1. Despite massive returns, DND expressway cost rose from Rs 408 crore to Rs 5,000 crore

Despite massive returns, DND expressway cost rose from Rs 408 crore to Rs 5,000 crore

Even before the Allahabad High Court ruled to end the tolling on the DND expressway connecting Delhi and Noida on Wednesday, there was enough evidence to show the project was badly conceived from the very start, and that is what led to its dramatically escalating costs.

By: | Updated: October 28, 2016 8:55 AM
Apart from the fact that the project was not competitively bid out, it was assured a 20% return on total cost—most such assured returns are on equity, not debt. (IE) Apart from the fact that the project was not competitively bid out, it was assured a 20% return on total cost—most such assured returns are on equity, not debt. (IE)

Even before the Allahabad High Court ruled to end the tolling on the DND expressway connecting Delhi and Noida on Wednesday, there was enough evidence to show the project was badly conceived from the very start, and that is what led to its dramatically escalating costs—the project that was structured as a Rs 408 crore one when it started in the early 2000s has seen its cost escalate to Rs 5,000 crore today. Apart from the fact that the project was not competitively bid out, it was assured a 20% return on total cost—most such assured returns are on equity, not debt. And, amazingly, if there was any shortfall in revenues, the contract allowed this to be added back to the costs on which a 20% return was to be ensured—this is why the costs are escalating—which effectively meant there was little project risk to justify this huge return. Worse, the contracting was so loose, there was no cap on costs. And, as a study for the Planning Commission pointed out in 2007, IL&FS, a project sponsor, was involved in conceptualising the project and was a member of the steering committee that decided the project would be implemented by a corporate entity promoted by itself—in other words, the project didn’t have the kind of checks and balances you would expect. The 20% return on project cost, the study calculated after looking at the interest costs paid, worked out to a 32% return on equity; and when the debt was restructured following traffic shortfalls in the initial years, this raised the return on equity to 47%.

Adding back shortfalls to the capital each year and no cap in costs, in effect, meant the project would never break even, so the length of the concession would have to be raised from the original 30 years—in 2006, in the Noida Toll Bridge Company Limited’s (NTBCL) AIM listing document, the directors estimated the concession period would be over 70 years. By 2012, as a document revealed in the high court hearing showed, this had gone up to 100 years. Not surprisingly, the court has said the original award was ‘unfair’. After examining the manner in which the costs kept galloping—ideally, costs should reduce each year as debt gets paid off—the court talked of the concession lasting in perpetuity ‘due to wrongful arbitrary terms and conditions of the contract’ and recommended the parts of the contract that allowed this to happen be struck off. It then looked at the amount of toll NTBCL had collected and said this more than covered costs and reasonable returns/profits, so tolling had to be discontinued. Given there are still large public infrastructure projects across the country being given out on a nominated basis, even if to government-owned entities, it is important to ensure none of them are able to extract such high returns from an unsuspecting public.

Please Wait while comments are loading...

Go to Top