Dnd Noida Flyway Case Study 5a72y

Concession of the Delhi-Noida Bridge Case Study

MDI, Gurgaon February 12, 2015

Background  One of the three bridges across Yamuna connecting Delhi and Noida which is tolled  MoU signed on April 7, 1992 between IL&FS, NOIDA and Delhi istration 

IL&FS recognised as the developer of the project

 Steering Committee comprising representatives of GoUP, GoD, MoUD, DDA, NOIDA and IL&FS established.  Noida Toll Bridge Company Limited (NTBCL) incorporated on April 8, 1996 

NTBCL to develop, establish, design, construct, operate and 2 maintain the flyway

Background

….contd

 Concession Agreement signed between IL&FS, NTBCL and NOIDA on Nov 12, 1997  Bridge opened for traffic in February 2001  Technical Details 

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552.5 m long bridge with approach roads on the Delhi and Noida ends Eight lanes with capacity of 222,000 vehicles per day. (Average Daily Traffic in 2000-2001 was 17,000 vehicles per day and grown to 99,700 vehicles per day in 2008-2009)

 Financing Details 

Project Cost Rs. 408.2 crore • Equity Rs. 122.4 crore • Debt Rs. 285.8 crore (Rs. 235.8 loans from banks and FI and Rs. 50 3 crore from deep discount bonds by NTBCL)

Concession Agreement  30 year BOOT concession  Key Issues 

Guaranteed returns on total project cost

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Developmental Rights

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Termination Payments

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Multiple Role of Sponsor

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Independent Auditor and Independent Engineer

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Selection of Project Oversight Board

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Fees 4

Concession Agreement

…contd

 Guaranteed returns on total project cost 

Concession Agreement grants the right to the Concessionaire to collect fees to recover • Total Project Cost as well as a return of 20% per annum on the Total Project Cost over the Concession Period of 30 years. • In the event the Concessionaire has not recovered the Total Cost of Project and returns thereon on 30 years the concession period would be extended for a period of two years until the Total Cost of Project and the returns thereon are recovered.

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Total Cost of Project (for determining returns) includes • Project Cost – Cost of Construction and other cost of Commissioning • Major Maintenance Expenses • Shortfalls in the recovery of returns in a specific FY

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Concession Agreement

…contd

 Effect of Guaranteed returns on Agreement – 

In 5 yrs of operation (upto 2006) the accrued dues to the company was Rs. 953.4 crores. (As on March 2008 the dues are 1284 cr.)

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Simulation exercise carried out by the consultant of the concessionaire estimated the Total Project Cost to rise to Rs. 11,817.54 crore by 2021 even if entire operating surplus is allocated for payment of returns.

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Such shortfalls and consequential rise in Total Project Cost would lead to extension of concession period i.e could result in a perpetual concession. The Directors estimated the concession in excess of 100 years in 2009.

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As the returns are calculated on the Total Project Cost which includes debt. The actual return on equity is in excess of 32% and could eventually increase to over 47%.

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Alternatively increase in toll rates or grant of developmental rights 6 were considered

Concession Agreement

…contd

 Developmental Rights 

Additional rights could be granted by NOIDA for enabling the Concessionaire to generate additional revenues for reducing the Total Project Cost

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Rights include provision of advertising services, developing hotels, restaurants and other facilities

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DND Flyway Limited (wholly owned subsidiary of NTBCL) incorporated for carrying out developmental activities.

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99 acres of land (65 acres on Delhi side and 34 acres on Noida side) available with NTBCL for development

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30.493 acquired by DND Flyway Limited from NTBCL at a cost of 103.48 crore.

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Criteria for award of developmental rights, the way developmental income would be used for reducing Total Project Cost and also how the developmental income would be monitored are not specified in CA

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Concession Agreement

…contd

 Termination on of 

Conditions Precedent not satisfied

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Default by either party

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Force Majeure

 Termination Payment 

Noida event of default

• All sums due to the lenders including the interest accrued and any other amount due and payable • Total Project Cost and returns thereon (in case Noida decides to repudiate the agreement in public interest it would be obliged to pay the Concessionaire an amount of Rs. 1486.3 crore in March 2009 which was three times the original project cost). 8

Multiple Role of the sponsor  IL&FS the project sponsor was involved in 

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Conceptualising the project As a member of the steering committee, in deciding that the project would be implemented by an entity promoted by itself As a lender to the Concessionaire have voice in selection of • Independent Engineer • Independent Auditor • Selection of one member Project Oversight Board in case of no agreement between NOIDA and the Concessionaire • Chairman of the three member fee review committee

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The project was awarded as a sole source negotiated project has not faced the market test of commercial viability. 9

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

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

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Concluding Thoughts  Several features appear to weigh the contract in favour of the private partner from public policy point of view.  Need for competitive process for selection of the Concessionaire.  Capping of total project cost and O&M cost to minimise potential for gold plating.  Conflict of Interest. Single entity acted as 

Adviser to the conceding Authority

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Promoter/ sponsor of the concessionaire company

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Lender to the project 12