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Philippines signs airport pact with GMR despite legal issues

Consortium pays concession fee of $320 million

BS Reporter  |  Bangalore 

Various ongoing legal issues notwithstanding, the GMR-Megawide consortium on Tuesday signed the concession agreement with the Philippines’ Department of Transportation and Communications (DOTC) and Mactan Cebu International Airport Authority (MCIAA) for expanding the Mactan Cebu International Airport (MCIA). The concession agreement was signed after the consortium paid $320 million as upfront premium. According to a statement from GMR Infrastructure, this marks the beginning of a transition phase before the operations of MCIA are formally handed over to GMR-Megawide later in the year. After giving a bid of $320 million, the GMR-Megawide consortium had emerged as the highest bidder for the MCIA project in the international bidding process, which culminated in December. DOTC had formally issued the Letter of Award to the consortium on April 4. Commenting on the signing of the concession agreement, G M Rao, group chairman of GMR Group, said: “By making the upfront payment of P14.4 billion ($320 million) within the stipulated time, we have clearly demonstrated our credentials and capabilities to take up this prestigious project. This is just the first step in our endeavour to transform the Mactan Cebu International Airport into a world-class airport destination.” GMR is in a 40:60 joint venture with the Philippines-based Megawide Construction and as much as 70 per cent of the $320 million has been raised from a major bank in that country. This move by the Philippine government comes even as a prominent Philippine politician, Serge R Osmena III filed a petition in that country’s Supreme Court to scrap the deal. The petition said the GMR group had violated bid conditions that barred with a conflict of interest from bidding. He asked the court to stop the notice of award to GMR and its local consortium partner, Megawide. It outbid seven global competitors, many of which had earlier raised questions about GMR. The conflict of interest arises because Malaysia Airport Holdings Berhad, which separately bid for the Mactan Cebu project, is also a stakeholder in GMR’s airports in Delhi and Hyderabad. Tan Bashir Ahmad, apart from being managing director of Malaysia Airport Holdings, is on the boards of the two GMR airport The petition said the other bidders were at a disadvantage because they were restricted from entering into similar arrangements. It also said the Senate Committee of Public Services had conducted two hearings on the issue and had concluded the pre-qualification bids and awards committee did not compare the submissions of the bidders in order to determine the existence of a conflict of interest.

GMR has been maintaining that the company that bid for the airport was GMR Infrastructure, in which Malaysia Airport Holdings has no stake or director representation. “The government gave us the contract only after looking into this issue, after we became the highest bidder in December,” GMR said. The consortium of GMR Infra and Megawide Construction, a publicly held Philippine firm, will invest $375 million over five years in building a new terminal and upgrading the existing one. At present, the Mactan Cebu International Airport can handle seven million passengers a year. The plan is to double the capacity to 14 million in the next five years. According to GMR, the airport reported $35 million in revenues in the last financial year.

GMR-Megawide plans to develop the Mactan-Cebu International Airport into a regional hub in the Philippines, creating passenger & cargo traffic growth, bringing jobs for the local community, giving a boost to the tourism traffic and creating multiplier economic benefits for the region.

GMR added this airport saw 65 per cent of its traffic coming from tourism and the rest from business travellers. "Cebu is emerging as a strong destination for BPO (business process outsourcing) services and this should fuel the growth of the airport much further," GMR officials told Business Standard.

Bagging this contract suggests GMR's "asset light, asset right" strategy, which it adopted nearly two years ago, might indeed have borne fruit. The company had gone for this strategy after it became highly leveraged (as much as 3.5 times) with a debt of Rs 40,000 crore for projects across its power station, airport and highway portfolios. In the past 18 months, GMR has generated close to Rs 4,000 crore free cash, besides reducing project debt by as much as Rs 10,000 crore. It will use future divestments to reduce corporate debt (close to Rs 5,000 crore at present).

The airports vertical, which accounts for about 60 per cent of the company's overall revenue of close to Rs 10,000 crore a year, is the only profitable vertical for GMR. Implementing the increased charges at the New Delhi international airport, besides revenues from the Hyderabad airport, has been among the main drivers for the company.

Highlights:

* GMR Infra's 40:60 joint venture with the Philippines-based Megawide Construction has won the project to expand & modernise the Mactan-Cebu international airport

* The GMR consortium on Tuesday made the upfront consession payment of $320 million

* GMR Infra's share: The highly-leveraged GMR Infra has said its equity contribution to the project will be about $50 mn

* Investment: The consortium plans to invest $375 million in building a new terminal and upgrading the existing one

* The The airport's current capacity is 7 mn passengers a year; this is planned to be doubled over the next 5 years

* At present, the Mactan-Cebu international airport has an annual revenue of $35 million

* The Cebu project has come within months of GMR selling its 40% stake in an airport in Istanbul, Turkey, for around Rs 1,300 crore, as part of its "asset light, asset right" strategy

* For GMR Infra, the airports vertical is the only profitable one in a portfolio that includes power stations, highways and urban infra

* At present, GMR operates international airports in New Delhi and Hyderabad

* GMR was forced out of an airport project in the Maldives. The company is contesting this through an arbitration in Singapore and seeking a compensation of $1.4 billion

* GMR is also planning a public offer for its airport assets, which have a revenue of Rs 6,500 crore - around 60 per cent of its total revenues

First Published: Wed, April 23 2014. 00:48 IST
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