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DIAL’s joint ventures may face audit

Probity audit will see if AAI’s returns were hit, if there was procedural lapse in giving contracts to joint venture firms
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First Published: Tue, Oct 23 2012. 11 38 PM IST
DIAL’s responded to CAG’s August report by saying that such JVs are allowed under operations management development agreement. Photo: Hindustan Times
DIAL’s responded to CAG’s August report by saying that such JVs are allowed under operations management development agreement. Photo: Hindustan Times
Updated: Tue, Oct 23 2012. 11 55 PM IST
New Delhi: India’s civil aviation ministry is considering an audit of the functioning of Delhi International Airport Pvt. Ltd (DIAL), according to two people familiar with the matter.
The development follows a report by the government’s auditor that highlighted how the company had short-changed the government.
The so-called “probity audit” will be conducted by an auditor appointed by the civil aviation ministry, and will review the functioning the 11 joint venture (JV) companies created by DIAL. The company, primarily owned by the Bangalore-based GMR Group, won the rights to develop and privatize the airport by offering the highest share of revenue the new airport would generate to state-owned Airports Authority of India (AAI).
A probity audit is one that focuses more on transparency, equity and fairness in the selection process of a private service provider in any public-private partnership (PPP) project.
“PPP projects have to be subjected to more audits because they are a public service being rendered by a private player,” said Amrit Pandurangi, a senior director at consulting firm Deloitte Touche Tohmatsu India Pvt. Ltd. who was speaking in general. “Are you going to be worried about your shareholders alone or the public which is paying for your profits?”
DIAL declined comment for the story.
The ministry’s move raises uncomfortable questions about the airport project, often held up as an example of successful privatization in infrastructure.
The 11 JVs were created by DIAL to manage all of its non-aeronautical revenue streams, including cargo, food and beverages, duty free and ground handling. The Comptroller and Auditor General of India (CAG) saw them as a means of diverting potential revenue that would otherwise have to be shared with AAI.
In its report, released in August, CAG said, “Such JVs are in violation of terms and conditions in OMDA (operations management development agreement).
At the time, DIAL’s response was to say that such JVs are allowed under OMDA.
AAI, which did not object to the creation of the JVs, has now refused to vouch for the way partners were chosen in its reply to the civil aviation ministry. AAI has said it does not sit on the boards of these 11 JVs, but only on the board of the holding company, DIAL.
“This (JVs) has been objected to conceptually by Aera, CAG, COPU, PAC. The ministry has taken a decision that a probity audit be done for this. This will see if the (AAI’s) returns are impacted and if there has been a procedural lapse in giving out these contracts to various bidders of joint venture companies,” said a person familiar with the matter who asked not to be identified.
Aera is the Airports Economic Regulatory Authority, the regulator for airports. Mint reported in a July 2011 story that Aera had warned the civil aviation ministry that the JVs formed by DIAL would result in a loss of revenue for AAI.
COPU is the committee of public undertakings, a parliamentary committee, that has sought details on the JVs in the wake of the report by the government auditor.
PAC is the parliamentary accounts committee, the parliamentary body that reviews CAG’s findings.
The modernization of Delhi airport cost $3 billion, double the original estimate.
After AAI sent in its reply to the civil aviation ministry, the latter told PAC that it will appoint an independent auditor to study the impact of the joint ventures on the revenue share of the former and also whether these deals were struck on an “arm’s length” basis.
An arm’s length transaction is one in which the buyers and sellers act independently.
The office of Murli Manohar Joshi, the Bharatiya Janata Party leader who heads PAC, didn’t respond to calls seeking comment.
DIAL’s stake in the JVs ranges between 26% and 50%. The joint ventures are Delhi Duty Free Services Pvt. Ltd, Devyani Food Street Pvt. Ltd, Travel Food Services (Delhi T3) Pvt. Ltd, Delhi Select Service Hospitality Pvt. Ltd, TIM Delhi Airport Advertising Pvt. Ltd, Delhi Airport Parking Services Pvt. Ltd, Delhi Aviation Fuel Facility Pvt. Ltd, Celebi Delhi Cargo Terminal Management India Pvt. Ltd, Delhi Cargo Service Center India Pvt. Ltd, Wipro Airport IT Services Ltd and Delhi Aviation Services Pvt. Ltd.
All the JVs have to pay DIAL a share in revenue of 15-25%, Mint reported in its July 2011 story, citing an Aera analysis that had pointed out that this would reduce the government’s share in revenues—fixed at 46%.
Citing the advertising company as an example, Aera had said in its analysis that for every Rs.100 in revenue earned by the JV, DIAL would receive Rs.22 in revenue and dividend. As per the agreement, 46% of this would have to be shared with AAI, earning it Rs.10.12. Without the JV, AAI’s share would have been Rs.46—more than four times higher.
DIAL had earlier said it was not the job of airport operators to do everything on its own. AAI, too, it pointed out (and rightly so at that) gives out contracts to other parties to do so.
The person familiar with the matter and cited in the first instance said AAI does manage things such as car parking and cargo handling on its own instead of outsourcing them, and that it was no longer about what was allowed and what wasn’t after the CAG report.
Earlier this month, GMR offices were raided across the country by the income-tax department. Mint couldn’t ascertain whether the raids had anything to do with the controversy regarding the JVs.
A second person familiar with the matter regarding the JVs and also the raids said DIAL officials were questioned by tax officials about a lobbying firm that had also managed to secure some lucrative airport contracts. Mint couldn’t ascertain the identity of this firm. The second person, too, asked not to be identified.
In a reflection that the ministry is getting tough with the private airport operator, it has told DIAL to stop using part of the revenue earned from the passenger service fee—meant to go towards government-provided airport security—towards paying for private security guards it appoints, added the second person.
Aviation minister Ajit Singh has already issued a statement that the airport developers in Mumbai and Delhi should scrap the airport development fee (ADF) and bring their own equity by 1 January subject to the proposal being approved by the airport regulator. ADF was approved during former civil aviation minister Praful Patel’s tenure as a means to finance the projects, the costs of both of which exceeded initial estimates.
“This is reminding me of the power sector, where initially the projects were all weighed in favour of the promoters, but led to unsustainable tariff structures (like Dabhol),” said Rishikesha T. Krishnan, a professor of corporate strategy at the Indian Institute of Management, Bangalore. “Later the government started awarding projects to the companies that promised the lowest tariffs to consumers. Otherwise there is no incentive to keep costs under control.”
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First Published: Tue, Oct 23 2012. 11 38 PM IST