Imagine the irony if, after all the years the NDMC has spent in various courts including the Supreme Court, the Taj Group of Hotels manages to win the auction for the Man Singh Road property in the capital at pretty much the same rates as today. At a basic level, of course, that’s perfectly okay since the reason why NDMC went to court was to establish its right to auction the property as opposed to the negotiated deal with the Taj in the first instance.
Once the principle of auctions has been established, as it has in the Supreme Court, the bid received will be a function of the business conditions which, as is well known, are not the best right now.
Even so, the government-owned NDMC has to do its best to ensure it gets a good deal, and doing so will require the concession to be structured well. Apart from the fact that a revenue-share bid is the best since it allows the NDMC an automatic upside when industry fortunes rise—the Railways is looking at lump-sum amounts in its bid for redeveloping of railway stations across the country—the lease must be a long one, say, a 50-year one with an automatic 50-year extension at an escalation that is built into the deal.
The Man Singh road property requires a lot of fresh investment—a new management would, in all probability shutter the hotel and refurbish it in much the same way as is happening in the nearby Oberoi property on Zakir Hussain Marg. No business, and a hotel is no different, can possibly recover large investments over a short lease period; so, if the lease period is long enough, the bids will be better.
This is also important from the point of view of bankers who, at the end of the day, will have a bigger exposure to the hotel than the owners. In the case of telecom licences, while the precarious financial conditions have hit the entire industry, the biggest potential losers are banks that have lent to telcos—indeed, RBI has just asked telcos to raise their provisioning on telecom loans.
Apart from their high price, had the spectrum been sold for a 50-100 year lease—since there is a revenue-share, the government gets the upside of the business—telcos would be in a better shape. Indeed, the mad bids in 2015 would have been tempered since telcos wouldn’t have been fearing a complete halting of business once their licences expired. In the case of oil, to use another example, Cairn India wanted its lease extended precisely because it found it could not justify the fresh expenditure if it didn’t get a longer period over which to drill for the oil.