Proposed New Model Concession Agreement for ports sector

The Ministry of Shipping has proposed a new Model Concession Agreement (MCA) for the Port Sector. The new MCA is expected to replace the existing MCA which is in existence since January 2008. MCA is nothing but a contract which sets the terms and conditions for the execution of a project. The contract is signed between the concessionaire (private party) and the government. The proposed new MCA is expected to take into account suggestions provided by various reports by Member Planning Commission (2010), Indian Ports Association (IPA-2015) and Kelkar Committee Report (2015).

Objectives of the proposed MCA

• Provisions to handle unforeseen circumstances efficiently.
• To attract more investments from the private sector.
• More equitable allocation of project risks.
• Removing ambiguous provisions form the existing MCA.

Key features

The new MCA has made 11 prominent changes to the existing MCA:

1. Change in equity holding to provide exit route for concessionaires: As of now, the Concessionaire shall hold 51% equity until 3 years after Commercial Operation Date (COD) (date on which the concessionaire receives the project completion certificate) and 26 % thereafter for another 3 years. Hence, the concessionaire is free to exist after 6 years from COD. The proposed MCA provides that the Concessionaire may approach the Concessioning Authority to waive the equity holding requirement during the second 3 year term if thay have achieved the required performance parameters during the first three year period.
2. Grievance Redressal Mechanism: The proposed MCA has provided for a grievance redressal mechanism through which the concessionaire will create a grievance redressal portal on their website with adequate monitoring system and timelines for redressal. The current MCA does not have such provisions.
3. Refinancing of debt: The rationale for the amendment is to facilitate availability of low cost long term funds to the concessionaires to enhance the financial viability of the projects. It is based on the Model Tripartite Agreement approved by Department of Economic Affairs.  Under this agreement, with the completion of one year of operation, the Concessionaire can issue Bonds for refinancing of debt. This is expected to optimize the financial cost of the projects.
4. Amendment in Definition of “Change of Law”: The proposed MCA shall compensate concessionaires for all changes in law except for imposition of “New Direct Tax”. This will ensure that the concessionaire gets compensation for all material changes in law.
5. Provision for mid-term review of concession.
6. Approval of Discounts on Ceiling Rates for the Purpose of Recovery of Revenue share.
7. Provision for Commercial Operations before COD.
8. Improved Utilization of Project Assets and Higher Productivity.
9. Provision of additional land, utilities and other services for the concessionaires.
10. Replacement of “Actual project cost” with “Approved project cost”
11. Concessionaires to have an option to adopt changed/revised tariff guidelines as and when issued by the government. They can have the option to stick to the new/revised guidelines within 90 days of publication in official gazette.

Discussion: Significance of the New Model Concession Agreement

India has at present 12 major ports. This new MCA is expected to bring in more investments from the private sector and even from the overseas players. The provision that makes available low cost long term funds to concessionaires will help in improving the financial viability of the projects. The provision allowing the concessionaires to issue bonds after completion of one year of operations will help them in refinancing debt and optimization of the finance cost of the project. The removal of ambiguous provisions from the existing MCA will augur well for the growth of the port sector.