The impact on the Government’s budget following the pandemic was par for the course, and the shift to PPP models such as BOT (Toll) and TOT as opposed to HAM, EPC and BOT Annuity models, was a necessity rather than a choice. Although these models place a significant financing burden on the private partner, recent bids show that developers have forgone Viability Gap Funding (VGF) and were ready to pay premia to the Government, as in the case of the Palsit-Dankuni project, awarded to IRB Infrastructure.
This Post seeks to analyze the impact of COVID-19 on Concession Agreements, particularly within the road sector. It revisits the effects of the relief measures and case laws dealing with delayed/terminated projects to determine the lacunae in addressing the issues plaguing the road sector. The advent of the second wave has indeed adumbrated the necessity to create a long-term solution for de-risking PPP projects, especially against the backdrop of Force Majeure events.
The Road Sector during the Pandemic
The dawn of the nationwide lockdown last year eclipsed road projects in India with inexorable ramifications. Construction and maintenance came to a halt while the collection of tolls was obstructed.  At this juncture, the onset of the second wave has prompted a re-evaluation of the issues plaguing the road sector, particularly concerning concession agreements.
Revisiting the first wave
Taking note of the difficulties faced by the sector, in May 2020, the Ministry of Road Transport & Highways (“MoRTH”) specifically directed the National Highways Authority of India (“NHAI”) to shut down toll plazas and announced several measures, inter alia, the release of bank guarantee to the extent of the works already performed, expeditious release of payments, extension of time, approval of change of scope and relaxation in PBG rules.  Following the lessons learnt from the previous year, the Ministry this year has set up a sub-group with members from the NHAI and the industry to consider further measures for de-risking Public Private Partnership (“PPP”) projects. 
During these turbulent times, road projects generally face issues such as change in traffic volume, hindrance to maintenance activities and shortage of human resources. The bankability of the project is also deeply impacted even with the extension of the concession period since projects face time and cost overruns, requiring additional funding. 
With the completion of a year since MoRTH and NHAI implemented the measures, concessionaires nevertheless require relief from the performance of obligations and penalties for non-performance as well as the compensation for revenue lost. In the absence of such assistance, parties have approached the courts to avail benefits found within the concession agreements. 
With the advent of the second wave, PPP projects now face a conundrum where one state eases restrictions while another imposes new limitations. The lack of preparedness for the first wave posed various challenges to the developers as well as to the authorities.
PPP at Crossroads: Dealing with Force Majeure under Concession Agreements
An important term that gained prominence during these times was “Force Majeure”. Under the Model Concession Agreement (“MCA”), Force Majeure events have been classified into the following: (i) non-political event; (ii) indirect political event; and (iii) political event. If the event is (a) beyond the reasonable control of a party, (b) could not prevented or overcome after exercise of due diligence and following good industry practice, and (c) has a material adverse effect, the affected party can make use of the Force Majeure claim. Once the Force Majeure event occurs, the clause requires the parties to mitigate its effects. In some cases, costs are prescribed to be paid, apart from renegotiation to the extent of Force Majeure event affecting performance. 
Fifteen months into the pandemic, questions arise as to the invocation of the Force Majeure clause during the second wave as well. Establishing a causal link between the pandemic and the resultant effects on the road project demands a perusal of complex issues such as lockdown, curfew, restrictions on the movement of labour and goods, as well as the isolation of infected workers in addition to the ever-increasing death toll and economic slowdown.
Since it is the ‘immediate and direct cause’ that is to be examined, as stated in Ananda Chandra Behera v. Chairman, OSEB, it seems unlikely that the current state-specific restrictions would come within the ambit of terms such as ‘beyond the reasonable control of a party’ and ‘material adverse effect’.  Moreover, in Standard Retail, the Court stressed the need for a direct impact of the restrictions on non-performance.  In M/s Halliburton Offshore Services Inc v. Vedanta Ltd., the Court held that the party has to be able to genuinely justify non-performance or breach of contract arising due to the pandemic. 
On the other hand, courts have recognised circumstances where the performance of obligations was rendered impossible following the imposition of restrictions and lockdowns, which could not have been avoided with the exercise of good industry practice or reasonable skill and care.  Generally, the terminus ad quem stands extended until the concessionaire can achieve the level of activity prevailing before the Force Majeure event. However, for toll-based projects, this is entirely based on the percentage of toll collection. 
Owing to the multifaceted effects of COVID-19, an integrated approach is to be adopted. In cases where the invocation of the Force Majeure clause requires payment, compensation would be determined by the severity of the restrictions and their after-effects, especially supply chain matters, investor outlook, and the return of labour following lockdown. 
However, considering the decision in Energy Watchdog and Ors. v. Central Electricity Regulatory Commission and Ors. where it was observed that Force Majeure clauses are to be narrowly construed, it will be challenging for an affected party to claim compensation if the clause provides that both parties will bear their own costs, which is the case in most concession agreements with respect to the allocation of costs arising out of Force Majeure. 
Force Majeure provisions often permit the termination of the agreement in case of persistence of the event beyond the prescribed period. Most concession agreements under the TOT, HAM and EPC models provide for termination payments to cover investments and financing obligations. Under the EPC (Engineering, Procurement and Construction) model, the NHAI compensates the private partner, and the government is in charge of ownership, toll collection and maintenance. The TOT (Toll, Operate, Transfer) model assigns to the private partner the right of toll collection and appropriation of fee against upfront payment of a lump sum amount to the NHAI while placing the O&M risks on the private partner. The HAM (Hybrid Annuity Model) combines EPC and BOT-Annuity, wherein the NHAI releases 40 percent of the project cost. The private partner handles O&M and execution of the project. According to the recent amendments to the MCA for the HAM, Article 28.9.1 requires the authority to make the termination payment to the concessionaire as per the revised bases for calculation across ten payment milestones, which was previously five. 
In M/s. MEP Sanjose Talaja Mahuva Road’s case, the Delhi High Court held that the benefit of the Force Majeure clause would not accrue since the concessionaires had been in prior default.  Additionally, the concessionaires were no longer signatories to the Concession Agreement, and the only link to it was on account of the Substitution Agreement.
When dealing with termination, there is a need to reduce the risk to the authority and concessionaires. In Confederation for Concessionaire Welfare & Ors. v. AAI & Anr., the Court held that postponing the exit by the concessionaires would cause hardships to both parties.  On the one hand, it would make it impossible for AAI to re-allot the spaces to willing concessionaires. In contrast, the outstanding dues against the concessionaires would continue to mount.
While it is in the interests of the authority to continue rather than terminate the PPP project, delineating the modalities for strategic exits is paramount. Surely, the pandemic will have a prolonged impact, stretching the ramp-up period to reach the state of affairs before the Force Majeure event.
From a practical standpoint, India’s project failure rate is fast catching up with the rest of the developing world.  Indeed, freedom to fail is part of the rationale for turning to the private sector, and project failures should be expected.
Change in Law
Under the MCA for the EPC model, change in law is defined as the occurrence of the following: Enactment, repeal, modification or re-enactment of any Indian law; the commencement of any Indian law which has not come into effect until the Base Date; or a change in the interpretation or application of any Indian law by a judgement of a court of record which has become final, conclusive and binding.  Indeed, due to the limited nature of change in law clauses, they often lead to disputes.
As per the recent judgement of the Delhi High Court in GMR Hyderabad Vijayawada Expressways Pvt. Ltd., the expression ‘existing Indian Law’ is not limited to primary legislation and would embrace subordinate legislation or executive orders having the force of law.  Since the Government has addressed the pandemic primarily through executive orders, effects on road projects, even during the second wave, could potentially qualify as change in law. Invoking the change in law clause would significantly contribute to de-risking the developer and would allow contractual relief or compensation where a Force Majeure clause could not be invoked.
Moving forward, if both clauses are inapplicable, parties would have to resort to other provisions of the concession agreement. For instance, under Article 24 of the MCA for the TOT model dealing with the effect of variation of toll collection, modification of concession period is allowed upon variation in Target Fee 1 and 2 according to the quantum of modification provided.  Further, to safeguard against legal, regulatory and political risks that may not come under change in law or Force Majeure, the parties can seek measures such as insurance.
Conclusion: Solving the Catch-22
While the Government has provided momentary solace to concessionaires and authorities, it is time to craft a long-term solution for handling road projects during the pandemic. Projects now face the dilemma of cash and labour crunch on one side, and penalties of non-performance and delay on the flip side. Private sector involvement can only be smoothened if the public sector steps up to standardise the remedy in terms of expenditure, incentives and relief. In March 2021, the Parliamentary Standing Committee noted that 888 road projects under the MoRTH were delayed, amounting to ₹3,15,373 crores, covering a length of 27,665 kilometres.  Yet, the Year-end Review released by the MoRTH focused on accelerated development of highways, without delineating the way forward for assisting developers in bringing the projects to completion. 
The debt-servicing liability of NHAI is higher than the estimates provided to the Committee.  To relieve the same, the NHAI submitted a proposal to SEBI to set up an infrastructure investment trust (InVIT) in the highway sector.  Additionally, the CCEA has given approval to the NHAI for raising funds from banks through securitisation of user fees.  Further, the Government has prioritised asset monetisation through the TOT model.  While these steps underscore the Government’s unwavering support in safeguarding the financial health of road projects, a strategic plan based on the Committee’s recent report is a pressing priority to combat the after-effects of COVID-19. Initiatives such as the National Infrastructure Pipeline need to be supported by innovative funding models and financial products. Additionally, the setting up of the National Bank for Financing Infrastructure and Development would provide the requisite impetus to the sector. However, there is no assurance that these measures would support the numerous SPVs that are neck-deep in debt, with respect to covering cost overruns and shortfall in repayment of loan; or provide the means to maintain a level of DSCR.
To ease the financial liability temporarily, the NHAI had provided a ‘COVID loan’ with repayment due one year before the concession period ends, a much-needed relief apart from extending the concession period.  However, the Policy Circular by NHAI imposing strict penal action in case of failure of structures/highways, along with the recommendation of the Committee to increase the upper limit of the penalty, presents itself as the snake bite after the lightning strike for contractors, developers and concessionaires.  Bearing in mind the fall in the creditworthiness of assets, dealing with termination payments, escrow arrangements, and substitution agreements would be of the essence.
As a lucrative means of financing road projects, transit-oriented development is crucial now more than ever. The state of play after the first wave has exposed the necessity to increase non-toll revenue. Capturing the value of financing done by NHAI was a model suggested by NITI Aayog to mobilise revenue from the incremental benefits brought to the surrounding area.  This can be done through vacant land tax, special assessment tax, transfer of development rights and creation of land pooling, among others. The recent Policy Guidelines for wayside amenities has attempted to rationalise the policy for developing such amenities.  However, past bids for wayside amenities were not encouraging due to the difficulty in the forecast of footfall and revenue generation.
Regarding the panoramic uncertainty that now comes with PPP projects, the Supreme Court has held that government authorities could not be permitted to obstruct or delay compliance with their obligations.  Moreover, the Committee stated that the Ministry may continue to work closely with various stakeholders, and help banks and lending organisations recover their loans by timely completion of delayed/stuck projects. 
Pertinently, insurance has a huge role to play and can provide adequate coverage to loss of revenue on account of disruptions and added costs. Model Concession Agreements provide for insurance during the construction period for contractor’s defects liability and against injury to persons and damage to property. Under Article 20.4 of the MCA for the EPC model, if the contractor fails to insure, the authority can either keep in force any insurances and recover costs or include the same while computing termination payment. 
Amendments to the MCAs have indeed contributed to the renewed interest of the private sector towards road projects. Dispute Resolution Boards (“DRBs”)set up under the MCA for HAM, whose decision is binding, would prove vital to solve issues between the authority and the concessionaire in the current landscape, with or without the mediation by the Independent Engineer.  Expectantly, these boards have a significant role in facilitating negotiations to deal with the effects of the second wave. In contrast to the conciliation and arbitration procedures, the DRB provides a flexible approach for constituting a Board consisting of independent members with sectoral expertise, although it is restricted to the list maintained by the NHAI. 
Truly, the pandemic has transformed the way PPP has functioned to date. From service contracts to concession agreements, contractual relations would now focalise on COVID-19 and parallel exigencies as well as the losses they entail. Of particular note, construction of national highways reached a record-high of 37 km per day in 2020.  Indeed, the pace of work following the pandemic-induced standstill and the increased investment pumped into the sector have painted a rosy picture during these grim times.
About the Author
Asima Ghosh is an Associate at HSA Advocates, New Delhi.
Hamna Viriyam is a 3rd Year Law Student at the National University of Advanced Legal Studies (NUALS), Kochi and is an Associate Editor at IJPIEL.
Managing Editor: Naman Anand
Editors-in-Chief: Akanksha Goel and Aakaansha Arya
Senior Editor: Varun Pandey
Associate Editor: Hamna Viriyam
Junior Editor: Vidhi Saxena
Preferred Method of Citation
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