Contracting a sickness

Last Updated: Fri, Dec 16, 2011 04:03 hrs

The government wants to rewrite the contracts for ultra-mega power projects, which will allow companies with pithead-based plants to sell surplus coal to their other power plants. This is supposed to ease the current shortage of coal in the country, though the Comptroller & Auditor General has said such a concession given to Reliance Power’s Sasan project in 2008 will result in a benefit of Rs 42,009 crore to the company over a period of 25 years. There is also a demand to revisit the production-sharing contract with Reliance Industries for the D6 gas field in the Krishna-Godavari basin in view of falling production — though it can produce up to 81 million cubic metres of gas a day, the current output is about half of that. The government has argued that the company should be allowed to recover not the full project cost from the revenue (the rest is profit which is shared with the government), but only that which corresponds to the current low production. Reliance Industries has called the move illegal and served an arbitration notice on the government. And there is the likelihood that the mobile telephony contracts may be amended to allow liberal mergers and acquisitions. While older operators want extra spectrum, the newcomers with loads of extra spectrum are without customers.

Clearly, the government is finding itself unable to draft watertight contracts. Typically, the government hires professional services firms to write these documents. That the contracts need to be revisited shows the incompetence of the consultants who draft these contracts and of the bureaucrats who vet them. The consultants are required to put the documents through lawyers; they have little incentive to hire competent, relatively expensive lawyers. That’s why there are too many bad contracts around. Consider the contract with GMR-led Delhi International Airport Ltd, which said the Airports Authority of India (AAI) would get 46 per cent of the revenue. But the concessionaire took advance rents from developers, which it didn’t have to share with AAI. It also created a new user charge, called the “airport development fee” — which didn’t have to be shared with the government, unlike the user development fee charged by the Hyderabad and Bangalore airports. Or take the example of the Noida Toll Bridge Company. It was promised a 20 per cent annual return – not on equity, but on the entire cost of the project – and every shortfall would get added to the project cost. It later came to light that the project cost had indeed shot up because of this, which had sharply raised the concession period.

In contrast, none of the 200 or so model concession agreements drafted by the Planning Commission in the last few years has had to be rewritten. It would be worthwhile for the various ministries to learn how the Planning Commission drafts these documents. True, its ambitious Hyderabad Metro project (where the concessionaire would pay the government annually) ran aground because Ramalinga Raju’s business went belly up. But it was able to extract a penalty of Rs 65 crore and put the project back on the block in good time.

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