The Uninvested, Immune & Experienced 'Associate': Ensuring The Project Performance Certainty In Concession Agreements

The question of significance

India’s infrastructure programmes largely depend on public-private partnerships (“PPPs”) to mobilise specialised expertise, capital and operational capacity for projects that serve public purposes. Models such as DBFOT, BOT, BOOT, HAM and similar arrangements distribute construction, financing, demand, operational and hand-back risks between the public authority and the private participant. The success of these models for projects depends not merely on selecting the most qualified and competitive bidder, but also, amongst others, on ensuring that the entity whose credentials secured the award remains meaningfully responsible for performance throughout the concession period.

This becomes especially important where a bidder does not have the required sector experience or financial strength on its own and qualifies by relying on an associate company. Model documents often allow bidders to rely on the credentials of connected entities popularly called ‘associates’, while the concession is later signed through a newly incorporated special purpose vehicle (“SPV”). The bidder is then subjected to equity lock-ins, restrictions on change in ownership and minimum shareholding requirements among others. However, the ’associate’ whose technical experience or net worth helped the bidder qualify and win may not have any clear continuing obligation to the project.

This article looks at that gap between qualification and the lack of any responsibility by the ‘associate’. It argues that while the law may recognise control, influence and group relationships, but it does not automatically make an associate responsible for the liabilities of the bidder or SPV. Unless the bid documents and concession agreement clearly connect the credential-providing associate with project delivery, the bid inviting authority may be left to enforce the bid and /or concession only against a bidder or SPV that did not have the relevant capacity in the first place.

To put the issue more simply, consider a company that works mainly in the hospitality sector and does not itself have the technical experience required for a large aviation-sector project. That company may still qualify for the bid by relying on the technical credentials of its ‘associate’ that has relevant aviation experience. If the bid is successful, the bidder may be locked into the project SPV through equity and ownership restrictions. However, the Model Concession Agreement often do not require the associate, whose credentials were relied, to remain involved in the concession SPV or take on any  obligation much less a continuing one. This can leave the bid inviting authority dealing only with a bidder that may not have had the required technical expertise on its own, while the associate remains outside the ambit of bid and/or concession agreement and beyond any  contractual accountability. This article treats that gap as a practical risk to project certainty and examines how it can be addressed systematically.

Qualification through an associate: the structural mismatch

The legal framework: “Associate Company” under the Companies Act, 2013

Section 2(6) of the Companies Act, 2013 (“Companies Act”) defines an “associate company” as a company over which another company has significant influence, but which is not its subsidiary, and includes a joint venture company. The explanation connects “significant influence” with control of at least twenty per cent of total voting power, or control of, or participation in, business decisions under an agreement. The definition recognises a real business relationship, but it does not make one company automatically responsible for another company’s contractual obligations. Further, a company continues to retain its separate legal entity status. This means that the bidder, the concessionaire SPV and the associate are separate entities with separate assets and liabilities.

Control, significant influence and related-party discipline

The Companies Act does, however, give useful language for identifying connected companies including defining ‘control’ and its contours under Section 2(27) to include the right to appoint a majority of directors or to control management decisions, whether directly or indirectly, through shareholding, management rights, shareholders’ agreements, voting agreements or otherwise. Section 2(87) identifies a subsidiary by control of the board’s composition or by exercise or control of more than one-half of total voting power. However, these provisions do not, by themselves, turn pre-bid reliance on an associate into a post-award performance obligation.

Why the concession structure magnifies the problem

The Government of Insia’s model PPP documents are meant to balance and allocate risks, contingent liabilities, guarantees, service-quality standards and performance obligations across the project cycle to the party best suited to take that risk. However, we found that the model frameworks leave the issue of maintaining associate’s skin in the game largely untouched. Leaving it unaddressed also touches upon the competitive aspect of any bid. The qualification conditions are intended to ensure that similarly placed bidders are assessed on comparable evidence of capacity. If an applicant can rely on an associate’s credentials without securing that associate’s continued participation, the threshold may be met on paper without the same level of real or tangible project support. This may disadvantage bidders that keep equivalent expertise within the bidding entity or commit experienced consortium members directly to the project. It also presents some larger practical questions which are pertinent for discussion.

The “experienced-but uninvested and immune associate” risk

While the model documents may not fix any obligation upon the associate throughout the project cycle, it may create a tangible risk. The associate may no longer meet the relationship test after bid submission, transfer its shareholding, withdraw key personnel, technology or operational support, or go through a change in control. While the  bidder and the consortium members, if any, may remain formally locked into the SPV, at least unto a couple of years post commercial operation of the project is achieved;  the real source of technical experience is no longer available to the project. If the bid and/or concession agreement does not treat this as an issue requiring cure, replacement or other corrective action, the bid inviting authority may have to continue with a bidder and resultantly a concessionaire SPV, whose qualification profile has materially changed after award of the project.

The practical experience

A balanced and practical solution propounded from our experience while assisting in a high value project development, proposed to match the associate’s obligation to the role its credentials played in the bid. At the outset, during the bid submission, a requirement must be added to RFP/RFQ for the bidder to identify each associate whose credentials are being relied on and specify the technical or financial requirement supported by that associate. Second, where those credentials are important to qualification, the associate should provide a clear credential-support undertaking to the Bidder and in favour of the Authority and the concessionaire which should subsist and binding at least unto a few years unto the commercial operation date. Third, the draft concession agreement should treat the breach of such undertaking as an event of default including if the qualifying relationship is lost, committed support is withdrawn, or the associate’s representations are materially inaccurate. Depending on the seriousness of the issue, the consequences may include cure, approved replacement or default.

Drafting safeguards and proportionality

In practice, bid inviting authorities have two main options. One option is to disallow reliance on an associate’s credentials and require every bidder or consortium member to meet the prescribed technical and financial thresholds on its own. While this approach is clean in principle, it may discourage and narrow the competition and exclude capable corporate groups from participation in major bids. A more workable solution appears to permit credential reliance, but only where the relevant associate gives a binding undertaking as discussed in the foregoing part above. Where an associate’s technical experience, financial capacity or net worth is relied upon for qualification, the associate should accept responsibility, along with the bidder and concessionaire SPV, for the project obligations connected to those credentials. The undertaking should be signed at the bid stage, survive award and incorporation of the SPV, and remain in place for the period during which the relied-upon qualification matters to project delivery, at least until the project achieves COD.

At the same time, the obligation should not be open-ended. Making every associate jointly and severally liable for the entire concession could discourage genuine group participation and increase bid prices. The existing distinguishment alike the members of the consortium (viz. technical and financial) can be used to categorize associate’s whose credentials are being relied for specific obligation fulfilment. A technical associate may need to provide personnel, know-how and replacement support during construction or stabilisation. A financial associate may need to maintain net-worth support or provide a capped guarantee until financial close or completion. The liability should be limited by amount, duration and subject matter, but it should still be direct enough to ensure that the associate is not merely lending its credentials without any real project responsibility.

Conclusion

 The associate credentials are useful because infrastructure groups often spread experience, assets and financing capacity across separate entities. The Companies Act recognises these relationships through the concepts of associate company, control, subsidiary and related party, but it also preserves each company’s separate legal identity. It does not automatically make the credential-providing associate liable under the bid or concession framework. The procurement documents must therefore fill that gap by expressly connecting decisive credential reliance with a proportionate and enforceable support obligation. If an associate’s experience helps a bidder win a public project, that associate should retain a defined legal stake in supporting delivery. This would improve bid integrity, and project-performance certainty while still respecting legitimate corporate individuality.