Sunil Jain: This is a partnership?

RATIONAL EXPECTATIONS

So what if private firms make a bit of profit, as long as critically short infrastructure gets built? It's a question asked frequently, particularly by state governments, each time it is pointed out that negotiated contracts as opposed to open auctions are a bad idea. In Rajasthan, for instance, the chief minister has decided that the state's highways will largely be built by a 50:50 JV called Ridcor with infrastructure firm IL&FS.

The problem with this is that it compares apples and oranges. Sure, Ridcor will build roads faster than the Rajasthan PWD, but the right comparator is the NHAI that, especially when it was free of political control during the NDA tenure, rolled out roads at a rapid pace; or the DMRC that built the metro in record time. But even if governments choose to go in for negotiated contracts, it's a good idea to know what they cost. In the Rs 1,500 crore Ridcor, an IL&FS subsidiary put in Rs 25 crore (as did the Rajasthan government) and Rs 110 crore of interest-bearing subordinate debt (the government has put in Rs 240 crore of zero-interest subordinate debt). The IL&FS group will get a 4 per cent project fee (so it has no real incentive to keep costs low) and a one per cent fee for arranging the loans (and service tax on both) "� so, by the time the road is completed, it will get Rs 75 crore of fees! It may still be worth it, but it's important to know the cost. 
 

ONE-SIDED PARTNERSHIP (funds flow in Rs lakh)
	Tamil Nadu Government		IL&FS
	Contribution to  TNRDC	Funds Flow from TNRDC	Contribution to  TNRDC	Funds Flow from TNRDC
1999-2000	0.00	0.00	175.00	133.00
2000-01	20.00	0.00	1043.00	505.00
2001-02	480.00	2.00	4363.00	427.00
2002-03	500.00	0.00	994.00	4975.00
2003-04	1250.00	0.00	116.00	1310.00
2004-05	2150.00	0.00	17.00	1751.00
2005-06	0.00	0.00	250.00	33.00
Total	4400.00	2.00	6958.00	9134.00
Source: Evolution of an Integrated Urban Facility, K Malmarugan and Sabina Narayan

A good book to read while examining such JVs is Evolution of an Integrated Urban Facility: The IT Corridor Story. The book, the story of the Tamil Nadu Road Development Company (TNRDC) Limited's attempt to build two roads, has been written by two TNRDC staffers (who've resigned since) "� K Malmarugan (VP New Initiatives) and Sabina Narayan (Co-ordinator, Design and Community Development). Since the book is the story of how the TNRDC "� a JV between IL&FS and the Tamil Nadu Industrial Development Corporation "� did a great job despite all the obstacles, the court cases, the rehabilitation etc, you have to read it carefully to get the picture of the favouritism, the faulty execution, the politics at the board level and other such issues. At one point, the book says, the TNRDC's CEO and Director of ITEL (a subsidiary of the TNRDC) even resigned and, after a review meeting, the state's new chief secretary referred to ITEL giving vendors a week to submit bids and finalising the contract with one of them before the bids came in as "against all propriety". Indeed, TNRDC officials who had quit were asked to come back and ITEL was told not to go ahead with the deal.

Without getting into the details, the story's a simple one. The TNRDC implemented the Rs 61 crore widening/strengthening of the East Coast Corridor (ECR) and, through ITEL, the Rs 205 crore IT Corridor road project. IL&FS and TIDCO contributed Rs 5 crore each of equity for ECR and IL&FS contributed Rs 10 crore of 15 per cent subordinate debt and Rs 41 crore of 15.5 per cent senior debt (it later sold part of the debt to PNB at a profit). For the IT Corridor, the state government gave a grant of Rs 34 crore, TUFIDCO (a state government body) gave a loan of Rs 65 crore at 6 per cent, Indian Bank Rs 50 crore at 8.5 per cent and so on "� the TNRDC got a 4 per cent management fee on the project cost.

What of the returns? According to the book, in the first seven years, the government of Tamil Nadu and TIDCO contributed Rs 44 crore but got Rs 2 lakh back while IL&FS contributed Rs 69.6 crore and got back Rs 91.3 crore. Interestingly, while the IT Corridor agreement was signed with ITEL, the government assigned a 4.9 acre plot to the TNRDC for Rs 1 crore "� the land, being auctioned right now, has a market value of around Rs 50 crore!

How fast did the project come up? While a Malaysian firm AZRB won the bid in August 2004, it was given the contract in April 2005 (there was some doubt over its ability to deliver) "� a year later, it had completed just 6.1 per cent of the work against the target of 100 per cent!

All those in favour of such negotiated contracts, including those in the finance ministry, would do well to read this book, if only to see how some of the obvious pitfalls can be avoided.