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Model Concession Agreement, or Why Environmental Clearances are Not Required Before Financial Closures?

There is something called a model concession agreement, which is tied with what is termed a financial closure. Model Concession Agreement (MCA) forms the core of public private partnership (PPP) projects in India. The MCA spells out the policy and regulatory framework for implementation of a PPP project. It addresses a gamut of critical issues pertaining to a PPP framework like mitigation and unbundling of risks; allocation of risks and returns; symmetry of obligations between the principal parties; precision and predictability of costs & obligations; reduction of transaction costs and termination. The MCA allocates risk to parties best suited to manage them. The preparation of contract documents can be a major administrative task in PPP development and may also require a considerable amount of time. The availability of standardized contract documents or model contract agreements with the provisions of model clauses can be of great help in this respect. It helps considerably in streamlining the administrative process by reducing the time in preparing such documents and getting them cleared from the concerned government agencies.  Model concession/contract agreements also reduce the cost of legal fees in preparing contract documents. Considering its advantages many governments have developed MCAs for their PPP programmes. According to the model concession agreement, ‘financial closure’ is defined as fulfilment of all conditions precedent to the initial availability of funds under the financing agreements. The phrase ‘conditions precedent’ refers to commitments to be met by the developer. After loans are tied-up, lenders agree that the ‘conditions precedent’ in the loan document are fulfilled. These are the conditions to be fulfilled prior to when you can start working on a project. These can be land acquisition, rehabilitation, and environmental clearances. While the developer’s responsibility will be arranging for shareholders’ funds, setting up an escrow account, the development authority would have to deal with the necessary state support required for the project in terms of clearances and land acquisition. Now, the question is: is there anything wrong in this mechanism even without the project being properly conceptualized and sent over for environmental clearances? On paper, everything is deemed to go haywire, but, if one were to connect PPP, model concession agreement, financial closure and SPV models within the larger ambit of project finance, this route is apparently considered the silk route (for smoothness of operationally more than anything else), since banks have their job cut out in terms of the increased number of companies which would approach them for financial closure. Add to that IFIs’ stakes in equity, nationalized banks + private banks consider it all the more worthwhile and profitable (in some goddamn sense) to honor the model concession agreement.

Originally posted here


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