramesh Vaidyanathan, managing partner, Advaya Legal, says for long, construction and management of public utilities and projects have been funded more through budgetary support and less through user charges. This has resulted in impractical expectations from the users on charges and political patronage for such expectations. "The problems with the PPP projects start right from the stage they are bid out, which is sure shot recipe for disputes. Bidders also price the risk given the lackof certainty." The tender must provide enough cushion for the private party to align its prices to market realities, "else there will either be a plethora of disputes or a poor quality product and service". Regulators themselves are sometimes vulnerable to populist pressures. Sometimes, they are hemmed in by the binding directions of the relevant government, says Vaidyanathan.
Are tender conditions undermined by an adverse court or regulatory verdict?
In the case of power, the Central Electricity Regulatory Commission (CERC) and the appellate tribunal (Aptel) have sought to establish a compensatory tariff regime but ultimately it is the state government-controlled power distribution companies (discom), who have to agree to it within the framework of power purchase agreements (PPA) which is a task to achieve.
Though the powers of the regulators are transcribed by the statute under which it is established or empowered, Nankani says discoms are "amenable to the jurisdiction of the regulators, the orders would be binding on them and can be enforced". Aptel, however, has decided to go into the issue of whether CERC has any jurisdiction to modify tariffs during the contract period. For the metro, there is no regulator, but the Bombay High Court has upheld the Reliance tariff while turning down Mumbai Metropolitan Region Development Authority plea. Vaidyanathan says the court, in such cases, merely interprets the terms of the tender and the contract.
It will be wrong to suggest the court has read down the terms of the tender. To preserve the sanctity of competitive bidding, while ensuring there is no violation on the part of the private party, the tender conditions need to be framed differently. Nankani says, for instance, a special provision can be inserted to ensure that in case of any extraordinary circumstances resulting in commercial impasse, certain costs be treated as pass through. "It would achieve the objective of maintaining the sanctity of the bidding process and at the same time, ensure that the contractor/vendor discharges contractual obligations without the threat of extension."Tender conditions cannot be oblivious to the market conditions, but at the same time, governments cannot be exposed to constant variations in the tariffs or rates under the contract. The function of balancing the competing interest of the government and the private parties as well as the public at large can be conferred on the regulator," says Nankani.
Can swifter arbitration mechanism help tackle disputes?
The inflexibility of contracts can cause an impasse, more so if there is a lack of a mechanism or machinery in the contract to address the issue. Vaidyanathan says there are inherent flaws in the arbitration process. "We need technical experts resolving conflicts, not retired judges." There is a need to embrace international best practices for resolution of disputes in large projects that are crucial for infrastructure building. Creating a permanent set of mediators available from the beginning of the contract period even before a dispute arises, is one way. The underlying point, however, remains disputes can not only be resolved faster, but prevented all together, if contracts are drafted clearly and carefully.
Mayaram has been involved with the framing of PPP policy ever since it has been talked about in the government circles, but there have been problems with one-size fit model, tried out many times earlier across sectors without much success. "The generic reason for failure of some of the big-ticket PPP contracts or non-PPP government and private company contracts is lack of proper balancing of risk factors," says Vikram Nankani, partner and head, litigation and dispute resolution, Economic Laws Practice.
| CONTRACTS IN DISTRESS |
Power purchase agreements
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In any PPP contract, the biggest risk is the expected revenue flow, especially if contracts are structured in a way that disallows flexibility. Tariffs or user charges are, therefore, at the bottom of most disputes, besides delays in land acquisition and green clearances.
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Nankani says long-term contracts need special treatment. Government departments take a rigid stand by transferring all risks onto the private parties. At the same time, private parties tend to take an over aggressive position to bag the contracts. "This results in an imbalance in risk allocation. The uncertainty makes the situation more complex." A case in point is that of highway contracts, where toll revenue did not materialise due to traffic projections being lower than expected. They were bagged on payment of premium by private developers who are now wanting restructuring of the payment schedule.Whether it is fares on Reliance Infrastructure-run Mumbai Metro's first phase or power rates offered by Tata and Adani Power's projects in Mundra, Gujarat, tariffs arrived through tender conditions have landed with the court and the regulator, respectively.
Ramesh Vaidyanathan, managing partner, Advaya Legal, says for long, construction and management of public utilities and projects have been funded more through budgetary support and less through user charges. This has resulted in impractical expectations from the users on charges and political patronage for such expectations. "The problems with the PPP projects start right from the stage they are bid out, which is sure shot recipe for disputes. Bidders also price the risk given the lackof certainty." The tender must provide enough cushion for the private party to align its prices to market realities, "else there will either be a plethora of disputes or a poor quality product and service". Regulators themselves are sometimes vulnerable to populist pressures. Sometimes, they are hemmed in by the binding directions of the relevant government, says Vaidyanathan.
Are tender conditions undermined by an adverse court or regulatory verdict?
In the case of power, the Central Electricity Regulatory Commission (CERC) and the appellate tribunal (Aptel) have sought to establish a compensatory tariff regime but ultimately it is the state government-controlled power distribution companies (discom), who have to agree to it within the framework of power purchase agreements (PPA) which is a task to achieve.
Though the powers of the regulators are transcribed by the statute under which it is established or empowered, Nankani says discoms are "amenable to the jurisdiction of the regulators, the orders would be binding on them and can be enforced". Aptel, however, has decided to go into the issue of whether CERC has any jurisdiction to modify tariffs during the contract period. For the metro, there is no regulator, but the Bombay High Court has upheld the Reliance tariff while turning down Mumbai Metropolitan Region Development Authority plea. Vaidyanathan says the court, in such cases, merely interprets the terms of the tender and the contract.
It will be wrong to suggest the court has read down the terms of the tender. To preserve the sanctity of competitive bidding, while ensuring there is no violation on the part of the private party, the tender conditions need to be framed differently. Nankani says, for instance, a special provision can be inserted to ensure that in case of any extraordinary circumstances resulting in commercial impasse, certain costs be treated as pass through. "It would achieve the objective of maintaining the sanctity of the bidding process and at the same time, ensure that the contractor/vendor discharges contractual obligations without the threat of extension."Tender conditions cannot be oblivious to the market conditions, but at the same time, governments cannot be exposed to constant variations in the tariffs or rates under the contract. The function of balancing the competing interest of the government and the private parties as well as the public at large can be conferred on the regulator," says Nankani.
Can swifter arbitration mechanism help tackle disputes?
The inflexibility of contracts can cause an impasse, more so if there is a lack of a mechanism or machinery in the contract to address the issue. Vaidyanathan says there are inherent flaws in the arbitration process. "We need technical experts resolving conflicts, not retired judges." There is a need to embrace international best practices for resolution of disputes in large projects that are crucial for infrastructure building. Creating a permanent set of mediators available from the beginning of the contract period even before a dispute arises, is one way. The underlying point, however, remains disputes can not only be resolved faster, but prevented all together, if contracts are drafted clearly and carefully.