India, one of the world's fastest growing commercial aviation markets has reached financial close on the modernisation of the Chhatrapati Shivaji International Airport (CSIA) in Mumbai

Modernisation of Delhi and Mumbai airports had been considered as early as 1996 by the Airports Authority of India (AAI).

In 1998, the Prime Minister made a declaration that world class airports should be set up in the country.

The following year, a task force on infrastructure recommended that a long term lease for outsourced management should be considered.

Spread over an area of 7.6 sq km, the CSIA is located inside the city, towards the north and is conveniently connected to the rest of the city by road and the local rail network.

The airport is the major international gateway to the industrial states of Maharashtra and Gujarat and is an important hub for domestic traffic.

Political Background

In June 2003, the AAI board approved a modernization proposal costing around US$7.4 billion for Delhi and Mumbai airports.

The Parliament then passed the AAI Amendment Bill which authorised AAI to transfer the operations and management of its existing airports by way of long term lease to private players.

These were expected to run for a period of at least 30 years, with an option to extend for a further 30 years.

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 a JV route with 74 per cent equity to be provided by a private consortium and 26 per cent by the AAI.

The country went for general elections in May 2004, resulting in the change of government to the United Progressive Alliance (UPA).

The new government took over towards the end of May 2004 and adopted a National Common Minimum Program, in which infrastructure development was a key focus area.

The bidding process began in late May 2004 with an original completion date of September 2004, however, due to a variety of reasons, the process was delayed and the bids were finally received by September 2005.

Major policy decisions were made by the Empowered Group of Ministers (EGoM).

The final decision was made in January 2006 by the EGoM after compromising on some of its own set parameters for the airport.

One of the losing bidders called this an arbitrary decision making process and challenged the decision in court.

After two stages of legal battle, the bidder finally lost the case in November 2006 and the original awardees retained their position.

The Project

In February 2004, expressions of interests were invited from private companies for a 74 per cent stake in the joint venture company for the BOOT (Build-Own-Operate-Transfer) project.

Ten bidders had submitted EoIs by July 2004, of which only one – the Videocon consortium - was not shortlisted. All the others remained pre-qualified bidders (PQBs).

Videcon’s bid was rejected because the group had involved an airport consultant rather than an airport operator.

The RFP document for the Mumbai airport and the draft transaction documents were issued to nine PQBs in April 2005. The finals bids were to be submitted no later than June 2005.

The nine teams that submitted EoIs were:

• Bharti Enterprises and Changi Airports International (CAI)
• Larsen & Toubro, Piramal and Hochtief Airport
• Sterlite Industries India, Macquarie Airports Group (MAG) and Aeroports de Paris (ADP)
• GMR, Fraport and India Development Fund (IDF)
• GVK, Airports Company South Africa (ACSA) and Bidvest
• Reliance and Aeropuertos y Servicios Auxiliares (ASA)
• DS Construction and Munich Airport
• DLF and MANSB
• Essel, TEPE and AKFEN Construction JV
• Videocon and Methven Corporation (rejected consortium)

Review meetings were held with the PQBs on various aspects of the transaction documents, partly at their request. The transaction documents were then finalised by August 2005.

These were issued to eight PQBs, with the extended bid date of September 2005.

The DLF-MANSB consortium then dissolved itself and MANSB was invited to join the GMR-Fraport consortium.

Out of eight PQBs, the Bharti-Changi consortium and L&T, Piramal and Hochtief team pulled out citing stiff performance conditions in the transaction documents.

The six teams that remained were:

• Reliance and ASA
• GMR, Fraport and IDF
• DS Construction and Munich Airport
• Sterlite Industries India, MAG and (ADP)
• Essel and TEPE and AKFEN Construction JV
• GVK, ACSA and Bidvest

In January 2006, after having evaluated all financial, technical and development capability aspects of the bids, the EGoM selected the GVK-led consortium as preferred bidder for the Mumbai airport.

The consortium set up a SPV – Mumbai International Airport (MIAL) – in March 2006 to carry out the project.

Modernisation

The project involves the refurbishment of the airport with the view to develop a world airport handling passenger traffic of 40 million per annum by 2012 and handle cargo traffic of 1 million tonnes per year.

Expansion works include:

• building a common integrated terminal for both domestic and international passengers
• upgrading and developing the runway system with taxiways and rapid exit taxiways
• developing infrastructure on the city-side and creating efficient access to the terminals

At present, CSIA caters to nearly 18 million passengers and handles around 400,000 tonnes of cargo annually.

The modernisation of CSIA assumes great significance given Mumbai's status as India's financial capital and its aspirations to become a key business centre in Asia.

MIAL also plans to significantly improve the cargo facilities at CSIA. A new integrated cargo complex is being planned, which will be equipped to cater to all kind of goods including perishables and agricultural produce.

Financing

In October 2006, MIAL announced a capital investment of US$1.258 billion for the modernisation of the Mumbai airport.

Members of the GVK-led consortium committed contributions of US$242 million in equity, while the AAI would not be making contributions towards the capital investment.

The AAI which has a 26 per cent stake in MIAL would not be making any contributions towards the capital investment.

GVK is leading the consortium with a 37 per cent stake; Bidvest has a 27 per cent stake and ACSA 10 per cent.

In tranche 1, the equity is being provided by the GVK-led consortium which amounts to US$242 million.

In tranche 2, senior debt is US$1.016 billion and the MLAs that are providing debt are Industrial Development Bank of India (IDFC) and UTI Bank.

It is a term loan with maturity standing at 17 years plus seven years loan drawl period.

The senior debt pricing on tranche 2 is: 3 years G-Secs + 215bp. The debt:equity ratio is 81:19.

Clifford Chance acted as legal adviser to the GVK-led consortium.

ABN Amro acted as financial adviser to the government with Amarchand & Mangaldas & Suresh A Shroff & Co (AMSS) providing legal services.

Conclusion

With air-passenger traffic levels expected to grow by 12.5 and 7 per cent domestically and internationally respectively over the next decade, India has no option but to seek more private investment to improve and build airport facilities to cope with this level of demand.

The country has endorsed new policies over the last ten years to ensure that the aviation sector meets international standards with the help of the private sector.

All 449 of India's airports are in urgent need of modernisation in equipment and services, terminal technologies and transport facilities.

In line with its move to improve airport infrastructure, India has a number of modernisation plans in the pipeline including:

• Modernisation of Delhi Airport - procured at the same time as Mumbai airport with a GMR-Fraport consortium selected as preferred bidder
• Navi Mumbai Airport  (US$894 million) - it has received cabinet approval and is to call bids later on this year
• Kolkata Airport modernisation  (US$368 million) - approved by the Indian government
• Nagpur Airport PPP  - approved by the Indian government

The market becomes even more attractive as air cargo air traffic is expected to increase by 600 per cent during the next 20 years. With the government promoting concessions on a BOT and BOOT basis, foreign companies in particularly are likely to be attracted by these schemes.

The project at a glance