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Sunil Jain: Mr 20 per cent

RATIONAL EXPECTATIONS

Sunil Jain  |  New Delhi 

Reports suggest the GMR Group-owned Delhi International Airport Limited (DIAL) is badly strapped for cash as it isn’t finding too many takers for the 250 acres of land it can develop commercially as part of the Delhi airport modernisation project. While this is a serious problem for DIAL and its completion targets, more serious from the point of view of probity is that this will slash Airport Authority of India’s (AAI) share of revenues. Depending on how real estate recovers, the cut varies from 20-25 per cent.

GMR won the bid for by promising to share 46 per cent of the airport’s top-line revenue with AAI — this included revenues from the airport operations as well as from the real estate. Last year, DIAL asked bidders for up-front deposits equal to six years of the average rentals during the 58-year lease (average rentals, not just rentals in the first six years). Based on a complex formula (see table), this meant DIAL hoped to get deposits of Rs 70 crore per acre — since the sub-lease was for 58 years, these values were significantly higher than the normal rental-deposits got for most land deals.

DIAL argued that these interest-free ‘deposits’ were not ‘revenue’ and so didn’t need to be shared. This is incorrect since the deposits are being taken in lieu of rent; the higher the deposit, the lower the rent, and the greater AAI’s loss. If a person gives a deposit of Rs 100 crore, and interest rates are 10 per cent, this deposit costs Rs 10 crore a year, so the annual rental will be cut by this amount.

Since this scheme would halve AAI’s revenue share, it asked DIAL to put its plans on hold. A few months ago, however, DIAL was allowed to go ahead and take deposits worth three years’ average rentals. According to DIAL, “The decision … was taken by the DIAL Board after due consultation with MOCA (civil aviation ministry) and AAI — DIAL Board also had representation from both AAI and government.” Civil Aviation Minister Praful Patel needs to be quizzed on the matter since he is responsible for his ministry’s decisions.

When DIAL invited bids for land last year, it hoped to get Rs 680 crore as rental per acre for the 58-year lease (after this, the airport has to be returned to AAI). A six-year deposit based on average annual lease rentals (over the entire lease period) works out to Rs 70 crore per acre, or Rs 17,590 crore for 250 acres. Given how property prices have crashed, let’s assume DIAL gets bids which are half this now — given the length of the lease, this is probably unduly pessimistic since DIAL will try to sub-lease more of the land only when property markets recover. At 50 per cent property prices, DIAL will get Rs 340 crore of rentals per acre over the lease period, which translates to deposits of Rs 18 crore per acre, or Rs 4,475 crore for all 250 acres.
 

DIALLING LESS REVENUES FOR AAI
(or how AAI’s revenue share falls)                                                                                                                         (Fig in Rs crore)
  Earlier Plan Current Plan
Total rent per acre for lease period* 680 340
Deposit amount (for 250 acres) 17,590 4,475
Decline in rent if interest rate of 10% assumed 1,759 448
DIAL revenues after 5 years**
a) Pure airport revenues 1,810 1,810
b) Including increased rentals if no deposits 3,569 2,258
AAI’s revenues from airport
a) Pure airport revenues 833 833
b) Including increased rentals if no deposits 1,642 1,039
c) Revenue share if DIAL takes deposits (%) 23 37
*When DIAL called for bids last year, it set a base rental of Rs 1.58 crore per acre in the first year and asked firms to bid on this. In addition, there was an annual escalation of 5 per cent; the 29th year rent would be 1.5 times that of the previous year; after this, the annual 5 per cent escalation would continue. For the current plan, we have assumed prices have crashed to half the level of last year.
** Assuming 15 per cent annual growth in airport revenues

What this means for AAI’s revenue share depends on what DIAL’s revenue will be. Given DIAL’s expected revenues of Rs 900 crore this year, assume an annual growth of 15 per cent — this gives pure airport revenues of Rs 1,810 crore after five years. Add to this the additional rentals DIAL would have got if no deposits had been charged. This shows that AAI’s share of DIAL’s revenues falls to 37 per cent when DIAL takes deposits — that is, it falls by a fifth compared to what GMR had originally promised (even if you allow DIAL to take the first year rentals as deposits, the numbers don’t change materially). Essentially, the higher the property prices, the greater the fall in AAI’s revenue-share due to DIAL’s deposits scheme. So, if real estate recovers, AAI’s losses will rise.

Postscript: If DIAL hadn’t tried to shortchange AAI and had its plans thwarted last year, it could have given 46 per cent of the deposits to AAI and still kept Rs 9,500 crore (54 per cent of Rs 17,590 crore) — if prices fall by half now, it gets to keep just Rs 4,475 crore! Playing by the book helps.

First Published: Mon, December 29 2008. 00:00 IST
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