How a weak record in en­forc­ing con­tracts can hit In­dia hard


Fall­ing re­new­able en­ergy tar­iffs have prompted some state gov­ern­ments to tell gen­er­a­tors that they can’t buy the en­ergy at prices agreed upon, ex­pos­ing the busi­nesses to risks due to poor en­force­ment of con­tracts in Asia’s third-largest economy.

In­vestors pan­icked ear­lier this year when the south­ern states of Andhra Pradesh and Kar­nataka, which ac­count for a quar­ter of the coun­try’s wind in­stal­la­tions, back­tracked on many pur­chase agree­ments to lower prices. Their rea­son— cost per unit of power had fallen to a record low of Rs3.46 the coun­try’s first wind auc­tions held in Fe­bru­ary.

The is­sue goes to the heart of any com­mer­cial economy, said Ra­jiv Ran­jan Mishra, man­ag­ing di­rec­tor at the In­dian arm of Hong Kong­based power de­vel­oper CLP Hold­ings Ltd. “You can ex­tend it to ev­ery sin­gle con­tract and this can cause may­hem,” he said. “Par­tic­u­larly in a sec­tor where you have com­mit­ments for over 20-25 years, if you can’t de­pend, then it will be ter­ri­ble news.”

The coun­try has con­sis­tently ranked among the worst places to do busi­ness, in part be­cause of its weak record in en­forc­ing con­tracts—in­dia ranked 172 out of 190 coun­tries in that cat­e­gory, be­hind Egypt and Zim­babwe, ac­cord­ing to the 2016 World Bank Do­ing Busi­ness re­port.

In wind alone, 3 gi­gawatts (GW) of ca­pac­ity worth Rs48,000 crore ($7.5 bil­lion) in four states is fac­ing un­cer­tainty be­cause of rene­go­ti­a­tion, credit as­ses­sor Crisil Ltd said on Mon­day.

That shows how the sanc­tity of con­tracts—the Achilles’ heel of the In­dian economy since it opened up to for­eign in­vest­ment in the 1990s—con­tin­ues to be vi­o­lated. The move is an at­tempt to lower costs at bank­rupt dis­trib­u­tors that ac­cu­mu­lated Rs4.3 lakh crore ($67 bil­lion) of debt as of Septem­ber 2015 and lose money on ev­ery unit of elec­tric­ity sold.

The wind-con­tracts is­sue also con­tra­dicts Prime Min­isin ter Naren­dra Modi’s goal of build­ing 175GW of re­new­able ca­pac­ity by 2022. The tar­get may re­quire over $200 bil­lion in in­vest­ment, much of it from over­seas.

“In­dia needs for­eign cap­i­tal to grow its re­new­able en­ergy sec­tor and that money will quickly turn away if there is such bla­tant flout­ing of the rule of law,” said Ran­jit Gupta, chief ex­ec­u­tive of­fi­cer at wind­pro­ject de­vel­oper Ostro En­ergy Pvt., backed by pri­vate eq­uity in­vestor Ac­tis Llp.

While open­ing wind power pacts is the most re­cent ex­am­ple of vi­o­lat­ing con­tracts, it has hap­pened else­where.

In June, the power dis­trib­u­tor for the north­ern state of Ut­tar Pradesh can­celled pur­chase agree­ments with Ba­jaj Ltd’s five coal-fired plants, say­ing the agreed prices were too high and hin­dered the state’s abil­ity to pro­vide elec­tric­ity to all cit­i­zens.

Ba­jaj En­ergy has chal­lenged the re­tailer’s de­ci­sion in court. A com­pany spokesman de­clined to com­ment, as the mat­ter is be­ing lit­i­gated.

In in­fra­struc­ture, a res­i­dents’ group went to court in 2012 to scrap toll on a road con­nect­ing the cap­i­tal New Delhi with Noida.

The con­tract be­tween the pri­vate de­vel­oper and Noida per­mit­ted the for­mer to re­cover con­struc­tion and main­te­nance costs, in ad­di­tion to a 20% op­er­at­ing profit.

The Al­la­habad high court con­tended that the op­er­a­tor had re­cov­ered its cost and or­dered the toll be scrapped. The mat­ter is now with the Supreme Court.

Gov­ern­ments use the con­cept of “pub­lic util­ity” as a rene­go­ti­a­tion ploy for projects that con­cern the price of power or toll for a road, ar­gu­ing that the greater good out­en­ergy weighs nar­row com­mer­cial in­ter­ests, ac­cord­ing to Ab­hishek Dutta, chief ex­ec­u­tive part­ner at law firm Aureus Law Part­ners.

“To re­duce in­vestor risk it’s im­por­tant to draft the con­tract in a way that de­fines what pub­lic in­ter­est would be so as to en­sure more cer­tainty over the life of a con­tract,” Dutta said in a phone in­ter­view.

Mean­while, as wind de­vel­op­ers con­tinue to hold talks with Andhra Pradesh and Kar­nataka, the Cen­tre has stepped in. The min­istry of new and re­new­able en­ergy wrote to seven states, in­clud­ing the two in ques­tion, to de­sist from open­ing con­tracts, as per a 21 Au­gust let­ter seen by Bloomberg News. BLOOMBERG


In wind, 3GW of ca­pac­ity in four states is fac­ing un­cer­tainty be­cause of rene­go­ti­a­tion

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