Is infrastructure´s golden goose on the chopping block

This new found concept of socialism in the private sector is a surefire way of choking the infrastructure boom, before it even takes off.

The PPP way of creating infrastructure in India has waned. Things got compounded by inherent risks that were stacked up upon the private sector, resulting in a bouquet of heavily invested infra projects getting waylaid and now languishing due to delays and cost overruns, populist politics hijacking revenue through toll concessions and resulting in user fees on toll roads not being realised by the private sector in many regions of India.

Enter HAM (hybrid annuity models) and government policy aimed at sharing the risks between the state and private sector in order to enthuse an ambitious $1 trillion in infrastructure investments in India. Just as the private sector thought things were on the mend, the Allahabad High Court, acting on a public interest litigation, has ordered the Noida Toll Bridge Company (NTBC) to stop collecting toll of around `28 per car forthwith.

A spokesperson for an infrastructure developer expressing shock over the ruling tells INFRASTRUCTURE TODAY, ¨At first glance, the court appears to have overstepped its authority. The only basis for a court to interfere with the business activity would be if the concession given to the toll road developer turns out to be grossly unfair to consumers. In this case that is not evidenced with civilian commuters paying a maximum of Rs.28 for using the 9 km long toll road. The pricing of the toll road is predetermined and the concessionaire does not enjoy any exclusivity in setting the tariffs. The toll was much lower and only increased as per the prescribed formula of the government. Why is the court infringing upon the executive and legislature in this manner?¨

In stark contrast, the MD and CEO of Centrum Infrastructure Advisory Ltd, Sandeep Upadhyay says, ¨Whenever such concessions get their contracts terminated, the developer becomes eligible for compensation as per the defined formula.¨

Capping Profits?
However, our angry developer (who preferred anonymity) counters this and says, ¨The court has only taken issue with the concessionary agreement, pertaining to cost calculations and stopped toll collections stating that the developer has already made reasonable profits. How can you cap profits, especially in the infrastructure sector where the government is keen to attract private sector investment? What is the immediate message sent out by this ruling? Should we not challenge why top Information Technology companies like Infosys were given tax breaks and have justified the same by becoming multibillion dollar conglomerates? Companies like Infosys benefitted from the emphasis by the political dispensation to encourage sunrise sectors that could result in all-round development. We have seen this happen and the tax breaks/tax-free status as well as other tweaks were crucial for the development of the industry in India. Can the courts now ask Infosys and other IT majors to cough up back taxes?¨

Upadhyay, however, feels that the court has not set a bad precedent at all and says, ¨The DND concession agreement is an exception to the rule as far as standard concession agreements go. The toll-based model of infrastructure development entails an anticipated 15 to 17 per cent return on investment for the concessionaire. The DND agreement was designed in such a manner that it will continue to keep increasing the outstanding liability recoverable by the developer.

It was the first project on the BOOT basis of this stature, and concessionaire agreements have since witnessed standardisation.¨

Our friendly neighbourhood infrastructure developer, who has constructed a few toll roads, does not agree with this assessment and says, ¨It is absurd to base the cancellation of the toll collections using the premise that ´reasonable profits´ have already been earned by the developer. What about the risks borne by the developer? This definitely sets a bad precedent. Tomorrow the Mumbai or Delhi airport facilities may be stopped from collecting user fees from passengers.¨

The developer cites the example of the Delhi-Gurgaon highway project. ¨Original estimates projected a 5 per cent growth of vehicular traffic, but today´s reality is that the growth has been in the range of 18 to 19 per cent. The government side estimations for infra projects, that is, the basis for undertaking such projects, is mostly skewed against the private developers. So the cost estimates made out by the bureaucracy are invariably lower than the actual costs the developers have to bear while implementing the project. These are construction cost risks that are borne by the private players on almost every road project. We grin and bear it.¨

According to him, the sanctity of the contract has to been maintained on pain of ruining the stability in the infrastructure sector. ¨Consider this – we had a project in West Bengal to construct a 256-km road project on a PPP basis at an estimated cost of Rs.4,500 crore. While we completed the first two sections on time, the third section was delayed by 5 years as the land acquisition process could not be completed owing to popular objections of a political nature. The cost component of the third section rose from Rs.700 crore to `1,100 crore due to the delay which is nearly half the EPC cost for the section. Besides that, we were paying carrying costs at 7 per cent per annum. The only option left for us was to terminate the contract.¨

Verdict Takes a Toll

By withdrawing Noida Toll Bridge Company´s right to earning tolls, the courts have made the government renege on its commitment and kill shareholder value, apart from spooking away potential investors in such projects, says PRATAP PADODE.

The conflict of providing a social good for an infrastructure service is a delicate issue. A citizen has a constitutional right to be provided basic amenities, but the nation has limited resources further constrained by a poor administrative system of collection of revenues, making it necessary to depend upon private investment. Private investment has to serve the profit motive which in turn conflicts with the ´right to be served´ of the citizen. The recent judgement by the Allahabad High Court has split this wound wide open.

It denied Noida Toll Bridge Company, which was awarded the contract of collecting toll from passengers for 30 years, the right to continue collecting toll as it claimed that the concessionaire has earned ¨reasonable profits¨.

Even the Supreme Court has not entertained the plea of the defendant. It has noted that ¨the Concessionaire, according to their own financial statements, has recovered Rs.810.18 crore from toll income from the date of commencement of the project till March 31, 2014, and after deduction of operation and maintenance expenses and corporate income tax, the surplus was Rs.578.80 crore (computed before interest, depreciation, and lease rental received by the Concessionaire).¨

Many issues need to be addressed here: Are contracts which provide service to citizens but allow the company providing the service to make profits, void? If power companies, airport operators, and port operators can make 16 per cent return or more, why not toll concessionaires? Will this not have a retrograde effect as was the case with retrospective tax which drove foreign investors away?

How will the government then fund such projects? Only funds which have a long payout date and are ultra-conservative will invest in these projects, provided the government provides sovereign guarantees. Noida Toll Bridge Company is a public listed entity and its business plan was the returns from only this project.

By withdrawing the company´s right to earn toll revenue, the courts have made the government renege on its commitment and kill shareholder value apart from spooking away potential investors in such projects. The risk quotient has spiked and shareholder value in such projects has eroded. Moreover, this will set a trend as local leaders with political ambitions will join protests to derail user charges and win the favour of voters.

GMR meanwhile has won an arbitration order of $270 million against the government of Maldives which had arbitrarily cancelled GMR´s contract of running its airport. The compensation covers the debt, equity invested in the project along with a return of 17 per cent and also termination payments and legal costs.

(The author is Managing Director, ASAPP Info Global Group)