Regulator pulls up Delhi airport for high cost of makeover

Regulator pulls up Delhi airport for high cost of makeover

New Delhi: Delhi airport’s $3 billion makeover has resulted in great acclaim for Terminal 3 as a world-class facility. But the newfangled modernity has come at a steep price, which may be paid for by travellers for several more years.

After an audit of the project, the regulator has criticized Delhi International Airport Pvt. Ltd (DIAL) for overshooting the budget to more than twice the initial estimate, not doing enough to keep a curb on surging costs, keeping the civil aviation ministry out of the loop and exceeding its mandate on the amount of work it was supposed to do.

DIAL, comprising a GMR Infrastructure Ltd-led consortium, completed the development of the airport in a record 37 months that ended March 2010. The airport was privatized by the government in 2006. The modernization cost shot up from Rs5,900 crore to Rs12,700 crore in the same period.

About one-fourth of the project cost is to be recouped through passengers by direct levies on airfare. DIAL has asked the regulator for about Rs3,500 crore in airport development fees.

Passengers are already paying Rs200 on domestic tickets and Rs1,300 on international flights as airport development charges, which would add to Rs1,800 crore by 1 March 2012.

DIAL has also asked for an additional Rs1,793 crore, of which the Airports Economic Regulatory Authority (Aera) has proposed to clear Rs994.5 crore so far. Aera made its observations on the technical and financial audit done by Engineers India Ltd (EIL) and consulting firm KPMG on the modernization.

The 179-page final audit report was made available this week on the Aera website.

“Important stakeholders such as the MoCA (ministry of civil aviation) and the AAI (Airports Authority of India) were not regularly updated on cost overrun," the report said.

The DIAL board, which included members of the ministry and AAI, got to know of the cost overrun only by the time the modernization was near-complete, “by way of the project cost report in March 2010". AAI has a 26% stake in DIAL.

Prior approval of the board was not taken for an increase in GFA (gross floor area) by nearly 84,000 sq. m from that finalized at the master plan stage.

The Aera report includes the audits by KPMG and EIL.

EIL said IGI’s Terminal 3 was on par with international standards. “However, the cost of the project could not be contained within their cost estimation prepared at the time of financial closure."

A reason for the escalated cost was that design was being carried out in parallel with the modernization and information was not available for this, EIL said.

The consulting firm also pointed out that estimation, negotiations and price reductions were done on a notional basis by DIAL.

“Due to the high risk involved in the project, the percentage of risk premium considered by the principal contractor and sub-contractor were also high, which were totally borne by the JVC (joint venture company, DIAL) resulting into further increase in project cost," EIL said.

KPMG said some of the risk mitigation “steps are not entirely compliant with international best practices and at no stage was the project cost capped and the risk of escalation shared with the engineering procurement and commissioning (EPC) contractor".

There were no “incentives and penalties to enable better control on cost" by sub-contractors in the project.

EIL has recommended that in future any variation in area, volume and specifications in similar projects should be approved by the aviation ministry or AAI before being implemented. The cost estimates should be ready with the developer beforehand, it said.

DIAL in a detailed response argued the modernization project was completed within 37 months, though a project of this scale would have typically taken 40-60 months.

“The board was apprised of project cost on various stages of estimation. AAI and MoCA were constantly monitoring the project through an independent engineer, whose role and responsibility included design and area oversight," a DIAL spokesperson said. “The board had appointed a sub-committee on project cost, which in turn had appointed auditors to verify project cost. The sub-committee found the project cost as being satisfactory."

The ministry had a dedicated committee that conducted quarterly reviews of the modernization programme from 2006 till the airport regulator was set up in late 2009. An aviation expert said the report suggests this was not enough of a check.

“Based on the reading of the report, the ministry does not seem to have intervened at the right time," said retired aviation ministry bureaucrat Sanat Kaul, referring to escalated costs and new provisions made for allowing an airport development fee to be levied on passengers.

“These are blank spaces and need intense investigations," he said. “From a public point of view, there seem to gaps which need to be answered."

Kaul said there was also a need to have a through report on the lessons from the public-private partnership in airports following the Delhi and Mumbai privatization programmes. “There is a need to find out what is happening in these projects."