DIAL’s joint deals to hit airport users

GMR Infrastructure Ltd leads the DIAL consortium, which has run the Indira Gandhi International Airport in Delhi since 2006. The company is required to share 46% of its revenue with AAI.

DIAL has set up 11 JVs for almost all of its non-aeronautical revenue streams, including cargo, food and beverages, duty-free, and ground handling.

“There are two implications. One, that this is completely innocent and GMR has no benefit out of this," said a person familiar with the matter, who asked not to be identified because of the sensitivity of the issue. “But two, the result of this innocent action is that you will damage AAI’s revenue and increase the burden on the user of the airport."

The company denies that this is the case.

“It is important to note that the concessioning by DIAL and joining as a JV partner was done in compliance with terms of the OMDA (operations, management development agreement)," the firm said in an emailed response, before adding that the airport’s total revenue had more than doubled in the five years since its privatization. “It is also relevant to note that the ability to concession out and participate in JVs was one of the factors for bidding for revenue share of 46%."

“There is thus no loss of revenue to AAI on account of JVs, which were concessioned out on competitive basis on terms most beneficial to DIAL (and hence to AAI too)," the company said. “DIAL has only joined as minority partner in the special purpose vehicle formed by the successful bidder."

DIAL’s stake in the JVs ranges from 26-50%. The JVs 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 Private Ltd.

All 11 JVs have to pay DIAL a share in revenue of 15-25%, said the same person. A DIAL spokesperson said the company started moving to this arrangement in 2010-11, but declined to disclose the details of the revenue-share agreements or the total revenue made by each of them.

In June, DIAL had submitted a proposal to the Airports Economic Regulatory Authority (Aera) listing the charges it wants to levy on airlines and passengers. This was based on Delhi airport’s final modernization cost of $3 billion, which is more than twice the amount projected in 2006. The Aera letter to the ministry comes just ahead of its taking a decision on tariffs.

According to Aera, tariffs will rise to compensate for reduced revenue to DIAL on account of the creation of the JVs.

Citing the advertising JV company as an example, Aera said in the letter reviewed by Mint that for every ₹ 100 in revenue earned by the JV, DIAL will get ₹ 22 in revenue and dividend.

As per the agreement, 46% of this would have to be shared with AAI, earning it ₹ 10.12. Without the JV, AAI’s share would have been ₹ 46—more than four times higher.

Normally Aera assigns a proportion of non-aero revenue, or income streams accruing from lines other than those related to aeronautical activities, to keep tariffs down. Under the current economic model, non-aero revenue is 30% for Delhi and Mumbai airports.

Citing the same example, Aera points out that in the JV system, the share of non-aero revenue would fall substantially, resulting in higher passenger and airline tariffs. In this scenario, the non-aero share works out to ₹ 6.61 for every ₹ 100 of revenue. Without the JV, this would work out to ₹ 30.

Aera’s approval for the tariffs, if granted, will mean that the structure involving JVs becomes a precedent for airports across India that have been or are being privatized.

The Comptroller and Auditor General of India, too, had recently questioned the formation of these JVs.

The aviation ministry disagrees with both the regulator and the auditor because it believes outsourcing of specialist activities is an international trend.

“You don’t expect them to sell tea on their own," said an aviation ministry official, who did not want to be named.

Interestingly, the Indian Institute of Management, Ahmedabad, in a November 2010 research paper on public-private partnership (PPP) projects in India had warned of revenue-share implications because of DIAL’s subsidiaries and said it was a “controversial issue".

“To develop the land and commercial activities towards the non-aeronautical business, the JV created subsidiaries. A significant implication of this would be that the total revenue of the subsidiary would not be treated as part of the JV’s revenue and only dividend paid by the subsidiary would become the revenue of AAI, thus reducing the revenue base for sharing. This has been seen as a controversial issue," Ajay Pandey, Sebastian Morris and G. Raghuram said in the November paper titled Structuring PPPs in Aviation Sector: Case of Delhi and Mumbai airport privatization.

A former top AAI official privy to the privatization agreement and its functioning said OMDA permits DIAL to have subsidiaries.

“But it also does not say you are allowed any activity that allows you a dilution of revenue share," he said, asking not to be identified.

He pointed out that in 2007, the operator had tried to lease out 45 acres of airport land through a JV, Delhi Aerotropolis Pvt. Ltd, by taking a higher deposit from the lessors and reducing the annual rent payable to DIAL. The reduced rent receipts would have meant that AAI’s share of revenue, too, would have fallen.

Then civil aviation secretary Ashok Chawla blocked the deal, Mint reported on 9 December 2007, and sought a legal opinion on these JVs from the law ministry.

Thereafter, the land was leased out directly by DIAL.

“As far as land is concerned, DIAL has directly sub-leased to the leading successful bidders and the entire licence fee is given to DIAL without involvement of any subsidiary," the company said in an email response.

The AAI official cited above said there should be government nominees on the boards of the JVs unlike now.

But the firm said: “As these 11 JVs are step-down JVs, these have adequate representation from DIAL through the participation of functional executives of DIAL in accordance with the provision of shareholder’s agreement of respective JVs."

tarun.s@livemint.com

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