The document discusses crony capitalism in India's public-private partnership model, using the Mumbai airport project as a case study. It notes that while Prime Minister Manmohan Singh praised PPP projects, the Mumbai airport project benefited GVK Reddy's company, MIAL, through several post-bid concessions like development fees, sovereign guarantees, and securing future revenues - advantages other bidders did not have. These actions distorted fair competition and enriched crony capitalists. The document questions if Singh is truly unaware of the tactics used in PPP projects or has known about cronyism all along.

1. 32 April 30, 2014
INFRA/ppp model/mumbai airport
GATE NO
420Amanmohan singh exalts the success of
mega schemes under the business
arrangement, but the new project is also
a showcase of crony capitalism
By Naresh Minocha
was struck recently by a comment in the media that most of the billionaires
among India’s top business leaders operate in oligopolistic markets and in sec-
tors where the government has conferred special privileges on a few. This
sounds like crony capitalism. Are we encouraging crony capitalism? Is this a
necessary but transient phase in the development of modern capitalism in
India? Are we doing enough to protect consumers and small businesses from
the consequences of crony capitalism?” These were the questions posed by
Prime Minister Manmohan Singh on May 1, 2007.
Seven years later, as he inaugurated the new integrated terminal, T2, of
Mumbai’s international airport in January 2014, he indirectly answered them. As he cut the
red ribbon, the prime minister said: “I compliment Mumbai International Airport Limited
(MIAL) for building this state-of-the art facility. The entrepreneurial skills of Shri GVK Reddy
and his colleagues are truly first-class.”
Exuding confidence in the Public-Private Partnership (PPP) model, Singh added: “The
construction of the new terminal is yet another shining example of successful execution of
large infrastructure projects under the PPP model which our government has encouraged in
recent years. I am very happy that the PPP model has worked particularly well in the civil
aviation sector.”
Ironically, and shockingly, the PPP model that Singh raved about has fattened the pockets
I“

2. 33April 30, 2014
of dozens of crony capitalists in the past few
years. It has drained the national exchequer due
to incentives to the private sector, and broken
the back of the consumers, because of high tar-
iffs paid by them to use these infrastructural
facilities. Even private sector players have
alleged that PPP has become a cozy cartel of
crony capitalists, bureaucrats and politicians, in
which huge sops are openly and grandly handed
over the platter.
PPP FAULTLINES
In 2013, a Parliament Standing Committee crit-
icized the Planning Commission for designing a
flawed PPP model. One, the various clauses
were borrowed from western contracts, and had
no relation to unique local conditions. Two, the
commission interfered in engineering and tech-
nical aspects of the projects, although it had no
experience in them. Three, the PPP allowed
bidders to quote huge premiums to be paid to
the government to bag lucrative projects. They
took on a gamble, and hoped that they could
cite reasons like GDP slowdown, policy bottle-
necks and poor market as “fig leaf” to wriggle
out of their commitments. In fact, several pri-
vate players did exactly that. And threatened to
abandon the projects if their demands to pay
lower premiums, and get higher financial
incentives, were not met.
Let’s consider how the Mumbai airport, like
the Delhi one and capital’s airport metro line,
became one of the biggest examples of corrup-
tion. Once the government decided to rebuild
the airport by inviting private sector, MIAL was
formed in 2006. The Hyderabad-based GVK
Reddy Group owned 74 percent and the state-
owned Airports Authority of India (AAI), the
COZY CARTEL
The government allowed
MIAL to levy
development fees on
passengers using Mumbai
airport, when the original
contract didn’t
mandate it

3. 34 April 30, 2014
remaining stake. The latter leased out the air-
port to GVK for 30 years so that the private
partner could recover investments and earn
robust profits.
ADVANTAGE GVK
When the agreement was signed in 2006, it did
not mention that MIAL could charge develop-
ment fees from domestic and international pas-
sengers in addition to the passenger services
fees, levied for facilitation and security services
at the airports. However, in May 2009, the
government allowed the company to charge
`100 per embarking domestic passenger and
`600 per embarking international passenger
for 48 months. This translated into additional
revenues of over `1,500 crore for the Reddys.
This was before the government had formed
the airport regulator, Airport Economic
Regulatory Authority of India. The reason to
allow development fees was MIAL’s argument
that its costs escalated sharply from over `6,800
crore in 2009. Once the regulator was put in
place, it allowed the airport operator to collect
the fee from each passenger not just for two
years, but for eight years (April 1, 2013, to April
1, 2021). The total amount that could now be
mopped by MIAL over this period jumped to
almost `4,000 crore.
According to the regulator, the operator’s
costs had ballooned to over `12,000 crore. In
addition, MIAL had to pay an interest of over
`1,300 crore on the extra loans it had to borrow
from its original lenders to finance the higher
investments. The regulator’s decision seemed
bizarre and was at loggerheads with the think-
ing in the ministry of civil aviation and other
stakeholders in the Mumbai airport project.
For example, the stakeholders said that the
development levy may be pooled as equity con-
tribution by the passengers to MIAL. At least, it
will make the users as shareholders and prevent
the company from boosting revenues and P&L
account. Once they become investors, the pas-
sengers will happily pay extra charges.
In October 2012, the ministry decided that
the extra funds required for the completion of
Mumbai airport should be through equity con-
tribution by the two promoters, GVK Group
and AAI. In fact, the latter agreed to pump in an
additional `293 crore as equity, but MIAL
refused. The latter insisted there was no scope
to infuse more equity. The regulator sided with
MIAL and allowed development charges for
eight years.
Why did the regulator show such generosity
to the GVK Group? It is due to the extra charges
that GVK Reddy heaved a sigh of relief; he took
out full-page advertisements in newspapers
which read: “My dream has been to create icons
which will last for generations.”
The promoter should definitely thank the
MIAL got several post-bid sops. These
included huge development fee, sovereign
guarantees, and securitization of future
revenues to raise fresh loans.
NAIVE FAITH
(L-R) The majority partner in
MIAL, GVK Reddy, and Prime
Minister Manmohan Singh. The
economist PM seems blissfully
ignorant of the arm-twisting
ways of PPP partners.
INFRA/ppp model/mumbai airport
PIB

4. Worse, this agreement is totally silent on
securitization of future revenues from whatever
source, including development levy. In this case,
how did the government allow it; the decision
helped MIAL to raise the second loan of over
`2,600 crore. If other bidders had known this
was possible, GVK may not have bagged the
project in the first place!
In addition, the contract provided for only
one tri-partite agreement between MIAL, AAI
and a consortium of lenders in case the operator
needed to raise funds. This was signed when the
operator borrowed almost `4,300 crore from
an IDBI-led consortium. Therefore, there was
no scope for MIAL to raise fresh loans. This
implied that the operator had no legal justifica-
tion to securitize future earnings from develop-
ment fee, which, in itself, was not allowed under
the bi-partite contract with the AAI.
To help MIAL get out of this contractual
mess, the arms of the authority are being twist-
ed to amend the relevant contracts to allow
MIAL to raise the second loan of over `2,600
crore. The changes will incorporate clauses to
allow the operator to put earnings from devel-
opment fee into an escrow account, whose
charge would be created in favor of the lenders.
In a bid to force AAI’s hands, the GVK
Group has threatened the former with dire con-
sequences. According to official sources, both in
the authority and ministry, the private player
has warned them that if it is not allowed to
securitize the development levy, the moderniza-
tion project of the Mumbai international air-
port will come to a standstill. “MIAL told us
that the lenders may even recall the loans,” says
one of them.
This twisting of arms is a classic tactic in the
art of crony capitalism. First, get the incentives.
Then ask for more sops; if they are not given,
say the project is in trouble. Maybe, it is time for
prime minister to answer his 2007 questions.
Maybe, he has known the answers all along.
35April 30, 2014
airport regulator for the Mumbai project.
High development fees was not the only
advantage that GVK enjoyed. In 2007, the same
year when Singh raised those questions on
crony capitalism, UPA-I extended sovereign
guarantee to MIAL for the repayment of the lat-
ter’s almost `4,300 crore debt.
The government had no transparent guide-
lines on how such guarantees could be given to
private players, who would use them to raise
cheap loans, both domestically and globally.
In September 2010, the ministry of finance
banned sovereign guarantees for private sector
projects. Despite these curbs, MIAL has again
asked the government for a similar guarantee
for the over `2,600 crore loan it raised from its
earlier lenders through the securitization of the
future earnings through development fee. As
mentioned earlier, the regulator allowed MIAL
to even finance the interest component of this
loan through development fee.
There are other technicalities involved in
how MIAL gained from the Mumbai project. As
mentioned earlier, the original agreement
between the operator and AAI does not men-
tion development fee. If other bidders had
known that they could do so, they would have
quoted a higher price. This is akin to giving an
unfair advantage to a specific bidder.
The twisting of arms is a classic tactic in
the art of crony capitalism. First, get the
incentives. Then ask for more sops; if they
don’t come, say the project is in trouble.
IN response to the queries posed by
Singh in 2007, we would like to ask him
a few of our own. Does the post-bid
permission to levy development fee,
which was not even mentioned in the
contract, amount to crony capitalism?
Does the permission to borrow against
future earnings from the extra levy
amount to crony capitalism? Does the
grant of a sovereign guarantee in a non-
transparent manner to a private player
amount to crony capitalism? Is it not
crony capitalism if the government
resists a probe into allegations of gold
plating, or a deliberate increase in
investment costs?
QUESTIONSFORPM
IL