Tying up Loose Ends: Cabinet approves revised MCA for PPP projects, issues still remain

Cabinet approves revised MCA for PPP projects, issues still remain

In a major development for the Indian port sector, the cabinet on January 3, 2018 approved the long-pending demand for amendments in the model concession agreement (MCA) for public-private partnership (PPP) projects in major ports taking into account suggestions from several stakeholders including NITI Aayog (2010), the Indian Ports Association (2015) and the Kelkar Committee (2015). The implications of the new MCA are as follows…

Commercial freedom and commercial risk sharing: Royalty payable by the operator would henceforth be an inflation-indexed absolute amount per metric tonne of cargo/twenty-foot equivalent unit (TEU) instead of the existing practice of a certain percentage of gross revenue of the operator. This new method will ensure that the downside risks of traffic volumes are shared by the government and it takes a predetermined amount per TEU/metric tonne of cargo, thereby leaving a large part of the upside potential to be enjoyed by the operator as a reward for the risk assumed. Henceforth, the operator can take a commercial call on tariff discount without penalty in terms of royalty paid. The port authority can now give permission for the commencement of operations prior to commissioning.

Ease of exit for investors: The investor/consortium shall hold managerial control and not less than 51 per cent equity in the special purpose vehicle up to two years from the commercial operation date and, thereafter, the investor/ consortium can exit. Any transfer in shareholding in the concessionaire shall be subject to prior approval by the port authority; however, this provision has a huge potential for and disputes. Approvals for change in shareholding can be withheld by the port authority to avoid anti-competitive effect/monopoly but this technical function may be better left to the Competition Commission of India.

Change in law: The investor is compensated for any change in law including orders of the tariff regulator, environment and labour laws and all taxes except direct taxes.

Dispute resolution: Any dispute which is not resolved amicably and by the expert shall be referred to the new Society for Affordable Resolution of Disputes-Ports (SAROD-PORTS) which is formed by the Indian Ports Association, the Indian Private Ports and Terminals Association and other members. Alternatively, such disputes can be referred by mutual consent of the parties involved to the Adjudicatory Board, which will replace TAMP in due course. However, once this has been done, the parties cannot seek redressal under SAROD.

Additional land for the concessionaire: Land rent has been reduced from 200 per cent to 120 per cent of the applicable scale of rates.

Stressed projects: A stressed project has been defined to mean that either party is unable to perform. However, this definition should have been synchronised with the “Material Adverse Effect” in the MCA to avoid overlap and ambiguity. As per the new MCA, the stressed asset may be referred to the Adjudicatory Board. However, the scope of the board has not been clearly defined in the new MCA.

Financial closure: The concessionaire is not considered to be the defaulter if the reason for lack of financial closure is on account of default by the port authority in meeting its conditions precedent, namely, non-provision of supporting project infrastructure, clearances or project site possession. The new MCA has not addressed the risk creating potential of aggressive and risky lending by banks.

Change in financial documents: Refinancing debt by bonds has now been made possible. However, if this move increases the financial obligations of the port trust, it requires prior written approval. If the change in financing documents increases the project risk, it may not require approval. No time limit has been given for approval by the port authority.

Anachronistic provisions: First, the clause on the minimum guaranteed cargo obligation by the concessionaire has been continued despite the unpleasant past experience. This could result in default, leading to termination of the contract. Due to commissioning of several new competing private ports and terminals and the current market conditions, it is difficult to impute a reliable number for traffic volumes. Second, the new MCA retains the old provision wherein the port authority is obliged to not develop competing facilities. This provision is anti-competitive, which is detrimental for the users and is inconsistent with the transition to a competitive port scenario.

Drafting errors: Definition of total project cost refers to the financial package, a term which has not been defined in the MCA. Further, the remedy for change in law, which refers to protecting the project internal rate of return, has not been defined.

Compensation for political event or default on the part of the authority: In case of a political event or default on part of the authority, the compensation continues to be debt and 150 per cent of paid-up equity. However, it is not investor friendly as the loss of profits is not covered.


Overall, the amendments in the MCA for private projects have been made to ensure equitable allocation of risks between several stakeholders. However, certain old provisions which are no longer consistent with the current MCA remain. New provisions on resolving disputes and stressed projects require more thought and reconciliation within the MCA.

A. Balasubramanian, a project financier turned lawyer with focus on ports.