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UPA’s misdeeds in aviation sector

Author: Sanjeev Nayyar
Publication: Vijayvaani.com
Date: October 15, 2014
URL: http://www.vijayvaani.com/ArticleDisplay.aspx?aid=3361

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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