Abstract
The rise in the number of Public-Private Partnerships (“PPP”) has instilled a gradient of competition law in the sphere of infrastructure laws, nipping with unprecedented challenges. Though a concession agreement is considered instrumental to foster competition, it puts forth concerns like monopoly over disadvantaged participants, causation of Appreciable Adverse Effect on Competition (“AAEC”) through bid-rigging to name a few which ultimately result in distortion of competition. This article aims at succinctly highlighting the factors that inhibit the functioning of a competitive market as well as putting forth comprehensive parameters required for competitive bidding processes. The article summarises reasons suggestions and propositions for fair and transparent competition in the infrastructure sector while emphasizing the approach that could be followed in India, suiting the prevailing dynamics and better enforcement of concession agreements.
Introduction
Infrastructure aids in economic growth and facilitates efficiency in key economic services with improved competitiveness and better-enhanced productivity. In recent years, the Government of India has shown particular interest in engaging, developing, and enhancing the infrastructure sector (“Sector“) given the attributes that infrastructure brings forth. The government normally didn’t permit participation from private players in the market, in the Sector, but having taken into account the need to wipe off the deficiency of infrastructure in the country and the fiscal constraints, while noting the mammoth of investment requirements, private players were allowed entry to coordinate the development of public infrastructure facilities with the public sector. The subsequent economic reforms which took place resulted in the emergence of the concept of ‘Public Private Partnership’ (“PPP“). This allowed scope for competition and helped remove the natural monopolies. The expression PPP has been assigned various connotations. In simple terms, it refers to a composition between the private partner and a public entity for the growth of infrastructure or for the conveyance of services through a special purpose vehicle (“SPV“). The PPP surrounds the whole diapason of perspectives from private participation via service contracting and shared gains partnership arrangement, to non-recourse project finance, and sometimes it may incorporate a limited range of project types. [1]
PPP and the Saga of Concession Contracts
The definition of PPP as per the Department of Economic Affairs, Ministry of Finance, and Government of India is broad and includes application to other sectors as well. It defines PPP as “an arrangement between Government or statutory entity or Government owned entity on one side and a private sector entity on the other, for the provision of public assets and/or related services for public benefit, through investments being made by and/or management undertaken by the private sector entity for a specified period of time, where there is a substantial risk sharing with the private sector and the private sector receives performance linked payments that conform (or are benchmarked) to specified, pre-determined and measurable performance standards.” [2]
PPP generally operates on any of these three models: Management Contract, Lease Contract, or Build-Operate-Transfer (“BOT“)/Design-Build-Finance-Operate and Transfer (“DBFOT“). Further, two particular characteristics of PPP, which reasons its feasibility and adoption are, one being the prominence on service provision along with private sector investment, and second the precariousness which the Government shoulders away to the private sector.
Given that private participation is now permitted, it offers scope for the competition to prevail. Further, where possession of public assets is a tender issue, financial constraints have particularly made policymakers devise modus operandi in which the private sector can be brought in to carry on and operate public assets. Having said that, it is appurtenant to note that the term ‘enterprise’ as defined [3] under the Competition Act 2002 (“ACT“) has been assigned a broad meaning whereby, conduct emanating from commercial activities of government agencies or departments, which are responsible for issuing tenders, could well be brought within the purview of investigation of the Competition Commission of India (“CCI“).
An interesting parcel of this is by virtue of a concession contract, where under private partner gets absolute rights from the public sector to carry on, operate, and sometimes even carry out investment for a prescribed time. Under this groundwork, the ownership of the project asset remains with the Authority which is the public sector in this case, while the constructive possession is conveyed on to the concessionaire. [4] A concession agreement has also been regarded as an implement under the competition laws that are utilised to generate competition, when it is inoperable in the market. [5] The subsisting principles of constitutional law, contract law, and administrative law, that manage the analysis of the process as well as the very grant of concession agreements at the present, have impediments on the degree of impartiality and scrutiny that they can subject the process of granting of concession agreements and the implementation of concession agreements thereto. [6]
Additionally, where the concession is intended to grant exclusive rights, such rights cannot be regarded as anti-competitive per se. Nonetheless, in cases where the allocation of such absolute or exclusive rights is performed in a manner which results in debarring of legit competitors, Appreciable Adverse Effect on Competition (“AAEC“) becomes pertinent as highlighted under Section 4 and Section 3(4) of the Act.
In a similar vein, concession agreements generate monopoly in support of the concessionaire, via grant of exclusive rights for a markedly long period. While mere dominance and supremacy is not violative of the Act, but conduct that impedes the process of competition by virtue of any abusive conduct (as provided for under Section of 4 of the Act), diluting the competitive fabric for concessionaire operating in the market, attracting disquietude under Section 4 of the Act. The Apex Court has emphasised that where a private company controls infrastructure facility through concession agreement, should not act in a manner that is prejudicial to the public interest. [7]
Further ahead, re-negotiation of the terms of the concession agreement puts other participants at a disadvantageous position, since it does not offer a level playing field to take on either the incumbent or earlier bidders. Such re-negotiations, where the concession agreement terms are revamped in a way, favouring the interests of the parties included in the initial phase during the bidding process, could potentially impact the competition in the market, based on the alteration in circumstances, currency fluctuations, cost structures, etc.
Additionally, in cases of bid-rigging, where the competing firms/enterprises agree not to bid or submit a losing bid or withdraw a bid such that the successful low bidder receives the contract and further sub-contracts to such competing firm/enterprise, act as a lucrative option and defeat the spirit of auctioning and fair play. This essentially must be seen from a perspective of competition law since bid rigging is presumed to have AAEC on the competition. [8]
Impediments on Competitive Markets in Obtaining PPP Contracts
The authors have further identified and analysed four particular factors, as identified by the OECD [9], which work against the functioning of a competitive market for the right to obtain a PPP contract. These have been discussed briefly as under:
a) Limited competition – PPP contracts are engulfed with complexity arising from the bundling of project phases, covering all aspects from design to construction and operation. The complexity results in high costs incurred during the bidding process alone, which makes the participation in the tenders scanty [10]. The high-risk transfer that PPP requires is less costly for those contractors who stand in a position to diversify risks. Thus, the bidding cost coupled with high-risk transfer makes the participation from Small and Medium Size Enterprises (“SMEs“) infrequent, as a consequence of which anti-competitive agreements germinate amongst the few potential players which promote collusive conducts and allows for easier coordination for rogue deals.
b) Market foreclosure – Bundling and long-term contracting in PPPs could potentially cause market foreclosure and allow for a long-term monopoly conditionality, wherein services that are bundled together in the PPP contract prevent competition during the life of the contract, and sometimes even after that too.
Further, collusion has the potentials of foreclosing the market. It could be facilitated by processes that permit communication among bidders which could frustrate the purpose of the auction in its entirety, given the ingenious methods of signalling, employed by cartel operators. This promotes informational advantages, which could discourage new entrants and thus result in foreclosure.
c) Hidden barriers from legal uncertainty – Inadequacy in the legislative framework and unpredictable dialogue process has resulted in legal uncertainty. The lack of harmonisation adds to the legal uncertainty which prevents cross-border participation, thus resulting in the concentration of a few domestic players, thereby eliminating competition.
d) Misallocation of contracts due to misallocation of risks – Conventionally, the theory of optimal risk allocation, shoulders the risks on the private parties including the risks involving designs, construction, and operation. But the practical aspect points out the contrary [11] as it is the public sector that thrusts more risks. This causes distress which is perceivable by the lower revenue, higher costs, postponement, and disaccords between the parties. This misallocation is often depicted by the renegotiation that happens in a concession agreement to reconsider the terms for the project completion. [12] Hence, the bidders gain incentives and strategic positions over the public sector and this creates contortions in the process. [13]
Finally, where the Supreme Court of India has laid down the comprehensive parameters concerning judicial review for competitive bidding processes, it holds that the judicial review concerns with the decision making process and not the decision per se. [14] Thus, it becomes quintessential that the practices undertaken in the Sector be scrutinised from a viewpoint wherein separation of power is maintained, and that fair and efficient competition prevails.
Conclusion
Having analysed the aforementioned, the authors propose the collection of information on the number and type of firms participating in PPP tender, such that wider participation from players is ensured to promote competition in the relevant market. While analysing the competitiveness of conducts of enterprises in PPP and the AAEC, it causes or could potentially cause the positive and negative factors, which ought to be weighed upon. [15]
Essentially, there is a wide implication of the variables that are negotiated at the time of the bidding process for the asset reversal that occurs at the end of the concession contract. Thus, the concession agreements must be efficiently designed to ensure finer quality of services not only at the initiations or during the concession contract, but also towards the end and thenceforth. Also, the Commission could involve this in the early stage, through competition advocacy during the design and award phase.
Based on the economic viability and suitability to the prevalent conditions in India, an approach like the one adopted in Brazil could be brought into the picture wherein the Brazilian Agency for Petroleum, Natural Gas and Biofuels (“ANP“), through its Directive, requires the assignment of rights under concession agreements in the exploration & production segment, to be subjected to the prior approval by the Administrative Council for Economic Defense (“CADE“). The submission to CADE, involving the assignment of rights under concession agreements, has become the rule when the referred revenue thresholds are met, failing which the regulatory approval process before ANP could be jeopardised.
Also, there ought to be a defined rationale where contract duration is for a period beyond 25-30 years, since durations longer could foreclosure markets for other operators. Further, the duration of these contracts must be distinguished based on the nature of services i.e., a differed duration be adopted for ancillary services as against the core services. Summarily, it is stated that the development of competition analysis may still be seen at a nascent stage, however, the same cannot be neglected for the implication which such anti-competitive conducts of enterprises in the Sector could often go undetected as a usual industrial practice. This necessitates the need for wider scrutiny in the said Sector, not just to ensure competition in the market but to check exploitative and exclusionary practices that are prejudicial to fair play.
About the Author
Ritum Kumar is an alumni of the Lloyd Law College, Greater Noida. He is currently an Associate at Atlas Law Partners, Delhi.
Dev Sareen is a 3rd year Law student at University School of Law and Legal Studies, New Delhi. He is also an Associate Editor at the Indian Journal of Projects, Infrastructure, and Energy Law (IJPIEL).
Editorial Team
Managing Editor: Naman Anand
Editors-in-Chief: Akanksha Goel & Samarth Luthra
Senior Editor: Varun Pandey
Associate Editor: Dev Sareen
Junior Editor: Muskaan Aggarwal & Swadha Sharma
Preferred Method of Citation
Ritum Kumar and Dev Sareen, “Analyzing Public-Private Partnerships in the Infrastructure Sector via the lenses of Competition Law” (IJPIEL, 29 December 2020)
<https://ijpiel.com/?p=2054&et_fb=1&PageSpeed=off>
Endnotes
[1] L. Lakshmanan, Public-Private Partnership in Indian Infrastructure Development: Issues and Options, Vol 29, Reserve Bank of India Occasional Papers, No. 1, (Summer 2008), https://rbidocs.rbi.org.in/rdocs/Content/PDFs/ppp1.pdf.
[2] PPP Guide for Practitioners, Department of Economic Affairs, Ministry of Finance, Government of India, 6 (April 2016), https://www.pppinindia.gov.in/documents/20181/33749/PPP+Guide+for+Practitioners/.
[3] Competition Act, 2002, Section 2(h), No. 12, Acts of Parliament, 2003 (India).
[4] Id.
[5] Michael Kerf et al, “Concessions for Infrastructure: A Guide to their design and award”, World Bank Technical Paper No. 399, A joint production of the World Bank and Inter-American Development Bank, 1998.
[6] Piyush Joshi and Anuradha R.V., “Study on Competition concerns in concession agreements in Infrastructure Sector”, (June 2009), https://www.academia.edu/9325832/COMPETITION_CONCERNS_IN_CONCESSION_AGREEMENTS_IN_INFRASTRUCTURE_SECTORS.
[7] VST Industries Limited v. VST Industries Workers’ Union and Anr, (2001) 1 SCC 298.
[8] Competition Act, 2002, Section 3(3)(d), No. 12, Acts of Parliament, 2003 (India).
[9] Working Party No. 2 on Competition and Regulation, DAF/COMP/WP2/WD(2014)1 available on: http://www.oecd.org/officialdocuments/publicdisplaydocumentpdf/?cote=DAF/COMP/WP2
/WD(2014)7&docLanguage=En.
[10] E.R. Yescombe, Public-Private Partnerships: Principles of Policy and Finance (Butterworth-Heinemann 2007).
[11] Elisabetta Lossa, et al., The Risks and Tricks in Public-Private Partnerships, (2014), ftp://ftp.repec.org/opt/ReDIF/RePEc/bcu/papers/iefewp64.pdf.
[12] Guasch, J.L., Granting and Renegotiating Infrastructure Concessions: Doing it right., WBI Development Studies, The World Bank, (2004).
[13] Patrick Bajaria, et al., “Bidding for Incomplete Contracts: An Empirical Analysis of Adaptation Costs”, 104, the American Economic Review, 1288-1319, (2013).
[14] Tata Cellular v. Union of India, AIR 1996 SC 11.
[15] Competition Act, 2002, Section 19(3), No. 12, Acts of Parliament, 2003 (India).
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