Even as the government auditor has cribbed at the high cost of constructing Delhi and Mumbai airports, it has approved a far higher set of costs for the government-run Kolkata and Chennai airports, but which will have to be borne by the passengers.
Worse, the generous cash padding leaves the owner, in this case the Airports Authority of India (AAI) with far less money to finance the 32 other airports it is supposed to bring up to standards to allow for the expansion of the aviation market in India.
At the same time the private sector BIAL has built the Bangalore airport using cash far more efficiently.
At the heart of the excessive cost padding for the AAI-run public sector airports is the percentage of equity that has been built into them.
For instance while the privately built Bangalore airport has a debt-equity ratio of 70:30, the two public sector airports have an equity share of 92 per cent.
Globally, it is a better alternative to build an infrastructure facility with a lower equity base and a higher debt load by a process known as leveraging. But the AAI, fuelled by the cash inflows from the two airports — Delhi and Mumbai, felt little need to optimise on the use of the funds.
It was helped along by the surprising go ahead by the Comptroller and Auditor General (CAG) which has allowed a generous depreciation charge, double that allowed for the two private sector airports.
No one, it seems, advised the AAI to use the equity and its sovereign support to raise debt from the banks at low interest rates that would have also been welcomed by the banks.
Due to high equity in these airports, the sector regulator allowed the Kolkata airport, for instance, to carry forward a loss of Rs 800 crore during the current “control” period—the number of years for which its tariff orders are valid.
As a result (see chart) the airports at Kolkata and Chennai, which were inaugurated this year, have run up a high Weighted Average Cost of Capital of 14 per cent. Just compare with the far more cautious rates for Delhi and Mumbai.
“The cost of capital being paid to AAI is over 14 per cent as compared to 11.5 per cent for private concessionaires. This is difficult to comprehend because a statutory authority should normally have a lower cost of capital. All these factors have