Safdarjung, India’s iconic British-era airfield that is now sadly defunct was the venue of a remarkable meeting one hot day in May. The crème de la crème of India’s passenger aviation business had assembled there to tell the sector’s new regulator how much they think travelers flying in and out of the city should be charged. The Airport Economic Regulatory Authority, or Aera, had a tough question to settle: Who should be made to bear the brunt of a 41 percent cost escalation in the construction of the Capital’s gleaming new international airport — the passengers, the government or the guy who built the airport?
The guy who built the airport — Grandhi Mallikarjun Rao, or GMR — was chewing his nails off at his office in Bangalore 2,000 kilometres away. The veteran infrastructure entrepreneur was seeing his best-laid plans being blown to smithereens at a pace even he could not keep up with. In a matter of a few months, his world had turned topsy-turvy.
Rao was staring at a hole of Rs. 1,800 crore ($400 million) in his balance sheet for no fault of his. He had built a world-class airport terminal with a capacity of 34 million passengers in a record time of 37 months. Given that planning always lags behind demand growth for infrastructure in India, he had to widen the scope of the project along the way. An exclusive terminal for low-cost carriers, an underpass for easier access from the highway and a few other bells and whistles had made the airport future-proof. Yet, in place of the accolades he had expected, Rao was facing regulatory hurdles and policy flip-flops that could make his business unviable.
At the core of his problems is the shift in the power equation from the civil aviation ministry to the new regulator. Aera is pushing for a tight control on the returns of private airport operators (and consequently on airfare) through a new system of calculating revenues. This passenger-friendly move, however, could temper the rate of return and delay the breakeven at Delhi International Airport Ltd. (DIAL), a subsidiary of the listed GMR Infrastructure.
Even if Rao were to accept a slower journey to breakeven, he has a more urgent problem to solve. As per his calculations, the project cost had risen to Rs. 12,857 crore ($2.86 billion) of which all the equity, debt and government funding could not meet a gap of about 15 percent. He needs to recover that in some form and had proposed he be allowed to charge passengers a development fee for another three-and-a half-years. It is this question that the Safdarjung meeting debated. But no decision came through that day and it is still not clear whether the regulator will allow this unpopular move.
There is more bad news. Aviation is not the only business that is in jeopardy in GMR’s empire. Each of his other ventures — power, roads, special economic zones and even his recent international foray — has gotten into trouble. In most of these cases, the problems have largely to do with the changes in the environment, like regulatory U-turns, irrational competition and that fickle thing called stock market perception.
In the power sector, he is hemmed in by a shortage of gas and uncertainty over fuel linkages. Earlier, Rao lost out on the bids for ultra mega power projects that seriously undermined its plans to be a major player in power. As a way out, he paid a billion dollars for Dutch company Intergen with a capacity of 8,000 MW in five countries. But falling margins quickly turned that acquisition sour.
The roads business, while ostensibly more profitable than airports, has become a cutthroat pursuit. Taken in by the hype surrounding the infrastructure business, rookie entrepreneurs and road contractors are bidding aggressively. They are taking away the projects from more experienced hands. Last year, GMR bid for 24 projects and won only one.
While GMR demonstrated more hunger for new projects than their rivals like GVK, the pressure from investors grew by the day. “It is simply impossible to keep sustaining the hype,” says Vinayak Chatterjee, chairman of Feedback Infra. When short-term excitement ran out in this long-term business, shareholders became upset.
All this has led to a simple equation: Revenues are slow to come, profits uncertain, debt mounting and new investors hard to come by. This is not just the story of GMR but of much of the entire infrastructure sector in India, which after two decades of economic reforms, is still choked by bureaucratic and regulatory bottlenecks.
Fighter-Survivor
During the bidding in 2005, it had actually been the pair of Anil Ambani group and ASA of Mexico that emerged as the highest financial bidder. GMR with Fraport had been only the second.
The Fight-Back
(This story appears in the 17 June, 2011 issue of Forbes India. To visit our Archives, click here.)
TRUTH TRUIMHPS .
on Oct 16, 2012I being an ex employee of GMR hope that it surely will very soon come out of any such problems as it is a company with very strong and clear cut policies.
on Oct 16, 2012GMR is a well respected company, the capability cannot be snatched environmental factors. They can come back. GOOD project management practices and moern management menthods will show the buisness sucess. All is not lost can earn back. I am proud of MR. RAO being born in vyshya community and a live example for vyshya community to take risk and be back in buisness once they cherished and helped the society as genrous donors.
on Oct 12, 2012he is hailing from our district. he is know n for discipline, hard work, professionalism in business. in everybody's life there will be ups and downs. this is not a big problem for him, he had successfully came our of no of problems, he will definitely come out of the problems.
on Oct 28, 2011i belongs to village saradhi near gmr village. No doubt he will come again. He will overcome all difficulties. We all feel proud that we belong to GMR village. Will feel proud that GMR belongs to ours.
on Sep 12, 2011i am a relative of gmr at rajam. i read about gmr . he is a good businessman. we cannot blame him for all the losses .business and profit depend upon many factors. i am sure he is very lucky and will come across his difficulties.
on Aug 16, 2011I worked for GMR on the construction of a floating power station about 10 years ago. Mr. G. M. Rao is a fine gentleman and an excellent decision maker. i am sorry to hear that he is in financial trouble for no fault of his own.
on Jul 3, 2011A govt which is frequently changing RULES of the game to remain in chair. One can not trust them at all. Look what they doing with LAVASA, POSCO and VEDANTA. No wonder now its GMR's turn.
on Jun 18, 2011Saw the Delhi airport , it is fantastic , when we, the users are charged for using the Bangalore Airport , which is pretty much a cow shed compared to the Delhi airport , feel this is not fair.
on Jun 14, 2011Airports are capital intensive business and one cannot build capacities overnight, unlike air trafiic which surges or declines on every small stimulus. Besides, lets not forget that this a PPP where the Govt has the last say in crucial decisions like airport capacity. A capacity of 34 million passengers pa was decided by a Govt panel only and considering the surge in passenger traffic it looks well suited to meet future needs. If the govt which cannot think of executing such a project (T3) even in their dreams and goes back on its documented promises, the private partner having delivered in record timelines has every reason to voice it's agony. If PPP model is going to be the mainstay of India's infrastructure development, then flip-flops like these need to be controlled, otherwise good luck to govt for developing world class projects on their own meeting stiff timelines and cost overruns.
on Jun 13, 2011"Given that planning always lags behind demand growth for infrastructure in India, he had to widen the scope of the project along the way.".. this statement alone hints at corruption.. For a company trying to make world class airports in India, it should have atleast tried to project the demand in a better way... Let this be a good lesson for GMR and the likes. Collusion with government and officials, and associated corruption can only take you so far.. because when common man has to pay for your inefficiencies, then democracy will see to it that the likes of you suffer. One can call it the "shift in the power equation from the civil aviation ministry" but why did they not think that no equation will remain the same given the time frame of the project and that each time that equation changes, it would be to their detriment due to the consequences of corruption involved.
on Jun 13, 2011It appears that GMR has taken more than he can chew, unlike GVK who is averse of aggressive strategy due to impending pitfalls.
on Jun 13, 2011