Competition Concerns in Structuring Concession Agreements in PPP projects

Introduction:
Public-Private Partnership (PPP) is a contractual arrangement between a government or statutory entity on the one side and a private sector company on the other side, for delivering an infrastructure service.[1] It is an alternative method of procurement, which involves substantial risk-sharing with the private partner. PPP is a departure from a traditional procurement model. In recent times, Governement of India (GoI) has made some serious efforts to mainstream PPP in infrastructure, and today, India is one of the most mature PPP markets.

The intricate arrangements that encompass a PPP project are usually enshrined in agreements commonly known as the concession agreement. A concession agreement refers to a contract between a private company and a government entity that gives the private company the right to operate a particular business within the government’s jurisdiction, subject to specific terms.

A concession contract, grants exclusive rights to a private entity from the government to operate, maintain, and sometimes even carry out investment in a public utility for a given period of time.[2] In return, the private party pays either a fixed sum, a percentage of revenue from the utility, or a combination of the two to the government for exclusive rights over a facility. Revenue to the private party comes from the user fee charged from the users of the facility. Concessions are granted in numerous sectors from roads, airports, ports, metro, railway station redevelopment, and healthcare as well as information technology.

A concession agreement has also been viewed as a device that can be used to create competition for the market, in a situation of absence of competition in the market. However, there also exist several competition laws concerns which can be resulted from an improper concession agreement. This article attempts to highlight the possible competition concerns arising out of concession agreements in PPP projects.

Competition Concerns in Concession Agreements:
The competition in the Indian markets is regulated by the Competition Commission of India (CCI) in accordance with the Competition Act, 2002. The preamble of the Act foists a responsibility on the Commission to prevent practices having an adverse effect on the competition, to promote and sustain competition in markets, to protect the interests of consumers, and to ensure freedom of trade carried on by other participants in markets.[3]

The domain of the CCI is wide enough to cover the activities taking place in any sector, having an adverse effect on the market. A concession agreement is also not immune from the scrutiny of the Commission since it falls under the ambit of a commercial agreement between a private player and a government entity. The exception for government in this regard is only with respect to functions which are sovereign in its nature. [4]

The advent of competition law has placed a crucial responsibility on the makers of a concession agreement. The most relevant anti-competitive practices which a well-structured concession agreement should seek to prevent are: “(i) entering into anti-competitive agreements (ii) unfair or discriminatory conditions on which services are provided or (iii) unfair or discriminatory determination or revision of price, or (iv) limiting or restricting or denying, directly or indirectly, access or (iv) using the dominant position obtained under a concession agreement to enter into or protect its or a related entity’s position in another relevant market.[5]

The competition concerns in a concession agreement can take place at different stages, during the selection of concessionaire, structuring of the concession agreement, granting of project, implementation as well as the re-negotiation prospect which is unavoidable in a long-term contract like PPP.[6] The project cycle of PPP generally starts with the selection of concessionaire and for identifying a suitable private player, the competitive bidding process is the most prominent method adopted in the Indian regime. There is a need for the presence of competition throughout this process for realizing the purpose of PPP, which is to obtain the best value for money. The entry of private players is in accordance with the policy document or Model Bid Documents (MBD). But on a perusal of such documents, it can be observed that the number of pre-qualified bidders is fixed to a maximum of 6 to 7.[7] The arbitrariness in the pre-fixing of the number of bidders is going to exclude the potential bidders who have technical expertise. Thus, such a document is affecting the competition regime at the entry-level itself.

Further, the dominance of a private party in the market occurs when there is bundling of essential activities in an infrastructure facility and the essential facilities are contracted out to a private party. The dominance can lead to its abuse when there is dilution of public interest by the private party.[8] Similarly, a concession agreement grants exclusive rights to the private party.The ministry justifies such provisions by stating that it is to attract the potential investors for the project. However, the exclusivity provisions are prohibited under the Competition Act. Such clauses in the agreement controls the services or market that poses an adverse effect on competition in the market. Hence, the onus of proof lies on the parties to the concession agreement to prove that such a clause will not result in an adverse effect on competition.[9]

The long duration and the huge size of the infrastructure projects is bound to have some conflicts in the life cycle of the project which requires renegotiation. This often poses a contractual risk in the concession agreements. The competition concerns which arise out of renegotion can be related to either clause specific renegotiation or overall restructuring of concession agreement.  The CCI may scrutinize the renegotiated concession agreement and its clauses if they raise concerns under Section 3 and Section 4 of the Competition Act.

Conclusion:
The PPP model for infrastructure development is a way forward to stabilize the disrupted economy. The CCI in recent times has asserted its role by actively probing into anti-competitive practices taking place in different sectors. Therefore, in future government bodies will have to maintain the utmost transparency and efficiency while designing a concession agreement. The legal context of concession agreement can be found across the diverse fields like competition, contracts, environmental law, labour laws. The formulation of the concession agreement will have to commensurate with each of the above-stated fields, thereby imposing greater responsibility on the government body entering into PPP. 

Author: Yagya Sharma ( Intern, CIRC)

1PPP Guide for Practitioners, Department of Economic Affairs Ministry of Finance Government of India (April 2016), https://www.pppinindia.gov.in/documents/20181/33749/PPP+Guide+for+Practitioners/e3853cb9-ac07-4092-b8ac-60a8c4d4ed35.
2Ramrao Mundhe, Infrastructure Concession Contracts: An Introduction, CUTS INTERNATIONAL (July 2, 2018), http://www.cuts-international.org/pdf/Viewpointpaper-> InfrastrConcessContract-intro.pdf.
3Competition Act 2002, Preamble.
4Competition Act 2002, s 2(h).
5Piyush Joshi & Anuradha R.V., Study on Competition Concerns in Concession Agreements in Infrastructure Sectors (June 2009), https://www.cci.gov.in/sites/default/files/ConAgreInfraSect_20100401141506.pdf.
6Bhagyalakshmi R., Changing Contours of Competition: Analysis of Market Regimen in Infrastructure Projects by PPP, NLSIU Book Series -5 (2019), http://nlspub.ac.in/wp-content/uploads/2019/05/NLSIU-Book-Series-5-Public-Private-Partnership-in-India.pdf.
7Model RFQ for Pre-­Qualification of Bidders for PPP Projects (OM No. 24 (1) /PF. II/ 2006), https://www.pppinindia.gov.in/documents/20181/36970/Model+Request+for+Qualification+for+PPP+Projects/a77f85bf-a4e6-4bd2-a901-78730f0942e6.
8Supra note 10.
9Id.

About Yagya Sharma ( Intern, CIRC)