China In India’s Infrastructure: Where Is The Fine Print?BloombergQuintOpinion
The months-long border standoff between India and China has had ramifications beyond the military conflict and adversely impacted economic and trade relations between the two countries. In the aftermath of the Galwan Valley skirmish in June, India has taken a series of steps to limit the involvement of Chinese companies in the domestic market with steps such as tweaking foreign direct investment rules to discourage Chinese investment, banning a range of apps with links to Chinese companies and tightening visa rules for Chinese nationals. These steps also included restrictions on the involvement of Chinese companies in domestic infrastructure development programmes.
While both India and China are members of the World Trade Organization and signatories to the General Agreement on Trade in Services and General Agreement on Tariffs and Trade, these agreements provide for general and security exceptions that allow members to justify their trade policies, which may be inconsistent with the WTO Agreements, in the interest of national security. Keeping national security in mind, the award of infrastructure projects to Chinese firms has been discouraged in power, and highways and railways infrastructure.
Yet To Pull The Trigger
The Ministry of Road Transport and Highways had stated that it would ban Chinese firms from undertaking road construction projects. The Union Minister stated that there would be a policy directive to enforce such a restriction on Chinese companies from participating in highway projects.
With the ‘Atmanirbhar Bharat Abhiyan’ being launched, it is also expected that the qualification criteria for Indian companies will be relaxed to promote domestic companies participating in these bid processes.
Similarly, in the power sector, the period of safeguard duty on solar cells and modules, which was announced in July, 2018 to the extent of 15%, has been extended for another year, till July, 2021. Additionally, the Union budget of 2020-2021 had proposed that a 20% basic customs duty may be imposed on import of solar equipment from China and a notification in this regard was awaited by the Ministry of New and Renewable Energy. While no such notification has been issued till date, it has now been proposed that the Ministry of Finance will soon notify imposition of BCD to the tune of 40% on solar modules and 25% on solar cells from April 2022 which shall replace the existing safeguard duty.
While the proposed imposition of these duties was suggested to protect domestic manufacturers and discourage cheap imports from countries like China, it was observed by the Government of India that domestic production of solar equipment was not sufficient to support self-reliance in the sector. Notwithstanding this, such a sharp drift in trade policies could also raise concerns regarding compliance with the WTO Agreements.
Separately, the Ministry of Power has urged state distribution companies to not place orders for import of power equipment from China instead buy equipment made in India and improve self-reliance. The notification issued by the Power Ministry on July 3, 2020, clarified that India will not procure equipment from ‘prior-reference’ countries without express permission. The Power Minister went on record saying that China and Pakistan would not be given such permission.
While the union government has initiated actions for restricting the supply of equipment from China, we are yet to see how this action will impact the private sector. Given that most imports of modules for solar power projects come from China, this could hinder achieving the government's ambitious target for renewable energy. A robust policy framework is required to bring about clarity on continued expansion and development.
Finding ‘Reasonable Grounds’
While geopolitical factors and nationalistic fervour have created an institutional resistance towards Chinese firms across sectors, it needs to be analysed whether these positions can legally be made to influence the decision-making in the award of such projects or placing such orders. Various Chinese firms may have already bid for tenders in India. There may be tenders that are pending evaluation or which may have already been awarded to a Chinese firm. In the absence of any policy directive by the Government of India in support of outright exclusion, the disqualification of these Chinese firms will have to be done on reasonable grounds.
In an attempt to strengthen such exclusions, on July 23, 2020, the centre amended the General Financial Rules, 2017, to restrict public procurement from countries which share land border with India on grounds of national security. The Department of Expenditure, under the GFR, issued a detailed order on public procurement to strengthen the defence of India and national security. As per the amendment to the GFR, any bidder from countries sharing a land border with India will be eligible to bid in any procurement whether of goods, services or works, only if the bidder is registered with the ‘Competent Authority.’
However, there are other tenders with bidders of Chinese origin that have recently been canceled for reasons other than a boycott of Chinese firms. For instance, Indian Railways has decided to terminate a signaling contract awarded to Beijing National Railway Research and Design Institute of Signal and Communication Group due to ‘poor progress’. Many projects, similar to the ones just mentioned, have been cancelled for reasons best known to the relevant authorities. There has certainly been a delay in awarding of projects which may be essential for development.
Impact Of Cancellation
While studying cancellation of projects, it is pertinent to analyse the stage at which that takes place—whether at the Request for Proposal stage or after the issuance of a Letter of Award—and the legal implications attendant to the stage of cancellation.
In a scenario where tenders have been canceled at the RFP stage, judicial pronouncements have firmly taken the view that “the authority has right to accept or reject any bid and even to annul the whole bidding process”. Courts have further observed that “a disclaimer at the forefront of the RFP makes it clear that there is only a bid process that is going on between the parties and that there is no concluded contract between the same”. It has also been highlighted that “it is equally clear that such bid process would subsume a Letter of Award” however, “right up till the stage of the entering into the Concession Agreement, the bid process may be annulled without giving any reason whatsoever”. Thus, concerning projects for which contracts have not been entered into, the government may take benefit of the judicial pronouncements mentioned above. However, the terms of specific tenders would need further examination to conclusively determine the consequences for disqualification or rejection.
Many power project contracts, including for renewable energy, have been executed where parties have either already placed orders from China or factored the pricing of Chinese equipment in their bids, which will now be affected by the levy of increased duties to discourage import from China. Such instances might be covered under the ‘change in law’ provisions, which typically cover an eventuality of a risk arising due to the change in applicable laws that may affect the cost-efficiency of the project. This provision ensures that the bidder, in case of an increase in project cost, is compensated to the extent the project has suffered due to the change in law, and principles of restitution are applied. Judicial pronouncements have also explained that the consequences of a change in the law are to compensate the party affected by such change to the extent that the affected party is restored to the same economic position as it were if the change has not occurred.
Therefore, in case the government decides to impose any duty or ban on the import of power equipment, it must evaluate the costs it may incur under the change in law provision under the respective contracts.
Projects for which work has commenced, but are affected due to these announcements, could also be covered under ‘change in law’ as just mentioned. Certain model contracts for infrastructure projects also provide for such actions by the government to be a force majeure event under the contract entitling developers to temporary relief, through the extension of term or compensation through termination payments. Depending on the outcome of the final stance taken by the government, it would be clear what kind of relief would be available to developers.
In terms of the way forward, it is expected that many projects would face delays in implementation given these roadblocks and curbs imposed by the government. Naturally, the restriction on imports from China or ban on participation of Chinese bidders would have an impact, and could potentially result in cost overruns and delayed completion of projects. Such an increase in cost could either be absorbed by the government or entitle the developers to an extension of the term, to mitigate cost overruns. Alternatively, where the sector permits, this increase in cost may also be passed through to consumers.
Besides potential legal and financial implications for local industry and the government, restrictions on imports or disallowing Chinese developers may become obstacles in achieving infrastructure development targets such as installing renewable energy to the extent of 175 GW—out of which solar needs to contribute to 100 gigawatt—by 2022 and building 65,000 kilometres of highways by 2022. The government is expected to balance the country’s national security and economic interests and take decisions to help our economic progress.
Hemant Sahai is the founding partner of HSA Advocates.
The views expressed here are those of the author and do not necessarily represent the views of BloombergQuint or its editorial team.