NHAI Circular for Substitution of Concessionaires

1.  In view of the difficulties being faced by Concessionaires in Public-Private-Partnership (PPP Projects), Government has decided to permit the substitution of existing Concessionaires, in a harmonious manner, in accordance with provisions of Clause 40.3 of the Model Concession Agreement read with Substitution Agreement set forth in Schedule-V of the Model Concession Agreement.

2.  This decision shall be applicable to all National Highway projects under PPP mode  awarded/yet to be awarded on Build-Operate-Transfer (BOT) mode of delivery:

a.  The on-going 2-laning and 4-laning National Highway projects where financial close has been achieved by the Concessionaire but Commercial Operation Date (COD) has not yet been declared by the Authority;

b.  The 6-laning National Highway projects wherein the financial close has been achieved by the Concessionaire but the project completion certificate has not yet been issued by the Authority;

c.  Completed 2-laning, 4-laning and 6-laning National Highway projects awarded on Build-Operate-Transfer (BOT) mode of delivery under PPP mode; and

d.   All the new National Highway projects under PPP mode yet to be bid out on BOT mode of  delivery in line with (a), (b) and/or (c) above, as the case may be.

3.   Provisions pertaining to substitution of the Concessionaire by the Lenders’ Representative are contained in Clause 40.3 of the Model Concession Agreement in general, and Clause 3.1.1 of Substitution Agreement in particular. Clause 3.2 and 3.3 of the Substitution Agreement provide for substitution in the event of Financial Default and Concessionaire’s Default respectively. It is further clarified that Right of Substitution by the Lenders’ Representative can be exercised in situations other than those illustrated in Clause 3.2 and 3.3 of the Substitution Agreement. In case of harmonious substitution as envisaged in this circular, the provisions contained in Clause 3.4 of the Substitution Agreement, except those contained in para 3.4.1, shall be applicable, in addition, to the procedure laid down herein below:

i.    The Concessionaire shall make a written representation to the Lenders’ Representative with a copy to the Authority requesting the Lenders’ Representative to seek approval of the Authority for its Substitution. Upon receiving the said request, the Lenders’ Representative shall make its own assessment regarding the said request of the Concessionaire and upon being satisfied that it will be in the interest of the Project that the Concessionaire may be substituted by a Nominated Company, Lenders’ Representative in consultation with the Concessionaire would invite, negotiate and procure offers either by private negotiations or public auction or tenders, for the takeover and transfer of the Project Highway including the Concession to the Nominated Company.

ii. Selection of the Nominated Company and the valuation of the Equity of the Concessionaire would be done by mutual consent of the Concessionaire and the Lenders’ Representative.

iii. Upon receiving the proposal of the Lenders’ Representative for substitution of the Concessionaire with the Nominated Company under Clause 3.4.3, the Authority shall satisfy itself about the credentials of the Nominated Company and accord its concurrence regarding such substitution.

a.   For projects that have achieved COD, the substituting entity should have adequate experience of operating and maintaining completed road projects by itself or through its associates/subsidiaries.

b.  For projects under construction, the substituting consortium/entity should have the requisite financial and technical qualifications to bid for a project of at least the same size, or higher/better.

Thereafter, the nominated Company will form an SPV for taking over the project along with all the rights and obligations of the Concessionaire.

iv.  While concurring to the said proposal of the Lenders’ Representative, Authority’s Board may levy an appropriate penalty keeping in view the nature and extent of default as per the procedure to be prescribed for the purpose by the Authority subject to a cap of 1% (one percent) of Total Project Cost.

v.  Where the responsibility for delay in execution or completion of the project is on account of non-fulfilment of the obligations of the Authority, namely, land acquisition, environmental clearances, other statutory/regulatory approvals/clearances, no penalty would be levied on the Concessionaire for non-fulfilment of its obligations. However, the Authority would be required to remedy the defaults before the formal agreement for substitution is signed.

vi. Subsequent to such substitution, for completed projects, the lead substituting entity shall be required to maintain at least 51% holding in the project SPV, save and except the situation for dilution of equity, in accordance with the provisions of Clause 7.1(k) of the Model Concession Agreement read with the definition of “Change of Ownership” as prescribed in Article 48 of the Model Concession Agreement.

vii. The procedure prescribed in other clauses of the Concession Agreement and the Substitution Agreement, other than that contained in Clause 3.4.1 of the latter, shall be strictly adhered to.

viii. The Authority shall stand fully discharged of any claims whatsoever, by the exiting Concessionaire.

ix.   Such substitution may be permitted only once during construction period

4.  The above clarifications/stipulations read with the Clauses referred hereinabove are with reference to Concession Agreements based on the Model Concession Agreement dated August, 2011. However, these shall apply mutatis mutandis to the relevant provisions of other Concession Agreements signed by the Authority for BOT Projects on PPP mode of delivery from time to time.

NHAI circular on Securitization of cash flows

An NHAI Circular dated 29/05/2013 has placed a cap on securitization proceeds of BOT (Toll) projects. The contents of the circular are as follows:

“The issue regarding Securitization of future casf-flow in BOT (Toll) Projects was discussed in the 94th Board Meeting of the Authority held on 14/05/2013. With a view to ameliorate the shortage of equity and improve liquidity of the prospective bidders, Board approved the proposal for granting of permission by NHAI to the Concessionaires of BOT(Toll) projects, which have Toll revenues significantly surplus to the repayment obligations, to raise subordinate loan on the strength of future surplus cash flows of their operational BOT road projects subject to the following conditions:

a)  Raising of subordinate loan upto 30% of TPC of NHAI would be allowed only after COD of the project is achieved in case of 4-laning projects and construction is completed in case of 6-laning Projects

b)  Repayment of such loan would be the last priority under the waterfall mechanism of the Escrow Agreement. It would be allowed only after meeting all kinds of statutory levies / taxes, O&M expenses, concession fee, damages and other dues of the Authority and Debt Service along with interest due.

c)   Submission of an undertaking by the Concessionaire that it would not enhance the amount of Debt due, Termination Payment or any other liability of NHAI in any manner whatsoever.

d)   Receipt of NOC from the existing lenders of the Project

e) Receipt of such loan, giving of loan to the parent company, Servicing and repayment of loan by the parent company and servicing and repayment of the subordinate loan would be routed through Escrow account of SPV.

f)  Such loans would be used exclusively for investment as equity in road sector projects 

g)  Statutory Auditors of the SPV as well as the Group Company availing the loan from the concessionaire shall provide the details confirming the name of the project, the Authority awarding the project, TPC of the project, sources of funds and the amount of the equity invested within three months of availing such loan.

This has the approval of the Board of the Authority in its 94th Meeting held on 14/05/2013.”

Eight rules for PPP policy makers

There are several papers regarding best practices in formulating PPP policies, but Public-Private Partnerships: Eight Rules for Governments (October 2008) by Aidan Vining and Anthony Boardman is probably one of the easiest to read.

This post is just a précis of the paper (do go through the original). Though it is meant for policy-makers, the paper should be read by lenders and advisors trying to get a sense of potential risks that cannot be modeled mathematically on an excel sheet. It is especially informative for managers / financiers / consultants who work with projects in multiple geographies and have to deal with different deal structures and concessions.

The rules are simple enough:

1. Establish a jurisdictional PPP constitution

As far as possible, use existing constitutional institutions and constructs to ensure transparency in the contractual structure. Ensure public availability of contracts (except for legitimate trade secrets).

If such constitutional means are not already available, the legal & constitutional framework should be put in place before the PPP process gets underway. An well-structure framework also discourages parties from following 'win first, renegotiate later' policies.

2. Separate the analysis, evaluation, contracting / administration, and oversight agencies

Separate the agencies that (a) analyzes projects feasibility, including social cost-benefit analysis; (b) decides which of the alternative provisioning modes to employ (government production, contracting or P3); (c) organizes the tendering of bids, selects the partners, makes the final decision whether to proceed with a P3 (or not) and monitors the implementation of the contract; and (d) evaluates the overall success of projects.

Though this step introduces several layers of bureaucracy, it ensures the avoidance of the conflicts of interest which would exist if all these functions came under the same body. Discrete, independent bodies also reduce the chances of a project being undertaken due to political or external pressures, rather than the primary motive: highest social benefit with lowest possible social cost.

3. Ensure that the bidding process is reasonably competitive

The policy should be to ensure that a sufficient number of serious bidders are competing with the project. Public sector companies should also be encouraged to participate in bidding.

This ensures that the competitors put up their most cost-efficient bids, and makes it difficult for bidders to raise costs through collusion and cartelization. A sufficient number of bidders also reduces the risk of the process being rigged or influenced, and thereby being at the risk of legal action or review at a later point of time.

4. Be wary of projects that exhibit high complexity and uncertainty

Any infrastructure project involves some form of complexity or uncertainty. Change in costs, changes in design or scope over the construction period should be expected and accounted for in the contractual framework. However, political changes, unexpected events, changes in law during the project lifetime cannot be anticipated in advance.

Therefore, the framework must include a provision for a simplified, low-cost process for renegotiation when the changes are not under control of the public or private parties involved in the project.

Additionally, it is wise for both parties to ensure that any unnecessary complications (unproven technology, unrealistic milestones, etc) are not introduced by the counter-party in the pre-construction phase.

Projects that can be broken into discrete packages, should be broken down and tendered separately.

5. Include standardized, fast, low-cost dispute resolution / arbitration procedures

Disputes take a lot of time to reach a resolution or a conclusion. They are extremely expensive and increase transaction costs due to legal fees, capitalized interest expenses, insurance expenses, project management costs, etc. 

The bigger issue is that the longer an infrastructure project takes to complete, the more its viability comes under question by investors, lenders and suppliers. If the project loses the support of investors and lenders, it can be quite difficult to restart and conclude the project.

Stakeholders in such long-term projects occasionally find themselves in situations where they do not necessarily agree with each other, and a solid dispute resolution process goes a long way towards attracting potential investors.

6. Avoid standalone deals with Private Sector shells bringing limited equity

PPP projects are often undertaken by private parties through project-specific SPVs. This allows them to finance these projects off-balance sheet, at a higher leverage than would have been possible if the project were financed on the parent company's balance sheet. The SPV structure simplifies tax assessments, transfer of project assets at project closure, etc. and therefore is a widely accepted structure.

However, it is important for lenders and policymakers to ensure that leverage does not reduce the equity requirement to a level where the promoter is incentivised to abandon a project rather than work towards a solution, in case that the project does not perform as per expectations.

7. Prevent the Private party from exiting the contract / project too early

The riskiest phase in the tenure of the concession is the construction phase. Therefore, the valuation of a project jumps as soon as the project is operational. This means that a developer has the incentive to sell the project and recover the invested capital as soon as the construction period is past. If this is allowed the developer may just complete a project, book their profits and leave without any further liability.

Therefore it is important to ensure that developers are present during the post-completion liability period, thereby forcing them to maintain construction standards and avoid under-investment during the construction phase.

8. Have a direct conduit to lenders / debt holders

Most PPP projects are too large to be secured with collateral. Since project assets are to be transferred to the government at the end of the concession period, the contract usually does not allow for a way to recover the outstanding debt by liquidating the project assets. Thus, projects debt is mostly unsecured in nature.

Therefore, financing a project is going to be difficult if lenders do not have some sort of recourse to the authority which awarded the contract. In the event of a default due to the concessionaire / developer, there must be a mechanism for lenders to approach the authority for redressal.

Funding Indian projects with foreign currency

References/Sources:
Consolidated FDI Policy: http://bit.ly/ri811t
RBI Circular - External Commercial Borrowings & Trade Credits: http://bit.ly/opZFWH


Foreign currency funding is picking up pace in India, not only for Large Corporates but for MSMEs as well. 


In some cases, increased supply is simply the symptom of available liquidity looking for higher returns. In others it is a necessitated by genuine strategic reasons, to finance both organic and inorganic growth. 


Demand is being pushed by tightening monetary controls in India (Refer to graphic below). Projects I am closing today are being finalized at a cost 200-250 bps higher than comparable projects I closed less than 9 months ago.

Additionally, foreign financial institutions - Banks, Hedge Funds, PE/VC funds - are now much more entrenched and cognizant of local realities, leading to a broad-based clientele and investment pool and a better ability and appetite to take risks in the market.


As and when time permits, I will try to filter the regulations (full versions in the sources at the beginning of this post) and break them down for quicker consumption. Till then, enjoy the originals. I will add other related Acts and Regulations as required.


Cheers

Basic 'Project Finance legal-ese' for the rest of us

I have been busy closing a few projects, and came across publications by Ashurst and Luthra & Luthra which I found helpful in decoding some of the jargon.

Happy reading!

Luthra - PF in India

RTL Documentation & Issues for International Sponsors

Indian Railways jumps on the PPP bandwagon

Sources:

Projects Monitor (22 Feb 2010): http://bit.ly/dCj5IV

Financial Express (15 Apr 2010): http://bit.ly/a1M4IJ

DNA India (4 May 2010): http://bit.ly/btEZ3D

The railway ministry, which till recently used to be on the sidelines when it came to PPP, has jumped on the bandwagon with 37 projects covering 3867km. The estimated investment for these projects is around Rs. 14,300 cr.

Sources from the railway ministry say the estimated rate of return for these projects is expected to range from 7% to 47%. While this is a very wide range, this includes 19 projects that are classified as 'socially desirable'. This means that these projects will be taken up for their social impact, rather than the financial viability of these projects. How exactly the Indian Railways is going to rope in the private sector for these projects is still a big question.

The projects involve doubling of existing lines, gauge conversion and new lines. Officials say that such initiatives aim at supporting the Vision 20-20 statement tabled by the Rail Minister Smt. Mamata Banerjee in December 2009. 

As per plans, more than 30,000 km of route would be of double/ multiple lines, compared with 18,000 km now. Of this, more than 6000 km would be quadrupled lines with segregation of passenger and freight services into separate double-line corridors, with the aim of increasing the share in freight movement to at least 50% compared with 35% now. The ministry also plans to complete additional electrification of 14,000 km in 10 years.

Perhaps with this in mind, the Indian Railways recently announced two draft models for PPP based railway infrastructure development. Both the models would be SPV based, but with different revenue-sharing patterns and land acqisition methods.

By one financing model proposed in the ministry’s draft policy, the Railways will contribute 26% equity in the SPV. The land will be acquired by zonal railway at SPV’s cost but its ownership will vest with the Railways. In return to laying the rail lines, the SPV will get a share in the revenue for 25 years. For project related traffic, the SPV will get 95% of freight apportionment less maintenance cost for the first 10 years and 90% of freight allotment less maintenance cost for next 15 years. Of non-project related traffic, the company will receive 80% of the freight traffic after deducting the maintenance cost for 25 years.

The second model is what is called the ‘private line model’. Here, the private players will lay down new lines on their own land and will share the revenue for 30 years with IR, after which the ownership of the line and land will go to the Railways.

Only new line proposals covering more than 20km, and a minimum rate of return of 14% would be eligible for consideration under this policy. It is also mentioned that the policy would not be applicable to lines intending to provide connectivity to coal mines and iron ore mines directly or indirectly.

Indian Railways has also prepared a draft policy on allowing private players set up freight terminals. As per the draft, providers of logistics services with a minimum of three years’ experience and a minimum net worth of Rs 10 crore at the end of the previous financial year will be allowed to set up such terminals.

As per the draft, the terminal management company would also be entitled to handle third-party cargo against payment of applicable charges including terminal charges, wharfage charges and charges for other value-added services. Depending on market conditions, the company would be free to fix tariff for such services.

While it has been argued that the PPP model is not viable for Indian Railways, especially for projects such as line laying, the model has been steadily gaining favour with railway infrastructure development model overseas. The Finnish Transport Agency, on the 19th of May, is due to present a 76.5km track project to be implemented under the PPP model with a total construction cost of € 263m (http://bit.ly/bZdD8L).

Jindal Power ties up Rs 10,057 cr from 23 lenders

Source:

NDTV Profit (6 Apr 2010): http://bit.ly/colEwl

Domain-b.com (7 Apr 2010): http://bit.ly/aeKL42

Jindal Power has achieved financial closure for its Rs. 13,410 crore expansion project of an existing 1000 MW thermal power plant to 2400 MW capacity at Tanmar in Raigarh district of Chhatisgarh. The execution of the loan agreements was concluded on the 26th March, 2010.

The total project project cost of Rs. 13,410 crore is financed on a Debt-Equity ratio of 3:1, with an RTL of Rs. 10,057 crore and Equity/Internal Accruals of Rs. 3353 crore. A 23 member consortium has sanctioned the loan at a average rate of 10.50% under what they are calling a 'unique two-tranche structure to meet the requirements of Jindal Power and the lenders'. SBI Capital Markets was the sole adviser and arranger of the deal. JM Financial, Enam Securities, Deutsche Equities, Goldman Sachs, ICICI Securities, UBS Securities and SBI Capital Markets were the lead managers for the issue.

Quoting a press release: "Under the financing arrangement, SBI Capital Markets has framed a two-tranche structure to meet the requirements of both Jindal Power and lenders. The blend of project finance and conventional debt financing has helped both parties to arrive at an optimal risk allocation structure. While the structure gives Jindal Power more flexibility in its other borrowing programmes by isolating project risk, lenders derive comfort from the company’s balance sheet".

Sounds to me like an SPV arrangement funded by a term loan, and perhaps a slice of debt to Jindal Power, injected into the SPV as equity. This allows Jindal Power to keep most of the debt off its financials, while retaining some of it on its own balance sheet to reduce the overall risk attached to the entire debt component. The last part is pure conjecture, any additional information/correction is more than welcome!