Group 16 | Section AJignesh Rathod | Lalit Mohan Meena | Pratyasha Burman Ray

COMPARATIVE ANALYSIS OF COCHIN AIRPORT AND BANGALORE AIRPORT – A PROJECT FINANCE PERSPECTIVE

WHY CHOOSE PPP AS A MODEL IN INDIAAlternative funding from private sources

• Sources of fund extend beyond government and include debt, equity and quasi equity• In many cases government itself can act as a shareholder and not the principal owner(CIAL) and can function as an equity

partner• Local and foreign commercial banks and export credit agencies can all act as sources of debt

Enhanced Risk allocation and mitigation

• Project risks- regulatory, construction, operating and completion risks are mitigated as risks are distributed among those parties which can handle it best

Maximisation of potential as sources of revenue

• Maximising lifespan, optimising utilisation and safeguarding future development of airports by means of comprehensive phasing strategies

RATIONALE FOR PPP IN AIRPORTS Government was the only source of funding. This limited investment to modernise the airport

infrastructure Airport and service providers held monopoly power which led to high prices for low service

standards PPP as a ‘fast track’ to modernising and improving the performance of airport PPP maximised investment efficiency in terms of risks allocation Dual till planning for sustainable airport development. Commercial revenue profits would be

significantly enhanced through application of dual till and a large number of private airports can shift the current revenue structure

Combination of developmental experience, operational expertise and investment capability from the international arena and local stakeholders

CIAL

• PPP STRUCTURE The CIAL is a green field airport with a BOO (Build Own and Operate

structure). The shareholding pattern is as follows Govt. of Kerala: 13% Central Government: 13% NRIs, Financial Institutions, Airport Service providers and the public:

74%

• PPP MODELBuild Own and Operate(BOO)

The government grants the right to finance, design, build, operate and maintain a project to a private entity, which retains ownership of the project. The private entity is not required to transfer the facility back to the government. Effectively, after the concession period, the airport is under the ownership of CIAL

Special Purpose Vehicle: Cochin International Airport Ltd.( CIAL)

QMV-CIAL

Microsoft Excel Worksheet

RISK NATURE MITIGANTPOLITICAL RISK As the major shareholder, the state

government had exercised its leverage over critical decisions-like appointment of CEO. Interference was also extended to daily operational issues.

Professionalise the board and management and invite expert opinion as an input for decision making to improve the quality of decisions taken

REVENUE RISK Demand side risk : Passenger and cargo demand would be driven by the availability of convenient flightsAnticipated decrease in gulf demand due to the changing employment pattern Traditionally, overdependence exists on aeronautical revenue

Working with airlines to offer convenient schedules and better in-flight services Better quality of customer service judicious mix of aeronautical and non-aeronautical revenues.

OPERATING RISK

The airport is located in Kerala, a state known for its high level of political activity and trade unionsCost escalation

evolve institutional frameworks like collective bargaining, dispute resolving machinery and adherence to negotiated settlement

REGULATORY RISK

The time delay in acquiring international airport status, which required up gradation of facilities, tariff fixation(which were set by the AAI) and did not involve cost considerations and revenue sharing were problems faced by CIAL

Creation of a Centralised Tariff authority, which brings the regulatory changes and can respond to cost considerations of newer airports under the PPP model

CIAL-RISKS FACED AND MITIGATION STRATEGY SUGGESTED

BIAL

• PPP STRUCTURE

• PPP MODELBuild Own and Operate(BOOT)

The private sector designs and builds an asset, operates it, and then transfers it to the Government when the operating contract or the concession period ends, or at some other pre-specified time. The private partner may also subsequently rent or lease the asset from the Government.

Special Purpose Vehicle: BIAL International Airport Ltd.( BIAL)

QMV-BIALMicrosoft Excel

Worksheet

State Promoters Private PromoterKSIIDC 13% Siemens  40%

AAI                  13% Unique Zurich Airport 17%

    Larsen & Tourbo Ltd. 17%

 TOTAL 26%   74%

• After the operations started, GVK bought 12% from Zurich airport (maximum equity allowed to be sold by Zurich airport under the agreement) and 17% from L&T after the construction phase started – giving GVK 29% stake in BIAL. Later on GVK acquired 14% from Siemens making GVK the largest stake holder in BIAL at 43% equity holding.

• ICICI was a lead arranger giving Rs 7.36 billion loan amounting to 50% of estimated cost. Further 20million were to be provided commercially in case of cost over runs.

CIAL-RISKS FACED AND MITIGATION STRATEGY SUGGESTED

RISK NATURE MITIGANTMARKET RISK Demand fluctuation and

reduction in market powerIn the concession agreement, Sponsors have made it a contractual obligation under concession agreement that no new or EXISTING airport (including old HAL airport) shall be permitted by GOI/GOK within 150km radius of BIAL for the first 25 years of operations of BIAL

COMPLETION RISK Since ICICI has agreed to give a loan with no recourse and there is no contractual obligation from any party to complete the project, there is a risk of non-competition of the project.

ICICI has made an agreement with GoK to infuse Rs.350cr loan in the project and have the guarantee taken by State bank of Travancore for the same. This would ensure commitment from the government on the project, mitigating risk of non-competition.

SUPPLIER RISK Poor supplier material and poor quality of workmanship

Supplier Siemens and construction work contractor L&T – both were made part of the sponsors, thus mitigating the stated risk.