 "Firms grow wary of govt's airport plan")
The response to the pre-application conference on airport privatisation on February 11 was muted. "There were only 12 players, and only six companies were serious," says a senior executive of a leading airport company. "In 2013," he contrasts, "there were over two dozen aspirants for six airports, including international players. The interest in airports is clearly waning."
The executive was talking about yet another attempt, this time by the National Democratic Alliance government, to offer the management, operation and development of four airports run by the state-owned Airport Authority of India (AAI) to the private sector on a revenue sharing model. The prize on offer: the airports in Kolkata, Chennai, Ahmedabad and Jaipur.
Airport privatisation has always been mired in controversy. In 2010, when the United Progressive Alliance government opted for the privatisation of the country's two main airports of Delhi and Mumbai and followed it up by inviting private sector participation in building two new airports for Bengaluru and Hyderabad, there were allegations of political interference and accusation by the Comptroller and Auditor General of losses to the government because of improper structuring of privatisation.
Then in 2013, when the UPA government offered six airports, including Lucknow and Guwahati, to private developers, serious differences cropped up between the civil aviation ministry headed by Ajit Singh and the Planning Commission over the terms of the project-award agreement. In spite of this, several Indian and global companies, such as IL&FS Transportation Networks, Essar Projects, Cochin International and Essel Infraprojects, evinced interest.
The NDA government, however, scrapped Singh's privatisation plan after it assumed power in May last year. After much debate, it decided to put airport redevelopment back on track, but now through the public-private partnership model without characterising the effort as "privatisation". The pre-bid conference for the four airports saw the participation of six companies: GMR, GVK, Essel group, Tata Realty, Siemens, Adani and Flemingo, a duty-free shop operator.
The country's existing private and PPP airports handle over 96 million passengers. With four more airports set to be privatised, the private sector stands to control 74 per cent of all passenger traffic, leaving AAI as a fringe player. Surely, this fact rankles with AAI employees, and it could prove a major stumbling block. The employees' unions have already called for an all-India strike on March 11 against the privatisation move.
The unions have a point when they argue that unlike in Delhi and Mumbai, where private players were brought in because a massive investment of over Rs 20,000 was required at a time when AAI did not have the money, the case with the latest airport plan is different. They argue that as AAI has recently invested over Rs 5,000 crore on modernising airports, the private players may only have to contribute around Rs 1,800 crore this time.
Funding, unlike earlier, is not a problem for AAI. In 2013-14, it earned Rs 1,800 crore just from the Delhi airport as its share of revenue, which explains why it returned a healthy profit after tax of over Rs 796 crore. Part of this money has been used to fund the modernisation of these four airports.
However, that is just one side of the story. Potential bidders too have their reservations. They say there are serious lacunae in the way the privatisation effort is being pushed through. Ambar Dubey, partner and India head (aerospace and defence), KPMG, says: "The three key challenges include lack of complete clarity on the tariff system; the operational control and freedom that the operator would have over AAI employees; and the low weightage given to operational experience vis-a-vis development experience of the bidding consortium. We hope the ministry will reconsider these points."
The companies that participated in the pre-application conference say that the government has not given any indications about what the revenue streams would be, whether AAI will take equity in the special purpose vehicle set up for the project, and what kind of revenues from real estate development the bidders will be allowed to raise.
There is another grey area. "Operators are chary of AERA (Airports Economic Regulatory Authority of India) fixing the revenue model along the same principles as in the existing PPP projects, which has been challenged by the airport companies," says a senior executive of one of the bidding companies. They cite the example of Delhi International Airport, or DIAL, which has questioned the 16 per cent return on equity capital offered to the airport by AERA. DIAL says that SBI Capital, which was hired as financial advisor by the ministry of civil aviation, had actually suggested taking it up from 18.5 per cent to 20 per cent. The matter is now in the appellate tribunal.
The revenue projections made by AERA have been much higher than the numbers on the ground. That is why DIAL accumulated substantial losses in eight years of operations. Obviously if the same method is applied without waiting for the final order of the appellate tribunal, some of the companies might just avoid making a financial bid at all.
The two-stage bidding process requires the shortlisting of up to six prequalified applicants for the second stage when the financial bids are placed. But with only six bidders, any sense of competition has been obviated.
Another worry is the AAI employees. AAI has made it clear that their interests will be protected, leaving the bidders wondering whether they will have to mandatorily absorb the entire work force or whether AAI will resolve the issue by shifting some of them to other airports. This could turn out to be a very sticky issue.
The existing airport operators are also peeved that there is no mandatory requirement for the bidders this time to have operating and maintenance experience. "The current request for quotation allows local infrastructure firms to find an airport partner after winning the bid," says an AAI official. "This is not good and we have to protect our interests at the bidding stage."
As the deadline for prequalification nears, bidders are hoping for early clarifications from the government.
The executive was talking about yet another attempt, this time by the National Democratic Alliance government, to offer the management, operation and development of four airports run by the state-owned Airport Authority of India (AAI) to the private sector on a revenue sharing model. The prize on offer: the airports in Kolkata, Chennai, Ahmedabad and Jaipur.
Airport privatisation has always been mired in controversy. In 2010, when the United Progressive Alliance government opted for the privatisation of the country's two main airports of Delhi and Mumbai and followed it up by inviting private sector participation in building two new airports for Bengaluru and Hyderabad, there were allegations of political interference and accusation by the Comptroller and Auditor General of losses to the government because of improper structuring of privatisation.
Then in 2013, when the UPA government offered six airports, including Lucknow and Guwahati, to private developers, serious differences cropped up between the civil aviation ministry headed by Ajit Singh and the Planning Commission over the terms of the project-award agreement. In spite of this, several Indian and global companies, such as IL&FS Transportation Networks, Essar Projects, Cochin International and Essel Infraprojects, evinced interest.
The NDA government, however, scrapped Singh's privatisation plan after it assumed power in May last year. After much debate, it decided to put airport redevelopment back on track, but now through the public-private partnership model without characterising the effort as "privatisation". The pre-bid conference for the four airports saw the participation of six companies: GMR, GVK, Essel group, Tata Realty, Siemens, Adani and Flemingo, a duty-free shop operator.
The country's existing private and PPP airports handle over 96 million passengers. With four more airports set to be privatised, the private sector stands to control 74 per cent of all passenger traffic, leaving AAI as a fringe player. Surely, this fact rankles with AAI employees, and it could prove a major stumbling block. The employees' unions have already called for an all-India strike on March 11 against the privatisation move.
The unions have a point when they argue that unlike in Delhi and Mumbai, where private players were brought in because a massive investment of over Rs 20,000 was required at a time when AAI did not have the money, the case with the latest airport plan is different. They argue that as AAI has recently invested over Rs 5,000 crore on modernising airports, the private players may only have to contribute around Rs 1,800 crore this time.
Funding, unlike earlier, is not a problem for AAI. In 2013-14, it earned Rs 1,800 crore just from the Delhi airport as its share of revenue, which explains why it returned a healthy profit after tax of over Rs 796 crore. Part of this money has been used to fund the modernisation of these four airports.
However, that is just one side of the story. Potential bidders too have their reservations. They say there are serious lacunae in the way the privatisation effort is being pushed through. Ambar Dubey, partner and India head (aerospace and defence), KPMG, says: "The three key challenges include lack of complete clarity on the tariff system; the operational control and freedom that the operator would have over AAI employees; and the low weightage given to operational experience vis-a-vis development experience of the bidding consortium. We hope the ministry will reconsider these points."
The companies that participated in the pre-application conference say that the government has not given any indications about what the revenue streams would be, whether AAI will take equity in the special purpose vehicle set up for the project, and what kind of revenues from real estate development the bidders will be allowed to raise.
There is another grey area. "Operators are chary of AERA (Airports Economic Regulatory Authority of India) fixing the revenue model along the same principles as in the existing PPP projects, which has been challenged by the airport companies," says a senior executive of one of the bidding companies. They cite the example of Delhi International Airport, or DIAL, which has questioned the 16 per cent return on equity capital offered to the airport by AERA. DIAL says that SBI Capital, which was hired as financial advisor by the ministry of civil aviation, had actually suggested taking it up from 18.5 per cent to 20 per cent. The matter is now in the appellate tribunal.
The revenue projections made by AERA have been much higher than the numbers on the ground. That is why DIAL accumulated substantial losses in eight years of operations. Obviously if the same method is applied without waiting for the final order of the appellate tribunal, some of the companies might just avoid making a financial bid at all.
The two-stage bidding process requires the shortlisting of up to six prequalified applicants for the second stage when the financial bids are placed. But with only six bidders, any sense of competition has been obviated.
Another worry is the AAI employees. AAI has made it clear that their interests will be protected, leaving the bidders wondering whether they will have to mandatorily absorb the entire work force or whether AAI will resolve the issue by shifting some of them to other airports. This could turn out to be a very sticky issue.
The existing airport operators are also peeved that there is no mandatory requirement for the bidders this time to have operating and maintenance experience. "The current request for quotation allows local infrastructure firms to find an airport partner after winning the bid," says an AAI official. "This is not good and we have to protect our interests at the bidding stage."
As the deadline for prequalification nears, bidders are hoping for early clarifications from the government.