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Legal Regulatory and Contractual Policy Frame Work in Public Private Partnership ‘PPP’ Infrastructure Projects in India.
Legal Regulatory and Contractual Policy Frame Work in Public Private Partnership ‘PPP’ Infrastructure Projects in India.
Legal Regulatory and Contractual Policy Frame Work in Public Private Partnership ‘PPP’ Infrastructure Projects in India.
Legal Regulatory and Contractual Policy Frame Work in Public Private Partnership ‘PPP’ Infrastructure Projects in India.
Legal Regulatory and Contractual Policy Frame Work in Public Private Partnership ‘PPP’ Infrastructure Projects in India.
Legal Regulatory and Contractual Policy Frame Work in Public Private Partnership ‘PPP’ Infrastructure Projects in India.
Legal Regulatory and Contractual Policy Frame Work in Public Private Partnership ‘PPP’ Infrastructure Projects in India.
Legal Regulatory and Contractual Policy Frame Work in Public Private Partnership ‘PPP’ Infrastructure Projects in India.
Legal Regulatory and Contractual Policy Frame Work in Public Private Partnership ‘PPP’ Infrastructure Projects in India.
Legal Regulatory and Contractual Policy Frame Work in Public Private Partnership ‘PPP’ Infrastructure Projects in India.
Legal Regulatory and Contractual Policy Frame Work in Public Private Partnership ‘PPP’ Infrastructure Projects in India.
Legal Regulatory and Contractual Policy Frame Work in Public Private Partnership ‘PPP’ Infrastructure Projects in India.
Legal Regulatory and Contractual Policy Frame Work in Public Private Partnership ‘PPP’ Infrastructure Projects in India.
Legal Regulatory and Contractual Policy Frame Work in Public Private Partnership ‘PPP’ Infrastructure Projects in India.
Legal Regulatory and Contractual Policy Frame Work in Public Private Partnership ‘PPP’ Infrastructure Projects in India.
Legal Regulatory and Contractual Policy Frame Work in Public Private Partnership ‘PPP’ Infrastructure Projects in India.
Legal Regulatory and Contractual Policy Frame Work in Public Private Partnership ‘PPP’ Infrastructure Projects in India.
Legal Regulatory and Contractual Policy Frame Work in Public Private Partnership ‘PPP’ Infrastructure Projects in India.
Legal Regulatory and Contractual Policy Frame Work in Public Private Partnership ‘PPP’ Infrastructure Projects in India.
Legal Regulatory and Contractual Policy Frame Work in Public Private Partnership ‘PPP’ Infrastructure Projects in India.
Legal Regulatory and Contractual Policy Frame Work in Public Private Partnership ‘PPP’ Infrastructure Projects in India.
Legal Regulatory and Contractual Policy Frame Work in Public Private Partnership ‘PPP’ Infrastructure Projects in India.
Legal Regulatory and Contractual Policy Frame Work in Public Private Partnership ‘PPP’ Infrastructure Projects in India.
Legal Regulatory and Contractual Policy Frame Work in Public Private Partnership ‘PPP’ Infrastructure Projects in India.
Legal Regulatory and Contractual Policy Frame Work in Public Private Partnership ‘PPP’ Infrastructure Projects in India.
Legal Regulatory and Contractual Policy Frame Work in Public Private Partnership ‘PPP’ Infrastructure Projects in India.
Legal Regulatory and Contractual Policy Frame Work in Public Private Partnership ‘PPP’ Infrastructure Projects in India.
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Legal Regulatory and Contractual Policy Frame Work in Public Private Partnership ‘PPP’ Infrastructure Projects in India.

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The Indian Contracts Act, 1872. …

The Indian Contracts Act, 1872.
The Sales of Goods Act, 1930

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  • 1. Compiled by Dayal Divyanshu. Portfolio www. 2purchase.wordpress.com, dayal1005@gmail.com (Source: Various Notes, Rules, Guidance from Govt. of India) LEGAL REGULATORY AND CONTRACTUAL POLICY FRAME WORK IN PUBLIC PRIVATE PARTNERSHIP ‘PPP’ PROJECTS IN INDIA 14th December, 2013. 1 DAYAL
  • 2. Compiled by Dayal Divyanshu. Portfolio www. 2purchase.wordpress.com, dayal1005@gmail.com (Source: Various Notes, Rules, Guidance from Govt. of India) Thanks to ‘The Viewers of Wordpress, Scribd, Slideshare and Linkedin all over the world who motivate me to keep on publishing’ 2
  • 3. Compiled by Dayal Divyanshu. Portfolio www. 2purchase.wordpress.com, dayal1005@gmail.com (Source: Various Notes, Rules, Guidance from Govt. of India) Legal Regulatory and Contractual Policy Frame Work in Public Private Partnership ‘PPP’ [INDIA] Contents Legal Regulatory and Contractual Policy Frame Work in Public Private Partnership ‘PPP’ .......................................................... 3 A. Government Initiatives ........................................................................................................................................................... 8 B. Types of Project Format for PPP.............................................................................................................................................. 8 1. Build Operate Transfer (BOT) ............................................................................................................................................ 8 2. Build Transfer Operate (BTO) ............................................................................................................................................ 8 3. Build Rent Operate Transfer (BROT) or Build Lease Operate Transfer (BLOT) ............................................................. 8 4. Build Own Operate Transfer (BOOT) ............................................................................................................................... 8 5. Build Own Operate (BOO): ................................................................................................................................................ 8 6. Refurbish Operate Transfer (ROT) or Modernize Operate Transfer (MOT) & Refurbish Own Operate (ROO) or Modernize Own Operate (MOO) & Design Build Finance Operate (DBFO) ......................................................................... 8 7. Build and Transfer (BT): ..................................................................................................................................................... 8 8. Build Lease Transfer (BLT): ................................................................................................................................................. 9 9. Contracts Add Operate (CAO):........................................................................................................................................... 9 10. Develop Operate Transfer (DOT): ................................................................................................................................. 9 11. Rehabilitate Operate Transfer (ROT .............................................................................................................................. 9 12. Rehabilitate Own Operate (ROO): ................................................................................................................................. 9 C. Structuring the Public Private Partnerships in Infrastructure Projects .............................................................................. 9 1. Public Ownership and Public Operation .......................................................................................................................... 9 2. Public Ownership but Private Operations........................................................................................................................ 9 3. Private Ownership and Operation .................................................................................................................................... 9 D. PPP Projects Stakeholders ..................................................................................................................................................... 10 1. 2. Developer: .......................................................................................................................................................................... 10 3. 3 Government ....................................................................................................................................................................... 10 Land Owners: .................................................................................................................................................................... 10
  • 4. Compiled by Dayal Divyanshu. Portfolio www. 2purchase.wordpress.com, dayal1005@gmail.com (Source: Various Notes, Rules, Guidance from Govt. of India) 4. Suppliers (Fuel, EPC, O&M, Technology, etc.) of various facilities and services to the project .................................. 10 5. Employees of Public Corporations ................................................................................................................................... 10 6. Consumers of the Infrastructure ..................................................................................................................................... 11 E. The Governing Frame Work (Legal Regulatory Policy Framework) ................................................................................. 11 1. The Constitution of India.................................................................................................................................................. 11 2. Diverse legislation applicable to a particular sector/activity ........................................................................................ 11 F. Constitutional Distribution of Legislative Powers .............................................................................................................. 12 G. Fundamental Principle Governing Contracting in India ................................................................................................... 14 1. Indian Contracts Act, 1872, A Practitioner’s Summary................................................................................................. 14  An agreement .................................................................................................................................................................... 14  To be enforceable by law .................................................................................................................................................. 14  Free consent ....................................................................................................................................................................... 14  The consideration and the Objects of an Agreement ..................................................................................................... 14  Void and not Enforceable by Law .................................................................................................................................... 14  Performance of an Agreement ......................................................................................................................................... 15  Performance of Reciprocal Promises ............................................................................................................................... 15  Privity of Contracts ........................................................................................................................................................... 16  Quasi Contractual Relationships, Restitution ................................................................................................................. 16  Breach and Consequences ................................................................................................................................................ 16  Dispute Resolution Mechanism Governing Contracts and Clauses.............................................................................. 17 2. Emergence of Sectoral Regulators: Statutory expert with powers including dispute resolution ............................... 17 Outline of an Illustrative Concession (Basic Structure of Contracts Agreement) ................................................................ 18 1. 2. Rules of Interpretation ...................................................................................................................................................... 18 3. Definition of Project Scope and Format........................................................................................................................... 18 4. Explicit Vesting of Concession with all Attendant Rights and Privileges ..................................................................... 18 5. Term and Phases of the Project Agreement..................................................................................................................... 18 6. 4 Opening Section ................................................................................................................................................................ 18 Concession Fees and/or Revenue Sharing ....................................................................................................................... 18
  • 5. Compiled by Dayal Divyanshu. Portfolio www. 2purchase.wordpress.com, dayal1005@gmail.com (Source: Various Notes, Rules, Guidance from Govt. of India) 7. Financial Close................................................................................................................................................................... 18 8. Design Requirements ........................................................................................................................................................ 18 9. Construction Requirements.............................................................................................................................................. 18 10. Operation and Maintenance Requirements.................................................................................................................... 18 11. End of Term Transfer/Hand Back Requirements ............................................................................................................ 18 12. Non-Complete/Exclusivity ............................................................................................................................................... 18 13. Tariff Structure .................................................................................................................................................................. 18 14. Lock in Period and Shareholding Restrictions ................................................................................................................ 18 15. Insurance Cover ................................................................................................................................................................ 18 16. Independent Verification.................................................................................................................................................. 19 17. Change of Project Scope ................................................................................................................................................... 19 18. Change in Law and Consequences .................................................................................................................................. 19 19. Stepin Rights of Lenders.................................................................................................................................................... 19 20. Substitution Rights ............................................................................................................................................................ 19 21. Force Majeure Events and Consequences ....................................................................................................................... 19 22. Termination Payments ...................................................................................................................................................... 19 23. Assignment and Charges .................................................................................................................................................. 19 24. Direct Agreements ............................................................................................................................................................ 19 25. Waiver of Sovereign Immunity......................................................................................................................................... 19 26. Dispute Resolution Mechanism ........................................................................................................................................ 19 H. Bidding and Award of Infrastructure Projects.................................................................................................................... 19 I. Sustainable Development Principles: Environment and R&R Issues ................................................................................. 20 J. Contracts Structuring and Negotiation: Risk and Reward Issues ...................................................................................... 20 1. Preparatory Phase.................................................................................................................................................................. 20 2. Bidding Phase ........................................................................................................................................................................ 20 3. The Award Phase ................................................................................................................................................................... 20 4. Incorporation and Financing ............................................................................................................................................... 20 5. Pre Construction Phase ......................................................................................................................................................... 20 5
  • 6. Compiled by Dayal Divyanshu. Portfolio www. 2purchase.wordpress.com, dayal1005@gmail.com (Source: Various Notes, Rules, Guidance from Govt. of India) 6. Construction Phase................................................................................................................................................................ 20 7. Operation and Maintenance Phase...................................................................................................................................... 21 8. Transfer/Hand Back Phase .................................................................................................................................................... 21 K. The structuring of Project Agreements................................................................................................................................ 21 L. Category of PPP Projects Risks .............................................................................................................................................. 22 1. Policy/Regulatory Risk....................................................................................................................................................... 22 2. Completion Risk ................................................................................................................................................................ 22 3. Revenue Risk ...................................................................................................................................................................... 23 4. Input/Supply Risk .............................................................................................................................................................. 23 5. Infrastructure Risk ............................................................................................................................................................ 23 6. Finance Risk ....................................................................................................................................................................... 23 7. Operating Risk ................................................................................................................................................................... 23 8. Project Developer Risk ...................................................................................................................................................... 23 9. Force Majeure Risk ............................................................................................................................................................ 23 10. M. Environmental, Rehabilitation and Resettlement (R&R) ............................................................................................ 23 Indian Public Procurement Law-Legislation .................................................................................................................. 24  The Indian Contracts Act, 1872. ...................................................................................................................................... 24  The Sale of Goods Act, 1930............................................................................................................................................. 24  The General Financial Rules (GFR), 2005. ...................................................................................................................... 24  The Delegation of Financial Powers Rules (DFPR). ......................................................................................................... 24  The Manual on Policies and Procedures for Purchase of Goods issued by the Ministry of Finance (Manual). ........ 24  Government Orders regarding Price or Purchase preference. ..................................................................................... 24  The Guidelines issued by the Central Vigilance Commission to increase transparency and objectivity in Public Procurement............................................................................................................................................................................... 24   The Electricity Act, 2003 .................................................................................................................................................. 24  The Petroleum & Natural Gas Board Act, 2006 .............................................................................................................. 24  6 Telecom Regulatory Authority Act, 2000........................................................................................................................ 24 The Public works Department.......................................................................................................................................... 24
  • 7. Compiled by Dayal Divyanshu. Portfolio www. 2purchase.wordpress.com, dayal1005@gmail.com (Source: Various Notes, Rules, Guidance from Govt. of India) The National Highways Authority Of India. ................................................................................................................... 24  N. Basic Underlying Principle of the Regime ........................................................................................................................... 24  Specifications ..................................................................................................................................................................... 24  Offers.................................................................................................................................................................................. 24  Procuring Authority .......................................................................................................................................................... 24  Stages of Procurement ...................................................................................................................................................... 24  Newspaper Advertisements of Tenders ........................................................................................................................... 25 O. Norms and Principles Governing the Contracts ................................................................................................................. 25 1. The terms of Contracts...................................................................................................................................................... 25 2. Standard forms .................................................................................................................................................................. 25 3. Discretion........................................................................................................................................................................... 25 4. Cost Plus Contract ............................................................................................................................................................. 25 5. Price Variation Clause ...................................................................................................................................................... 25 6. Provision for Payment ....................................................................................................................................................... 25 7. Lumpsum ........................................................................................................................................................................... 25 8. Scope and Specification .................................................................................................................................................... 25 9. Extensions of the Scheduled Delivery.............................................................................................................................. 26 10. Recovery of Liquidated Damages................................................................................................................................. 26 11. Warranty ....................................................................................................................................................................... 26 12. Rejection of Goods......................................................................................................................................................... 26 P. Rules on Specifications.......................................................................................................................................................... 26 Q. Rules for Awarding Tenders ................................................................................................................................................. 26 R. Remedies and Enforcement .................................................................................................................................................. 27 Arbitration.................................................................................................................................................................................. 27 7
  • 8. Compiled by Dayal Divyanshu. Portfolio www. 2purchase.wordpress.com, dayal1005@gmail.com (Source: Various Notes, Rules, Guidance from Govt. of India) A. Government Initiatives    Constitution of a PPP cell in the Department of Economic Affairs (DEA) for central and state sectors. DEA has formulated policy, schemes, programmes and capacity building. Standardized contractual documents such as sector specific Model Concession Agreements, which will lay down the standard terms relating to allocation of risk, contingent liabilities and guarantees as well as service quality and performance standards, and standardized bidding documents such as Model Request for Qualifications and Model Request for Proposals are being prepared and notified.  Approval mechanism for PPPs in the Central sector has been streamlined through setting up of the Public Private Partnership Appraisal Committee (PPPAC).   The Government of India now allows FDI in most infrastructure sectors to the extent of 100 per cent. The nature and extent of private sector participation in infrastructure projects can occur at varied levels and formats ranging from publicly owned and operated infrastructure where private party may be a mere contractor for procurement of specific goods or services (like design, equipment, maintenance) to ownership participation in project special purpose vehicles. B. Types of Project Format for PPP The various types of project formats of PPP infrastructure are according to the type of private participation or the ownership of the relevant infrastructure: 1. Build Operate Transfer (BOT) The contracting authority selects a concessionaire to finance and construct an infrastructure facility or system and gives the entity the right to operate it commercially for a certain period, at the end of which the facility is transferred to the contracting authority. 2. Build Transfer Operate (BTO) Have the infrastructure facility becomes the property of the contracting authority immediately upon completion of the construction and capacity testing, the concessionaire being awarded the right to operate the facility for a certain period. 3. Build Rent Operate Transfer (BROT) or Build Lease Operate Transfer (BLOT) These are variations of BOT or BTO projects where, in addition to the obligations and other terms usual to BOT projects, the concessionaire rents the physical assets on which the facility is located for the duration of the agreement. 4. Build Own Operate Transfer (BOOT) A concessionaire is engaged for the financing, construction, operation and maintenance of a given infrastructure facility in exchange for the right to collect fees and other charges from its users. The private entity owns the facility and its assets until it is transferred to the Contracting authority. 5. Build Own Operate (BOO): The concessionaire owns the facility permanently and is not under an obligation to transfer it back to the contracting authority. 6. Refurbish Operate Transfer (ROT) or Modernize Operate Transfer (MOT) & Refurbish Own Operate (ROO) or Modernize Own Operate (MOO) & Design Build Finance Operate (DBFO) These acronyms emphasize one or more of the obligations of the concessionaire. In some projects, existing infrastructure facilities are turned over to private entities to be modernized or refurbished, operated and maintained, permanently or for a given period of time. Depending on whether the private sector will own such an infrastructure facility, those arrangements may be called either ‘Refurbish Operate Transfer’ (ROT) or ‘Modernize Operate Transfer’ (MOT), in the first case, or ‘Refurbish Own Operate’ (ROO) or ‘Modernize Own Operate’ (MOO), in the latter. The expression ‘Design Build Finance Operate’ (DBFO) is sometimes used to emphasize the concessionaire’s additional responsibility for designing the facility and financing its construction. 7. Build and Transfer (BT): A private entity undertakes the financing and construction of a given infrastructure facility and after its completion hands it over to the Government, Government agency or the local authority. The Government authority would reimburse the total project investment on the basis of an agreed schedule and operate it. 8
  • 9. Compiled by Dayal Divyanshu. Portfolio www. 2purchase.wordpress.com, dayal1005@gmail.com (Source: Various Notes, Rules, Guidance from Govt. of India) 8. Build Lease Transfer (BLT): A private entity undertakes to finance and construct infrastructure project and upon its completion hands it over to the Government or the local authority concerned on a lease arrangement for a fixed period, after which ownership of the facility is automatically transferred to the Government or the local authority. 9. Contracts Add Operate (CAO): A private entity adds to an existing infrastructure facility which it rents from the Government authority and operates the expanded project and collects user levies, to recover the investment over an agreed franchise period. There may or may not be a transfer arrangement with regard to the added facility provided by the developer. 10. Develop Operate Transfer (DOT): A private entity builds an infrastructure facility and is integrated into the BOT arrangement by giving that entity the right to develop adjoining property and thus, enjoy some of the benefits the investment creates such as higher property or rent values. 11. Rehabilitate Operate Transfer (ROT): An existing facility is handed over to the private entity to refurbish, operate (collect user levies in operation period to recover the investment) and maintain for a franchise period, at the expiry of which the facility is turned over to the Government or the local authority. This could cover the purchase of an existing facility from abroad, importing, refurbishing, erecting and consuming it within the host country. 12. Rehabilitate Own Operate (ROO): An existing facility is handed over to the operator to refurbish and operate with no time limitation imposed on ownership. As long as the operator is not in violation of its franchise, it can continue to operate the facility and collect user levies in perpetuity. C. Structuring the Public Private Partnerships in Infrastructure Projects Three (3) generic options (within which the diverse formats fits in) 1. Public Ownership and Public Operation Creation of a separate legal entity controlled by the Government, i.e. Special Purpose Vehicle (SPV) which is managed as an independent commercial enterprise. Bonds or securities may be issued by the SPV to leverage private finance (municipal bonds), Specific Operation and Maintenance (O&M) activity/ies may be contracted out to the private sector in terms of the service contracts. The operator’s compensation may be linked to its performance on specified 2. parameters where verification is practicable such that the fixed fees may be predicated on a minimum assured output/level of performance, with certain incentives for better levels of performance. Public Ownership but Private Operations The complete O&M of the public infrastructure facility may be contracted to a private entity, whereby a private entity is permitted for a defined period to use an infrastructure facility to supply the services to 3. consumers and collect revenue for the same. At times when a new facility/asset is to be created, that work may be assigned to the same or another private party by the contracting authority. Private Ownership and Operation Here the private party owns the assets and operates the facility. There may be several variants like: Divestiture (joint venture or 100 percent), Licensed activity wherein private ownership of the physical assets (electricity or telecommunications network) is separable from the license permitting provision of public services (granted by an economic regulator as in electricity, or the government as in telecom licensees by the Department of Telecommunications of Government of India). 9
  • 10. Compiled by Dayal Divyanshu. Portfolio www. 2purchase.wordpress.com, dayal1005@gmail.com (Source: Various Notes, Rules, Guidance from Govt. of India) D. PPP Projects Stakeholders Different stakeholders have inter-relationships for diverse stages and aspects of the project, like    Designing Engineering Construction  Maintenance and repairs Operations  Financing    Fuel, raw material and input procurement and storage Sale/Delivery The category of stakeholders. 1. Government   As the custodian of interests of the citizens/consumers. As the custodian of interest of tax-payers. 2. Developer: As the investor in high cost, long gestation and prolonged pay back public assets/services. 3. Land Owners: Acquisition of large tracts of contiguous land which is suitable for use of the project including the land use permissions, clearances from statutory authorities like State Pollution Control Board, Ministry of Environment and Forest, et.al. The land owners need following assurances from the Government.   Only such land is acquired as is required for the infrastructure facility without any arbitrage or windfall profits to the developer. A fair and reasonable rehabilitation and resettlement package including compensation is implemented expeditiously. 4. Suppliers (Fuel, EPC, O&M, Technology, etc.) of various facilities and services to the project Suppliers need following assurance from the Government.   Fair and transparent selection process. Timely payment of dues and safeguards against unfair rejections, costs and withholding of payments. 5. Employees of Public Corporations The ‘workmen’ category consists of all blue collared employees engaged in any manual, unskilled, technical, operational or clerical work being entitled to various benefits/protections under various Indian labour laws including the Industrial Disputes Act, 1947. The decisive factor in determining whether an employee is a workman or not is his actual nature of duties (designation or remuneration is not the material factor). 10
  • 11. Compiled by Dayal Divyanshu. Portfolio www. 2purchase.wordpress.com, dayal1005@gmail.com (Source: Various Notes, Rules, Guidance from Govt. of India) ‘Employees other than workmen’ comprise of employees whose functions are predominantly managerial, administrative and supervisory do not enjoy any protections by laws, and their employment related issues will be governed by the employment contracts and the Indian Contracts Act, 1872. Another relevant consideration is that employees of an establishment owned by the state are also entitled to certain legal safeguards with regard to their employment, including protections in terms of security of service, equal pay for equal work, no discrimination of any kind, reservations for various backward sections of society. Article 16(1) of the Constitution, provides that there shall be equality of opportunity for all citizens in matters relation to employment or appointment to any office under the state. The matters referred to above in Article 16(1) cover (i) Initial appointment (ii) Promotions (iii) Termination of employment (iv) Matters relating to salary, periodical increments, leave, gratuity, pension, age of superannuation, etc. Therefore an employee of the utility may continue to be entitled to the same even after any functional unbundling. 6. Consumers of the Infrastructure Primarily interested in   Delivery of good quality, affordable and reliable services. An efficient, consumer focused and responsive operator. E. The Governing Frame Work (Legal Regulatory Policy Framework) In a common law jurisdiction like India, the applicable legal regulatory policy framework (governing framework) plays a vital role in defining the rules of the game for various stakeholders in any economic activity. The governing framework comprises the following: 1. The Constitution of India   Its twin goals of ‘social and economic justice’. Fundamental rights of citizen which acts as a check on state action, including the freedom to do lawful business, trade and commerce.   Right to property. Separation of powers amongst 3 wings of state executive, legislative and judiciary with an inbuilt system of checks and  balancing. Centre state relations regarding allocation of legislative and executive powers.  Access to Justice. 2. Diverse legislation applicable to a particular sector/activity (Enacted by a legislature of competence) Laws governing various sectors like:         The Electricity Act, 2003. The Telecom Regulatory Authority of India Act, 1997. The National Highways Authority of India Act, 1988 Municipal laws of various states. Laws governing normal commercial transactions like The Contracts Act, 1872. The Sale of Goods Act, 1930. The Negotiable Instruments Act, 1881. The Companies Act, 1956.  The Foreign Exchange Management Act, 1999. The Competition Act, 2002.  Laws for recognition and enforcement of rights and obligations like the Specific Relief Act, 1963, the Code of Civil Procedure,   11 1908. The Arbitration and Conciliation Act, 1996.
  • 12. Compiled by Dayal Divyanshu. Portfolio www. 2purchase.wordpress.com, dayal1005@gmail.com (Source: Various Notes, Rules, Guidance from Govt. of India) Within the framework, various stakeholders (including private participants) are free to enter into valid and enforceable contractual/commercial arrangements to actually transact business, including  Investment arrangements by private participants with the concerned instrumentality of state/statutory authority as the grantor of concession or joint venture partner or principal.  Arrangements for partnering or collaboration in ventures between 2 or more persons including incorporation of specific entities with the rules for their functioning (like a company).  Contracts for sale/supply of goods, services or intellectual property rights including Business Process Outsourcing (BPO), Engineering Procurement and Construction (EPC), Operations and Maintenance (O&M), Refurbishment and Modernization (R&M), et. al.   Contracts for permitting use of certain assets, facilities and rights like leases, licenses, concessions. Financing arrangements. F. Constitutional Distribution of Legislative Powers [Articles 245 to 254 read with the VIIth Schedule of the Constitution of India]  The Federal/Union Parliament is empowered to make laws for the whole or any part of the territory of India on subjects allocated to it and the state legislatures may make laws for the whole or any part of the state concerned on subjects allocated.  The allocation of legislative powers between the Union Parliament and the state legislatures is set out in the three legislative lists set out in Schedule VII to the Constitution of India. It is noteworthy that  The Union Parliament has exclusive power to legislate with respect to subjects enumerated in the union list (List I, containing 97 entries).    12 The Union Parliament and the state legislatures have concurrent power to legislate on items listed in List III i.e. the concurrent list (List III, containing 47 entries). The state legislatures have the power, to legislate on items listed in the state list (List II, containing 66 entries), subject to the power of the Union Parliament to legislate in respect of matters enumerated in the union and the concurrent List. The residual power to legislate on aspects not specifically provided for belongs to the Union Parliament.
  • 13. Compiled by Dayal Divyanshu. Portfolio www. 2purchase.wordpress.com, dayal1005@gmail.com (Source: Various Notes, Rules, Guidance from Govt. of India) Different states in India have taken quite divergent approaches to both the institutional arrangements and the legal framework for PPP. 13
  • 14. Compiled by Dayal Divyanshu. Portfolio www. 2purchase.wordpress.com, dayal1005@gmail.com (Source: Various Notes, Rules, Guidance from Govt. of India) G. Fundamental Principle Governing Contracting in India Broad principles and parameters governing entering into and enforcing contracts in India. This is a practitioner summary of The Indian Contracts Act, 1872 as interpreted by the superior Indian courts but is by no means meant to be a comprehensive or exhaustive commentary. 1. Indian Contracts Act, 1872, A Practitioner’s Summary  An agreement comprises a set of reciprocal promises by parties to do/abstain from doing something which is enforceable by law.  To be enforceable by law , an agreement must be     Made by free consent of the parties to the agreement. For a lawful consideration. With a lawful object. The parties must have agreed upon the same set of reciprocal promises understood to be the same thing/set of activities by the parties (consensus ad-idem).   The agreement must be certain and ascertainable (not vague). Free consent requires the following   It must be signified by a person who is competent to contracts. Such person must be of the age of majority as per the applicable law.  Such person being of sound mind at the time of entering contract. Such person not being disqualified from contracting by any applicable law.  The consent must not be caused by    Coercion or threat. Undue influence by one who is in a position to dominate the free will of the other to obtain an unfair advantage/ unconscionable.  Fraud or deceipt to induce the consent by misrepresentation or active concealment of material facts or a promise without    Mistake as to an essential matter of fact underlying the agreement, or any law in force in India. The consideration and the Objects of an Agreement are not lawful in case        intent to perform or other act to deceive. Misrepresentation. It is forbidden by law. It would defeat any provisions of applicable law. It is fraudulent. It involves or implies injury to the person or property of another. It is opposed to public policy. It is regarded as immoral by court of law. Void and not Enforceable by Law The following agreements are void and not enforceable by law   Where considerations and objects thereof are unlawful in part. Where agreement is without consideration (though adequacy of consideration is not an issue), except where   14 It is in writing and registered. It is a promise to compensate for something done.
  • 15. Compiled by Dayal Divyanshu. Portfolio www. 2purchase.wordpress.com, dayal1005@gmail.com (Source: Various Notes, Rules, Guidance from Govt. of India)        It is a promise to pay a debt caused by the law of limitation. If the agreement is in restraint of any of the following, the same shall be void  Restraint of marriage. Restraint of trade. Restraint of legal proceedings. If agreement is by way of wager or is an agreement contingent on an impossible event, it is void. An agreement to do an impossible or unlawful act or where a contingent contract becomes impossible or unlawful (due to efflux of time or conduct) is void. Performance of an Agreement   A promise must be performed by the person who made the promise, unless the promisee accepts performance by a third person. In the case of joint promise by 2 or more persons, they are liable to perform while the promisee is free to call upon one or more of them to perform. Each party to a contract must either perform or offer to perform its promise/s unless the same has been dispensed with excused under the applicable law. Such offer to perform must be    Unconditional. Made at proper time and place. Made under circumstances giving the promisee a reasonable opportunity to ascertain promisor’s ability and willingness to perform or verify the goods being delivered.   Where such offer has been made and the offer has not been accepted, the promisor is not responsible for non performance. Also such party does not lose any rights under the contracts, including right to seek performance by the other party. Normally, promises bind representatives/estate of the promisor in case of death of promisor before performance, unless a contrary intention appears from the contracts like where performance is linked to a special talent or training of a promisor (e.g., surgeon, musician etc.).  Where a party to a contract has refused to perform or has disabled himself from performing his promise in its entirety, the  promisee may terminate the contracts or he may acquiesce in its continuance. Where the agreement specifies a time and place for performance of a promise, it must be performed accordingly during normal business hours unless the parties agree to a change/variation. In cases where no time is specified for performance, it must be performed within reasonable time as per the facts and circumstances of that agreement. In case of ambiguity or silence replace of performance/time, the promisor may offer to perform at a place and time of mutual convenience.  Performance of Reciprocal Promises  A promisor is obliged to perform only if the reciprocal promisee is ready and willing to perform its part.  If the agreement sets out a sequence of performance of reciprocal promises, that should be followed strictly. If the agreement does not stipulate a sequence of performance of reciprocal promises, they shall be performed in the sequence  that the nature of the transaction requires. If a party prevents the other from performing his promise, the obstructor renders the agreement voidable at the option of the  obstructed besides claiming compensation for any loss suffered due to such non performance. This is particularly so where due to stipulated sequence or inherent nature of the promises the obstructor fails/refuses to perform his promise thereby preventing performance by the other party.  15 Where a promisor obliged to perform a promise at or before a specified time fails to perform by that time, the agreement (to that extent of the unperformed party) becomes voidable at the option of the promisee in case time was of the essence of the
  • 16. Compiled by Dayal Divyanshu. Portfolio www. 2purchase.wordpress.com, dayal1005@gmail.com (Source: Various Notes, Rules, Guidance from Govt. of India) contract. However, if time is not of the essence of the agreement, though the agreement is not voidable but the promisor is  obliged to compensate the promisee for failure to perform as per stipulated time. In any voidable agreement, if the promisee accepts alternate performance then he is not entitled to claim compensation for loss caused due to non performance in a timely manner, unless at the time of such alternate acceptance he gives notice of intention to claim damages.  Release from obligation to perform its promises under an agreement where  Promisee dispenses with or remits performance of promise. The promisee fails, refuses or neglects to afford to the promisor reasonable facility to perform.  The agreement has been rendered void. In such circumstances, the person who has received any advantage under such   agreement is bound to restore it, or to compensate the person from whom he received it. The agreement has been terminated once it became voidable. The party rescinding agreement shall, if he received any benefit there under from another party, restore to the person from whom it was received.  Privity of Contracts While the Indian law and enforceability is predicated upon ‘privity of Contracts’, an intended beneficiary under the agreement is normally permitted by courts of law to seek enforcement of his claims under the contract even when he might not be a party thereto.  Quasi Contractual Relationships, Restitution  When any person lawfully does anything for another person, or delivers anything to him not intending to do so gratuitously such that the other person enjoys the benefit thereof, the latter is bound to compensate the former or to restore the  thing/benefit. When a person furnishes necessities/supplies to another person suited to his condition in life, but the recipient is incapable of entering into a Contract, the supplier is entitled to be reimbursed from the property of such incapable person.   When money is paid or anything delivered to a person by mistake or under coercion, that person must pay or return it. Breach and Consequences  The fundamental principle is that the party who suffers due to breach of a contract by another party is entitled to compensation (being restitutive and not a windfall) for any loss or damage caused to him which loss/damage  Is caused by such breach and arose naturally in usual course of things from such breach. The parties knew when they entered into the agreement that it would be likely result of breach of the agreement. Ordinarily compensation is not paid for any remote or indirect loss/damage, unless specifically agreed to.     In estimating loss/damage arising from breach, courts consider the means that existed of remedying the inconvenience caused by the non performance of contract. Where the contract provides for a specified amount as the liquidated damages or penalty payable in the event of breach, the party complaining of breach shall be entitled to receive compensation:  Which is reasonable and restitutive in nature.   Which shall not exceed the liquidated damages/penalty so specified. Being the liquidated damages so specified so long as the same can be established as a fair and reasonable mutually agreed compensation for such breach.   16 Where a person gives any bond or other instrument for performance of a public duty, in the event of a breach shall be liable to pay the amount specified. A person who rightfully rescinds a contract is entitled to receive restitutive compensation for any loss/damage sustained due to non fulfillment of the agreement.
  • 17. Compiled by Dayal Divyanshu. Portfolio www. 2purchase.wordpress.com, dayal1005@gmail.com (Source: Various Notes, Rules, Guidance from Govt. of India)  Dispute Resolution Mechanism Governing Contracts and Clauses  Normally, a dispute relating to validity, enforceability, interpretation or nonperformance of a contractual obligation would be a civil dispute adjudicated upon by a court of competent jurisdiction in its original side. The possible claims would be for  Declaration of rights and obligations.    Injunctive relief preventing a party likely to breach from doing so. Impairing the legal rights/status of the claimant under the Contracts. Mandatory injunctions for enforcing/performing contractual obligation. Damages for compensation for loss suffered by a party due to breach/ non-performance by the other. Due to the burden on courts and the time factor, as also the need for specialized knowledge for infrastructure disputes (re.   finance, technology, economics, project management etc.), the trend has been to provide alternate dispute mechanism  described below and exclude jurisdiction of courts of law. While The Indian Contracts Act holds that any agreement in absolute restraint of legal proceedings is void, it carves out an  exception to save agreements wherein it is agreed that Any dispute arising inter-se parties in respect of any subject/s shall be referred to arbitration.   Only the amount awarded in such arbitration shall be recoverable in respect of the dispute so referred. Based on the UNCITRAL Model Arbitration Law, the Arbitration and Conciliation Act, 1996 provides for:  Non-binding conciliation and mediation which are recognized as Alternate Dispute Resolution mechanism under the Code of Civil Procedure, 1908.   Binding arbitration with restricted/limited grounds of challenge and time bound enforcement. It is normally seen that project agreements for PPP in infrastructure development provide for     On-going consultation/coordination committee. Resolution of day-to-day issues through Independent Engineer and Independent Auditor. Time bound conciliation at senior management levels. Reference of disputes to an expert body being the Disputes Resolution Board (DRB) for time bound adjudication, whose decision upto a financial limit will be final and binding. Reference of dispute to arbitration in case of DRB decision involving claims exceeding the materiality threshold specified. Various High Courts have notified their Mediation Rules to try and resolve disputes that have a chance of quick resolution   through court appointed mediation centers. 2. Emergence of Sectoral Regulators: Statutory expert with powers including dispute resolution Various sectoral laws like the Electricity Act, 2003 have constituted independent multi-disciplinary expert economic regulators vested with powers to adjudicate upon disputes amongst regulated utilities, or refer some such disputes to arbitration. The merit of this mechanism lies in the following factors  Courts of law do not normally interfere with such expert adjudication. The regulator is comprised of sector focused technical, financial, legal and other expertise, besides permanent secretariat which has  extensive data related to the sector. Being specialized, they are mandated by law to decide most complex issues after public hearings in a time bound manner, e.g., in  tariff setting.  To evolve consistency in approach on diverse issues faced by the sector, a statutory forum of regulators has been constituted. This along with the fact that all regulators in states and at central level have one appellate tribunal has led to a very quick settling of jurisprudence on various issues. 17
  • 18. Compiled by Dayal Divyanshu. Portfolio www. 2purchase.wordpress.com, dayal1005@gmail.com (Source: Various Notes, Rules, Guidance from Govt. of India) Outline of an Illustrative Concession (Basic Structure of Contracts Agreement) 1. Opening Section 1.1 Name, place and date of execution of the concession. 1.2 Description of parties to the concession: name, legal status (company, society, trust, partnership etc.), address and name of authorized signatory. 1.3 Recitals setting out the background of the infrastructure facility being implemented in the PPP format, like a. b. c. d. Need for the infrastructure facility. Structuring decision and format (including legal provisions and Cabinet/ Government approvals et.al. which form the basis of the project). Procurement process leading to award to the concessionaire. Basic value for money proposition of the project. 2. Rules of Interpretation 2.1 Specific definitions and standards used in the concession. 2.2 Rules of interpretation, including priority and hierarchy of project agreements along with schedules and appendices. 3. Definition of Project Scope and Format 4. Explicit Vesting of Concession with all Attendant Rights and Privileges 4.1 Delineation of status of grantor as also the underlying legal provisions and Cabinet/Government decision to procure the infrastructure facility to the concessionaire being the winning bidder. 4.2 Explicit award of the project and delineation of various rights and privileges vested in the hands of the concessionaire during the tenure of the concession. 5. Term and Phases of the Project Agreement 5.1 Term. 5.2 Construction Period. 5.3 Completion and commercial operation. 5.4 Concession period. 6. Concession Fees and/or Revenue Sharing 7. Financial Close 8. Design Requirements 9. Construction Requirements 10. Operation and Maintenance Requirements 10.1 Output-based specifications. 10.2 Routine/scheduled maintenance. 10.3 Periodic/major maintenance. 10.4 Refurbishment and Modernization. 11. End of Term Transfer/Hand Back Requirements 12. Non-Complete/Exclusivity 13. Tariff Structure 13.1 Base Tariff. 13.2 Revisions. 14. Lock in Period and Shareholding Restrictions 15. Insurance Cover 15.1 Aspects to be secured. 18
  • 19. Compiled by Dayal Divyanshu. Portfolio www. 2purchase.wordpress.com, dayal1005@gmail.com (Source: Various Notes, Rules, Guidance from Govt. of India) 15.2 Application of insurance proceeds. 16. Independent Verification 16.1 Independent Engineer and his role. 16.2 Independent Auditor and his role. 16.3 Periodicity of checking by independent engineer/auditor. 16.4 Concessionaire’s obligation to cooperate/ submit data/maintain records/ undertake testing. 17. Change of Project Scope 18. Change in Law and Consequences 19. Stepin Rights of Lenders 20. Substitution Rights 21. Force Majeure Events and Consequences 22. Termination Payments 22.1 In case of Force Majeure related termination. 22.2 In case of Default related termination. 23. Assignment and Charges 24. Direct Agreements 25. Waiver of Sovereign Immunity 26. Dispute Resolution Mechanism H. Bidding and Award of Infrastructure Projects  Award of a contract by a public body or the state is essentially a commercial transaction wherein the commercial considerations are of paramount importance, including:  Price.        Specifications. Track record of tenderer. Timelines. Ability of tenderer to give post delivery services. The requirements in a tender notice can be classified into two categories    Whether Goods/Services offered are of requisite specifications. Tenderers’ ability to deliver goods/services of requisite quality. Essential conditions of eligibility. If a party fails and/or neglects to comply with the requisite conditions which were essential for consideration of its case by the employer, it cannot supply the details at a later stage or quote a lower rate upon ascertaining the rate quoted by others. Ancillary or subsidiary to the main object to be achieved by the condition. A Contract need not be given to the lowest tenderer and in this regard the employer is the best judge. The same ordinarily being within the employer’s domain, court’s interference in such matter should be minimal. The Court should normally exercise judicial restraint unless illegality or arbitrariness on the part of the employer is apparent on the face of the record. The application of law, however, would depend upon the facts and circumstances of each case. 19
  • 20. Compiled by Dayal Divyanshu. Portfolio www. 2purchase.wordpress.com, dayal1005@gmail.com (Source: Various Notes, Rules, Guidance from Govt. of India) I. Sustainable Development Principles: Environment and R&R Issues The impact of intervention of the Supreme Court of India and the High Courts in large infrastructure projects can be seen with reference to cases on river valley projects, thermal power plants, mining projects, railway projects, tourism infrastructure and roads and highways. The grounds of challenge had included mainly the following Adverse environmental impacts      Safety aspects. Inadequate Environment Impact Assessment and Environment Management Plan. Extraneous financial considerations. Forced displacement. Inadequate Resettlement and Rehabilitation measures arising there from. Most of the challenges to such projects have been mainly because all such projects require acquisition of substantial areas of land and consequential displacement of a large number of people and also involve substantial impact on the environment and ecology of the regions. J. Contracts Structuring and Negotiation: Risk and Reward Issues Vital consideration in structuring project agreements is the phases of the project, viz: 1. Preparatory Phase which comprises of:   Pre-Feasibility/Detailed feasibility phase wherein technical feasibility, financial viability and market status are studied. Detailed Project Report. 2. Bidding Phase wherein expressions of interest are typically solicited with statement of qualifications to pre-qualify bidders. The shortlisted bidders are normally provided information and opportunity to conduct due diligence/site visits for a defined period where after they have to submit the bids. 3. The Award Phase wherein bids are evaluated and contract/project is awarded. 4. Incorporation and Financing Phase wherein the project SPV is incorporated by the promoters/successful bidders followed by capitalization and financial closure of debt financing for the project. This can be a very intensive phase where after a comprehensive lender due diligence, debt syndication and documentation is completed if the project is found creditworthy followed by security creation and finalization of key project agreements as also insurance package. 5. Pre Construction Phase wherein the following aspects are covered     Land acquisition with land use conversions/rights. Provision of utilities; roads, water, power, telecom. Appointment of EPC Contractors. Obtaining necessary permits and approvals to commence work. 6. Construction Phase comprising of  Issuance of Notice to Proceed.  Completion of design and engineering work.  20 Completion of civil construction and erection of plant and machinery equipment on site.
  • 21. Compiled by Dayal Divyanshu. Portfolio www. 2purchase.wordpress.com, dayal1005@gmail.com (Source: Various Notes, Rules, Guidance from Govt. of India)  Capacity testing, start up and commissioning of the equipment in conjunction with the relevant network of which it forms a  part. Completion tests. 7. Operation and Maintenance Phase wherein the infrastructure facility is operated to deliver the infrastructure services as per agreed standards, including undertaking of routine/scheduled and major/periodic maintenance as also refurbishment and modernization/up gradation thereof. 8. Transfer/Hand Back Phase of the infrastructure facility to the governmental authority concerned in terms of the Project agreements. Besides the above stages, certain cardinal rules which must be borne in mind in structuring, negotiating and implementation of infrastructure projects in a PPP format include:  A private entrepreneur is interested in doing the project to earn profits. As such, the project must meet the threshold test of financial viability based on realistic assumptions. This is particularly vital for ensuring bankability of the project, i.e., ability of the developer to arrange for cost effective finance on the strength of the project’s revenue stream and the project agreements.  A private entrepreneur brings in efficiency in operations, finance and technology commensurate to the rewards assured for risk taken. Should the project be perceived to be too risky, the project may fail to elicit interest from the private sector.  A private entrepreneur has no funds to put into support government’s welfare schemes like free power unless the same constitutes a cash flow which can be funded in a sustainable manner from the project’s revenue stream after meeting all reasonable expenditures  incurred as also recovering a reasonable return on investment commensurate to the risk profile of the project. Improper or unfair risk allocation invariably enhances risk profile of the project and will   Deter credible players who wish to deliver quality infrastructure facilities. Attracts whose who work on ‘concession capture’ and short term profiteering business model. K. The structuring of Project Agreements  Terms of the rights and corresponding obligations of the parties, viz. The objective of the infrastructure project being structured/implemented in a public private partnership format  Flexibility/innovative structures.  Output quality standards/performance standards.   Nature and quality of assets created as the infrastructure facilities to render the level of service required. User charge/tariff levels for consumers.   Revenue share, royalty, license fees for governmental authority. Mapping of risks to develop project agreements with optimal risk allocation  Guarding against excessive risk transfer.   Risk mitigation mechanism. The ‘value for money’ proposition for the governmental authority to structure the project as PPP. This must be build as  tangible/verifiable stagewise outcomes/ deliverables in the project agreements. Acquisition of adequate (size and quality) and appropriate (forest, environment, coastal regulation zone, user) land, coordination with the governmental agencies, third parties.  Securing effective and timely project completion and commencement of operations by  Stabilization of scope, design and drawings and avoiding changes midcourse.  21 Performance bonds with parent/sponsor support.
  • 22. Compiled by Dayal Divyanshu. Portfolio www. 2purchase.wordpress.com, dayal1005@gmail.com (Source: Various Notes, Rules, Guidance from Govt. of India)     Liquidated damages. Incentives for early completion. Termination with penalty and procurement through others in case of default. Securing effective delivery of promised quality/service levels of infrastructure services by   Performance standards, testing and cure. Benchmarking, tolerance and obligation to restore quality.  Penalties for non-performance. Ensuring timely payments in terms of project structuring.  Establish suitable protection of project viability and fundamentals against material adverse effect arising out of   Force majeure. Change in law (including policy or regulatory regime).  Other unforeseen/supervening events.  L. Category of PPP Projects Risks 1. Policy/Regulatory Risk It is associated with the rules and conditions governing entry into and undertaking of specified activities.        Change in entry conditions: Entry of new competitors (may come with lower cost structures or better technology solutions). Change in FDI norms and norms governing foreign debt. Changes in rules governing ‘competitive’ behaviour. Revision on compliance standards. Health, Safety, Environment. Delays in or denial of regulatory approvals, consents or NOCs. Capturing/sharing of windfall gains and unforeseen upside. The only suitable litigant, other than what exists in the applicable legal framework will form a part of the contractual arrangements. 2. Completion Risk             Availability of suitable land without encumbrance, encroachment or other complications (like environment, forest, coastal zone, land use, scisemetogical, soil strength etc.). Availability of construction water, power supply. Construction technology and design risks. Project planning and scheduling. Appropriateness of suitable infrastructure (transport, storage, telecommunication links etc.). Government clearances, approvals and permits. Supplier/contractor delays and defaults. Latent defects. Change to project scope. Increase in non firm costs. Regular availability of construction material at budgeted prices. Suitable mitigating factors/structures could be provided for in  EPC Contracts price, time, performance security and liquidated damages.    22 Completion tests and independent engineer supervision. Equity stake from contractor and governmental agency. Insurance cover.
  • 23. Compiled by Dayal Divyanshu. Portfolio www. 2purchase.wordpress.com, dayal1005@gmail.com (Source: Various Notes, Rules, Guidance from Govt. of India) 3. Revenue Risk 4. Input/Supply Risk 5. Infrastructure Risk timely availability of appropriate and adequate infrastructure (telecom links, road networks, water, power supply etc.). 6. Finance Risk timely closure of adequate and cost-effective debt-finance for the effective implementation of the project.     Inability of the selected private developer to tie up and leverage adequate and cost efficient debt from credible lender/s due to lack of track record or inadequate project structuring. Interest rate risk. Foreign exchange risk. Excessive reliance on third party equity/mezzanine financing by developers. 7. Operating Risk 8. Project Developer Risk   Selection of a developer who possesses the necessary technical, financial and managerial capabilities and track record to successfully implement and operate the infrastructure facility. Strong pre qualification criterion (technical and financial) combined with a prudent and rigorous evaluation process to short list eligible bidders.  Suitable safeguards being built into project award and documentation. 9. Force Majeure Risk Unforeseen changes in the environment paralyzing or naturally impacting the project implementation and its viability. These are largely in the nature of unavoidable/supervening impossibility arising for no fault of the developers.   Acts of God like natural calamities. Indirect political events like acts of war, terrorism, strike, public agitation or law and order problems. Political events like change in law or expropriation. The mitigation mechanism/strategy could include:     10.     Contractual provisions to address each category of events. Definitional standards of when it be invoked and for how long. Suitable insurance cover. Environmental, Rehabilitation and Resettlement (R&R) Quality of Environmental Impact Assessment (EIA). Robustness of Environmental Management Plan (EMP). Nature/effectiveness in implementation of EMP. Appropriateness of the R&R Scheme and effectiveness in implementation of the R&R plan. The above elements of the risk can be mitigated, by      23 Public consultation process conducted by governmental authorities on the project structuring as also its impact on the project site and its vicinity. Environmental Impact (forest clearance, Coastal Region Zone (C.R.Z.). Clearance, State Pollution Control Board (S.P.C.B.) clearance. Land Acquisition. Employment benefits.
  • 24. Compiled by Dayal Divyanshu. Portfolio www. 2purchase.wordpress.com, dayal1005@gmail.com (Source: Various Notes, Rules, Guidance from Govt. of India) M. Indian Public Procurement Law-Legislation At the apex of the Indian legal framework governing public procurement is Article 299 of the Constitution of India, which stipulates that all contracts made in the exercise of the executive power of the Union of India or by a State Government shall be expressed to be made by the President or by the Governor of the state, as the case may be and all such contracts made in exercise of such power shall be executed on behalf of the President or the Governor by such person as he may direct.   The Indian Contracts Act, 1872. The Sale of Goods Act, 1930. are the major legislations governing Contracts of sale/purchase of goods in general. At the federal level, there is no law exclusively governing public procurement of goods in India, though at the state level certain state legislatures (like Tamil Nadu) have enacted such laws. However, comprehensive rules and directives have been put in place at the federal level in terms of  The General Financial Rules (GFR), 2005.  The Delegation of Financial Powers Rules (DFPR).    The Manual on Policies and Procedures for Purchase of Goods issued by the Ministry of Finance (Manual). Government Orders regarding Price or Purchase preference. The Guidelines issued by the Central Vigilance Commission to increase transparency and objectivity in Public Procurement. These provide the regulatory framework for public procurement by governmental instrumentalities. In addition there exist certain sectoral laws and their underlying sectoral policies like the    Telecom Regulatory Authority Act, 2000. The Electricity Act, 2003 . The Petroleum & Natural Gas Board Act, 2006. Et al which also guide the public procurement processes. Within this framework various Governmental instrumentalities and agencies including ministries and departments like   The Public works Department. The National Highways Authority Of India. Et al have evolved their own public procurement system each of which cannot be covered here. N. Basic Underlying Principle of the Regime Rule 137 of the General Financial Rules, 2005 lays down the basic underlying principles of the regime and provides that every authority delegated with the financial powers of procuring goods in public interest shall have the responsibility and accountability to bring efficiency, economy and transparency in matters relating to public procurement and for fair and equitable treatment of suppliers and promotion of competition in public procurement. In specific, Rule 137 of the General Financial Rules, 2005 provides that the procedure to be followed in making public procurement must conform to the following yardsticks  Specifications in terms of quality, type etc., as well as quantity of goods to be procured, should be clearly spelt out keeping in view the specific needs of the procuring organisations. Care should also be taken to avoid purchasing quantities in excess of requirement to avoid inventory carrying costs.    Offers should be invited following a fair, transparent and reasonable procedure. Procuring Authority should be satisfied that the selected offer adequately meets the requirement in all respects. Stages of Procurement At each stage of procurement concerned procuring authority must place on record, in precise terms, the considerations which weighed with it while taking the procurement decision. 24
  • 25. Compiled by Dayal Divyanshu. Portfolio www. 2purchase.wordpress.com, dayal1005@gmail.com (Source: Various Notes, Rules, Guidance from Govt. of India)  Newspaper Advertisements of Tenders All contracts by the Government or by an instrumentality of the state should be granted only by public auction or by inviting tenders, after advertising the same in well-known newspapers having wide circulation. However, in rare and exceptional cases  During natural calamities and emergencies declared by the Government.    The procurement is possible from a single source only. The supplier or contractor has exclusive rights in respect of the goods or services and no reasonable alternative or substitute exists. The auction was held on several dates but there were no bidders or the bids offered were too low, etc., The normal rule may be departed from and such contracts may be awarded through ‘private negotiations’. O. Norms and Principles Governing the Contracts General Financial Rule 2004 - Provides for the norms and principles governing Contracts entered into by Government as follows 1. The terms of Contracts must be precise, definite and without any ambiguities. The terms should not involve an uncertain or indefinite liability, except in the case of a Cost Plus Contracts or where there is a Price Variation Clause in the Contract. 2. Standard forms of contract should be adopted wherever possible, with such modifications as considered necessary in respect of individual contracts. The modifications should be carried out only after obtaining financial and legal advice. 3. Discretion : a. Ministry or Department may, at its discretion, make purchases of value up to Rupees One Lakh by issuing purchase orders b. In respect of works contracts, or contracts for purchases valued between Rupees One Lakh to Rupees Ten Lakh, where General Conditions of Contracts (GCC), Special Conditions of Contracts (SCC) and Scope of Work, the Letter of Acceptance will result in c. containing basic terms and conditions. a binding Contracts. In respect of contract for works with estimated value of Rupees Ten Lakh or above or for purchase above Rupees Ten Lakh, a contract document should be executed, with all necessary clauses to make it a self-contained contract. If however, these are preceded by Invitation to Tender, accompanied by GCC and SCC, with full details of scope and specifications, a simple one page contract can be entered into by attaching copies of the GCC and SCC, and details of scope and specifications, offer of the d. Tenderer and Letter of Acceptance. Contracts document should be invariably executed in cases of turnkey works or agreements for maintenance of equipment, provision of services etc. 4. Cost Plus Contract should ordinarily be avoided. Where such contract become unavoidable, full justification should be recorded before entering into the contract. 5. Price Variation Clause can be provided only in long term contract, where the delivery period extends beyond 18 months. In short term contracts firm and fixed prices should be provided for. Where a price variation clause is provided, the price agreed upon should specify the base level viz., the month and year to which the price is linked, to enable variations being calculated with reference to the price levels prevailing in that month and year. 6. Provision for Payment Contracts should include provision for payment of all applicable taxes by the contractor or supplier. 7. Lumpsum Contract should not be entered into except in cases of absolute necessity. Where Lumpsum Contract become unavoidable, full justification should be recorded. The contracting authority should ensure that conditions in the Lumpsum Contract adequately safeguard and protect the interests of the Government. 8. Scope and Specification The terms of a contract, including the scope of specification once entered into, should not be materially varied. 25
  • 26. Compiled by Dayal Divyanshu. Portfolio www. 2purchase.wordpress.com, dayal1005@gmail.com (Source: Various Notes, Rules, Guidance from Govt. of India) 9. Extensions of the Scheduled Delivery Normally no extensions of the scheduled delivery or completion dates should be granted except where events constituting force majeure, as provided in the contracts, have occurred or the terms and conditions include such a provision for other reasons. Extensions as provided in the contract may be allowed through formal amendments to the contracts duly signed by parties to the contract. 10. Recovery of Liquidated Damages All contracts shall contain a provision for recovery of liquidated damages for defaults on the part of the Contractor. 11. Warranty Clause should be incorporated in every contract, requiring the supplier to, without charge, repair or rectify defective goods or to replace such goods with similar goods free from defect. Any goods repaired or replaced by the supplier shall be delivered at the buyers premises without costs to the buyer. 12. Rejection of Goods All Contracts for supply of goods should reserve the right of Government to reject goods which do not conform to the specifications. P. Rules on Specifications Some of the aspects to be duly considered by Governmental instrumentalities whilst formulating the specifications and other technical particulars of the goods to be purchased are as follows  The specifications of the goods shall meet only the actual and essential needs of the user because ‘over-specification’ will  unnecessarily increase the cost and may stifle competition. Specifications should aim at procuring the latest technology and avoid procurement of obsolete goods.  Specifications should have emphasis on factors like efficiency, optimum fuel/ power consumption, use of environmental-friendly materials, reduced noise and emission levels, low maintenance cost etc.  The specifications should not be too restrictive as the aim should be to attract reasonable number of competitive tenders. The specifications should also take care of the mandatory and statutory regulations, if any, applicable for the goods to be purchased.  Wherever Indian Standards exists for the required goods, the same should be adopted. Preference should be given to procure the goods, which carry BIS (Bureau of Indian Standards) mark. For any deviations from Indian Standards or for any additional parameters for better performance, specific reasons for deviations/modifications should be duly recorded with the approval of the competent authority.   In cases where Indian Standards do not exist or, alternatively, a decision has been taken to source the foreign markets also, International Standards (like ISO etc.) may be adopted. Where no widely known standards exist, the specifications shall be drawn in a generalized and broad based manner to obtain competitive bids from different sources.  Except in case of proprietary purchase from a selected single source, the specifications must not contain any brand name, make or catalogue number of a particular manufacturer and if the same is unavoidable due to some compelling reasons, it should be followed by the words ‘or equivalent’. Q. Rules for Awarding Tenders The tender is usually awarded to the lowest evaluated tender. All aspects, which are to be taken into account for evaluating the tenders including the method to be adopted for evaluation of tenders and the techniques for determining the lowest evaluated responsive tender for placement of contract are to be incorporated in the tender enquiry document in clear and comprehensive manner without any ambiguity and/or confusing stipulations. In addition to the above, all the tenders are to be evaluated strictly on the basis of the terms and conditions incorporated in the tender enquiry document (based on which offers have been received) and the terms, conditions etc. stipulated by the tenderers in their tenders. No new condition should be brought in while evaluating the tenders. Similarly, no tender enquiry condition (specially the significant/essential ones) should be over looked while evaluating the tenders. 26
  • 27. Compiled by Dayal Divyanshu. Portfolio www. 2purchase.wordpress.com, dayal1005@gmail.com (Source: Various Notes, Rules, Guidance from Govt. of India) After completing the entire evaluation process for the responsive tenders on equitable basis, the bids are to be entered into a ranking statement in ascending order of the evaluated prices (like L1, L2, L3…etc.) along with other relevant details, so that a clear picture of their standing as well as comparative financial impact is available at a glance. Before placing the contract on the lowest evaluated responsive tender (L1), the purchase organization is to ensure that the price to be paid is reasonable. The broad guidelines for judging the reasonableness of price are as under:  Last purchase price of same (or, in its absence, similar) goods. Current market price of same (or, in its absence, similar) goods.  Price of raw materials, which go into the production of the goods.       Receipt of competitive offers from different sources. Quantity involved. Terms of delivery. Period of delivery. Cost analysis (material cost, production cost, over-heads, profit margin). R. Remedies and Enforcement Remedies/enforcement of public procurement contracts can also be sought under the provisions contained in the Indian Contract Act, 1872, the Specific Relief Act, 1963 and the Sale of Goods Act, 1930. In addition to the above, a tendering process can be subject to judicial review before a High Court in India inter alia on the ground of arbitrariness, fairness in action, malafide or violation of a fundamental or legal right as enshrined in the Constitution of India. Arbitration The conditions governing the contract shall contain suitable provision for settlement of such disputes/differences binding on both the parties. If a dispute/difference arises, both the purchaser and the supplier shall first try to resolve the same amicably by mutual consultation. If the parties fail to resolve the dispute by such mutual consultation within twenty-one days, then, either the purchaser or the supplier may give notice to the other party of its intention to commence arbitration. In addition, for violation of the reasonableness doctrine state action is amenable to judicial review by the competent High Court in exercise of the constitutional writ jurisdiction. 27

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