Bangalore International Airport

Privatisation Drive
Started in India in 1990s with Road sector.
That project too was not under BOT model. Project funded by Government through 1% cess on

diesel. Infrastructure bonds were floated where the Public Sector Corporations invested. Proper privatisation has only been undertaken in this Millenium.

Why privatise airport sector?

Indian economy grew robustly. But GDP growth hampered

by infrastructure. Infrastructure leads to growth and completes the cycle. Airport sector grew by 35% against 9 % growth internationally between 2001 to 2007. Currently airport infrastructure in inadequate?
Flights hover around airports due to congestion. Delhi Airport with a capacity to handle 12 million passengers

per annum carries 20 million passengers per annum.

Airport modernization inevitable. Government cannot

cope up with the demand - and hence privatization was necessary.

Snapshots for future

Two "green field" airport projects, international

airports at Bangalore and Hyderabad, have been completed fully. Two "brown field" airport projects for Delhi and Mumbai to be completed by 2010. Process on for inviting bids for 6 more green field airports in metro cities and 35 brown field airports in the non-metro cities.

Structure
Concessionaire for the Bangalore airport is a private

limited company. Amongst the private players, Siemens of Germany have the majority 40%. Zurich airport holds 17%. Government through its agencies and instrumentalities holds 26% shareholding?

Salient features of project

Promoters: Siemens-Zurich Airport-L&T consortium,

Airports Authority of India (AAI) and Karnataka State Investment and Industrial Development Corporation [KSIIDC]. Start Date: October 2002, June 2003, September 2003, November 2003, December 2003, June 2004, Jan 2005, Feb 2005, April 2005, July 2-2005 End Date: 2003, Early 2005, Mid-2006, Mid-2007 [27 months], Jan 2-2008 Trial Run: Jan 15, 2008 [held in 3 stages: Basic, Advanced and Integrated] First Commercial Flight: March 30, 2008, May 11, 2008, May 24, 2008

Salient features of project

Area: 4300-acre plot in Devanahalli, 29 km

Bangalore Project cost: Rs 1,334 crore [$288 million] Rs 2,478 crore State share: Rs 350 crore Exemptions: No sales tax Exemption Passenger Capacity : 12 million per year Additional Jobs Created: 1,000 jobs per million passengers Cargo capacity : 100,000 tonnes per year First phase by : June 2007

Salient features of project

Design allows a second runway to come up later with a

separation distance of about 2 km. Run way would be approximately 4000m in length with a width of 60m. The concessionaire can develop up to 300 acres land commercially for any activity not connected with the airport? Concessionaire is free to set up not only hotels or malls, it can even go for Special Economic Zones, manufacturing factories, country clubs, golf courses, power plant etc.

Nature of the concessions

Basically for Development, Construction, Operation &

Maintenance of the airport for a period of 30 years. It is extendable at concessionaires sole option for another 30 years (i.e. total 60 years). The land for the same is leased by the State Government. Concessionaire has the burden to independently evaluate the scope of the project and be responsible for all risks. Government on the other hand, undertakes to : Guard the interests of the shareholders and lenders

investment or economic interests in the project Ensure statutory compliances are granted promptly Ensure insulation of concessionaire from competition?

Monitoring of the project

It is provided that the Government shall not intervene in or

interrupt in the design, construction, completion, commissioning, maintenance, monitoring or developing of the airport unless on account of national emergency or as per any existing law or for public safety. If intervention is on account of public safety, it shall be limited in time and for a period to be mutually agreed between the parties. Agree to set up a joint Co-ordination Committee comprising of representatives of the State and private parties to monitor the implementation. Airport performance shall be monitored through passenger survey and as per the IATA Global Airport Monitoring survey standards.

Charges which can be levied

The charges in 300 acres for non- airport activities area

are not subject to Government control and will be free market driven. Airport Charges which include passengers fees, landing charges, user development fees shall be fixed with the approval of the Ministry of Civil Aviation. To be fixed on the basis of the current charges in place for other airports in India and consistent with the International Civil Aviation Organisation's policies on charges for airports.

Heads of risks
Why risk? Mammoth project. Long span of 60 years. All risks cant be clearly identified and addressed through contracts. Type of risks Delays and consequences of delay in the airport opening. Change in law and the risks involved therein. Termination of agreement due to default of either party. The role of the regulatory authority. Dispute resolution.

Delays and consequences of delay

Target date for airport opening is stipulated as 33

months. From this date (i.e. date of airport opening) the concession period is to start running. In Roads or Ports, the concession period starts to run from the date of signing of the concession agreement. This is the greatest incentive and at the same time coercive measure to ensure timely completion of the project? However in the airport sector one finds the provision for delays to be rather soft on the concessionaire?

 Completion can be extended by as much as six months

if it can be shown that the delay was on account of failure by Government of its obligations. After the six months extension liquidated damages kick in which are meagre at around US$ 2250 per day. If for another six months the airport does not open then it becoming an "event of default", which has its own cure period etc. Finally it will lead to termination of the contract, which can take upto 2 years. Is it justified?

Change in law
A concession agreement over a long period of time cannot

guarantee against change of law. Concession agreement divides and treats the subject of change of law in two categories Where a change in law entitles the concessionaire to some

compensation. Second is where it does not entitle the concessionaire to any compensation.

No compensation cases relate to any of following statutes: Non Federal (or State) law Environmental law Labour law Tax law

Change in law
if there is change in any other law which results in a

financial loss and the affect to which exceeds over US$ 200000 in any given year, then the concessionaire may notify the Government and propose amendments to the contract so that it is put in the same financial position it would have been, had there been no such change in law. Any dispute is to be settled through Dispute Resolution Mechanism.(Is it an efficient method and what is the answer?)

Independent Regulator

Termination of the agreement

Agreement enumerates the "events" which would

tantamount to "events of default" for either party. A 120 days cure period is stipulated before notice of termination. Once notice of termination is issued, two consequences would follow : Government would acquire the airport and all rights,

interest and titles Government has the option to acquire and take over the non airport activities.

Termination of the agreement

Compensation after take over of airport If concessionaires default- 100 % outstanding debt plus value of investment of the concessionaire in the nonairport activities taken over by the Government. If Government's default - Outstanding debt or "Settlement Amount" (as defined) whichever is higher plus value of the non-airport activity the govt decides to takeover plus damages.

Role of regulatory authorities

In infrastructure projects involving the public, an

independent regulatory authority is essential? Concession Agreement envisages that an Independent Regulatory Authority would be set up. The Regulator would not only lay down or regulate standards, approve charges, impose penalties etc., but solve disputes. Points to note: Vast power of regulator will fade the contract. Draft bill go create regulators has to pass through long stages

before being enacted. Poor track record of electric regulators.

Dispute resolution
The Concession Agreement envisages that Dispute

Resolution shall be through ad hoc arbitration, under the UNCITRAL Rules and under the Indian Arbitration Act with the venue at New Delhi. Once an independent Regulator is put in place, the arbitration agreement shall stand overridden. There are two types of problems envisaged : International parties committing huge funds in a foreign

jurisdiction will have far greater confidence in arbitration in a neutral country under the Rules of a neutral Arbitral Institute. Once the Regulator is put in place, it would naturally be subject to the hierarchy of the Indian legal system , which is slow.

thanks