The critical Delhi-Noida-Direct (DND) flyway, which connects the Capital to its booming suburb in neighbouring Uttar Pradesh, could well remain in the hands of its operator, Noida Toll Bridge Co. Ltd, for some 70 years despite the original concession period being only for 30 years, thanks to a little-noticed clause in the agreement.
Meanwhile, a government official familiar with the DND agreement said that several other such public private partnership (PPP) projects—in roads and ports—signed around the same time, also had similar clauses favouring private players, though he declined to identify other such projects or be named.
A study, Concession for the Delhi-Noida Bridge, done by an independent consultant and hosted on the Planning Commission’s website, notes: “This review has shown that the concession agreement for the Delhi-Noida bridge project has several features that appear to weigh the contract in favour of the private partner and that, from a public policy viewpoint, depart from best-practice contract design.”
Under the existing agreement, at the end of 30 years, Noida Toll would have had to hand back DND to the government for a token payment of Re1. This then would have allowed the government to either run it on its own and keep all the tolls, or lease it to another operator for a fee, or even decide to not levy any tolls. However, it is unclear how the 70-year estimate would change as it is based on current traffic projections.
According to the concession agreement signed by the government of UP, Noida Toll was guaranteed 20% return on the project cost, which was not capped. Additionally, the company was promised that if the annual revenues, made up of tolls and revenues from roadside advertising signs, were not sufficient to cover the assured returns, then the deficit would be added to the cost prior to computing the 20% returns for the next year.
As per the contract, project cost is defined to include the construction cost, major maintenance expenses as well as a category called other costs of commissioning, which covers a slew of items, including taxes other than corporate tax, insurance costs and staff salaries. Noida Toll recently replaced its operations and management contractor Intertoll Management Services with a group subsidiary ITNL India Consultants Pvt. Ltd.
In the six years since it was commissioned, the company’s revised project cost, according to Noida Toll officials, is currently estimated at more than Rs1,000 crore, more than double the initial investment cost. Since tolls can’t be raised indiscriminately, the only option open is to increase the concession period as built into the contract.
“A review of the concession agreement will reveal that the concession agreement is virtually in perpetuity and, in addition, the company has even managed to obtain adjoining land for commercial development,” said the same official familiar with the issue but who didn’t wish to be identified.
Indeed, Noida Toll says in its “admission document” ahead of listing on the Alternative Investment Market of the London Stock Exchange that “the concession period will be in excess of 70 years, as a result of the shortfalls in the recovery”.
“People are bound to call it a sweet deal,” said Pradeep Puri, president and chief executive officer of the Noida Toll. “But the fact is, our concession was without precedent. When we achieved financial closure (tied down financing for the project) in 1997, the interest rate environment was about 16-18%. Our financial architecture was based on that.”
The financial agreement was based on the fact that the expressway was a no-recourse project, Puri said. “If something went belly-up, then we cannot go to anybody (for the money),” he noted.
Noida Toll was one of India’s earliest road projects to be financed and run on the PPP model with the eight-lane expressway opening for traffic in February 2001. It was built and operated by a special purpose vehicle promoted by Infrastructure Leasing and Financial Services Ltd at a cost of about Rs408 crore; a link road added to a New Delhi neighbourhood cost an additional Rs45 crore. The equity share in the project cost is currently Rs186 crore, say its officials.
The company reported a net profit of Rs6.5 crore for the quarter ended June, up from Rs1.6 crore in the year-ago period. Average daily traffic for the quarter was 75,373 vehicles, up 19% from 63,133 vehicles in the 2006 period. The shares of Noida Toll closed at Rs25.80 on Wednesday on the Bombay Stock Exchange where they are trading well below their 52-week high of Rs43.60 of 10 October.
Drawing a parallel to National Highways Authority of India (NHAI) projects, which sees a significant amount of private investment, Puri said the accepted norm was the higher the risk, the higher the return.
“In NHAI projects, the levels of state guarantee are much higher. Most of their projects are annuities, where there is no traffic risk.” Annuities refers to a financing method where private sector investors are paid an annual amount by the government for financing and operating a public utility. The Noida expressway is not administered by NHAI.
At present, NHAI, which administers the 65,000km long national highway network in the country, does not transfer ownership of its projects to the private sector partner.
Not talking about DND, but commenting on PPPs as a financing mechanism in general, Vinayak Chatterjee, chairman of Feedback Ventures Pvt. Ltd, said that in an economy where private investment in public infrastructure is just evolving, the risk tends to get loaded initially on the state or on the taxpayers. “It has to be seen in context,” he said. “It (PPP) is a long story. In the long run, the graph will even out and the risk will be apportioned appropriately.” Feedback Ventures helps develop projects for private sector investment.