In an attempt to check expenditure overruns, the operator of Mumbai’s international airport has to now regularly update the civil aviation ministry on the cost of modernizing the facility instead of waiting for the project to be completed.

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The ministry has also asked Delhi International Airport Ltd (DIAL), run by a consortium headed by GMR Infrastructure Ltd, how the cost of modernizing the capital’s airport has more than doubled.

Cost pressure: Mial is modernizing Mumbai airport to handle an annual 40 million passengers by 2012. HT

The two airports were privatized four years ago. DIAL saw its project cost rise to Rs12,700 crore after the first phase of modernization was completed in March, from Rs5,900 crore estimated in 2006.

Mumbai International Airport Ltd (Mial), due to complete its first stage of modernization in 2012, has estimated project cost at Rs9,800 crore and the ministry is concerned that its cost may also shoot up.

“In the light of the DIAL costs, we wanted to put in some safeguards," said a ministry official who declined to be named. “Costs can’t suddenly increase, they happen over time, (and) they need to tell us as they happen."

Mial is a joint venture of GVK Power and Infrastructure Ltd, Bidvest Group and Airports Authority of India.

It is modernizing Mumbai’s international airport to handle an annual 40 million passengers by 2012 from 26 million currently.

Cost escalations directly impact passengers as the privatization contracts are built in a way that an airport operator is promised assured returns. The higher the project cost, the higher the charges users pay.

Passengers are paying Rs1,543 crore of the Mumbai airport’s modernisation cost by shelling out an airport development fee on fares since 2009. The airport charges Rs100 per departing domestic passenger and Rs600 per international passenger.

“The board (of Mial) discussed at length details of project cost incurred so far against approved budget and monitoring mechanism thereof," according to the minutes of the April board meeting reviewed by Mint. “It was decided that a report on budgeted project cost vis-à-vis actual should be prepared regularly, which should include budgeted and actual cost package-by-package awarded till date and total estimated cost of completion of the project."

This will help “to monitor the project cost and identify escalations, if any, at an early stage instead of knowing only at the completion of the project," it says.

A Mial spokesman said the airport operator doesn’t expect another cost escalation and the figure of 9,800 crore is final. He said Mial was “trying to ensure all processes are geared to target that."

The ministry official quoted above said it had asked Dial to explain “when exactly did the cost for Delhi airport upgrade increased and who approved the costs."

The Airports Economic Regulatory Authority (AERA) is auditing the project cost, after which it will take a decision on a hike in airport charges as the new airport gets ready to open its swanky new Terminal 3.

“As the issue is pending before AERA, it may not be appropriate to comment at this stage," a Dial spokesman said.

Washington-based lawyer Elliot J. Feldman, who works with legal services firm Baker and Hostetler Llp and has written extensively on airports, says governments are mostly seen to be helpless while dealing with private contractors.

“Governments don’t actually build anything; they take bids and hire private contractors. The more the private contractor does, the more the government must depend on them, and the more the contractor can find reasons why the price should go up," he wrote in an emailed reply. “It may always seem unfair, and it is rarely without corruption, but it is also in the nature of the process and inescapable."