Making the right noises

Will the proposed Dispute Resolution Bill enhance or stymie the negotiating power of infrastructure developers? While the Planning Commission has articulated a clear need for a new law that addresses the typical infractions that occur between public and private parties, the industry says that public-private partnership (PPP) is too unique to be enveloped in a larger Bill. Encouragingly for the anxious industry, the government is making the right noises about renegotiation of contracts. Shashidhar Nanjundaiah writes.

Do we really need a new law just for dispute resolution in public-private partnership projects? This is the question many industry observers are asking, while shaking their heads in response to what seems to be increasingly a rhetorical question. Even the Finance Ministry has questioned the need for a PPP dispute resolution law, pointing out that such legislation would be too broad anyway to cover all the sectors.

The Planning Commission will meet the cabinet with a draft Bill that outlines an institutional mechanism to resolve public contracts, with a separate note on PPP projects. Earlier, soon after the Prime Minister´s Office instructed the Planning Commission to draft a dispute resolution bill exclusively to help fast-track PPP projects, the Commission emerged with one on public dispute resolution.

Already, courts are in place to address corporate disputes. Many commercial wings of courts are underway pursuant to the Commercial Division of High Courts Bill, 2009. These commercial courts were deemed necessary because in India, the desire to mutually settle a dispute is low and courts take inordinately long to resolve disputes. As a result, business and economy suffers. Under the Bill, a commercial dispute is defined as ´a dispute arising out of ordinary transactions of merchants, bankers and traders such as those relating to enforcement and interpretation of mercantile documents, export or import of merchandise, affreightment, carriage of goods, franchising, distribution and licensing agreements, maintenance and consultancy agreements, mercantile agency and mercantile usage, partnership, technology development in software, hardware, networks, internet, website and intellectual property such as trademark, copyright, patent, design, domain names and brands and such other commercial disputes which the Central Government may notify´.

If all commerce must come under these courts, including heavy-duty infrastructure projects, they can hardly serve the purpose of fast tracking PPP projects stuck for clearances, land acquisition and disputes.

The first draft of the Planning Commission´s document, prepared in response to the call by the PM in June this year, included all business disputes over Rs 10 crore. This, experts say, was an unacceptable effort to resolving something as specific as PPP projects. Stalled PPP projects needed a special shot in the arm as the Prime Minister also the Planning Commission Chairman have recently felt the pressure to get a move on to clear projects, ease land acquisition, and resolve disputes. That is why, as Vinayak Chatterjee, Chairman of Feedback Infrastructure and a member of the Expert Committee discussing the Bill, a general ´Public Dispute Resolution´ paper does not make sense to most infrastructure players. GMR, GVK, Ashoka Buildcon and several others are stuck in a tough quagmire with the National Highways Authority of India (NHAI). It may be recalled that GMR´s Kishengarh-Udaipur-Ahmedabad highway pullout was a result of a refusal by the union law ministry to grant it a delayed payment schedule, despite even NHAI´s own efforts. Now, the finance ministry has made an allowance for ´all possibilities´ to be considered before arriving at a decision.

As has been widely reported, contract renegotiation in PPP projects remains a sticky issue in the Bill. The infrastructure industry, weary of delays and cancellations that a lack of renegotiability brings upon projects, are adamant that it should be a part of the Dispute Settlement Bill. Chatterjee says he has stopped attending the meetings now because he is disappointed that the Planning Commission does not seem to understand how relevant the issue of contract renegotiation is as a clause in the Bill. There are other laws to handle normal industrial disputes, he points out. The infrastructure industry has expressed its disappointment at the absence of re-bid, restructuring, renegotiation of contracts, expropriation clauses in the draft legislation. Chatterjee says the Bill is a watered down document from what was originally envisioned by the Prime Minister. While the PMO communiquT does not direct the Planning Commission per se to work on a PPP-related document, it provides the hint: ´There are a few hundred PPP contracts already in operation and more are being signed on a fairly rapid pace. As a result of this expansion, contractual disputes have been rising steadily and it has now become essential to consider an institutional arrangement that would address such disputes expeditiously and at reasonable costs,´ said a release from the Prime Minister´s Office (PMO) in May this year.

Not everyone agrees. The reworked Settlement of Disputes in Public Contracts draft bill is not only adequate, but the overarching nature of the bill will provide the needed depth, if implemented with intelligence, say some experts.

Amrit Pandurangi, Senior Director at Deloitte Touche Tohmatsu India says the industry´s demand for a separate dispute resolution mechanism for PPP is understandable, but redundant. ´These are specialised domains, and disputes can be equally specific. At the same time, so long as there is a judicial mechanism already in place [which the proposed Bill sets out to do], the government can augment that existing process rather than create sector-specific laws. There is, on the other hand, a need to empower people with enough guidance and declared flexibility in organisations to resolve disputes.´ If not resolved, he advocates a more ´permanent´ body because each domain has a pile of disputes.

Arbitration law
It could be just a coincidence that the arbitration laws of the UK (the ´Arbitration Act´) and India (the ´Arbitration and Conciliation Act´ were cemented in the same year, 1996. The law offers parties the choice to determine the number, constitution and nationality of the arbitrator(s), failing which a single arbitrator will be appointed by the Chief Justice or his appointee (except that India mandates an odd number, which the UK does not).

´Internationally, timelines and rules are set, agreed and adhered to,´ says Vishal Narula, Associate Director Forensics Services, KPMG, with wide exposure to domestic and international infrastructure industry disputes. ´Arbitral panels of experts have relevant industrial, commercial and financial expertise to adjudicate and arbitrate essential to take arbitration to its resolution in a time frame with the objective that projects can resume. These aspects are badly lacking in India, where arbitrators are ex-judicial persons with or without prior industry experience, so while they are legal experts, they are not adept at commercial issues. So finding an arbitrator who is a domain expert is just a matter of chance.´

Ajay Thomas, Registrar at the London Court of International Arbitration, sees the need for a two tier dispute resolution clause where mediation can be the first option followed by arbitration or legal recourse. ´You also need to explore the concept of a Dispute Resolution Board in the case of large infrastructure contracts where a panel of three experts is constituted at the start of the project. Their role is to oversee the project and to nip any potential disputes in the bud.´

Contract renegotiation
There is no enabling provision clause in any agreement for renegotiation along with circumstances, and the provision of an external mechanism.

Now, the Planning Commission has drafted two separate but concurrent notes the draft dispute bill and a draft bill on issues that PPP projects are faced with. But contract renegotiation is unlikely to fructify while acknowledging that the private sector has been demanding a contract renegotiating clause, the Planning Commission rejects the argument.

KV Pratap, Director of the Infrastructure Division at Planning Commission of India, articulates the rationale emphatically: ´We strongly feel that renegotiation is not the way to go. By doing so you create problems related to the sanctity of contracts. Once you start renegotiation all the gains of competition are lost. The whole idea of inducting private sector investment into infrastructure projects was to allow them freedom to fail. We have to allow some projects to fail. On the must do steps I would say: prepare the projects well; do no rush projects because that would lead to delays and disputes; there should be clear allocations do not renegotiate contracts just to reduce commercial losses of private sector on account of opportunistic bidding.´

Rather, the government is keen to amend the Model Concession Agreement (MCA), whose first version by the Planning Commission was highly applauded and was responsible for large-scale private interest in the sector. ´There is a distinct need for renegotiation,´ said Rohit Singh, Joint Secretary-Highways at the Ministry of Road Transport & Highways (MORTH), speaking at a seminar recently in the national capital. He said the amendment in the MCA is required because it does not adequately address changes that can occur over a long concession like 25-30 years.

Sensibly, as a more permanent solution is being woven, a more immediate problem is also being address. While the flexible version of MCA is on the way, the one-time renegotiation of delayed payment terms of the Kishengarh-Udaipur-Ahmedabad highway (GMR) is also on the anvil.

4 Steps to Better System

1. Renegotiation in PPP projects should be offered more as a last recourse in an agreement, and should find itself as a part of a well-entrenched process in a concession agreement.
2. MCA should provide for periodic revisit, but changes must be allowed in case of proven and observable changes in the external environment.
3. Like renegotiation, mechanism for speedy dispute resolution must be spelled out in agreements, but must be preceded by bilateral negotiations mandatorily.
4. Independent (or joint) oversight is missing in PPP projects. Such oversight, especially in disputes and contractual obligations, can be a speedier and more intrinsic solution.