Sunil Jain: Getting crony capitalism to fly

RATIONAL EXPECTATIONS

While the media celebrates the creation of a truly world-class airport at Hyderabad, spare a moment for the toll, literally, this will take on users, right from the couple of hours it'll take to get there from the centre of town to the Rs 700 that each passenger will pay as User Development Fee (UDF) each time he/she flies. Given the existing airport is in the centre of town and there's no UDF, it's easy to see why passengers are up in arms. Indeed, if you think the goings on in the Delhi airport are a scandal (see "Bumps on the PPP Highway," Oct 29 and "Dial a Mystery," Dec 3), what's happening in Hyderabad is a lot worse. In Delhi, the problems stem from the GMR group's interpretation of the concession; in Hyderabad, the problems stem from the huge post-bid concessions given to the GMR group.

To begin with, the bidding itself was curious. The state government owned the land of the new airport and so carried out the bidding. But since the concession (more on this later) was signed with the Government of India's (GoI) Ministry of Civil Aviation, the actual negotiations took place with the GoI! So, the state government selected the GMR group on the basis of its bidding and, in the process of negotiating with the GoI, a host of additional concessions were added on. Needless to say, if these concessions were known earlier, others would have liked to bid as well, and perhaps a lot more than GMR, which is going to give just 4 per cent of its revenues to the AAI. As in the case of the Delhi airport, the GMR group has a host of subsidiaries (six) to help reduce the divisible pool of revenues, which include, if you please, those from a 308-room hotel.

What were these post-bid sweeteners? For one, the government promised that the existing Airports Authority of India airport, which serviced around 6 million passengers and gave AAI annual revenues of around Rs 150 crore, would be closed down. It also promised no new airport was going to be set up within 150 km of the GMR one for 25 years. The aviation policy, on the other hand, allows such airports to be set up, with some concessions though. So, in Delhi, for instance, if a new airport is to be set up, the GMR group gets the right of first refusal if it bids up to 10 per cent less than the top bidder. Then, to help make the new concessionaire make some more money, the concession allowed charging of a User Development Fee (UDF).

On the face of it, a UDF seems fair enough and is equivalent to paying tolls to help fund an expressway. But since a UDF is based on the cost of a project, it's important to ensure this cost is not over-stated. There is nothing in the concession that deals with this. All it says is that the final cost will be audited by the ministry of civil aviation. But auditing, as we know, is just about ensuring there's a bill to match each item of expenditure; it's not about ensuring all parts of a project are competitively bid out or benchmarking of costs with other projects. The concession is also silent on whether this UDF will take into account the earnings the GMR group will make from other airport-related operations. Essentially, in sectors where cost-plus regimes are still in vogue, such as in power, there are elaborate rules/guidelines on how costs are to be determined/apportioned, but there is nothing of the sort for the UDF in the concession agreement.

Sadly, the central government's dubious role extends even further. The ministry of civil aviation, which granted the Hyderabad concession, has actually no right to do so since it doesn't even own the airport/land! In Delhi and Mumbai, the AAI signed the concession since it, not the ministry, owned the airports. In this case, since the AAI couldn't sign, the ministry helpfully stepped in!

Big deal, some will say since, under the law, only the central government has the right to grant licences for setting up new airports "" so, concession or licence, they're both really the same thing. Well, not really since a licence does not entail any obligations on the part of the licensor while a concession does. It was under the concession, for instance, that the central government promised to shut down the existing airport, to give GMR monopoly rights and UDF "" and since all these are in the concession, GMR has a legal right to them. None of these sweeteners could have been given under a licence.

Postscript: Several of the irregularities in the Delhi airport are now being fixed thanks to media and other pressures. It'll be interesting to see if the same happens in Hyderabad.