Financing bidding process for big PPPs needs review

By Anjan Dasgupta, HSA Advocates
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In public-private partnership (PPP) projects in India, financial closure indicates the commencement of the concession period. Financial closure is defined as a stage when all the conditions of a financing agreement are fulfilled prior to the initial availability of funds. Financial closure is attained when all the tie-ups with banks and financial institutions for funds are made, and all the conditions precedent under the financing agreements to initial drawing of debt are satisfied.

Anjan Dasgupta
Anjan Dasgupta

The date on which the conditions precedent set out in the concession agreement are met and financial closure is achieved is the appointed date. The appointed date is deemed to be the start date of the concession period, and the concessionaire is permitted to begin construction of the project from that date. Typically, concession agreements provide anywhere between 180 and 240 days after signing the concession agreement to achieve financial closure.

This important milestone in the project cycle is often delayed, or not achieved in many successfully awarded PPP projects in India for various reasons thus rendering these projects unviable or resulting in their ultimate termination. The global financial crisis, coupled with India’s own mounting pressure on domestic banks from non-performing loan assets, are having a major impact on financial closure of PPP projects.

This is more particularly affecting mega infrastructure PPP projects. Given the tighter debt finance market, combined with the emergence of mega infrastructure PPP projects, it is time for the government to revisit standard bidding practices and consider alternative approaches that will help achieve timely financial closure.

Banks and financial institutions typically fund 60-80% of the total project cost of PPP projects by way of project finance. This makes banks and financial institutions vital stakeholders in any PPP project, particularly the mega infrastructure PPP projects, where the total costs amount to billions of dollars. It is normal to get these banks and financial institutions involved in such a PPP project only after the bidding process has been completed and the PPP project is awarded to the successful sponsor/bidder.

At the stage when the banks and financial institutions get involved in the project, they are often not allowed to make any changes to the concession agreement and to related project documents, which in turn has a direct and adverse impact on financial closure of the project.

At times during the bidding process sponsors are asked to submit to the government, along with their bids, letters of intent from their banks and financial institutions confirming their willingness to fund the project subject to full due diligence, credit approval, appropriate documentation and fulfilment of conditions set out in the finance documents.

Such a letter also states that the letter is not a legally binding commitment on part of the concerned banks and financial institutions. Banks and financial institutions often take the letters seriously to ensure their involvement in a project. However, these letters should not be regarded as a real commitment, as most banks and financial institutions issue these letters without going through any internal credit approval.

To avoid delays in financial closure and to make PPP projects bankable, the government should require financial commitment at the time of a bid. This is vital for the timely financial closure of mega infrastructure projects.

This requirement will force banks and financial institutions to complete their due diligence process, put together a detailed financial package, obtain credit approvals, and in some cases, also agree to the financing documentation with the bidders. This would considerably extend the timeframe to complete the bidding process, however, this would help sponsors/bidders to show that financing can be provided and the PPP project can begin without delay.

Sponsors/bidders are often reluctant to agree and include this requirement of commitment from banks and financial institutions in the bid process, as this would involve fee payments and substantial legal and other costs at a stage when there is no certainty that they will win the bid. To address this issue the government may agree to cover the costs of the losing bidders up to a pre-agreed amount.

The government should not require full commitment from banks and financial institutions for all bids for PPP projects, but rather only for mega infrastructure ones; projects that have structured novel risk mitigating methods; and those where there is a doubt about the bankability of such projects.

Anjan Dasgupta is a partner at HSA Advocates. HSA is a full-service firm with offices in New Delhi, Mumbai, Bangalore and Kolkata.

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