Govt turns down plea for amending port concession agreements

P Manoj Mumbai | Updated on January 09, 2018 Published on November 29, 2017

Time for change The Indian Private Ports and Terminals Association had sought review of concession agreements periodically to take account of changing circumstances

Private terminal operators had called for review of such pacts based on changing market dynamics

Shipping Minister Nitin Gadkari has rejected calls from private firms running cargo terminals at government-owned major ports to allow change in the concession agreements to tide over stress emanating from regulatory risks and market dynamics.

“Except for change in concession agreements, he said he would do whatever possible. He clearly told the chief executive officers of private terminals that he cannot change the concession agreements,” a Shipping Ministry official, who attended a meeting called by Gadkari in Goa on November 7, told BusinessLine.

The Minister’s categorical statement has dashed the hopes of private terminal operators who have been lobbying with the government to amend the concession agreements. The Indian Private Ports and Terminals Association (IPPTA), an industry lobby, has sought “review of concession agreements periodically to take account of changing circumstances” and for “progressive migration to market-driven tariffs with no conditions”.

“There is an agreement signed between two parties. The draft concession agreement was given to bidders during the tendering process. The government has not asked for a change in the CA in the last 15 years, then why are you asking for a change,” the Minister was quoted by a port company CEO as telling the private terminal operators.

When the going is good, this is the best concession agreement, but when the facilities are facing stress, you seek changes in CA, Gadkari is understood to have told the private firms.

Multiple sources who attended the meeting confirmed this stance of the government.

In 2015, a committee led by Vijay Kelkar had asked the government to develop and implement a framework for dealing with requests for amending the concession agreements.

PPPs are typically very high value contracts, often with huge capital costs and high ongoing operating costs and revenues, which make it difficult for a party to such agreement to cope with any losses to capital invested or revenue forgone. Besides, PPPs are usually long-term arrangements spanning 10-30 years and, hence, are not amenable for writing “perfect” contracts covering all situations and developments during a project’s lifetime.

Given the above characteristics, it is no surprise that a number of such projects can become distressed. The forms of distress may vary but the factors that lead to such distress could give rise to a call for amending the terms of the concession agreement to better reflect project realities. The committee noted that such calls typically (but not always) originate from the private party to the concession agreement and, since the objectives behind such a call would be biased towards maintaining a required return on investment, or preventing a default under financing agreements undertaken by the private party, or avoiding a risk or set of risks, amending the concession agreement may not be in the best interest of the public concessioning authority acting on behalf of the government.

Renegotiation rules

While suggesting benchmarks to be applied for such renegotiation of agreements, the Kelkar committee, asked the government to exclude any event of distress that was foreseeable at the time of financial closure, any event that would affect the concessionaire just as any other company in its ordinary course of business (for example general changes in law) and any impact arising from assumptions made or risks taken by the concessionaire in preparing its bid, from such an exercise.

The final decision for a renegotiated concession agreement must thus be based on full disclosure of long-term costs, risks and potential benefits, comparison with the financial position for the government at the time of signing the concession agreement and comparison with the financial position of the government prior to renegotiation.

“This will permit the concessioning authority to make a decision based on awareness of likely outcomes over the foreseeable future of the concession,” the Kelkar panel said in its report submitted to the government in November 2015 on ‘Revisting and revitalising PPP Model of Infrastructure’.

Published on November 29, 2017
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