10. When Things Go Wrong: Renegotiation and Cancelation of Infrastructure Projects

In the Indian Model Concession Agreements, user tariffs are linked to inflation. Any tariff increase resulting from the mechanism provided in the Concession Agreement would not be considered Renegotiation.

Guasch (2004).

Guasch (2004).

GVK Jegurupadu electricity generation project in Andhra Pradesh was renegotiated twice prior to commercial operations.

Only the escalable fuel charge component of the tariff can be escalated as per the escalation indices of Central Electricity Regulatory Commission (CERC).

CGPL had filed the petition seeking relief under Article 12 (Force Majeure) and Article 13 (Change in Law) of the PPA and Section 79 of the Electricity Act to mitigate the impact of the unprecedented increase in the price of imported coal.

Government of Indonesia promulgated the “Regulation of Minister of Energy and Mineral Resources No. 17 of 2010 regarding Procedure for Setting Mineral and Coal Benchmark Selling Price” on 23.9.2010. According to the new Indonesian Regulations, the holders of mining permits for production and operation of mineral and coal mines are required to sell mineral and coal in domestic and international markets including to their affiliates by referring to the benchmark price and the spot price of coal in the international market. All long-term coal contracts for supply of coal from Indonesia are required to be adjusted with the Indonesian Regulations within a period of 12 months, i.e., by 23.9.2011. CGPL amended the CSA in 2012 to align with the new Indonesian Regulations. Due to adoption of the Indonesian Regulations, CGPL petitioned that it is supplying power to the procurers by purchasing coal at a higher price than the price envisaged at the time of bid. The petitioner has submitted that Tata Power Company Ltd. submitted its bid for Mundra UMPP in December 2006 after considering the prevailing economic situation at the time of the bidding. The petitioner has submitted that the then price for benchmark coal of Gross Calorific Value (GCV) 6322 kcal/kg was USD 49.75 which was equal to USD 42 for GCV 5350 kcal/kg. The petitioner has submitted that due to certain subsequent unforeseen and unprecedented developments such as promulgation of Indonesian regulations and rise in international coal prices from USD 40–50/MT in 2006 to USD 110–120/MT in 2011, mainly due to increase in its spot price on account of increase in coal import by India and China, it has become commercially impracticable for the Petitioner to supply power at the bid out tariff. (Source: Central Electricity Regulatory Commission order dated 15.4.2013).

Central Electricity Regulatory Commission (2013): “Order dated 15 April 2013 on Petition No. 159/MP/2012”, Viewed on 20 April 2013 (http://​www.​cercind.​gov.​in/​2013/​orders/​159_​mp_​2012.​pdf). CERC passed a “compensatory tariff” order to offset losses on account of costly imported coal in favor of Tata Power in April 2013. The difference between actual and quoted energy charges was to be the compensatory tariff mechanism.

The Compensatory Tariff Committee was set up under Deepak Parekh. The Committee recommended 0.59/kWh as the compensatory tariff for 2013–14. It also recommended true-up/reconciliation of actual costs every year vis-à-vis normative assumptions. Thus, the Committee effectively converted the tariff arrived through competitive bidding (Section 63 of Electricity Act, 2003—tariff determination through competitive bidding) to a cost-plus regime (Section 62 of Electricity Act—tariff determination through Electricity Regulatory Commission) after contract award. This amounts to renegotiation of the contract.

PPA between CGPL and distribution companies was signed in 2007.

Tata sought tariff increase of 0.67/kWh; ‘Compensatory Tariff’ Committee recommended 0.59/kWh; CERC ordered 0.55/kWh; APTEL agreed for 0.52/kWh. The benefit to CGPL amounted to Rs. 250 billion over the PPA period. In the process, the private sector liability was transferred to the public sector. This corresponds with Guasch’s view that the predominant beneficiary in most renegotiations is the private sector.

Section 79(1)(b) of the Electricity Act, which has been used by CGPL to obtain relief from CERC, deals with the following function of CERC: “to regulate the tariff of generating companies other than those owned or controlled by the Central Government specified in clause (a), if such generating companies enter into or otherwise have a composite scheme for generation and sale of electricity in more than one State”.

Section 63 of the Electricity Act states that “the Appropriate Commission shall adopt the tariff if such tariff has been determined through transparent process of bidding in accordance with the guidelines issued by the Central Government”.

Wells and Ahmed (2007).

As per the CGPL petition, the additional financial implication due to increase in Indonesian coal price works out to Rs. 1,873 crore per annum and Rs. 47,500 crore over the 25 year PPA period. This adverse financial implication was sought to be transferred to the account of the state-owned power procurers.

Pratap (2013).

Lok Sabha Unstarred Question number 536 answered on Nov 24, 2006.

“Report of the Comptroller and Auditor General of India for the year ended March 2012 on Implementation of Public Private Partnership in Indira Gandhi International Airport, Delhi” (Report No. 5 of 2012–13, Viewed on 18 February 2013) (http://​saiindia.​gov.​in/​english/​home/​Our_​Products/​Audit_​Report/​Government_​Wise/​union_​audit/​recent_​reports/​union_​performance/​2012_​2013/​Commercial/​Report_​No_​5/​5.​pdf). This view is, however, contested by the DIAL sponsor, GMR.

Pratap et al. (2012).

If the auction is designed well and provides adequate incentives, competitive bidding for the right to operate a concession for a given number of years should elicit the most efficient operator. If bidders believe that renegotiation is feasible and likely, however, their incentives and bidding will be affected, and the auction will likely select, not the most efficient provider, but the one most skilled at renegotiations. This result helps explain why many concessions in LAC region have been renegotiated just after concession award. (Source: Guasch 2004.)

Renegotiation takes place between the government and the operator only, so it is not subject to competitive pressures and their associated discipline. Opportunistic renegotiation, can reduce or eliminate the expected benefits of competitive bidding.

As far as possible, there should be outcome targets (regulation by objectives), rather than investment obligations (regulation by means).

This approach forces operators to bear the costs of aggressive bids and of normal commercial risks—even if doing so results in the abandonment of concessions. It is necessary to establish a reputation of canceling concessions, when appropriate.

Low value of performance bonds increases the chances of renegotiations by private operators and is associated with higher incidence of noncompliance with contractual clauses. Performance bonds in the form of bank guarantees rather than bankers’ cheques would reduce blocking of financial resources of the concessionaire.

Based on Pratap (2016).

The incidence of project cancelations in India was less than 1% till 2012.

As per the Private Participation in Infrastructure database of the World Bank, a project is deemed to have been canceled if, before the end of the contract period, the private company physically abandons the project (such as withdrawing all staff); or the private company ceases operations or halts construction for 15% or more of the license or concession period, following the revocation of the license or repudiation of the contract by the relevant authority; or the private company sells or transfers its economic interest in the project to the public sector.

Vernon (1971).

Gomez-Ibanez (1999).

Harris and Pratap (2009).

Two water and sewerage contracts in the province of Maldonado (Uruguay) reverted to the public sector (to Obras Sanitarias del Estado, OSE) after 2004 when the electorate approved a constitutional amendment that made access to water a fundamental human right and transferred water and sanitation services to the public sector.

Harris and Pratap (2009).

Pratap (2011).

As the Report of the Committee on Revisiting and Revitalizing PPP Model of Infrastructure states “Over-aggressive bidding with inadequate due diligence by bidders has sometimes led to unviable offers. Since determining whether a bidder's capital structuring permits such optimistic bidding is difficult for the Authority, despite its own conservatism in its project report, bids were accepted and later failed.” (http://​finmin.​nic.​in/​reports/​ReportRevisiting​RevitalisingPPPM​odel.​pdf) (page 34, viewed on 30 December 2015).

Allowing Delhi International Airport Limited to levy and use the development fees violates one of the basic provisions of Operation, Management and Development Agreement, which was part of the bid documents.

China with 36 cancelled PPP projects has the highest number of such cancelations.

Pratap (2011).

Increased role of domestic investors—seen in countries such as India, Mexico and Brazil—and development of local capital markets will likely make projects even more robust to cancelation.

Harris and Pratap (2009).

In 2014, India recorded $6.2 billion investment in private infrastructure projects—a 9 year low.