Sunil Jain: Twist in the road

RATIONAL EXPECTATIONS

The Uttar Pradesh government's 8-lane 850-km access-controlled expressway from Greater Noida to Ghazipur appears to be off to a bad start. It's missed its first deadline (August 31) of evaluating the technical bids for selecting a consultant to help structure the project, but that's the least of the problems with this Rs 25,000 crore project which is meant to showcase the Mayawati government's efforts to develop a world-class project in the state.

In an ideal situation, the UP government should have hired a top-notch consultant/advisor to help it draw up plans for the expressway (techno-economic feasibility, environment impact, road alignment, etc) and help bid this out and then evaluate various bidders for the actual development/building of the expressway. Instead, the UP government has decided that this pre-development work will be done by an SPV, in which both it and the bidding firm will hold a stake "" how much this stake will be is one of the parameters the consulting/advisory firms will bid for.

Since the UP government believes this entire exercise till the access-controlled expressway is ready to be bid out to a developer/builder could cost around Rs 20 crore, making this a bid parameter could save it some money. So, if, for instance, Ernst & Young bids Rs 15 crore for the SPV, the UP government will end up spending just Rs 5 crore. While it's an unorthodox method, the question is whether it is also undesirable.

While this will obviously depend upon how the final contract for the development/building of the expressway is structured, the terms of reference for the SPV bid are shocking. The SPV, which will help the UP government select the final firm that will develop/build the expressway and execute various agreements with it, may, the terms of reference say, "also take up post selection activities of co-ordination, monitoring and supervision of project". That is, the consulting/advisory firm that wins the contract to prepare the expressway project will be involved in selecting which firm gets to build it, and may then also get to monitor this firm, decide whether its bills are inflated, and so on!

In the Noida Toll Bridge case, which this column dealt with a fortnight ago (see "The Perfect Murder," 27/8/07), the problem began with the fact that, as a project sponsor, IL&FS was involved in conceptualising the project and then, as a member of the steering committee, it decided that the firm which implemented the project was a firm promoted by it. On the face of it, however, the UP government's tender takes care of this by stating that the partners of the SPV and their associates will not be permitted to bid to build the expressway.

But two points need to be made here. One, even if the developer/builder is not an associate of the consulting/advisory firm, allowing the latter to monitor the developer/builder after having selected it, is inviting collusion between the two firms. Two, if the tender for the consulting/advisory part of the expressway is any indicator (more of this below), there is always the possibility this proviso could be side-stepped at the time of selecting the bidder.

To digress a bit, the finance ministry has a list of transaction advisors, or firms which it believes have the credentials to provide consulting/advisory services to central/state governments to develop big infrastructure projects and take them to the stage where they can be bid out to potential developers. While it can be argued the list should be expanded to include more global consulting/advisory firms, few would argue the 11 firms on the list are not among the bigger ones "" IDFC, for instance, has outstanding infrastructure loans of Rs 22,000 crore and accounted for a fourth of the total loans made to the infrastructure sector last year; Ernst & Young was the consultant for the two ultra-mega power plants that were successfully bid out this year; IL&FS has built a large number of infrastructure projects; and so on.

The problem is, the way the UP tender is structured, most of these firms don't qualify! The tender says, for instance, the consulting/advisory firm must have "project development experience" of around Rs 5,000 crore of infrastructure projects "" since consulting/advisory firms typically don't "develop" projects, few firms in the world qualify. The tender then says the firms must have at least two "institutional arrangements" with either the Central or state governments to structure infrastructure projects "" since most advisory/consulting contracts are made for one project at a time, this rules out most firms (in the world, not just among the 11 talked of earlier). Another condition says the consulting/advisory firms must have experience in creating and operationalising an SPV to develop an infrastructure project "" you guessed it, few consulting/advisory firms create or implement an SPV since, typically, they don't develop/build projects.

Yet another condition says the consulting/advisory firm much have committed at least Rs 15 crore by way of equity in a fund to help finance the project development (that is, they must have participated before in ventures of the type being envisaged by the UP government) "" most consulting/advisory firms work for a fee, few contribute to a fund which then pays them for their consulting/advisory work.

So, if a tender to select the consulting/advisory firm which will help select the final developer/builder (and possibly monitor it as well) is structured so as to eliminate most of those in the business, when the tender is designed to select the final developer/builder, who's to say it won't be structured in a similar manner? That's something the Mayawati government and its supporters in the central government would do well to ponder over.