GMR arm to develop airport land

GMR arm to develop airport land

New Delhi August 16, 2007

Delhi International Airport Ltd move likely to impact revenue flow to
government kitty.

In a move that could significantly dampen the revenue flow to the
government, GMR Infrastructure group company's Delhi International
Airport Limited (DIAL) has passed on the licence to develop the land
it received as part of the privatisation deal to a newly formed
subsidiary.

DIAL had received 250 acres of land around the airport area to be
developed commercially, with 46 per cent of the revenues accruing from
it flowing back to the government (Airport Authority of India), and
the rest to be utilised by the company for airport development.

In May this year, DIAL licensed the land to its newly formed 100 per
cent subsidiary called Delhi Aerotropolis Private Limited (DAPL) which
is responsible for developing the entire infrastructure. Currently,
the company is in the process of selling the land rights to potential
developers through a competitive bidding process.

"Since the sale consideration would be recognised in a "separate
entity" (DAPL), the government would not be entitled to any share in
this revenue," GMR officials said.

To give a ballpark estimate, the income potential (present value of
the life-time lease rentals) from one acre of land would be in the
range of Rs 100 crore.

This would mean potential revenues in excess of Rs 25,000 crore for
the 250 acres of land. Even after deducting certain expenses, the
government should ideally be entitled to revenues of over Rs 10,000
crore.

In a recently held conference call, GMR Infrastructure's top officials
said DAPL was negotiating with potential bidders to take 80 per cent
of the value (present value of lease rentals for the 60-year period
discounted at 10 per cent) as upfront payment in the form of interest-
free deposits, refundable after the end of the lease period (60
years), and the remaining as lease rentals to be paid through the
tenure of the lease.

The entire refundable deposit will be passed on to DIAL to meet the
capital cost for airport development. "Since it comes as deposit, it
is not being shared with the Airport Authority of India....because our
concession agreement says we need to share only 46 per cent of the
"revenue". DAPL will declare dividends after netting expenses from the
rentals received by it, which will be shared with the government," GMR
officials said.

It may be noted that since DAPL would accept upfront deposits (which
gets accounted into the balance sheet directly) and not recognise this
as income, it would not affect the profitability of the company
directly, and hence escape the regular corporate tax levy of 35 per
cent.

The company denied any conflict of interest with the government on the
grounds that the latter is a beneficiary by virtue of its 26 per cent
shareholding in DIAL. "The entire funding plan is according to the
master plan, which has been approved by the airport authorities and
the ministry of civil aviation in December," GMR officials said.

Civil aviation ministry officials, on their part, said that even if it
forms a subsidiary company, DIAL has to act according to the operation
management distribution agreement clauses. "According to the
agreement, there has to be a 46 per cent revenue sharing even if a
hundred per cent subsidiary is formed. The sharing will be on the
basis of gross revenue of all the companies put together," said a
senior ministry official.

The arrangement has received the approval of the board of directors
too. Currently, there are two government nominees on the board of DIAL
- K N Srivastava and H S Bain.

According to the most recent plan, in the first phase about 45 acres
of land adjoining the Delhi airport is to be developed by 2010. The
strategy for the remaining land would be devised after 2010 when more
land is taken up for development.

In Hyderabad, too, where the company has 1000 acres of land, the
company would follow a similar model by incorporating a subsidiary of
Hyderabad International Airport called Hyderabad Aerotropolis Private
Limited. But the board is yet to clear the proposal. The crucial
difference between the Delhi and Hyderabad models, however, is that in
the latter case, the company would develop the land on its own rather
than selling it to a third party.
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PASSING THE BATON

DIAL receives 250 acres of land around the Delhi airport to be
developed commercially, with 46 per cent of the revenues accruing from
it flowing back to the government


The company passes on the licence to develop the land it had received
as part of the privatisation deal to a newly formed subsidiary Delhi
Aerotropolis Private Limited (DAPL)


Since the sale consideration would be recognised in a "separate
entity" (DAPL), the government would not be entitled to any share in
this revenue, GMR officials said

According to ballpark estimates, potential revenues from land lease
and rentals stand in excess of Rs 25,000 crore for the 250 acres of
land, with the government ideally entitled to revenues of over Rs
10,000 crore