Challenges in airport financing

Although Ajit Singh, the civil aviation minister, has said Airport Development Fee (ADF) would be scrapped at the Mumbai and Delhi airports from January, the GMR Group which runs the latter has said raising funds in two months to compensate the loss would be difficult.

Also, scrapping of ADF might not even result in lower fares, as airport operators would recover the additional cost of funding through higher rates and User Development Fees (UDFs). Analysts told Business Standard the UDF amount will go up, though the quantity would be fixed by the Airports Economic Regulatory Authority (AERA).

Currently, passengers are charged ADF, which is viability gap funding, and UDF, collected to meet operational expenses.

IMPACT OF ADF ABOLITION

Raising proportionate debt/equity by airport operators will be a challenge

Change in capital structure

EARLIER ADF-capital receipt and is not subject to revenue share or tax. Passenger just had to pay principal amount   ADF was to be recovered in a defined time frame NOW ADF amount becomes a part of Regulatory Asset Base   With ADF amount changed to debt and equity- it will be subject to revenue share or tax. Passenger would have to shell out principal amount + cost of capital of around 10 % + taxes   All this to be recovered over the life of the asset by airport operators

According to a spokesperson of Delhi International Airport Ltd (DIAL), run by GMR, “Given the current business environment and the fact that it will require the concurrence of multiple parties, raising of further debt and debt/equity will be a major challenge. Based on ADF collections up to September 30, approximately Rs 1,550 crore (more) will need to be raised through equity/debt.”

Adding: “Our partners, Fraport and MAHB, are nearing the end of the statutory seven-year association with the project (to operate Delhi airport) . In fact, they have an option to exit the project in the next eight months. We are not sure whether at this stage, they would be amenable to infusing fresh equity. Apart from that, lenders might have serious concerns on increasing DIAL’s debt levels further and we are not thinking of hiving off assets.”

The GVK group, which runs Mumbai International Airport Ltd (MIAL), would not comment for this story.

Funds at a cost
According to Amber Dubey, partner and head-aviation at global consultancy KPMG, “Given the slowdown in traffic and low profitability, airport operators at Delhi and Mumbai might face significant difficulty in raising fresh debt or equity.”

However, Vishwas Udgirkar, senior director at Deloitte, said: ''Raising of funds will not be difficult for these companies but there will be a cost attached to it. Cost of funding will increase, as debt and equity comes with a cost. ADF is treated as a zero-cost fund. Eventually, UDFs will also increase.''

"Growth companies (like GVK and GMR) would generally have many early-stage projects and cash flows not yet sufficient to cover costs. They will find it hard to meet this additional financing gap. A number of their businesses — coal mining, power, ports, etc — are in a development stage, and in different SPVs (Special Purpose Vehicles) and companies. In addition, the implication of borrowing at this stage, when the cost of capital remains high, is that this will eventually find the way into user charges -- and, that would be much more than if concurrent recovery were permitted,'' said Kameswara Rao of PricewaterhouseCoopers.

ADF arithmetic
Though ADF will be abolished from next year with the infusion of equity from Airports Authority of India (AAI) in the Delhi and Mumbai airports, passengers will have to shell out more UDF. Whether they’d have to pay more fare or not would be known only after AERA approves the revised rates for DIAL and MIAL.

http://www.business-standard.com/india/news/challenges-in-airport-financing/489992/