With the rise of Public-Private Partnership Projects, Concession Agreements have come into the spotlight of discussion. In this Blog Post, the authors take an intersectional approach and discuss the impact of Concession Agreements on the Infrastructure Sector in the following ways — firstly, the authors discuss the impact of Concession Agreements in the Ports Sector. Secondly, the authors explore Concession Agreements from a Competition Law point of view and their impact on the infrastructure sector. Thirdly, the authors analyze the Goods and Services Tax (GST) implications on Concession Agreements and their impact on the infrastructure sector. Fourthly and lastly, the authors discuss the future way forward for Concession Agreements.
1. Introduction to Concession Agreements
A Concession Agreement governs a Public-Private Partnership (PPP) Project wherein a governmental authority gives a concession or grants a right to a private sector entity to implement an infrastructure project for the public good. Thus, this means that the purpose of Concession Agreementsis two-fold – (a) grant the private entity, i.e., the concessionaire, with rights necessary to implement an infrastructure project and obtain agreed returns as per the Terms and Conditions of the Concession Agreement; and (b) allocate and share risks with the concessionaire.
It is imperative to note that the ownership of the infrastructure project remains with the governmental authority. In contrast, the possession of the assets is passed to the concessionaire for developing and implementing the infrastructure project. After the expiry of the Concession Agreement, all the infrastructure project-related assets, which also include the assets purchased by the concessionaire, are reverted to the governmental authority. Further, the project’s commercial viabilitydetermines whether the payment is made by the concessionaire to the governmental authority — through revenue-share or concession payment — or by the governmental authority to the concessionaire through annuity payment or grant.
2. Impact of Concession Agreement in Ports Sector
The ports sector has seen multiple investments through the PPP model wherein the major and non-major ports and terminals are bid out and given to private players. A Model Concession Agreement (MCA) for Portswas introduced in 2001 by IDFC. Further, an MCA was developed by the Ministry of Shipping (MoS) wherein Ports projects have been governed under this MCA, which has been subject to various revisions such as the provision of exit clause for promoters, increase and imposition of new taxes and duties, change in royalty payable calculation mechanism, and other relevant revisions to cater to the stakeholders. Some of the issues related to Concession Agreements in the ports sector are as follows:
a.Delay in obtaining approvals for land acquisitions.
b. Lack of connectivity road connectivity to the Portsis a major bottleneck faced by the Ports sector, owing to various factors such as the need for awarding of road projects, increasing the workforce in National Highways Authority of India (NHAI) for proper utilization of funds, and other relevant factors.
c. Provide for a revenue-share model rather than a profit-share model because the latterresults in a skewed sharing of returns.
Therefore, from the preceding analysis, it is evident that there are various intersectional and recurring problems concerning Concession Agreements that can significantly and negatively impact the Ports sector.
3. Competition Law Conundrums in Concession Agreements and the Impact on the Infrastructure Sector
Concession Agreements can fall under the spectrum of competition law issues in cases related to the stage of granting a Concession and the nature of the Concession Agreements. Further, these Agreements fall within the purview of the Competition Act, 2002 (hereinafter “2002 Act”) because the term “enterprise,” according to Section 2(h) of the 2002 Act, includes a governmental entity that carries out a commercial activity but excludes those governmental entities that carry out sovereign functions of the government mainly related to space, atomic energy, defense, and currency. This means that any anti-competitive conduct by a governmental entity while issuing tenders can be investigated by the Competition Commission of India (CCI). Thus, in this regard, the scope of competition law-related issues concerning Concession Agreements is as follows:
a. Exclusive Rights: The intention to grant concessions is to give exclusive rights over a certain real estate or a channel of distribution/supply for the long term. Although CCI has not explicitly dealt with exclusivity and Concession Agreements cases, it is imperative to note that the grant of concessions, i.e., grant of exclusive rights, is not anti-competitive. This grant of exclusive rights becomes anti-competitive if it is done in a manner and under terms unfair to other bidders that lead to their exclusion and competing on merits, thereby raising concerns under Section 3 or 3(4) of the 2002 Act due to its Appreciable Adverse Effect on Competition (AAEC). And to be able to assess whether a concession agreement causes AAEC, Section 19(3) of the 2002 Act has laid down various general factors that can be applied while granting Concession Agreements as follows —
i. Section 19(3)(a) – The Concession Agreement should not create barriers to new entrants in the infrastructure market.
ii. Section 19(3)(b) – The Concession Agreement should not drive existing competitors out of the infrastructure market.
iii. Section 19(3)(c) – The Concession Agreement should not lead to the foreclosure of competition by hindering entry into the infrastructure market.
iv. Section 19(3)(d) – The Concession Agreement should cause accrual of benefit to consumers in the infrastructure market, such as the public.
v. Section 19(3)(e) – The Concession Agreement should improve the distribution or production of services or goods.
vi. Section 19(3)(f) – The Concession Agreement should promote economic and technical development by distributing or producing services or goods.
b. Colluding Behavior: Concessions are commonly granted through a competitive bidding process. Suppose we apply Section 3(3) of the 2002 Act. In that case, we comprehend that when any grant of Concessions, by way of a Concession Agreement, is found to be collusive — either through collusive bidding or bid-rigging — it is presumed that such Concession Agreements are to have an AAEC, thereby rendering such Concession Agreements void. The reason behind the same is that the term “Agreement” under Section 2(b) of 2002 Act has been broadly defined in “Builders’ Association v. Cement Manufacturers’ Association” as follows: “Further, it may be noted that the definition of ‘agreement’ as given in Section 2(b) of the Act requires inter alia any arrangement or understanding or action in concert whether or not formal or in writing or intended to be enforceable by legal proceedings. The definition, being inclusive and not exhaustive, is a wide one. The understanding may be tacit and the definition covers situations where the parties act on the basis of a nod or a wink. There is rarely any direct evidence of action in concert and in such situations, the Commission has to determine whether those involved in such dealings had some form of understanding and were acting in cooperation with each other. In light of the definition of the term ‘agreement,’ the Commission has to assess the evidence on the basis of benchmark of preponderance of probabilities.” Thus, this means that collusive Agreements are also included under the purview of the 2002 Act, thereby allowing the 2002 Act to declare collusive Concession Agreements as void according to Section 3(3).
c. Abusive Dominant Position: Concession Agreements’ nature leads to the creation of a monopoly because access to a certain real estate or a market is granted to a concessionaire on a long-term basis. This market dominance is not detrimental per se; however, abuse of such dominance is prohibited under Section 4 of the 2002 Act. This means that a concessionaire, a dominant player in the market, must not harm market competition by acting in a way that does not dilute or impede the overall competitive structure of the concessionaire’s market. Failing to do so attracts Section 4 in the following ways:
i. Section 4(2)(a) – The concessionaire should not directly or indirectly impose unfair or discriminatory conditions and prices regarding the purchase of goods and services on other market participants who are using the concession project facility. Further, the concessionaire should not indulge in predatory pricing. Suppose a Concession grant is granted through a competitive bidding process. If the Terms and Conditions of the tender documents are discriminatory and unfair without reasonable justifications, CCI can question the same under Section 4(2)(a) of the 2002 Act.
ii. Section 4(2)(b) – The concessionaire should not limit or restrict the production of goods and services and the technical or scientific development of such goods and services and not cause prejudice to the consumers.
iii. Section 4(2)(c) – The concessionaire should not indulge in any practices, in any manner, that results in denial of market access to other participants in the market.
iv. Section 4(2)(d) – The concessionaire should not conclude contracts that are subject to the acceptance of unfair conditions on other market participants.
v. Section 4(2)(e) – The concessionaire should not use its dominant position in its existing market to protect or enter another relevant market. Suppose a new concession is being granted in another market. The concessionaire should not use its dominant position in its existing market to influence the other market to win the concession for the other market as it may come at the cost of detrimenting and excluding the other market competitors.
Additionally, it is also important to note that if the concession’s project infrastructure or facility fulfills the requirements for being an “essential facility” and the concessionaire unreasonably and unfairly denies access to this essential facility to other market participants, a case under Section 4 of the 2002 Act can be made. Although the “Doctrine of Essential Facilities” has not been applied by CCI as a basis for Section 4 cases, references to the same were made in “Arshiya Rail Infrastructure Ltd. v. Ministry of Railways.”
d. Concession Agreements and Renegotiations: Renegotiation of Concession Agreements is renegotiating to refurbish and revise specific clauses of the Concession Agreement that makes the Agreement favorable to the Concessionaire. This reduces the level playing field for other market participants, reducing their ability to bid for projects. Suppose a Concession Agreement is renegotiated wherein there is a change of pricing of the goods and services offered under the Concession Agreement. This may raise potential concerns under Sections 3 and 4 of the 2002 Act because this price change detriments the other market participants solely favor the concessionaire.
e. Mergers and Acquisitions between concessionaires: If one concessionaire entity is merged or acquired by another entity in the same market and stage of production, i.e., horizontal integration, it is bound to reduce/eliminate competition in the same market, thereby violating the spirit of the 2002 Act, i.e., promotion of competition, and attracting Section 4 of the 2002 Act if such dominant position is abused. Further, suppose one concessionaire entity is merged or acquired by another entity in different stages of production, i.e., vertical integration. In that case, it is bound to create market control and dominance at two different market levels because of the newly merged or acquired entity. If such market control and dominance are abused, Section 4 of the 2002 Act is likely attracted. In finality, if certain mergers or acquisitions between a concessionaire entity and another entity breaches the threshold of Section 5 of the 2002 Act, prior approval from the CCI would be required wherein the CCI can pass appropriate orders under Section 31 of the 2002 Act.
Therefore, from the preceding analysis, it is evident that there are various intersectional problems concerning Competition Law and Concession Agreements capable of significantly and negatively impacting the infrastructure sector.
4. GST Implications in Concession Agreements and Impact on the Infrastructure Sector
In 2017, various indirect taxes such as central excise, value-added tax, and others were subsumed into a singular form of levy, i.e., Goods and Service Tax (GST). The implications of GST on Concession Agreements and its impacts on the infrastructure sector are as follows:
a. It is imperative to note that it is unclear as to whether GST is payable on grants that are received from the Concession Grant Awarding Entity [for e.g., National Highway Authority of India (NHAI)] to resolve the “viability gap” of the project. According to Section 2(31) of the Central Goods and Services Tax Act, 2017 (hereinafter “2017 Act”), the term “consideration” does not include any grant received from the Central or State Government. This leads to whether NHAI can be considered a Central or State Government to make the grant liable to GST, considering NHAI acts as an intermediary that facilitates a grant from the Central Government.
b. Benefits of Zero-Rated Supplies — such as the whole value of the supply chain being exempt from GST — are available to the main contractor who supplies goods or services to the Special Economic Zone (SEZ) Unit or Developer. However, these same benefitsare not available to the sub-contractor of such contractor, resulting in the shortage of funds or Working Capital.
c.According to the concept of Time of Supply of Goods and Services under GST, GST is discharged on receipt of “advances.” However, there will be no supply of goods or services at that point in time. An integral condition to claim Input Tax Credit (ITC) is the receipt of goods and services. Thus, this means that the supplier will pay GST on advances, whereas the recipient defers ITC until the recipient receives the goods or services. This results in a shortage of funds or Working Capital.
Therefore, from the preceding analysis, it is evident that there are various intersectional problems concerning GST implications on Concession Agreements that are capable of significantly and negatively impacting the infrastructure sector.
5. Conclusion: Bolstering Infrastructure Sector to Help Achieve $5 Trillion GDP in India
According to aneconomic survey, it was found that India must spend approximately $1.4 trillion to achieve $5 trillion Gross Domestic Product (GDP) by 2025. It wasalso found that Concession Agreements were instrumental in the rapid growth and success of Indian PPPs and the development of the Indian Infrastructure sector as these Agreements allowed the undertaking of a standardized process by contributing as standardized, substantive documents. Thus, Concession Agreements would be an integral element to enable India to take a step closer to $5 trillion GDP by 2025. To be able to achieve the same, the preceding issues mentioned may be resolved in the following ways: firstly, when it comes to the Ports sector, the MoS and NHAI need integrated and cooperative efforts to be able to resolve the issue of road connectivity, which seems closer to resolution due toincreased Governmental support for speedy implementation of Bharatmala Project for the road logistics sector and Sagarmala Project for the Ports sector alongside the operationalization of the Indian Major Ports Act, 2021, the passing of the Inland Vessel Act, 2021 in the Indian Parliament, andrevision of the MCA for PPP projects in the Ports sector in 2021. Secondly, when it comes to the Competition Law point of view on concession agreements, the CCI must maintain stringent watch over market use of dominant positions through enhanced monitoring and due diligence of PPP projects to prevent market abuse and detriment to the infrastructure sector in terms of reduction/elimination of competition which, in turn, can affect quality, prices, and new competitors. Thirdly and lastly, when it comes to the GST implications, zero-rated benefits must be extended to sub-contractors of contractors who supply the goods and services to the SEZ Unit or Developer to ensure the adequacy of funds or Working Capital and allow smooth development of the infrastructure project. Therefore, active resolution of the issues mentioned above would bolster the growth and development of the infrastructure sector and enable India to achieve a $5 trillion GDP.
The views and opinions expressed by the authors are personal.
About the Authors
Ms. Padmamala Madhusudan is an Advocate, having received her State Bar Council License from Bar Council of Maharashtra and Goa.
Pushpit Singh is a 3rd-year student at Symbiosis Law School, Hyderabad, and is an Associate Editor at IJPIEL.
Managing Editor: Naman Anand
Editors-in-Chief: Jhalak Srivastav and Aakaansha Arya
Senior Editor: Muskaan Singh
Associate Editor: Pushpit Singh
Junior Editor: Harshita Tyagi
Preferred Method of Citation
Padmamala Madhusudan and Pushpit Singh, “A Three-way Critique of Impact of Concession Agreements in the Indian Infrastructure Sector: From a Competition Law, Ports Sector, and GST Perspective” (IJPIEL, 28 February 2022)