India: Projects & Project Financing In India- Risk Identification, Allocation & Mitigation

Last Updated: 2 August 2017
Article by Ran Chakrabarti


It's no secret that India's infrastructure is in critical need of wholesale overhaul, if it is going to launch itself into a sustained growth trajectory and unleash the potential of its human capital. However, if last year's project finance deal statistics are to be believed, the evidence on the ground suggests that infrastructure financing lags way behind what's necessary to sustain growth. Although the global project loan market fell by approximately USD 40 billion to a total of USD 236 billion in 2016, India's share of that market fell by USD 8 billion, with 50 deals aggregating to just over USD 8.5 billion.

Lets put that into context: benchmarked against the global project finance market, project financing in India last year, so critical for the growth of over 20 per cent of humanity, amounts to just over 3.5 per cent of the global market.  Compare that to say, Australia. During 2016, although there was a slight dip of just over USD 1 billion, the Australian project finance market stood at USD 24.3 billion, almost three times the size of the Indian market. 1

So where is India's project financing market going wrong and more importantly, what can be done about it? This article will highlight the complexities of project financing in India and makes suggestions about how things can be fixed and conclude that simply throwing money at projects is not the solution, even if it were available to throw. Bidding structures, fair risk allocation, timely land acquisition, efficient dispute resolution and the re-cycling of distressed capital are the key to success, and an understanding by government and policy makers of their importance is critical.


Will it get built; will it get built on time; will it do what it's supposed to do; and will it generate the revenue that it is modeled to generate? If there are four cardinal issues to project financing, whether it's from a developer or lender perspective, then it's these, for almost any project you care to think of.

Add to these cardinal issues, the questions of: what happens if? You are then half way to structuring a successful project. Essentially, the: what happens if can really be distilled down to delay and performance and the implications thereof are summarized in the table below.






Delay in Land Acquisition


Construction Delay

Project Viability?

Project Document Default?

Liquidated Damages

Finance Document Default

Debt Rescheduling

Pass Through?

Time Extensions?

Government Compensation for Delay or Termination?

Delay in Licenses, Permits and Consents


Construction Delay

Project Viability?

Project Document Default?

Liquidated Damages

Finance Document Default

Debt Rescheduling

Pass Through?

Time Extensions?

Government Compensation for Delay or Termination?

Delay or Suspension of the Works


Construction Delay

Liquidated Damages

Debt Rescheduling

Pass Through?

Time Extensions?



Construction Delay

Liquidated Damages

Debt Rescheduling

Pass Through?

Time Extensions?

Authority Default


Project Viability

Project Termination

Government Discharges Debt

Off-taker Default


Revenue Deficiency

Project Document Default

Finance Document Default

Off-taker Guarantee?

Borrower Default


Project Document Default

Finance Document Default

Sponsor Support?

Lender Step-In?

Contractor Default


Project Document Default

Finance Document Default

Parent Company Guarantee

Performance Bank Guarantee

Advance Payment Bond?

Change in Law


Project Viability?

Financing Viability?

Increased Cost?

Decreased Cost?

Project Termination?

Pass Through?

Government Discharges Debt?

Force Majeure


Project Viability?

Increased Costs?

Time Extension?

Debt Rescheduling?

Project Document Event of Default

Finance Document Event of Default

Insurance (for natural force majeure events)

Government Support (for political events of force majeure)

The table above demonstrates that no matter how complicated a project might seem to be, what can go wrong and what consequences flow from a particular event, are easily identifiable on the back of a paper napkin. If they are easily identifiable, assessing the likelihood of any one or several events occurring becomes a commercial decision as to whether the project is worth the risk. In assessing this, we take each risk in turn below and discuss its likely implications, though it cannot be emphasized enough that risk depends upon a particular entity's role in the project and whether it's appropriate for that particular entity to shoulder such risk.


3.1 Delay in land acquisition

In the Indian context, land acquisition remains a problem and particularly so for any infrastructure project that aims to achieve point-to-point connectivity (whether it be a road, railway line, power transmission line or pipeline). But it's not just the delay in land acquisition that poses a problem: it's the consequence of land acquisition during the term of the project, which is equally important. Political agitation and events leading to political force majeure on the ground are a risk, as Tata realized to its detriment at Singur, West Bengal, the proposed site of its manufacturing plant for the Nano. While this is perhaps a worst-case scenario, it nevertheless needs to be assessed and the consequences need to be considered. For Tata, relocating to Gujarat rescued the project, notwithstanding sunk costs estimated to be up to INR 1,400 Crore (approximately USD 200 million).2

To rub salt into Tata's wound, the purported transfer by the Government of West Bengal of 997 acres of land for the project back in 2006, was finally determined to violate the old Land Acquisition Act by the Supreme Court in September 2016, more than 10 years after the event.3

While events of this magnitude are few and far between, it would nevertheless, be a brave decision by any CEO to ignore the possibility from the project risk calculus and it begs the question as to how a failure in land acquisition is going to be dealt with. In such circumstances, the project developer and project sponsors need to thoroughly understand to what extent liabilities can be passed through to the defaulting party and what compensation will be available in such circumstances.

Other nuances to consider, in particular, in relation to road, rail, transmission line and pipeline projects, is the parceling up of the project between interconnecting points. If joining up the dots is critical for the project to generate revenue, consideration needs to be given to delay in execution of a particular stretch of the project. Executing the middle section of the project on schedule will be of little comfort for project developers, sponsors and lenders if either end is stuck in land acquisition (and vice versa). 

In the context of power projects, developers (and lenders) should therefore pay careful attention to power evacuation and the complexity of connecting the project to the grid. Ultimately, to mitigate the risk, developers and lenders should insist that the grid contractor or the grid owner take these risks and the consequences of delay.

It cannot be emphasized enough how important it is to ensure timely land acquisition and the consequences of cutting corners on this point. Ideally, bids should not be tendered if the tendering authority does not have the land necessary for the project to become a performing asset and lenders would be ill-advised to waive any requirement for land necessary for the construction of the project as a condition precedent for drawdown of any financing.

3.2 Delays in Licenses, Permits and Consents

A well-structured project will see the lenders insist that all project consents, permits and licenses necessary for construction and operation are issued to the project developer as a condition precedent to drawdown under the finance documents. Failure to achieve these necessary consents by a particular long-stop date will lead to a termination of the financing documents, putting the project back to the drawing board and in such circumstances, project developers and sponsors will need to consider their exposure to break costs under the finance documents.

Lenders will, no doubt, carefully diligence the terms of critical licenses, permits and consents to assess the risk of hairpin termination triggers and in some South Asian projects (depending on a number of variables) may even be able to negotiate quasi step-in rights pursuant to a tripartite agreement or a comfort letter, enabling the lenders to temporarily suspend termination and step-in to rectify a breach by the project developer.

In certain PPP projects, where there is a concession agreement between the authority (granting the right to construct and operate the project) and the project developer, the parties should consider the consequences of delay to the granting of tangential licenses, permits and consents, in particular, where they are in the control of the authority granting the concession itself. This consideration becomes even more important when other governmental authorities are required to grant consents (the Environment Ministry springs to mind), but the project developer and sponsors should push the point that those risks should remain with government and government should indemnify the project developer for costs that arise from delay or non-issuance in circumstances that are not the fault of the project developer.

It would be pertinent to add here, that where there is a concession agreement between a government authority and a project developer, lenders should push for a related direct agreement (otherwise referred to as a tripartite agreement), giving the lenders the ability to rescue the project and correct a project developer default that would otherwise terminate the concession. Such step-in rights should normally be exercised during a reasonable time period, allowing the lenders enough time to assess the consequences of the breach and the ability to rectify it.

3.3 Delays or Suspension of the Works

Once the elation of reaching financial close and condition precedent satisfaction under the finance documents has subsided, the sobering task of executing the construction begins. The project developer and the contractor will hopefully have assessed the risk of site access and site conditions prior to execution of the construction contract, though unforeseeable site conditions may only be discovered at this stage of the project. Who takes the risk for site conditions is a key negotiation between the project developer and the construction contractor before execution of the construction contractor, and it wouldn't be prudent to ignore this risk by sweeping it under the carpet. Depending on the nature of unforeseeable site conditions, it may even require a variation to the works, but inevitably, it is likely to result in increased costs and delay to the construction milestones.

If the construction milestones are extended, then it's highly likely that the required commercial operation date for the project is going to be pushed back and the project developer needs to consider to what extent third party liabilities (for example, liquidated damages payable to any off-taker for power, or other service user) are triggered and to what extent they can be mitigated by an extension of time without liability (which might be unlikely).

It is also important to consider further, other reasons for delay or suspension. There are a number of scenarios which could arise, including failure by the project developer to make the site available to the contractor (perhaps because the relevant government authority has failed to make the land available to the project developer), a breach by the contractor of its obligations under the construction contract, a failure of a sub-contractor or supplier of goods and materials necessary for any civil, electrical, or mechanical engineering works necessary for the project, an event of force majeure impacting the site, or, other unforeseen circumstances that bring construction to a halt. These issues will be dealt with in the sections that follow.

3.4 Variations

We touched on the possibility of delay to the construction schedule above, arising from unforeseen site conditions, which might only be addressed by varying the works. In such circumstances, the construction contract needs to have a clearly specified mechanism to deal with an instruction to vary the works from either the contractor or the project developer, though it cannot be emphasized enough that should a notice to vary be issued, the consequences of that delay (and the likely increase in costs) need to be squarely allocated.

In well-structured projects with a concession agreement, the consequences of a variation to the works should ideally be addressed, depending on the reason for the variation and the implications for construction milestones and the required commercial operation date of the asset. Where a variation is required by the concession granting authority, then it's only fair and reasonable for the authority granting the concession to indemnify the project developer from increased costs or third party claims.

The common problem, however, is the question of who takes the risk for a variation required by unforeseen site conditions, which can only be fairly mitigated by either party carrying out detailed site due diligence before the construction contract is entered into (which is not often practical for a number of reasons).

A common risk that contractors face arising out of delay due to force majeure or other unforeseeable conditions, is the issue of what happens to goods, equipment and supplies in transit. Depending on the complexity of the supply chain, the question of suitable warehousing facilities for technical components needs to be addressed and the associated costs of storage.  Potential degradation of equipment also needs to be factored in, should storage conditions be sub-optimal, resulting in question marks about whether those components will be fit for purpose and whether related acceptance testing regimes will be passed.

Furthermore, warranties for defects liability are likely to fail in such situations and in the event that the contractor and the project developer cannot negotiate a solution for these problems, well-structured construction contracts should contain a variation mechanism, allowing the contractor to serve notice to vary the works, effectively cancelling particular sections that are to be constructed with components that have been degraded as a result of the delay and sub-optimal storage.

3.5 Authority Default

The scope for authority default depends on its obligations under the concession agreement. A common occurrence is the inability to procure land necessary for the project within specified timelines, either as a condition precedent to the concession agreement, or a condition subsequent. Astute lenders will insist that land acquisition is a condition precedent to the concession agreement becoming operational, which in itself would also normally be a condition precedent for drawdown under the loan agreement. For project developers, the key thing to look out for is that the failure of the relevant authority to meet its conditions precedent under the concession agreement, shouldn't trigger break costs under the financing documents (on the basis that the conditions precedent to the financing documents have not been met).

In road projects (where revenue arises from using the infrastructure, rather than derived from supplying energy or other services), the projections for traffic over the concession period are cardinal to determine toll revenues, debt service and returns on equity. Critical in concession agreements relating to roads are covenants by the granting authority that it will not develop competing infrastructure that will divert users from the project during the period of the concession. Common sense dictates that a competing project will likely see revenue drop and put the project into financial distress.

Project developers could at least ask for a right of first refusal to execute any competing project, but even then, that doesn't in itself mean that the existing project won't suffer revenue loss and lenders are likely going to be prejudiced, if revenue drops as a result of competing infrastructure.

3.6 Off-taker Default

Much of the initial due diligence by the project developer on the viability of the project will focus on the ability of the off-taker or user of the project being able to discharge its financial obligations in taking and paying for the out-put. Concerns about the credit rating of the off-taker at the beginning should set the alarm bells ringing over the actual viability of the project altogether. Credit support for off-take obligations are generally limited to revolving letters of credit for three to six month's debt financing obligations.

Beyond that, third party support is fairly limited and therefore, developers need to be aware to what extent there is a broader market for the project output or service beyond the original off-taker or user. In unusual circumstances, where government support in principal is available, though for whatever reason, not practical until a future date, the lenders to the project might suggest that the sponsors take government risk, up to and until the government provides support mitigating that risk, either through a guarantee or some type of concession agreement.

3.7 Borrower Default

The issue of Borrower default firstly begs the question under which project or finance document the borrower has defaulted and the nature of the breach. In badly structured projects, a default by the Borrower under one project document may not necessarily trigger a default under another project document or the financing documents. Consider, for example, termination under the concession agreement that did not trigger a termination of the off-take agreement. In such circumstances, the Borrower will no longer have the right to develop the project, yet theoretically, still have the obligation to provide the out-put, off-take or service.

Likewise, consider the circumstance whereby the concession agreement or the off-take agreement terminates and the construction contract doesn't terminate?  In such circumstances, the project developer will still have obligations towards the authority granting the concession and the construction contractor (and potentially, the operating contractor). Essentially, the point is that should one project document terminate for a particular reason, to what extent will a party be exposed for continued liability under other related project documents and it is surprising how often the issue of cross-default is overlooked.

Should the default arise as a result of a breach by the project developer, giving either: the governmental authority the right to terminate the concession agreement; the contractor the right to terminate the construction contract; or the off-taker the right to terminate any off-take agreement, then any termination notice will likely trigger a cross default the loan agreement financing the project. Following the expiry of cure periods to rectify the situation, the parties to the concession agreement, construction contract or off-take agreement will be faced with the possibility of termination and the consequences that will flow from it.

In well-structured projects, the lenders will have a tripartite or direct agreement in relation to all the major project documents (including the concession, the construction contract and the off-take agreement) with the project developer and the relevant project counter-party, permitting the lender to suspend the termination rights of that project counter-party for a period of time, to enable the lenders to remedy the default and even substitute the project developer out of the contract in the worst case scenario.

In such a scenario, the lenders will need to substitute the project developer from all related project documents, including any concession or off-take agreement (and also licenses and consents) and the substitute proposed by the lender will need to demonstrate the capability necessary to pick up the project and see it through to construction completion.

But what if the lenders decide, after the expiry of the termination suspension period in any tripartite agreement, not to either step-in, or find a suitable substitute? This would result in project termination, with counter-parties to the project documentation terminating their contracts, leaving the project in distress. In such circumstances, the tendering authority should, ideally buy the project back, on the basis that it would, in any event, revert to the authority following the expiry of the concession period. The buy back would ideally be at a value that would discharge existing lender debt, enabling the authority to retender the project (free of security interests) to the private sector and select a developer who can pick up the pieces and put the project back on track. 

3.8 Contractor Default

Contractor default is often mitigated by the liquidated damages regime in the underlying construction contract. In well-structured projects, delay to the construction schedule caused by the contractor, triggering liabilities under any off-take agreement, is mitigated by liquidated damages under the construction contract. Care needs to be taken however on the limitation of liability clauses and any caps that apply to the contractor's total exposure and considered carefully in the context of the liabilities that the project developer may be exposed to in any off-take contract. Liabilities, should, to the extent possible, be passed through, taking risk off the shoulders of the project developer.

Although perhaps the most common reason for disputes, delay is not the only reason. What happens if the project doesn't perform to the criteria specified in the technical requirements for the project? Again, this is often dealt with through the liquidated damages regime in the construction contract, though it is critical for the project developer to assess the risk of exposure under any off-take contract and again, as far as possible, pass through those risks to the construction contractor: a careful comb through the limitation of liability clauses is essential.

Needless to say, the bank guarantee or performance bond provided by the construction contractor is the core security for the project developer to mitigate its risk for contractor breach. On demand bank guarantees (that extent to the end of the defects liability period) for 10 per cent of the contract price are the standard requirement and project developers (and lenders) need to be careful that the bank guarantee doesn't contain contradictory drafting, suggesting that its encashment is conditional.

In the worst-case scenario, a project developer (or lender for that matter) would not want to have to dispute with the construction contractor the question whether the bank guarantee was on demand or not. It is therefore imperative that the guarantee is unambiguous and the notice for calling it must not require the project developer to establish that a breach has occurred.

Finally, common in Indian projects are corporate guarantees given in lieu of a bank guarantee. These corporate guarantees are often given by the construction contractor itself and are essentially, a contradiction of the definition of a guarantee: guaranteeing the performance of your own obligations makes no sense at all; if the contractor cannot perform its primary obligations, it is unlikely to be able to perform secondary obligations. Project developers (and lenders) should resist this approach and insist on a bank guarantee, or a parent company guarantee.

3.9 Change-in-Law

The risk of change-in-law, which has the effect of making the project illegal, unviable or no longer financially possible, needs to be duly mitigated under the concession agreement and government needs to squarely accept the risk of the consequences that flow from it. Any change-in-law, which makes the project illegal is essentially, an expropriation of the rights of the project developer and the flow of revenue that the asset will generate over the lifetime of the concession period.

In such circumstances, the project developer should be compensated, not just with an amount that will discharge lender debt, but also with an amount that would provide the project developer with a return on equity, essentially compensating the project developer for loss of expectation.

Far more likely during the course of the project concession agreement is a change-in-law that essentially makes the costs of the project more expensive. In such circumstances, the question of who should take the risk for an increase in cost of equipment, supplies or services needs to be considered along with the mechanism as to how such an increase in cost is going to be passed through?

It's worth pointing out here that particular risks such as the increase in cost in the supply of raw materials, need to be considered in detail. Generally, claiming frustration in such circumstances will not absolve project developers from the commercial risk of commodity prices, without the express contractual mitigation of such risks and who should take them.4

Finally, a word should be said about regulatory risk, especially on the financing and tax aspects. Changes in Reserve Bank of India policies on external commercial borrowing, and the rules governing foreign direct investment and the subscription for equity or debt instruments are forefront in the minds of all foreign project sponsors or lenders. The demonstration of predictable and stable rules governing the inflows of debt and equity and the repayment of interest, principal and dividend are critical to attract more foreign participation in Indian projects.

3.10 Force Majeure

Delay or suspension of a major project party's obligations under a key project document (including any construction contract) arising out of an event of force majeure, begs the question as to what happens when the period excusing performance expires?

Before we turn to that question however, it's important to consider whether the unforeseen circumstance causing delay or suspension falls under the definition of force majeure. Carefully crafted force majeure clauses are critical here, because differences between them between project documents could lead to the scenario where performance is excused on behalf of the contractor under the construction contract, but, if such event is not mirrored in any off-take agreement, it will not excuse performance by the project developer in relation to its third party obligations. This mismatch in risk is a common occurrence and very careful attention needs to be given to ensure that risks are dovetailed across all project documents.

That aside, the occurrence of other unforeseen circumstances that do not fall into the definition of force majeure should raise alarm bells: implicitly it raises the question as to why it wasn't included as an event of force majeure (or a change-in-law event) under the construction contract or the underlying concession agreement relating to the project at the drafting stage and to what extent the risk is allocated to a particular party.

Unallocated risk is therefore not an ideal situation for any of the parties to be in post facto, since it is inevitable that much time will be invested in trying to reach an ad hoc solution for the delay and how to allocate costs that will necessarily arise.


Notwithstanding the economic statistics suggesting that the Indian economy is the fastest growing major economy at the moment, policy makers in particular will do well to reflect on the more than sobering statistics cited in the first section of this article. For India to sustain medium to long-term economic growth, the project financing market has to grow at substantially higher levels to support that economic growth. Growth in the project financing market will only occur when private sector developers and lenders are convinced that the bottlenecks to project implementation are adequately addressed by government and the recycling of capital locked up in distressed projects is demonstrably achievable in a relatively short time-frame.

Well-structured projects require an understanding of the nuances of what can go wrong over the term of the concession and the consequences that flow from that. Risks that are known can be mitigated, or at the very least, be taken after factoring them into the commercials of the project. Risks that are unknown, however, are risks that nobody wants to take post facto and inevitably lead to delay and potential project paralysis.

Ultimately, how the parties to the project deal with the possibility of paralysis and the speed that it can be resolved determine the likely successful outcome of any project and this should not be forgotten in any project negotiation.


For further information and statistics on the project financing market during 2016, see Project Finance International's league tables for 2016 in the following link



4 See for example, the recent Supreme Court decision in April 2017 relating to compensatory tariff in Energy Watchdog & Ors v. Central Electricity Regulatory Commission set out in the following link

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.

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