Policy disorders: Tax and financial incentives overturn on government

Gujarat International Finance Tec-City (GIFT), which is a showpiece project of the government of Gujarat, faces a PIL filed by DC Anjaria, Gift City’s first independent director and the former chairman of audit committee. According to the petition, the Rs70,000-crore project has indirectly been gifted away to its private sector partner, Infrastructure Leasing & Financial Services (IL&FS), which has led to massive losses to the government and the people.

GIFT city has been envisaged as an oasis and a well-designed urban agglomeration. There are great systems that have been conceptualized. From the perspective of financial services, they are providing a lot of tax and fiscal incentives to set up financial services, as well other high tech facilities. This is how the city has been envisaged:

But it presently looks like not far from this:
According to the PIL, the allegations include:

Sham Land Deals: When Gift City was conceptualized, it was stated that the land will remain with the state government and will be provided to the project only on lease. The GIFT City Company Limited, however, structured it as a 50:50 joint venture between the Gujarat government and IL&FS, with IL&FS enjoying full management rights, which in other words, made it a private project with the state as a source of funding and a non-controlling partner. One rupee per acre was the price that was charged for nearly 880 acres of land for this project.

The land was to remain in the government’s name but has been fully transferred to the company’s name and in this way, IL&FS gets control over this huge land, by a mere investment of Rs2.5 crore as its share of the 50% equity. It should be noted that the value of the land is at least Rs2 crore/acre, which carries a value of Rs440 crore being transferred to the private partner.

Gold-plated Contract: While the land is provided by the state government, the private partner: IL&FS does not either put its contribution through management expertise, which on the other hand, is paid separately, says the petition. A fee of Rs20 lakh per month excluding taxes and out-of-pocket expenses, was collected separately by IL&FS.

To calculate the money involved, IL&FS got back its share of investment as management fees at the end of first year, apart from the amount of Rs400 crore paid to the consultants hired by IL&FS as project consultancy fees, over the years. In addition, the government has agreed to pay 1% as success fees of the full landed cost of the project on completion. Given that this is billed as a Rs70,000 crore project, IL&FS stands to earn Rs700 crore from this fee alone, on completion.

Favoured Associates: The petitioner alleges that a contract for ‘architectural and engineering services’ for the project was signed by IL&FS with Fairwood Consultants, before incorporation of the GIFT Company, on the very day that an MOU was signed with the government. Later, when a company was formed to implement the project, the board of directors was asked to ‘regularise the contract’ without even placing the actual contract before the board. There was no tender to select the consultant, although this is clearly a 50:50 PPP.

If this weren’t bad enough, the firm was paid hefty fees of Rs400 crore without providing any significant architectural or engineering services (beyond photographs and models of building designs, says the petitioner). When the audit committee asked Gift City to demand services or recover the fees paid, there was allegedly another shocker.

It was revealed that the contract included a clause that advances once paid, are not recoverable even if services are not provided, making the contract a route to transfer money to Fairwood Consultants, without even any service obligation. Importantly, the petitioner says, Fairwood Consultants did not have any worthwhile team/expertise and were housed in a small office within IL&FS’s premises at the controversial Delhi Noida Toll Company.

The petition also makes the following key points:
• No advertisements were issued by the government for the selection of private partner to construct the township project.
• The project should have been undertaken as per the requirements of Gujarat Infrastructure Development Act, 1999, which specifically regulates PPP projects in the state of Gujarat.
• No bids were invited before the contract for management services was awarded under the garb of it being joint venture contract.
• Investment of Gujarat government is routed through Gujarat Urban Development Co Ltd, a company wholly-owned by government of Gujarat, and is otherwise amenable to audit of comptroller and auditor general (CAG). The funds invested in GIFT City have also been contributed from consolidated fund of the government of Gujarat, which made the GIFT City to be a beneficiary of the consolidated fund of India.
• Owing to Section 15 of CAG’s (Duties, Powers and Etc) Act, 1971, even IL&FS is amenable to audit of CAG.
• Recording of the minutes of the board meetings were not properly allowed. In case of the audit committee, the minutes were allegedly altered by the board after Mr Anjaria was removed as the audit committee chairman. These minutes specifically pertain to the meeting where it was resolved to recover funds from Fairwood Consultants and resolution was passed by a majority of the committee members.
• The comments of various directors, including the petitioner, were not recorded by the chairman of the board using his discretion to approve the minutes of board meetings.
• The petition accuses IL&FS of squandering government resources and siphoning off money belonging to GIFT City and the government and causing a loss to the exchequer.

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