Understanding Performance Security in Highway Concession Agreements: A Deep Dive into Article 9

Public-Private Partnership (PPP) projects in India, particularly in the road and highway sector under models such as BOT, HAM, and TOT, are governed by carefully drafted Concession Agreements. One of the critical financial instruments embedded in these agreements is the Performance Security, covered in detail under Article 9.

In this article, we unpack Article 9 of a typical Indian Concession Agreement, explaining its intent, obligations, mechanisms, and implications—with a dummy example to make it practical for bidders, concessionaires, and stakeholders.

What is Performance Security?

Performance Security is a financial guarantee provided by the Concessionaire to the Authority to ensure faithful performance of contractual obligations. This serves as a risk mitigation tool for the public entity (NHAI or State Authority) in case of failure or default by the private developer.

It can be in the form of:

• An Insurance Surety Bond (per IRDAI norms),

• An Account Payee Demand Draft,

• A Banker’s Cheque, or

• An Unconditional Bank Guarantee / e-Bank Guarantee.

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Key Provisions of Article 9 Explained

9.1 – Provision and Timeframe

The Concessionaire is required to provide the Performance Security within 30 days of signing the Concession Agreement. Until then, the Bid Security remains valid.

Consequence of Non-Compliance: If Performance Security is not furnished within 30 days, the Authority has the right to encash the Bid Security and terminate the Agreement without further recourse.

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9.2 – Encashment Upon Default

If the Concessionaire fails to meet any Condition Precedent or commits a default, the Authority can encash the Performance Security.

Scenarios:

• Partial encashment: Concessionaire must replenish the security within 15 days.

• Full encashment: A fresh Performance Security must be submitted within the same timeline.

If not done, the Authority may terminate the Concession Agreement under Article 31.

Additional Cure Period:

Upon replenishment, the Concessionaire gets an additional 120 days to cure the default—except in specified situations (like Clause 4.5 failures).

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9.3 – Release of Performance Security

Performance Security remains valid for one year from Appointed Date. However, it can be released earlier if at least 30% of the Bid Project Cost has been expended and there’s no ongoing breach.

Efficient Concessionaires can unlock their capital earlier—an incentive for fast-track progress.

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9.6 – Legal Interpretation

Mentions of "Performance Security" in the agreement will be interpreted even if it hasn’t been submitted yet or has expired, for the sole purpose of calculating damages.

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9.7 – Additional Performance Security (APS)

If a bidder wins the project with a Bid Project Cost that is more than 10% lower than the Authority’s Estimated Project Cost, then an Additional Performance Security is required.

• This is also a Condition Precedent.

• Failure to furnish APS is treated as a Concessionaire Default under Article 31.

Rationale:

To prevent “unrealistically low bids” that can lead to future delays, cost overruns, or project abandonment.

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9.8 – Encashment and Release of APS

• If the agreement is terminated before achieving Milestone III (excluding Force Majeure or Authority Default), the Authority can encash APS.

• Once Project Milestone III is achieved (as per Schedule G), the APS must be released within 30 days of certification.

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Dummy Example: NH 123 BOT Project

Let’s consider an example to illustrate the workings of Article 9:

Project Snapshot:

• Project: 4-laning of NH 123 (BOT model)

• Estimated Project Cost (by Authority): ₹1,200 crore

• Bid Project Cost (by Concessionaire): ₹1,050 crore

• Performance Security: ₹52 crore

• Additional Performance Security: Required (since bid is >10% below EPC)

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Performance Security Timeline:

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What if the Concessionaire Failed to Submit PS?

If PS was not submitted by Jan 30:

• Bid Security would be encashed by the Authority.

• Agreement deemed terminated.

• Concessionaire loses all claims to the project.

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Strategic Takeaways for Bidders

• Early planning of PS/APS is crucial—secure approvals from insurers and banks in advance.

• Keep track of Condition Precedents, including APS where applicable.

• Utilize the milestone-linked release clauses to free up capital early.

• Ensure compliance to avoid triggering Article 31 (Termination for Default).

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Conclusion

Performance Security is not just a procedural formality—it’s a foundational risk instrument in Concession Agreements that protects public investments and incentivizes private diligence.

For developers, understanding the nuances of Article 9 helps avoid early-stage defaults, maintain project credibility, and optimize financial planning.