Introduction Bengal Government policy regarding the foreign/private investment in

Introduction

Government of India is allowing Public
Private Partnership Model (PPP) for improvement of Airports in the country. GMR and GVK, are the two principal private promoters
involved in this sector, have implemented rich developments in airport infrastructure
at the five major airports.. Fruitful application of PPP Model depends
on the competent supply of project risks between the major stakeholders.

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India’s choice to ask
private players to contribute in the modernization of its airports has brought
substantial paybacks for travelers, airline companies and the government.
The passenger involvement was enhanced, the productivity and volume for
airline operators were improved and that resulted in an massive dividend payout
to the state owned Airports Authority of India.

As
of now Five Airports have successfully used this model

Ø  Delhi – Brownfield

Ø  Mumbai – Brownfield

Ø  Hyderabad – Greenfield

Ø  Bangalore – Greenfield

Ø  Koch i- Greenfield

 

Projects
& Policies

Government of India (GoI) has granted ‘in-principle’ approval for
setting up of the following 14 Greenfield airports in the country with
estimated project cost (approx.) as given under: 

Mopa in Goa (Rs.3000 cr)

Navi Mumbai (Rs.15149 cr)

Sindhudurg (Rs.350 cr) and Shirdi (Rs.320.54 cr for Phase I) in
Maharashtra

Bijapur (Rs. 150 cr)

Gulbarga (Rs.13.78 cr in initial phase)

Hassan (approx. 793.95 cr in three phases) and Shimoga (Rs.38.91
cr in initial phase) in Karnataka

Kannur (Rs.1892 cr) in Kerala

Dabra (Rs.200 cr) in Gwalior

Pakyong (Rs. 605.59 cr) in Sikkim

Kushinagar (Rs.600.39 cr) in Uttar Pradesh

Karaikal (Rs. 280 cr) in Puducherry

Durgapur (Rs. 700 cr) in West Bengal

 

Government
policy regarding the foreign/private investment in this sector

?  The policy have evolved over time.

?  No Private, domestic and foreign investment
was allowed

?  GOI in 1990 passed a legislation to allow
private participation

?  Till 1999 all the airports in India was under
control of  AAI

?  In Dec 2013 GOI approved Greenfield Airports
policy that brought major changes

?  As per the new regulations, No central govt.
approval was needed if the airport is beyond 150km of existing civilian airport
and DGCA would be competent enough to grant licenses

?  100% FDI allowed for airports in operation
with automatic approval up to 74%

?  100% FDI allowed for Greenfield airports via
automatic route.

 

Major
Private Sector Players

Kaufmann
and Vander Meer Planer AG: Responsible for Design of BIAL Airport.

Siemens
Project ventures: Hold 26% of equity currently and are responsible for
equipping the airport with technical system. The responsibilities cover the
technical system installation and engineering of all the areas including
airfield lighting, IT and communication system, baggage handling system, and
power supply of building services.

Larson
& Turbo: Responsible for the entire Civil construction work and has
divested their equity holding completely after the project was completed.

Unique
Zurich Airport: Hold 5% equity and are responsible for handling airport
operations. They have also divested their major stake and is now only holding a
part of initial investment as a performance guarantee.

GVK
powers and Infrastructure: Total shareholding of 43% acquired from initial
stakeholders over time i.e., 12% from Zurich Airport in Nov 2009, 17% equity
divestment process of L and 14% from Siemens in Oct 2011.

 

Why PPP?

Government
of India (GOI), is using the Public-Private-Partnership Model (PPP), mainly
Build-Own-Operate-transfer (BOOT) scheme, for the development of the Bangalore
International Airport. PPPs are considered a better way to fund and operate an
infrastructure development, while reducing the pain of the central and state
gov. in development of huge projects.

PPP’s
are a better option when there is limited public sector fund and the cost of
raising capital is high. Privatization can enhance the quality and efficiency
of the services delivered to the public. By this model the government can
invest their funds in developing and operating the remote or small facilities
that will ensure the inclusion of backward societies, while the major projects
will also contribute to the revenue of the state by the PPP model. Today a
major chunk ( approx. 30%) of the total revenue for Airports Authority of India
is received as fees from the 5 PPP airports in India.

 

Project
Structure – BIAL

 

Diagrammatic representation of project
structure at implementation

Bangalore
international airport limited is a PPP model which was constructed under Build,
own, operate and transfer model. BIAL concession documents states a concession
period of 30 years which is extendable up to 60 years. The new BIAL airport is
located at a distance of 34km from the Bangalore city. It is spread over a land
area of 3900 Acre. The airport is having an annual passenger capacity of 12.0
million and cargo handling capacity of 35000 tones.

The
BIAL airport was initially proposed to cater the passenger capacity of 8 to 10
million per year. Keeping future air traffic anticipation, the capacity of the
airport was then revised to 12 million. This resulted in project cost going up
from $UDS 389 million to $USD 495.6 million.

 

Sponsors

Siemens Project Ventures

Siemens
hold up at 40% of the capital of BIAL for 3 years after commercial operation
date of airport and not less than 26% for 7 years after commercial operation
date.

Flughafen Zurich AG

 Zurich had equity stake of 17% in BIAL that
can divest equity only after 3 years from commercial operation date, but its
equity cannot go below 5% during the concession period. Zurich was responsible
for all the operations of the airport. They also sign a contract of all
maintenance agreement.

L&T

The
role of construction agency was given to L&T which was the major
stakeholder in the project. Since L&T was only stakeholder which could
divest completely after construction completion. Concession Agreement about the
sale of equity by L&T was silent.

Kaufmann and Vander Meer Planer AG
Switzerland

The
design of BIAL Airport was developed by the award winning agency Kaufmann and
Vander Meer Planer AG of Switzerland. Their expertise in airport planning was
critical as this was a Greenfield model of project.

M/S Siemens Industrial Solutions and
Services Group (I&S) and Siemens India Ltd.

Siemens
signed a Contract signed for equipping the airport with technical system.  The contract covered the responsibilities
included supply, engineering ,testing and installation of airfield lighting,
communication systems, airport luggage handling system and the power supply for
the building and automation system

 

 

Airport Authority of India

Airports
authority of India is the owner of all other airports in India before the PPP
Model began. In the BIAL project AAI had the responsibility to construct and
supervise the air traffic control unit. This considered to be a high tech
activity and only a centralized agency like AAI can ensure the successful
completion of this critical unit. The overall project coordination was handled
with AAI

Karnataka State Industrial &
infrastructure Development Corporation Limited

To
handles acquisition of land efficiently, an expert agency KSIIDC Public agency
was incorporated. The airport land acquisition involved a lot of legal
proceedings and the representative from the Govt. side was included to handle
this process hassle free.

Shareholder

Initial Shareholding (%)

Present shareholding (%)

Private Promoter

 

 

Siemens Project venture Gmbh

40%

26%

Flughafen Zurich AG ltd

17%

5%

L&T IDPL

17%

Nil

GVK Group

Nil

43%

Sub-Total

74%

74%

 

 

 

State Promoters

 

 

Airport Authority Of India

13%

13%

Karnatka State Industrial Investment & Development
Corporation ltd

13%

13%

Sub-Total

26%

26%

 

Equity’s sponsor contribution

 

Lenders

Name Of The Bank

Loan Availed(? crores)

State Bank of Mysore

221.8

Vijaya Bank

301.8

Canara Bank

280.7

Central Bank Of India

250.0

Punjab National Bank

100.0

Sub-Total

1154.3

 

 

ECB Loan

 

ICICI Hong Kong

270.6

Sub-Total

270.6

Capital Structure

Particular 

 

2012

2013

2014

2015

2016

Debt (? crore)

D

1461.7

2155.0

1983.2

1726.1

2148.7

Equity in reserved (in crore)

E

849.8

1197.8

1600.5

2023.8

2595.6

D+E ( in crore)

C

2311.6

3352.8

3583.7

3749.9

4744.3

Kd

Kd

10.71%

10.71%

10.71%

10.71%

10.71%

Ke

Ke

24.40%

24.40%

24.40%

24.40%

24.40%

 

Internal Risk

Pre-construction
risk:

It
took 32 months (from the date of signing of MOU for progress of Airport) for
assortment of concessionaire for BIAL. It was almost equivalent to the period
taken for the building of the airport. The bidding procedure for assortment of
concessionaire seems to be very lengthy. It was expected that public specialist
can do land procurement proficiently, so professional public agency, KSIIDC,
was involved as equity holder in BIAL. It took 75 months, for land procurement,
from the date of passing of Airport development MOU. Concession contract has
provided the deadlines for creation by private partner but it has not provided
deadlines for procurement of land by public partner. Time for land procurement
was too high. This shows the necessity for enhancement in land procurement
process. The rate of the project was not fixed at the time of passing of the
BIAL concession contract. The concessionaire was permitted to take the cost on
the date of completion of the project as the project rate for setting up the
airport demand. This was mostly a cost-plus model where the concessionaire was
protected from cost hazard due to probable time over-run caused by lengthy
bidding and undefined land procurement process. Project cost on completion can
be stated only for the time sure contract. 
Investors only like to invest in projects which are free from
pre-construction risks.

Foreign Exchange
Risk:

Few
of the foreign investors in BIAL had traded their equity just on completion of
their minimum lock-in time. Foreign equity exits not only effect in capital
outflow but also effect the loss of expertise, which can affect effective
operation of Airport. In airports, if venture is made in foreign currency and
income is obtained in local currency then the partner’s interest will be badly
affected due to downward crusade of local currency. The investors are exposed
to financial risk on reason of exchange rate variation.

 

External Risk

Demand (Traffic)
Risk:

Major
risk in airport operation appears to be variation in demand. The future cash
flows for BIAL were predicted considering only the positive advancement in
traffic. But this proved to be inappropriate during the starting years of the
BIAL concession time. Realization of predicted traffic during long period of 30
years (concession period of BIAL) seems uncertain. Presently obtainable
statistical techniques may not be appropriate for forecasting long period
demand. Economic slowdown may affect the Airways customer demand, which is hard
to predict. There is a need to have some formula to consider it for more
accurate prediction of traffic demand. Major decline in demand also affect
non-operational revenues such as those from parking, food and beverage, retail,
and advertisement, which has a strong connection with the volume of passenger demand.
The concession contract of BIAL is silent on the issues of traffic and revenue
risks. These risks have to be borne by private partners.

Liquidity Risk:

In
large debt projects, the cash flow should be adequate to meet debt service
requirement and continue reserve fund. If not, then possibility for liquidity
risk persist. In such case, either the sponsor shall deliver cash in reserve or
investor shall provide the additional cash. Backer is supposed to maintain
obligatory DSCR (debt service cover ratio) as per the promise with project
lender. If due to low cash flow DSCR falls below the required level then no
cash out of income can be distributed to investor till the time needed
requirement is fulfilled. In such case, the cash flow after debt examining
shall be put in an escrow account.

 

Post Facto Developments

The
airport, which got its sanction way back in 1993, started the construction in
2005, after the settling of disputes in land acquisition, which was hindering
the ICICI lead consortium to provide the loan. The Phase 1 of the airport
completed in 33 months from 2005 and the airport was commissioned on March
2008.

The
Bangalore International Airport is a grand scheme project consisting of Three
Phases. The Phase 1 included the construction of lounge, retail and concession
spaces and increasing the security checkpoints for the airport. The Phase 2
included the full expansion of the existing Terminal 1. The Phases 1 and 2 got
completed by end of 2013. Phase 3 of the project includes construction of a new
terminal and runway and is underway.

Bangalore
International Airport was initially designed with a capacity of handling around
8 million  passengers per year but during
the construction of Phase 1, the design was revamped to accommodate 12 million
passengers per year. The redesign of the airport was based on the revised air
traffic survey of June 2005 and the last minute changes was included in the
plan. Due to the change in this, the estimated project cost was revamped from
USD 389 Million to USD 465 Million. The redesign included an increase in the
size of the passenger terminal building, number of aircraft stands, taxiways,
passenger boarding bridges and the main access road. The redesign proved right
as the airport handled 12.5 Million Passenger and 224000t of cargo in 2011.

The
expansion activities of the Terminal 1, which started operation in 2008,
commenced on June 2011 and was completed by December 2013. The airport was
renamed as Kempegowda International Airport on December 2013, when the
expansion activities of Terminal 1 was completed and the airport inauguration
took place.

The
project for expansion was designed by HOK and Larsen & Toubro was roped in
as the construction partners for the expansion project. HOK subcontracted IMPaC
to provide the terminal planning and designing services. The project will be
carried out with a debt : equity ratio of 70:30. After the investment of GVKPI
of around 29 percentage in early 2010, the newly reconstituted consortium
raised around 700 crore rupees as debt from the banks and 300 crore rupees from
the internal accruals and other stakeholders.

In
the expansion activities that started on 2011, is a 1500 crore (USD 230
Million) project, aimed at doubling the capacity of the airport. After
expansion the new terminal will have a size 150,556 square meters, double the
original capacity and will have the additional facilities for check –in,
immigration, security and baggage reclaim. Four additional gates including one
domestic gate and three international gates will be also added. The terminal 1
expansion also includes the construction of a new VIP lounge and the
construction a highly advanced Airport Operation Control Center. The expansion
activities are also aimed at sustainable development bringing in the gold
certification in leadership in energy and environmental design (LEED) from the
US Green Building Council. This expansion activity has raised the annual
capacity of the airport to 20 Million passengers.

The
biggest development in the BIAL project is the ongoing expansion. The terminal
2 of Bangalore International Airport is underway. The expansion includes a new
terminal and a parallel runway to the existing one so that the capacity of the
airport will be enhanced. The project costs a whopping 4000 crore and is
expected to complete by 2022.The overall expense will be met by 70% debt and
30% internal accruals.

Skidmore,
Owings & Merill, will design the new terminal. The upgradation works will
be carried out on the existing runway also, which will increase the ATM
capacity from 34 to 44.The parallel runway is expected to complete by 2019. The
Terminal 2 expansion project will be completed in 2 phases. The completion of
first phase will enhance the traffic handling capacity by another 20 Million
and the second phase of terminal 2 will add another 15 Million. The total
capacity of the airport will touch 55 Million when the construction is over.
The concession agreement has the option to increase the concession period from
30 to 60 years, which was included keeping in mind the Phase2&3 expansion.

 

BIAL – PPP Model Drawbacks

?  Concession Agreement had major drawbacks on
the following

Ø  Silent about local partner’s performance and
lock-in period, which allowed L to divest very early after the project
completion.

Ø  Silent about refinancing during the period,
which can prove critical as there are multiple expansions planned for the
airport in near future.

Ø  Silent on tariff fixation methodology for
Airport and User Development fees.

•      Bidding process took 33 months, equivalent to
the construction time taken.

•      Efficient land acquisition process required.
It took 73 months in BIAL and only after this step the financing was made
available.

•      Cost plus model – Not efficient as there is no
incentive/penalty for time bound completion.

•      No timeline was provided in the agreement and
the design and scope of work was not fixed before the construction began.

•      Foreign investors were not protected from
exchange risk, this cause early exit of foreign players resulting loss of
expertise.

x

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