Introduction the respective state owned Airports Authority of

IntroductionGovernment of India (GOI) is promotingPublic Private Partnership (PPP) for development of Airports in India. India’s decision to invite private capital to participatein the modernization of its airports has delivered significantbenefits for passengers, airlines and the government. Successfulimplementation of PPP depends on the efficient distribution of project risksamong stakeholders.GMR and GVK, the twoleading private promoters involved in this sector, have implemented vividimprovements in airport infrastructure at the five major airports.

Thepassenger experience was transformed, the efficiency and capacity forairline operators were improved which delivered an enormous dividend to therespective state owned Airports Authority of India.FiveAirports have been developed so far under this modelØ  Delhi- BrownfieldØ  Mumbai- BrownfieldØ  Hyderabad- GreenfieldØ  Bangalore- GreenfieldØ  Kochi- Greenfield Projects& PoliciesGovernment of India (GoI) has granted ‘in-principle’ approval forsetting up of the following 14 Greenfield airports in the country withestimated project cost (approx.) as given under: Mopa in Goa (Rs.3000 cr)Navi Mumbai (Rs.15149 cr)Sindhudurg (Rs.350 cr) and Shirdi (Rs.320.

54 cr for Phase I) inMaharashtraBijapur (Rs. 150 cr)Gulbarga (Rs.13.78 cr in initial phase)Hassan (approx.

793.95 cr in three phases) and Shimoga (Rs.38.91cr in initial phase) in KarnatakaKannur (Rs.1892 cr) in KeralaDabra (Rs.200 cr) in GwaliorPakyong (Rs. 605.59 cr) in SikkimKushinagar (Rs.

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600.39 cr) in Uttar PradeshKaraikal (Rs. 280 cr) in PuducherryDurgapur (Rs. 700 cr) in West Bengal Governmentpolicy regarding the foreign/private investment in this sector?  The policy have evolved over time.?  No Private, domestic and foreign investmentwas allowed?  GOI in 1990 passed a legislation to allowprivate participation?  Till 1999 all the airports in India was undercontrol of  AAI?  In Dec 2013 GOI approved Greenfield Airportspolicy that brought major changes?  As per the new regulations, No central govt.

approval was needed if the airport is beyond 150km of existing civilian airportand DGCA would be competent enough to grant licenses?  100% FDI allowed for airports in operationwith automatic approval up to 74% ?  100% FDI allowed for Greenfield airports viaautomatic route. MajorPrivate Sector PlayersKaufmannand Vander Meer Planer AG: Responsible for Design of BIAL Airport.SiemensProject ventures: Hold 26% of equity currently and are responsible forequipping the airport with technical system. The responsibilities cover thetechnical system installation and engineering of all the areas includingairfield lighting, IT and communication system, baggage handling system, andpower supply of building services.Larson& Turbo: Responsible for the entire Civil construction work and hasdivested their equity holding completely after the project was completed.

UniqueZurich Airport: Hold 5% equity and are responsible for handling airportoperations. They have also divested their major stake and is now only holding apart of initial investment as a performance guarantee.GVKpowers and Infrastructure: Total shareholding of 43% acquired from initialstakeholders over time i.e.

, 12% from Zurich Airport in Nov 2009, 17% equitydivestment process of L and 14% from Siemens in Oct 2011.  Why PPP?Governmentof India (GOI), is using the Public-Private-Partnership Model (PPP), mainlyBuild-Own-Operate-transfer (BOOT) scheme, for the development of the BangaloreInternational Airport. PPPs are considered a better way to fund and operate aninfrastructure development, while reducing the pain of the central and stategov.

in development of huge projects.PPP’sare a better option when there is limited public sector fund and the cost ofraising capital is high. Privatization can enhance the quality and efficiencyof the services delivered to the public. By this model the government caninvest their funds in developing and operating the remote or small facilitiesthat will ensure the inclusion of backward societies, while the major projectswill also contribute to the revenue of the state by the PPP model.

Today amajor chunk ( approx. 30%) of the total revenue for Airports Authority of Indiais received as fees from the 5 PPP airports in India. ProjectStructure – BIAL Diagrammatic representation of projectstructure at implementationBangaloreinternational airport limited is a PPP model which was constructed under Build,own, operate and transfer model. BIAL concession documents states a concessionperiod of 30 years which is extendable up to 60 years. The new BIAL airport islocated at a distance of 34km from the Bangalore city. It is spread over a landarea of 3900 Acre.

The airport is having an annual passenger capacity of 12.0million and cargo handling capacity of 35000 tones. TheBIAL airport was initially proposed to cater the passenger capacity of 8 to 10million per year. Keeping future air traffic anticipation, the capacity of theairport was then revised to 12 million. This resulted in project cost going upfrom $UDS 389 million to $USD 495.6 million. SponsorsSiemens Project VenturesSiemenshold up at 40% of the capital of BIAL for 3 years after commercial operationdate of airport and not less than 26% for 7 years after commercial operationdate.

Flughafen Zurich AG Zurich had equity stake of 17% in BIAL thatcan divest equity only after 3 years from commercial operation date, but itsequity cannot go below 5% during the concession period. Zurich was responsiblefor all the operations of the airport. They also sign a contract of allmaintenance agreement. L&TTherole of construction agency was given to L&T which was the majorstakeholder in the project. Since L&T was only stakeholder which coulddivest completely after construction completion. Concession Agreement about thesale of equity by L&T was silent.

Kaufmann and Vander Meer Planer AGSwitzerlandThedesign of BIAL Airport was developed by the award winning agency Kaufmann andVander Meer Planer AG of Switzerland. Their expertise in airport planning wascritical as this was a Greenfield model of project.M/S Siemens Industrial Solutions andServices Group (I&S) and Siemens India Ltd.Siemenssigned a Contract signed for equipping the airport with technical system.  The contract covered the responsibilitiesincluded supply, engineering ,testing and installation of airfield lighting,communication systems, airport luggage handling system and the power supply forthe building and automation system  Airport Authority of IndiaAirportsauthority of India is the owner of all other airports in India before the PPPModel began.

In the BIAL project AAI had the responsibility to construct andsupervise the air traffic control unit. This considered to be a high techactivity and only a centralized agency like AAI can ensure the successfulcompletion of this critical unit. The overall project coordination was handledwith AAIKarnataka State Industrial &infrastructure Development Corporation LimitedTohandles acquisition of land efficiently, an expert agency KSIIDC Public agencywas incorporated. The airport land acquisition involved a lot of legalproceedings and the representative from the Govt. side was included to handlethis process hassle free. Shareholder Initial Shareholding (%) Present shareholding (%) Private Promoter     Siemens Project venture Gmbh 40% 26% Flughafen Zurich AG ltd 17% 5% L&T IDPL 17% Nil GVK Group Nil 43% Sub-Total 74% 74%       State Promoters     Airport Authority Of India 13% 13% Karnatka State Industrial Investment & Development Corporation ltd 13% 13% Sub-Total 26% 26%  Equity’s sponsor contribution Lenders Name Of The Bank Loan Availed(? crores) State Bank of Mysore 221.

8 Vijaya Bank 301.8 Canara Bank 280.7 Central Bank Of India 250.

0 Punjab National Bank 100.0 Sub-Total 1154.3     ECB Loan   ICICI Hong Kong 270.6 Sub-Total 270.

6 Capital Structure Particular    2012 2013 2014 2015 2016 Debt (? crore) D 1461.7 2155.0 1983.2 1726.1 2148.7 Equity in reserved (in crore) E 849.

8 1197.8 1600.5 2023.8 2595.6 D+E ( in crore) C 2311.

6 3352.8 3583.7 3749.9 4744.3 Kd Kd 10.71% 10.71% 10.

71% 10.71% 10.71% Ke Ke 24.40% 24.40% 24.40% 24.

40% 24.40%  Internal RiskPre-constructionrisk:Ittook 32 months (from the date of signing of MOU for progress of Airport) forassortment of concessionaire for BIAL. It was almost equivalent to the periodtaken for the building of the airport. The bidding procedure for assortment ofconcessionaire seems to be very lengthy.

It was expected that public specialistcan do land procurement proficiently, so professional public agency, KSIIDC,was involved as equity holder in BIAL. It took 75 months, for land procurement,from the date of passing of Airport development MOU. Concession contract hasprovided the deadlines for creation by private partner but it has not provideddeadlines for procurement of land by public partner. Time for land procurementwas too high. This shows the necessity for enhancement in land procurementprocess. The rate of the project was not fixed at the time of passing of theBIAL concession contract.

The concessionaire was permitted to take the cost onthe date of completion of the project as the project rate for setting up theairport demand. This was mostly a cost-plus model where the concessionaire wasprotected from cost hazard due to probable time over-run caused by lengthybidding and undefined land procurement process. Project cost on completion canbe stated only for the time sure contract. Investors only like to invest in projects which are free frompre-construction risks. Foreign ExchangeRisk: Fewof the foreign investors in BIAL had traded their equity just on completion oftheir minimum lock-in time. Foreign equity exits not only effect in capitaloutflow but also effect the loss of expertise, which can affect effectiveoperation of Airport.

In airports, if venture is made in foreign currency andincome is obtained in local currency then the partner’s interest will be badlyaffected due to downward crusade of local currency. The investors are exposedto financial risk on reason of exchange rate variation. External RiskDemand (Traffic)Risk: Majorrisk in airport operation appears to be variation in demand. The future cashflows for BIAL were predicted considering only the positive advancement intraffic. But this proved to be inappropriate during the starting years of theBIAL concession time. Realization of predicted traffic during long period of 30years (concession period of BIAL) seems uncertain.

Presently obtainablestatistical techniques may not be appropriate for forecasting long perioddemand. Economic slowdown may affect the Airways customer demand, which is hardto predict. There is a need to have some formula to consider it for moreaccurate prediction of traffic demand. Major decline in demand also affectnon-operational revenues such as those from parking, food and beverage, retail,and advertisement, which has a strong connection with the volume of passenger demand.The concession contract of BIAL is silent on the issues of traffic and revenuerisks. These risks have to be borne by private partners.

Liquidity Risk: Inlarge debt projects, the cash flow should be adequate to meet debt servicerequirement and continue reserve fund. If not, then possibility for liquidityrisk persist. In such case, either the sponsor shall deliver cash in reserve orinvestor shall provide the additional cash. Backer is supposed to maintainobligatory DSCR (debt service cover ratio) as per the promise with projectlender. If due to low cash flow DSCR falls below the required level then nocash out of income can be distributed to investor till the time neededrequirement is fulfilled. In such case, the cash flow after debt examiningshall be put in an escrow account. Post Facto DevelopmentsTheairport, which got its sanction way back in 1993, started the construction in2005, after the settling of disputes in land acquisition, which was hinderingthe ICICI lead consortium to provide the loan. The Phase 1 of the airportcompleted in 33 months from 2005 and the airport was commissioned on March2008.

TheBangalore International Airport is a grand scheme project consisting of ThreePhases. The Phase 1 included the construction of lounge, retail and concessionspaces and increasing the security checkpoints for the airport. The Phase 2included the full expansion of the existing Terminal 1. The Phases 1 and 2 gotcompleted by end of 2013. Phase 3 of the project includes construction of a newterminal and runway and is underway.BangaloreInternational Airport was initially designed with a capacity of handling around8 million  passengers per year but duringthe construction of Phase 1, the design was revamped to accommodate 12 millionpassengers per year.

The redesign of the airport was based on the revised airtraffic survey of June 2005 and the last minute changes was included in theplan. Due to the change in this, the estimated project cost was revamped fromUSD 389 Million to USD 465 Million. The redesign included an increase in thesize of the passenger terminal building, number of aircraft stands, taxiways,passenger boarding bridges and the main access road. The redesign proved rightas the airport handled 12.5 Million Passenger and 224000t of cargo in 2011. Theexpansion activities of the Terminal 1, which started operation in 2008,commenced on June 2011 and was completed by December 2013. The airport wasrenamed as Kempegowda International Airport on December 2013, when theexpansion activities of Terminal 1 was completed and the airport inaugurationtook place.Theproject for expansion was designed by HOK and Larsen & Toubro was roped inas the construction partners for the expansion project.

HOK subcontracted IMPaCto provide the terminal planning and designing services. The project will becarried out with a debt : equity ratio of 70:30. After the investment of GVKPIof around 29 percentage in early 2010, the newly reconstituted consortiumraised around 700 crore rupees as debt from the banks and 300 crore rupees fromthe internal accruals and other stakeholders.Inthe expansion activities that started on 2011, is a 1500 crore (USD 230Million) project, aimed at doubling the capacity of the airport. Afterexpansion the new terminal will have a size 150,556 square meters, double theoriginal capacity and will have the additional facilities for check –in,immigration, security and baggage reclaim.

Four additional gates including onedomestic gate and three international gates will be also added. The terminal 1expansion also includes the construction of a new VIP lounge and theconstruction a highly advanced Airport Operation Control Center. The expansionactivities are also aimed at sustainable development bringing in the goldcertification in leadership in energy and environmental design (LEED) from theUS Green Building Council. This expansion activity has raised the annualcapacity of the airport to 20 Million passengers.Thebiggest development in the BIAL project is the ongoing expansion. The terminal2 of Bangalore International Airport is underway.

The expansion includes a newterminal and a parallel runway to the existing one so that the capacity of theairport will be enhanced. The project costs a whopping 4000 crore and isexpected to complete by 2022.The overall expense will be met by 70% debt and30% internal accruals.

Skidmore,Owings & Merill, will design the new terminal. The upgradation works willbe carried out on the existing runway also, which will increase the ATMcapacity from 34 to 44.The parallel runway is expected to complete by 2019. TheTerminal 2 expansion project will be completed in 2 phases.

The completion offirst phase will enhance the traffic handling capacity by another 20 Millionand the second phase of terminal 2 will add another 15 Million. The totalcapacity of the airport will touch 55 Million when the construction is over.The concession agreement has the option to increase the concession period from30 to 60 years, which was included keeping in mind the Phase2&3 expansion.  BIAL – PPP Model Drawbacks?  Concession Agreement had major drawbacks onthe followingØ  Silent about local partner’s performance andlock-in period, which allowed L to divest very early after the projectcompletion.Ø  Silent about refinancing during the period,which can prove critical as there are multiple expansions planned for theairport in near future.Ø  Silent on tariff fixation methodology forAirport and User Development fees.•      Bidding process took 33 months, equivalent tothe construction time taken.•      Efficient land acquisition process required.It took 73 months in BIAL and only after this step the financing was madeavailable.•      Cost plus model – Not efficient as there is noincentive/penalty for time bound completion.•      No timeline was provided in the agreement andthe design and scope of work was not fixed before the construction began.•      Foreign investors were not protected fromexchange risk, this cause early exit of foreign players resulting loss ofexpertise.