UPA's misdeeds in aviation sector

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If  one were to recall scams during UPA regime, 2G and Coalgate come to  mind instantly. The scandals around the Commonwealth Games are sort  of remembered. But most people tend to overlook the UPA’s acts of  omission in the Aviation Sector! This article takes two examples to  bring new insights and reinforce earlier ones, namely, the Delhi  International Airport Limited (DIAL) and Air India.

Relying  mainly on the 2012 report of the Comptroller & Auditor General on  DIAL, one finds that against an area of 470,179 sq metres indicated  in the Major Development Plans, the actual built up ground floor area  exceeded Plan by 17.8 % (83,708 sq metres or 9,00,698 sq feet). As  per the Business Plan, original project cost approved by DIAL was Rs  8,975 crs. Actual approved (Rs 12,502.86 crs) exceeded original  project cost by 39.31%. (Note ‘that Ministry of Civil Aviation did  not suggest any changes to or provide any comment when the Master  Plan was submitted by DIAL’ as provided for in the State Support  Agreement or SSA). Such large increases in area/cost reflect the  quality of approval/monitoring process.

Secondly,  to compensate for increase in cost, DIAL asked for levy of User  Development Fee (not part of draft development and management  agreement contained in bid documents). This was approved by the  Ministry of Civil Aviation vide letter dated 9/2/2009 and ‘vitiated  the sanctity of the bidding process.’ [More about Undue Benefits in  Aviation http://www.business-standard.com/article/opinion/undue-benefits-in-aviation-112052800011_1.html]

This  additional levy, to the tune of Rs 3,415.35 crs, (cost over-run Rs  3,528 crs) was used to meet the funding gap in project cost which was  not envisaged in the OMDA (Operation, Maintenance and Development  Agreement) and SSA.

Third,  there is another angle to increase in ground area. According to terms  of the SSA, the Targeted Revenue for the purpose of tariff fixation  takes into account only 30% of the revenue generated from  non-aeronautical services (these are less capital intensive and more  profitable. This provision also exists for Mumbai Airport). The moot  point is how much of the additional 9 lakh sq feet are used to  generate revenue from non aeronautical services (say shops). If such  additional area is substantial, DIAL benefits to the detriment of the  consumer.

Fourth,  the CAG Report states that, ‘Using OMDA’s provisions, DIAL has  outsourced most of the non-aeronautical services through the  mechanism of JVs (DIAL has equity share in these companies ranging  from 26 per cent to 50 per cent; details in CAG report). While OMDA  allowed DIAL to sub-contract any service, this has an impact on the  revenue to be shared with AAI and put additional burden on the  passenger in the form of Development Fees.’ Since DIAL has equity  stakes in these companies, commercial dealings cannot be at arm’s  length. Again DIAL benefits more than the consumer!

Also  ‘the target revenue does not include revenue generated from  non-transfer assets in this case commercial exploitation of 239.95  acres of land’.

Therefore,  on one hand targeted revenue excludes 70% of non-aeronautical revenue  and receipts from commercial exploitation of land, whilst on the  other cost over-runs are recovered from consumers through levy of  development fee. The agreements allow DIAL to win irrespective of  whether the tossed up coin is head or tails.

Receipts  of Rs 2,936 crs by Airport Authority of India, as its share of  revenue from 2006-07 to 2011-12, cannot be used to deflect points  raised in CAG report. How much would AAI have earned if points raised  by CAG were considered?

The  CAG report on DIAL carries the responses of the Ministry of Civil  Aviation and the auditor’s counter response.  [http://online.wsj.com/public/resources/documents/IGI.pdf]

Even  though Delhi Airport’s infrastructure is much appreciated the  question is, why must consumers overpay?

Fifth,  the OMDA has effectively granted DIAL the sole right to operate Delhi  Airport for a period of 60 years on the terms and conditions frozen  in the OMDA. According to the CAG report, a Cabinet note of September  2003 envisaged an initial concession period of 30 years, which could  be extended by another 30 years subject to mutual agreement and  negotiation of terms. However, in the draft OMDA, which formed part  of the bid documents, the important condition, ‘subject to mutual  agreement and negotiation of terms,' was omitted. Thus ‘this does  not provide the Government any scope for review of any of the  conditions in OMDA and SSA.’

Note  that in the case of Istanbul airport, where GMR (key DIAL promoter)  is a stakeholder, the concession period is 20 years.

Learning  from the above the Government must do a clear cost benefit analysis  before seeking to privatise airports like Ahmedabad, Chennai, and  Kolkata etc. The process would be transparent if this analysis is  uploaded on Ministry site and debated.

Now  let us look at Air-India.

One, have you heard of a Company that makes a financial commitment of Rs  55,000 crore for purchase of 111 aircraft on an equity base of Rs 145  crore and carry-forward losses of Rs 776 crore -- (Indian Airlines  loss of Rs 957 crore less Air India profit reserves Rs 181 crs) as on  March 31, 2006?

Two,  since loan funds were used to fund purchase of aircraft, was it  confirmed that expected revenue and profits would enable timely  repayment of debt! If there was indeed such a confirmation, the  projections and underlying assumptions should be published to start a  public debate.

Three, UPA first changed the name of Indian Airlines to 'Indian' accompanied  with a smart logo. Even before all the IA aircraft sported the new  logo, the Ministry of Civil Aviation, vide letter dated April 20,  2006, asked the Air India board to work towards a merger with Indian  Airlines. [Why Air India is in a mess and how it can be revived http://business.rediff.com/slide-show/2009/jul/21/slide-show-1-how-air-india-can-be-revived.htm]

Four, according to an article in Business Standard (18 July 2009), ‘Within  the overall west Asian pie, Emirates has seen its capacity rise  four-fold from 12,400 seats per week in 2004 to 48,600 in 2008;  Etihad Airways from 1,600 to 8,500, even tiny Air Arabia’s capacity  is more than that of British Airways and is quickly closing in on  Lufthansa’.

Further,  a Business Standard report (9 November 2011) states, ‘The CAG  criticized the civil aviation ministry for granting “massive  increases” in bilateral air traffic rights to Gulf nations in  2004-05, despite Air India’s (AI) “strong reservations”, as  this was its most profitable international sector. Between May 2007  and March 2010, the Dubai sector saw the number of seats per week  rise from 18,400 to 54,200.’

[http://www.business-standard.com/article/companies/huge-traffic-rights-to-gulf-hit-ai-111090900099_1.html]

Did  such generosity result in any foreign policy or commercial gains for  India?

Aside,  Air Traffic rights are a national resource like Coal. Should these  rights be auctioned like spectrum?

Five, Business Standard (12 September 2011) reports how 6th Freedom rights  choked AI, ‘The sixth  freedom permits a  foreign carrier to fly passengers from one country to another while  stopping in its own country. And, airlines like Emirates, Lufthansa,  British Airways, Qatar, Gulf  Air and  Singapore Airlines - which operate large hubs (like Emirates in  Dubai) and offer passengers onward flights to the US and Europe -  have used it effectively to increase their Indian market share at the  expense of Air  India (AI).  Employees of AI would have got demoralized at the denial of a  level-playing field.

[http://www.business-standard.com/article/companies/sixth-freedom-choked-air-india-111091200033_1.html]

Six,  here are a few quotes from a book written by former AI Director,  Jitendra Bhargava, published by Bloomsbury and subsequently  withdrawn. The author purchased the book before it was withdrawn by  the publisher.

Pg  114 ‘When India won the T20 cricket championship the Minister of  Civil Aviation did not consult Air India before awarding the entire  the entire cricket team and family free tickets for 5 years!’

If  the honorable Minister had asked a private sector airline to provide  a similar concession it would have been funded from the Union Budget.  Why treat AI differently?

Pg  156 ‘Despite the recommendations of the techno-economic committee  and the AI board that two-third of the 50 aircraft should be ordered  on a ‘firm basis’ and the rest on ‘option’, the empowered  group of ministers decided to order the entire lot on a firm basis’.

Why  did the EGOM take this decision when AI had such a low capital base?

Last,  is the facilitation of Etihad Airways investment in Jet! Jitendra  Bhargava wrote the Ministry of Civil Aviation granted over 40,000  additional seats over a three year period. The announcements for  stake sale and grant of additional seats came within hours of each  other.

[http://www.business-standard.com/article/opinion/jet-airways-national-carrier-113042500916_1.html]

One  can argue that all decisions were approved by the Cabinet, thus the  principle of collective responsibility comes into play, but that does  not take away the primary responsibility of the administrative  ministry and its leader. When  will those in Government, bureaucrats  and politicians, be accountable for their actions?

J.R.D.  Tata, the Indian skies miss you!

The  author has relied on published reports for this piece. Any errors or  omissions are unintended. It is not the author’s intent to defame  an individual singly or a group

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