Sunday, April 12, 2015

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:

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

[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

[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.

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