Sunil Jain: Dialling Mayawati

RATIONAL EXPECTATIONS

Let us accept the Congress party's position that the government is not behind the Income Tax Appellate Tribunal's shocking ruling to let Uttar Pradesh Chief Minister Mayawati off the hook on the disproportionate wealth case by accepting her assertion that her followers had given her the money. But given how quickly this was followed up with the Cabinet approving the Noida airport that Mayawati wanted despite it not meeting the aviation policy criterion, it's difficult to shake off the feeling the government is keeping her sweet for a possible electoral alliance. Of course, the government will defend itself by saying the approval is an in-principle one, and that the details have still to be ironed out by a Group of Ministers (GoM).

The details, of course, involve ensuring the GMR Group, which has the franchise to run the Delhi airport, does not go to court citing the aviation policy, level playing field and other arguments "" it has already said that, when it signed the request for proposal, there was no talk of a second airport, unlike in Mumbai, where it was known a second airport was coming up. Under the aviation policy, the minimum distance between two international airports has to be 150 km "" the Noida one is only 72 km from the Delhi one. GMR also asserts the Delhi airport will be able to handle 100 million passengers by 2026 as compared to the projected traffic of 80 million. So, GMR can argue that had it known the Noida airport was going to come up, it would have bid lower for Delhi. Of course, since the State Support Agreement talks of the possibility of a new airport within 150 km and gives GMR the right of first refusal, a legal claim may be a bit difficult to sustain.

It is possible, however, that under the guise of ensuring there is no legal hurdle, the GoM will undo the work done by the ministry of civil aviation in safeguarding the Airports Authority of India's (AAI's) interests "" under the bid, the GMR Group's Delhi International Airport Limited (DIAL) was to share 46 per cent of all top line revenue with the AAI.

Enough has been written about how DIAL interpreted the revenue share concepts in a manner which would have denied the AAI a large part of this top-line share (see "Bumps on the PPP runway," Oct 29, 2007). One way was by claiming that the interest-free deposits of (at least) Rs 63 crore it got per acre on the 250 acres it can develop commercially were not "revenue" and therefore did not need to be shared; and the other by forming subsidiaries to run various operations "" since a subsidiary is a separate legal entity, only the dividend it declares can be shared. If the subsidiary makes a profit of 20 per cent, say, and decides to declare all of it as dividend, the AAI will just get Rs 9.2 out of each Rs 100 of top line revenue as opposed to the Rs 46 it would get if there was no subsidiary. The AAI, however, has written to DIAL asking it not to proceed with either of these schemes till it further examines the Attorney General's opinion, which most felt okayed DIAL's plans (see "No all-clear for DIAL yet," Dec 18, 2007).

Take the land deposits that DIAL wanted to go ahead with. A Merrill Lynch report on GMR Infrastructure, prepared when the firm was looking to sell part of its equity (it sold 9 per cent for $1bn last month), points out that these interest-free deposits will lower DIAL's cost of capital to around 7.6 per cent as compared to 12.1 per cent for GMR's Hyderabad airport and 13.4 per cent for its Turkish one. Just a 0.5 per cent change in the cost of capital, the report adds, would change its asset valuation of the Delhi airport project by 5-10 per cent (it's different for different phases of the development)! Similarly, the subsidiaries that reduce its outflow to the AAI, Merrill Lynch's model estimates, adds around Rs 4,500 crore (or Rs 27 in a share that cost Rs 243 at that time) to GMR Infrastructure's present value. Similarly, if the FSI allowed on the 250 acres is increased from current levels, this will also make the airport a lot more attractive.

Given that DIAL desperately needs to go ahead with its plans, the GoM is likely to negotiate on these conditions to come out with a 'win-win' situation. A win-win for Mayawati and perhaps for DIAL, but not for the AAI.