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Airport Privatization

Airport Privatization

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Published by Saurabh Suman

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Published by: Saurabh Suman on Oct 05, 2009
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Airport Privatization: Bidding Process forDelhi and Mumbai (A)
It was January 24, 2006. The Empowered Group of Ministers (EGoM) was meeting for thefourth time. They were to discuss the future of the Rs 54 billion Delhi and Mumbai airportmodernization projects. The matter had become even more controversial after the Group of Eminent Technical Experts (GETE), headed by the Delhi Metro Rail Corporation (DMRC)Chief, Mr E Sreedharan qualified only one bidder, GMR-Fraport, and downgradedReliance-ASA consortium on the evaluation criteria of ‘management capability.’The EGoM had to decide the way forward based on the technical evaluation score summary(Exhibit 1) of the bidders for the Delhi and Mumbai airports. As per the Request for Proposal (RFP), a minimum of 80% score was required on both the criteria of ‘managementcapability’ and ‘development capability’ to qualify for the next round, when the winner would be selected on the best financial bid. In case the same bidder won both the airports,they would have to give up one.The EGoM was headed by Mr Pranab Mukherjee, the Minister of Defence and included Mr Hans Raj Bhardwaj, the Minister of Law and Justice, Mr P Chidambaram, the Minister of Finance, Mr Kamal Nath, the Minister of Commerce and Industry and Mr Praful Patel, theMinister of State (independent charge) for Civil Aviation. Exhibit 2 gives the scope andmembers of the various committees involved in the bidding process.After the bids were submitted on September 14, 2005 and their technical evaluation by theEvaluation Committee (EC), the review by the Government Review Committee (GRC), andthe inability of the Inter Ministerial Group (IMG) to arrive at a decision, the EGoM first meton December 05, 2005 to discuss the IMG and GRC recommendations. They referred theissue back to the IMG, suggesting a review of the EC report, but with no dilution of the RFPcriteria and no fresh evaluation of bids. However, after going through the process, the IMGfailed to reach a unanimous decision.
Prepared by Rekha Jain, G Raghuram, and Rachna Gangwar.Research assistance by Meghna Mathur is acknowledged.Teaching material of the Indian Institute of Management, Ahmedabad is prepared as a basis for classdiscussion. Cases are not designed to present illustrations of either correct or incorrect handling of administrative problems.Copyright
2007 by the Indian Institute of Management, Ahmedabad.
Indian Institute of ManagementAhmedabadIIMA/PSG0102(A
IIMA/PSG0102(A)2 of 50
The EGoM met on December 21, 2005 and noting the failure of the IMG to reach adecision, constituted a Committee of Secretaries (CoS) under the Cabinet Secretary torecommend the selected bidders. The CoS constituted the GETE to validate the technicalevaluation process, including transparency and fairness. The EGoM met for the third timeon January 11, 2006, to discuss the CoS recommendations. The EGoM decided to meetonce again after seeking additional inputs from the GETE, which were provided on January17, 2006.Mr Praful Patel had publicly committed to completing the already delayed bidding process by January 31, 2006. He was keen to see this process through, so that the governments’thrust on infrastructure development was seen to be on track. He was also concerned thatfurther delays could affect the involvement of private parties in the modernization process, both from the perspective of the interest from the private parties and the ideology of someof the political parties supporting the current coalition government. It had been nearly 10years since the first proposal for modernization of Delhi and Mumbai airports had been presented to the government by the Airports Authority of India (AAI).
Early Steps towards Privatization
Modernization of Delhi and Mumbai airports had been considered as early as 1996 by theAAI. In 1998, the Prime Minister had made a declaration that world class airports should beset up in the country. A task force on infrastructure recommended in 1999 that a long termlease for outsourced management should be considered. They were not in favour of corporatization. In June 2003, the AAI board approved a modernization proposal costingapproximately Rs 30 billion for Delhi and Mumbai airports. The AAI Amendment Bill was passed by the parliament authorizing AAI to transfer the operations and management of itsexisting airports by way of long term lease to private players. These were expected to runfor a period of at least 30 years, with an option to extend for a further 30 years. However,air traffic control would remain the responsibility of AAI and security that of thegovernment. The Act was notified as effective from July 01, 2003.In September 2003, a cabinet meeting of the then National Democratic Alliance (NDA)government approved a restructuring of the Delhi and Mumbai airports on a long term lease by adopting joint venture route with 74 per cent equity of a private consortium and 26 per cent of AAI. They also constituted the EGoM for implementing the decision. The Ministryof Civil Aviation (MoCA) constituted the IMG in October 2003 to assist the EGoM. Thethen EGoM met on November 09, 2003 under the chair of the Finance Minister.The EGoM approved the appointment of ABN Amro as the financial consultants (FC) onDecember 22, 2003. An Invitation to Register an Expressions of Interest (ITREOI) for acquisition of 74 per cent equity stake in the Joint Venture Company (JVC) was issued onFebruary 17, 2004. Last date of submission of expression of interest (EOI) as a response tothe ITREOI was June 04, 2004. Exhibit 3 gives excerpts from the ITREOI, includinggovernment objectives and decisions, and bid structure. AAI’s overall objective was tocomplete the transaction for both the airports not later than September, 2004. Exhibit 4gives a macro economic perspective on the rationale for restructuring and modernization of Delhi and Mumbai airports as given in the ITREOI.Exhibit 4 also describes the aviation oversight functions which were distributed betweenMoCA, AAI, Directorate General of Civil Aviation (DGCA) and the Bureau of Civil
IIMA/PSG0102(A)3 of 50
Aviation Security (BCAS). There were 449 airports/airstrips in the country. Commercial air services were possible only to 122 AAI approved airports. Eleven of these wereinternational, 83 were domestic civil airports and 28 were civil enclaves at defence airfields.Of these, commercial airlines operated only through 60 airports. The remaining wereunutilized, at best handling occasional charter aircraft operations. Only 11 out of the 122airports generated profits.
Delhi and Mumbai Airports
The Delhi and Mumbai airports accounted for 47% of the passenger traffic in 2003-04.They were even more significant in terms of cargo traffic, accounting for 58% of the share.Catering to this, the aircraft movements share was 38%. These airports generated one thirdof all revenues earned by the AAI. Both Delhi and Mumbai airports handled twice as manyaircraft movements as they were originally designed for, resulting in congestion for bothaircrafts and passengers.In 2003-04, Delhi airport handled 10.4 million passengers, of which 58% were domestic.The total cargo traffic was 296 thousand tons, of which 31% was domestic. The mainsource of revenue at Delhi airport was aeronautical services (42%). Non-aeronauticalservices included cargo (26%), and commercial and others (32%).In 2003-04, Mumbai airport handled 13.3 million passengers, of which 60% were domestic.The total cargo traffic was 326 thousand tons, of which 28% was domestic. The mainsource of revenue at Delhi airport was aeronautical services (50%). Non-aeronauticalservices included cargo (17%), and commercial and other (33%).During the early period of the tenth plan (2002-07), passenger traffic at airports had grownat an average rate of 7% per annum. Government was expecting an average growth rate of 16% per annum by 2010, given the “Open Skies” policies and the response by the privatesector in establishing new airlines, including low cost carriers. Nearly 97% of the country's foreign tourists arrived by air, mostly through the Delhi andMumbai gateways. Tourism was the nation's second largest foreign exchange earner. Whilecargo carried by air weighed less than 1% of the total cargo exported/imported, it accountedfor nearly 20% of the total value.A survey by the International Air Transport Association (IATA) revealed that for the year 1999, Delhi and Mumbai airports ranked amongst the three least favored airports in the AsiaPacific region in each of the 19 service elements considered. The overall ratings for Delhiand Mumbai were 2.6 and 2.3 respectively on a 5 point scale, while the average for airportsin the Asia Pacific region was 3.5 and for world airports was 3.8. Copenhagen, Singapore'sChangi and Helsinki ranked among the top for overall passenger satisfaction out of the 57airports covered in the survey, with a rating of about 4.3 to 4.4.
(http://www.hinduonnet.com/fline/fl2303/stories/20060224006913000.htm) (http://www.ipsnews.net/news.asp?idnews=31659)
Pre Bid Events (May 2004 to September 2005)
Change of Government 

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