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Stalled PPP infrastructure projects likely to get a renegotiation clause

The Cabinet Committee on Economic Affairs had in July directed Planning Commission to come up with a proposal for strengthening the PPP regime.

, ET Bureau|
Last Updated: Oct 14, 2013, 03.56 AM IST
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Absence of provision for renegotiation of contracts hampering large PPP projects in highways, power, airports and ports sectors
Absence of provision for renegotiation of contracts hampering large PPP projects in highways, power, airports and ports sectors
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NEW DELHI: The government is considering the introduction of a force majeure clause in public-private partnership projects to allow renegotiation of contracts to revive private participation in infrastructure development and salvage some big-ticket projects.

The Planning Commission has proposed adding a provision for renegotiation in PPP contracts, including existing projects, to deal with unforeseen developments in a draft note sent to concerned ministries. ET has reviewed the note.

A large number of existing infrastructure projects in sectors such as highways, power, airports and ports have run into rough weather because of unforeseen circumstances, and the lack of provision for renegotiating the contracts has made them unviable for investors. This year GMR and GVK walked out of mega-highway projects worth Rs 10,700 crore, while most recently Reliance Infrastructure pulled out of the Rs 5,800-crore Airport Express line of the Delhi Metro. There are problems brewing in the Gurgaon Expressway project, while Tata Power and Reliance Power are struggling to transform their ultra-mega power projects powered by imported coal into profit-making ventures due to changes in input costs.

Private developers have been demanding a renegotiation provision in PPP contracts because they cannot foresee all the events and contingencies during the entire contract period, which is typically 20 years or more. The government has targeted to attract at least half of the $1-trillion investment envisaged in the infrastructure sector during the 12th plan period (2012-17) from the private sector.

The Cabinet Committee on Economic Affairs had in July directed Planning Commission to come up with a proposal for strengthening the PPP regime


The Cabinet Committee on Economic Affairs had in July directed Planning Commission to come up with a proposal for strengthening the PPP regime after various big-ticket projects failed. The proposed force majeure clause will come into play only when a project “is likely to become infructuous or when the parties are facing a situation that could not have been contemplated by a prudent and diligent person and the contract does not provide a remedy for the same”, the commission said in its draft note. “As and when renegotiation is undertaken, it would have to be based on fair and transparent justification, confined to the specific issues, no greater in scope than is necessary for addressing the issue; quantified and restricted in terms of relief; and undertaken only when other remedies are not available,” the panel said in the note.

It has proposed that the finance ministry, in consultation with the plan panel, will prepare and present a discussion paper on renegotiation of contracts, taking account of international best practices and after consultation with the World Bank. The discussion paper will be placed before the Cabinet within three months.

The draft note also stressed the need to spell out a clear and well-defined treatment of contingent liabilities, including the extent to which they can be undertaken and the process of authorising the same. The Planning Commission is of the view that PPP projects tend to create contingent liabilities that could become a charge on future budgets, which would even preempt Parliamentary approvals as and when such contingent liabilities arise. Hence, it has asked the finance ministry to include appropriate recommendation on the treatment of contingent liabilities in the annual financial statement in its discussion paper.

Last week, the Cabinet had given its in-principle approval to a proposal of the National Highway Authority of India to allow highway developers defer premium payments in stalled projects. Following this, a committee under C Rangarajan has been constituted.
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