If the project is terminated, the concessionaire will have negligible resources to repay its lenders. Tangible assets of the concessionaire, which are charged in favour of lenders, are rarely sufficient to repay the debt. Failure to recover these sums of money would in turn deplete public funds, causing stress on the financial ecosystem. Thus, security and certainty of receiving termination payment makes PPP projects bankable despite the non-recourse nature of such funding.

However, over time, it appears that such security and certainty itself has come into question. A demand for termination payment is usually disputed by governmental authorities, invariably resulting in arbitration and litigation. The delay not only hampers the re-development of the project, but also leaves the concessionaire and the lenders empty-handed for years, with the interest-meter ticking for inordinate periods.

To smoothen the termination payment process, the Committee of Public Undertakings (2022-23) recently suggested in a report to Parliament that the onus of making termination payments in the road sector should be outsourced to insurance companies. In this arrangement, the NHAI will subscribe to an insurance premium, and upon termination, the insurer will directly make the termination payment to the concessionaire. The suggestion may address delays by automation of these payments without subjectivity. Additionally, it would minimise claims of conflict of interest arising because of the NHAI’s authority to terminate projects while also being empowered to release termination payments on account of such termination. However, implementing this in practise will pose challenges.

With no similar insurance product currently in the market, insurance companies will have to be sufficiently incentivised to undertake such high-liability insurance.

Additionally, variance in calculation of termination payment in certain road projects may continue to be grounds for dispute, which will not be resolved by merely involving a third-party insurer. It will also be important to have an automatic trigger for termination payment by the insurer, as want of express approval before release of each payment may lead all stakeholders back to square one.

Another suggestion to consider is introducing a tripartite arrangement among NHAI, the concessionaire and the lenders, since lenders do not have privity of contract with NHAI. It is a valuable suggestion but not a first — model tripartite agreements issued in past to allow infrastructure debt funds to refinance projects have met with lukewarm success in terms of the intended outcome.

Past learnings suggest that lenders must have recourse for termination payment directly against the NHAI under a tripartite arrangement, as ambiguity on this front may leave room for disputes. A neutral dispute resolution mechanism, which is arguably amiss in concession agreements, should also be included.

This article was originally published in The Hindu Business Line on 19 July 2023 Co-written by: Anurag Dwivedi, Partner; Shashwat Bhaskar, Associate. Click here for original article

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