Tuesday, January 13, 2009

'Contracting' problems


Are contract terms sacrosanct? Yes, they have to be, unless you want to be drawn in cases of perennial litigation. Its important to understand that a large contract makes or breaks a promoter. GMR is identified by Delhi Airport, GVK by the Mumbai Airport, Reliance Power by Sasan UMPP and the corporate brands are identified by these assets. We have a lot of cases in the infrastructure space where the incumbent contractors have been asking for a change in contract terms because the economics that they had envisaged have not panned out.

The idea is preposterous and will put the whole PPP program at risk.

1) Bidding will become meaningless and promoters quote crazy numbers hoping for a future adjustment in contractual conditions. Risk will go for a toss.

2) Extended litigation by the parties that were L2 and more in the bids, bringing infrastructure development to a stand still.

It is not as if govts use feasibility studies for different bid models (think Navsheva - Sewri or the the earlier ballooning contracts in many infrastructure projects), while choosing the winners. As far the bid evaluation is concerned, once the technical specs have been met, the govt. does not care who executes the project as long it makes the max. money (or looses the least money). While ensuring that projects get completed does indeed need top priority, in case companies are unable to meet their obligations the govt can cancel the existing contracts and call in fresh bids (with significant up front deposits to ensure that there is no random bidding). The govt. does not participate in the upside of projects, so it should not bear the downside risk.

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