Regulator review to nix DIAL gains?

Regulator review to nix DIAL gains?
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First Published: Fri, Aug 28 2009. 09 42 AM IST

Increasing expenditure: Development work under way at the Indira Gandhi International Airport, Delhi. Madhu Kapparath/Mint
Increasing expenditure: Development work under way at the Indira Gandhi International Airport, Delhi. Madhu Kapparath/Mint
Updated: Fri, Aug 28 2009. 09 42 AM IST
New Delhi: The government, by not creating sufficient institutional checks and balances in time, has left the project cost of rebuilding the Capital’s Indira Gandhi International Airport open-ended and also permitted private sector consortium Delhi International Airport Ltd (DIAL), which manages the airport, to partially pass on the increase in costs as higher user fees on airport facilities.
These details came to light after Mint requested, and was provided, the relevant information under the Right to Information (RTI) Act. There is no requirement for government approval of project costs, the government said.
In the three years since the contract was awarded, project costs of DIAL have increased by Rs2,975 crore. This is around 50% higher than the so-called “indicative” cost of Rs5,900 crore the government stated in 2006 and could rise even more after another review is completed in August. Part of the cost increase has been mitigated with the aviation ministry on 9 February approving an hike in the airport development fee which will give DIAL Rs1,827 crore from additional user charges. A public interest litigation challenging this was filed in the Delhi high court, the next hearing for which is scheduled for 18 August.
Cement and steel prices rose sharply in 2006 and 2007 and peaked in 2008, before beginning their southward journey. They are just beginning to firm up again. Construction costs are driven largely by the prices of these two commodities.
Increasing expenditure: Development work under way at the Indira Gandhi International Airport, Delhi. Madhu Kapparath/Mint
The situation has been exacerbated because the independent oversight of the contract is vested in the Airports Economic Regulatory Authority (Aera), which is yet to be fully operational. Worse still, the 30-year concession agreement signed between the government and DIAL did not specify a project cost at the time it was awarded.
In fact, Aera was scheduled to do its first review of the project this month, which could have shed some more light on the vexing issue. This is yet to happen, with the regulator’s chairman, Yashwant Bhave, taking charge on 1 August.
If Aera reverses the pass-through approved by the ministry in February, then the cost increase will have to be borne by DIAL. “If there was no approval of the final cost as you say, then they probably have taken a small risk of assuming that they will be able to convince Aera whenever it becomes operational. Because if Aera doesn’t approve, they won’t be able to get tariff increases or pass-through (the costs to users). They will be fairly certain that the risks can be managed. Otherwise, they wouldn’t have incurred the costs,” said Amrit Pandurangi, who heads transport and infrastructure practice for audit and consulting firm PricewaterhouseCoopers. “I think it is fair to assume that the regulator will not be partial only to the investor. That is an assumption and that is a fairly reasonable assumption to make,” he added.
The problem
“The project cost was not estimated at the time of signing OMDA (operations, management, development agreement), since it could be done only after the submission and approval of the master plan,” said DIAL spokesperson Arun Arora in an emailed response.
The development of the Delhi airport, which was handed over to a private consortium led by the Bangalore-based GMR Infrastructure Ltd, is governed by an OMDA which sets out the development road map over a 30-year time frame. The first phase is scheduled to be completed ahead of the Commonwealth Games in October next year.
Other consortium members include Frankfurt airport operator Fraport AG, a unit of Malaysia Airports Holding Bhd, the Airports Authority of India (AAI) as well as private equity firm India Development Fund.
Government officials are divided on the way the deal cost is structured, with some saying that not capping it or requiring an approval process could result in the practice of “gold-plating” where costs are inflated. However, AAI officials and those who helped structure the deal say that appropriate checks and balances had been built into the system in the form of necessary approvals from the airport regulator, whose job it is to set tariffs.
However, until Aera is ready to do this job, any increase in cost is voted on by the board of DIAL, which includes two representatives from AAI and one from the ministry of civil aviation. The total strength of the board is 15.
The ministry of civil aviation, in reponse to queries filed by Mint under the RTI Act, said that there was “no requirement of the approval of the project cost” by the government, but chose not to respond to queries seeking details on the cost escalation.
In an emailed response, a spokesperson for the aviation ministry said the costs are to be cleared by the board of the joint venture company (DIAL).
“Further, the final project cost is subject to review by Aera, before fixing the tariff.”
A former government official familiar with the process, who did not want to be identified, said the cost escalation was approved by the board of DIAL as early as 2007. The ministry did not respond to RTI requests for the minutes of the board meetings. DIAL echoed the ministry’s line and said project costs are cleared by its board but subject to review by Aera.
The impact
Any increase in the capital cost of the project will affect passengers as well as airlines, because, pending the setting up of Aera, tariffs are decided on a formula which uses costs as a base. The development fee approved by the ministry in February, for instance, is to be recovered from passengers. DIAL said the development fee is to cover a gap in financing for the airport.
Significantly, this may not be the last round of cost escalation for the project. An email communication from the aviation ministry states, “As per the lenders’ appraisal, the estimated project cost is reported to be Rs8,975 crore, which is likely to go up as DIAL has adopted open-book process (cost plus margin) to L&T (Larsen and Toubro Ltd), who are executing the project on a turnkey basis.”
“The project cost will be known by August 2009.”
AAI said costs were incurred after the specifications of the project were changed from catering to some 24 million passengers to around 35 million due to the torrid growth rate in air travel. An AAI board member who asked not to be identified conceded the cost has escalated for Delhi airport modernization because of various reasons.
“We haven’t done a minute scrutiny,” the official said. This person added that the increased costs of the project were “put up to the civil aviation ministry” for its perusal after Dial asked to be allowed to levy an additional charge to recover increased costs. This official cited the example of Kolkata airport, which AAI is developing and has seen costs escalate from Rs1,980 crore to Rs2,800 crore for a terminal with a capacity of handling 20 million passengers, owing largely to higher construction costs.
Robey Lal, former AAI board member and former country head for industry body International Air Transport Association, said an increase of 10-12% annually was understandable because of inflation or increase in scope of work, but a jump in excess of 20% was difficult to comprehend.
“There has to be a cap on what you are going to spend. How can they be off their business plan (by) 50-60% of their (estimated) cost? No government department can justify a 60% increase in cost in three years. A 10-12% increase, I can understand without a moment’s hesitation. It really shows poor planning of the whole project. You can build the whole of Hyderabad airport for Rs3,000 crore. In fact, much less than that,” he said.
With Bhave taking charge at Aera, attention will now shift to the regulator. “A review of these airports (Delhi and Mumbai) will certainly be made according to the procedures,” Bhave said. “We will keep the timelines (August-September) in view.”
Lal added that the cost increase reported could be the developer’s way of justifying increased tariff to the regulator beforehand. “It’s very possible that they are increasing because they have to justify the rates—the charges that they are going to levy on airlines and passengers. So, they are trying to get the increase in cost recorded before that. ”
rahul.c@livemint.com
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First Published: Fri, Aug 28 2009. 09 42 AM IST
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