The Supreme Court has before it petitions moved by many private thermal power companies against the Reserve Bank of India’s direction to banks to initiate insolvency proceedings against loan defaulters.

The power companies argue that their under performance is due to systemic issues; whereas the RBI’s argument is that the banking regulator cannot discriminate between sectors when dealing with loan defaults.

There is no easy solution. The 40th Standing Committee on Energy estimated that loans to two- thirds of the country’s coal-based power capacity are under stress. Banks are hesitant to take any further risk on the thermal power sector. Yet insolvency may result in the power companies being sold off piece by piece, leading to recovery of a fraction of the crores of rupees poured into them. Long-term ramifications for the country’s power-generation capacity and investor confidence in the sector are obvious.

This costly turn of events began, partly, in 2014, when the Supreme Court cancelled over 200 coal-block allocations, because no objective criteria or consistent standards and guidelines were followed, and consequently found the approach to be arbitrary, unconstitutional and illegal.

The decision exposed the absence of a comprehensive legal framework when entrusting public resources and duties to the private sector. That absence continues, even as public-private partnerships(PPPs) have evolved to include complex structures in traditional state functions such as transportation, water distribution or health infrastructure.

It is difficult for the judiciary to provide the needed clarity. In the absence of legislation, the judiciary relies upon Article 14 of the Constitution, which guarantees equality before law, and has been interpreted to include restrictions on the state from acting in an arbitrary, unreasonable or discriminatory manner. These are sound constitutional principles, but are best relied upon to set the boundaries for how the state cannot act, rather than detailed guidance on how it can.

In 2012, the Supreme Court cancelled first-come-first-served spectrum allocations, noting that “while transferring or alienating natural resources, the state is duty bound to adopt the method of auction by giving wide publicity”.

Yet, in 2009, it upheld the decision not to publicly auction the development of Pondicherry port, in 2013, upheld the grant of land, without auction, to a joint venture public-private-partnership project in Ahmedabad, and while cancelling the coal block allocations in 2014, accepted the contention that the coal blocks need not have been auctioned.

In each case, the court examined the individual circumstances to assess whether the state acted in an arbitrary manner.

Corruption and fear

A by-product of the resulting ambiguity is corruption and fear. Those who are able to wield influence can shut out others who may prove to be good partners. At the same time, fear of accusations of corruption constricts the space for meaningful dialogue between honest bureaucrats and businessmen. It is notable that of the 312 projects approved by the PPPAC since 2006, only 48 have been approved in the last four years, and only 13 in the last two financial years.

There are a number of key questions a rules based framework could clarify, starting with the allocation process. If public auction is the preferred but not the only method, then the exceptions to it should be clearly articulated. Unsolicited proposals, emergency situations and continuity of service are examples of articulated exceptions to public tendering in other countries.

The impact of price competition, as in the coal allocation case, where non-tendering was justified on the basis that it may cause power prices to increase, is potentially another exception to consider.

Given the high public cost of business failure, one-sided contracts in favour of the public authority do not necessarily serve public interest. In addition to getting the best price and service quality, public authorities should also aim to identify the right commercial partner and achieve the correct balance of commercial risk, and nuanced regulation can go a long way to achieving this. European Commission directives, for example, provide detailed guidance and different auction procedures to help achieve this.

In India, by contrast, template contracts developed years ago are still the norm, and fear of deviation can lead to a natural reluctance by public authorities to address genuine commercial concerns. As a result, the environment can be more conducive for bidders with experience and comfort of “dealing with” public authorities.

Some guidance on what contractual terms can be offered would also be helpful. In 2016, in response to a public-interest petition filed by the Noida Resident Welfare Associations, the Allahabad High Court partly struck down the contract for the Delhi-Noida tollway bridge. The term of the concession was open ended inasmuch as it was to continue until the concessionaire made a certain return, and the court noted that “this element of perpetuity in a public contract where the assets belonging to the state have been put in the hands of a company is bothering us.”

Most countries with PPP laws stipulate at least some basic guidelines on public contracts, such as the maximum term. (In Brazil, for example, the term of the contract cannot be more than 35 years.) Knowing the limits of what they could offer during contract negotiation may have been helpful to the public authority in the Delhi-Noida tollway case.

The process of setting contractual terms should ideally involve affected stakeholders. In India, unlike in some other jurisdictions, there is typically no formal consultation with potential stakeholders other than the bidders. Such consultations could serve to better identify concerns, and means to address them. For example, projects which entail displacement could involve consultation procedures with affected persons to better identify meaningful resettlement and rehabilitation obligations.

A legal framework should also provide guidance on amendment of contractual terms. A few years ago, a change in Indonesian price controls for exported coal caused several Indian power plants to become economically unviable overnight.

Given public sensitivities, state distribution companies did not agree to change the power tariffs in the contracts, and only after years of agitation spanning governments, commissions, and courts, has the Supreme Court now finally agreed to permit approaches to electricity regulatory commissions to tweak the contracts, on the strength of expert reports that the power companies would face liquidation if not allowed the benefit of revised power prices.

The power companies’ present plight should spur on a comprehensive policy review. There may be no time like now.