It is important for the government to develop an efficient dispute resolution mechanism to prevent the slowdown of PPP projects.
The private sector brings with it the benefit of private funding of the projects and efficiency of operations. ´Public-Private Partnership´ (PPP) has been a relatively flourishing model for infrastructure development in India. In PPP, the concession agreement is signed between two parties i.e., the authority and the private party, viz., concessionaire, where the private party is elected through the process of open competitive bidding. Each party is assigned certain rights and obligations with a well-defined division of risk under the terms of the agreement. Existence of a suitable legal framework and efforts of knowledgeable and trusted advisors of both public and private entities are the determining factors for the success of PPPs.
The Government of India is taking several initiates to encourage PPP projects, with the aim of boosting confidence in the private sector to invest in infrastructure projects and bringing about transparency and accountability in PPP projects. Some of these initiatives include: standardising contractual documents such as sector specific model contracts/concession agreement and bidding documents; establishing special purpose vehicles like the Indian Infrastructure Finance Company Limited for facilitate funding of infrastructure projects; setting up the India Infrastructure Development Fund; relaxing the restrictions on foreign direct investment in most infrastructure sectors; and providing various fiscal incentives under the Income Tax Act, 1961 and state laws to developers and lenders of infrastructure projects.
It is also important for the government to develop an efficient dispute resolution mechanism to prevent the slowdown of PPP projects. A long-drawn dispute resolution mechanism leads to derailing of project timelines and causes freezing of funds. Thus, in this article, we shall analyse the available dispute resolution mechanisms under the PPP model and the steps that are being undertaken by the government to address this need for a quick, equitable, efficient and enforceable dispute resolution mechanism.
Potential disputes can be avoided between the government agency and the private agency, if there is clarity in the determination of tariff and the bid criteria. It is important to have an unambiguous understanding regarding the tariff determination method and the same should be just, to enable the private entity to earn a reasonable return. Along with tariff determination, bid evaluation criteria also need to be simple and objective, so that eligible entities are identified for the project and at the same time bids are not indefinite.
Speculative bids should be avoided as they have the potential to disrupt a project during the operations stage if the private entity is not able to maintain its overstated commitments. It is important to have well-drafted contractual clauses in relation to the tariff and bid criteria, in order to prevent disputes that may halt the operations and also lead to financial losses.
It is also important for parties to agree upon such a dispute resolution mechanism that does not hamper the operations of the infrastructure project and ensures that the dispute is settled without affecting the functioning of the ongoing project. Such a mechanism will prevent delay in the completion of the project, curb financial loss and safeguard the public interest. However, under such an arrangement, the disputed claim is to be settled after the completion of the project, and the agreed project consideration is to be paid to the private party so as to enable him to carry out the contracted operations in an uninterrupted manner.
Often it is seen that inefficient and inequitable risk allocation leads to breakdown of a PPP project. Thus, there is a need for a rational risk allocation addressing the concerns of the specific sector and project. Many a times, model concession agreements do not address project and sector specific concerns, and this leads to project implementation hurdles. Thus, there is a need to ensure that interests of all stakeholders are accounted for when allocating risk. It is also suggested that the basic principle to be followed for optimal risk allocation is that ´the entity that is best suited to manage the risk is allotted that risk´. Thus, there is a need for assessing relative ease, efficiency, and cost-effectiveness in managing the risks between the parties.
PPP contracts are long duration contracts spanning over 20-30 years, and often risks emerge that may not have been contemplated at the time of signing of the contract. In order to accommodate such risks, there is need for the parties to amend the concession agreement and renegotiate the terms to reflect the new project realities better. Thus, PPP contracts should provide flexibility for restructuring the contract within the commercial and financial boundaries of the project.
In order to ensure equitable and efficient renegotiation, the final decision for renegotiation must be based on: (i) full disclosure of long-term costs, risks and potential benefits; (ii) comparison with the financial position for government at the time of signing the concession agreement; (iii) comparison with the financial position for government at the time prior to renegotiation. The concession agreement can also provide for an ex-ante provisioning of renegotiation framework to safeguard the interests of the stakeholders. Such an option for renegotiation is also important to ensure that the private developer does not lose its bargaining power during the long duration of the project by abrupt changes in the economic or policy environment, which may be beyond his control.
However, certain conditions should also be imposed to safeguard the misuse of the option of renegotiation. The Kelkar Committee has suggested some benchmarks to be applied for triggering re-negotiation: (i) evidence that the project distress is material and likely to cause default under the concession agreement; (ii) not caused by the private party and likely to cause adverse outcomes for the government; (iii) likely to have social benefits or avoided costs that provide better long-term outcomes. It has also been suggested that the concession agreement shall not be amended in case any event of distress was foreseeable at the time of financial closure, or any event that would affect the concessionaire in the ordinary course of business, or any impact arising directly or indirectly from the performance, action or inaction of the concessionaire.
In order to safeguard public interests and minimise uncertain events during the continuation of the PPP project, the GoI guidelines (commonly known as the ´Planning Commission Guidelines for Institutional Mechanism of PPP Projects´) provide for constitution of a contract management team and lays down the powers and duties of the government authorities and private agencies to ensure continuous monitoring of the PPP project. It is also important to note that PPP projects can be challenged on the ground that it affects the public interest through the device of Public Interest Litigation. Thus it is important for the parties to recognise the scope of such litigation and the power of the courts, when negotiating such agreements.
Thus, disputes can be avoided by ensuring well-drafted clauses in the PPP agreement with a provision for re-negotiation for accommodating unforeseen risks and by effective post-award contract management.
Dispute Resolution Mechanisms
In order to ensure speedy dispute resolution in PPP contracts, litigation is not a preferred option due to unreasonable delay and lack of adjudication by experts. Therefore, in order to overcome bottlenecks of the inefficient litigation system, several alternative methods are being followed such as negotiation, conciliation, mediation, arbitration and expert adjudication. The perks of resorting to alternative dispute resolution mechanisms include maintenance of confidentiality, flexibility in proceedings and expedited settlement of disputes in the most sophisticated way.
(i) Mediation & Negotiation
An amicable settlement, through the process of mediation and negotiation, ensures that the parties reach a satisfactory solution and at the same time preserve the affable relationship between them. While in mediation a neutral third party helps the parties to negotiate a settlement, under the process of negotiation, the parties reach an agreement by themselves or through their lawyers. Other advantages of these mechanisms include: speedy resolution, cost reduction, confidentiality and flexibility in the process. While in many countries, mediation is a mandatory method of resolving disputes, in India, the establishment of the Delhi Mediation Centre (started by the District Courts in Delhi) has introduced ´judicial mediation´ as a distinctive method of alternative dispute resolution.
(ii) Expert Adjudication
Adjudication by quasi-judicial bodies comprising technical and legal experts, with a provision for appealing to the appellate body, is becoming an attractive method of dispute resolution in the PPP model. Sector-based regulators like Central Electricity Regulatory Commission and the Appellate Tribunal for Electricity, Dispute Review Board/Dispute Review Expert of NHAI are giving way to expert adjudication by continuously settling disputes. The proficiency of the regulator, in the financial, technical and legal aspects of a particular sector, ensures a better understanding of the issues between the parties and thus guarantees an optimum solution. Moreover, the statutes provide for a legal timeframe within which such expert regulators have to give their decision, thereby providing for a timely dispute resolution.
Arbitration is one of the most feasible ways of dispute settlement between parties of a PPP contract. Generally, concession agreements provide for arbitration due to their benefits in terms of speedy disposal and technical knowhow of the adjudicators. It is noteworthy that the Punjab Infrastructure Development and Regulation Act, 2002, makes arbitration mandatory. Arbitration in India is regulated by the Arbitration and Conciliation Act, 1996 (´Arbitration Act´), modeled on the UNCITRAL Model Law of International Commercial Arbitration, 1985 and UNCITRAL Conciliation Rules, 1980. In the year 2015, the Arbitration Act was amended to address the flaws of the previous arbitration regime. This amendment is a welcome move as it minimises judicial intervention, provides for a timeline of around 18 months for settlement of disputes, curbs arbitrators from charging arbitrary fees and confers greater powers upon the Arbitral Tribunal in terms of granting interim measures. The amendment also clarifies that a party can seek interim relief from Indian courts in case the arbitration is seated abroad. With the Amendment of 2015 and upcoming International Arbitration Centers being set up in Mumbai and Delhi, India is surely going to come up as an arbitration destination for commercial disputes.
Kelkar Committee recommendations
In light of the various challenges faced by the PPP model in the infrastructure sector, a high-powered committee chaired by former Finance Secretary Vijay Kelkar was constituted for putting forth their recommendations for revisiting and revitalising the PPP model. On December 28, 2015, the Committee suggested the setting up of independent regulators namely, Infrastructure PPP Project Review Committee (IPRC) and the Infrastructure PPP Adjudication Tribunal (IPAT), for PPP projects in various sectors, to strengthen the dispute resolution mechanism in PPP projects, and thus, to avoid cost and time overruns.
In the event a dispute between a private entity and the government under a PPP arises or a stakeholder demands a review of the economic viability of the project, the following process can be adopted:
Along with this advanced step of institutionalising the dispute resolution mechanism, the Committee has also suggested the setting up of sector-specific monitoring and regulatory committees to periodically revisit and review contractual and commercial relationships between parties. Analysing the contracts, after every three to five years, can help ensure that the project does not go into distress with the change in the economic environment. The Committee also suggested that when deciding disputes, all stakeholders should receive benefits as per their obligations, and the private party should not be meted out profits alone. It has also suggested that changes should be made in model concession agreements to ensure that the clauses provide for a speedy dispute resolution.
Public Utility Bill, 2016
Finance Minister Arun Jaitley, in his budget speech, announced the passing of the proposed Public Utility (Resolution of Disputes) Bill, 2016, as a part of the various other infrastructure reforms to be undertaken by the government. The proposed Bill contains a number of clauses which are parallel to the recommendations of the Kelkar Committee.
The Bill seeks to provide a structure to resolve disputes in infrastructure-related construction contracts, PPP and public utility contracts. It includes a number of clauses to ensure that contractual disputes between private partners and government agencies get resolved in an institutional and time-bound manner. Among other things, the Bill also seeks the establishment of sector-specific tribunals and monitoring agencies independent of the government. This upcoming Bill is expected to give a revolutionary boost to the PPP model and provide a legal framework for speedier resolution of disputes in PPP projects.
Furthermore, it was also announced that new guidelines for renegotiation of PPP concession agreements would be formulated. Along with this, a new credit rating system for infrastructure projects would be introduced to give emphasis on a variety of inbuilt credit enhancement structures.
According to the World Bank Report, India has the largest market for PPP contracts. Thus, in order to tap into this potential, revamping of the PPP model is the need of the hour. Implementation of the suggestions of the Kelkar Committee and passing of the Public Utility Bill 2016, will surely provide a fillip to India for boosting its infrastructure sector. Taking steps towards establishing an efficient and effective dispute resolution mechanism will prevent slowdown of PPP projects and curb huge financial losses. These measures will help in increasing investments and accelerating economic growth.
Apart from institutionalising the dispute resolution mechanism, there are some other dispute resolution mechanisms that could be adopted and which are followed in other jurisdictions. The parties can select a few experts at the time of negotiation, and these experts can form a panel of trusted and independent advisors which will resolve problems that arise during the contractual relationship and prevent them from escalating into adversarial disputes. This method has been known as ´Standing Neutral´. Another voluntary, flexible and informal dispute resolution technique is known as ´Neutral Evaluation´, where a neutral third party helps the party reach a settlement after the evaluating the dispute from the perspective of all stakeholders and overall economic development.
There is also a need to set up independent regulatory structures to expedite the process of receiving environmental and other clearances, so that the probability that the concessioner withdraws participation from the project is reduced. Moreover, appointment of an expert intermediary by the regulator to check the ground realities of the project at the time of dispute or his precautionary inspections is essential for reducing the propensity of disputes.
(This article has been authored by Krishan Singhania, Partner, Singhania & Co Solicitors & Advocates, along with Associate Kranti Khatu).