Concession of the Delhi-Noida BridgeCase Study

MDI, GurgaonFebruary 12, 2015

*BackgroundOne of the three bridges across Yamuna connecting Delhi and Noida which is tolledMoU signed on April 7, 1992 between IL&FS, NOIDA and Delhi AdministrationIL&FS recognised as the developer of the projectSteering Committee comprising representatives of GoUP, GoD, MoUD, DDA, NOIDA and IL&FS established.Noida Toll Bridge Company Limited (NTBCL) incorporated on April 8, 1996NTBCL to develop, establish, design, construct, operate and maintain the flyway

* Background .contdConcession Agreement signed between IL&FS, NTBCL and NOIDA on Nov 12, 1997Bridge opened for traffic in February 2001Technical Details552.5 m long bridge with approach roads on the Delhi and Noida endsEight lanes with capacity of 222,000 vehicles per day. (Average Daily Traffic in 2000-2001 was 17,000 vehicles per day and grown to 99,700 vehicles per day in 2008-2009)Financing DetailsProject Cost Rs. 408.2 croreEquity Rs. 122.4 croreDebt Rs. 285.8 crore (Rs. 235.8 loans from banks and FI and Rs. 50 crore from deep discount bonds by NTBCL)

*Concession Agreement30 year BOOT concessionKey IssuesGuaranteed returns on total project costDevelopmental RightsTermination PaymentsMultiple Role of SponsorIndependent Auditor and Independent EngineerSelection of Project Oversight BoardFees

* Concession Agreement contdGuaranteed returns on total project costConcession Agreement grants the right to the Concessionaire to collect user fees to recoverTotal Project Cost as well as a return of 20% per annum on the Total Project Cost over the Concession Period of 30 years.In the event the Concessionaire has not recovered the Total Cost of Project and returns thereon on 30 years the concession period would be extended for a period of two years until the Total Cost of Project and the returns thereon are recovered.Total Cost of Project (for determining returns) includesProject Cost Cost of Construction and other cost of CommissioningMajor Maintenance ExpensesShortfalls in the recovery of returns in a specific FY

* Concession Agreement contdEffect of Guaranteed returns on Agreement In 5 yrs of operation (upto 2006) the accrued dues to the company was Rs. 953.4 crores. (As on March 2008 the dues are 1284 cr.)Simulation exercise carried out by the consultant of the concessionaire estimated the Total Project Cost to rise to Rs. 11,817.54 crore by 2021 even if entire operating surplus is allocated for payment of returns.Such shortfalls and consequential rise in Total Project Cost would lead to extension of concession period i.e could result in a perpetual concession. The Directors estimated the concession in excess of 100 years in 2009.As the returns are calculated on the Total Project Cost which includes debt. The actual return on equity is in excess of 32% and could eventually increase to over 47%.Alternatively increase in toll rates or grant of developmental rights were considered

* Concession Agreement contdDevelopmental RightsAdditional rights could be granted by NOIDA for enabling the Concessionaire to generate additional revenues for reducing the Total Project CostRights include provision of advertising services, developing hotels, restaurants and other facilitiesDND Flyway Limited (wholly owned subsidiary of NTBCL) incorporated for carrying out developmental activities.99 acres of land (65 acres on Delhi side and 34 acres on Noida side) available with NTBCL for development30.493 acquired by DND Flyway Limited from NTBCL at a cost of 103.48 crore.Criteria for award of developmental rights, the way developmental income would be used for reducing Total Project Cost and also how the developmental income would be monitored are not specified in CA

* Concession Agreement contdTermination on account ofConditions Precedent not satisfiedDefault by either partyForce MajeureTermination PaymentNoida event of defaultAll sums due to the lenders including the interest accrued and any other amount due and payableTotal Project Cost and returns thereon (in case Noida decides to repudiate the agreement in public interest it would be obliged to pay the Concessionaire an amount of Rs. 1486.3 crore in March 2009 which was three times the original project cost).

* Multiple Role of the sponsorIL&FS the project sponsor was involved inConceptualising the projectAs a member of the steering committee, in deciding that the project would be implemented by an entity promoted by itselfAs a lender to the Concessionaire have voice in selection ofIndependent EngineerIndependent AuditorSelection of one member Project Oversight Board in case of no agreement between NOIDA and the ConcessionaireChairman of the three member fee review committeeThe project was awarded as a sole source negotiated project has not faced the market test of commercial viability.

* User FeesConcessionaire given the power to determine, demand, collect, retain and appropriate the user fee in order to recover the total cost of project and returns thereon.Base fee rate is adjusted to reflect the consumer price index and full indexation has been permitted.Present toll is Rs. 20 for the 5-6 Km stretch

* Questions for DiscussionWas there a serious conflict of interest? Did it affect the project structure?Do negotiated projects adequately protect public interest?Should the Authority keep the Total Project Cost and the operational cost of the project open?Should the user charges be fixed by the concessionaire?Should the returns to the developer be guaranteed? Should returns be allowed on equity alone or on total project costs?Should the concession period be increased to allow the concessionaire to recover all its costs and returns? Should additional real estate rights be given after the contract has been signed? If yes, what should be the treatment of supplemental returns from such real estate rights?What is the way forward?

* Concluding ThoughtsSeveral features appear to weigh the contract in favour of the private partner from public policy point of view.Need for competitive process for selection of the Concessionaire.Capping of total project cost and O&M cost to minimise potential for gold plating.Conflict of Interest. Single entity acted asAdviser to the conceding AuthorityPromoter/ sponsor of the concessionaire companyLender to the project

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