Four potential risks for investors in the 2022 Model Concessionaire Agreement (MCA) for Multi-modal Logistics Parks (MMLPs)

The MCA provides a public-private partnership (PPP) framework to construct and maintain MMLPs. MMLP represents a hub of freight-handling facilities encompassing warehouses, container terminals, cold storage, mechanised material handling facilities, and services including customs clearance, testing facilities or warehousing management among other things. In many ways, MMLP, as a hub of all these activities, is accessible by roadways, railways and waterways.

The MCA presents both the opportunity and a potential exposure to financial risks, which may impact the interests of both the Concessionaire and investors or lenders. Understanding the potential opportunity and risk exposure is crucial for investors to protect their interests given the high costs of and complexity involved in the construction. Therefore, although investors can avail a huge investment opportunity by capitalising on the high costs of construction, the complexity associated with the construction can expose them to a high financial risk. Irrespectively, an MCA is generally expected to protect the interests of the private parties including the investors who are the source of the private capital for the Concessionaires. In this respect, the investors must review the MCA to assess whether the MCA balances the risk exposure and their commercial interests.

The MCA provides a framework for protecting the rights and interests of the investors in its clause provisions, particularly related to insurance, suspension, termination, substitution, and Escrow.

1. Regarding insurance. The MCA does not require the Concessionaire to co-insure the investor besides the authority. The investor’s financial right is protected where the insurance provision prioritises the re-payment of the lender’s due before the determination of the level of insurance (Article 31.1).

2. Regarding suspension, termination, and substitution. The MCA appears to provide a stronger framework for protecting the rights of the lender in case the Concessionaire defaults or breaches the MCA. This framework ties the defaults or breaches with the suspension, termination and substitution rights. In effect, in case the Concessionaire fails to cure its default within the stipulated curing period (Article 36.1.3.), the lender is entitled to exercise the right to substitute the Concessionaire during the suspension (Article 35.4) and even extend the suspension period (under Article 35.1 – from 180 days to an additional 90 days by a joint request placed by the Concessionaire and the Senior Lender) so that it could exercise the substitution right.

The substitution right cannot be undermined by Concessionaire termination rights (Article 35.5.1). The MCA entitles the lender to notify the Authority to revoke the suspension and terminate the agreement so that it can exercise its right of substitution. In effect, the substitution right precedes this termination right. However, the only limitation is that the substitution right is subject to the discretion of the authority following the representation of the lender regarding the substitution (Article 36.1.3.)

The Concessionaire termination rights, concerning mutual termination, also interact with the lender’s rights. The lender’s rights are protected by the MCA which requires the lender’s approval of terms and conditions that the authority and the concessionaire may negotiate in the event of a mutual termination of the MCA (Article 36.8.3.)

3. Regarding the protection framework extended to Assignment provisions. The lender has a set of rights under the Financing Agreements and working capital arrangements. These rights can be affected in any way by assignment prohibitions provided by the MCA. Therefore, the MCA exempts theserights from the prohibition, particularly the security against the Concessionaire’s indebtedness to the lender (Article 39.2(b)). This protection of interest is further extended to assignments associated with the substitution agreement (Article 39.2(c)).

4. Regarding potential burdens. While the MCA provides a framework for protecting the lender’s interest and rights, some provisions (Article 5.2.5 read with Article 5.12) can potentially bring a burden of liability upon the lenders through the Concessionaire. Article 5.2.5 provides a duty to the Concessionaire to select and use the O&M Contractor and execute the O&M contract. This duty is subject to the approval of the authority, which may expose the Concessionaire to the burden of liability.Thisprovision may be read to mean, in a theoretical sense, that the authority could potentially exercise an influence over the Concessionaire. While the authority has the discretion to reject contractors chosen by the Concessionaire, it can potentially suggests a contractor that the authority finds favourable.This risk must be read with the exemption of the authority from the default of breaches of the contractor. The discretion and potential influence of the Authority may expose the concessionaire to the potential liability from the default or breaches by the contractor, who was contracted under the influence of the Authority. While proving this influence may be complex, the lender/Concessionaire may need to read these provisions with Article 5.12, which provides a defence the Authority can use. This Article requires the Concessionaire to foresee “…all difficulties and costs of successfully completing the Project.”  While the authority will not absorb any liability from breaches by a contractor, which may disrupt the completion of the project, it requires the Concessionaire to foresee the difficulties of “successfully completing the project”. The question is therefore that if the Concessionaire foresaw the problem that is discussed here, will the authority be ready to absorb liability or share the liability in a situation where the authority has influenced the selection of a contractor?

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