Saturday, December 27, 2014

New PPP contracts to have renegotiation clause / Vrishti Beniwal

The Union finance ministry is not for putting a renegotiation clause in previously awarded public-private partnership (PPP) contracts, saying that would be against law. It is, however, looking to put such a clause in new contracts, to revive investment in infrastructure projects.

Officials said certain renegotiation triggers might be necessary for long-term projects, as in the case of some complicated construction contracts. If the scope of a project is changed midway, that could trigger renegotiation. The ministry might soon come up with a guidance note or a discussion paper on this.

“You can’t change the conditions after awarding the contract. It can lead to disputes and others can challenge it. (But) In a 60-year contract, you don’t know what will happen. However, if a renegotiation happens, it should not alter financial returns,” said a  ministry official.

Earlier, the infrastructure sectors, particularly roads and power, had pushed for changes in the terms of signed contracts to get more favourable terms, in the case of those which had become financially unsustainable due to extra-aggressive bidding to secure them. GMR, GVK, Adani, Reliance Power and are some companies which have tried to modify their contracts or exit these.

“Most projects in the roads sector are not doing well. If they extend the maturity or reduce the premium, that would be a violation of original bid conditions. So, rather than renegotiating, they must concentrate on addressing the fundamental aspects,” said Rajaraman Venkataraman, director, infrastructure, India Ratings.

The industry has been pushing for introduction of a mechanism to avoid unrealistic over-bidding by companies. And, to enable contract renegotiation, to ease the pressure on the balance sheets of banks, staring at huge non-performing assets due to developers’ inability to pay.

Government officials, on the other hand, said there already was a ‘force majeure’ clause (meaning, for unforeseen events that include major macro economic changes and excuse a party from an obligation).

“We are looking at best practices in the world for contract renegotiation. The longer the term of contract, the better it is for both the sides,” added the official.

Globally, about a third of projects undertaken on a basis have to be renegotiated. This is higher in  sectors such as transport, water and sanitation. Usually, the renegotiations have been favorable to the companies, resulting in increased rates or lower investment obligations.

“As the country with one of the world’s largest share of private sector investments, India is being keenly monitored and would do well to use this opportunity to devise best practices for renegotiation of PPP contracts and set global standards,” rating agency CRISIL had said in a report earlier this year.

Under the 12th five-year Plan, ending in 2016-17, an investment of Rs  55,75,072 crore or 8.18 per cent of the country’s gross domestic product has been pegged as needed for infrastructure. Of this, about half is expected from the private sector.

However, the mid-year economic analysis, penned by economic advisers in the finance ministry, said the PPP model had been less than successful. It pointed to over-exuberant investment, especially in the infrastructure sector in the form of PPPs, as the most important domestic challenge in the way of reviving of investments.

PARTNERSHIP CONUNDRUM
  • The finance ministry does not want a renegotiation clause in previously awarded PPP contracts, saying that would be against the law
     
  • However, it wants such a clause in new contracts to revive investment in infrastructure projects
     
  • Infrastructure sectors, particularly roads and power, had earlier pushed for changes in the terms of signed contracts to get more favourable terms
     
  • GMR, GVK, Adani, Reliance Power and Tata Power are some companies which tried to modify their contracts or exit these
     
  • The industry has been pushing for introduction of a mechanism to avoid unrealistic over-bidding by companies
     
  • It also wants to enable contract renegotiation, to ease the pressure on the balance sheets of banks, staring at huge non-performing assets due to developers’ inability to pay
     
  • Government officials, however, said there already was a clause for unforeseen events, including major macroeconomic changes.

Source: http://www.business-standard.com/article/economy-policy/new-ppp-contracts-to-have-renegotiation-clause-114121900212_1.html

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