Sunil Jain: Bumps in the PPP runway

RATIONAL EXPECTATIONS

The way things are snowballing, the privatisation of Delhi airport could soon become the ideal case study of how not to structure/run PPP initiatives. The privatisation process received flak two years ago, when the attempt to favour the Anil Dhirubhai Ambani Group was exposed, and now, there's a huge furore over how the private sector firm Delhi International Airport Private Ltd (DIAL) is structuring its operations in a way that the Airports Authority of India (AAI), which was to get 46 per cent of DIAL's revenues, will get a lot less. Equally inexplicable is the manner in which, believe it or not, the airport costs have gone up 2.7 times in a little over a year, from Rs 3,287 crore to Rs 8,900 crore. But that's probably the subject of another column, more so since the airport regulator, which will decide just how much of this cost is due to the aeronautical needs of the airport and how much is due to the need to have more duty-free shops, is still not in place.

The immediate problem, of course, is about the manner in which DIAL is planning to take an 8 per cent deposit from those it leases out land to develop hotels and commercial complexes. While DIAL has set aside 45 of the project's 5,000 acres for this at the moment, it has around 170 acres on which it can exercise a similar option. Here's how it works: DIAL has put a minimum rental of Rs 1.58 crore per acre per year and developers will bid on this. The other terms are fixed. The rent will rise by 5 per cent per year till the 28th year, the rent in the 28th year will be increased by half in the 29th year, after which rents will once again rise by 5 per cent annually till the 58th year, after which the airport reverts to the AAI. DIAL then adds up this income stream and tells developers to give it 8 per cent of this up front as an interest-free deposit "" this works out to around Rs 63 crore per acre.

This is where the problem arises since DIAL's lawyers have assured it that this money need not be shared with the AAI as it is a loan and not revenue. But the deposit does affect revenues. If you assume this money is costing the developers 8 per cent per annum, this adds up to around Rs 5 crore. So, if DIAL did not take the deposit, developers would theoretically have been prepared to pay it a rent of Rs 6.58 crore a year "" so the AAI will end up getting Rs 2.3 crore a year less per acre in the deposits-scenario. Multiply that by the 45 acres in question and that's over Rs 100 crore a year "" it crosses Rs 390 crore if DIAL does the same for all commercial land.

In its defence, DIAL says the finance plan it had submitted as part of the bid had indicated "a portion of the debt would be replaced by deposits raised from concessionaires and from property development" and so the AAI always knew about this. This is incredible for a variety of reasons. For one, if true, it means the consultants ABN Amro, who advised the government on the deal, didn't think it worth their while to pin down the firm on just how much deposit it would take and whether this was to be shared. It's also incredible since, if you accept the DIAL logic, it means it would have been possible to build the airport virtually free!

DIAL's original cost estimate for the airport was Rs 3,287 crore and it had 170 acres of land at its disposal "" at Rs 63 crore an acre, that's an estimated Rs 10,710 crore it can get by way of deposits! No one's saying that DIAL is going to do this, only that, if its argument is to be taken to its logical conclusion, the entire airport can be financed out of just the land, with quite some cash to spare! In which case, others who lost the bid to the GMR Group, which owns 74 per cent of DIAL, could have won the bid by promising to share even more revenue with the AAI.

It also casts a huge doubt over the conduct of the AAI directors on DIAL's board. After all, if ABN Amro missed it, why didn't these directors oppose it in DIAL's board?

The other argument DIAL's management makes is that taking interest-free deposits is actually good for the project and so even benefits the AAI, which owns 26 per cent of DIAL. If the company did not take deposits, DIAL argues, it would have to raise debt which would have to be serviced "" so aeronautical tariffs would go up and the project would get hit.

This sounds plausible till you examine the deal a bit. Under the deal, to keep tariffs low, DIAL has to use 30 per cent of its non-aeronautical revenues to subsidise the aeronautical operations. In which case, anything that reduces DIAL's revenues (as taking deposits does) also reduces the amount of cross subsidy "" and therefore raises the aeronautical tariffs!

Any way you look at it, serious issues arise from the project and either way, some very serious action needs to be taken. If ABN Amro and other consultants left such a huge loophole, they can hardly be allowed to go unpunished; if there is no loophole, then you need to throw the book at DIAL and at the AAI directors on its board. Whatever decision gets taken, it has to be made public and not just settled between the government/AAI and DIAL.

sunil.jain@bsmail.in