Delhi-Noida Flyover Order: Of Judicial Overreach, Unlawful Delegation & Regulatory Capture

The Allahabad High Court’s judgment – which was on November 11 upheld by the Supreme Court – holds the collection of tolls on the Delhi-Noida Direct (DND) flyover illegal with effect from the date of the judgment for three reasons:

• First, the manner in which the concession agreement was entered into was contrary to the requirements of equality and fair play under Article 14 of the Constitution.
• Second, NOIDA (the authority, not the area) had no power to give the Noida Toll Bridge Co Ltd (NTBCL) the power to levy and collect tolls.
• And third, the manner in which NTBCL was allowed to recover costs and get a guaranteed rate of return of 20 percent from the project was contrary to “public policy”.

Of these reasons, the first is on shaky factual footing. The second is legally sound, based on fundamental legal lacunae in concerned legislation. But the last ground, also legally sound, must spark a wider debate on the idea of the public-private partnership model.

Judicial Overreach

In holding that the way in which the contract was awarded to the IL&FS-promoted NTBCL was illegal, the high court has turned on its head one of the cardinal rules of judicial review – that a governmental action is presumed valid unless shown otherwise. Here, the high court has presumed that simply because there was no tender or a bidding process, the award of the concession is per se illegal and unconstitutional.

No doubt a price discovery process like an auction or a tender may have helped in finding the best possible deal, but the justification offered, that in the 1990s there were few agencies capable of implementing and operating an infrastructure project such as this, has been brushed aside without a cogent discussion of the merits of NOIDA’s stance. Even legally speaking, as the Supreme Court recently clarified in the Presidential Reference following the 2G judgment, it is not per se illegal to have a single bidder contract, provided sufficient reasons are provided for it.

Unlawful Delegation By NOIDA

The high court is on firmer ground in holding that NOIDA could not have delegated the power to levy and collect tolls to a third party. A toll is essentially a fee for the use of the road and the power to levy and collect the same was exclusively with NOIDA under the Uttar Pradesh Industrial Development Act, 1976. This power could not have been lawfully delegated by NOIDA to NTBCL under the Agreement, and therefore, the High Court holds that the power of the NTBCL to “levy and collect” fees was unlawful exercised. Arguably, this should have been sufficient to put an end to the collection of tolls on the DND flyover, leaving it open to be retroactively regularised by the UP government if it chooses to.

However, the high court also finds the substantive terms of the agreement itself problematic – especially in that NTBCL could operate the toll in perpetuity and make a guaranteed “return” of 20 percent every year, and there would be nothing that NOIDA could do about it. Even though, on paper, there’s a 30-year term prescribed for the collection of tolls, the other provisions of the agreement ensure that NTBCL would be allowed to operate it in perpetuity as the conditions for ending the toll would never be met at any time in the future. That NOIDA allowed itself to get into this terrible arrangement where the public would pay for the profits of a monopolist in perpetuity has clearly disturbed the court. As it should disturb any right-thinking person.

Under Section 23 of the Indian Contract Act, the court is not required to enforce any clause that is contrary to public policy and it is hard to think of any public policy justification for the state guaranteeing monopoly profits of a private company in perpetuity. It is a matter of concern that this has come to light nearly two decades after the Agreement was first entered and it calls into question the whole PPP model – is it promoting any public interest or just private interest?

It is interesting to note that NOIDA and NTBCL were aware of the lacunae in the legal arrangements governing the DND flyover. An amendment was moved to the UPIDA Act in 1999 (with effect from 1998) to try and vest NOIDA with the power to allow concessionaires to levy and collect tolls based on an agreement. However, a drafting flaw meant that this did not cover the arrangements concerning the DND flyover and applied only to future infrastructure projects. Proposed amendments to the Agreement were also placed before the court trying to salvage the glaringly one-sided provisions of the Agreement, but did not impress the court given that NOIDA’s actions thus far did not fill the court with confidence about its ability to protect public interest in its dealings with private interest.

The Vice Of Regulatory Capture

What this case highlights though is the problem of “regulatory capture” which has plagued the public-private-partnership model of executing infrastructure projects in the country. “Regulatory capture” is when the regulator (here the public entity) ends up working for the benefit of and protecting the interests of the private entities and not the wider public interest. This does not necessarily just mean monetary corruption, and can happen in multiple ways, the simplest of which is cutting out the public from the decision-making process. NOIDA virtually surrendered its regulatory oversight over the DND flyover and its operation to the private entity here, without a second thought to the welfare and interests of the users of the flyover itself.

For all the flaws in its reasoning, there is nothing per se wrong with the High Court stepping in to stop such obvious cases of regulatory capture where the regulator has, through incompetence, negligence or malfeasance, stopped working in public interest and caters only to private interest. In the specific context of infrastructure, where there is sometimes no competition which can keep prices in check or is sometimes an out and out monopoly, the saga of the DND flyover calls for the better regulation of infrastructure projects.

Alok Prasanna Kumar is Senior Resident Fellow of the Vidhi Centre for Legal Policy, based in Delhi and has practised as an advocate in the Supreme Court of India.

The views expressed here are those of the author’s and do not necessarily represent the views of Bloomberg Quint or its editorial team.