Over four years ago in 2012, a Public Interest Litigation (PIL) was filed and admitted in the Allahabad High Court against the Noida Toll Bridge Company Limited (NTBCL), a listed company on the Indian and foreign bourses. In October, an adverse judgement was pronounced on the NTBCL, which prevents the company from collecting toll from users. An appeal was made immediately by the company to the Supreme Court, which in turn ordered a Comptroller and Auditor General (CAG) audit of the cost of the project.
The cost of the project of Rs 408 crore, which was completed in 2001, was the basis of the contract between the state of Uttar Pradesh, Noida Authority and the Infrastructure Leasing and Financial Services (IL&FS) promoted NTBCL. Surely, ordering a CAG audit of an infrastructure project in this manner after 15 years is not routine.
The CAG is a government auditor, and was established to supervise the audits of public sector units and PSU Banks, which formed part of the “commanding heights” of the Indian economy.
Ordering CAG Audit in the Middle of a Contract Is Very Disruptive
NTBCL has over 80,000 shareholders including institutions, foreign institutional investors (FII), and Global Depositary Receipt (GDR) investors. It has got audited routinely by chartered accountancy firms regulated by the Institute of Chartered Accountants of India (ICAI) – so what is this really about?
Indian Accounting Firms, and subsidiaries of foreign accounting firms that operate in India, are considered amongst the best in the world when it comes to following global best practices in accounting.
Apparently, the belief is that the CAG is more independent than the firms because of the absence of any relationship between the institution and the company. Ordering such an audit in the middle of a contract is very disruptive. Disruption is good for technology but not when it comes to the promise made to investors. Now, its just a fishing expedition, without a shred of evidence.
Keep in mind also, that while the CAG is a highly respected institution, the presumptive loss number of Rs 175,000 crore in the case of the 2G auction was at the higher end of the spectrum. With many other techniques used, it was also widely agreed that the number was in the region of Rs 30,000 crore.
The point being, what happens if the CAG comes out with a different conclusion about the Noida Toll original cost which has already been highly scrutinised. Where are the investors to go?
India’s First PPP Project, and its Land Development Clause, Was Experimental
Noida Toll Bridge was built against a backdrop of high interest rates on debt funding. Soon after the signing of the agreement and even before the bridge construction began, India tested nuclear weapons at Pokhran. Lenders and investors were shying away from infrastructure projects in India. The project, when finished in 2001, cost Rs 400 crore.
A rate of return on the project cost of 20 percent was contracted for a period of 30 years along with extensions of two years at a time, if the contracted rate was not met. The starting denominator in the year 2001, was Rs 408 crore, to be precise. The numerator for each year was to be PBDIT – Profit Before Depreciation Interest and Tax.
Hence there was a guaranteed rate of return of 20 percent on one of the first Private-public Partnership (PPP) projects in the country. This was experimental. As a mitigating clause, if enough traffic did not come through, the toll got a right to develop approximately 100 acres of land, now considered prime, but not quite so then. The permission was dependent on the Noida Authority.
The land development clause in the contract was there to give further assurance to investors that they would get good returns from this project. Both from an aesthetic and utilitarian point of view, there is not much by way of development on the banks of the Yamuna when compared with the river side promenades and complexes built in some of the other great cities of the world like Paris, London, Vienna, Melbourne, Istanbul, New York, Moscow, Prague, Vienna etc.
Traffic Traction: Contract Obligation-Turned-Problem
Fast forward a decade later, with substantial development in the area, there was a large increase in the population. The very reason for which the contract obligations may have been met, i.e. enough traffic traction, was the cause for the residents to file a Public Interest Litigation (PIL). There were now enough residents in the Noida area represented by their various associations who believed that the company had recovered enough toll. Rs 28 of toll, which 15 years ago was Rs 10, had become a cause of irritation and feeling of injustice to some users. Another cause for irritation was the need to wait at the toll as most of the lanes were cash lanes, as was the case throughout the country for toll roads. (Post demonitisation that will change with more digital enabled lanes. There will be longer waits at the one or two remaining cash lanes.)
Politics took over and an association of local residents associations on the Noida side filed a PIL which was admitted, supported by some local political leaders. Two things contributed to this, and one wonders whether the drafters of the contract saw this coming, discussed it and ignored anything in the Concession Agreement or just did not see it coming.
1) The Company started paying dividends – at some point it was expected to – once the debt burden came down. However, within four years, the residents and users of the toll road felt it was time to stop paying the toll.
2) The government ordered cancellation of the Delhi Gurgaon toll after taking control of the project citing inability of the toll operator to service the debt.
‘If Delhi-Gurgaon Toll Can Be Cancelled, Why Not Delhi-Noida?’
In reaction to the Gurgaon toll becoming free, the Noida association demanded the same. Meantime the shareholders who used the road were happily paying the toll, feeling a certain pride while doing so.
Many users also still feel that a toll is necessary to have a quality road. In the case of Gurgaon, the over 80,000 investors, as in the Noida toll, were not involved.
The toll bridge has also witnessed violence in the form of breaking of the barriers where toll is collected.
Those protesting the toll have levied charges of collusion against the management, the promoters and the authorities, for fudging the accounts and gold plating the project cost. The subject matter of the CAG audit is to ascertain whether the charges of gold plated costs are true.
Accounting principles involved in the case and are subject to differing interpretations at times. But in this case, everything was known – the costs incurred were known and contracted to be allowed in the calculation of returns. The contract was signed between institutions; not between David and Goliath.
Perplexing SC Order
The SC order is perplexing. The company's management is not the promoter, but the ownership and management in the case of NTBCL is separate. This is not a family-controlled company. So far, the investors have not accused the management of oppression and mismanagement.
Something which the courts may have overlooked is that many users believe that the toll should be there for a quality road to be maintained sustainably. Some others who understand what implications this will have for infrastructure projects in the country, believe that contract conditions should be met. It's a matter of perception of individual politics – socialism, capitalism, communism, or a cocktail of all three.
The Allahabad High Court order and the subsequent ordering of a CAG audit of numbers of 15 years ago is putting a dampener on the stock price of the company and in general on the confidence of investors.
The Burger Analogy
There are alternative routes available to the Noida Toll users – Kalindi Kunj and Nizamuddin. The availability of these alternative routes provide a certain price elasticity of demand for the toll.
It would be bad economics to discuss price elasticity in case of an infrastructure product where alternatives were not available, but certainly not in this case.
For example, the burgers at Taj Hotel are awesome but priced at Rs 1,000. The principle is the same.
The company decides the price of the toll in consultation with the Noida Authority. Revenues would decline substantially if it were to suddenly hike the toll to meet the original contract conditions. Furthermore, law abiding users would decline the move, leading to protests. In our country, unfortunately, the law enforcing agencies are too stretched to be able to protect public assets from being damaged and destroyed.
Was the Original Contract Poorly Worded?
The 20 percent return was the return on capital (both debt and equity). On completion, the toll could be collected at an afforadable price point from commuters. The collection of toll, after meeting expenses including interest on the debt and income taxes, would go towards paying off debt and paying dividends to shareholders.
While a 20 percent return on equity by good companies is not unheard of, that quantum of return on the entire project was always going to balloon into a large number, given that it would be on the accumulated return not achieved in earlier years.
There is an argument that the original contract was poorly worded and left ambiguous with inadequate numerical scenarios. The contract needs to be looked at afresh, in the middle of the concession period, as both the returns to shareholders have not been achieved. This, in turn, gives an opportunity to protesting users to make the asset free of charge for them.
Govt Learnt Its Lesson the Hard Way
As the surface transport sector developed in the country, the government stopped guaranteeing a Rupee amount of return to the developer while awarding contracts. This is the learning experience of the government and as many toll projects in the country are aggressively bid for by many infrastructure companies, there is almost unhealthy competition at the bidding stage.
Since traffic is always going to be an unknown factor, the returns could vary. The concession periods, even in the emerged environment, still go upto 30 years.
Investors built the Noida toll bridge under a certain promise, which is far from being met. Yet, users want to deny investors even that. Instead, they should collaborate and become shareholders. The current dividend itself will meet their toll requirements for time being.
In a friendly environment, the company would be able to get development rights as per the original contract from the Noida Authority and other Government authorities to the benefit of all.
At the end of the lengthy order of the Allahabad High Court, one cannot help but feel that the original drafters of the contract forgot to add a few things. A significant variable of the contract was government estimate of traffic flow, from which the company would get it's assured return. In a country hungry for infrastructure, it was not an anathema for the first PPP of it's kind to get an assured rate of return and a minimum time period of 30 years to collect the toll.
The paradox in the case of NTBCL is that protesting users may not have been residents of the sparsely populated area when the project was commissioned. There may even have been a welfare association in existence, but like all RWAs, the powers must have been quite limited. The contracting parties, the company, the authority, and the State Government backing the Authority, did not find any rationale in making the RWA also a party to the contract.
This country is in dire need of investment in infrastructure and foreign capital. The great investor Warren Buffett has often stated that he is on the look-out for toll projects to invest in.
The bottom line is that if bread and butter is taken away forcefully, or contracts executed in good faith are broken, then investors in infrastructure projects will just flee the country. Adequate compensation needs to be paid to investors soon enough if the Supreme Court decides, in its wisdom, that the toll cannot resume.
(This is a personal blog and the views expressed above are the author’s own. The Quint neither endorses nor is responsible for the same. The author is a writer and an activist investor. He can be reached @sanjay_kohli.)