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Comptroller and Auditor General of India report on PPP at Delhi Airport – Bangalore Aviation

Comptroller and Auditor General of India report on PPP at Delhi Airport

In a report titled “Implementation of Public Private Partnership, Indira Gandhi International Airport, Delhi” the Comptroller and Auditor General of India (CAG) has found faults in almost every step of implementation of the Public Private Partnership (PPP) model in the brownfield privatisation of New Delhi’s Indira Gandhi International Airport (IGIA).

While acknowledging the PPP was the correct method to follow and praising the airport operating company Delhi International Airport Ltd., (DIAL) owned by a consortium headed by GMR Group,

It is acknowledged in this report that there have been significant improvements in services at the airport for the travelling public. The new terminal T3 was completed within time for the Commonwealth Games. The airport has been adjudged as the second best in the world in the category of 25-40 million passengers per annum by Airports Council International.

the report is probably the most damning indictment of former civil aviation minister Praful Patel and the ministry he led during the period of the airport privatisation.

Many observations in the present report would indicate that whenever DIAL raised an issue regarding revenue to accrue to it or expenditure to be debited to Government in contravention of the provisions of OMDA, the Ministry and AAI interpreted the provisions always in favour of the operators and against the interest of the Government.

The report accuses the Ministry of Civil Aviation, headed by Mr. Patel, of violating laws, and providing post contractual benefits to DIAL, to the detriment of the government as well as the travelling public.

Ministry of Civil Aviation and later AERA allowed DIAL to collect Development Fees amounting to Rs. 3415.35 crore. The order of Ministry in February 2009 allowing that was in contravention of the OMDA, AAI Act and the AERA Act.

Contrary to the provisions of OMDA, DIAL was allowed to use the amount collected as Development Fees to meet the project costs. In fact, only 19 per cent of the project cost came from equity, approximately 42 per cent came from debt. The remaining project costs were met from security deposits and Development Fees.

The report also highlights where DIAL was given benefits significantly over and above Government departments

It was noted that the concept of upfront fee was used to lease out an additional land of 190.19 acres for a paltry one time payment of Rs. 6.19 crore. Other Government offices like Director General of Civil Aviation and Bureau of Aviation Security were given a much harsher treatment when 7.60 acres of land was leased out to them at a license fee of Rs. 2.41 crore per annum.

The report highlights how by omitting the phrase “mutual agreement and negotiation of terms” which was present in the note approved by the Union Cabinet, but removed in the concession agreement OMDA, DIAL has unilateral rights to extend the concession period for an additional 30 years at the original already grossly under-rated terms of the OMDA.

The decision to adopt the joint venture route was taken based on the Cabinet Note of September 2003. While seeking approval for restructuring of the Delhi and Mumbai Airports, this Cabinet Note specifically envisaged an initial concession period of 30 years which could be extended by another 30 years subject to “mutual agreement and negotiation of terms”. However, in the draft OMDA which formed part of the bid documents, the important condition “subject to mutual agreement and negotiation of terms” was omitted. The OMDA, which was signed in April 2006, did not contain any provision of mutual agreement and fresh negotiations before extension of the concession period. This is not only a violation of the commitment in the Cabinet Note but is also a unilateral and unfair advantage given to DIAL which is detrimental to Government interest as it does not provide the Government any scope for review of any of the conditions.

The report also highlights the liberal manner of how the OMDA is written to favour DIAL.

The possibility of any JVC event default in the small window of 5 years between 20th and 25th year is remote. Such a sweeping provision, without any scope of review at any time during the currency of the concession period, has effectively granted DIAL the sole right to operate the airport for a period of sixty years with the terms and conditions frozen in the OMDA.

Editor’s note: The relaxation of requirements or confining performance to an extremely narrow window is a common thread found in virtually every India PPP airport concession agreement, all of which were signed during the tenure of Mr. Patel as civil aviation minister.

The report alleges the virtual give-away of land to DIAL, accusing the Ministry of giving DIAL land worth more than Rs. 24,000 Crore for a sum of Rs. 31 lakhs, and an annual payment of Rs. 100 only.

The projected earning capacity of this land in terms of license fee over the concession period of 58 years was indicated by DIAL itself as Rs. 681.63 crore per acre in a letter to the Joint Secretary, MOCA. Thus for the entire area of 239.95 acres, the potential earning from the land, according to the calculations worked out by DIAL itself, amounts to Rs. 1,63,557 crore. Audit would like to draw attention to the fact that this area is part of the entire area of land that has been handed over to DIAL at the lease rent of Rs. 100 per annum.

It has been ascertained from AERA [Airport Economic Regulatory Authority] that the current valuation of the land made by M/S Merrill Lynch in the report of 26th August, 2011 has been worked out at the rate of Rs. 100 crore per acre. Thus even in terms of this conservative estimate, the total current value of the land available to DIAL for commercial exploitation, would amount to approximately Rs. 24,000 crore.

Audit is constrained to observe that against the aforementioned calculations, MoCA [Ministry of Civil Aviation] allowed DIAL to use 239.95 acres of land for commercial exploitation at a consideration for one time payment of Rs. 31 lakh (5 percent of Rs. 6.19 crore) and an annual payment of Rs. One hundred only.

Both DIAL and the Ministry of Civil Aviation have refuted the observations of the CAG. In a release DIAL said

The Comptroller and Auditor General (CAG) has tabled a report on the Implementation of Public-Private Partnership at Indira Gandhi International Airport before the august Houses of the Parliament.

This report pertains to an audit conducted by the CAG on the performance of the AAI with particular reference to the privatization process of Indira Gandhi International Airport (IGIA). Therefore, the appropriate and competent authority for redressal of all queries on this issue is the Airport Authority of India (AAI) or the Ministry of Civil Aviation (MOCA).

Even though many of these issues have already been discussed between the ministry and auditors and were responded to in detail, they have not been reflected in the final report. Even the former Secretary Civil Aviation had expressed this view in a separate letter to the Audit Authority.

Hence, we feel sad that a showcase airport created with dedicated efforts and a well-thought-out policy of the national government has come in for adverse remarks. We have also noted with concern that the reputation of this company has been questioned regularly in the media based on incomplete and inaccurate facts. Hence, purely in order to put the records straight, we would like to state the following without prejudice to our rights:

1. Delhi International Airport Private Limited (DIAL) has NOT received any undue benefits from the government before, during or after the bidding process. The entire process of the privatization and selection of Joint Venture was based on a transparent, international, competitive bidding which was guided and presided over by competent bodies and has been upheld as such by the Hon’ble Supreme Court in 2006.

2. It is alleged that with the airport modernization project DIAL was effectively handed over land valued at Rs. 1,63,557 Crore for only Rs. 100 per year.

a. The purpose of leasing the airport land by AAI to DIAL was neither sale of land nor earning of a rental income from it.

b. The basis of providing the concession to operate the airport was the revenue share quoted by the bidders to AAI.

c. The entire commercial land available with DIAL neither has any immediate commercial value nor can be put to use and therefore cannot be monetized immediately. Thus, just using value of one acre and extrapolating the same for the entire land parcel is at best an arithmetic exercise and not practical.

d. In fact, using the same method of calculation, AAI will receive Rs. 3 to 4 Lakh Crore from DIAL as revenue share over the 54 years.

3. The allegation that Airport Development Fee (ADF) was an afterthought and done only to benefit DIAL is absolutely untrue:

a. ADF is allowed as per section 22 A of AAI Act 1994 as amended in 2003 – long before the bidding process – and hence was known to all bidders

b. AAI Act is the primary governing legislation for the concession as provided in the transaction documents

c. The levy of ADF was upheld by the Hon’ble Supreme Court vide its order dated 26th April 2011

4. The concession period of 30 years with 30 years extension being an unfair advantage to DIAL is also not true:

a. Such long concession periods are quite normal in infrastructure projects where the investment is large and gestation period is long

b. Moreover, as this was a bid condition known to all bidders, they had already considered this condition while quoting the bids

The Indira Gandhi International Airport (IGIA), Delhi is a shining example of the success of PPP model of infrastructure development in India. IGIA is currently rated as the second best airport in the world in the 25-40 million passengers per year category. The current Airport Service Quality (ASQ) rating of IGIA stand at 4.73/5.00 which far exceeds that stipulated in the concession agreement – at 3.75/5.00. It is currently the largest airport in India – catering to 36 million passengers per annum (mppa), handling 600,000 tonnes of cargo and managing over 300,000 aircraft movements every year. According to NCAER, IGIA contributes 0.45 per cent to the national GDP and 13.53 per cent to state GDP of Delhi. It has also created 15,78,000 jobs which is 25.9 per cent of Delhi’s total employment and 0.34 per cent of national total employment.

The Ministry said

Ministry of Civil Aviation has gone through the report of the CAG on Indira Gandhi International Airport, Delhi as tabled in Parliament today and strongly refutes the loss figures and other allegations as made in the report.

The calculation of presumptive gain from the commercial use of land at the Delhi Airport is totally erroneous and misleading as it simply adds the nominal value of the projected revenue, without taking the net present value. In fact the net present value of the figure quoted by CAG is Rs 13795 crores only. CAG has further failed to appreciate that 46% of this amount would be payable to AAI as revenue share.

It is also pointed out that the levy of Development Fee is under Section 22 (A) of AAI Act, 1994 and was in the knowledge of all the bidders prior to the bidding process. Hence, contrary to what the CAG has said, the levy of Development Fee by DIAL was not a post contractual benefit provided to DIAL at the cost of passengers. Further, the levy of the Development Fee has been upheld by the Supreme Court, which has already examined and rejected all the issues now being raised by CAG in its report.

On the issue of lease of Airport land, it is clarified that the land has not been given to DIAL on rental basis. Rs100 is just a token amount for the purpose of the Conveyance Deed. The determining factor for grant of concession to the bidder was the Gross Revenue share quoted by the bidders. As a result, Airports Authority of India (AAI) now receives 45.99% share of Gross Revenues of DIAL and 26% of all Dividends. Benefit to AAI is likely to be more than Rs 3 lakh crores in this process during the entire Concession period. AAI has already got its revenue share of Rs.2936 crores in the last 6 years and likely to get Rs. 1770 crores in the year 2012-13 and Rs. 2287 crores in the year 2013-14. The AAI share of revenue from DIAL is further going to constantly rise every year in the balance concession period.

It may also be noted that the right to use 5% of Airport land for commercial purpose was also defined in the bid and known to all bidders.

The decision to restructure and modernize Delhi and Mumbai Airports was a policy decision of the highest body i.e., the Cabinet following the broad policy formulations of Policy on Airport Infrastructure, 1997. The modalities of modernization/ restructuring were as per the Cabinet decision and were frozen in the Transaction Documents finalized and approved by the Empowered Group of Ministers (EGoM), based on which the bidding process was completed. The issues now being highlighted in the CAG report, viz. Concession Period, Right of First Refusal (ROFR), Upfront Fee, Commercial exploitation of land, and Lease rental of land were part of these documents and were symmetrically known to all bidders before bidding and during the bidding process. These documents were later converted into different agreements, like Operation Management and Development Agreement (OMDA), State Support Agreement (SSA), Shareholders Agreement (SHA), Lease Deed Agreement, CNS-ATM Agreement, and State Government Support Agreement (SGSA), and there has been no change in these documents ever since.

All decisions including the entire bidding process and the approval of the OMDA was monitored by EGoM and subsequently approved by the Union Cabinet. The bidding process has also been upheld by the Supreme Court.

All Aeronautical and Airport assets created by DIAL will be transferred back to AAI as per agreement at the end of the concession period.

It is further stated that the views of Ministry of Civil Aviation and AAI have not been incorporated in the final report of the CAG and there are aspects mentioned in the final report which were neither included in the draft audit report nor were discussed with the Ministry of Civil Aviation at any point in time.

It is pertinent to mention that CAG in its report has itself acknowledged the significant improvement in the services for travelling public, new terminal T-III being completed within the time frame for Common Wealth Games and Delhi Airport being adjudged the second best in the world in the category of 25 to 40 million passengers per annum by the Airports Council International.

India has few world class Airports achieved in a very short span of time. Reports like these would damage the process of PPP and stunt infrastructure development in the country.

The brief parawise comments to the CAG report on IGI Airport are attached as Annexure and are also available on the website of Ministry of Civil Aviation.

Click here to see Annexure

You can download the entire CAG report on DIAL here. Do read it, and share your thoughts.

About Devesh Agarwal

A electronics and automotive product management, marketing and branding expert, he was awarded a silver medal at the Lockheed Martin innovation competition 2010. He is ranked 6th on Mashable's list of aviation pros on Twitter and in addition to Bangalore Aviation, he has contributed to leading publications like Aviation Week, Conde Nast Traveller India, The Economic Times, and The Mint (a Wall Street Journal content partner). He remains a frequent flier and shares the good, the bad, and the ugly about the Indian aviation industry without fear or favour.

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