Delivering Private Sector Efficiency within Public Law Principles

[The following
guest post is contributed by Santanu
Sabhapandit
, who works as a legal consultant. He can be reached at: Sabhapandit@gmail.com.
This is an
abridged version of author’s article “Application
of Public Law Principles to Entities Implementing PPPs in India: The Current
‘State’ of Affairs
” published in Public Procurement Law Review (Sweet and
Maxwell). The article can be accessed here.]
  
With more than
700 projects at various stages of completion, the “Public Private Partnerships”
(PPP) model has established itself as a preferred mode of project
implementation, especially in infrastructure projects such as highways,
airports, urban transit systems, ports, etc. 
It is seen as one of the practicable means to combine private sector
efficiencies and public sector safeguards in delivering governmental services.
However, PPPs are not immune from the dichotomy that traditional privatization
initiatives are fraught with, i.e. of potential efficiency gains in production
and management on one hand and possible dent to some of the public law safeguards
and benefits available to their employees, stakeholders and consumers. Further
experience of implementation may be expected to bring greater clarity.
According to the Draft
National PPP Policy 2011, the essential features of a PPP are that (i) the
asset and/or service under the contractual arrangement is provided by the
private sector entity i.e. an entity with 51% or more non-governmental
ownership; and (ii) the asset and/or service so provided has been traditionally
provided by the government to the people in exercise of its sovereign functions
[[1]]
.
In consideration of the provision of public sector services or assets and assumption
of commercial risks thereof, the private entity receives grant of certain
rights and support from the government. Although there may be sector-wise variations
and also variation among individual PPP arrangements, the following types of involvement
of the government are generally observed in PPPs in India,
(a)        Grant of concession at a nominal price: the government
delegates its rights to the private entity, e.g. the right to collect user fee
from users of roads or lease of government land or acquired land to the private
entity, at a nominal consideration.
(b)       Financial support: the government may provide a portion
of the finance required for implementing the project, by way of viability gap
funding and equity participation.
(c)         Control: besides prescribing extensive performance
parameters, the government may have certain control over the functioning of the
private entity. This may be by way of appointment of oversight committees, appointment
of nominated directors in the board of the private entity and requiring board
approval in certain specific issues etc.
What could be the legal
implications of this for the
entity set up for implementing a PPP project
(hereinafter referred to as “PE”)? Does the degree of
participation by the government in any way affect the legal characteristics of
the PE?
There are currently
no PPP specific regulations in India. Also, there are no regulations that grant
a separate treatment to PEs compared to other private entities operating in the
economy. However, some of the judicial pronouncements offer an interesting
insight on the likely factors that may determine the legal nature of an entity.
If applied to PEs, these factors may potentially have significant affect on the
internal administration and management of PEs.
Indian courts
have in numerous cases had the occasion to examine the legal character of statutory
corporations. Disputes pertaining to service matters as well as commercial
transactions by these corporations have led courts to examine the rules and
regulations applicable to these entities. Through various judicial pronouncements,
the ambit of ‘State’ under Article 12 of the Constitution has been expanded from
public corporations[[2]]
to companies and societies not constituted by any statute.[[3]]
In Ajay Hasia, the Supreme Court
explicitly summarized the following tests to determine if an entity falls
within the ambit of ‘State’ under Article 12:
(1)       If the entire share capital of the
corporation is held by Government, it would go a long way towards indicating
that the corporation is an instrumentality or agency of Government;
(2)       Where the financial assistance of the
State is so much as to meet almost entire expenditure of the corporation, it
would afford some indication of the corporation being impregnated with
governmental character.
(3)       It may also be a relevant factor whether
the corporation enjoys monopoly status, which is State conferred or State protected.
(4)       Existence of deep and pervasive State
control may afford an indication that the corporation is a State agency or
instrumentality.
(5)       If the functions of the corporation of
public importance and closely related to governmental functions, it would be a
relevant factor in classifying the corporation as an instrumentality or agency
of Government.
(6)       Specifically, if a department of
Government is transferred to a corporation, it would be a strong factor
supportive of this inference of the corporation being an instrumentality or
agency of Government.
       
Post Ajay Hasia, there are a number of judgments where the Supreme Court has dealt
with the issue of determining whether certain legal entities fall within the
definition of State in Article 12. The six tests have been relied upon time and
again. However, a discernible methodology of assigning priority to one factor
(e.g. financial assistance from the government) over another (e.g. the function
of the entity) in determining the legal character of an entity may be difficult
to gather from an overview of various judgments.[[4]]
Also, whereas factors like deep and pervasive control by the government or the
extent of financial support may be possible to discern from the constitutional
documents or the financing structure of an entity, the question of categorizing
the functions carried out by the entity as ‘governmental function’ or
‘functions of vital public importance’ may pose a greater uncertainty.
Since government
participation is characteristic of any PPP project, application of the above
tests may be redundant for PEs as more often than not they are likely to fall
within the ambit of the term ‘State’ under Article 12.[[5]]
But does it facilitate or deter achievement of the purpose of introducing PPP
models?
Once the PE is declared a ‘State’, does the
public-private-partnership lose its ‘private’ characteristics? Does being a
‘State’ also effect the internal management of the entity? In J.K. Shah v. Birla Cotton Spinning and
Weaving Mills Ltd. and Anr.
[MANU/DE/2960/2011] the
High Court of Delhi reviewed the legal position in India regarding the
difference in public employment and private employment. It referred to the
judgment in Sirsi Municipality by its
President, Sirsi v. Cecelia Kom Francis Tellis
[AIR 1973 SC 855] where the
Supreme Court opined that in case of a pure contractual master servant
relationship, a dismissal or termination of an employee is not declared as
nullity because the remedy available in case of a breach of contract is damages.
However, if a servant in the employment of the State or of other public or
local authorities or bodies created under statute is dismissed contrary to
rules of natural justice or if the dismissal is in violation of the provisions
of the statute the courts may exercise jurisdiction to declare the act of
dismissal to be a nullity. A declaration of nullity may usually lead to
reinstatement along with back wages. In J.K.
Shah
, the high court also referred to other precedents where it was held
that a writ of Mandamus may be issued to restore a person to a corporate office
if the office is of a public nature, and an office is of a public nature if it
is created by a statute and the duties of the office effect the general public
or a section thereof.[[6]]
The Law
Commission of India 145th
report
(1992) that contains concerns raised by the then Bureau of
Enterprises[[7]]
pertaining to public sector enterprises, further elaborates the issue. The
Bureau raised these concerns following a number of judgments where the Supreme
Court had held public sector corporations and undertakings to fall within the
definition of ‘State’. The concerns, amongst others, were,
(a)        Once the public sector enterprises are
considered a ‘State’ under Article 12 of the Indian Constitution, their
functioning become subject to the principles of natural justice under Article
14 of the Constitution, which not only require them to act in a fair and
non-discriminatory manner, but also their actions become subject to judicial
review by the Supreme Court and the High Courts. As regards service matters, issues
of fairness, non-discrimination, natural justice become far more important than
suitability and efficiency of the employee and the exercise of extensive legal
recourse available to them can affect the efficient functioning of public
sector enterprises;
(b)       In terms of award of contracts by the
public sector enterprises, being a ‘State’ makes them subject to various
formalities insisted upon by judicial pronouncements and they cannot deal with
another firm at a purely business-to-business level. The management of public
enterprises has to worry more about procedural correctness and defensibility in
a court of law, than making the most expeditious, efficient and economic choice.
It was submitted
that this weakens the management of public enterprises and renders commercial
enterprise like behavior extraordinarily difficult. In effect, this alters
their nature as business ventures and handicaps them in the practice of management.
In countering these concerns, the Law Commission seems to have relied on the
then existing legal position (established through various judicial
pronouncements, and against which the Bureau had preferred the reference to the
Commission) and the existing statistics on number of litigations against public
sector enterprises that pertain to the concerns raised by the Bureau. It is
submitted that some of the concerns raised by the Bureau may have had
potentially long term ramifications which may or may not be fully captured in
existing statistics on pending litigations. Also, a potential expansion in the
available remedies may also signify a potential expansion in number and cost of
litigation.
On the policy front, if the report of
the Comptroller and Auditor General of India report (CAG 2012) on the working
of the first PPP project in the airport sector in India is any indication,
there seem to be perceptual difference. Whereas lease of land to be used for
commercial purposes, at a rate below market rate to private concessionaire has
been questioned on propriety, legally it does not seem to make any distinction
if the activities carried out by the concessionaire is commercial or non
commercial. Once it is determined that an entity is a ‘State’ within the meaning
of Article 12, Judicial interpretation tends to assess all activities of the
entity, be it commercial or employment related or otherwise, against the
touchstone of Constitutional mandate under fundamental rights. In contrast,
however, the current political interpretation seems to rely on different scales
to assess state support to an entity for a public purpose and for a private or
commercial purpose, even though in the legal analysis the same entity may be
considered a ‘State’ based upon the same state support or an overarching public
purpose that the entity undertakes.
Given the
relatively new structure adopted under the PPP model, it may be useful to re-examine
the relevance of some of the underlying rationale for holding an entity a
‘State’ under Article 12. In the absence of clarity, an ex-post transition in
status may mean additional challenges for a private participant in a PE. The
private participant in a PE may have to face market forces and related
socio-political challenges prior to its constitution of the PE, whereas, once
constituted, it has to operate within the Constitutional limits that its status
as a ‘State’ may entail. This may mean unforeseen costs of the private
participant and a deviation from its usual managerial practices. Policies may
evolve with further experimentation with PPP and it is hoped that perhaps the
necessary conditions required for private sector functioning will get the
requisite recognition and policy support as much as the requirement of private
sector funding and operational efficiency.
– Santanu
Sabhapandit



[1]           The draft National PPP Policy 2011 is
available at http://www.pppinindia.com/Defining-PPP.php.
[2]           See Rajasthan State Electricity Board vs. Mohan Lal [1967 SCR (3) 377];  Sukhdev
Singh and Ors. vs. Bhagatram Sardar Singh
[1975 SCR(3) 619]; Ramana
Dayaram Shetty vs. International Airport Authority of India and Ors.

[AIR 1979 SC 1628].
[3]           See Ajay Hasia v. Khalid Mujib
Sehravardi
[AIR 1981 SC
487];  
Pradeep Kumar Biswas and Ors. vs Indian Institute of Chemical Biology
and Ors.
[(2002)3 SCALE 638].
[4]           For analysis of various judgments
mentioned here and a detailed discussion on various aspects of the topic,
please refer to the article “Application
of Public Law Principles to Entities Implementing PPPs in India: The Current
‘State’ of Affairs
” available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2580244
[5]           See Flemingo Duty free Shops Pvt.
Ltd. vs. Union of India and others
[2009(5) KarLJ 9]; Flemingo Duty-Free Shop Pvt. Ltd. and Mr.
Vivek S. Bhatt Vs. Union of India and Ors.
[2008(110)BOMLR1730].  Also see Bangalore International Airport Limited vs.
Karnataka Information Commission
[(2010)ILR NULL3214] in a similar context.
[6]           Prem
Narain Srivastava v. Kanpur Chemical Works
(WPC 4947/1972).
[7]           Now known as the Department of Public
Enterprises under the Ministry of Heavy Industries and Public Enterprises,
Government of India. The Bureau was set up in 1965 for the purposes of
providing policy guidance to and for continuous appraisal of performance of
public sector enterprises.

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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