Tuesday, March 29, 2011

Chhattisgarh Accelerated Road Development PPP: brazen corruption


The state government makes a crude attempt at allowing an unfair advantage of Rs 5700 crore to the private partner in a PPP project for roads, finds an RTI activist.

In January 2007, Chhattisgarh government and IL&FS (Infrastructure Leasing & Financial Services Ltd) signed a ‘programme development agreement’ for ‘Chhattisgarh Accelerated Road Development Programme’.
A June 2007 advertisement issued by the state government said it was building 1754 lane kms of roads under Chhattisgarh Accelerated Road Development Programme (CARDP) at a cost of Rs 2500 crore.
The programme was to be executed in ‘fast track mode’ as a public private partnership (PPP) between the government and IL&FS.
The two partners incorporated Chhattisgarh Highways Development Company Ltd (CHDCL), a special purpose vehicle (SPV) for project implementation, in which IL&FS held 74 per cent equity and the government held the remainder.
The project was described as ‘annuity-based programme’ because the government were to make annuity payments to the concessionaire.
An investigation by an RTI activist
Starting from July 2007, Rajesh Bissa, who is one of the secretaries of Chhattisgarh Pradesh Congress Committee, made a series of RTI requests to the public works department (PWD) to seek more information about CARDP.
He asked for the following information, among other things.
(1) Copies of expressions of interest for selection of private partner for upgrade and construction of roads, all correspondence about tendering system, copies of bids, file notings for evaluation of bids and documents related to pre-bid meeting, etc.
(2) Copies of agreement signed between the government and IL&FS.
(3) Copies of amendment, if any, made in the agreement with IL&FS and relevant file notings.
(4) List of roads to be constructed.
(5) Documents of incorporation of CHDCL and relevant correspondence.
Grave illegalities
In response, PWD released copies of expressions of interest (EOIs) for selection of private partner, the programme development agreement signed with IL&FS, and other information some of which was let out only after months of struggle by Bissa and adjudication by the state information commission (SIC).
The documents showed that the EOIs were invited for 1500 kms of roads, but the programme development agreement had mysteriously acquired a figure of 2500 kms.
The lists of roads under CARDP showed that the government had already asked IL&FS to start work on 2286 kms of roads.
What it meant, in simple terms, was that the government had illegally awarded 1000 kms of extra road work worth thousands of crores of rupees to the private partner without so much as a legal procedure.
The agreement had been signed on the government’s side by P. Joy Oommen, who was then Principal Secretary, PWD, but there were no signatures by witnesses.
“The entire procedure for selecting the private partner from four bidders appeared to be loaded in favour of IL&FS,” says Bissa.
In assessing the bidders, their parent company or subsidiaries should not have been considered, but IL&FS had been considered along with IL&FS Transportation Networks, a subsidiary.
IL&FS made the second best bid, behind a Malaysian company, which mysteriously opted out at the final stage.
The bidders were not required to deposit any earnest money, but only a small processing fee of Rs 50,000 each.
Cheques of processing fee accompanying two of the four bids did not conform to the prescribed mode of payment, but the bids were still accepted, presumably to create an appearance of sizeable competition.
While IL&FS had asked in its original bid to be paid Rs 351 for every Rs 100 of cost, the agreement allowed a larger amount of Rs 384, or Rs 825 crore in absolute terms.
The cost was estimated to be Rs 1.50 crore per km of road length, i.e. Rs 1500 crore for 1000 kms. So IL&FS was to be paid about Rs 5700 crore for Rs 1500 crore of the cost at the rate of Rs 384 for every Rs 100 of cost.
Given that 1000 kms of additional road length had been fraudulently introduced into the agreement, IL&FS would have received Rs 5700 crore of payment in addition to what it was to be paid for constructing road length that was agreed upon.
More revelations
The documents also revealed that the state cabinet gave ex post facto approval to the programme development agreement 10 months after it was signed.
The revelations were widely reported in the Media. In September 2007, almost all local newspapers carried the news about illegal addition of 1000 km of road length to the contracted road length.
As the opposition parties demanded scrapping of the agreement with IL&FS, the state government was compelled to do some damage control. It stated that a “typing error” had caused 1500 km to become 2500 km and hurriedly signed an amendment to the agreement with IL&FS to restore the lower figure.
The state government had no convincing explanation, however, as to why it sent to IL&FS a list of roads totaling 2286 km in length if the contracted road length was only 1500 kms.
Writ petition
As the government continued to trot out unconvincing explanations, Bissa filed a writ petition (PIL) in April 2008 at Chhattisgarh high court, seeking an independent enquiry, action against officials involved in the scam, and quashing of the agreement with IL&FS.
The court, however, disposed of Bissa’s petition with the suggestion that the matter needed a thorough enquiry, which Chhattisgarh Lok Ayog was in better position to conduct.
In May 2008, Bissa made a formal complaint to Lok Ayog, which issued in June 2008 notices to the chief minister, the PWD minister, and other top officials. The enquiry is still on.
Interestingly, the uncovering of the “annuity scam” has stalled the entire road project without any stay order from the court, according to Bissa.
(The scam was well reported in the local Hindi press. The details of the scam, based on documents obtained by Rajesh Bissa through RTI Act and press reports, have also been reported by Public Cause Research Foundation or PCRF, a Ghaziabad-based NGO that organizes RTI awards. http://www.rtiawards.org/rajesh_bissa.html)

Delhi-Noida toll bridge: loaded for private windfall profits


A case study commissioned by the Planning Commission shows the Delhi-Noida toll bridge PPP to be a manual on how to milk the public for private profits.

The Delhi-Noida toll bridge is one of the three bridges across the Yamuna river connecting Noida (in Uttar Pradesh) with Delhi and the only one that is tolled.
Popularly known as the DND Flyway, the bridge is 552.5 metres long and includes the approach roads on the Delhi and Noida ends. It has eight lanes with a capacity of around 222,000 vehicles per day.
The main advantage of using the bridge is the savings in time, distance and fuel consumption for travelers between South Delhi and Noida.
One of the earliest PPPs
The bridge, which opened to traffic in February 2001, was among the first few projects to have been developed as a PPP in India.
The project was structured as a Rs 408.2 crore, 30-year BOOT concession, which was financed through equity of Rs 122.4 crore and debt of Rs 285.8 crore. Debt financing consisted of term loans from various Indian banks and financial institutions totaling Rs 235.8 crore and the issue of deep discount bonds totaling Rs 50 crore by the Noida Toll Bridge Company Ltd or NTBCL (the concessionaire).
IL&FS, Noida authority (New Okhla Industrial Development Authority, an agency of the Uttar Pradesh government) and the Delhi Administration signed an MoU in April 1992, which recognized IL&FS as the developer of the project, notes Sheoli Pargal in a case study, commissioned by the Planning Commission and published in August 2007.
IL&FS incorporated NTBCL in April 1996. Concession agreement, signed in November 1997, grants NTBCL the right to collect user fees to recover (a) the total cost of the project, as well as (b) returns on the total cost of the project at a rate of 20 per cent per annum, over the concession period starting from the effective date.
The return on the total cost of the project is guaranteed in that the contract provides that the concession period will be extended by Noida in two-year increments beyond the 30 year initial concession period until such time as the total cost of the project and the returns thereon have been recovered by the concessionaire.
No cap on project cost
Pargal notes that the guaranteed return on the total cost of the project is the aggregate of (i) project cost, (ii) major maintenance expenses and (iii) shortfalls in the recovery of returns in a specific financial year. Project cost is defined as, collectively, (a) the cost of construction and (b) the other costs of commissioning.
“The project cost is defined ex post – once construction and commissioning have been completed – and the contract does not put a cap on project cost and total cost of the project.
This means the magnitude of the financial commitment being made by Noida, and, whether it is ‘reasonable,’ are not known up front.
Since the contract provides for returns on total project cost, the public interest in ensuring that only ‘appropriate’ expenditures are incurred would have been better served if the agreement had provided specifications and costs,” says Pargal.
She adds: As high costs would be borne by Noida and users, it would have been appropriate for Noida to have a say in approving the costs incurred by the concessionaire, especially the capital cost of Rs 408 crore and its components, to ensure that they were ‘reasonable’.
While auditors can certify that specified expenditures have occurred, they cannot opine upon whether these expenditures are ‘reasonable’.
Open-ended base for profits
The agreement does not provide a tight definition of what items are allowable as costs; so costs are effectively open ended. Given the public service nature of the project, the base upon which returns are guaranteed is unduly inflated by including the management fee in project cost and by including land costs, rather than having the government absorb these costs.
In fact by providing a return on the total cost of the project and not specifying exactly what is included under total cost, a perverse incentive is created for the concessionaire to (a) attribute whatever it can to the cost of the project and (b) over-engineer the project.
Such as increase in project cost would mean that toll levels and/or the concession period would need to be adjusted upwards to permit recovery of costs and returns; so users could end up paying unnecessarily high tolls and for a longer period than warranted, says Pargal.
The total cost of the project, which qualifies for an assured return of 20 percent per annum, includes shortfalls in the recovery of returns in previous financial years.
In other words, if the toll revenues of a given year do not generate such returns, the deficit is added to the total cost of project and the enhanced total cost of project forms the base for calculating the return of 20 percent in subsequent years.
“The inclusion of shortfalls in the recovery of returns in total cost of project not only substantially removes traffic risk from the concessionaire, but could be expected to result in very significant increases in the total amount due to the concessionaire.
Since any deficit in returns significantly increases the total cost of the project, this can create a vicious cycle in which shortfall in achievement of required returns and the compounding thereof results in a repeated need to lengthen the concession period and/or raise toll rates or grant development rights.”
In fact, actual revenues fell far short of projected revenues in the initial years of operation of the bridge, leading to significant losses which were added to total project cost. The first ever book profit was earned by NTBCL only in the year ended March 31, 2006.
There is no incentive to minimize costs since costs are completely passed through to consumers. O&M expenses are taken ‘off the top’ when determining the surplus available for appropriation to recover project cost and returns.
There is neither any norm-based estimate of what they should be nor any cap on what is allowable. For instance, they include “without limitation” attorneys’ fees associated with the settlement of pending or threatened suits/claims.
Profits without risks
Several of these eventualities have come to pass. The independent auditor has determined accrued return due to the company till March 31, 2006, amounting to Rs 953.40 crore, inclusive of project cost.
The directors estimated that the concession period will be in excess of 70 years, as a result of the shortfalls in the recovery by the company of the total project cost and the returns to date.
Finally, the concessionaire has requested the grant of development rights under the concession agreement and has received ‘in principle’ approval for the same. Subsequently, DND Flyway Ltd, a subsidiary of NTBCL, has acquired 30.5 acres of land for development from its parent.
The level of return, at 20 percent per annum on the total cost of the project, cannot be assessed as appropriate without knowing whether such returns are the norm.
In the absence of benchmarks or data on comparable projects in the sector and country at the time, the return can be judged to have been justified only if it was the outcome of competitive bidding for the contract. However, the concession for the Delhi-Noida toll bridge project was not awarded competitively.
High returns are also considered a reward for high risk. In this concession agreement, however, the guarantee of return means that the concessionaire does not bear any significant commercial risk.
Big returns on equity
In addition, since the base upon which returns are paid is the total cost of the project, i.e., equity holders are effectively earning substantially more than 20 per cent per annum given the rate of interest on debt is less than 20 per cent per annum.
In effect, the margin between the average interest rate payable on the company’s term loans (14.7 per cent per annum) and the assured return of 20 per cent would accrue as an additional return to equity holders, who would receive about 32 per cent per annum on their equity holding.
In fact, returns to equity are likely to be higher than described above on two accounts.
First, carrying forward the annual deficit in returns and payment of compounded returns on this deficit means that while the debt burden on the concessionaire would only be compounded by the rate of interest, a major share of the compounding of returns would be allocated to equity, resulting in an extraordinary rise in the return on equity.
Second, debt has been restructured to reduce the average interest rate payable. This implies a sharp rise in the return on equity as there is no mechanism in the concession agreement for the conceding authority or the users to claw back these gains.
Onerous obligations for public partner
The criteria for deciding that development rights need to be granted, the value of the development rights to be granted (and the principles underlying such valuation), as well as the duration for which they would be granted are not known.
The concession agreement also does not state how the development income generated would be monitored in the absence of an escrow account, by whom it would be monitored and what role, if any, the independent auditor would play in this.
In the event Noida authority decides to repudiate the agreement, it would be obliged to pay the concessionaire an amount equal to the total project cost and returns thereon outstanding till the termination date.
Since the accrued return due to concessionaire was as high as Rs 953.4 crore in March 2006, it would be very difficult for Noida to terminate the contract.
In the case of termination following a concessionaire event of default, Noida is obligated to compensate the concessionaire for the debt and debt service outstanding.
No distinction has been made in terms of compensation between a concessionaire event of default that occurs prior to operationalisation of the bridge and the one that occurs after the operationalisation. In both cases Noida authority pays off the total debt outstanding.
‘Let me award the project to myself’
IL&FS, a project sponsor, was fully involved in (a) conceptualizing the project and (b) as a member of the steering committee that decided that the project should be implemented by a corporate entity promoted by itself.
This involvement of the project sponsor in designing the structure and setting the technical specifications of the project would be considered a clear conflict of interest under public-sector contracting norms, says Pargal.
IL&FS was also counted among the lenders to the concessionaire and in that capacity would have had a voice in the selection of the independent auditor and independent engineer, sole say in the selection of the one-member project oversight board in case of no agreement upon this between Noida and the concessionaire, and, likewise, sole say in determining the chairman of the three-member fee review committee.
The potential tie-breaking role of IL&FS (as a lender) in the these selection processes could result in both the project oversight board and the free review committee being perceived as weighted in favour of the interest of the private partner.
The concession agreement does not spell out the penalty payments or sanctions for not adhering to performance specifications/standards. Pargal cites several other provisions loaded in favour of the private partner.
Pargal concludes that the Delhi-Noida toll bridge project illustrates “the pitfalls of not following the good practices in contract design and the process of awarding the contract.”
The net profit of the Noida Toll Bridge Company rose 45.04 percent to Rs 10.07 crore in the April-June 2010 quarter from Rs 6.95 crore in the corresponding quarter of the previous year, according to media reports of July 2010.
“It is one of the most lucrative public-private partnerships this country has seen,” Ashish Chugh, an investment analyst, was quoted as saying by Moneycontrol.com.
Chugh added: “As on March 31, 2009 this company had receivables of about Rs 1486 crore from Noida Authority, which is a shortfall in 20 percent guaranteed profits and as on 31 March, 2010 that figure would have jumped to about Rs 1,700 crore. So you have a company that is available at enterprise value of Rs 780 crore where the value of the asset if build today maybe much more than the current enterprise value of the company and along with that they have got receivables, which are good which will come to them over a period of time of about Rs 1,700 crore.”
(This article is primarily based on a detailed case study on Noida toll bridge project done by Sheoli Pargal on behalf of the Planning Commission. The full case study can be accessed on government website: http://infrastructure.gov.in/pdf/NOIDA.pdf)

Tirupur water supply PPP: stubborn secrecy


Despite a ruling by the Madras high court, the concessionaire has refused to share with the public information about the project, which otherwise has not fulfilled its tall promises, find researchers of a Madhya Pradesh-based NGO.

Located in Coimbatore district of Tamil Nadu, Tirupur is an industrial town that is home to a vibrant garments industry. In 1995, Tamil Nadu government and IL&FS promoted New Tirupur Area Development Corporation Ltd (NTADCL) as a special purpose vehicle (SPV) to implement the Tirupur Area Development Programme (TADP).
TADP primarily included Tirupur water supply and sewerage project (TWSSP) which became operational in April 2005
The concession agreement allows NTADCL to develop, construct, operate and maintain a 185 million litre per day capacity water supply project and sewerage facility.
The total project cost is Rs 1023 crores; NTADCL is to supply 185 million litres per day (mld) of raw water -- 100 mld water to industries, 36.3 mld to ‘wayside’ villages and 48.7 mld to domestic and non-domestic users within Tirupur Municipality (TM).
The concessionaire (NTADCL) also has the mandate to increase non-domestic water supply by additional 65 mld in case the demand for water from the industries exceeds the allocated 100 mld.
The project draws water from Bhavani river from an intake station located about 55 km from Tirupur. NTADCL is also to collect and treat 30 mld sewage and connect about 9000 new households to the sewerage network by 2014.
There is also provision for 255 low-cost public toilets in all the 88 slums of the Tirupur town, which, the concessionaire claims, will benefit about 60 percent of Tirupur town.
While IL&FS holds 27.17 per cent equity in NTADCL, the state government holds 17.04 per cent, according to the facts presented in the Madras high court in early 2010 in a lawsuit that is discussed below.
AIDQUA Holdings, a Mauritius-based company, holds 27.89 per cent and public-sector insurance companies hold 10.85 per cent.
Manthan’s studies
Manthan Adhyayan Kendra, an NGO based in Badwani, Madhya Pradesh, that tracks privatization of water projects, has been studying the project since 2006 and made in 2007 field visits to Tirupur town, some villages in the neighbourhood, some of the industries, as well as Chennai where head offices of the most of the agencies involved are located.
The Manthan team met slum dwellers, corporators, political workers, industrialists, journalists, lawyers, environmental consultants, water engineers, trade unionists, etc. The representatives of IL&FS and NTADCL refused to meet the Manthan team or respond to its communications.
The following were the findings of Manthan’s Gaurav Dwivedi as included in a presentation he made in August 2008 at the ‘Third international conference on public policy and management’ at IIM-Bangalore.
No improvement in water supply to village panchayats and slums
The project promised improved supply of potable water to Tirupur municipality and village panchayats, which, according to census estimates, have population of of 4.5 lakh each.
Interviews with slum dwellers of Tirupur municipality confirmed that they still have to buy water from the colonies with regularized connections or from water tankers, who sell it for Rs two to Rs five per pot.
They still have to wait long hours for the tankers to deliver water or walk long distances to fill their pots from the colonies.
The project documents claim that water supply to the municipality would be 25 mld out of the total 185 mld.
The concern with this claimed benefit is that the project is not directly related to the issues of water supply, distribution and extension of services; it just delivers water at the input points of the municipality and the village panchayats. In all 21 panchayats were promised 35 mld water from TWSSP.
The concession agreement states that all the panchayats should have contractual agreements with NTADCL for potable water supply, but local sources claimed that NTADCL was supplying water only to 10.
In some of the panchayats, water is supplied once in 10-12 days. The panchayat presidents have long been demanding that NTADCL should increase the allocated water supply to the villages.
Tirupur’s high migrant population – about two lakh in number at any given time during the year -- further stress the water supply.
According to media reports, local people have staged road blockages and protests against NTADCL, demanding an increase in the quantity of water supplied to the VPs. Water supply increased after such actions, albeit marginally.
Tariffs for domestic users are Rs five/KL and Rs 3.5/KL in the municipality and rural areas, respectively, which, project authorities claim, are subsidized by tariffs for industrial areas. Industrial users pay in the range of Rs 23-45/KL.
Tariffs for domestic consumers are slated to be reviewed after the first two years of the operations.
The concession agreement requires the concessionaire to introduce ‘subsidy correction factor’ to gradually end the subsidization of domestic tariffs.
Preliminary assessment shows that while the supply of water to the local polluting dyeing and bleaching industry has improved, the project has not been able to improve access and affordability of water for the lowest rung of the Tirupur society, i.e. slums-dwellers and panchayats.
All risks covered
Tirupur water supply and sewerage project exemplify public sector’s eagerness to assume the risks for and on behalf of the private sector.
The state government has provided the private partner guarantees against risk concerning quality, quantity, regulation and control, and use by others of the water flowing in Cauvery upstream of the abstraction area.
The state government has undertaken to regulate the use of ground water in Tirupur region for non-domestic purposes. It has agreed to extend the concession period of 30 years if NTADCL is not able to generate expected returns from the project within that period.
The government has also agreed to reviewing tariffs and changing the formula to calculate tariffs to make it more likely that NTADCL will recuperate its investment and make profits.
No claims from riparian or any other users of raw water from Cauvery can be brought against NTADCL for withdrawal of water from the river.
The state government will bear the expenditure on land acquisition, if any, and rehabilitation, relocation and resettlement of persons displaced by the project. The TM will lease project sites with all clearances.
The state government has guaranteed that any change in law or tax regime would not adversely affect NTADCL returns from the project. NTADCL would be granted exceptions under Tamil Nadu Land Reforms Act in relation to the leased land in case of any future change in the law.
The state government would have to mitigate any action or suit that may have material adverse effect on NTADCL.
The government would ensure that the wayside villages would enter into service agreements with NTADCL for purchase of potable water and discharge their dues.
The state government has undertaken not to use its ‘sovereign immunity’ in any lawsuit or asset.
NTADCL would be compensated for losses suffered during the concession period on account of lack or delay in any clearances, or any clearance revoked, not renewed or additional clearance not given by the state government.
The Tirupur municipality will also fulfill several obligations, including assisting the state government in rehabilitating the displaced, bearing the cost of acquisition and in amending water by-laws under Tamil Nadu District Municipalities Act, 1920.
The municipality will provide exemption, waiver, remission of taxes and levies of octroi, water taxes and property taxes during the period of concession.
The municipality would have to mitigate any legal action that may have material adverse effect on NTADCL.
The state government has agreed to provide the concessionaire ‘water shortage period fund’ (WSPF) of Rs 75 crore to make up for loss of revenue during the period when water supply is disrupted on account of shortage of water.
A ‘debt service reserve fund’ (DSRF) of Rs 50 crore has been created to provide against the risk of the concessionaire not able to generate revenues from its operations to service its debt.
Financial assistance
The state government would facilitate the financing of the project by permitting the creation of security interests over the facilities and systems and the establishment of suitable financial arrangements.
The state government would co-operate with NTADCL in financial closure, including changes in project agreement as requested by the lenders.
Confidentiality clause
A clause in the concession agreement states that neither of the parties to the agreement shall, at any time before the expiry of or termination of the contract, divulge or permit its officers, employees, agents or contractors to divulge to any other person, except on conditions of confidentiality and execution of confidentiality bonds, any of the contents of this agreement or any information relating to the negotiations concerning the operations, contracts, commercial or financial arrangements or affairs of the other party.
Transparency and accountability
Vital information about the project, such as that related to operations, shareholding, debt, revenue, expenditure and profits, remains unavailable to the public.
The project authorities have only PR propaganda for the media and the citizens, making it difficult to for anyone to make an independent assessment of the project.
The officials did not respond to any of the several attempts made by Dwivedi, the author of this report, to communicate with them. Finally, an RTI request elicited the response, which was terse in stating that since ‘NTADCL is not a public authority under the RTI Act,’ the information requested would not be provided.
Dwivedi then made an appeal to the Tamil Nadu state information commission, which decided in March 2008 that NTADCL was very much a ‘public authority’ and must answer the RTI request within the next 15 days.
NTADCL appealed to the Madras high court against the decision of the information commission.
In April 2010, the Madras high court upheld the decision of the information commission, ruling that NTADCL must be considered a ‘public authority’ under the RTI Act because it was essentially carrying out an activity that constitutionally belonged to the State.
“The activity that is undertaken by the petitioner company is essentially a power vested in the municipal authority under article 243(W) read with items 5 and 6 of the XII schedule to the Constitution,” the order passed by justice K. Chandru said.
NTADCL argued that since it was not “substantially financed” by the government, it could not be deemed a public authority under Section 2(h) of the RTI Act.
The court took the view that since the law did not specify the proportion of funding required for an entity to become “substantially financed”, it “will have to apply proper test in each case and apply the provisions of the RTI Act to those authorities.”
The order also relied on the Comptroller and Auditor-General’s (duties, powers and conditions of service) Act, 1971, which allows CAG to audit the accounts of any body or authority that has received no less than Rs one crore in public funding, to contend that NTADCL was “substantially financed” by the government.
“The office of the CAG can audit the accounts of the petitioner company after getting prior approval from the state government…. It cannot be contended that the petitioner company will not come within the term ‘public authority’ under Section 2(h)(d).”
The court observed that the PPPs “must explain to the people about their activities”.
“Every citizen has a right to know the working of such bodies, lest they may be fleeced by such companies,” the order said.
NTADCL has, however, stuck to its guns, appealing the order to a division bench of the Madras high court, where the case is pending as in October 2010.
(This article is entirely based on the study of Tirupur water supply and sewerage project by Manthan Adhyayan Kendra, an NGO based in Badwani, Madhya Pradesh, which tracks privatization in the water sector. The full study can be accessed on Manthan’s website at http://www.manthan-india.org/IMG/pdf/PPP-Tiruppur_Paper_IIMB_Conference_for_Website.pdf)

Nhava Sheva Container Terminal project: extortionately costly


The actions and inaction of the government, the port trust, and the regulator allow unlawful gains to the private partner at the cost of port users, shows a study commissioned by the Planning Commission. Here’s a PPP that’s not only extortionately costly but also represents abdication of governmental responsibility.

The Centre issued in 1996 the guidelines that recognized that the port trusts could undertake PPP projects under the Major Port Trusts Act, 1963.
The guidelines were aimed at attracting private investment in building terminals and other facilities on build-own-operate (BOT) basis.
The bidders were to indicate an upfront fee for the licence and royalty per ton of cargo to be handled, both to be paid to the port trusts, as well as the minimum guaranteed cargo.
The port trusts were to continue to maintain their regulatory role and “ensure that private investment does not result in the creation of private monopolies.”
The guidelines underscored the need for an independent tariff regulatory authority for determination of port tariffs.
The tariff so fixed would be a ceiling and both the private entrepreneurs and the port trusts would be free to charge less than such notified tariff. Accordingly, the MPT Act was amended in March 1997 for setting up the Tariff Authority for Major Ports (TAMP).
First PPP in port sector
Nhava Sheva International Container Terminal (NSICT) became India’s first PPP initiative in the port sector in July 1997 when Jawahar Lal Nehru Port Trust (JNPT) awarded the BOT concession for the terminal to a consortium of P&O Australia Ports, Konsortium Perkapalan Behrad and DBC group of companies. The consortium was later incorporated as NSICT Ltd.
The project included construction of a two-berth terminal, reclamation of 20 hectares of area for container yards, installation of requisite container handling equipment and other facilities, with a projected capacity of 0.6 million twenty foot equivalent unit (TEU) containers per annum.
The bid conditions did not specify the capital cost of the project.
The terminal was completed at a cost of about Rs 733 crore in 1999, over a relatively short period of two years.
‘Success’ at what cost?
“One view of the partnership is that NSICT has been a runaway success, recording gross ship rates of over 100 moves per hour and average vessel turnaround time of 0.75 days. In April 2005, NSICT handled traffic that exceeded twice the capacity estimated by JNPT at the time of bidding,” wrote Bharat Salhotra in a ‘case study’ commissioned by the Planning Commission and published in November 2007.
“The contrary view is that NSICT made profits far in excess of the permitted returns and that a significant part of these profits could be attributed to monopoly rents arising out of a flawed regulation of tariffs in an environment of inadequate capacity creation compared to rising demand,” Salhotra wrote.
From its inception up to March 2005, NSICT revenues aggregated over Rs 1624 crore out of which 7.2 percent or Rs 117 crore were paid as the royalty to JNPT.
In contrast, between 2000 and 2005, NSICT achieved an average return (post royalty) of nearly 80 percent per annum on its equity, which was four times the stipulated return of 20 per cent, making it one of the most profitable ports in the world, albeit at the expense of captive users.
Inadmissible returns, effete regulation
Over 2002-2005, NSICT extracted inadmissible returns of Rs 524 crore, which translated into annual returns of over 100 percent on its equity.
In the absence of any norms relating to capital and operating costs, TAMP had to rely on the information provided by the ‘regulated’, which was not always dependable or forthcoming, says Salhotra.
The tariff guidelines of 1998 provided for an assured return on equity (RoE), but did not specify a normative debt-equity ratio. TAMP “adjusted” the debt-equity ratio from 65:35, as stated by NSICT, to 50:50 after 2000. (Typically, such ratios for infrastructure projects range from 90:10 to 70:10.)
This “adjustment” resulted in the equity base increasing from Rs 213.17 crore to Rs 304.53 crore for the years 2000-2001 and onwards. That translated into higher tariff, providing greater returns to NSICT at the expense of port users.
Though the revised guidelines of 2005 eliminated the distinction between debt and equity by providing a flat return of 15 percent on capital employed, no attempt was made to specify any norms relating to capital and operating costs that determine the bulk of port tariffs, says Salhotra.
The absence of any norms provides an inbuilt incentive to the concessionaire to overstate costs – capital or operating.
In the matter of tariff setting, TAMP dithered for three years and engaged in half-hearted efforts to solicit cooperation from NSICT, right until 2005, while NSICT reaped ‘undue benefits’ arising out of large increase in traffic. (The tariff should have gone down with the heavy growth in traffic.)
The sharp increase in the volume of traffic was known to JNPT, yet there is no evidence to suggest that in its capacity as a licensor and in discharge of its responsibility under section 42 of the MPT Act, JNPT sought the intervention of TAMP for a tariff review or compelled NSICT to subject itself to a review of tariffs as per law, especially to prevent it from recovering monopoly rents.
The tariff order of 2005 recognised that NSICT had accumulated (post royalty) an excess surplus of Rs 473.42 crore during 2000-2005 over and above the admissible 20 percent return on equity.
In addition, despite admitting that a reduction of 30 percent in tariff was indeed warranted, TAMP reduced the revenue by only 12.8 percent to bring it back to JNPT level.
Ill-conceived policy directives
The Department of Shipping (DoS) and JNPT apparently erred in structuring the project, which involved a tariff model that was incompatible with the bidding model.
The DoS attempted to address this incompatibility through an ill-conceived policy directive on treatment of royalty, which changed the tenor and structure of the entire deal. As a result of this policy directive, NSICT would pay only Rs 2560 crore to JNPT over the concession period against an estimated royalty of Rs 8390 crore, resulting in an undue gain of Rs 5830 crore which would be borne by port users.
TAMP allowed the burden of royalty payments to be passed on to port users even though royalty was the basis on which NSICT was selected. As a result, port users paid over 80 percent more than what was due during that period.
The role of JNPT as grantor of the concession was equally suspect, as it took no steps discharge its statutory duties under the law or the concession agreement and allowed NSICT a free hand.
“When viewed in the light of its extraordinary returns, notwithstanding the rate of return regulation, the project signals an unequal partnership between a private operator, fiercely driven by objective of maximizing returns, and an absentee landlord unable to enforce the basic terms of a badly structured concession agreement, coupled with a weak regulator who chose to be dependent on the ‘regulated’ for determination of tariffs.
This environment provided enough leverage for NSICT to manipulate the deal, ex post, to its own advantage and to the disadvantage of port users,” says Salhotra.
(This article is a summary of the detailed case study of Nhava-Sheva international container terminal project done by Bharat Salhotra on behalf of the Planning Commission. Salhotra currently works as a General Manager for Delhi Freight Corridor Corporation of India Ltd. The full case study can be accessed on the website run by the secretariat on infrastructure of the Planning Commission: http://infrastructure.gov.in/pdf/NSICT.pdf)

The Centre plays the PPP evangelist

Over the years, the central government has been fine-tuning its PPP policy and prodding states and local bodies to take up PPPs. Here's an overview of the Centre's PPP policy and institutional framework.
By Kapil Bajaj

The Centre is the primary promoter of PPPs and expects the states to emulate it in policy and institutional framework.

It provides funds to the central and state authorities to hire consultants for PPP project development and has been engaged in ‘capacity building’ of the states and local bodies to help them take up PPPs. The Centre has also engaged credit-rating agencies for pre-bid grading of PPP projects.

Over the last 5-6 years, the Centre has worked on developing a system for promoting, evaluating and approving its own PPP projects and providing support to the PPPs of the states.

(The system for PPPs has evolved separately from the system for the approval of central-sector projects as well as the rules that govern traditional procurement.)

From August 2004 to July 2009, the Committee on Infrastructure (CoI), with the Prime Minister as chairman and 10 other members, including his cabinet colleagues and deputy chair of the planning commission, was the highest decision making body in PPP policy and monitoring of projects.

The CoI was serviced by the ‘secretariat for infrastructure’ in the Planning Commission.

In July 2009, the Centre set up the Cabinet Committee on Infrastructure (CCI), which replaced CoI as the highest decision making body in PPP matters.

The establishment of CCI took away the three-member representation that the plan panel enjoyed in the CoI. The new body, which has 12 Cabinet members in addition to the PM, gives only a ‘special invitee’ status to the deputy chair of the plan panel. (Like the Cabinet and all its committees, CCI is serviced by the Cabinet Secretariat.)

The ‘secretariat for infrastructure’ in the plan panel, however, continues to operate and provide vital policy, appraisal, analysis and support services to the PPPs.

The CCI decides whether or not to grant final clearance to infrastructure-related proposals costing more than Rs 150 crore.

The CCI also decides measures to enhance investment in infrastructure and lays down performance targets for various sectors.

In November 2005, the Centre notified the procedure for approval of PPP projects and set up PPP Approval Committee (PPPAC), hosted by department of economic affairs (DEA) in the ministry of finance (MoF).

Set up on the lines of Public Investment Board (PIB), the PPPAC is chaired by the secretary of the DEA-MoF and has membership of secretaries of the plan panel, DEA-MoF, department of legal affairs (the ministry of law), and the ministry sponsoring the PPP project. The PPPAC secretariat is the ‘PPP Cell’ in DEA-MoF.

Simultaneously, a PPP approval unit (PPPAU) was set up in the plan panel, which prepares ‘appraisal note’ for the PPPAC, providing suggestions for improving the terms of concession agreements.

The PPPAC evaluates PPPs worth Rs 100 crore or more; the projects cleared by PPPAC go for final clearance by CCI (in case of project cost of Rs 150 or more) and other authorities (in case of lesser project cost).

The Centre started viability gap funding (VGF) scheme in 2006 to provide grant of 20 per cent of the total project cost to PPPs that “are justified by economic returns but do not pass the standard thresholds of financial returns.”

An inter-ministerial empowered committee (EC) evaluates projects for VGF. Up to June 2010, the Centre’s VGF commitment was Rs 51,629 crore for 159 central and state projects with total investment of Rs 1,77,365 crore.

Set up in 2006, India Infrastructure Finance Company (IIFCL) raises funds from the market on the strength of central government guarantees.

IIFCL provides 20 percent of project cost both through direct lending to project companies and by refinancing lending institutions. Up to June 2010, IIFCL had sanctioned Rs 21,000 crore for 125 PPPs.

The plan panel has a scheme for providing consultants for PPPs. The MoF manages India Infrastructure Project Development Fund to provide loans for meeting project development expenses, including engaging consultants.

The government has also prequalified about a dozen ‘transaction advisors’ that the project authorities can engage.

Among the fiscal incentives available are 100 per cent exemption on income tax to eligible projects for 10 years and duty-free imports of equipment.

For faster appraisal and approval of PPPs, the Centre has developed model concession agreements (MCAs) and other bid documents for award of contracts. The MCAs include those for national and state highways, port terminals, airports, and urban rail transit systems. Model bid documents include request for qualification (RFQ) for PPPs and request for proposal (RFP) for PPPs.

A two-stage competitive bidding for award of contracts has been laid down. RFQ is the pre-qualification stage and RFP is the stage when the financial bids of prequalified bidders are evaluated and winning bidder is selected.

The Centre has been publishing policy documents, reports and manuals on PPPs, such as financing plan for ports, Delhi-Mumbai and Delhi-Howrah freight corridors, measures for operationalising open access in the power sector, an approach to regulation in infrastructure, and the manual of specifications and standards for two-laning of highways, etc.

Over the years, the Centre has set up regulators in the power, telecom, ports and civil aviation sectors in pursuit of its PPP policy and amended/enacted laws to facilitate PPPs.

At the state level, about 24 state/UT governments have set up PPP cells; some states have also passed laws enabling PPPs in provision of infrastructure.

PPP conception, evaluation and approval

A broad categorization has been made between central-sector PPPs costing Rs 100 crore or more and those that cost less than that threshold.

(A) The following procedure is followed for PPPs that cost Rs 100 crore or more.

1. Project identification: The sponsoring ministry/PSU identifies the PPP project, undertakes preparation of feasibility studies, project agreements, etc. It’s free to hire legal, financial and technical consultants.

2. Inter-ministerial consultations: The sponsoring ministry may discuss the project in an inter-ministerial consultative committee, whose comments may be incorporated into the proposal for consideration of PPPAC. The PPPAC may also seek the participation of other ministries/departments.

3. ‘In principle’ approval of PPPAC

(a) The sponsoring ministry submits its proposal to the PPPAC secretariat (PPP Cell) and a term-sheet containing the features of the proposed project agreements.

(b) The PPPAC meets within three weeks to consider the proposal.

(c) If the project is based on the MCA, ‘in principle’ clearance is not necessary. In such cases, PPPAC approval may be obtained before inviting the financial bids (RFPs) as detailed below.

4. Pre-qualification of bidders: After the ‘in principle’ clearance of PPPAC, the sponsoring ministry may invite RFQ to be followed by short-listing of pre-qualified bidders.

5. Drawing up project documents: The documents to be prepared include the concession agreement and other associated agreements.

6. Appraisal/approval of PPPAC

(a) Invitation to submit financial bids (RFP) should include a copy of all the agreements that are proposed to be entered into with the successful bidder. The sponsoring ministry needs to get the draft RFP cleared by the PPPAC before inviting the financial bids.

(b) The proposal for seeking PPPAC clearance is to be sent to the PPPAC secretariat along with copies of all draft project agreements and the project report.

(c) The plan panel forwards its ‘appraisal note’ to the PPPAC secretariat. The ministry of law and any other ministry involved will also forward comments to the PPPAC secretariat within the stipulated time period. The PPPAC secretariat will forward all the comments to the sponsoring ministry for submitting a written response to each of the comments.

(d) The concession agreement and supporting documents, along with the PPPAC memo, will be submitted for consideration of PPPAC. The PPPAC will take a view on the ‘appraisal note’ and on the comments of different ministries, along with the response from the sponsoring ministry.

(e) The PPPAC either recommends the proposal for approval of the ‘competent authority’ (with or without modifications) or request the sponsoring ministry to make necessary changes.

(f) Once cleared by the PPPAC, the project is put up to the ‘competent authority’ for final approval.

7. Invitation of bids (RFP): Financial bids are invited after final approval of the ‘competent authority’, but can also be invited after PPPAC clearance. (For Rs 75 crore-Rs 150 crore project cost, the ‘competent authority’ is the minister in charge of the sponsoring ministry and the minister of finance. For a project costing Rs 150 crore or more, the competent authority is the CCI.)

(B) The evaluation and approval of PPPs that cost less than Rs 100 crore is as follows.

Type of proposal

Financial limits

Appraisal forum

Approval forum

All PPP projects of central ministries and PSUs

Less than Rs 25 crore

The sponsoring ministry or department

Secretary of the ministry or department

From Rs 25 crore to Rs 100 crore

Standing finance committee or SFC*

Minister in charge

*The SFC consists of the sponsoring ministry’s secretary in the chair and the financial adviser and a joint secretary as members; also included is a representative of the department of legal affairs of the ministry of law.

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PPPs in plain English

PPPs are fundamentally changing public procurement by allowing the private sector to exercise greater control over, and often ownership of, public assets, such as land, roads and airports.

By Kapil Bajaj

Public-private partnerships (PPPs) usually refer to an ever-widening range of the ways in which ‘public procurement’ (or ‘government procurement’) can take place with the participation of the private sector.

The government uses public funds to provide many goods, services and infrastructure to the citizens. The publicly-funded goods, services and infrastructure may include food for the needy, passport services, education, hospitals, roads, bridges, airports, ports, electricity generation and distribution, petrol pumps, water supply, waste water treatment plants, etc.

Since the government cannot produce or provide everything on its own, it is a big procurer or purchaser of products and services from the market.

For example, it lets contracts to construct roads worth billions of rupee (or dollars) to builders operating in the market. It may award a contract to a private company to develop software for providing an online passport service or award a contract to a private caterer to run a canteen at a railway station for a fixed term.

These examples represent the age-old methods of public procurement, which usually involve ‘inviting tenders’ (i.e. calling for bids or offers from willing suppliers) to build a road or develop a software package or provide canteen services, evaluating the technical and financial abilities of the bidders, and then awarding the job to the bidder that can provide the best value for public money – usually the one who has offered to do the job at the lowest price.

A contract is then signed between the government/public authority and the private party (winning bidder), formalizing their agreement over the job to be done, quality standards, the price, the time-frame, penalties, and other terms and conditions.

(A contract used commonly in traditional procurement for getting a public facility constructed is ‘item rate contract,’ which requires the bidders to quote rates for individual items of work on the basis of a schedule of quantities furnished by the public partner. The design and drawings are usually provided by the public partner. The contractor bears little risk in these contracts except escalation in the rates of items. Another contract used in traditional procurement is ‘lump sum contract,’ which requires the bidders to quote a lump sum figure for completing the works in accordance with the designs and specifications of the public partner.)

Traditional public procurement, therefore, has always been a ‘public-private partnership’ or PPP; it is the coming together of a public authority and a private supplier in a contractual relationship with the objective of providing a part or whole of a public good, service or infrastructure.

(The term ‘partnership’ in PPP must not be confused with a ‘partnership firm.’ A PPP is not in the nature of a partnership firm.)

Since most of the public infrastructure, goods and services are provided with inputs from the private sector, they all involve PPPs.

(Aside from the usual examples of public procurement, a business whose shareholding is divided between a public authority and a private company is a ‘PPP’, more specifically described as a ‘joint venture’. A formal relationship between a government body and a voluntary, non-profit organization to provide a service to the citizens is also a PPP.)

Then how are modern-day PPPs different from the age-old PPPs that represent the traditional methods of public procurement?

The answer lies in the nature and scope of contractual relationships that public authorities and private partners are now entering into. The modern-day PPP relationships allow the private partner to play a much bigger role in the provision of a public good or service, over a much lengthier time-frame (up to 20-30 years), than is envisaged in traditional public procurement.

More importantly, the new and emerging PPPs allow the private partners to exercise greater control over -- and sometimes ownership of -- public assets (e.g. land and natural resources) than what the traditional PPP contracts permitted.

Private control or ownership of public assets has fundamentally changed the nature of PPPs as they have been known for long, particularly by introducing commercial principles in the provision of public services.

Also, the new PPPs have been allowing more direct dealings between the private service provider and the citizens/customers than has been the case in traditional PPPs.

The traditional PPPs restrict the role of the private partner to performing the job specified in the contract, even as the government partner continues to control and own all public assets used in the job.

Generally, the traditional way also means that public services are provided either free or at prices (‘user charges’) that are regulated by government orders; they also allow very limited amount of direct dealings between the private service provider and citizens/customers.

The newfangled PPPs usually allow the government/public partner to concede to the private partner the right to provide a service or infrastructure as well as to collect charges from the users, such as tolls from road users.

Here too, the user charges are regulated, but the private partner is allowed full cost recovery and a rate of return on his investment.

Since the new PPPs are used in risky infrastructure projects and rely on a large proportion of borrowed funds, the private partner(s) often forms a separate company, called ‘special purpose vehicle (SPV)’, to execute the project and insulate the parent firm from the risks of the venture.

It is the SPV that signs the contract (or concession agreement) with the government. If the project were to fail, only the SPV would incur the losses and be liable to pay off the loans, not the parent firm(s).

(Large infrastructure projects can have debt-equity ratios of up to 90:10, which means as much as 90 per cent of the funding could come from borrowings and only 10 per cent from the pockets of the concessionaire. It is also important to note that funds borrowed by private entities are invariably much more expensive than funds that a government can arrange because lenders perceive more risks in lending to the former.)

The SPV may also engage subcontractors to build the facility, maintain it, and collect user charges over the period of the concession.

The public partner may provide some financial support to the SPV by subscribing to some of the equity capital of that special company. The government may also provide some amount of grant to make a PPP project ‘commercially viable’.

The government may also bind itself to repaying the loans partially or fully if the contract were to be terminated prematurely.

The government may also guarantee a minimum revenue to the private partner in order to mitigate ‘demand risk’ (fluctuation in the number of users of, say, a road), but may also provide for revenue sharing if the demand exceeds a certain threshold.

In addition, the government provides various tax incentives to the PPPs. The various forms of government involvement in a PPP project is obviously a big attraction for the lenders.

The new PPPs are supposed to transfer some amount of risks inherent in a project from the public partner to the private partner. A private partner willing to assume more risks also negotiates a higher rate of return in the contract.

Thus, an important thing to look for in any PPP project is how fairly risks and rewards have been allocated between the government and the private partner.

In traditional public procurement or older PPPs, in contrast, the public partner bears almost all the risks; the risk borne by the private partner is limited to the extent of performing the job laid down in the contract.

Described below are three kinds of the new PPP modes that have been used in India.

1. The lease contracts provide a means for the private partner to purchase the income streams generated by publicly owned assets in exchange for a fixed lease payment to the public authority and the obligation to operate and maintain the assets. Lease contracts transfer commercial risk to the private sector partner, as its ability to derive a profit is linked with its ability to reduce operating costs, while still meeting designated service levels.

2. The BOT contract requires the private partner (‘concessionaire’) to design and build an asset (say, a road), operate and maintain it, and eventually transfer it back to the government partner at the end of the specified term, which can last for 20-30 years.

A project is financed by either the public partner or the private partner. In India, the private partner is required to finance the project and is either paid a rent for the use of the facility or allowed to collect user charges.

3. Build-own-operate-transfer (BOOT) concession is a variation of the BOT model except that the private partner also ‘owns’ the facility and finances the project, thus assuming risks relating to planning, design, construction and operation of the project.

(It is important to realise that ‘ownership’ even in BOOT concessions in India does not mean an unfettered property right; it’s usually limited to that of exclusive operation and thereafter transfer of the facility to the private partner.)

Thus, from a simple outsourcing of a job that traditional procurement has been, PPPs of the present times have evolved into complex legal contracts, allowing deeper private involvement that may cover financing, designing, constructing, owning and operating a facility. The number and kinds of PPP that can exist are limited only by one’s imagination.

Worldwide, the advocates of public-private partnerships have cited limited budgetary funding available for public services and infrastructure as the reason why governments should increasingly promote PPPs.

Thus, PPPs are being promoted on the promise that they will help governments “leverage” their scarce budgetary resources to attract larger private investments into providing, expanding and improving public services and infrastructure.

Another promise is that PPPs will infuse private sector expertise and efficiency into public services and infrastructure.

It is intuitive to realise that the PPP policy represents the new form of privatisation, which is perceived to be politically less controversial than the policy of outright privatisation of public assets.

(The article, ‘PPPs in Plain English’, was first published in Governance Now magazine, October 1-15, 2010 issue)

PPP highways: The road that takes you for a ride

Taking Delhi-Gurgaon expressway project as an example…

…This article introduces a lay person to the public-private partnership (PPP) policy of the central government and how it is affecting public interest.

It draws on a parliamentary panel’s enquiry and large amount of reportage on Delhi-Gurgaon expressway project to show that National Highways Authority of India (NHAI) and its private partner have left no stone unturned to damage public interest.

This article gives a lay person an insight into the nature of the entire PPP policy and why the government and the ‘experts’ keep telling you that PPP is the only way to health, wealth and happiness.

By Kapil Bajaj

Bina Verma (33), who lives in Gurgaon (Haryana) and travels to west Delhi five days a week for her college lectureship job, acquired ‘smart tag’ last May to avoid having to stop at the toll plaza on Delhi-Gurgaon expressway, the 28 km ‘access-controlled’ stretch on National Highway-8.

She pays Rs 600 to buy the right to drive, without having to stop, across the 32-lane toll plaza at Delhi-Gurgaon border for a maximum of 60 trips over a maximum of 30 days.

It’s not always an uninterrupted drive though; it may take her “up to 10 minutes” on some trips to make her way through the traffic slowing before the toll plaza to get to the lane reserved for smart tag users and pass. “There is no lane discipline,” she complains.

Rakesh Giri (30), a Delhi-based marketing executive who is a frequent, not daily, user of Delhi-Gurgaon expressway, says he prefers paying Rs 20 per trip to using the smart tag. His monthly payments for using the expressway are usually in the range of Rs 320-480. He must stop at the toll plaza on the border and cannot avoid the snarl-ups that sometimes happen at peak hours and consume “10-20 minutes”.

On days when he drives up to Manesar or beyond, Giri pays another Rs 25 at ‘km 42’ toll plaza, which takes his one-way expense on the road to Rs 45. (The expressway has three toll collection points.)

Verma and Giri are thankful for the convenience and saving of time that Delhi-Gurgaon expressway has afforded them, compared to the traffic jams they endured before January 2008 when the stretch opened to the public after a delay of three and a half years.

They do, however, begrudge the valuable time they lose at the toll plaza.

As for the price they must pay for using the road, they do not really have a choice; the toll road is the only practical route to and from Gurgaon for both of them.

“If you leave out the congested route that will take me from west Delhi to Gurgaon via Dwarka, I am left with only the toll road,” says Giri.

Verma says simply: “It’s something that I have learnt to pay because I don’t have a choice.”

Asked if they believe the toll charges to be reasonable, both shrug their shoulders, indicating that they do not have the necessary information.

Verma and Giri certainly need to be better informed about a project whose costs will ultimately be borne by road users and taxpayers.

They also need to start wondering if it would have been possible for the government to get the Delhi-Gurgaon expressway built without imposing any tolls on the users or imposing much less financial burden than is the case currently.

(Since the taxpayers have for many years been paying the cess on transport fuel to help the government build national highways, why must they also have to pay tolls for using roads? Does the society gain anything – financially or in terms of efficiency, quality and safety – by building privately operated pay-for-use roads as is usually claimed?)

The following are some of the highlights of the Delhi-Gurgaon expressway project, based on a report of the Committee on Public Undertakings (2009-10) that was presented to the Lok Sabha in December 2009.

The committee considered the audit of the project conducted by the Comptroller and Auditor General (CAG) and testimonies of the officials of the Ministry of Road Transport and Highways (MoRTH) and National Highways Authority of India (NHAI).

1. The Rs 555 crore Delhi-Gurgaon expressway project was awarded in January 2002 to a consortium of two private companies, Jaiprakash Industries Ltd and DS Construction Ltd, which incorporated Jaypee-DSC Ventures Ltd (‘concessionaire’) to execute the project.

The project was to be executed on build-operate-transfer (BOT) basis, which meant the concessionaire would finance, build and maintain the road; it would also collect tolls to recoup its investment and make a profit.

The concession period was 20 years, which meant the concessionaire would maintain the road and collect tolls, revisable every year in line with inflation, until the year 2023.

2. In the year 2000, when phase-I of National Highways Development Programme (NHDP) to which Delhi-Gurgaon expressway belongs, got the Cabinet approval, the government had begun to favour greater private-sector participation in road projects through ‘public-private partnerships’ (PPPs).

Unlike traditional public procurement where private participation is limited to construction, PPPs usually allow private participation in financing, construction, operation and maintenance of road projects.

PPPs also marked a policy shift towards greater commercialization of road projects, which meant that motorists would need to pay tolls for using a road. (See the article headlined ‘PPPs in plain English’ for an understanding of PPPs.)

3. There were then no government guidelines (or NHAI’s internal guidelines) as to how best to execute a highways project – through traditional procurement (old style contracting) or one of the new PPP modes that allow greater private participation.

The NHAI first approved the project to be executed through ‘special purpose vehicle (SPV) mode’ and then changed that to ‘build-operate-transfer (toll) or BOT-toll mode’ “despite the fact that its financial consultant (SBI Caps) had initially found BOT-toll mode to be unviable.”

Justifying the change of mode, the government stated through the NHAI that BOT-toll would bring more private investment and allow it to spread its limited budgetary funds to more road projects in less time.

(The term ‘SPV mode’ and its contrasting with ‘BOT-toll mode’ can be quite confusing because both the modes will usually require building-operating-transferring a project and collecting tolls from users. In NHAI’s terminology, ‘SPV mode’ means the government will be the primary investor in the project even though private investors will also be welcome and ‘BOT-toll’ means a private company will be the primary investor.)

4. NHAI stated the government ‘policy’ thus: first consider BOT-toll failing which BOT-annuity failing which SPV or EPC. (EPC is a way of traditional procurement in which the contractor’s role limited to ‘engineering, procurement of materials and construction.’)

The policy, which continues to this day, meant that traditional procurement modes were ruled out even before NHAI evaluated their costs and benefits in relation to the PPP modes. Similarly, no comparative evaluation of the costs was done between the PPP modes.

Describing this policy as beset with “serious lacunae,” the Committee on Public Undertakings (CPU) recommended that “the mode of execution should be based on case-to-case basis instead of a common guideline for all projects and the NHAI be invariably made accountable in respect of project related deficiencies irrespective of the mode of execution.”

5. BOT-annuity, by which the government would have collected the tolls and the concessionaire would have been entitled to receive fixed payments every six months, was similarly shunned without a comparative study.

The CPU said it found it “inconceivable as to how a high traffic density stretch like Delhi-Gurgaon was not opted for execution on BOT-annuity despite the fact that toll collection is of the order of Rs 208 crore in just 20 months of the opening of the project.” (Such has been the traffic density that the concessionaire “will break even in three years, despite the fact that it has incurred 73 per cent of cost over-run and is running two years behind schedule,” predicted a report in Business Standard of November 6th, 2007.)

The government’s reasoning that BOT-annuity would have saddled it with the “traffic risk” (fluctuation in toll collection) was termed “unconvincing” by the CPU.

“Had the government carried out a comparative study of the toll and annuity modes, the unjustified enrichment of the concessionaire could have been avoided,” the CPU said.

6. Interestingly, it was a project which was won on the basis of ‘negative grant,’ i.e. the winning bidder offered to pay NHAI Rs 61 crore for being awarded the contract instead of asking for government grant. (The government provides grant up to 40 per cent of total project cost to bridge the ‘viability gap’ of a highways PPP.)

NHAI, however, fully nullified that gain by incurring Rs 146.62 crore of costs in introducing ‘change in scope’ works after the finalization of the detailed project report (DPR). That has also been blamed for contributing to a 42-month delay in project completion.

The CPU noted that the DPR, which NHAI commissioned RITES to prepare, was deficient on many counts, such as insufficient number of foot over-bridges and underpasses. The cost of all of these additional works is being borne by the public exchequer.

7. To make the project financially attractive for the bidders, NHAI assumed traffic density in “the worst-case scenario.” It also relied on an old traffic study rather than heeding the advice of its financial consultant (SBI Caps) to conduct a fresh study before inviting bids.

“Though this project was expected to be a very high traffic density corridor, strangely the toll rates were fixed on the basis of worst case scenario in bidding documents on the pretext of generating sufficient bidding interest in the project,” the CPU noted.

The worst-case scenario meant that the tolls were set at a much higher level than would have been the case if an accurate traffic estimate had been available.

It also meant that NHAI lost the opportunity of getting a higher ‘negative grant’ from the bidders.

8. While 14 years would have been enough for the concessionaire to recoup its investments and generate a reasonable rate of return (20 per cent), NHAI allowed a concession period of 20 years, pointed out the CAG and noted by the CPU.

The CAG estimated that the concessionaire would gain Rs 187.77 crore over the extra six years at the cost of road users.

“The committee is convinced that no homework was done by NHAI to assess the correctness of the 20 years concession period worked out by the financial consultant,” the CPU said.

9. The concessionaire’s honesty in generating traffic reports and sharing revenue with NHAI became suspect when an ‘independent auditor,’ appointed with considerable delay by NHAI, pointed out a “difference of Rs 2.16 crore” in the financial records and toll collection reports.

The CPU “took a serious note” of the matter that the NHAI had neglected inexplicably. (Upon the daily traffic exceeding 1,30,000 passenger car units or PCUs, the concessionaire is required to share the toll revenue equally with the NHAI. A Times of India report of January 16th, 2010 said NHAI had imposed a fine of Rs one crore on the concessionaire, which included the fine for the “delay” in paying the share of the revenue that belonged to the authority – clearly a response to the CPU’s criticism.)

10. “No road safety audit was carried out in respect of Delhi-Gurgaon project either at the planning stage or at the DPR stage,” the CPU noted, citing a report of the Central Road Research Institute, submitted in 2008. Safety of the non-motorised traffic and pedestrians was neglected.

Only four subways and two foot over-bridges have been provided on the entire corridor, which are inadequate by any standard.

“Over 100 people lost their lives in accidents in a relatively short period of time, primarily due to inadequate safety norms and utter callousness on the part of the authorities,” the CPU noted.

The concessionaire has failed to deploy even a handful of personnel who would manage traffic, enforce lane discipline and ensure safety of the road-users.

That, as also the fact that the expressway lacks public toilets, rest areas, fuelling and service facilities, constitutes a breach of its contractual obligation by the concessionaire.

11. NHAI allowed the ‘independent consultant’ (who acts on behalf of NHAI to monitor the entire project) to issue a completion certificate to the concessionaire even before several items of work were complete.

No penalties were imposed on the concessionaire and NHAI simply blamed the “blatant lapse” on the independent consultant, the CPU observed.

(Since then NHAI seems to have responded to the CPU’s strictures. The January 16, 2010 report of the Times of India said Rs one crore of fine had been imposed on the concessionaire for its failure to complete the minor works within the given timeframe and for delaying revenue sharing.)

12. According to NHAI’s statement to the CPU, the ‘chartered accountant balance sheet of the concessionaire’ showed the final project cost to be Rs 1170.26 crore, which is a 110 per cent escalation over the original project cost of Rs 555 crore.

13. The CPU cited “avoidable confusion and chaos at toll plazas and undue traffic holdups there” which negate the very concept of a high-speed expressway.

In recommending better monitoring of toll plazas, the CPU referred to “illegal and unscrupulous methods of toll collection” (more on that in subsequent paras).

It “strongly recommended that the government should find a way of providing some relief to the commuters either by sharing the toll or making it toll-free once the concessionaire has recovered his investment.”

14. Finally, the CPU wondered who was ultimately responsible for monitoring the project and its failings, such as the large number of fatal accidents.

“NHAI has washed its hands off its responsibilities by submitting that monitoring is the responsibility of the independent consultant. Thereafter the government has washed its hands off by submitting that it is for NHAI to enforce the agreement.”

There is much more to the financial and social costs of Delhi-Gurgaon expressway project than what the CPU covered. Here is a summary of a few of those costs, starting with the most startling.

(a) According to the concession agreement, the concessionaire cannot charge drivers of vehicles that it registers as “local personal traffic” (such as Bina Verma’s car) anything more than “50 percent of the applicable fees for the specific category of vehicles”.

Here is how the concessionaire has been violating this clause with impunity, cheating the registered local commuters every day, and making money in illegally collected tolls.

The concessionaire registers “local personal traffic” for 50 per cent discount only through the SmartExpress plan, which allows a registered vehicle a maximum of 60 crossings of the toll plaza at Delhi-Gurgaon border over a period of 30 days (counted from the date of registration or top-up) for a fee of Rs 600 paid in advance. (The ‘applicable fee’ for a personal car is Rs 20 per trip, adding up to Rs 1200 for 60 crossings.)

But Verma, whose car has been registered by the concessionaire as “local personal traffic” through the SmartExpress plan, has usually been crossing the Delhi-Gurgaon toll plaza only 22 days a month, i.e. 44 times. (She goes to work from Monday through Friday and only rarely uses the expressway for any other purpose.)

She should be charged Rs 440 for her 44 trips, at 50 per cent discount on Rs 20 per trip, and the balance (Rs 160 corresponding to unutilized trips) should be either carried forward to the next 30-day period or refunded.

The concessionaire has, however, devised the SmartExpress plan to appropriate the unspent amount after every 30-day period unless Verma renews her subscription with Rs 600 within that period to accumulate more unwanted trips.

The trips that she accumulates also don’t get carried forward. The plan is thus a clear violation of the concession agreement that says that the concessionaire shall deal with local traffic “so as not to cause any inconvenience or cost or loss to the operator of such a vehicle”.

The concession agreement also mentions “refunds”. (“It shall issue appropriate passes or make refunds in a manner that minimizes the inconvenience to local traffic consistent with the concessionaire’s need to prevent any leakage of fees.”)

If the concessionaire has defined “local personal traffic” -- as indeed it has by giving such commuters no option other than the SmartExpress plan (See the ‘terms and conditions’ on concessionaire’s website at http://dgexpressway.com/pdfs/terms_n_conditions.pdf) -- as a personal vehicle crossing the toll plaza at least 60 times in 30 days, then Verma’s car should not continue to have been registered as ‘local personal traffic’ and she should not have been ‘enjoying’ a supposedly concessional fare.

Verma, in that case, should be paying Rs 880 for her 44 trips a month rather than Rs 600. But she pays Rs 600 under a special plan flowing from the concession agreement, which means her trips have been officially recognized as “local personal traffic”.

If, on the other hand, the concessionaire attempts to disclaim its own notification and argues that it has not defined “local personal traffic” in specific terms and therefore anyone is free to register their vehicle on the SmartExpress plan, then it will have admitted to breaching its contractual obligation of giving a differential and advantageous treatment to the local commuters.

Since subscribing to the SmartExpress plan neither gives them the full price advantage that they deserve nor any advantage over other motorists because of “lane indiscipline” at toll plazas, even the regular commuters like to pay cash, i.e. full amount, another factor contributing to what the CPU described as “unjustified enrichment” of the concessionaire.

That only a small proportion of motorists subscribe to the smart tag is borne out by media reports and substantially explains the congestion at toll plazas (which, in turn, has its own costs, such as loss of productive time and fuel).

The “local commercial traffic”, which must be given a monthly discount of 66 per cent of applicable fee, is being cheated similarly by the concessionaire.

The concession agreement defines local traffic only as vehicles (personal or commercial) registered with the concessionaire and “plying routinely” on the highway without crossing more than one of the toll plazas.

Mischievously, the concessionaire, who is required to “formulate, publish and implement” an appropriate scheme for charging local traffic, has put in place a system that cheats the local commuters.

Not only has the local traffic not been defined in a fair, transparent, and public-spirited manner, but the system of charging local traffic that the concessionaire filed with NHAI has never been made public by either of the two partners!

Reached by this writer, VK Rajawat, the NHAI general manager in charge of the expressway, said: “The concessionaire has not defined the local traffic in a way other than that defined in the concession agreement.”

After several phone calls and text messages, Rajawat promised to send this writer a copy of the system for charging local traffic, filed by the concessionaire, but never did.

Signed in April 2002, the concession agreement itself was hidden from public eyes until Dwarka Forum, an association of local residents, compelled NHAI to upload it on its website in February 2010 through a yearlong battle using the Right to Information (RTI) Act.

(b) An investigation into the project, conducted by the director general of investigation and registration (DGIR) of Monopolies and Restrictive Trade Practices Commission (MRTPC) found: “It is evident that the traffic analysis submitted by the concessionaire to NHAI and RITES (independent consultant) was highly under-projected and ... the toll fees (which should be charged) in 2020 are being charged now, for each category of vehicles.”

“Thus by submitting unprojected/misprojected figures of volume of traffic, the concessionaire has adopted a method which amounts to unfair trade practice,” the DGIR found in its probe as reported by PTI in August 2009.

“Evidently, NHAI influenced the notified toll charges (in a manner that resulted) in undue gains to the concessionaire at the cost of public at large,” the DGIR added.

DGIR pointed out another disturbing feature of the project: the no-competition clause, according to which the government cannot build a road competing with the Delhi-Gurgaon expressway without meeting some very difficult conditions.

The concession agreement stipulates that the governments at the Centre or Delhi or Haryana cannot operate a “competing road facility” before the traffic at the expressway reaches 1,70,000 PCUs per day or the expiry of 20-years concession period, whichever is earlier.

If the government does get a competing road built and operated, the concession period of the expressway will have to be increased by half the number of years between the commissioning of the former and the end of the latter.

The competing road will have to be priced 133 per cent of the fees charged for the use of Delhi-Gurgaon expressway.

DGIR’s case against the concessionaire and NHAI has since been transferred from MRTPC, which was wound up in 2009, to the Competition Appellate Tribunal, set up under the Competition Act, 2002.

Since the no-competition clause finds its origin in the government-approved ‘model concession agreement’ for PPPs in national highways, the entire policy of turning over the operation of public roads – a naturally monopolistic activity -- to private management and then fortifying those monopolies has come under a cloud.

(c) From January 2008, when it opened to the public, to June 2009, the expressway saw 1694 accidents of which 1594 were of serious nature leading to 100 deaths, KS Anand, a Delhi-based businessman, was informed in response to an RTI query.

Anand’s son died on the expressway in March 2009 after his car rammed into a stationary water tanker whose presence on the high-speed road was directly attributable to the criminal neglect of the concessionaire.

“The concessionaire never bothered to make available any medical assistance as required by the concession agreement and despite a large number of serious accidents,” Anand told this writer.

None of the SOS telephones installed on the road worked, he added.

A large number of people who lost their lives were from nearby villages in Gurgaon, who trying to cross the high-speed road that does not have enough crossover facilities.

Asked why NHAI allowed the expressway to open without compelling the concessionaire to fulfill its obligation of providing fencing, foot over-bridges, underpasses, and medical facilities, the authority replied to Anand that the completion certificate was issued by the independent consultant only after it was satisfied with the provisions.

Anand has filed a PIL at Punjab and Haryana high court, charging the concessionaire, NHAI and the ministry of road transport and highways with negligence.

Dwarka Forum too has been struggling for many months to get itself heard on serious safety hazards, including absence of a flyover, which will help ease traffic moving out of Dwarka sub-city, and service lanes on a long stretch of the expressway.

“The concessionaire and NHAI have zero interest in taking responsibility for their actions. We have even written to the department of public grievances of the central government and the prime minister, without any relief,” CK Rejimon, President of Dwarka Forum, told this writer.

The Delhi-Gurgaon expressway is thus a classic example of how a PPP and the web of contractual relationships that it creates are used by both public and private partners to evade their responsibility and accountability to the citizens.

(e) A report in the Economic Times of August 27, 2010, said NHAI had written on August 6, 2010, to the concessionaire, threatening to terminate the concession agreement if the latter did not provide satisfactory answers to “dozen-odd points of confrontation.” The points include the concessionaire’s traffic count being less than that estimated by the independent consultant and the concessionaire not depositing “all proceeds” into the escrow account, as prescribed in the agreement.

According to the newspaper, NHAI had alleged, citing a Central Vigilance Commission report, that during construction, thickness of the pavement was reduced from the stipulated standard without seeking NHAI’s permission; the cost of construction thus saved was not passed on to NHAI even though the bid was made on the basis of pavement thickness.

NHAI also complained that the concessionaire had “failed to ensure safe, smooth and uninterrupted flow of traffic,” which had resulted in the loss of lives and given a bad name to the authority.

The letter is thus a clear admission by NHAI of the project’s abject failures on various counts and continuing financial improprieties.

(f) While general commuters have been left to the tender mercies of the private monopoly over a public road, the concession agreement exempts the following “types of vehicles” from payment of tolls.

“Official vehicles transporting and accompanying the president of India, the vice-president, the prime minister, central ministers, governors, lieutenant governors, chief ministers, presiding officers of central and state legislatures having jurisdictions, ministers of state government, judges of the supreme court and high courts having jurisdiction, secretaries and commissioner of state government, foreign dignitaries on state visit to India, heads of foreign missions stationed in India using cars with CD symbol, executive magistrates, officers of the ministry of road transport and highways and NHAI, and central and state forces in uniform, including police.”

So much for the Constitutional principle of equality of all citizens!

If private management of a public facility is really the epitome of efficiency and quality, then why the advocates of this policy – those in the government, including the ministry of road transport and highways – exempt themselves from payment of tolls and waiting at the toll plazas?

From the highlights of the Delhi-Gurgaon expressway project, the following are a few of the insights for Verma, Giri and other road users.

(a) The expressway might as well have been built the traditional way as a free-of-charge road if the government had not followed, in the name of ‘policy,’ the bizarre thumb rule that says “first consider BOT-toll failing which BOT-annuity failing which SPV or EPC”. This thumb rule hardly gives a chance to traditional procurement, let alone making a comparison of the lifecycle costs of the project in various modes.

(b) The road users might as well have been paying much less in tolls than they have been paying since January 2008 if NHAI had not relied on the “worst case” traffic estimate.

(c) The regular commuters should not have been paying a rupee more than 50 per cent of the ‘applicable fees,’ as per the concession agreement. Why NHAI and the government have been allowing the concessionaire to cheat the road users is the question that the public must ask and the ‘public partners’ must answer.

(d) Cost savings and efficiency that the PPP policy promises are hardly evident in the way the expressway project has been executed and is being operated. There was a 42-months’ delay from the scheduled completion date of June 2004 and 110 per cent cost escalation.

(e) As for ‘improved service’, another promise of the PPP policy, road users can decide for themselves, but NHAI itself believes that the concessionaire “failed to ensure safe, smooth and uninterrupted flow of traffic.”

Many of the financial and social costs of Delhi-Gurgaon expressway project exemplify the way the Centre has been implementing its PPP policy in development of infrastructure.

The PPP policy for national highways, for instance, gives private partners encumbrance-free land, “facilitation” in environment clearances and getting permits, income tax exemptions for 10 years, grant up to 40 percent of project cost, up to 30 per cent equity by NHAI, 100 per cent FDI up to Rs 1,500 crore, easier external commercial borrowings, custom duty exemption on import of equipment, the right to collect and retain tolls, concession periods of up to 30 years, repayment of 90 per cent of senior debt if the contract gets terminated prematurely, and several other benefits.

The PPPs have also been implemented without taking into account their enormous social costs. The PPP policy creates very complex contractual relationships that have far greater scope for corruption and avoidance of accountability to the citizens than in traditional public procurement.

No wonder, PPP is proving itself to be the road that is taking us for a ride.


Delhi Gurgaon expressway project and public choice theory

Why do road users like Bina Verma and Rakesh Giri seem somewhat indifferent to the significant costs that they have to bear on account of the bungling and corruption in the conception, execution and operation of Delhi-Gurgaon expressway project as detailed in this article?

Why don’t they question and protest against all that is wrong with the project and perhaps also the policy that engendered this project?

Public choice theory, developed, among others, by Scottish economist Duncan Black and American economists James M. Buchanan, Gordon Tullock and Kenneth Arrow, has an interesting explanation.

Public choice theory takes a cynical view of three ‘maximizing groups’: elected officials who seek to maximize their votes, civil servants who seek to maximize their salaries (and hence their positions in the hierarchy), and voters who seek to maximize their own utility. No one cares about the larger public interest!

(A caveat: It bears repeating and emphasizing that this is a theoretical view of the behavior of the three groups that is commonly used to explain bad policies. It’s not an accurate view of the behavior of the three groups; elected and unelected officials and voters are also known to behave honourably and in public interest. One must guard against using public choice theory to justify a bad situation arising out of a bad policy.)

The gainers from a project like Delhi-Gurgaon Expressway are developers who get monopoly rights over a money spinning road. They are a wealthy group with significant measure of influence over politicians and a voice that’s noticed and reported by the media.

The losers are the entire group of citizens (generally all Indian taxpayers and specifically the users of the expressway). Although they are more numerous than developers, and although their total loss is large, each individual citizen suffers only a small loss.

For example, let us assume that there are five lakh frequent users of the expressway who are together being charged Rs 7.50 crore wrongly and in excess every month.

Their individual loss every month would be only Rs 150. They have more important things to worry about than Rs 150 they pay in excess every month, and so do not protest, or arrange a collective voice of protest, against the project (nor do they contemplate voting against the government that favours bad projects like Delhi-Gurgaon expressway).

As long as the average citizens are unconcerned about, and often unaware of, the losses they suffer, the vote-maximising politicians will ignore the interests of the many and support the interests of the few.

The politicians will consider finding some solution for the wrongs of the project (or changing the policy that brought about the project) only when the cost of the project becomes so large that the ordinary citizens begin to count the cost (such as the large number of fatal accidents).

What is required for policy change, according to public choice theory, is that those who lose become sufficiently aware of their losses for this awareness to affect their behavior as socially and politically active citizens.

The ability of elected officials and civil servants to ignore the public interest is strengthened by a phenomenon called ‘rational ignorance’.

Many policy issues are extremely complex. A good example is the public-private partnership (PPP) policy, which involves a great many actors/agencies from the government and the private sector and very complex contractual relationships, such as voluminous concession agreements.

Much time and effort is required for a layperson even to attempt to understand the myriad issues arising out of the PPP policy.

Yet one person’s vote has little influence on which party gets elected or on what they really do about the issue in question once elected. So the costs are large, the benefits small.

Thus a majority of rational, self-interested voters will remain innocent of the complexities involved in many policy issues.

Who will be the informed minority? The answer is those who stand to gain or lose a lot from the policy, those with a strong sense of moral obligation, and those policy junkies who just like this sort of thing!

(Except for the examples, the description of public choice theory here has been taken from ‘Principles of Economics’ by Richard G. Lipsey and K. Alec Chrystal; ninth edition, published 1999; Oxford University Press.)

(The articles on Delhi-Gurgaon expressway were first published as cover story in Governance Now fortnightly magazine, Oct.1-15, 2010 issue.)

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