Delhi Noida Bridge Project – A Case Study of PPP Project

by
Naveen Kumar (22PPM07)

1.0 ANALYSIS
1.1 A concession agreement was entered into between Noida Toll Bridge Company Limited
(NTBCL) - an SPV created for the project and Infrastructure Leasing & Financial Services
(IL&FS) granting the right of Building, Own, Operate and Transfer (BOOT) the Delhi
Noida toll bridge (known as DND Flyway) to NTBCL.
1.2 The connectivity was opened for the public in Feb. 2001 with an early PPP project in India.
Main advantage of this connectivity was saving of time and fuel consumption from traveling
from South Delhi to Noida. The project included 552.5 Mtr. bridge over Yamuna and
connecting 8 lane road to Delhi and Noida with capacity of about 222,000 vehicles per day.
1.3 The project was executed for 30-year BOOT concession period. Under the concession
agreement, NTBCL has been given the right to commercially exploit the Delhi Noida toll
bridge by levying tolls. The concession agreement provides that the concession shall last
until the concessionaire has recovered the total project cost plus a return, which is 20% per
annum of the total project cost.

2.0 ISSUES
2.1 The concessionaire had guaranteed a return on the Total Cost of the Project. The
Independent Auditor, in consultation with the Independent Engineer, would have determined
the Project Cost as on the Project Commissioning Date. The following issues arisen up: -
2.1.1 The project cost is defined ex post and the contract did not put a cap on project cost and total
cost of the project. The reasonability of the magnitude of the financial commitment made by
NOIDA were not known. While the auditors could certify that specified expenditures have
been incurred, they also could not opine upon whether these expenditures are ‘reasonable’.
2.1.2 The agreement did not provide a close definition of what items are allowable as costs
specially the ‘Other Costs of Commissioning’. The Other Costs of Commissioning was
limited to the various expenses and fees.
2.1.3 The Model Concession Agreement for National Highways published by the Planning
Commission defines Total Project Cost as the lowest of (a) the capital cost of the Project as
set forth in the Financial Package; (b) the actual capital cost of the Project upon completion
of the Project Highway, etc.

1
2.1.4 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. Such an 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 the
returns thereon) – so users could end up paying unnecessarily high tolls and for a longer
period than warranted.
2.1.5 The concessionaire is assured return of 20% per annum on the total project cost includes
shortfalls in the recovery of returns in previous financial years. The accrued return (inclusive
of project cost) due to the concessionaire was Rs. 953.4 crore on March 31, 2006, an amount
more than double the original project cost.
2.1.6 The return on the equity works out to be about 32% which is very high while most of the
risks have been taken care in the agreement
2.1.7 The concessionaire has the power to determine this fee is in contrast to the general practice
in the case of National Highways and State Highways, where (as per law) the power to
determine user fees rests with the government – rather than being vested in a private entity
2.1.8 The accrued return (inclusive of project cost) due to the concessionaire was Rs. 953.4 crore
on March 31, 2006, an amount more than double the original project cost. The magnitude of
this financial liability would make it very difficult for NOIDA to terminate the contract if it
concluded that the contract was no longer in the public interest.
2.1.9 There should be costs to unilateral abrogation of any contract, the size of the penalty
imposed on the public partner in this case seems disproportionate to the risk of capricious
repudiation by the public sector.
2.1.10 In the project no distinction is made in terms of compensation between a concessionaire
event of default which occurs prior to entry into operation of the bridge construction.
2.1.11 The 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 best
practice norms of public sector contracting. The potential tie-breaking role of IL&FS (as a
lender) in these selection processes could result in both the Project Oversight Board and the
Fee Review Committee being perceived as weighted in favor of the interests of the private
partner.
2.1.12 The Project Oversight Board is a single member body. This could result in a perception that
the Board is biased towards the private party.
2.1.13 In case of safety, a requirement was missing for medical and emergency response within 15
minutes of reported accidents and the clearance of blockages within one hour of any
accident and no other output measures have been specified or quantified.
2
2.1.14 The obligation of NOIDA to consider reasonable modifications to this Agreement as may be
required by the Lenders and execution of such further appropriate documentation or
additional writings, in order to facilitate the process of achieving Financial Closure.” This
appears to be a very open-ended obligation for NOIDA to take on.
2.1.15 The O&M contract is signed between the concessionaire and the O&M contractor, it seems
odd that penalties that would be applied to the concessionaire by NOIDA would be specified
in the O&M contract rather than in the concession agreement.
2.1.16 The concessionaire has been given the right to mortgage its interest in the project assets,
including the project site. By comparison, the MCA for National Highways and the
concessions for the Delhi and Mumbai airports do not give any such rights to mortgage
public land to the private developer. This unusual provision reduces the concessionaire’s
risk significantly.
2.1.17 The slow growth of traffic in contrast to the levels projected at contract award implies that
the period for which NTBCL would retain a monopoly over traffic between South Delhi and
Noida is likely to be much longer than the ten years originally foreseen.

3.0 RECOMMENDATIONS
3.1 There could be a more transparent and competitive process for selection of the concessionaire.
3.2 This case study illustrates that the project was one of the appriciable project under Public
Private Partnership.
3.3 Sector providing essential good/services should have provide services with more passion.
3.4 The transfer of traffic risk to the private party in combination with bid solicitation could have
helped dimension the project in such a way as to avoid the need for support to project cash
flows from Development Rights, etc.
3.5 The potential for gold-plating could also be minimized if the total cost of project and O&M
cost had been capped.

4.0 LESSONS LEARNT

4.1 The natural monopoly sector, where privatization participation is there, are to be under a
strong regulatory framework.
4.2 The awarding methods and criteria for Development Rights should be precise, clear and
unambiguous.
4.3 Sector providing essential good/services should have provide services with more passion.
4.4 The Project’s capital and operational costs should be capped and the associated parties
bearing these costs should be able to validate their reasonability.
3
4.5 The guaranteed returns on cost should be avoided.
4.6 There should be a clear separation between the roles of the public authority as concedent and
the private sector as concessionaire.
4.7 The risks associated in Public Private Partnerships to be shared between the parties, therefore,
rewards to be commensurate with risk.
4.8 The appointments of the Independent Examiners and Validators should be based upon
transparent selection criteria with mutually acceptable terms between the parties.

xxxxxxxxxx