Reliance Infra of the Anil Dhirubhai Ambani group, an equal partner in the country’s first public-private partnership (PPP) project, has pulled out from the Airport Express Metro Rail. This move by Anil Ambani has left Metro holding a Rs 5,800 crore baby
Sadiq Naqvi Delhi
On the busy Dhaula Kuan intersection in the capital, a giant glass structure stands out, catching the eye of those going by. It is the third station on Delhi’s showcase Airport Express Metro Rail but few commuters are seen coming out of this swanky but deserted building at any given point of time. Unlike the other stations on the Delhi Metro Rail Corporation’s (DMRC’s) network, where you may find yourself jostled, the journey on this route is surprisingly peaceful, although it makes you poorer by Rs 180 if you decide to take the entire journey from New Delhi Railway Station to Sector 21, Dwarka. With commuters dropping to just about 5,000 people every day, many wonder if this project is the new white elephant in the government’s kitty.
Reliance Infra of the Anil Dhirubhai Ambani Group (ADAG), an equal partner in the country’s first public-private partnership (PPP) project, has recently pulled out after expressing its inability to run the Metro. This move by Anil Ambani has left the DMRC holding a Rs 5,800 crore baby. It also raises strong questions on the viability of the PPP model. Moreover, with the two parties locked in arbitration proceedings, there is a big chance that DMRC may have to repay the humungous debt of more than Rs 1,500 crore that Reliance Infra has taken from Axis Bank and others. It may also have to pay a 130 per cent return on the equity invested by Ambani’s company.
According to the Concessionaire Agreement signed between DMRC and Reliance Infra, the latter was supposed to run the Rs 5,800 crore project for a period of 30 years as an ‘agent’. For the project, Reliance Infra, which claims to be the biggest infrastructure company of the country, had created a special- purpose vehicle, the Delhi Airport Metro Express Private Limited (DAMEPL), with 95 per cent equity being held by the company. “The termination clause had to be invoked by DAMEPL, as DMRC had persistently failed to cure the substantial defects in the civil structure designed and built by DMRC, within the period prescribed under the Concession Agreement, and on account of Material Breach and Event of Default by DMRC arising under the agreement as a result thereof,” the company said in a statement.
It put the blame squarely on the DMRC for it has done the civil structures which were found to be faulty. Interestingly, Lalit Jalan, the CEO of Reliance Infra, while announcing the quarterly profit results, had said in May this year that the company hoped to achieve the break-even (EBITDA) on the Airport Express line project this financial year.
Owing to the defective civil structures, the route had to be shut for six months in 2012. (The route had already been delayed after Reliance Infra failed to deliver it in time for the Commonwealth Games.) Even before the route was re-opened in October 2012, a contract termination notice from Reliance Infra was on its way. The reason given was that the DMRC failed to cure the defects in the civil work. Once the route was reopened, the company claimed compensation to the tune of a whopping Rs 700 crore from the DMRC for the damages that it had incurred on account of closure, dent in its reputation, and so on.
The problem in the civil structure was a big setback for the premium project. It was a huge dent in the DMRC’s reputation as an ‘efficient’ and ‘professional’ organization which has a record of delivering projects before time. The inquiry report by the two-member committee comprising an additional member, the Railway Board, and a senior official from the Union Ministry of Urban Development (MoUD) concluded that both the DMRC and Reliance Infra are equally to be blamed for the mess (See box).
Interestingly, a supplementary note to the report prepared by D Diptivilasa, Additional Secretary, MoUD, pinned the blame on DMRC Chief Mangu Singh who was then Director (Works) and Keshav Verma, Director (Projects). It went on to name them for poor civil work and their failure to oversee the project.
Reliance Infra bagged the project after an aggressive bid wherein it promised to pay DMRC Rs 51 crore every year as concession fee each year which would increase by five per cent on an early basis, and one to five per cent as revenue share. In lieu, it got the rights to operate the route for 30 years
The matter was also referred to the Chief Vigilance Commission (CVC) in June when Sudhir Krishna, Secretary, MoUD, wrote a letter to the CVC, asking him to suggest appropriate action. This was after questions were raised on the MoUD’s jurisdiction over the DMRC, which is equally owned by the Delhi government and the central government. “There have been ego battles with the MoUD ever since DMRC was founded. Many top officials in the MoUD don’t like DMRC’s freedom which came largely due to the clout that ‘Metro Man’ E Sreedharan wielded when he was at the helm,” says a source. “There was absolutely no need to go to the CVC for such a trifling matter. The cost of the defective material is a meagre Rs 1 crore,” says a DMRC official. Even the Delhi government is said to be unhappy over the matter being referred to the CVC. Once the decision comes, it will be binding on DMRC officials.
However, the DMRC top brass is not too amused by these attacks by Reliance Infra and MoUD. “One should not forget that DMRC was under tremendous pressure to deliver the projects on time before the Commonwealth Games,” says a senior executive. “To oversee this project DMRC had to appoint independent consultants from the country and abroad. These consultants, including Rail India Technical and Economic Service (RITES), foresaw the whole project. The top management was not directly involved.”
Defects in the civil structure are just part of the issues that Reliance Infra has been talking of since it began operating the route. It has been constantly attacking DMRC for providing fudged commuter (‘ridership’) estimates. “According to the Detailed Project Report (DPR) prepared by the DMRC, we were told that the daily ridership figures will hover around 40,000 passengers per day. Since the day we began operations, it has seldom gone beyond 20,000, with an average ridership of just 16,000,” says a source.
This, Reliance believes, has upset their entire calculation. “It basically implies that we don’t get retailers to set up shops along the entire route. They refuse to come, seeing the ridership numbers. We approached so many parties but all of them backed off, saying most of the business is just confined to office hours,” says
Moreover, the company now has problems with the alignment of the route. “There are only two important pick-up stations, New Delhi Railway Station and T3 Terminal. As for the other stations, the Shivaji Stadium is a bit off from Connaught Place, Aerocity is not developed, they are at places where people prefer to take the other modes,” says an insider. “Also, we were shortchanged. We were told that the domestic terminal will be shifted to T3. That has not happened. We lose a lot of passengers due to that as well,” the insider adds.
The company is also not happy with the way it has to foot the bills of the Central Industrial Security Force (CISF) which is mandated to secure the metro routes. “We were told that we have the independence to hire our own security staff. That could have been much cheaper for us,” a source says. According to the company, they are running an operating loss of Rs 4 crore every month.
The DMRC officials don’t discount the Reliance’s contention on the cost of security or the inability of the government to shift the domestic terminal. “Yes, they are right when they say that the domestic terminal has not been shifted as promised. They are also paying a hefty sum for CISF. But their contention about the placement of the stations is not correct. They are all at busy junctions. People prefer not to take it because they have increased the fare to the maximum permitted limit,” a DMRC insider reveals. “We know that the airport has not shifted. Such planning changes happen in government as per the needs,” says SK Lohia, Officer on Special Duty, Urban Transport, MoUD.
Reliance Infra bagged the project after an aggressive bid wherein it promised to pay DMRC Rs 51 crore every year as concession fee each year which would increase by five per cent on an early basis, and one to five per cent as revenue share. In lieu, it got the rights to operate the route for 30 years. It also got 1.2 million square feet of land to develop and lease out to developers and retailers. “It is this aggressive bid which has landed them in a soup,” says an insider.
The only other bidder, Larsen & Toubro, had asked for a yearly viability gap fund of Rs 346 crore or an interest-free loan of Rs 1,440 crore for a period of 25 years. “Larsen & Toubro were much more pragmatic,” says a DMRC source.
Interestingly, the Comptroller and Auditor General (CAG) had said in a draft report that undue benefits were extended to Reliance in the concession agreement. A final report is awaited.
Also, DMRC officials are unaffected by Reliance Infra’s claims of fudged ridership figures. “You will be surprised to know that although they are claiming that we mentioned ridership figures of 40,000 every day, their own survey which they have submitted to us puts the figure at 16,000 which is close to the actual figures they were getting on the route every day,” an official informed. “Hence, their argument of bad ridership doesn’t stand.”
“Are they not supposed to apply due diligence when they enter into such a big contract,” asks Lohia.
According to the contractual agreement, Reliance Infra was to realise 75 per cent of the revenues through the real estate component of the deal. “The real estate market tanked after they signed the agreement. They could not anticipate this,” says a source.
The figures are so dismal that the company has only been able to lease out less than 10 per cent of the area to retailers. “This is the main issue,” says a DMRC source. This is why the company had been sending frantic letters to DMRC, asking it to restructure the agreement, to share the losses, to waive the concession fee and to increase the concession period. “The defect in civil work is just an excuse,” says a DMRC insider.
Reliance Infra was to realise 75 per cent of the revenues through the real estate component of the deal. “The real estate market tanked after they signed the agreement. They could not anticipate this,” says a source
As per the latest figures, DAMEPL owes the DMRC Rs 64,78,97,137 on account of concession fee default and another Rs 32,07,533 as revenue share.
It is not clear why Reliance bid so aggressively for the project. If insiders are to be believed, “it was desperate to showcase itself as the foremost player in the construction of the Metro rail”. That has clearly not happened.
The Airport Express line is not the only project where it has faltered. It bagged two contracts for the construction of a metro rail in Mumbai. The first one, Mumbai Metro Rail One, is running four years behind schedule, while it has opted out of the second contract.
Even in the case of the Airport Express line, it is desperate to bleed the government. “We want 130 per cent return of our equity and 100 per cent return of the debt that we have taken,” an official says. Some estimates say that DAMEPL had taken a loan of Rs 2,000 crore from the banks, the major lender being Axis Bank. Also, sources point out that Reliance Infra has transferred 65 per cent of its shareholding in DAMEPL to a trust managed by the company. Officials believe that it was done to lessen the smear on the balance sheet of the company. Its capital fell from Rs 467 crore to Rs 1 lakh with the former being shown as share application money. This issue could also make it difficult for Reliance Infra since it is against the contract agreement. Arbitration proceedings are on between the two parties.
Meanwhile, DMRC officials point out that this PPP model was forced on them against the wishes. “Then Metro chief E Sreedharan was clearly not in favour of any private player entering Metro projects. The Planning Commission forced it upon us,” says a DMRC top official. “All across the world there are examples of how metro projects, which were being run by private players, had to be ultimately handed over to the government as they could not run it,” he adds.
“The way the real estate market has tanked is affecting the economy in a big way. All the major corporate houses had overleveraged themselves during the boom time in 2003-04 and invested heavily in real estate. The returns are negligible from this sector at the moment,” says Dr Pronab Sen, Chairman, Central Statistical Commission. “It is for this reason that we see, for example, that, of the 5,000 km of the road contracts that were awarded by the National Highway Authority of India (NHAI) in the last five years or so, only 1,500 km have been constructed,” he adds while stressing that there is an urgent need to reconsider these contracts.
The DMRC is hopeful that arbitration will go in its favour. It has maintained that the contract termination notice is illegal and it is running the line in the larger public good. Although it is for the lender banks to decide who will run the line, DMRC is hoping that it will ultimately get the responsibility. Till that happens, it has maintained that it is DAMEPL which will continue to repay the debt.
The 103 page inquiry report submitted by the two-member committee into the faults on the route said that the concessionaire can be held responsible for not inspecting the bearings on time. The report came down heavily on the contractors who were part of the project.
The report blamed the top management of the DMRC, including its three top officials, Director (Works), Director (Projects), and Director (Finance), for their inability to properly define the role of the concessionaire, the general consultants, and said they should have ensured coordination between different agencies. “Exactly and jointly pre-defining the concessionaire’s role (pre-commissioning and post-commissioning) was not done and therefore there were large differences between Delhi Metro and Delhi Airport Metro Express Private Limited (DAMEPL),” the report says.
The report criticised the way the project was given to IJM, which had no prior experience. “M/s Systra and IJM-IJMII JV did not come up to the task of ensuring a foolproof, correct and well thought out design with a clear method statement and the methodology for implementation, besides the rigid control on the process and outcome of execution of the pier cap as well as design elements about it and below the track structure,” the report said while noting that designs provided by Systra should have been checked by independent consultants. “Thus IJM-IJMII JV can mainly be held responsible for closure of the line. The other stakeholders — Delhi Metro, DAMEPL, M/s Systra and ALC did not adequately play the roles expected of them and certain amount of responsibility on this account lies with these organizations,” the report says.
DMRC maintains that it followed the rules in the award of the project. “IJM had prior experience of doing such a project in Malaysia and the contract was awarded after open tendering,” a top official told Hardnews.
A draft CAG report earlier this year noted that DAMEPL got undue benefits from the government. It says that the concessionaire merely invested 46 per cent in the project as against 60 per cent which is required under government norms. The project, CAG says, was also not presented to the PPP Appraisal Committee as is required for any project above Rs 1,000 crore.
The draft report also noted that the special-purpose vehicle got a Rs 29.5 crore exemption on custom duty on import of capital goods worth Rs 990 crore after it put forward a recommendation letter by DMRC. This exemption, the report says, could have been applicable if it was the DMRC which was importing equipment which would also be under in its ownership.
With the two parties now locked in arbitration, a top economist with the government questioned how DMRC was using rolling stock imported by DAMEPL. “The private player can tomorrow seek compensation and say that their equipment got damaged. DMRC should not use their equipment unless the agreement is clear on it,” he said. The DMRC spokesperson expressed his inability to comment.
Moreover, the draft report criticized the way the concessionaire had released Rs 285.43 crore from an escrow account to various subsidiaries of Reliance Infra without properly disclosing the details as related party disclosures.
The report also criticised the unhealthy debt to equity ratio of the concessionaire and noted that although the MoUD approved a debt-equity ratio of 7:3, the actual ratio maintained between 2009 and 2012 was 4,3218:1, 230,907:1 and 275,205:1, respectively.