GMR shares dip on back of Civil Court ruling against airport development charge

GMR shares on the Mumbai stock exchange fell 7.57 percent on Thursday on the back of a Civil Court ruling in the Maldives against its proposed US$25 Airport Development Charge (ADC), India’s Economic Times reported.

The paper earlier reported that the share slip had taken the company to a 52-week low, and that that the decision could leave the airport development project facing an annual funding shortage of US$25 million.

GMR said yesterday that it had yet to receive a copy of the Civil Court’s judgement and was only aware of the ruling through media reports.

“We are yet to receive the copy of the judgment and as such we are not in a position to evaluate the implications of the ruling,” the company said in a statement.

“GMR has been permitted to collect ADC and Insurance charge under the Concession Agreement signed between GMR-MAHB, Maldives Airport Company Limited (MACL) and The Republic of Maldives (acting by and through its Ministry of Finance and Treasury), and as such has set up processes for ADC collection from 1st January 2012 supported by an information campaign to ensure adequate awareness,” the company said.

“The bid for the Concession to manage, develop and operate Ibrahim Nasir International Airport for 25 years was conducted by the [World Bank’s] International Finance Corporation (IFC) and the component of ADC was part of the bid. GMR is confident that Government of Maldives will take such measures as would be necessary to honour its contractual obligation in this regard, given that the success of the development of the airport project is of national economic importance.”

The company noted that the payment of a development fee was “a common concept in many airports globally”, particularly as a part of concession agreements where airports are privatised.

“The reason for the inclusion of ADC in many global concession agreements is to address the funding needs to meet the investment model required to upgrade and develop new airport facilities at significant costs,” GMR stated.

The Civil Court ruled that the clause in the concession agreement with GMR violated the Airport Service Charges Act of 1978, which was amended in 2009 to raise the charge to US$18 for foreign passengers and US$12 for Maldivians above two years of age.

Judge Ali Rasheed Hussein ruled that the Airport Development Charge and insurance charge were service charges “under other names.”

He noted that the Airport Service Charges Act had been amended seven times to raise the charges since 1978 by the legislature, “based on the economic circumstances of the Maldives and the means of the public,” which showed that the purpose of the law was to ensure that enforcement agencies did not have the authority to raise the charges.

The suit was filed by the opposition-aligned Dhivehi Quamee Party (DQP), led by former Attorney General, Dr Hassan Saeed.

President Mohamed Nasheed’s Press Secretary Mohamed Zuhair said he believed the government was obliged to appeal the lower court ruling to in order to comply with the terms of the concession agreement.

GMR’s 25 year concession agreement to construct and manage a new US$400 million terminal (to be competed in 2014) is the single largest foreign investment in the history of the Maldives.

The strength of the IFC-monitored bid by the GMR-Malaysian Airports Holdings Berhad (MAHB), split 77:23 percent respectively, came from its US$78 million upfront payment (compared with US$27 million from the second-highest bidder) and in particular, its 27 percent sharing of fuel revenue (from 2014).

At the time, the government anticipated that 60 percent of government revenue from the airport deal would derive from fuel – US$74.25 million annually between 2015-2020, increasing to US$128.7 a year from 2025-2035. This in turn was the most significant element of the final ‘net-present-value’ calculations to determine the winning bid.

A briefing document obtained by Minivan News following GMR’s successful bid in June 2010 contained forecasts of the government’s expected earnings from the airport over the lifespan of the contract. It revealed that a majority of the predicted revenue, a major factor in calculating the NPV (net present value) used to determine the successful bid, derived from the 27 percent fuel revenue share once the airport is completed in 2014:

• 2015-2020: 12.8m gross + 74.25m fuel = US$87.05m per year
• 2020-2025- 17.02m gross + 90.99m fuel = US$108.01m per year
• 2025-2035 – 20.43 gross + 108.27m fuel = US$128.7 m per year

The document contrasted this with the dividends paid to the government by MACL over the last three years, noting that the majority of the dividends paid in 2008-2009 were achieved “by taking a loan.” Dividends in 2007 were 2.3 million, 13.3 million in 2008, and 5.05 million in 2009.

On the suggestion that MACL should be allowed to raise finance and invest in the upgrade itself, a predicted US$300-400 million, the document noted that MACL “already has debts of Rf 600 million (US$46.69 million)” and would be unable to obtain further leverage “without a sovereign guarantee – simply not allowed due to the IMF measures.”

At the same time, GMR’s bid offered a significantly lower 10 percent share of gross airport revenue, as compared to the other two bids.

The only historic figures available to the government in estimating this revenue (a staid US$20.43 million by 2025-2035) were derived from the existing commercial revenue from the airport – usage fees, ground handling charges, duty free shop rents, and so forth.

Compared to the glittering Gucci-lined corridors of airports in tourist hubs such as Dubai, the airport’s 4-5 departure lounge shops and dilapidated eateries – some serving pot noodle – were a missed opportunity, given the bulging wallet of the average visitor to the Maldives.

Speaking at the opening of GMR’s cavernous Delhi Terminal 3, GMR Manager P Sripathi told Minivan News that the consortium was very interested in the well-heeled concourse traffic in the Maldives – sufficiently interested to invest a sum equal to almost half the country’s stated GDP at the time.

“It’s a lovely project. The type of tourists coming are from the very high-end tourism market, therefore the business opportunities are plenty,” Sripathi said at the time.

Minivan News reported in June 2010 that some of the investment was to be recovered through a US$25 airport development charge, set by the government for all bidders to be levied only on international travellers at time of departure and added to ticket prices.