Shocking: CAG report shows how GVK made fliers foot their airport bills

CAG has also severely indicted the government for failing to allocate proportionate financial risks to the concessionaire for Mumbai airport

Sindhu Bhattacharya July 18, 2014 16:17:51 IST
Shocking: CAG report shows how GVK made fliers foot their airport bills

India is the largest market for Public Private Partnership (PPP) infrastructure projects but at least in development of airports, this model has had limited success. Four of the country's showpiece airports - at Delhi, Mumbai, Hyderabad and Bengaluru - were developed through the PPP model in the last decade. The four cities did get world class airports because of private investments but the usual problems over poorly drafted concession agreements and concessionaries not adhering to their provisions are still to be sorted out.

As a result, passengers have been paying through their nose for using some of these PPP airports despite a passenger levy never being envisaged in their respective concession agreements. And in many instances, the private airport operators do not appear to have taken much financial stress, passing on almost all of it to the airport project instead.

An audit done by the Comptroller & Auditor General in the case of Mumbai International Airport (MIAL) shows us how the operator - a consortium lead by GVK group - has conveniently been passing on increased project costs to passengers. CAG has also severely indicted the government for failing to allocate proportionate financial risks to the concessionaire for Mumbai airport though the project cost doubled and funding gap was filled up by passengers through development fee.

In the case of Hyderabad Airport, where a GMR lead consortium is the operator, a dispute over which method of calculating airport operator revenues - single or dual till - should be used is yet to be resolved. The airport operator wants a model where non-aeronautical revenue is not included in calculations while the AERA (Airport Economic Regulatory Authority) wants a single till model where aeronautical and non-aeronautical revenue is taken together. Again, which calculation is finally adopted will determine if hapless passengers are once again to bear the burden of getting to use a modern airport or whether the operator will bear its share of costs.

Sources tell Firstbiz the OMDA (Operation Management Development Agreement)envisages dual till method but that AERA is "exploiting" ambiguity in the concession agreement to insist on single till. Why was the OMDA not drafted better so that there is no scope for ambiguity on such matters is a question no one is willing to answer.

A recent report by Sydney-based aviation consultancy CAPA noted that in September last year, the Airports Authority of India had announced plans to award PPP concessions at six more airports - Chennai, Kolkata, Ahmedabad, Guwahati, Jaipur and Lucknow - with another nine airports to follow.

Talks on this tender process are beginning afresh but participants will do well to study the hurdles faced with the fist four PPP airports. CAPA noted that despite the successes of the first wave of PPP airports there are certainly areas for improvement, particularly in terms of economic regulation, land monetisation, management of project costs and at a broader level creating a more predictable operating environment on issues such as bilateral policy, airspace efficiency and airline viability.

"Increased charges at PPP airports have certainly been a contentious issue for airlines. On some domestic sectors for example approximately 17 percent of the average gross fare now consists of taxes and fees, of which 10-12 percent is related to airport charges. A clear process has not been established for determining the appropriate level of capital expenditure in airports and for monitoring project costs to prevent the massive budget over-runs that have occurred in some cases and which have simply been recouped through higher charges that are borne by the airlines and passengers," it said.

What CAG has said on MIAL in its report tabled in Parliament today:

Equity contribution by the private party was not even 8 percent of the project cost but passenger levy accounted for almost a third of the cost as on December 2012! The CAG report is for 2012-13. This, when the OMDA of the airport did not even envisage collection of a fee from passengers and the operator was supposed to raise funds on its own.

So what CAG is essentially saying is that the airport operators and the AERA bypassed OMDA to agree to a passenger levy which was used to substantially fund increased project cost. Instead of the developer taking various available routes to raise these monies.

Another anomaly: Absence of a review clause and renegotiation before extension of concession period appears to virtually allow the GVK lead consortium the right to operate the airport for 60 years with the terms and conditions frozen in the OMDA. The agreements from Mumbai and Delhi airports envisaged an initial concession period of 30 years which could be extended by another 30 years through mutual consent.

The CAG report also took the Civil Aviation Ministry to task for granting extensions to the project, which was delayed by four years and not penalising the private-led airport operator, Mumbai International Airport Limited (MIAL) for it.

The project cost of MIAL more than doubled from Rs 5,826 crore to Rs 12,380 crore though it was restricted to Rs 11,647.46 crore till March this year by AERA.

Though the project cost doubled, "the concessionaire did not appear to have faced financial vulnerability for the same, as the funding gap was being largely absorbed by the passengers through levy of development fee (DF) though such levy was not in the OMDA and no efforts were made to secure sources of financing for the project," CAG said.

It also said the revenue share of state-run Airports Authority of India (AAI), which partners with private infra firm GVK in MIAL, was "set to decline with the outsourcing of activities as noticed in the case of domestic and international cargo activities and the airport hotel project".

AAI received a gross revenue share from MIAL of over Rs 2,857 crore between 2006 and 2013.

"The private partner, on other hand, received gross revenues of Rs 4,526 crore during the same period on an investment of Rs 888 crore, without taking into account other potential benefits that would accrue over time from commercial exploitation of land," CAG said.

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