Privatization of Airports: An Indian Case Study and Institutions and Instruments: PPP Framework

Rekha Jain (rekha@iimahd.ernet.in) G Raghuram (graghu@iimahd.ernet.in) Centre for Infrastructure Policy and Regulation, Indian Institute of Management, Ahmedabad, India

India: The Infrastructure Vision, SIBF, November 21, 2007

Major Airports in India

Indian Airports - 449 airports/airstrips in the country (126 managed by Airport Authority of India (AAI) -16 international -88 domestic operational

The case study was jointly done with Prof G Raghuram (graghu@iimahd.ernet.in) and Rachna Gangwar, IIMA
India: The Infrastructure Vision, SIBF, November 21, 2007

Privatization: Earlier Non-AAI Airports

Hyderabad - Government of Andhra Pradesh (13%) - AAI (13%) - GMR Group (63%) - Malaysia Airports Holdings Berhad (11%) Cochin - Government of Kerala (35%) - Investor Directors and Relatives (37%) - Public and NRIs (14%) - Central PSU (AI, BPCL) (7%) - Commercial Banks (6%) - Facility Providers (AI, BPCL, SBT) (1%) Bangalore - Karnataka State Investment and Industrial Development Corporation (13%) - AAI (13%) - Siemens Projects (40%) - Larsen & Toubro (17%) - Unique Zurich Airport (17%)

India: The Infrastructure Vision, SIBF, November 21, 2007

Airport Traffic in India

2004-05 200304 200203 2001-02

2004-05 to 200304

200304 to 200203

2002-03 to 2001-02

All Airports Aircrafts movement (000) Passenger movement (mn) Cargo movement (000 tons)
730 59.5 1290 639 48.7 1068 560 43.7 979 510 40 854 14.2 22.2 20.8

% Change 14.1 11.4 9.1 9.8 9.3 14.6

Delhi Airport
Aircrafts movement (000) Passenger movement (mn) Cargo movement (000 tons)
122 12.8 344 106 10.2 296 93 8.8 276 86 8.2 233 15.1 25.5 16.2 14.0 15.9 7.2 8.1 7.3 18.5

Mumbai Airport Aircrafts movement (000) Passenger movement (mn)

153 15.7 137 12.8 126 11.7 115 11 11.7 22.7 23.6 8.7 9.4 5.8 9.6 6.4 11.6

India: The Infrastructure Vision, SIBF, November 21, 2007 403 326 308 276 Cargo movement (000 tons)

Scope
Projections (2025) Delhi Mumbai

Capital Expenditure (Mandatory)

2005-2010 Delhi airport 28

Passenger (mn)
Cargo (mn tons) Aircrafts (000)

46
1.5 420

50
1.4 525

Mumbai airport
2005-2024 Delhi airport

26

Share of Delhi and Mumbai Airports (2003-04)

Passenger traffic Cargo traffic Aircraft movements Revenues 47 58 38 33

79 59

Mumbai airport

India: The Infrastructure Vision, SIBF, November 21, 2007

Transaction Agreement: Key Points (1/2)

30-year concessions agreement with a further 30 year option A mandatory Capital Expenditure program (key projects) to be completed by March 2010

Massive liquidated damages for non-compliance

Objective and subjective service standards Aeronautical charges currently as per AAI rates. In future, an independent regulator (AERA) to decide
India: The Infrastructure Vision, SIBF, November 21, 2007

Transaction Agreement: Key Points (2/2)

Limiting the use of land for non-Aero purposes to 5%

Minimum non aeronautical revenue 40%

Retention of all staff initially and then of a significant number even after 3-years ATC would still be under the control of AAI/DGCA First right of refusal, if within 10% of best bid for a second airport within 150 km
India: The Infrastructure Vision, SIBF, November 21, 2007

Pre Bid Events

Bid Submission (September 14, 2005)

Bidders for Delhi airport

1. 2. 3. 4. 5. Reliance-ASA GMR-Fraport DS Construction-Munich Sterlite-Macquarie-ADP Essel-TAV

Bidders for Mumbai airport

1. 2. 3. 4. 5. 6. Reliance-ASA GMR-Fraport DS Construction-Munich Sterlite-Macquarie-ADP Essel-TAV GVK-ACSA

All bidders
India: The Infrastructure Vision, SIBF, November 21, 2007

Post Bid Events (September 2005 January 2006)

September 14, 2005 September 19, 2005 October 05, 2005 November 21, 2005 December 6, 9, 12, 13, 14, 16, 2005 Submission of bids IMG met: constitution of EC , opening of bids on 22.09.05, setting up of GRC MoCA met: constitution of GRC EC met: submission of report IMG met: asked EC to strictly adhere to the RFP documents and award marks again

Until January 17, 2006

Series of meeting by various groups: Setting up of Group of Eminent Technical Experts, Submission of final report by GETE

India: The Infrastructure Vision, SIBF, November 21, 2007

Issues by GETE for Rescoring

Weightages were assigned to sub-factors equally. (The EC had assigned the weightages on a subjective basis).

Since the non-OECD experience of ASA was only in airport development and not in operations, giving high marks to this was not in conformity with the RFP. (The EC had given 75% marks). The marks for the current non-aeronautical revenue share of the bidders were rescaled to begin at 50% (from 75%) for the required 40% share. The marks for the proposed three year staff absorption share were rescaled to begin at 0% (from 50%) for the minimum 40% share.

India: The Infrastructure Vision, SIBF, November 21, 2007

EC and GETE Scoring Bidder

Management capability, commitment and value add Old New Development capability, commitment and value add Old New GETE

Delhi Airport
Reliance-ASA GMR-Fraport 80.2 84.9 72.7 57.0 39.2 80.9 84.7 73.1 57.0 37.6 81.0 80.1 69.9 61.9 40.3 81.0 80.1 70.5 61.9 41.4 74.8 81.7 73.3 53.5 40.4

DS Construction-Munich
Sterlite-Macquarie-ADP Essel-TAV Reliance-ASA GMR-Fraport DS Construction-Munich Sterlite-Macquarie-ADP Essel-TAV GVK-ACSA

Mumbai Airport
80.4 84.9 72.7 57.0 37.1 75.8 81.0 84.7 73.1 57.0 35.5 76.0 80.2 92.7 54.1 55.1 28.3 59.3 80.2 92.7 54.7 65.1 29.4 59.3 74.8 81.7 73.3 53.5 38.3 73.0

India: The Infrastructure Vision, SIBF, November 21, 2007

EGoMs Framework (January 24th, 2006)

GMR-Fraport is the only technically qualified bidder for both the airports Financial bids of the top four technical bidders will be opened GMR-Fraport is given the choice of selecting the airport subject to matching the highest financial bid since they are the only technically qualified bidder The other airport (not chosen by GMR-Fraport) will be awarded to the highest financial bidder amongst three bidders. Government has declared technical cut-off marks of 50% for this airport
India: The Infrastructure Vision, SIBF, November 21, 2007

Financial Bids (January 31, 2006)

S No

Name of the Bidder

Management Capability

Pre GETE

Post GETE

Development Capability

Financial Bid

Delhi Airport
1
2 3 4 5

Reliance-ASA
GMR-Fraport DS Construction-Munich Sterlite-Macquarie-ADP Essel-TAV

80.9
84.7 73.1 57.0 37.6

74.8
81.7 73.3 53.5 40.4

81.0
80.1 70.5 61.9 41.4

45.99
43.64 40.15 37.04
Bid not opened

Mumbai Airport
1
2 3 4 5 6

Reliance-ASA
GMR-Fraport DS Construction-Munich Sterlite-Macquarie-ADP Essel-TAV GVK-ACSA

81.0
84.7 73.1 57.0 35.5 76.0

74.8
81.7 73.3 53.5 38.3 73.0

80.2
92.7 54.7 65.1 29.4 59.3

21.33
33.03 28.12
Bid not opened Bid not opened

38.70

India: The Infrastructure Vision, SIBF, November 21, 2007

Subsequent Events
After GMR-Fraport chose Delhi airport and matched the highest bid of Reliance-ASA, EGoM awarded a) Delhi airport to GMR-Fraport b) Mumbai airport to GVK-ACSA February 2, 2006 :- Reliance filed a writ petition under Article 226 of the Constitution in the High Court of Delhi April 21, 2006 :- A division bench of the High Court dismissed the writ petition on the primary ground that the EGoM had absolute discretion in the matter of choosing the modalities April 24, 2006 :- The petitioner appealed to the Supreme Court November 07, 2006 :- The Supreme Court also dismissed the petition
India: The Infrastructure Vision, SIBF, November 21, 2007

Lessons Learned
1. A lot of thought should be given to the RFP including

Bid structure Parameters (eg integration between different terminals, other modes) Weightages and Scoring Obligations of bidders during the bid process, Transparency, identifying and bringing to notice deficiencies in the bid document during pre bid meetings Implications for those who had not bid Constitution of EC and other Committees Contingency plan: if none or one had qualified India: The Infrastructure Vision, SIBF, November 21, 2007

Post Bid Issues

DIAL vs MoCA on Architecture Subsidiaries for Commercial Development Implications for Revenue Share Cargo Free Time Reduced from 5 Days to 3 Days Implications on Service Levels and Tariffs MIAL Encroachments, Responsibility? New Airports NOIDA, New Mumbai

Other Issues
Positive Mood of Privatization of Infrastructure Central Government ; Commercial Capital and National Capital Tired/Worn out: Further Modernisation not by Privatization Centre vs State
India: The Infrastructure Vision, SIBF, November 21, 2007

35 Non-Metro Airports
Development and modernization will be undertaken by AAI Funding through internal resources Estimated cost: Rs 47 bn 10 airports chosen under phase 1 (2006-08) 15 airports under phase 2

Other Two Metro Airports Decision on Chennai and Kolkata

Modernization will be undertaken by AAI Funding through internal resources Estimated modernization cost: Chennai airport: Rs 20 bn Kolkata airport: Rs 15 bn

India: The Infrastructure Vision, SIBF, November 21, 2007

PPP Framework: Institutions and Instruments

India: The Infrastructure Vision, SIBF, November 21, 2007

Investment Scenario
GCFI in infrastructure as percentage of GDP 4.6 % during the 10th
tenth plan, expected to go up to 8%. Combating poverty through Infrastructure led growth If growth in GDP to be sustained GCFI in infrastructure must keep pace. Total estimated investment of US $ 400-450 billion in infrastructure up to 2012 Infrastructure requires private capital (shortage of funding in the government), not the deficiencies in the public sector (operations, maintenance, citizen orientation, pro-poor (?), environment Increasing recognition of the role of the government in ensuring project viability, providing the appropriate regulatory frameworks for competition and choice, facilitating the financial closure (capital market reform, institutional infrastructure) Increased role for commercialization of projects India: The Infrastructure Vision, SIBF, November 21, 2007
[Source: Arvind Mayaram, Department of Economic Affairs, Ministry of Finance]

Sector-wise Projections of Investments

S No Sectors 11th Plan (2007-12) (Projected)
Rs Billion 1 2 3 4 5 6 7 8 9 10 US $ Billion Share (%)

10th Plan (2002-07) (Est)

Rs Billion Share (%)

Power Roads Railways Telecommunication Irrigation Water Supply & Sanitation Ports Airports Gas Storage Total
Share of Private Investment

5650 3330 2550 1820 1720 1060 740 350 210 150 17,580

141 83 64 46 43 27 19 9 5 4 440

32.1 18.9 14.5 10.4 9.8 6.0 4.2 2.0 1.2 0.9 100.0
33%

2890 1300 830 920 1320 640 30 40 90 90 8160

35.5 16.0 10.2 11.3 16.2 7.9 0.4 0.5 1.1 1.1 100.0
16%

[Source: IIFCL, 2007]

India: The Infrastructure Vision, SIBF, November 21, 2007

Revenue Potential
India scores because of its large untapped markets
Example: India is a telecom success story despite low
Revenue per User- there is comfort in numbers

Average

Power: High revenue recovery recorded in recent times with

100% recovery in many cases High economic growth rate has translated into a larger disposable income and larger spending capacity Willingness to pay exists provided delivery is of good quality

[Source: Arvind Mayaram, Department of Economic Affairs, Ministry of Finance]

India: The Infrastructure Vision, SIBF, November 21, 2007

Investment Opportunities in India (Indicative)

Planned Projects
Roads ($ 48 bn.): BOT preferred mode; NHDP40,000 kms Airports ($ 9 bn.): 4 Metro, 35 Non-metro airports

Demand Potential

Airports: Passenger and cargo traffic growth at over 20% annually

Ports ($ 12 bn.): All new berths Ports: 877 million tons of traffic by through BOT 2011-2012 Railways ($ 12 bn): Container Railways: Freight traffic is growing at trains, Stations etc close to 10% and passenger traffic at close to 8% 15.5% growth in containerized traffic Power Generation ($ 130 bn): Power: 13% peaking and 8% average Transmission, Distribution shortage of power annually
India: The Infrastructure Vision, SIBF, November 21, 2007

FDI Caps
Roads, highways, vehicular bridges, toll roads, vehicular tunnels, ports and harbours: construction and maintenance: FDI upto 100% under automatic route Ports: supporting services to water transport, such as operation and maintenance of piers, loading and discharging of vehicles No approval required for foreign equity up to 51% in projects Ports: construction and maintenance of ports and harbours (Up to Rs 15 billion), (FIPB subsequently): Automatic approval for foreign equity upto 100%

Civil Aviation: Airport infrastructure Automatic approval for foreign equity participation in upto100 percent.
[Source: http://www.iic.nic.in/iic3_a.htm]

India: The Infrastructure Vision, SIBF, November 21, 2007

Creating a Pipeline
Building capacity within institutions to handle large PPP

program, including project preparation Preparation of project preparation manuals, handbooks on procedures, toolkits, standard bidding and contract documents etc. Expert support to central ministries/state governments for project preparation India Infrastructure Project Development fund Independent initiatives by IDFC, IL&FS

[Source: Arvind Mayaram, Department of Economic Affairs, Ministry of Finance]

India: The Infrastructure Vision, SIBF, November 21, 2007

Optimal Risk Allocation

Demand Risk is partly mitigated through provisions for change
in duration of concession both upside and downside Competition from other suppliers limited through a variety of non-compete clauses Escalation in input costs mitigated through indexation of user charges to inflation Construction and performance risk to be borne by the investor Political risk and force majeure risks borne by the Government

[Source: Arvind Mayaram, Department of Economic Affairs, Ministry of Finance]

India: The Infrastructure Vision, SIBF, November 21, 2007

Optimal Risk Allocation

Termination payments and terms protect against
arbitrary termination by Government Land acquisition risk borne by government Risk relating to permits and approvals especially environment permission borne by government Provision of other related infrastructure an obligation of the authority

[Source: Arvind Mayaram, Department of Economic Affairs, Ministry of Finance]

India: The Infrastructure Vision, SIBF, November 21, 2007

Representative Steps Taken By Government To Ease Financing Constraints Viability Gap Funding (VGF) India Infrastructure Finance Company Limited (IIFCL)

India Infrastructure Initiative ($ 5 bn. Fund)

Encouraging development of new instruments such as grading of PPP projects/SPV rating by the major credit rating companies
India: The Infrastructure Vision, SIBF, November 21, 2007

IIFCL: Framework for PPP

Addresses the need for providing long-term debt for financing infrastructure projects that typically involve long gestation periods. Debt finance for such projects should be of a sufficient tenure that enables cost recovery across the project life. Indian markets, however, are deficient in long-term debt instruments. Most of the available debt is of seven to twelve years maturity. Assistance through long term debt; either by way of refinance to banks and financial institutions or by direct lending to project companies. It will lend up to 20% of the capital costs of a project. IIFCL will raise funds from both domestic as well as external markets on the strength of government guarantees, which will be extended as necessary.
India: The Infrastructure Vision, SIBF, November 21, 2007

IIFCL: Framework for PPP

The IIFCL shall finance only commercially viable projects. Viable projects may also include those projects that will become viable after receiving viability gap funding under a government scheme. The total lending for such private projects shall not exceed 20% of the lending program of the SPV in any accounting year. The eligibility for direct lending and or/ raising the limit of 20% will be reviewed at the end of one year having regard to the progress made in funding public sector and PPP infrastructure projects.
India: The Infrastructure Vision, SIBF, November 21, 2007

IDFC: Facilitating PPP

IDFC was set up on the recommendations of the Expert Group on Commercialization of Infrastructure Projects as a specified financial intermediary for infrastructure. IDFCs policy advisory mandate is to provide leadership in rationalizing policy and regulatory frameworks, and removing impediments to the movement of capital to infrastructure sectors. Has helped to rationalize policy and regulatory frameworks across infrastructure sectors Encouraged an increased flow of private capital, including foreign capital, into infrastructure investment. Domain knowledge, particularly with regard to project structuring, appraisal and risk evaluation.

India: The Infrastructure Vision, SIBF, November 21, 2007

IDFC: Facilitating PPP Providing financing through a variety of products, including senior debt as well as mezzanine and private equity investments A key role in introducing innovative financial products and structures which allow a broader crosssection of lenders and investors to participate in infrastructure financing. Relationship with the government gives access to decision makers in government entities and multilateral development agencies
India: The Infrastructure Vision, SIBF, November 21, 2007

IDFC: Facilitating PPP (Examples)

Representative Portfolio
Financing new construction and maintenance of roads, gas terminals, gas gods, natural gas distribution in Gujarat, electricity generation, transmission and distribution, oil and gas industry. Advisory role: Structuring BOT, Annuity projects and securitization of toll receivable. Equity investments in the listed equity of leading companies in Oil and Natural Gas Corporation, Jet Airways India (Pvt) Ltd. Important role in making ports a more attractive investment for private investors through an optimal allocation of risk by proposing a move from guaranteed royalty payments to revenue sharing. The lead lender for the new international airport, Hyderabad.

India: The Infrastructure Vision, SIBF, November 21, 2007

IL&FS: Facilitating PPP

IL&FS is a prominent institution that harnesses the power of PPP to develop and finance infrastructure projects across a variety of sectors. Success in turning infrastructure capacity creation into a commercially viable proposition. Projects are developed in conjunction with governments, financing agencies, private sector partners and communities. Providing projects with financial investment, managerial expertise and inputs that ensure efficiency in service delivery. Services include investment banking, project financing, project development, management and implementation, asset management, merchant banking, corporate advisory services and back office services. Creating value by developing contractual frameworks and using innovative design solutions and financial instruments.
India: The Infrastructure Vision, SIBF, November 21, 2007

State Level Initiatives

Legal Framework to facilitate PPP: Gujarat Infrastructure Development Act (BOT Law) Contractual framework Creation of Gujarat Infrastructure Development Board under the Chair, Chief Minister Inputs from functional departments Private initiative in formulating projects: Swiss Challenge Direct Development
India: The Infrastructure Vision, SIBF, November 21, 2007

References
1. 2. 3. AAI, 2004. Restructuring and Modernization of Delhi and Mumbai Airports Invitation to Register an Expression of Interest (ITREOI). Airports Authority of India, February 17, 2004. AAI, 2005a. Information Memorandum: Indira Gandhi International Airport. Airports Authority of India, April 01, 2005. AAI, 2005b. Restructuring and Modernization of Delhi Airport Request for Proposal (RFP). Airports Authority of India, April 01, 2005. GMR, 2006. Communication from GMR. Indian Infrastructure, 2006. Key Statistics. Volume No 9 Issue No 2, September 2006. Jain, Raghuram and Gangwar, 2007. Airport Privatization: Bidding Process for Delhi and Mumbai (A, B, C, D, and E). Indian Institute of Management, Ahmedabad. IIMA/PSG0102. MoCA, Various Years. Annual Report. Ministry of Civil Aviation, Government of India. SC, 2006. The Supreme Court Judgment: Reliance Airport Developers Pvt. Ltd vs Airports Authority of India and Others. 2006 INDLAW SC 913. http://www.indlaw.com. Thakurta and Majumdar, 2005. How the Airport Bids were Evaluated. December 30, 2005. http://inhome.rediff.com/money/2005/dec/30paran.htm. http://www.hinduonnet.com/fline/fl2303/stories/20060224006913000.htm. http://www.ipsnews.net/news.asp?idnews=31659.

4. 5. 6.
7. 8. 9. 10. 11.

India: The Infrastructure Vision, SIBF, November 21, 2007

Thank You
India: The Infrastructure Vision, SIBF, November 21, 2007

Pre Bid Events (May2004 September 2005)

Original Bidders
1. Bharti-Changi: pulled out citing stiff performance conditions in the transaction documents 2. L&T-Piramal-Hochtief: pulled out citing stiff performance conditions in the transaction documents 3. Sterlite-Macquarie-ADP 4. GMR-FraportReliance-ASA 5. GVK-ACSA 6. Reliance-ASA 7. DS Construction-Munich 8. DLF-MANSB : dissolved itself, MANSB was invited to join the GMR-Fraport consortium 9. Essel-TAV 10. Videocon-Methven Corporation: Was rejected because the group had involved an airport consultant rather than an airport operator
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Post Bid Events(September 2005 January 2006)

December 21, 2005
December 24, 2005

EGoM metconstitution of Committee of Secretaries (CoS)

CoS met constitution of Group of Eminent Technical Experts (GETE) for An overall validation of the evaluation process, including calibration of the qualifying cut-off and sensitivity analysis. The sensitivity analysis would cover the impact of inter- se weightages of sub-criteria as well as scoring Addressing the issues raised by the members of IMG about the evaluation process An overall technical assessment of transparency and fairness of the evaluation process, including steps required, if any, to achieve a transparent and fair outcome Providing suggestions for improving the selection procedure for joint venture partners in future

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India: The Infrastructure Vision, SIBF, November 21, 2007

Post Bid Events (September 2005 January 2006)

January 07, 2006 GETE submitted the first report

Technical flaws in the technical evaluation process Assignment of marks to sub-factors was not done A liberal attitude was shown by the EC to the Reliance-ASA consortium GETE reassessed the marks On reassessment, Reliance-ASA did not qualify, GMR still scored above 80%
CoS met

January 09, 2006

endorsement of GETE recommendations

January 11, 2006 EGoM met

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India: The Infrastructure Vision, SIBF, November 21, 2007