Ominous signs

What was supposed to be a flight of fancy is now proving to be a course in disaster management for Grandhi Mallikarjun Rao (GMR). The infrastructure major that built a world-class airport terminal (T3) in New Delhi is now struggling with losses that have already wiped out half the net worth of Delhi International Airport (DIAL), a consortium led by the GMR Group (54% stake), Airports Authority of India (26% stake), and Fraport and Eraman Malaysia, with 10% stake each. 

The Bengaluru-based GMR group, the largest stakeholder in DIAL, had won the bid to develop the project in January 2006 by defeating the Anil Dhirubhai Ambani Group in an international bidding process. Within a record 37 months, the swanky, 5.2 million sq ft terminal was inaugurated by prime minister Manmohan Singh in July 2010. T3 delivered what was promised. Sample this: there are 168 check-in counters and 95 immigration counters at the airport; it has Asia’s longest travelator at 118 meters, 200,000 sq ft of retail area and a massive, multi-level 4,300-car parking area. But more importantly, T3 put Delhi on the global aviation map by doubling the passenger handling capacity to 35 million a year.

When DIAL took over the operations of the Indira Gandhi International (IGI) airport in May 2006, it was one of the busiest airports in the world, where a flight took off or landed every two minutes. The Delhi airport was already making a profit of Rs.20-30 crore on revenue of Rs.600 crore when Airport Authority of India (AAI) was operating it. But over the past two years, DIAL has made cumulative losses of Rs.1,508 crore on revenue of Rs.2,791 crore. And this year looks no better. 

Much of DIAL’s trouble began with cost escalation. Says Sidharath Kapur, chief financial officer, DIAL, “When we took over in 2006, there was no capex on DIAL’s books. The existing terminals had come as a concession.” But subsequent years saw the airport privatisation cost escalating to Rs.12,502 crore — Rs.3,527 crore more than the initially estimated Rs.8,975 crore.

Kapur says the cost escalation was because the time available to build the airport was reduced to 37 months thanks to a delay in signing the concession agreement. This meant DIAL had to design and implement at the same time. “Had we developed the airport the conventional way, it would have taken us nine months just to finalise the design, so we decided to construct and design at the same time,” he explains. The result was that the design changed several times during construction, leading to a massive cost overrun. When DIAL started construction, there were 200 documents of designs; by the time it finished, there were 60,000 design documents.

Failure to launch

DIAL had three ways of funding this cost overrun. The first option was to borrow from banks, but banks refused to lend to the company because it was overleveraged. The second option was to ask shareholders to infuse equity. AAI refused on the grounds that it had other airports to operate. Private shareholders could not pump in equity because if they did, it would have reduced AAI’s shareholding to under 26%, which the concession agreement did not allow.

Kapur says that with debt and equity ruled out, the only option left to DIAL was to levy Airport Development Fee (ADF), charges that airlines pay to land and park aircraft and for navigation services. Unfortunately for DIAL, there was a delay in fixing the ADF. “The regulator, Airport Economic Regulatory Authority (AERA), took 21 months assess the cost escalation. After which it analysed airport charges. We then had to file for a revision of the airport charges in June 2011,” points out Kapur.

DIAL had filed its tariff proposal seeking a one-time increase of 874% in airport charges for the five-year tariff period from FY10 to FY14. “In 2010, infrastructure was ready and it was capitalised in our books but the revenue was not enough to service that infrastructure and its costs, such as interest, depreciation, which were bleeding our books,” explains Kapur. “There was a mismatch in cost and revenue because of the delay in fixing airport charges,” he adds. 

Kapil Kaul, CEO, Centre for Asia Pacific Aviation, India and Middle East, says the government should have capped the project cost. “The government had given DIAL a free run. Had the cost been capped, there wouldn’t have been a revenue and cost mismatch,” he adds. 

Finally, in April this year, DIAL was allowed to raise airport charges by 346%. While this is half of what was asked for, it has not gone down well with domestic and international airlines, which feel the charges will add to the existing high cost of operations. The Federation of Indian Airlines and over 10 international airlines operating out of India have moved the Delhi high court against the sharp increase in airport charges. Kapur says there is no reason for airlines to crib. “The burden of ADF is more on passengers than airlines, so I don’t understand the reason for the discontent,” he points out. ADF works out to an additional Rs.200 per ticket for a domestic passenger and Rs.1,300 for an international passenger.

In contrast, Kaul declares airport charges do hurt airlines because they make up around 7-8% of operating costs. “Jet Airways incurred an additional cost of Rs.50-55 crore last quarter on account of the airport charge hike. The concerns of airlines are legitimate,” says Kaul. 

However, Amber Dubey, partner and head-aviation at KPMG, agrees that ADF as per International Air Carrier Association (IACA) standards is legitimate and should be the source of funds of the last resort. “The hike is not as high as it is made out to be,” Dubey points out. “Airport charges have not been revised for the past 10 years except for a 10% hike in 2009. It looks high because ADF was to be levied between 2009 and 2014 but, because of a delay in fixing the charges, it has been bunched and levied in two years instead of five.” 

DIAL had requested extending the tariff regime over the next regulatory period so that the tariff increase was over seven years instead of the suggested two. But AERA rejected it, citing absence of a provision in law to extend the period. That means DIAL can charge ADF only from April 2012 up to March 2014.

For now, AERA agrees that the company is entitled to levy ADF. “It is a tax that DIAL can levy,” says Kapil Chaudhary, secretary, AERA. “We have calculated the increase in airport charges on the basis of how much the airport operator should earn to get a fair rate of return.” The regulator, however, feels that DIAL could consider increasing its revenue from other sources as well. One way could be monetising the land that DIAL got from AAI as part of its agreement to develop the New Delhi airport. But it isn’t as easy as it seems. This is another controversy that has embroiled the infrastructure major.

Air turbulence

The Comptroller and Auditor General (CAG) has stated in a report that it is unfair DIAL was given 230 acres of land at a paltry lease of Rs.100 per acre per year for 60 years. Kapur says the CAG report misses out the pertinent fact that DIAL shares 46% of its gross revenue with AAI. “CAG has said the genesis of the concession is that land is given at Rs.100 an acre, but that is only a notional value. If the land was given by AAI to the company at market rates at, say, Rs.1 crore, it would have affected its revenue share and AAI would have got just about 5-6%.” DIAL has thus far leased out 45 acres of land to hotels. There are 10 hotels coming up with a capacity of around 5,000 rooms. The company still has about 200 acres of land, which it will lease out gradually. 

Another bone of contention between GMR and AERA is the return on equity from the Delhi airport, which is fixed at 16%. It is significantly lower than the 24% requested by GMR. “The return on equity is less because the government of India had recommended a 20.5% return,” says Kapur. GMR has appealed to AERA to increase the return to a minimum of 24% by arguing that the world over, return on equity in airport projects is close to 25%. 

The second stumbling block is that of “reasonable return” on the refundable security deposit, which DIAL raised by leasing land to hotels. The company received around Rs.1,471.52 crore as interest-free security deposit to be repaid after 57 years, in addition to an average rental of Rs.2 crore per acre.

“This deposit was used to fund the airport modernisation and expansion. It is akin to quasi equity. The lenders also treat it as quasi equity but the regulator has given us a zero return,” Kapur complains. “If we had used that cash somewhere else it would have added to our revenue and improved our bottom line.” DIAL’s argument is that the deposit should be treated as equity in the project because it is not given in any agreement to use the money for the Delhi airport project.

Essentially, DIAL wants to be compensated for the opportunity cost of deploying the funds in the airport project. Another point of conflict is that AERA has used estimated non-aeronautical revenue while determining tariffs instead of the actual audited figures for the period for FY10 and FY11. The State Support Agreement (SSA) for IGI airport does not state that the forecasted data should be used when actual data is available. “AERA has taken a number that is much lower than what was actually achieved,” points out Kapur 

As things stand today, GMR has approached the Airport Economic Appellate Tribunal objecting to these decisions made by AERA. “We have appealed over the issues because we hope there will be some redressal,” says Kapur. “If the appellate rules on even a few in the company’s favour, there will be a definite increase in our revenue.”

However, industry observers are fast losing patience as the cumulative losses have eroded DIAL’s net worth. Though the recent hike in development charges will stem the bleeding somewhat, GMR needs more than a hike to turn around DIAL’s fortunes. The GMR stock has already seen close to 50% of its market cap being wiped out since 2011. If the rough weather lasts any longer, DIAL could well see its ambitions grounded.