Two much in one

The Delhi Airport Metro project frames the distortions in PPP projects where construction and operational activities are bundled into one contract

Some recent performance audit reports of the Comptroller and Auditor General (CAG) of India have been acclaimed for their exposure of egregious corruption. A more important but less-discussed contribution has been to shine a light on critical instances of largescale incomplete contracts with private agencies in the infrastructure sector. The just announced end to the tortured relationship between the Reliance-Infrastructure-promoted Delhi Airport Metro Express Private Ltd (DAMEPL) and the Delhi Metro Rail Corporation (DMRC) is a case in point.

In a recent audit of the DAMEPL, the CAG has found large equity dilution by the private concessionaire. Similar equity restructuring has been observed in projects in other states too. This is representative of the distortions that arise in public-private partnership (PPP) projects where construction and operational activities are bundled into one contract.

The 22.7 kilometre metro rail linking the Indira Gandhi International Airport was built as a PPP at a cost of Rs 5,780 crore, of which nearly 54 per cent was financed by the government and 46 per cent by DAMEPL, a private consortium led by Reliance Infrastructure. Operations started in February 2011. The CAG has found that DAMEPL had diluted its debt-equity ratio from the mandated 70:30 to 43,218:1, 2,30,907:1 and 2,75,205:1 for 2009-10, 2010-11, and 2011-12 respectively. Thus, the project had been leveraged to an extent farbeyond what was initially envisaged, and indeed far beyond any prudent level. Reliance Infrastructure, for its part, contends that the concession agreement allows the concessionaire to restructure its equity holdings after two years of the agreement.

The significance of this equity dilution goes beyond concerns that the concessionaire now has limited financial exposure or fears that Reliance Infrastructure may slowly exit the project itself. An important lesson is that since the returns on project investments, both debt and equity, have been calculated assuming a debt-equity ratio of 70:30, any dilution of equity will benefit the equity holder.

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