In a story carried by both the Economic Times and Times of India on November 12, Pradeep Puri, an ex-Indian Administrative Service (IAS) officer, writes, “if, as it seems, the state prefers or chooses to remain a mute or indifferent spectator to the DND (Delhi Noida Direct Flyway) saga, it will be the death knell of private sector investment in infrastructure.”

The saga Puri was referring to is Allahabad High Court’s decision to make DND flyway toll-free and the Supreme Court’s refusal to stay the high court’s decision.

Puri, with his years of experience, should know that some Public-Private Partnerships (PPPs) are a virtual sellout to private interests at public expense. The DND Flyway – the execution and management of which Puri had a key role in, after taking a premature retirement from the Indian Administrative Service –  is such an example of a corrupt contract that it would render the very idea of PPP an anathema.

In 1990, the National Capital Region Planning Board conducted a study that highlighted an urgent need to build a bridge across the Yamuna to ease traffic congestion between Delhi and Noida.

In 1991, a few prematurely-retired IAS officers came together to float, in collaboration with some businessmen, a company called Infrastructure Finance & Leasing Services (IF&LS).

On April 7, 1992, a Memorandum of Understanding was signed between the Uttar Pradesh government, Delhi Administration and IL&FS for the implementation of a toll bridge across Yamuna.

The obvious question is why did the UP government and the Delhi administration sign an MoU with a newly-constituted private body, less than a year old, with no prior experience in undertaking such projects? As a matter of fact, the company did not even have a single completed project to showcase its claim to be the sole bidder – yes, the sole bidder — for this mammoth enterprise!  

And that wasn’t enough.

Subsequent to the MoU, a steering committee – comprising representatives of the Delhi Administration, UP government and IL&FS – decided to award the contract for the construction of the bridge to a company owned by IL&FS. Accordingly, IL&FS set up and subsequently incorporated the Noida Toll Bridge Company Limited (NTBCL), and established its corporate office in Lucknow.

Thereafter, the Noida Administration was given the authority to flesh out a detailed framework of collaboration. After due deliberation, the administration, IL&FS and NTBCL signed a concession agreement on November 12, 1997.

The salient provisions of the agreement were a bigger scam.

The agreement gave the IL&FS and NTBCL the charge of the Noida-Delhi expressway on a Build-Own-Operate-Transfer (BOOT) basis. This allowed the NTBCL to set the toll rate without any approval from the Noida administration.

Plus, there was no cap as to how many years the NTBCL could collect toll from the public.  The NTBCL was authorised to collect toll for at least 30 years from the commencement of the expressway. There was also a clause in the agreement that let the NTBCL collect toll for an indefinite period after 30 years, if it had not earned enough returns on the investment after three decades of toll collection.

And the stipulated return the company was supposed to get? At least 20 percent annually on its initial investment. What was that initial investment? The company, on its own admission, said that the engineering, procurement and construction (EPC) cost was Rs 193 crore. The cost for acquiring the land, facilitated by the Noida administration, was just Rs 11 crore.

But by the time the Delhi-Noida route commenced in 2001, the NTBCL projected the total cost at Rs 408 crore, the initial estimate having doubled. When there was no delay in the completion of the project, why this cost overrun? The company claimed that it had to pay a huge management fee – the cost of men, material, machinery and land was Rs 200 crore, and lo and behold, the management fee was also Rs 200 crore!

At the stipulated rate of 20 percent, the company had to earn at least Rs 82 crore a year.  But a year after the commencement of the DND expressway, the company said that its real earning (toll collection minus the operational cost) was just about Rs 2 crore, which means it had a shortfall of Rs 80 crore in the first year.

As to who determined and approved the operational cost? The NTBCL itself. It appointed its own auditors who endorsed the claims of the company. The Noida authority had no say in the matter. There was no stipulation of nor a cap on the annual operational cost in the agreement. It kept increasing with the increase in income, neutralising annual profits year after year.

As the official records show, the salary and perks of the top management committee constituted an overwhelmingly large part of the operational cost. And who constituted the top management of the company? Among others, a handful of IAS officers — instrumental in the execution of the DND project — who had taken premature retirement from service to float and join the company as directors at fat salaries and perks.

The strangest clause of the agreement was that if there was any shortfall in the annual earnings, then that would be added to the initial investment for the purpose of determining the subsequent year’s earning stipulation.

What that meant was, in 2001-02, there was a shortfall of Rs 80 crore. For the year 2002-03, the initial investment was construed as Rs 488 crore (Rs 408 + Rs 80 crore); then the stipulated earning next year had to be Rs 98 crore (at 20 percent rate).

But there was a catch: even if the toll revenue went up sharply, the operational cost was shown to have correspondingly increased to nullify the net gain.

No wonder, then, that in a seminal study conducted by the Planning Commission in 2005-06, economist Sheoli Pargal trashed the DND agreement: “The agreement does not provide a tight definition of items allowable as cost, so costs are effectively open-ended… the base upon which returns are guaranteed is unduly inflated…”.

Pargal was aghast to find that the original project cost of Rs 408 crore –  a figure which itself was hugely inflated – had ballooned to Rs 953 crore by 2005-06, because of the strange clause of adding the shortfall in the annual returns to the original project cost.

A simulation undertaken by Halcrow Consulting India, a company that provides environmental and engineering consultation, concluded in February 2006 that with the 2005-06 figures, the accumulated project cost in 2021 could be Rs 11, 817.54 crore!

This all but gives the NTBCL to collect toll till infinity!

Isn’t it an exemplary case of a fraudulent public-private partnership that brings into sharp focus the shenanigans of private sector investment in infrastructure?