Airports facelift cost doubles

Airports facelift cost doubles
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First Published: Thu, Sep 24 2009. 11 48 PM IST

Bearing the brunt: A file photo of passengers at IGI domestic terminal, Delhi. Analysts say the privatization agreement is built in a way that most of the costs will be squeezed from passengers who ha
Bearing the brunt: A file photo of passengers at IGI domestic terminal, Delhi. Analysts say the privatization agreement is built in a way that most of the costs will be squeezed from passengers who ha
Updated: Thu, Sep 24 2009. 11 48 PM IST
New Delhi: The modernization cost of the airports at Delhi and Mumbai is set to almost double to nearly Rs20,000 crore, with passengers to continue to foot the bill for the steep escalation in the privatization projects kicked off in 2006.
The increased costs are disclosed in letters written by the developers to the Airports Economic Regulatory Authority of India (Aera) and reviewed by Mint. The Delhi airport upgrade is estimated to cost about Rs10,500 crore and could escalate further, while the Mumbai airport upgrade has been put at Rs9,802 crore.
Bearing the brunt: A file photo of passengers at IGI domestic terminal, Delhi. Analysts say the privatization agreement is built in a way that most of the costs will be squeezed from passengers who have shelled out at least 16% of the project cost directly by way of a levy on tickets. Ramesh Pathania / Mint
In October 2006, six months after the projects were awarded, the cost estimated for the first phase by Delhi International Airport Pvt. Ltd (DIAL) was Rs5,900 crore and Rs5,826 crore by Mumbai Airport International Pvt. Ltd (Mial), according to the aviation ministry.
“It is excessive,” said Robey Lal, a former board member of the Airports Authority of India (AAI) that owns and runs most of the country’s commercial airports, adding that the increased costs will eventually be passed on to passengers. “When you borrow money, the bank collects money back from the developer. Where does the developer cover it from? (The) passenger is the ultimate customer.”
The ministry’s original estimates had been far more conservative at the time the contracts were awarded in 2006.
“It has been estimated on preliminary basis that a capital investment to the extent of Rs7,961 crore and Rs6,131 crore will be required for Delhi and Mumbai airports, respectively, over a period of 20 years in four stages of five years each, ” it said.
DIAL, set up by a GMR Infrastructure Ltd-led consortium, has asked for another extension from Aera for submitting its final costing.
The deadline for this had been mandated as August by the civil aviation ministry in February when it allowed the airport operator to charge a development fee (DF) of Rs1,300 per departing international passenger and Rs200 per departing domestic passenger until 2012, adding up to revenue of Rs1,827 crore in total. It will arrive at a final figure only by February next year, close to the end of the project’s timeline.
“Indications are that the final project cost may be of the order of about Rs10,500 crore,” the company said in a February letter that it sent to the aviation ministry.
That figure may also be altered. “The final project cost can undergo change over the next few months. The T3 Project (passenger terminal) is slated for completion by 31 March with the commencement of trial runs thereafter. We are therefore expecting to complete the final assessment of the project cost by February,” according to the 31 August letter sent to Aera.
“Considering the stiff timelines of completion of the project, we had to necessarily go for parallel design and construction methodology for completion of the project, with resulting change in the project cost estimates as appraised by the lenders,” DIAL said in the letter. Till then, DIAL said, it should be allowed to “charge DF in line with the approval” given on 9 February last year.
This would mean that there would be no change in DF being paid by passengers, which is what had been promised at the time the levy was cleared. Passengers may not have a choice.
Aera, which was set up this year after a long delay and only received its mandate to set airport tariffs this month, said it was looking into the demand.
“We are looking into the proposal and will take a decision after consulting with all the interested parties,” Aera’s chairman Yashwant Bhave said, referring to stakeholders such as airlines. Deciding on the deadline for the DIAL review and, therefore, DF will be the agency’s first big decision after becoming functional. A DIAL spokesman confirmed that the company had sought an extension. Aera is expected to consider all relevant factors while finalizing the tariff, Bhave said.
Mial, led by GVK Power and Infrastructure Ltd, was allowed to charge Rs600 and Rs100 from international and domestic passengers, respectively, from 1 April until 2013, contributing a total Rs1,543 crore.
No caps were applied to the final cost when the airports were privatized in 2006, as Mint reported earlier. The privatization agreement is built in a way, say analysts, that most of the costs will eventually be squeezed out from passengers who have already shelled out at least 16% of the project cost directly by way of DF on tickets. Mial said the Rs9,802 crore figure is final.
“The cost has increased because there has been a change in the master plan (since the first submitted in 2006). In the earlier one we were using the footprint of the existing terminal...and we were increasing the capacity,” a Mial spokesman said. “In the new master plan, building a brand new integrated terminal from scratch is the main reason why there is an increase in cost.”
The final cost covers the completion of the terminal in 2012, he said. A part of the new terminal will be opened in 2010. By 2013, the airport will be able to handle 40 million passengers annually, up from about 26 million currently.
Unlike DIAL, which has got part of the funding—Rs864 crore for 29.26 acres of land— through real estate development, Mial is yet to raise funds from prime airport land. That process will start in the next fiscal year, Mial spokesman said.
A Mumbai-based analyst who tracks GMR said DIAL wanted to buy more time because it will help both revenue streams—from DF and land sales—to continue. If the pending land sale fetches more money, the DF component could be reduced. He asked not be named as he is not authorized to speak to the media.
“DF was contingent on meeting the shortfall in funding. Once they have got it, they want it to continue for the time it was initially proposed. Obviously, they need to work around for a favourable review and avoid it as long as possible,” he said
Another analyst said Aera needs to look beyond the capital costs incurred. “The airport charges are cost-plus, and you are a monopoly; this is probably one reason why they are not much worried about the cost,” said Tulsi R. Kesharwani, consultant with the International Civil Aviation Organization, and a retired AAI board member who has advised the government on airport privatization. “Aera should not only see the capital cost, but also whether all the investments made are justified or not. Otherwise, everything will be justified. It will go up more.”
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First Published: Thu, Sep 24 2009. 11 48 PM IST