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Sector: State Highway  |  Module 1: PPP Background

PPP supporting environment

Legal environment and policy support for PPPs
Laws that enable or do not limit PPPs

Since they are a contractual arrangement, the legal environment is very important to PPPs. At a minimum, existing legislation and other legal requirements must not prohibit the use of PPPs. In particular, it must be permitted for private firms to provide the infrastructure services that are the subject of the PPP. There have been cases in the past in India where an existing law made it very difficult for a private partner to enter into a meaningful PPP contract (eg, in the case of airport PPPs).

The general legal structure may include aspects that prohibit PPPs or, while not prohibiting PPPs, create legal barriers that inhibit them. In cases where there is no prohibition on a particular PPP, private sector partners may still not find the project sufficiently attractive unless the legal framework is stronger and clearer, granting them sufficient comfort that their investment will be protected and the terms of the contract honoured.

This general legal enablement of PPPs can cover a wide range of areas, such as:

  • regulation of tariffs
  • award of the PPP
  • what secondary approvals are required and how these can be obtained
  • dispute resolution options (right to arbitration etc)
  • right to sell/grant security over the assets
  • rights to exclusive service (monopoly), existing or able to be assigned
  • protections of foreign exchange convertibility, to enable repatriation of proceeds from the project (in the case of foreign investment)

Without a strong framework in some of these areas, investors either will not be interested in the project, or may demand higher returns, government guarantees or other compensations for the legal and regulatory risk they perceive. 

When a PPP policy is established a legal review should be carried out as part of an overall assessment of the enabling environment for PPPs. This involves analysis of legislation and other legal requirements governing all aspects of PPP schemes. The legal review will make an assessment of regulatory requirements (such as permissions) for, and any legal barriers to, implementation of the project as a PPP. It should also highlight where it may be necessary or desirable to introduce new legislation or amend existing legislation so as to enable the project to take place, to provide a clearer legal basis for the PPP scheme or to provide the necessary regulation of the infrastructure services.

Beyond ensuring there is no active legal restraint on private participation, some jurisdictions have chosen to create a specific law, an Infrastructure Act or similar, whose purpose is to explicitly allow and support PPPs. Some Indian States, including Gujarat, Punjab and Andhra Pradesh, have enacted such laws.

A specific law can provide some advantages by consolidating legal details into a single point of reference. The preparation of a single Act can also be an opportunity to explicitly specify procedures that must be followed for PPPs, such as for procurement and dispute resolution. This can be advantageous where oversight and procedural provisions are less well established.

However, sufficient legal support can be achieved through reliance on the supporting legal framework embodied in existing laws, regulations and judicial decisions, often with amendments where necessary to ensure the necessary powers to participate in PPPs are vested in the public sector agencies.

Dispute resolution and arbitration processes are also an important part of the supporting legal environment. Click here <link to Module 2, Phase 4, Dispute Resolution> for more on the arrangements for dispute resolution in India.

 

 

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