8 min read.Updated: 10 Sep 2020, 08:20 AM ISTAnto T Joseph
With Mumbai in the bag, Adani is India’s largest private airport operator. What makes it such a coveted business?
There are concerns that AAI’s revenues would now be completely dependent on the volume of passengers. There is also no cap on royalties to subcontractors
After a whirlwind negotiation lasting about 40 days, troubled GVK Group gave up the fight for the majestic Mumbai airport on August 31. The Adani group, fronted by Adani Airport Holding Ltd (AAHL), is now in control of Mumbai International Airport (Mial). It will acquire debt from various GVK lenders including a Goldman Sachs-led consortium, HDFC and Yes Bank. GVK Group will be relieved of its various obligations, securities and corporate guarantees.
“What GVK got is a ridiculously low valuation. The deal happened in a jiffy," says a senior official who was part of the negotiations, but did not want to be identified. When contacted, GVK Group CFO Issac George refused to divulge details. “We will inform the authorities at the right time," he says. Adani Group is unwilling to reveal numbers too. Incidentally, both the buyer and seller are public limited companies.
On condition of anonymity, a top official from Adani Group dismissed the claim that Mial was valued low. “There is nothing called low valuation or high valuation, there is only workable valuation."
Fact is, when GVK was forced to come to the negotiating table, it was armed with a valuation done by three potential investors in Mial 10 months ago: 79.1% stake for ₹7,614 crore. But Adani group chairman Gautam Adani was firm—he wanted 100% stake. In other words, the outright purchase of GVK Airport Holding that held 50.5% in Mial.
When it was pointed out to Gautam Adani that management control would have ideally attracted a premium, he told Mint, “There was no Covid then." As usual, Adani preferred to sew up the deal by himself. “I never use any banker nor a lawyer," he added.
GVK sources reveal that the deal was brokered by a Mumbai-based law firm that has seen its position in the rankings fall in recent times.
Efforts are currently on by Adani to talk to the lenders directly for a haircut, despite the fact that these are standard assets, said officials. Separately, Adani will buy out 23.5% stake held by two minority partners—Airport Company of South Africa (ACSA) and Bidvest—to take their holding in Mial to 74%. The remaining 26% is held by the Airports Authority of India (AAI).
So what led to a quick turnaround in GVK’s prospects? Clearly, the twin probe by CBI and Enforcement Directorate (ED) mounted on GVK promoters and Mial on a money-laundering case and the subsequent raids were a major pressure point. All this was happening when the airport was reeling from a revenue shock as the pandemic grew across the country. Revenues went for a toss and Mial was teetering on the brink of a major default.
“There was huge pressure from lenders," said the GVK official quoted above.
Along with Mumbai airport, the takeover will give Adani the proposed airport at Navi Mumbai on a platter. The ₹16,000-crore project is yet to achieve financial closure. Adani Airport Holdings Ltd, an unlisted public company set up on August 2, 2019, has also won bids for six AAI-operated airports—Ahmedabad, Lucknow, Mangalore, Jaipur, Thiruvananthapuram and Guwahati—and emerged as India’s largest airport operator.
Interestingly, the Adani Group had delayed the takeover of the airports by invoking the force majeure clause in the contract, citing the disruption caused by covid-19. Adani had also asked AAI to defer the deadline for payment of asset transfer fees of over ₹1,000 crore for the first three airports (Ahmedabad, Lucknow and Mangaluru)—for which Adani signed the concession agreement in February -- from August to beyond December 2020.
“We are not seeking any further extension. We have already submitted the bank guarantees," said Adani.
The government’s move to hand over as many as six airports to a group that faces a debt pile of ₹1.3 trillion at the end of the last financial year has raised eyebrows. What’s more, the Adani group witnessed a steep fall in its net profit in 2019-20.
For the group however, the acquisition of Mumbai airport is crucial as it wants to integrate the six airports in a hub-and-spoke model with Mumbai, the second-largest airport in the country. This will have implications for the other major airport operators in the country. There are 17 major private airports in the country (see Chart).
“In the long term, when India builds 200 additional airports to handle over 1 billion passengers across its tier-1, tier-2 and tier-3 cities, a majority of them will be connected to Mumbai," said Adani. “We see airports as the nucleus around which we can catalyze real-estate and entertainment facilities, e-commerce and logistics capabilities, time-sensitive industrial ecosystems and aviation-linked businesses," he added.
The Adani group looks at a hybrid revenue model with aero as well as non-aero revenues. To boost non-aero revenues, the group also plans to develop a concept of airport villages which will tap into the non-passenger airport visitors.
The airport model
To make airport privatisation more exciting and attract more players, the government has made some sweeping changes in the bidding parameters. The old revenue-sharing model which was adopted during Delhi and Mumbai privatisation has been junked. In its place, there’s the ‘per-passenger fee’ model, which is another revenue-sharing method.
Interestingly, the government has also allowed the successful bidder to charge a separate user fee from passengers. Under the new privatisation rules, the concession period has also been extended to 50 years from the earlier 30 years.
“The revenue share model adopted for the privatised airports has led to much contestation. In particular, the way revenue share is calculated and how the government perceives from the CAG (Comptroller and Auditor General) audit perspective is always unclear. Thus, AAI perceives per-passenger (fee) more verifiable. This has been one of main reasons for the shift in the bidding parameter," explains Amit Kapur, joint managing partner, J Sagar Associates.
But policy analysts have raised concerns that AAI’s revenues would now be completely dependent on the volume of passengers in each privatised airport. It’s clear that the operator would be able to generate substantial revenues from a range of aeronautical activities —as well as from running shopping centres, hotels, restaurants, duty-free shops and eateries, among others, which will remain outside the ambit of revenue sharing.
Analysts have argued that the bidding parameters should have included an element of cost minimisation. For instance, under the new regime, an operator could potentially take over an airport by offering to pay the government an exaggerated amount in per-passenger fee, and look to squeeze extra revenues from passengers and airlines.
The operator can then approach the regulator, Airports Economic Regulatory Authority (AERA), seeking nod for a higher user development charge or passenger service fee. If the bidding is not based on restricted cost, it may lead to fliers shelling out more money in user charges. Airports in India are already among the most expensive in the world.
To get a sense of the numbers, consider Mumbai airport. During a 14-year period, Mial’s revenues to AAI steadily rose and peaked in 2018-19, when it touched a revenue sharing of ₹1,448 crore. For GMR Group, which runs Delhi airport, revenues to AAI have declined over the past couple of years after a court-directed revision, to ₹1,591 crore.
Vinayak Chatterjee, chairman and co-founder of Feedback Infra, says there is an inevitable shift in the focus of airport operators, with the dip in passenger traffic on account of the pandemic. Real estate will become even more important.
“There are two important factors driving the airport business today—increasing focus on the high-value cargo and commercial development of real estate around airports. The aerocity concept that allows you to develop the hinterland around airports to set up warehouses, hotels, restaurants and medical facilities, among others, is fast catching up. Yes, real estate development is an important part of the airport business now," said Chatterjee. The maintenance, repair and overhaul (MRO) services for commercial aircraft is another potential area.
The royalty issue
Speaking on condition of anonymity, a senior Delhi-based lawyer who specialises in airport management has flagged another concern. The airport sector regulator, AERA has pegged a cap of 30% of revenues as royalty that can be allowed as ‘pass-through expenditure’ (that is passed on to the consumer) for all ground-handling and cargo-handling and other aeronautical services.
“This means that the operator can outsource these services and charge the subcontractors high royalties. If not royalty, operators will charge a licence fee," said the lawyer. “The fact is that subcontractors are more than willing to pay as much as 200% of their revenues while bidding shows a big anomaly in the system. Obviously, this will lead to overcharging the customers and underreporting their revenues," he added.
The reference here is to AAI cancelling bidding of ground-handling services for 76 airports in June, 2019, following concerns over some short-listed bidders offering steep royalties as high as 226%.
There is also no cap on royalties on subcontractors providing non-aero services such as hotels, duty-free shopping and liquor sales since they don’t come under the purview of AERA. Airport operators continue to levy huge royalties or licence-fee on those service providers. “Strangely, in most cases, the bidding and selection is based on royalties—meaning how much revenues will the subcontractor share with the airport operator, and not on technical parameters and financial strength of bidders," the lawyer quoted above added.
In consultations before the new regime, airport users, including the International Air Transport Association (IATA), a trade association of the world’s airlines, argued that such a high royalty cap will make flying expensive. IATA strongly argued that AERA should aim to not allow any royalty fees. “However, if AERA intends to continue to allow them (with a cap), a more appropriate level that we believe is sustainable for the industry, is a cap of 5%," it said in a submission to AERA.
Meanwhile, Mial contested this, arguing that limiting the royalty/concession fee at a specified percentage would limit the availability of cross subsidy and lead to increased aeronautical charges which will be detrimental to the interest of airlines and passengers.
After a long consultation process, AERA in April 2018 capped the amount allowed as ‘pass-through expenditure’ out of the royalty/revenue share for determining tariffs of the service providers as 30% for cargo, ground handling and other services, and 5% for into-plane fuel services.
To be fair, it remains to be seen how the new ‘per-passenger fee’ model actually works on the ground. But private airports surely look like the proverbial goose that lays the gold egg.
Anto T Joseph is a senior journalist.
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