terminal turbulence-india today june13, 2011

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Terminal TurbulenceDelhi's new airport is a huge hit on the exchequer: CAG report

Shantanu Guha Ray and Bhavna Vij-Aurora Edition: June 13, 2011

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Terminal 3 of Delhi Airport

The construction of Delhi's new airport is a story of corrupt practices, huge cost overruns, dubious

oint ventures with ministerial favourites and appalling mismanagement by the public-privatesector alliance, Delhi International Airport Limited (DIAL), which built the facility.

These are the findings of the Comptroller and Auditor General (CAG) of India, the government

watchdog, whose report on the aviation sector will be tabled in Parliament's next session.

The CAG report, accessed by India Today, says: DIAL, comprising a GMR Infrastructure Limited-

led consortium, has overshot its budget by over $2 billion (Rs 8,955 crore) and one-fourth of the

amount will have to be borne by air passengers in the form of higher airport taxes. Passengers

departing from Delhi airport already pay an airport development fee (ADF) of Rs 200 for domestic

flights and Rs 1,300 for international flights. The Supreme Court has allowed DIAL to continue

charging ADF as it was approved by the Airports Economic Regulatory Authority (AERA) even

though Mumbai airport has been barred from levying the fee.



C AG head Vinod Rai

According to the report, the Government lost at least Rs 1,185

crore in the development of 48.5 acres (196,000 sq mt) of land

around the airport area. dial gave the licence to develop the land

(as a part of the privatisation deal) to a newly formed

subsidiary, Delhi Aerotropolis Private Limited on a valuation of Rs 775 crore for the land. Officials of the CAG told India Today

that the value-based on local land rates in Gurgaon that start

from Rs 1 lakh per sq mt-should not be less than Rs 1,960 crore.

CAG noted that by forming joint ventures, revenue payable by

DIAL to Government-owned AAI has got reduced. Here's how.

AAI should have earned Rs 46 out of Rs 100 based on its 46 per

cent revenue share partnership agreement with DIAL which

was to get the remaining 54 per cent. But here lies the catch. Through the joint ventures, DIAL

brought its own share of revenue down to 15 per cent, says CAG. As a result, AAI's share also went

down substantially. AAI was left only with 46 per cent of what DIAL was left with after sub-

contracting. For example, in a sub-contract where DIAL had only 15 per cent share, AAI actually earned a meagre Rs 6.90, as against Rs 46 which was its due.

The government has been deprived of its legitimate share of revenue through formation of joint

ventures by DIAL with private entities. Government-owned Airports Authority of India (AAI) had

in April 2006 signed a contract for the operation and management of Indira Gandhi International

Airport, Delhi with DIAL, wherein a revenue share of 45.99 per cent was to go to aai and 54.01 per

cent to DIAL. The contract permitted subcontracting of various aeronautical/non-aeronautical

services to ventures entered into by DIAL, again on a revenue-sharing basis. DIAL created 11 joint

venture companies for non-aeronautical operations. AAI has 26 per cent equity participation in

DIAL, with the remaining 74 per cent held by a private consortium of GMR Group, Fraport AG,

MAPL and IDF.

The government's revenues from Delhi airport have dropped in many business activities-sale of

food and beverages, cargo, ground handling, advertisements, fuel infrastructure, information

technology and ground power equipment. In December last year, the chairman of AERA, the

official regulatory authority, raised the issue of DIAL's joint ventures with the civil aviation

ministry. "It has been alleged that various revenue streams are being sub-contracted to joint

ventures specially created by DIAL on revenue-sharing

basis," AERA chairman Yashwant Bhave said in a letter to the

civil aviation secretary. "This reduces the revenue share of AAI,"

he stressed.

Praful Patel has been blamed by C AG for granting favours to people close to him.

DIAL has also drawn flak from the CAG for the number of joint

ventures it gave to people claiming allegiance to the then civil

aviation minister Praful Patel and senior functionaries of his

Nationalist Congress Party. Among those who were given

contracts is Deepak Talwar, a lobbyist who won two major

business contracts with DIAL. Talwar was a familiar face in the



civil aviation ministry and his closeness to Patel caused tensions between the minister and former

aviation secretary, M. Nambiar, after the latter protested a number of decisions taken allegedly at

Talwar's behest. Talwar denies the charge. "I have never been to the ministry of civil aviation

during the tenure of Mr Praful Patel," he says.

CAG has sought a probe into the duty-free store contract being given to Aer Rianta Indian Duty

Free Services (IDFS) in the light of allegations that minutes of the meeting of the dial board of directors were fabricated to select the combine in which Talwar has a 17 per cent stake. "Any

inference that it was awarded to us due to our relationship with anybody in the ministry of civil

aviation is factually incorrect," Talwar said. On his proximity to Patel, Talwar said, "He is a friend,

that's all." Sources close to Patel insist that although he knows Talwar, Patel did not grant him

favours.

Talwar's clout in the civil aviation ministry has seen a steady rise since upa came to power in May

2004. According to an internal investigation by Air India, in 2005, Talwar's company supplied in-

flight special dvds at $3,000 (negotiated down from $3,600) each to the airline. The market rate

was $300 per piece. The contract, signed during the tenure of V. Thulasidas as chairman and

managing director, was pushed by Talwar through one Gerald Betts, a representative of North Star Aerospace, which was considered an exclusive representative for the product without any sort of

documentation. "You have abused your official position as a result of which Air India was made to

buy a hardware of NSA who were neither manufacturers or authorised dealers of the product," Air

India CMD Arvind Jadhav wrote in his chargesheet to V. Srikrishnan, executive director (materials

management).

C AG has blamed DIAL for undervaluing

CAG has questioned why dial did not undertake a comparison

between the joint venture model and the concession model and

went ahead to create 11 joint ventures. The cag has highlighted

the case of Garuda Aviation Services, a company withexperience in ground handling and car parking services at

Indian airports. The firm has sued DIAL for the partisan

manner in which it entered into a joint venture with Greenwich

Investment and Tenaga Parking Services of Malaysia for 25 years. Tenaga owns only 10 per cent of

the joint venture and the rest is in the hands of funds based in tax havens of Bermuda and

Mauritius. The substance of the suit is that AAI is losing Rs 3,584 crore over the concession period

of 25 years and how it could have gained had the contract been awarded on a "straight concession"

basis. "Straight concession" is a standard tendering process followed by AAI across most airports

in India.

CAG, said officials, has also questioned the loss of an estimated Rs 73.12 crore in revenue to the

government-owned AAI from the fall in cargo business at Delhi airport between November 2009

and September 2010-a period when cargo tonnage globally increased by 250 per cent. DIAL's

contention that the revenue from the cargo business would increase from the fourth year has been

contested by CAG because AAI's share would be limited to 45.99 per cent of dial's 36 per cent

revenue-sharing arrangement with an associate company formed for the cargo business. The

auditors found that AAI incurred a reduction in share of revenue to the tune of Rs 73.12 crore due

to the formation of the associated company for running the cargo business.



Some of the CAG findings already find reflection in the audit done by AERA that blames DIAL for

not checking 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. The cost of modernisation of Delhi airport

skyrocketed from Rs 5,900 crore to Rs 12,700 crore. For this, AERA blames dial for taking the

estimated cost of the airport to be Rs 5 lakh per sq mt against a maximum cost approved by the

dial board of Rs 1 lakh per sq mt.

DIAL has already asked aera for about Rs 3,500 crore in airport development fees. It has also

asked for an additional Rs 1,793 crore, of which aera has so far agreed to clear Rs 994.5 crore.

aera's observations were made on the basis of the technical and financial audit done by Engineers

India Limited (EIL) and consulting firm KPMG on Delhi airport's modernisation.

The DIAL board, which included senior officials of the ministry and AAI, realised there was a cost

overrun only when the modernisation process was nearing completion.

AERA said prior approval of the board was also not taken for an increase in gross floor area (GFA)

by nearly 84,000 sq mt from that finalised at the master plan stage. Another reason for costsescalating was that a redesign was carried out even as modernisation was on, EIL said in its report

to AERA. It also says that "estimates, negotiations and price reductions were done on a notional

basis by DIAL. All contracts were awarded in-house or to companies where GMR or group

companies had a substantial stake".

Financial manipulation to benefit the promoters was clearly evident. "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 DIAL, resulting in further increase in

project cost," EIL report said.

DIAL has argued that the board was apprised of estimated project costs at various stages. "AAIand the civil aviation ministry officials were constantly monitoring the project," K. Narayana

Rao, DIAL director, told India Today. "The ministry did not intervene at the right time," said

former aviation bureaucrat Sanat Kaul.

Once tabled in Parliament, the CAG report is bound to generate more controversy in a country

suffocated by scams, and lead to further scrutiny of the operations of GMR-led dial and the

aviation ministry.

terminal turbulence-india today june13, 2011

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