Issues in the Implementation of Long Term Contracts - June 7, 2013 [Compatibility Mode].pdf

7/28/2019 Issues in the Implementation of Long Term Contracts - June 7, 2013 [Compatibility Mode].pdf

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Issues in the Implementation

Deepak Kumar ThakurJ. Sagar Associatesadvocates & solicitors

Delhi | Gurgaon | Mumbai | Bangalore | Hyderabad

Long Term Contracts

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Long Term Contracts

Typical Classification of Contracts

Spot contracts One-off transactions where there is nointention of developing a long relationship with the

contracting party

Short term contracts Used for routine transactions,

over relatively limited times, typically one year or less

Long term contracts Typically covers the

transactions, term of which are five years or more

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Long Term Contracts

Features of Long Term Contracts

Considered to be a comprehensive contract, with an

objective to balance risks between operator and user

Aims to secure productivity and welfare for users in the

Creates the basis for services of public or semi-public

character and to a large extent, contracted under public-

private partnership (PPP) framework

Several policy initiatives & schemes by Government of

India and State Governments for promoting PPPs 4


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Long Term Contracts

Types of Long Term Contracts

Some of the major types of long term contracts ininfrastructure sector, that are considered for the purpose

of this presentation, are:

framework)

Operations, Maintenance and Management Agreement

Power Purchase Agreement

Fuel Supply Agreement

Fuel Transportation Agreement

Service Agreements

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KEY ISSUES

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A. Regulatory Issues

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Regulatory Issues

National Regulatory Regime

No uniform regulatory framework/ policy on the

implementation, operation, maintenance ormanagement of infrastructure project across sectors

No clear interpretation or consensus on vital terms

or issues common across the sectors

No national regulator in various sectors to oversee

the implementation of projects (as may be noted

from below)

Absence of coordination amongst variousgovernmental instrumentalities during the

implementation, operation & maintenance of project

Draft National PPP Policy and Public Procurement

Bill pending finalization and notification since 20118


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Regulatory Issues

Sector Relevant Statute Relevant Authority

ENERGY (NO SECTOR REGULATOR)

Power Electricity Act, 2003 and Rules andregulations framed thereunder

Regulatory commissions at Centre andStates with very extensive functions and

powers.

Oil & i. Petroleum and Natural Gas PNG Regulatory Board set up in October

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,

ii. Petroleum Act, 1934iii. Petroleum & Minerals Pipelines

(Acquisition of Right of User in

Land) Act 1962

iv. Oil Fields (Regulation and

Development) Act 1948

, ,

storage, transportation, distribution &marketing of petroleum products

Director General of Hydrocarbons

licenses and regulates the exploration of

hydrocarbons.

Coal i. Coal Bearing Area (Acquisition

and Development) Act ,1957

ii. Mines and Minerals (Regulation

and Development) Act,1957

iii. Coal Mines Nationalisation Act,

1974

No regulatory authority. Control by

Ministry (Coal Controller), through

nationalised corporations.


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Regulatory Issues


TRANSPORT (NO SECTOR REGULATOR)

Airport i. Airports Economic RegulatoryAuthority of India Act, 2008

ii. Aircraft Act, 1934

iii. Airports Authority of India Act,

1994

Airports Economic Regulatory Authority(AERA). AERA has provided certain

favorable decisions in recent times

providing relief to the private developers/

operators of airports.

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iv. Air Corporation (Transfer Of

Undertaking And Repeal) Act,

1994

Ports i. Indian ports act, 1908

ii. Major port trusts act, 1963

Tariff Authority for Major Ports (TAMP)

has the sole function of tariff setting.

Investors and users have no recourse to

an independent regulator on othermatters such as dispute resolution,

performance standards, consumer

protection and competition.


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Regulatory Issues


TRANSPORT (NO SECTOR REGULATOR)

Roads i. National Highways Authority ofIndia Act, 1998

ii. Central Road Fund Act, 2000

iii. The Control of National

Highways (Land and Traffic) Act

No regulatory authority. NHAI acts asthe regulator as well as the operator.

States have floated their own

Corporations or agencies.

Investors have no recourse to an

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2002 independent regulator

Railway i. Indian Railway Board Act, 1905

ii. Railways Act, 1989

Railways act as the operator as well as

the regulator.

Investors have no recourse to an

independent regulator.

Metro i. Metro Railways (Construction ofWorks) Act, 1978

ii. Metro Railway (Operation and

Maintenance) Act, 2002

No regulatory authority. Commissionerof Metro Rail Safety confirms the safety

aspects of the metro rail projects.


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Regulatory Issues


COMMUNICATION (NO SECTOR REGULATOR)

General i. Communications ConvergenceBill, 2011

Draft Bill proposes a sectoral regulator topromote, facilitate & develop carriage

and content communications (including

broadcasting, telecommunications and

multimedia).

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Posts Indian Post Office Act, 1898 No regulatory authority. Proposal tocreate a new regulatory body. A draft

amendment bill is open for consultation.

Cable

TV

Cable Television Networks

(Regulation) Act, 1995

Provides for the regulation of carriage

and content of cable TV broadcasts.

TRAI has the responsibility of tariff

setting and interconnection for cable

operators.


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Regulatory Issues


.COMMUNICATION (NO SECTOR REGULATOR)

Broad-casting

i. Prasar Bharati (BroadcastingCorporation of India) Act, 1990

ii. Sports Broadcasting Signals

(Mandatory Sharing with Prasar

Bharati) Act, 2007

Private participation is allowed in the FMradio sector through licensing. No

regulatory authority exists for radio and

TV broadcasts. A Draft Broadcasting

Services Registration Bill, 2007 is open

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for consultation. It proposes setting up a

Broadcasting Regulatory Authority of

India.

Telecom

&

Internet

i. Indian telegraph act, 1885

ii. Indian Wireless Telegraphy Act,

1993

iii. Telecom Regulatory Authority of

India Act, 1997

iv. Information Technology Act,

2000

TRAI has been given the responsibility

to regulate telecom and internet for cable

operators.


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Regulatory Issues


URBAN INFRASTRUCTURE

Water Supply& Sanitation

i. Indian Easement Act, 1882ii. Water (Prevention and

Control of Pollution) Act,

1974

No regulatory authority.Central Ground Water Authority is

responsible for regulation and control

of ground water development, with

powers to control pollution and

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protect the environment.


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Regulatory Issues

Other Regulatory Issues

Change in Government policies (telecom licensing,

coal allocation)Delay in the grant of key government approvals,

licenses and permissions, due to corruption &

bureaucrac

Delay in the fulfillment of the performance

obligations by the government instrumentalities like

handing over of site/ land/ right of way, etc.

Political constraints and ministerial preferencesConformance with sector and state legislations

Non- availability of grant/ viability gap funding

from the government

Divergence approach in different sectors (as below)15


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Regulatory Issues

Divergence Approach

Process of appointment (by selection committee or

otherwise), tenure (3 to 5 years) and powers (rulemaking, licensing, enforcement, imposition of

penalties) of regulators varies from sector to sector

Telecom regulator promote competition as one of its

functions, while electricity regulators are not

assigned with this function

Telecom and electricity sectors have appellate

tribunals while other sectors do not have a

specialized forum of appeal16


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Regulatory Issues

Environmental Clearance and Forest Land

Delay in the grant of Environmental Clearances

Approvals for implementation of Projects in Coastal

Regulated Zone in accordance with Coastal

,

Issues concerning diversion of forest land for use for

non-forest purposes and creation of charge/ lien over

such forest land

Projects worth over Rs. 7 lakh crore are held up in

the absence of environmental and forest clearances 17


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B. Land Related Issues

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Land Related Issues

Land acquisition is, at present, the single-largest

roadblock for development of infrastructure.

Several projects (like roads and metros) havebeen delayed or stalled due to land acquisition/

right of way related issues.

Primary reason is resistance from localcommunities, due to huge difference between

the registered value offered and the actual

market value of the land acquired by industries.Land Acquisition and Resettlement and

Rehabilitation (LARR) Bill, 2011 introduced

in Parliament to address such issues yet to befinalized and notified.19


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Land Related Issues

LARR Bill seeks to replace Land Acquisition

Act, 1894 & defines public purpose to include

(a) strategic defence purposes and nationalsecurity, (b) roads, railways, highways, and

ports, built by government and public sector

, ,

planned development or improvement of

villages, and (e) residential purposes for the

poor and landless.

LARR Bill, now proposes to make it mandatory

for companies buying land to win the approval

of 80% of land holders, and for PPP projects,

70% of landowners need to give consent. 20


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C. Financial Availability Related

Issues

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Financial Availability Related Issues

Major financing related risks during the

implementation stage include the following:

Project appraisal and financial viability ofproject

Insufficient credit rating to the Projects and

SPVs implementing such Project due toseveral factors

Charge creation related issues

Foreign exchange/ hedging related issues(applicable for ECB/ ECA financing)

Enforcement related issues

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D. Market Related Issues


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Market Related Issues

Gap between supply and demand, wherein:

Demand more than supply Delhi-Gurgaon Express

Tollway;

Supply more than demand Delhi Airport Express

Metro

lesser recoveries

Unanticipated increase in the cost of raw

materials

Unforeseen business risks and unanticipated

change in market conditions

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E. Miscellaneous Issues


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Miscellaneous Issues

Termination related issues

Payment of termination payments upon

termination of governing contractsHand-over of the Project Assets upon the

termination of governing contracts

Technology related issues Implementation of Projects under various sub-

contracts defining the exact role &

responsibilities and coordination related issuesLabour related issues

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Suggestions

Every contract poses its own unique set of

circumstances and needs to be approached with

vigilance

However, any regulatory development in the common

interests of ublic and a ro ect, needs to address social

risk, market failure or equity concerns through rule-based direction of social and individual action

In this regard, there is a need for independent regulatory

commission in each sector for policy making, framing,

legislation, rule making, ownership enterprises,

adjudication of any differences, claims or disputes,

enforcement of orders 28


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Suggestions

Draft National PPP Policy, 2011 and Public

Procurement Bill, 2011, should be finalized and notified

pursuant to deliberations with various stakeholders

Contractual framework should be standardized for each

sector in consultation with the stakeholders. Some ste s

have been taken by Planning Commission in this regard

Independence and autonomy of regulatory institutions,

with no or minimal political/ governmental interference

Independent and sufficient budget allocations for

performance of obligations by such regulatory

institutions 29


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Suggestions

Performance linked payments to the licensees/

contractors incentives and penalty based structures

Market driven determination of user fees/ tariff in a

transparent manner increase competition

Renegotiation, post contract execution, to be allowed,only if:

Justification by implementing agency that risk sharing at

allocation stage has significantly changed due to rare

circumstances beyond the control of the parties

Spirit of adhering to value for money analysis established

during the project development process to be justified

Agreement on audit on all such renegotiation related terms, to

ensure transparency and fair play 30


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Documents

Issues in the Implementation of Long Term Contracts - June 7, 2013 [Compatibility Mode].pdf