Introduction

Since decades, India’s infrastructure policies and initiatives have evolved around and have been catering to the traditional infrastructure segments i.e roads, highways, ports, airports, power plants and recently high-speed metro rails. However, significant shifts are now being observed, and Solid Waste Management (“SWM”) projects have assumed importance and are now being kept at the forefront of national and state level initiatives targeting development and innovations in the infrastructure sector. Management of waste is no more considered just a regular function to be performed by municipal corporations, instead it has become one of the core focus areas of the national infrastructure agenda. This transition stems again from the rapid development of other sectors where huge volumes of regular and hazardous waste are generated, management and disposal of which is a very time-consuming and costly affair which adds to the overall costs of the project development. As is with other infrastructure sectors, an increase in the implementation of SWM projects has highlighted the urgent need to understand the nuances and challenges that need to be navigated in relation to the contractual model adopted, negotiation of key project documents, issues specific to single sponsor and consortium developed projects and the complex and long journey to the Financial Close (“FC”).

Development of SWM projects on the Public Private Partnership (PPP) mode

PPP mode has emerged to be an efficient and by far the most sustainable solution to the complexities surrounding these projects which are diverse ranging from commercial/technical risk (typically handled by the private partner), regulatory/ political risk (usually handled by the government who is responsible for providing land and obtaining permits) and financial risk (this is often shared and supported by government in form of viability gap funding). SWM project implementation on the PPP mode revolves around the principle that risk allocation is best managed when it is left to the party best equipped to deal with the specific risk.

Private contracting, although is an option to execute these projects, it is more suited for the implementation of simple projects and generally lacks the resources and risk appetite to cope up with modern, innovation-heavy projects, notably most large scale SWM projects typically will comprise of ‘Engineered Sanitary Landfills’, ‘Composting/Bio-Methanation plants’, ‘Material Recovery Facilities’ and ‘Waste to Energy Plants/Incinerators’. These facilities are very costly, and the return on investment is never short term. Alternatively, the PPP model provides for development on a long-term basis spanning a construction period typically ranging 3 to 5 years and operations period ranging 15 to 20 years, which enables the private Developer (“Developer”) to secure long-term loan from the banks and also recover the return made on its investment.

Single Sponsor vs multi-jurisdictional consortium of Sponsors supported SWM projects

The term ‘sponsor’ when used in context of these projects refers to the entity that primarily invests and funds the project either in the form of equity or by procuring loans from lenders, generally both equity and debt is used to fund the projects. Whether a certain developer will arrange for the entire funding and other project obligations on its own or will invite other entities to become co-sponsors depends on many factors including but not limited to the risk involved, capital required and any specific technology that the project may require. Set out below are few nuances observed with single sponsor and multi-jurisdictional consortium backed projects.

1) Single Sponsor backed projects

The advantage here is that the decision-making process is smooth and simple, since the time, planning and resources required to coordinate and get all the sponsors to agree on critical time sensitive decisions is not required. There is no requirement for lengthy and complicated negotiations on risk and profit sharing and a detailed consortium agreement. However, the drawback is that the entire commercial and technical risk of the project is concentrated with a single sponsor which of course also exposes the lenders more, as compared to a consortium-backed project. Also, it is devoid of the benefit that there is no other partner to either bear the risk or contribute technology, obviously obligations are passed on to EPC and O&M Contractors, but they don’t have skin in the game as is the case with consortium partners who look at the bigger picture and are not just concerned with their margins. Given these limitations, the single sponsor model is not very suited for complicated, high stake and capital-intensive projects that run for a very long duration.

2) Issues with multi-jurisdictional consortium backed projects

The consortium of sponsors comes together for a variety of reasons, ranging from one partner lacking adequate technology, sufficient funds not being available with a single sponsor, not meeting the required financial and technical criteria, or the project’s complexities are such that international expertise is required that may not be available with companies situated in the jurisdiction where SWM project is to be developed.

While a multi-jurisdictional consortium arrangement provides significant commercial and technical confidence, it also becomes a pain point that must be carefully planned and managed effectively. The consortium post award of the project will typically incorporate a special purpose vehicle (“ProjectCo”) to undertake obligations under the main agreement (main agreement could be referred to as the ‘Concession Agreement’/‘Treatment Services Agreement’/Offtake Agreement/Waste to Energy Agreement, depending on the scope of work involved) with the Authority and the Operations and Maintenance Company (“OpCo”) with whom the ProjectCo will contract and pass on the operation and maintenance obligations under the main agreement. The incorporation of these entities requires a fair bit of corporate compliances including but not limited to drafting, filing of constitutional documents, drafting and issuance of resolutions for setting up the board of these entities, multiple board resolutions for approval and signing of the project documents and the financing documents as pre-requisites to FC. Since sponsors based in different jurisdictions are involved, these actions need to be coordinated well in advance to account for the differences in internal policies and specific jurisdictional requirements that each of the sponsors could be subject to.

Process typically followed/Critical documents agreed on and executed by the Consortium as prerequisites to FC

1. Execution of the Shareholders’ Agreement setting out details on incorporation of the ProjectCo and OpCo

The Shareholders' Agreement remains a critical and fundamental document that must be extensively discussed and needs to provide the solution for all foreseeable bottlenecks. This agreement will clearly provide for the

  • Details on equity commitment required from each sponsor with clear bifurcations on initial capital contribution, percentage of shares to be allotted to each sponsor, equity bridge loan to be procured by each shareholder and stand-by funding, if applicable.
  • Composition of the Board of Directors - which sponsor will have the right to appoint Chief Executive Officer (“CEO”), Chief Financial Officer (“CFO”), Chairman etc on the board of project companies. The powers of the CEO, CFO are deliberated on extensively, the consortium member with maximum equity would want to retain actual control, at the same time, the other consortium partners would also push for adequate representation.
  • List of Board Reserved Matters - matters requiring majority affirmative vote of the board of directors with at least one representative appointed by each shareholder.
  • List of unanimous Shareholder Reserved Matters - these matters shall require a unanimous decision of the shareholders.
  • Agreement on Governing Law and Dispute Resolution - The choice here, specially where multi-jurisdictional parties are involved, is almost invariably international arbitration with a neutral seat. However, at the negotiation stage, the sponsor with the maximum equity commitment will push for a seat and venue favourable to it, the other sponsors will try to ensure that a neutral seat and venue is agreed to. All parties will want to make life a little easier if disputes do occur which more often than not, do not resolve quickly and inevitably mean extra financial burden on parties to the dispute.

2. Incorporation of the ProjectCo and the OpCo

The ProjectCo and the OpCo will typically be incorporated in the jurisdiction where the project is located. The project awarding Authority will never accept a shell company that has been incorporated offshore. To facilitate this process, local counsel, and experts in corporate compliance relevant to the project jurisdiction will typically be engaged. These professionals will need to coordinate, and source required documents from the sponsors based in different jurisdictions. Each consortium partner has its own set of corporate laws, notary and authorisation requirements. Mostly all constitutional documents are required to be notarised and apostilled by the relevant authorities in each country’s jurisdiction which makes the process complex and long drawn. Additionally, all corporate approvals, resolutions, power of attorneys require internal approvals from each sponsor, who are responsible for ensuring compliance with the specific regulations applicable to it.

3. Negotiations and signing off on Project Documents

All project documents including but not limited to the Concession Agreement, the Engineering, Procurement and Construction Contract (“EPC Contract”), the Operations and Maintenance Contract (“O&M Contract”), the Early Works Agreement (if applicable), the Owner’s Engineer Agreement, require consensus from all consortium partners on all critical provisions. Typically, the consortium members engage an external legal firm to represent them before the Offtaker, manage the entire documentation process, and conduct negotiations end to end up until FC. However, this process is not as straightforward as it may seem, parties need to go back to their internal committees for all major approvals, the timelines and the complexities involved vary as per the specific jurisdiction of the sponsors and their internal corporate policies.

4. Negotiations and signing off on the Financing Documents

Closing and execution of Financing Documents is one of the most time taking process which requires all sponsors to first align internally. After this first level is cleared, considerable time is consumed on bringing together all the banks comprising the lending consortium to provide their final sign off. The ability of the consortium banks to revert on the common timelines agreed will again depend on very prompt and tactful planning of the complexities that are specific to each of the banks’ jurisdiction and even their own internal committee approvals. This process may not be uniform for all banks, delay at the end of one bank may also stall the process and delay the process of FC.

5. Responsibility to capitalize the SPVs

Once the ProjectCo is incorporated successfully, the sponsors then need to focus on capitalising the same in proportions agreed to in the Shareholders’ Agreement. A precursor to this is opening of bank account of the company, this also requires extensive compliance documentation and board resolutions notably resolution for bank account signatories. This resolution is discussed on extensively between the Sponsors, while the CFO of the ProjectCo/OpCo, as the case may be, is authorised, the other Sponsors would also want to nominate a representative each who will jointly authorise all the banking transactions.

Critical negotiations points that impact the closing and execution of the critical Project Documents

1. Concession Agreement - This is the primary document executed between the Government (Municipality or an Urban Local Body) and the Developer, who will usually contract through a special purpose vehicle. This is the bible document that will set out detailed provisions around the scope of work of the Developer, obligations of both parties, performance standards, construction and operations timelines, payment framework (tipping fees), penalties and liquidated damages for breach of obligations, guarantees and indemnities, termination events and mechanics around the transfer of facility back to the Government at the end of the concession period. Negotiations under this document largely evolves around allocation of major risks and financial sustainability. Given the complexity and long duration of this agreement, all the provisions are discussed at length before they can be considered closed by the parties. However, for sake of brevity, below set out are few provisions which assume great significance from both Government and Developer’s perspective -

a) Guaranteed Waste Quantity and Quality (Risk pertaining to the “Raw Material”) -

The Concession Agreement will contain provisions on the obligation of the Government to supply fixed and pre-agreed quantity of waste (“Minimum Guaranteed Quantity/MGQ”) which is crucial for the waste processing plant to run at optimum capacity. In some jurisdictions, if applicable, segregation of wastes could also be made mandatory which enables the Developer to negotiate and push for definition of “Acceptable Waste” to ensure the plant is not dumped with mixed and contaminated waste. Government pushes for flexibility in the supply obligations to account for seasonal and variations in MGQ which cannot be attributed to its default. Developer will focus on having clear penalties set out to say that Government should be liable to pay, in the event the plant cannot be operated on the optimum capacity due to the MGQ and/or criteria set out for Acceptable Waste not being met by the Government.

b) Revenue and Payment Security -

Payments to the Developer under the Concession Agreement usually assumes the form of ‘Tipping Fees” to be paid basis per tonne of the solid waste collected, transported, processed and disposed. Government pushes to link the payment of Tipping Fees to achievement of strict Key Performance Indicators (“KPI’s”) and will also insist on including broad set off provisions where the Government can be excused from payment where the Developer defaults. Developer will be keen to link ‘Tipping Fees’ to indexation to account for changes in costs of fuel, labour and other inputs and will also aim at securing strict escrow arrangement/ letters of credit/ guarantees to ensure they do not struggle with cash flow.

c) Availability of Land and Site Risk -

The Government usually is under the obligation to provide unencumbered right of way to the site, yet it will reserve disclaimers which will require the Developer to perform site analysis and conduct its own investigation. The Developer must fulfill its obligation to restore and return the Site to the Government in an acceptable form at the end of the concession period.

d) Change in Law and Force Majeure -

The Government will seek to carve out exemptions from the definition of Force Majeure Events to avoid overly broad interpretations, and similarly, will push for narrow definitions of Change in Law restricted to clearly identified events. The Developer would prefer a broad definition of Force Majeure with further categorisation into political, non-political, and natural events given the differing monetary consequences attached to each of these. The Developer will require that all new regulatory compliance obligations which arise after project commencement must be treated as Change in Law which provides the Developer with rights to request additional time and cost adjustments.

e) Take or Pay Clauses -

The Government would prefer to negotiate a lower minimum guaranteed waste percentage of total plant capacity as its take-or-pay obligation and will seek to establish that this obligation does not apply in situations where failure is attributable to reasons outside its control. The Developer will push for the take-or-pay obligation to cover as high a percentage of plant capacity as possible, given that this guaranteed revenue stream is critical for meeting regular O&M expenses and the debt service payments due to the lenders.

2) EPC Contract - This contract is executed between the ProjectCo incorporated by the Developer to execute the project and the EPC Contractor. All the construction obligations under the Concession Agreement will be passed on a back-to-back to the EPC Contractor under this document. The flexibility of negotiation on scope of work and technical requirements is very little, the ProjectCo would want to ensure a very strict implementation of the back to back principle and the EPC Contractor will focus on carving out exemptions and accepting obligations strictly related to its scope of work and also capturing provisions on relief when non-performance by it can in any manner be attributed to ProjectCo’s acts omissions. Set out below are few provisions that are discussed extensively.

a) Performance Guarantees

ProjectCo will push for comprehensive guarantees with coverage, invocation events and validity periods on a complete back-to-back basis with some calculated and reasonable buffers at times, with the corresponding security provided by the Developer under the Concession Agreement. EPC Contractor will attempt at limiting the guaranteed invocation events to include those solely and directly attributable to its scope of works under the EPC Contract and not mirror the guarantee to what has been provided by the Developer under the Concession Agreement.

b) Limitation of Liability

ProjectCo will emphasize on indemnity obligations on a complete back-to-back basis with its obligations to the Government under the Concession Agreement. While they will accept an overall cap on liability of the EPC Contractor, but the push will be towards ensuring a broad list of exclusions to this overall liability cap (notably - abandonment of works, IP breach, breach for death or bodily injury, violation of environmental laws, wilful default and gross negligence). EPC Contractor - will typically push for an overall liability cap equivalent to 100% of the EPC Contract price and even lower caps (typically 10 - 20%) for delay and performance liquidated damages.

c) Force Majeure and Change in Law Provisions

ProjectCo will push for narrow definitions of Force Majeure and Change in Law events because they expect the EPC Contractor to handle some business and operational risks through their specialized expertise. The EPC Contractor, in turn, strictly applies the back-to-back principle, insisting that these definitions should mirror the corresponding terms set out under the Concession Agreement and not be modified to its disadvantage in any manner. The EPC Contractor will also seek to negotiate extension of time and increased cost entitlements for these events in circumstances where ProjectCo itself receives a corresponding relief or benefit under the Concession Agreement.

3) O&M Contract - This document will run for a much longer period as compared to the EPC Contract and is intended to cover a significant part of the operational life of the facility (15-25 years) once the EPC works are over. This contract is executed between ProjectCo and the O&M Contractor with the objective of passing on all operation and maintenance obligations under the Concession Agreement on a back-to-back basis to the O&M Contractor. Set out below are a few provisions which assume great significance from both ProjectCo and O&M Contractor’s perspective.

a) Risks Pertaining to Waste/Input Material

ProjectCo would want the O&M Contractor to accept waste on an “as is” basis and assume risk of handling minor variations given their expertise and technology available. O&M Contractor will be keen on strict obligations and clear compensation when the minimum guaranteed quantity and quality of waste is not provided. The focus will be on securing the right to receive damages, extra time for performance if the quantity and quality of waste supplied does not meet the criteria set out under the O&M Agreement.

b) KPIs

ProjectCo will negotiate strict KPIs for environmental compliance which inter alia requires strict adherence without any allowance of leaks or contamination and for diversion rates which must achieve high recycling and composting targets to meet sustainability goals. The O&M Contractor will defend its position by negotiating extended timeframes to fix minor KPI violations while claiming safety from responsibility during force majeure situations. The O&M Contractor will request that scheduled maintenance and major maintenance periods serve as valid reasons to excuse strict compliance.

c) Availability Payments

ProjectCo would want to link these payments to performance and also agree to reduce the pay out in case of persistent or repeated failures. They would also want to reserve audit rights to be able to audit and ascertain whether or not the plant is actually available and will be capable of processing waste when it is supplied. O&M Contractor will expect these payments to come through, to enable it to service the debt procured from lenders and cover for the fixed costs invested in the plant. In fact, they would negotiate guaranteed availability payments when performance defaults cannot be solely and directly attributed to the O&M Contractor. The target will also be to link the availability payments to indexation to account for changes in the consumer price index.

Getting Ahead of the Problems: Practical discipline for Consortium backed projects

Achievement of FC is one of the most important milestones that can significantly impact the remaining journey of the project. While the process of achieving FC is inherently complex, it becomes even more complicated in the case of a consortium sponsored project, complexity further magnifying if these consortium partners are based out of different jurisdictions. Some projects reach FC on time, some miss the deadline triggering potential commercial, contractual and legal consequences. Advance planning, substantial preparation to provide for the potential foreseeable delays and bottlenecks, streamlined and consistent coordination between the consortium members are few factors that tilt the scales towards a favourable scenario where FC is achieved well within the timeline. Set out below are few factors that should be kept in mind and paid adequate attention to right from the start -

1) Clear Agreement on the internal Consortium Arrangements

  • The Consortium Agreement, the Shareholders’ Agreement and other arrangements between the consortium members require adequate attention and deliberation. Once these are set out in ink, these should be followed in letter and spirit, it should never be the responsibility of one consortium member to do the entire heavy lifting.
  • If any consortium member is not prompt enough to perform its obligations, this translates to the remaining members having to spend time and resources to consistently follow up, coordinate and get the dormant partner to contribute what it needs to, this can stall the progress and has a great potential to upset FC timelines, especially with multiple workstreams running parallelly, there is little room for such avoidable delays.

2) Managing corporate compliances and regulatory approvals

  • There are a fair number of conditions that need to be satisfied under the project documents. To name a few, incorporation of the ProjectCo, OpCo, opening of bank accounts, capitalization, foreign investment approvals, regulatory approvals (registration with chambers of commerce, registration with human resources ministry etc). These activities may seem more administrative and procedural but have real potential to stall the process, since many of these items are interconnected and rely on other steps being completed on time.
  • All legal documents, including the constitutional documents of the project companies, requisite corporate resolutions and other requisite documentation must be prepared ahead of timelines and the time budgeted should factor in time required for all sponsors to review and comment on items where they need to reach a consensus.
  • Sponsors should nominate representatives within their organization who are experts in the relevant discipline who should sync and align on a regular basis with their counterparts in other consortium partners and even the external legal counsel engaged.

3) Allocation of clear responsibilities on the conditions precedent to achieving FC

  • Conditions precedent linked to ProjectCo and OpCo incorporation, project documents and the financing documents must be tabulated carefully and tracker assigning clear responsibility should be established. Weekly meetings to track progress, identifying potential hiccups and serious efforts to resolve those will ensure that there are no loose ends to fix later which could derail the timelines and give way to conflicts and blame games between the consortium partner where the period remaining for FC is reducing day by day and is already stressing everyone out.
  • Some of the conditions that would have been achieved at the level of the ProjectCo will be repeated at the OpCo stage, those should be documented very carefully, for instance documents of the Sponsors used to incorporate a company, open bank accounts for the ProjectCo will also be useful for the OpCo, since the Sponsors remain the same with only shareholding percentages changing. All such duplicate and repetitive work should be very carefully identified and documented for future reference to ensure minimum waste of time and coordination efforts when these are required the second time.

4) Coordination between Sponsor and Lenders to close the financing documents

  • While this process is outsourced by the Sponsor consortium to external legal counsels who are experts and liase with the lender’s counsel to manage timelines, the consortium partners also have a critical role to play. This task also requires close coordination and timely feedback from all the sponsors, each partner, given its awareness of its internal organizational complexities and any special jurisdiction specific requirements, should work backwards to ensure that the overall timeline does not get impacted.
  • Timely achievement of FC has more implications for consortium, hence coordinating and getting all banks to get all credit approvals, providing timely feedback on financing documents and providing the required sign-off must be given significant importance. If there are loose ends that have not been addressed by the consortium partners, pushing the banks will not be very effective, since banks will not be able to excuse compliance with the multi-layered approvals system before they can sign off on finance documents and disburse the requisite funds.

5) Discussion and negotiations with the Offtaker

  • The positive impact of consistent and transparent communication with the Offtaker regarding all timelines, pending items, and potential bottlenecks should not be underestimated in ensuring that project timelines are met in real time. Steering committee meetings, comprising members from both the Offtaker and consortium partners, should be held at regular intervals to promptly take note of and address any potential bottlenecks that could surface during the road to FC.
  • If the consortium partners working on the ground level identify that there are certain documents that cannot close or few approvals that will not come through, but form conditions precedent to FC, these should be disclosed and discussed with the Offtaker to see if these can be waived in whole or part or be made conditions subsequent to FC, as may be feasible and acceptable to the Offtaker.
  • Offtaker will appoint its own legal firm to manage the process at its end, regular meetings and alignment on all documentation between the Offtaker’s legal counsel and the Sponsor’s counsel is non-negotiable to identify all pain points that need to be addressed in time for the project to witness timely occurrence of FC.

Conclusion

While this article aims to touch upon the key issues that surface in multi jurisdiction consortium based SWM projects, the ground level complexities are even more and require considerable significance and planning. Successful implementation and meeting key milestones depends a lot more on how strong the alignment between the consortium sponsors is and even with the external stakeholders i.e the lending banks and the Offtaker. Even projects where the project documents, inter-consortium documents have been very well drafted, there could be issues, resolution of which may not find immediate answers in these documents, but practical experience of the project participants will be more useful. For instance, the requirement to execute an early works agreement or issue a limited notice to proceed may not have been initially there, however, the consortium partners should be able to quickly align internally and implement these arrangements if doing so will help with meeting the overall timelines committed to the Offtaker. Given the scale and complexity of projects of this nature, cooperative problem-solving and alignment are key to meeting project milestones and safeguarding the interests of all parties involved. In such large consortium backed projects, a collaborative approach, rather than a unilateral stance is essential to navigate the multitude of stakeholder interests and ensure smooth project execution.

Author:

Swati Rawat, Principal Associate

Disclaimer:

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.