More than 13 years in the making, frequently tied up in government red tape and reliant on fickle political support, for a long time Bangalore airport seemed trapped in the limbo that often plagues Indian projects, writes Simon Ellis.

But this image obscures the fact that India’s first privately developed international airport BOT is a pioneering scheme which will act as a curtain-raiser for a US$5 billion market for private airport redevelopment.

And now, in the wake of sweeping reforms that revolutionised the Indian aviation industry earlier this year, the sponsors Siemens, Zurich Airport and Larsen & Toubro have benefited from their perseverance.

Bangalore is set to be a crucial nexus in the booming open market for international air travel.

With two prestige projects to refurbish and operate airports valued at more than US$1.5 billion each in India’s two largest cities – Delhi and Mumbai – to be awarded imminently, it is also a crucial water testing exercise.

Background

With a population of six million Bangalore is one of the largest cities in the world without a full scale international airport. Instead the city relied on a facility uneasily-shared between the Karnataka regional government, the Indian Air Force and Hindustan Aeronautics Limited.

However Bangalore’s booming high-tech industry and increasingly affluent middle class seemed to offer abundant opportunities for international travel, a fact attested by the decisiohns by Air France, British Airways and Canada’s Northwest Airlines to start international services to the city later this year.

To channel this growing demand, a full scale international airport was planned in 1991 to be sited at Devanahalli, 30 kilometres north of the city.

The groundswell of demand did not initially surpass political inertia. In it’s first avatar, a construction and lease agreement with Indian engineering giant Tata, the project fell through in the mid 1990s after arguments with the national government.

In the late 1990s the project was re-tendered and drew bids from consortia led by two of Germany’s largest conglomerates, Siemens and Hochtief.

Siemens added Unique Zurich airport as FM and operations partner and the ubiquitous domestic construction firm Larsen & Toubro and in October 2001 was selected as preferred consortium.

Project

With the contract awarded, the Karnataka government and the Airport Administration of India joined the SPV, now known as Bangalore International Airport Limited (BIAL).

The consortium would be on the 74:26 private:public ratio typical in Indian PPP deals.

Linklaters India partner Sandeep Katwala, who advised the consortium explains: ‘26 per cent is a magical number in India because of the fact that under the Companies’ Act a special resolution requires a 75 per cent majority. So if you have 26 per cent you block changes to the business of the country or the articles etc.’

But it is also generally as a matter of policy, the government will keep at least 26 per cent of a project for the Indian sector, public or private’

The overall ownership of Bangalore International Airport Limited would be:

Larsen & Toubro: 17 per cent Unique Zurich Airport: 13 per cent Siemens Project Ventures: 40 per cent Airports Authority of India (AAI): 13 per cent Karnataka state Government: 13 per cent

The technical features of the deal were conventional. The airport would have two runways, 120 aircraft stands, two terminal buildings that can handle more than 40 million passengers a year and up to one million tons per year of cargo.

Siemens India was awarded the EPC covering to complete project management, turnkey electrification and supply of electrical equipment, Unique Zurich would operate the airport and Larsen & Toubro would carry out all construction work on site.

Under the proposals, the consortium would also draw revenue from 350 acres earmarked for commercial activities, hotels, business centres, shopping and other conveniences.

However the legal aspects of the deal were not so straightforward. The first stumbling block was that the consortium faced was that there was no provision under national law for a concession agreement.

The nation’s only other major airport outside the jurisdiction of the AAI, at the southern city of Cochin, was operated on the base of a rolling short-term lease.

The consortium’s lawyers and financial advisers understandably decided that a renewable 12-month lease was hardly a firm grounding for 30-year project financing.

However the Karnataka government was not as amenable as the consortium had hoped claiming that authority for airports came under the jurisdiction of the Indian central government.

The legal team was dispatched to Delhi to meet the minister of law but found obstacles there, Katwala explains, ‘The government was reluctant to put legislation through parliament because of the concern that the opposition parties have used foreign investment as a political tool.'

They were also unwilling to concede anything that could have impacted on the planned concessions for Bombay or Delhi.’

Eventually after nine months of negotiations, the BJP government passed the concession law in late 2003. The agreement was signed between the government and consortium in July 2004.

However, in early 2005, with no sign of work on site Siemens lost patience with the Karantaka government and set an ultimatum to walk out of the project.

The state government relented and Larsen & Toubro began groundwork in March 2005. Under the current timeline, the consortium intends to have the airport ready by April 2008.

Financing

As with the legal arrangements, the BIAL consortium came up against entrenched opposition when it came to financing the airport – this time in the form of the Airports Authority of India, which sets tariffs at all other Indian airports.

Katwala explains, ‘We said we are not entirely comfortable with that, we need to recover costs and derive a decent profit margin and we cannot necessarily be controlled by AAI charges.’

The two parties agreed to tie the tariffs to the international tariff principals of the International Civil Aviation Organisation (ICAO) which assures the recovery of construction cost plus margin to the consortium.

But that was not the end of the story, ‘Halfway through this the government said they were going to bring in a regulator who will set charges, and they are still talking about that.So we had to put a mechanism in there to make the regulator work within ICAO principles.’

The state government was more forthcoming though when it came to financial support, offering a 2 billion rupee (US$46m) three year soft loan, backed by Standard bank India (SBI).

Along with the state loan it was undertaken to raise the rest of the funds through rupee financing.

After considerable interest form the banking sector, ICICI was selected as MLA to raise the 5.2 billion rupees (US$119m) balance of the debt. The 12-year loan will be syndicated in the domestic banking market before the end of the Summer

BIAL itself provided an equity of 3 billion rupees (US$69 million), which is not subject to a completion guarantee. 

Siemens will raise US$27.4m; Larsen & Toubro and Unique Airport Zurich both US$11.8m and the two state agencies

In return for their investment the consortium is expected to receive around of the revenues generated by the airport every year.

Conclusion

It is hard to look at Bangalore project without keeping half an eye on the US$1.5bn Mumbai and Delhi projects where bids are due in this month.

While there are clear differences – not least the Bangalore project was a completely new greenfield BOT while Mumbai and Delhi are prized state assets – Bangalore has laid much of the legal and political groundwork.

Overall, the model that Bangalore has established bodes well. Despite a degree of opposition from all the public sector bodies involved, the final balance sheet seems to have stacked up in BIAL’s favour.

In fact despite setbacks, the consortium mitigated the regulatory risks, negotiated a favourable financing deal and found central government responsive, even to the degree of passing the ‘Open Skies’ act.  

The project may have been nearly fourteen years in the making, but in its current form it has taken a relatively modest four years to go from preferred bidder to financial close.

As Katwala says, ‘There is a lot of red tape but it probably takes less time to do a project in India than a project in the US, where a new stadium can take around seven years after environmental and planning approvals’

Ultimately the project is an exemplar that a mixture of determination, aggression and innovation can get through the red tape. It will be interesting to see if the winners of Delhi and Mumbai follow the Bangalore example.

Project at a glance

Project name	Bangalore International Airport Ltd (BIAL)
Location	Devanahalli, 30 km north of Bangalore
Description	Two terminal BOT airport to serve the city of Bangalore, Karnataka, southern India
Sponsors	SiemensLarsen & ToubroUnique Zurich Airport Airports Authority of IndiaKarnataka Government
Operator	Unique Zurich Airport
EPC Contractors	Siemens, Larsen & Toubro
Total project value	10.2 billion rupees (US$234m)
Total equity	3 billion rupees (US$69m)
Equity breakdown	Siemens - US$27.4mLarsen & Toubro - US$11.8mUnique Airport Zurich - US$11.8mKarnataka gov. - US$9mAirports Authority of India - US$9m
Total senior debt	7.2 billion rupees (US$165m)
Senior debt breakdown	ICICI- 5.2 billion rupees (US$119m)Karnataka government loan (backed by SBI) - 2 billion rupees (US$46m)
Senior debt pricing	N/A
Debt:equity ratio	71:29
Mandated lead arranger/s	ICICI
Legal adviser to sponsor	Linklaters, Crawford Bayley (Indian counsel)
Legal adviser to banks	AZB & Partners
Legal adviser to Karnataka government	Jyoti Sagar & Associates
Legal adviser to Indian government	Amarchand Mangaldas
Date of Financial Close	June 2005