Delays ahead?

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Inadequate expertise in the legal profession may create roadblocks in the infrastructure sector, argues A Balasubramanian of IDFC

The scope for conflicts to arise during public-private-partnership (PPP) projects is huge. One of the most common sources of such disputes is a breach of commitment by either the investor or the government. If left unattended, disputes have the potential to undermine investor confidence, dissuade new investors and seriously disrupt trade and the economy. For example, a dispute that affects the operation of a private terminal of a busy port could bring foreign trade to a grinding halt. It is vital, therefore, that any disputes affecting PPP projects in the infrastructure sector are dealt with quickly and effectively.

Balasubramanian
Balasubramanian

Unfortunately, many of these disputes are complex, and owing to the nascent stage of the PPP model in India (large-scale PPP projects have only existed for around eight years), there is little in the way of precedents to guide their resolution.

While legal practitioners and judges are expected to address and balance the delicate issues of equity, efficiency and accountability, they should also be able to appreciate the nuances of public policy, economics, technology and governance under the new disposition towards economic liberalization. This is especially true for infrastructure projects, where the public sector often plays a dominant role.

PPP contracts, such as build-operate-transfer concession agreements, are drawn up between public authorities and commercially oriented private investors. Government and public authorities, such as port trusts or road agencies, cannot exercise sovereign rights. This is a huge departure from conventional contracts, where the government’s interests would take precedence over all others.

Such ventures therefore require a thorough understanding of the economic rationale for a project, the risk allocation between the government and the private investors and the balancing of public policy issues, such as the need to establish independent regulators. These concepts are new to legal practitioners. Indeed, project financiers and economists have only recently become familiar with them.

Acknowledging the complex demands of the new PPP-focused framework for infrastructure development and the fact that infrastructure is expected to expand rapidly under the PPP model, there is an urgent need for capacity-building by the country’s legal fraternity (including judges and advocates). This should be achieved through a rigorous process of professional education and training.

Lawyers need to be trained in several areas relating to infrastructure, PPPs and project finance, including risk allocation rationale, the commercial nature of a concession agreement, public policy issues on the access of facilities for all and providing a level playing field for investors and the government. In addition, they should familiarize themselves with return expectations and the interests of equity investors and financiers. This is necessary because although the investment is in public infrastructure, it still remains a business proposition.

As infrastructure programmes expand, the scope for judicial intervention rises, as does the risk to all stakeholders, including the government, private investors, lenders and citizens using the infrastructure. Bid invitations, evaluations, the awarding of contracts and the administration of projects all provide the scope for conflicts to arise. Completed projects may turn out to be inconsistent with assessments made during the preliminary planning stages and unrealistic expectations on the part of the government may clash with the aggressive aspirations of private investors.

This is inevitable because the objectives of both parties are often different. The public sector wants high-quality infrastructure developments that are cost-effective and widely accessible to their intended users. Private investors, meanwhile, focus on optimizing investments, leveraging the potential for maximizing tariffs and generating profits. While the public sector would do well to realize that private investors are interested in infrastructure as a business, the private sector should appreciate that this business remains ever sensitive to the demands of society as it serves the public at large.

Lawyers play a crucial role in this balancing act, and as such, it is vital that they possess a thorough understanding of all the delicate issues that come into play.

So far, the Indian system has responded well to the demands of the PPP-led infrastructure revolution. A recent case involving the shifting of operations from an existing container terminal to a new private one in Cochin, for example, was handled in the spirit of the concession agreement. The way in which this and other legal disputes in the private infrastructure sector have been resolved offers encouraging signs of a responsive system of judicial and public governance.

But these are early days for PPPs, and while the road so far has been relatively smooth, the inadequate pool of specialist knowledge within the country’s legal profession has the potential to throw up unforeseen roadblocks.

The time has come for the country’s lawyers to raise their game by acquiring the professional know-how that is needed to broker and nurture successful PPP projects. The future of India’s infrastructure sector may well depend on it.

A Balasubramanian is the senior director of project finance at Infrastructure Development Finance Company (IDFC). Over the last 12 years he has financed and advised several domestic and international private investor consortia on port projects and has also been an adviser to the Indian government and the World Bank on port reforms in India.