Change for the Better

Cabinet approves revised MCA for PPP projects at major ports

The long-pending demand for amendments in the model concession agree-ment (MCA) for public-private partnership (PPP) projects at major ports has finally been met. The Union cabinet approved amendments to the MCA on January 3, 2018.

The Ministry of Shipping (MoS) had proposed the new MCA for the port sector in September 2016. The agreement aimed to replace the existing MCA, which had been in place since January 2008. The broad objectives of the new MCA include more equitable allocation of project risks, provisions to handle unforeseen circumstances, removing ambiguity in the existing provisions and attracting more private investment.

The amendments have been made after extensive consultations with stakeholders. The MoS has taken into account suggestions made in various reports by the erstwhile Planning Commission (now NITI Aayog) (2010), the Indian Ports Association (2015) and the Kelkar Committee (2015) while modifying the MCA. One of the salient features of the new MCA is the constitution of the Society for Affordable Redressal of Disputes – Ports (SAROD-PORTS) as a dispute resolution mechanism similar to the provision available in the highways sector.

“The introduction of the SAROD framework for port projects, which was first introduced by the National Highways Authority of India for highway projects, will definitely help in reducing the cost of arbitration and encourage speedy resolution of disputes arising in PPP projects undertaken by the major ports,” says Anjan Dasgupta, senior partner, HAS Advocates.

The constitution of SAROD-PORTS along with the provision of “change in law” will have a positive impact on the investment climate in the sector. The new definition of “change in law” includes the imposition of standards and conditions arising out of Tariff Authority for Major Ports (TAMP) guidelines/orders, environmental laws, labour laws, and an increase in and imposition of new taxes, duties, etc., for compensating the concessionaire.

The new MCA has also incorporated a simplified exit route for concessionaires by way of divesting their equity (up to 100 per cent) after two years from the commercial operation date (COD). This is similar to the MCA provisions in the highways sector. The exit clause will ensure unlocking of capital and is a welcome step. “A faster exit route will allow developers to cash out of successful projects or minimise losses by exiting the project,” says K. Ravichandran, senior vice-president and group head, corporate ratings, ICRA.

The new MCA includes the provision for commencement of operations before the COD on project-specific terms and conditions about the level of operations and payment to the port. This is expected to lead to better utilisation of assets provided by the port in many projects before the formal completion certificate is granted.

To improve the utilisation rate of port assets and to raise productivity, the new MCA has specified that the concessionaire will be free to deploy higher capacity equipment/ facilities/technology and carry out value engineering for higher productivity and improved utilisation of project assets and/or for cost savings.

Under the provision for additional land being made available to the concessionaire, land rent has been reduced from 200 per cent to 120 per cent of the applicable scale of rates for the proposed additional land.

The concessionaire will pay royalty on a “per metric tonne of cargo/twenty-foot equivalent units handled” basis which will be indexed to variations in the wholesale price index annually. This will replace the present procedure of charging royalty which is equal to the percentage of gross revenue quoted during bidding and calculated on the basis of the upfront normative tariff ceiling prescribed by TAMP. According to Ravichandran, “For royalty calculations, by changing to per million tonne of cargo handled instead of percentage of gross revenue based on the upfront tariff determined by TAMP, the port operator will pay royalty on the actual income and not on notional income. Earlier, the royalty was calculated as a percentage (quoted during bidding) of gross revenue based on the ceiling tariff set by TAMP and discounts were not factored in. The change in the royalty calculation mechanism is expected to address this issue and also eliminate several disputes related to collection of revenue share on the storage charges.”

The new MCA will also provide for the replacement of “actual project cost” with “total project cost”. Earlier, if the actual project cost, as certified by the statutory auditors, was higher than the earlier estimates, the concessioning authority could increase the project cost. However, the procedure for the same was not prescribed. The new MCA will replace the actual project cost with the total project cost and will prescribe the procedure for approval.

In order to facilitate the availability of low-cost, long-term funds to concessionaires so as to improve the financial viability of projects, there is a provision regarding refinancing.

Apart from these, the other features of the new MCA involve the extension of the provision of SAROD-PORTS for redressal of disputes to the existing concessionaires by introducing a supplementary agreement to be signed between the concessionaire and the concessioning authority, the introduction of a complaint portal for port users and the introduction of a monitoring arrangement for periodic status reports of projects.

Supporting the new MCA, Dasgupta says, “The recent changes in the MCA for PPPs in major ports is a welcome move which was long overdue. These changes will go a long way in developing investor confidence and reviving PPPs in the port sector.”

Conclusion

The amendments in the MCA for private projects are intended to make port projects more investor friendly and make the investment climate in the sector more attractive. The cabinet has approved the changes for new projects for which bidding will take place in the future. In addition, the cabinet has also appointed a committee to examine whether the new MCA can be applied to 12 stalled port projects, the total cost of which is estimated to be Rs 200 billion.

According to industry stakeholders, the amendments are a welcome step. Going forward, the challenge will be to ensure that the policy implementation guidelines are robust, investor friendly and equitable.

“The changes address the key concerns in the earlier MCA which include bringing in more equitable allocation of project risks, providing for unforeseen circumstances and removing ambiguity on parameters. For project developers, there would be a significant reduction in overall project risks with these changes in place. ICRA believes that this development augurs well for the sector and would be instrumental in attracting higher private sector investment. The government also stands to gain from these changes as apart from the higher investments by private players, the changes should bring in efficiency improvements and better service to the trade,” says Ravichandran.

However, “The need of the hour in relation to dispute resolution not only for PPP projects in ports but also for other infrastructure projects, is to set up a dedicated and independent tribunal for the settlement of disputes arising from government contracts. This was recommended by the Kelkar Committee and was envisaged under the Public Contracts (Resolution of Disputes) Bill, 2015,” adds Dasgupta.

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