In what can be termed a ‘parting gift,’ the outgoing UPA government has addressed the issue of non-availability of long-term and low cost debt which has stalled many infrastructure projects in the recent past. Anjan Dasgupta, a partner at law firm HSA Advocates and currently head of the firm’s Mumbai office, tells us how.
One of the major bottlenecks in the infrastructure sector, which includes public-private partnerships (PPP), is the lack of financing options in India and the resulting liquidity crunch. An investment of $1 trillion is required to flow into the infrastructure sector and most of this is expected to originate from the private sector including debt funds. Non-availability of long-term and low cost debt has stalled many infrastructure projects in the recent past.
In what can be termed a ‘parting gift,’ the outgoing government has addressed this issue by approving the model Tripartite Agreement for takeout financing of PPP projects in the ports sector via the Empowered Inter-Ministerial Group constituted by the Cabinet Committee on Infrastructure. Though currently applicable only to major ports, this agreement, which is based on the model concession agreement for private sector projects in major ports, is certainly a major shot in the arm for low cost and longer tenor bond financing in the ports sector.
The Tripartite Agreement empowers the infrastructure debt funds (IDFs) to take over loans extended to developers of major ports projects by banks and financial institutions for financing the project. If a project has successfully completed one year of commercial operations and its debt service obligations have not been rescheduled, waived or postponed, the project developer would be permitted to issue bonds in accordance with the terms set out in the Tripartite Agreement. Such bonds would then be subscribed by the IDFs and the proceeds from the same would be used to refinance the existing lenders to the project. The IDF(s) would be deemed to be party to both the escrow as well as the substitution agreements with the existing lenders, and would also acquire all rights, privileges and obligations of such lenders of the project.
The rights and obligations of the concessioning authority and the project developer under the concession agreement would stand modified to the extent provided in the Tripartite Agreement. In the event of termination of the agreement (including) for any event of default by either party, the concessioning authority would be required to pay compensation. This compensation would be in accordance with the provisions of the concession agreement, which would in turn be applied for redemption of the bonds in accordance with the provisions of the Tripartite Agreement.
Further, in the event of default in debt service by the project developer, the existing lenders and/or the IDFs would reserve the right to enforce termination of the Concession Agreement in accordance with the terms of the agreement. The concessioning authority would then have to pay compensation in accordance with the terms of the Concession Agreement to the existing lenders and the IDFs. The rights of the existing lenders would be subordinate to the rights, title and interest created by the bonds in favour of the IDFs and, accordingly, any compensation from the concessioning authority would first be applicable to the redemption of the bonds and the remaining balance, if any, shall be paid into the escrow account of the project for meeting the debt service obligations of the existing lenders.
The IDFs would be required to pay to the concessioning authority a fixed amount annually by way of a guarantee fee in light of the obligation of the concessioning authority under the Tripartite Agreement in accordance with the terms set out therein. This fee would be calculated as a percentage of the outstanding debt of the project financed by the IDF.
This initiative of the government will go a long way in boosting bond investor confidence by facilitating the refinancing of existing short term and high cost bank funds with longer tenor and low cost funds through investment by IDFs following the risky construction period. These bond investors are typically insurance and pension funds looking for relatively stable and less risky investments. Such refinancing will reduce the cost for infrastructure projects and also provide additional liquidity by freeing up bank funds for newer projects. It is recommended that the new government come up with similar initiatives in other infrastructure sectors including state port projects which currently do not benefit as they are not covered under the definition of major ports.