This article has been written by Sayantani Chakraborty pursuing the Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution from LawSikho. This article has been edited by Zigishu Singh (Associate, Lawsikho) and Smriti Katiyar (Associate, Lawsikho).
Project financing is an integral part of infrastructure projects which are generally undertaken either for a specific purpose, or as a result of a public-private partnership agreement. The premise of the infrastructure projects based on public-private partnership is financed by a lender who is also known as a special purpose vehicle. In this type of agreement, the repayment is measured by the income generated by the success of the project rather than the balance sheet of the borrower. It cannot be denied that the public-private partnership agreement also known as the concession agreement has been playing a significant role in the development of various commercial projects across India. Starting from airport reconstructions, highway projects to the maintenance of major forts in India this model has been able to deliver numerous successful and commercially viable projects.
Before delving into the details of a concession agreement, it is important to understand the nuances of the public-private partnership model. The public-private partnership (PPP) model is based on contracts or concession agreements as mentioned above. The parties to the projects are namely the governing authority or any statutory authority on one side and a private sector company on the other side. Due to these kinds of agreements, the private companies take part in infrastructure projects of the government, and the licenses to carry out the projects are granted by the statutory authorities.
Financing of the PPP projects
The PPP projects are largely owned by the government authorities and the money is borrowed from banks and financial institutions. They look into the cash flow generated from the project as a source of funding. Further, the monetization of the asset is for a limited period only and the ownership is retained by the public authority; the private sector is only given constructive possession i.e. “right to use”. Therefore if the agreement is terminated at any given time, then the developer i.e. the private sector company is getting back the “termination payment”. Now, the question may arise as to how this payment is linked in the concession agreement. This “termination payment” is always linked to the debt payment.
Concession agreement and forts in India
History of forts in India
As proof of our glorious past as well as the standard of craftsmanship, the forts of India have become popular attractions for tourists all over the world. Forts are situated in almost every corner of India and are mentioned in chapters of our history books. The Agra fort and the Red fort are among the UNESCO World heritage sites in India. Besides them, there are hill forts, marine forts, forts in jungles that are incredible.
Types of concession agreements
1. Works and services contracts;
2. Management and maintenance contracts;
3. Operation and maintenance contracts;
4. Build operate transfer contracts;
5. Full privatization.
Anchuthengu Fort vis-à-vis concession agreement
Anchuthengu fort is located 12 kilometers from Varkala and is a coastal town in the district of Thiruvananthapuram known for its old colonial settlement. Although the island is small and is situated between the sea and backwaters it holds a significant place in the history of India. During the Anglo-Mysore war in the 18th century, the fort played an important role as the British used to store ammunition in the fort. The fort does not look like typical forts; it is more of an enclosed stronghold with lateral walls.
As the fort is surrounded by water bodies, hence the concession agreement would be drafted as a management and maintenance agreement between the state tourism department and the private sector company. The main lookout into this agreement shall be to develop the area surrounding the fort and prevent the lateral walls of the fort from damages caused by the sea specifically. So let’s look into the clauses that must be incorporated into this concession agreement.
THIS AGREEMENT is made on the [DATE]
BETWEEN (1) Kerala State Tourism Authority, (which expression shall include successors and permitted assigns,
Theroux Private Limited, (registered number) whose registered office is at, [address] (the “Concessionaire” whose expression shall include successors and permitted assignees).
The recital part would describe in detail the purpose of the concession agreement between the Parties. The Clause would mainly state.
1. The authority is responsible for assisting the concessionaire in carrying out the terms of the agreement
2. The concessionaire is a private sector company, engaged in the restoration, maintenance of major Indian forts as well as the development of the nearby area of the forts and employs in underdeveloped areas of forts.
3. The company has applied for the tender floated by the State of Kerala vide. newspaper advertisement through Kerala State tourism department and the authority has accepted the tender concerning the concession area.
4. The procedure by which the company has been selected as a concessionaire and defines the concession area.
a. Company – would mean a subsidiary company, holding company, or a subsidiary of a holding company.
b. Competent Authority – the competent authority of both the parties, its agents, official representatives, any Government, provincial or local government, any agency, authority, body, or standard-setting institution or other person or entity having jurisdiction under any law or Regulatory Provision or organ of the state.
c. Charges – charges means the charges as has been affirmed and agreed between parties that are subject to changes from time to time and the schedule of the charge is annexed hereto [the schedule].
d. Concession Area– the area of the concession includes the area adjacent to the fort and any other area that may be expanded from time to time by the authority including the area demarcated by the municipality of the designated area.
e. Concession fee – means the annual fee to be paid by the concessionaire from time to time to the authority according to the payment schedule [the schedule].
The authority transfers the rights to operate, maintain and restore the fort and its nearby area according to the terms of the agreement which includes but is not limited to the fort and the nearby area for ten years.
3. Concessionaire services
The Concessionaire shall along with the authority maintain, restore the damages of the lateral walls of the fort and make the area adjacent as described in the schedule developed.
4. Novation of existing agreements
This agreement shall be deemed to substitute the tender that was floated and any other arrangements or agreement that has taken place between the parties.
5. Condition Precedent
This agreement is subject to the fulfillment by the concessionaire, the approval of the Articles of Association (AOA), and the Shareholder’s agreement.
6. Appointment of the concessionaire
The authority hereby appoints the concessionaire as a private sector company for the maintenance, restoration, operation of the fort, and development of the scheduled area and the concessionaire accepts the same subject to the terms and conditions of the agreement.
The concession fee shall be payable to the authority according to the payment schedule annexed hereto [schedule].
The fee payable to the council shall be deposited by the concessionaire to the designated account as agreed upon by the parties and shall be utilized for supplying clean water to the adjacent village located near the fort.
8. Duties and responsibilities of the concessionaire
a. Supply of clear water to the villages near the fort through the pipeline under the concession area.
b. To control, operate, maintain and restore the fort and the concession area under the terms of the agreement.
c. To disclose any changes to the Articles of Association of the company that would change or alter the object and purpose of this agreement.
d. To share the details of the annual general meeting (AGM) of shareholders and any minutes of the meeting about the agreement with the authority.
e. Supply, install any hardware or software related to geographical information in respect to the work as well as continuously update the technology for better implementation of the plan as per the terms of the agreement.
9. Assistance by the authority
a. The authority shall assist the concessionaire on the request that would prevent any delay in the execution of the agreement and the plan.
b. The authority would assist the concessionaire in procuring the required permits, licenses, authorizations, consent, and approvals to carry on the operations in the concession area without any delays and disruptions.
c. The authority shall provide all kinds of assistance from time to time promptly and shall not incur any monetary liability whatsoever at any point of time during the term of the agreement.
The concessionaire warrants and represents that:
a. it is a duly incorporated company under the Companies Act, 2013
b. it has the power and authority to conduct any business as has been agreed in the terms and conditions of this agreement.
c. the agreement does not violate any statute, laws, order, decree, legislation, the judgment of any court, or any award of an arbitrator related to the concessionaire.
d. the agreement is following the Articles of Association, Memorandum, contract or agreement to which the concessionaire is a party or is bound by any obligation thereof.
The Authority warrants and represents that:
a. It is an entity created by statute under delegated legislation by the State of Kerala.
b. It has the power, authority to enter any legally binding contract or agreement as well as undertake any responsibility under the agreement.
c. The authority has the exclusive right to supply clean and potable water to the nearby villages under the concession area and is authorized to delegate this to the concessionaire to undertake the same on its behalf.
d. It enjoys unlimited and unrestricted rights of ownership in respect to the assets of the fort.
e. That the assets in the concession area at the effective date are free from any encumbrances, lien, and right of pre-emption.
a. Within two months the concessionaire shall prepare an inventory of the assets in the concession area and update on the repairs to be made.
b. The parts which are beyond repair or restoration shall be delivered to the authority and the risk in respect to the same shall pass on to the authority.
On the termination of the agreement, all the assets directly or indirectly in the possession of the concessionaire in the concession area shall be transferred to the authority unencumbered and the authority shall not be liable for any damages that would take place during the term of the agreement.
The Concessionaire shall indemnify and shall not hold the Council liable in respect of any claim by a Third Party in respect of such Concession Assets that would come up after the Effective Date and during the term but before the date of return of such Concession Assets.
14. Training and development
The concessionaire shall employ the locals residing within the concession area and the young men and women residing in the adjacent villages after prior training by the company personnel with the assistance of the authority.
15. Force Majeure
In the event of force majeure, the authority shall pay the lenders from its funds and shall hold the concessionaire harmless and not liable at any point of time and the concessionaire shall clear the dues accrued before the event.
No party shall assign, transfer or delegate any rights and obligations according to this agreement furnishing without prior notice or written consent of the other party.
Each party is liable to send notice by the terms of the agreement and the notice period shall not be less than sixty days and it has to be sent via e-mail or through registered A.D by speed post.
If any part of this agreement becomes illegal, inoperative, or unenforceable, it shall be ineffective to such extent only and severed from the rest of the agreement.
19. Dispute Resolution
In case of any dispute in respect to the whole or any part of the agreement, the same shall be submitted to arbitration. Each party shall appoint an arbitrator and the third arbitrator shall be appointed by both the parties.
20. Governing Laws
The governing law shall be the laws of India and the relevant state laws and any dispute arising from the agreement shall be dealt with under the Indian Contract Act, 1972 and other applicable statutes and state legislations.
Under the “adopt a heritage scheme” the Dalmia group has entered into an MoU with the ministry of tourism to adopt the iconic Red Fort for five years to maintain it for a contract worth Rs. 25 crores. This agreement is also based on the PPP model but it is not binding being an MOU. Nonetheless, a concession agreement serves the purpose of any public-private partnership model as the nature of this kind of agreement is binding and the success rates are maximum. It is pertinent to mention that the clauses of this agreement depend upon the kind of concession agreement the parties are entering into and crafted according to the requirements of the parties.
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