DIAL – Civil aviation in India
The Indian aviation industry has shown continued growth in recent years with the key drivers being high GDP growth, steady industrial performance, higher disposable incomes, growth in consumer spending and low air fares. By Mrigendra Verma, deputy general manager, Infrastructure Finance Group at ICICI Bank.
This article was first published in the PFI Asia Pacific Report 2008
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Air passenger traffic in India has increased from about 59m in financial year 2004–05 to about 115m in 2007–08, reflecting a cumulative annual growth rate (CAGR) of about 25% over last three years, and experts say growth is expected to remain at 20% over the next five years.
The Indira Gandhi International Airport (IGIA) in Delhi handled 24m passengers in 2007–08, up from 6.4m in 1994–05, a CAGR of 10.7% over the period, with more than 25% annual growth over the past three years. It also handled more than 0.44m tonnes of cargo during the same period. The modernisation of the Delhi airport is one of the largest PPP projects to have been implemented in India. The current stage of expansion will form the platform for the long-term aim of an 80m–100m capacity airport over the next 20 years.
As per the Indian Constitution, civil aviation is under the legislative jurisdiction of the Government of India (GoI). The GoI has identified the need for improving the standard of services and facilities at airports in the country and to bring them to a par with international standards. To achieve this objective, it decided to undertake the task of restructuring the airports under the Airports Authority of India (AAI) and to encourage private sector participation in modernising airports across the country. Some of the major initiatives taken by the GoI in this context include:
* Amendment of the AAI Act of 1994 in order to create an effective legal framework for restructuring existing airports under the AAI and for encouraging private sector participation in the airport sector;
* Formulation of the Airport Infrastructure Policy 1997, including a policy on greenfield airports;
* Announcement of various initiatives in the Union Budgets (2002–03 and 2003–04) for private sector participation in airports;
* Appointment of the Naresh Chandra Committee, which has given recommendations on:
* Structural changes to strengthen the aviation sector and make air travel affordable in July 2003; and
* Training, aviation security, safety regulation and steps required to be taken with respect to airport management and infrastructure in October 2004
Furthermore, the GoI has indicated in its aviation policy that it will constitute/incorporate an independent regulator (AERA) for the airlines/airports.
In 2005, in view of the GoI's approval for the modernisation, upgrading and development of the Mumbai and Delhi Airports through private sector participation, the AAI initiated the process of selection of partners in the private sector to form a joint venture company (JVC) for the Delhi and Mumbai airports.
Delhi International Airport Private Ltd
The GMR consortium, comprising GMR Group, Fraport AG, Malaysia Airports Holdings Berhad (MAHB) and India Development Fund (IDF), participated in the bidding process and won the bid for Delhi Airport after the technical and financial evaluation. The consortium agreed to share 45.99% of the gross revenues of Delhi Airport with the AAI. ICICI Bank provided financial back-up to the GMR consortium from the pre-bid stage.
A special purpose vehicle (SPV), which would carry out the modernisation and development of Delhi airport, named Delhi International Airport Private Limited (DIAL) was incorporated on March 1 2006. The GMR consortium acquired a 74% equity share in DIAL, with the AAI retaining 26%. Equity participation in the GMR consortium comprises GMR Group 50.1%, Fraport 10%, MAHB 10% and India Development Fund (IDF) 3.9%. On April 4 2006, DIAL signed the concession agreement, ie, the operation, management and development agreement (OMDA) with the AAI and on May 3 2006, DIAL took over the operations of Delhi airport.
The OMDA gives DIAL the exclusive right to operate, maintain, develop, design, construct, upgrade, modernise, finance and manage the airport and to perform services and activities constituting aeronautical and non-aeronautical services at the airport 30 years from the date of signing of the concession agreement. The concession agreement is extendible by a further 30 years by DIAL upon satisfactory performance and meeting the development and service standards set forth in the concession agreement.
The GMR Group was founded more than 30 years ago by G Mallikarjuna Rao. It is a group with diversified interests in infrastructure (energy and transportation), agro-based business (sugar) and manufacturing (ferro-alloys). On the infrastructure front, it has three operating power projects, six road projects (two of which are operational) and three airport projects. The airport projects includes Delhi Airport, Hyderabad International Airport and the Sabiha Gokcen International Airport (SGIA, the second airport in Istanbul, Turkey). Over the years, the group has established a creditable track record in timely implementation of various projects.
Fraport is one of the world's major airport operator groups. It is the owner and operator of Frankfurt International Airport – Europe's third largest and the world's eighth largest airport in terms of passengers handled, and the second biggest European cargo hub. Fraport AG handled 75.6m passengers during calendar year 2007. It has been appointed as an airport operator for the Delhi Airport in accordance with the project documents.
MAHB is the operator and manager of 39 airports in Malaysia, which comprise domestic and international airports including Kuala Lumpur International Airport (KLIA), one of the world's most technologically advanced and efficient airports. MAHB has subscribed to the equity of DIAL through wholly owned subsidiary Malaysia Airports (Mauritius) Private Ltd (MAMPL).
IDF is an infrastructure private equity fund set up in 2002 with a corpus of around Rs8.4bn. It was set up with the support of the Ministry of Finance of the GoI to facilitate equity investment in the infrastructure sector. Its investors include financial institutions such as the IDFC, State Bank of India, Life Insurance Corporation of India, Bank of Baroda and Bank of India.
Project contractual arrangement
DIAL has entered into various agreements with the AAI, the GoI and the Government of National Capital Territory of Delhi (GoNCT) to give effect to the various provisions that will govern the arrangement between DIAL and AAI. The key agreements in the transaction are:
* The operations, management and development agreement (OMDA), executed between DIAL and the AAI on April 4 2006, is the main concession agreement for the project. It has a tenor of 30 years with the option available to DIAL to extend the agreement for a further 30 years subject to its satisfactory performance under the OMDA.
* Lease deed agreement signed between the AAI (lessor) and DIAL (lessee) on April 25 2006 allowing use of assets on an "as is where is basis" together with all encumbrances thereto have been leased to DIAL
* Shareholders' agreement entered into by the private participants and the AAI on April 4 2006. The agreement outlines the ways and means of ensuring the smooth functioning of DIAL, more importantly because of both private sector and public sector entities being equity holders in DIAL.
* State support agreement (SSA) entered into between GoI and DIAL on April 26 2006. The SSA outlines the support from the GoI in consideration for DIAL entering into the OMDA with the AAI for the modernisation of IGIA.
* State government support agreement signed between GoNCT and DIAL on April 26 2006. The agreement outlines the support that GoNCT will provide on a best effort basis to DIAL during the term of the OMDA in various areas, including clearing the land from encroachments, making available additional land if required, expanding existing modes and developing additional modes of surface access to the airport and the provision of requisite quantities of utilities.
* Airport operator agreement (AOA) signed between DIAL and Fraport AG on May 1 2006 whereby Fraport is appointed as airport operator for Delhi Airport. The scope of the agreement covers the services, personnel and resources that the airport operator will make available to DIAL. Fraport AG will perform its obligations under the AOA through its project office in India.
* CNS/ATM facilities and services agreement entered into between the AAI and DIAL on April 25 2006 whereby the AAI has agreed to provide communication, navigation, surveillance and air traffic management services at the airport.
The main objective of the Government of India is to ensure the phased development and expansion of Delhi Airport through the timely provision of high quality airport infrastructure (both airside and landside) to meet growing demand and to ensure the timely implementation of high quality airport management systems. The Delhi Airport is being developed using the following contractual structure:
Figure 1 – Project agreement and contractual structure
A – Shareholders agreement
B – 74% equity/lease/licence consideration
C – Lease and operation, management and development agreements
D – 26% equity
E – Employer deputation arrangements
F – CNS/ATM agreement
G – Escrow agreement
H – Airport operator agreement
I – State support agreement
J – State government support agreement
K – Regulatory framework
L – Lease/concession/service agreements
DIAL had submitted the initial master plan within six months of signing the OMDA, prepared by Mott MacDonald, to the Ministry of Civil Aviation (MoCA) for its review and to the AAI for its information. After incorporating the observations and suggestions made by various stakeholders, including the MoCA, the AAI, airlines etc, the master plan was finalised in December 2006.
The master plan sets out the proposed development of the airport over a 20-year time horizon and envisages a build up in annual passenger handling capacity in a phased manner to about 100m passengers per annum (MPPA) by 2026 from the current capacity of 12.0 MPPA. After the first phase of the development scheduled to be completed by March 2010, the airport will be capable of handling nearly 50 MPPA, with facilities comparable with the best in the world. The design of all airport facilities will comply with technical requirements, development planning principles and the objective service quality requirements as per the OMDA.
The financing requirement that has been set out is to meet the aforementioned Phase I of development of the project. The project cost is Rs89.75bn, which is envisaged to be funded in a debt equity ratio of 1.25:1. The debt component of Rs49.86bn comprises a rupee component of Rs36.50bn financed by a consortium of 10 domestic banks and financial institutions and an external commercial borrowing component (ECB) of US$350m financed by a consortium of eight international banks and financial institutions.
The deal is the first airport financing to come from India and the longest tenor financing from India. The response from the offshore bank market is indicative of the interest that global banks have in India's infrastructure sector
The differential in tenors for the rupee loan and the ECB loan is a unique feature of the transaction and a crucial factor in the structuring of the deal. Keeping in view the overall debt servicing capability of the project on a per annum basis and the appetite of the investor market, the ECB facility was fit into the shortest possible tenor while the rupee facility was stretched to the maximum possible tenor.
The key consultants associated with the project are as follows:
Lead technical adviser – Mott MacDonald, UK
Project management consultant – Parsons Brinckerhoff, US
* Terminal 1 – TCE Consulting Engineers
* Terminal 2 – Lahmeyer International
* Terminal 3 – Parsons Brinckerhoff, US
Traffic study – Mott MacDonald, UK
Property development – Jones Lang La Salle, India
Model audit – PricewaterhouseCoopers
Environment – Mott MacDonald, UK and Vimta Labs, Hyderabad
Lenders' legal counsel
* English Law – Herbert Smith
* Indian Law – Amarchand & Mangaldas and Suresh A Shroff & Co.
Lenders engineer and environment consultant – Scott Wilson India Private Ltd
Lenders Insurance consultant – Marsh India Private Ltd
Key risks and its mitigants
The project risks include revenue risk, which is covered by a state government support agreement that stipulates a suitable rate of return on the investment made by DIAL; construction risk, which is mitigated to a great extent by DIAL entering into a construction contract with Larsen & Toubro, India's largest construction company; funding risk, the equity portion of which is covered by the commitment of sponsors through the equity contribution and support agreement (ECSA), and the debt portion through the rupee facility agreement (RFA) and the ECB facility agreement (ECBFA); competition risk, which is mitigated by the right of first refusal that DIAL enjoys over any greenfield airport facility that is established within 150km of the existing facility; regulatory risk, which would be mitigated to a great extent through the proposed establishment of the Airports Economic Regulatory Authority (AERA), the draft bill of which is under consideration by a standing committee of parliament.