New Delhi: In a departure from the practice of leasing out duty-free shopping space to a third party, Delhi International Airport Ltd, or DIAL, plans to award retail concessions based on a revenue-sharing model, with the winning bidder required to form a joint venture with the airport operator, three people close to the development said.
The plan by DIAL, which runs the airport in the national capital, would dilute the revenue it has pledged to the exchequer as part of a May 2006 privatization agreement, an aviation equity analyst insisted, although it is not clear that the proposal violates the 2006 pact.
Test case? A file photo of Delhi airport’s new terminal being built by Delhi International Airport Ltd. The airport’s Terminal 3 is designed to have around 20,000 sq. m of retailing space and is expected to be completed before the Commonwealth Games in 2010. Sanjeev Verma / Hindustan Times
A senior official of the Airports Authority of India, or AAI, India’s airports regulator, said the government will investigate the plan if it is seen as a way of skirting DIAL’s obligations under the agreement.
The analyst and the AAI official, as also four other people interviewed for this story, didn’t want to be identified.
A senior DIAL executive said the duty-free operator will be chosen on the basis of the highest revenue-share percentage it is willing to offer, and will hold a 51% stake in the joint venture. DIAL will own the rest. The partnership will be formed for 10 years and may be extended for five more years after that.
This executive did not want to be identified because he is not authorized to speak officially for DIAL. A spokesman for the airport operator declined to comment on the proposal.
Two senior executives of a global duty-free operator, one of whom attended a meeting on 2 April to discuss the proposal, confirmed the plan.
Also See Duty in Doubt (PDF)
“In this model, some of the risks are shared,” the DIAL executive said. “If things are good, we all benefit, and if things are bad, we all take a bit of pain.”
DIAL’s proposal to form a duty-free joint venture, first reported in March in Moodiereport.com, a London-based industry website, comes in the face of a decline in air passenger traffic, with global economies battling recession and Indian weathering a slowdown.
DIAL won 30-year rights in 2006 to run New Delhi’s Indira Gandhi International Airport (IGIA) by pledging around 46% of its revenue from the airport to the government.
DIAL is a consortium led by GMR Infrastructure Ltd, which holds a 50.1% stake in the venture. The other partners are Frankfurt airport operator Fraport AG, a unit of Malaysian Airports Holding Bhd, private equity firm India Development Fund (IDF), and AAI. While Fraport and Malaysian Airports’ unit hold 10% each, IDF owns 3.9%, and the rest is controlled by AAI.
DIAL’s proposal could raise concern in the government. A previous attempt by the firm to set up a hotel and a cargo venture on similar lines had provoked protests from AAI.
In 2007, DIAL decided to form subsidiaries for the commercial development of 45 acres of land around the New Delhi airport. The company had then floated two units— DIAL Cargo Pvt. Ltd to tap the cargo potential and Delhi Aerotropolis Pvt. Ltd for developing a hotel—and had initiated plans to form a third subsidiary for the duty-free business.
Senior officials of the civil aviation ministry had then worried that such a structure could potentially dilute the share of revenues DIAL had pledged to AAI.
Opposition from parts of the government led to a delay of about two years before the land parcels were given out to hotel developers last month under a revised financial formula.
The senior AAI official termed the latest move a “financial gimmick”. When asked if the airports regulator would investigate this arrangement, he said, “We will.” He did not want to be named because he was not certain if DIAL’s plan would indeed affect the government’s share of revenues from the airport.
The official said that while DIAL has been permitted to form units, it has to meet certain criteria before getting into such arrangements. “Where there is funnelling out of revenue, that (forming a subsidiary) is not (permitted).”
The equity analyst said the plan by DIAL to own 49% of the proposed duty-free venture at the New Delhi airport would certainly have an impact on the revenue percentage a bidder would want to share with DIAL. “If DIAL owns half (49%) of the venture, the retail operator will get just half in returns (from the venture) and so will bid the revenue-sharing percentage much lower,” he said.
An aviation expert from New Delhi said DIAL’s new move could also lead to lower fiduciary control over the duty-free shopping business.
“In OMDA (operations management development agreement), there is a defined formula of revenue share. If you create subsidiaries, they start working independently and AAI will not have supervisory role over them,” he said, asking not to be identified given the sensitivity of the matter. “This is what was examined by the attorney general last year and we will have to see how this pans out (this time).”
Duty-free shopping businesses elsewhere at international airports in Mumbai and Bangalore have also been mired in controversies involving the bidding process and business potential. The two airports awarded retail concessions on a straight lease, based on a formula that hinged on highest rentals offered.
In 2007, Mumbai International Airport Ltd, or Mial, scrapped the contract given to a joint venture of Spain’s Aldeasa and state-owned India Tourism Development Corp., or ITDC, after the winner asked for a renegotiation of the contract fee. Mial later awarded the contract to Hong Kong-based DFS Group.
Late last year, the Karnataka high court quashed the award of a concession by Bangalore International Airport Ltd to a joint venture between Zurich-based Nuance Group and India’s Shoppers Stop Ltd after Dubai-based duty-free operator Flemingo alleged that it had been wrongly excluded from the bidding process.
The Supreme Court has temporarily stayed the Karnataka high court ruling, allowing Nuance-Shoppers Stop to continue even as the case is being heard in the country’s top court.
“The Indian (airport retailing) market is in a bit of mess… and things have not worked as we had expected,” said the senior DIAL executive cited earlier. DIAL’s new move, he added, is designed to “encourage the better players to come on board”. “...you are basically reducing the risk for them in a volatile market,” he said.
Terminal 3, or T3, at the IGIA is designed to have around 20,000 sq. m of retailing space, equivalent to the size of around three football fields. It is expected to be completed before New Delhi hosts the Commonwealth Games in October 2010.
DIAL has sought bids from global duty-free operators and the final date of submitting the bids is 5 May, the DIAL executive said.
The T3 terminal is seen by analysts as a test case for the duty-free shopping business in India. About a quarter of the international travellers out of India use the Capital’s airport and the T3 terminal is designed to handle 34 million passengers a year.