The
Pertinently, the Amaravati project and the renewable energy PPAs represent a significant private sector investment aggregating billions of dollars that have already been made in the state. Therefore, the timing and overtly arbitrary and opaque nature of executive action by the
The fear that this contagion may spread to other states is real. As regards the
However, a rudimentary analysis of the facts suggests otherwise, or at the very least creates an impression that the private sector consortium succumbed to political pressure. In the world of infrastructure contracts requiring private sector investment, perceptions are usually stronger than facts, especially because the counterparty is always the government.
This series of events in
The timing and overtly arbitrary and opaque nature of executive action by the
This series of events raises significant questions on the durability of contracts, especially in the context of insulating infrastructure projects from political risk. The fear that this contagion may spread to other states is real.
Source: BloombergQuint
Viability of projects put at risk
Even if one were to undertake a nuanced analysis and accept that there might indeed be certain justifiable reasons for the termination of the projects, however, the timing and manner of effecting such termination is anathema and destructive to the fundamentals of creating an enabling environment for private investors in the infrastructure sector.
While fundamentally the Indian law on contracts is robust in philosophy and principles, however, the burden for enforcement remains on the aggrieved party. Therefore, in delicately balanced infrastructure projects that depend on timely cash flows for viability, any arbitrary withholding of payments by the government as the counterparty can be fatal to the project.
Remedial action needs to be swift and designed to give the benefit of doubt to the project investor. Regrettably, that is not what the Indian law and judiciary deliver. The relatively weak enforcement of contracts in
Remedial action
The
Notably, however, these amendments do not address the primary contagion affecting privately funded infrastructure projects, which is timely payment of tariffs and dues to the private investor by the government. It appears that the central government is taking the
My first reaction to this news was that the law already provides that parties including governments must respect and honour contracts. However, what is urgently needed are explicit provisions that preclude governments from acting arbitrarily and capriciously. The usual stratagem for governments has been to make allegations against the private sector counterparty to a contract, and on such unproven allegations, take precipitative action such as withholding payments, or terminating the agreement.
In simple words, the monopolist buyer remains unaccountable and wields disproportionate and arbitrary power.
Preventing ad hoc moves by governments
In my view, therefore, the proposed new law should re-calibrate the enforcement regime to expressly provide a framework to fix accountability to deter opaque and arbitrary decisions. One such mechanism could be to prevent governments, or indeed any party to a contract, from taking any precipitative action merely based on an allegation. The person making the allegation must be obliged to escalate the issue to specialised courts or tribunals (such as the electricity tribunals already provided for the power sector, or specialised dispute resolution tribunals to be created for the infrastructure sector) and such tribunal would be required to address these disputes in a time-bound manner. Thus, the burden of proving the allegation must remain with the person making the allegation.
"The practical challenge in the current regime is that the aggrieved party is burdened to prove the negative, i.e. that he has not been in breach as alleged. This is a logical fallacy as one cannot prove the negative." The government can get away with shifting the onus as well as the financial burden onto the aggrieved party and take advantage of the delays.
Certain disputes can be made mandatorily referable to arbitration. However, in any scenario, the government should be obliged to continue making some minimum payments, such as 80 percent of the amounts in dispute, to ensure that the project does not head into insolvency. This continued payment is especially critical since on the other hand, the insolvency laws now require that a borrower must mandatorily and automatically be declared a non-performing asset within a legally specified time frame, and thereafter be referred to insolvency proceedings in a time-bound manner.
This chatter of a new law stems primarily from the negative actions taken by the
Other ripple effects
The central government's urgency to bring in new legislation is justified on several counts. Not only is the current weak enforcement regime threatening further investments in the infrastructure space, but there is a real threat of foreign investors bringing legal action under the bilateral investment treaties and similar bilateral arrangements, to recover damages for losses attributable to arbitrary actions by governments. The preponderance of BIT-related legal jurisprudence would justify such action in the context of the actions taken by the
Another law that has not been invoked as yet but would appear to have a direct bearing on these events, is the Competition Act, especially in the context of the electricity utilities that are monopolistic and largely government owned. There are several international precedents where large monopoly utilities have been broken by the anti-trust authorities, of which the 'Baby Bells' created from the monolithic
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HSA Advocates
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Sri
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