PPP projects face increased accountability

By Akshay Jaitly, Rachika Sahay and Varun Nair, Trilegal
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In the previous issue of India Business Law Journal this column discussed the revised request for quotation norms for public-private partnership (PPP) projects, which was an attempt by the government of India to provide a more bidder-friendly environment for PPP projects, made in response to bidders’ concerns.

The government now wishes to make private sector participants financially accountable, and is taking steps to introduce checks and balances.

Akshay Jaitly Partner Trilegal
Akshay Jaitly
Partner
Trilegal

Public audit of public funds

PPP projects often receive what is referred to as viability gap funding, in which the government authority that invites bids makes public funds available for infrastructure projects which would otherwise be commercially unviable or have long gestation periods. This funding may constitute up to 40% of the project cost. As public funds are being used, the government, including the prime minister, believe that such projects should be audited by the leading authority appointed to audit public bodies, the Comptroller and Auditor General of India (CAG).

The CAG will audit PPP project vehicles either by making such provision in the concession agreement, or by amending the Comptroller and Auditor General’s Act, 1971, to create these powers. Once implemented, private PPP project developers will be required to account for the public funds they receive and utilized by them.

The CAG will also scrutinize the commercial assumptions on which projects are based. It is important that these are correct, as otherwise the project’s viability is likely to be compromised. For example, the volume of traffic on the Delhi-Gurgaon expressway turned out to be more than the projected estimates, resulting in congestion. As a result, following the opening of the expressway the government had to consider a new project to provide additional capacity for the same route.

New JV guidelines

In another step to increase accountability, the government has recently issued new guidelines for the establishment of joint venture companies for PPP projects.

The guidelines disallow equal joint ventures between a private participant and a government entity, or between two government entities. The government hopes this will enable it to fix responsibility for the project on the majority partner, ensuring quick and efficient implementation of the project.

Rachika Sahay Senior associate Trilegal
Rachika Sahay
Senior associate
Trilegal

Secondly, the guidelines aim at preventing conflicts of interest by disallowing (a) incumbent government utilities, also performing regulatory roles, from developing PPP projects through joint ventures, and (b) government officials from holding any position in the PPP project vehicle where the government entity has 50% or less shareholding. The purpose of this is to avoid nonsensical situations in which the regulator would be required to regulate itself.

Finally, the guidelines require all rights, obligations and duties in relation to the project to be incorporated in the concession agreements. They also discourage reliance on shareholders agreements where the concessioning authority is one of the joint venture partners. The government believes that existence of rights under two separate agreements may allow the private entity to “forum shop” in search of the most advantageous (cheapest and easiest) resolution in case of dispute.

It appears that the aim of these regulatory initiatives is to ensure that the developer implements the project in time by efficiently using the available resources. This necessitates regular checks on the performance of the concessionaire. While the new regulations go some distance in this direction, they do not offer a complete solution.

Regulation – a one way street?

Merely regulating the private entity involved in a PPP project cannot ensure that the project will be implemented in time. The central government and relevant state governments must require various statutory and other government authorities to expedite their procedures for granting regulatory approvals – providing land, rights of way and other requisite amenities. Further, the central government must establish an effective mechanism requiring the CAG to complete audits in a manner that does not interfere with project execution.

The decision to fix responsibility for the project on the majority partner also lacks a clear rationale. While the minority partner probably has significant functions to perform in respect of the project, logically, the project vehicle should remain solely responsible for project development, while any arrangement between shareholders should be allowed to remain behind the corporate veil.

While it is of course good to have accountability, the government would be well advised to think through its new measures to determine if any of them may actually act as a deterrent to private participation.

Akshay Jaitly is a partner at Trilegal in Delhi, where Rachika Sahay is a senior associate and Varun Nair is an associate. Trilegal is a full-service law firm with offices in Delhi, Mumbai, Bangalore and Hyderabad. The firm has over 120 lawyers, some of whom have experience with law firms in the US, the UK and Japan.

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