Buying it out may help CM Hooda win election, make daily commute easier for people and rid firm of debts
Chief minister Bhupinder Singh Hooda's plans to take over the Delhi-Gurgaon expressway may help him in elections, make daily commute easier for people and rid the company of its debts, but the road ahead is ridden with challenges
Bhupinder Singh Hooda, the chief minister of Haryana, recently announced his government’s willingness to buyout the Delhi-Gurgaon expressway from Delhi Gurgaon Super Connectivity Ltd, or DGSCL, a company promoted by the DSC group, in order to save over 200,000 commuters their daily hassle at the toll gates. During rush hour, you can spend up to half an hour at the gates. In the age of disinvestment, the buyout, if it happens, will be a rare act of nationalisation. Much of it could be rearguard action by Hooda after his government was stung by anti-corruption activist Arvind Kejriwal and whistleblower bureaucrat Ashok Khemka for shady land deals cleared by it. Also, elections to the Lok Sabha and the Haryana legislative assembly are slated to happen in 2014. The inconvenience on the expressway can become a political liability for Hooda and the ruling Congress party. A solution needs to be found quickly.
Officials in the Haryana government, on their part, insist that the initiative predates the Kejriwal disclosures. Communication in this regard, they say, started way back in June, when Chief Secretary P K Chaudhery wrote to the National Highway Authority of India, or NHAI, as well as Union Road Transport & Highways Minister C P Joshi. It will, in all likelihood, be a long while before the proposed acquisition goes through. All the stakeholders — apart from DGSCL, there are NHAI and the central government — will have to be taken on board, and a fair valuation of the business will have to be arrived at. A DGSCL spokesperson, in response to an email from Business Standard, says the company has not been approached by either the Haryana government or NHAI with such a proposal; he refuses to comment further. Privately, senior executives of the company say they will be happy to sell the expressway for Rs 2,000 crore.
|HURDLES ON THE WAY|
That will actually be a very decent deal for DGSCL. The Delhi-Gurgaon expressway was the first project to earn NHAI a negative grant, also called a premium. In other words, the operator did not want any viability-gap funding from the government; instead it gave the government close to Rs 62 crore in 2002 for the rights to build and operate the expressway. The expressway was supposed to be ready by 2005; it finally opened in 2008. Also, there was a cost overrun of over hundred per cent in the construction of the highway, from Rs 548 crore to Rs 1,175 crore. DGSCL is a closely-held company; so its financial statements are not in the public domain. But some indications are available. As of March 2010, the debt on its books stood at Rs 1,262 crore. If the average interest on the debt was 10 per cent, this debt would result in an annual interest outgo of Rs 126.2 crore. Its annual revenue of Rs 135 crore for 2009-10 was barely enough to cover that. Little surprise then, the company reported a loss of Rs 49 crore for the year. Meanwhile, according to credit rating agency ICRA, the company contracted new debt of Rs 1,600 crore to retire (possibly high-cost) earlier debt and fund other group investments. So, if DGSCL gets Rs 2,000 crore, it can repay this debt and cut its losses.
NHAI has, so far, distanced itself from the liabilities of DGSCL perhaps because, according to the concession agreement, it would have to repay a part of the loans on the company's book if the contract is terminated. The proposed buyout by the Haryana government would amount to termination of contract. So, if the money paid by the Haryana government is not tied down to repaying DGSCL’s creditors, a part of the liability will fall on NHAI. It will be left holding the can. So, it needs to monitor the developments and safeguard its interests closely. On the other hand, some time back, when DGSCL failed to decongest the gates, NHAI had threatened to cancel the contract. However, DGSCL got a stay from the Delhi High Court against it. Also, it has been reported that DGSCL has restructured its loans thrice without NHAI’s consent. This obviously hasn’t gone down well with NHAI, and it can use this as an excuse to distance itself from the additional liabilities of DGSCL.
Some investment analysts who have worked closely with DGSCL attribute the losses to depreciation and high interest outgo. Others, especially those who have worked with NHAI, say this has happened in spite of the traffic being much higher than the initial projections. According to the concession agreement, the operator had to share the additional revenue (50:50) with NHAI, if the traffic exceeded 130,000 passenger cars. At the time of signing the agreement, it was expected that such a situation would arise close to the end of contract in 2020. Then, a 2006 study conducted on traffic projections on the route showed that the traffic would be 165,000 cars in 2008. In other words, the traffic was more than expected right from the early days of the project. According to recent figures available, the traffic through all the three tolls on the expressway is over 7.2 million cars per month, or almost 240,000 per day — way ahead of both the initial and revised projections.
The debt overhang seems to have troubled DGSCL right from the beginning. ICRA had rated the company’s Rs 1,600-crore long-term loans as LBBB (So) [L triple B structured obligation] in May 2011. However, in just a span of six months, the agency had to suspend the rating. “The suspension follows ICRA’s inability to carry out a rating surveillance in the absence of the requisite information from the company,” an ICRA statement issued on December 2011 said. Further, the statement added that the rating would be withdrawn if it remains under suspension for three years.
The poor state of the company’s fiancials may also have been the reason for the congestion at the toll gates. NHAI has been pressuring DGSCL to put up more booths at the gates. But the company has said that’s not possible in the current land that is available with it. For more booths, Haryana will have to allot it more land, something, the company alleges, the Hooda government has refused to do so far. The blame game continues. Recently, the Haryana High Court ordered the company to suspend toll collection and look for solutions. But nothing came out of it. Long queues reappeared when the toll was reinstated. Various suggestions have been made to decongest the gates — RFID tags, midway toll booths, machines that read number plates and send challans to the owners — but nothing seems to have come out of it.
Removing the gridlock
According to an expert advising NHAI on this matter, the best option available, and being considered seriously, is that toll collections should stop at the Delhi-Gurgaon border and should be collected only at the end of the stretch, perhaps at a higher rate. This would mean a free passage for vehicles between Delhi and Gurgaon, but those going beyond Gurgaon on National Highway 8 would be charged. Also, this means that even if the Haryana government spends large sums of money to acquire the expressway, it will have some income streams to make good the investment. NHAI officials maintain that the smooth flow of traffic on the expressway is their priority and discussions are underway on the proposal by the Haryana government. Also, the no-toll option on the Delhi-Gurgaon border can be applicable even without changing the operator, but that would definitely further hit the finances of DGSCL, as revenues will sharply come down.
Despite no formal approach made by the Haryana government in this regard, analysts are quite sceptical that this effort would yield some result. The reason is that the concession agreement does not have any buyback provision. Moreover, the Haryana government is not a signatory to the agreement. The only options available are termination of contract by the NHAI if the operator fails to maintain a certain level of service or force majeure. The recent attempt by NHAI to take the former route made DGSCL approach the Delhi High Court, which advised the parties to settle it out of court. As a result, a memorandum of understanding was signed between NHAI and the concessionaire to ensure smooth flow of traffic in a time-bound manner. The other option of a political force majeure looks the most likely way out in the present circumstances. The concession agreement has the detailed formula through which the compensation amount would be decided. Analysts are of the opinion that in any case, the compensation won’t exceed a thousand crores, far short of the Rs 2,000 crore the company expects.
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