Don’t give in to airports’ Covid-relief demand

In fact, Delhi International Airport Limited (DIAL), on the basis of an estimated loss of Rs 1,330 crore in FY21, against a profit of Rs 383 crore in FY20, has invoked force majeure to suspend revenue share (45.99%) with AAI during FY21.

By K Vinay Pratap

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Newspapers have it that the private airports in the country have demanded a relief package from the government on account of low traffic because of the Covid pandemic (“cash support …to sustain operations”). This was expected given the severe hit to airport financials.

The way to deal with this demand is to follow the concession agreement. The private sector has entered into an agreement with the government entity (in this case, the Airports Authority of India, or AAI) that defines the risk and the returns of the private sector. The agreement, in the case of Delhi Airport, is called the Operation, Management and Development Agreement (OMDA) and has force majeure provisions (chapter 16) that deal with events or circumstances that “materially and adversely affects the performance” of the parties, “are beyond the reasonable control” of the parties, the parties “could not have prevented or reasonably overcome with the exercise of Good Industry Practice or reasonable skill and care”, and do not result from the negligence or misconduct of parties or the failure of the parties to perform their obligations. As per OMDA, the events that merit force majeure include an “epidemic”. The WHO declared Covid a Public Health Emergency of International Concern on January 30, 2020, and a pandemic on March 11, 2020. Therefore, the Covid pandemic falls in the definition of force majeure in the OMDA.

The OMDA also describes the relief (suspend performance of an obligation by the contracting party), including termination of the contract for reasons of force majeure. Nowhere is it written in the force majeure clause that the government will provide “cash support …to sustain operations”. The government has already taken a number of measures to ameliorate the impact of Covid on infrastructure projects. It has accepted that Covid-19 would be considered a force majeure event. To address immediate liquidity concerns, RBI has allowed moratorium on debt payments for six months.

In fact, Delhi International Airport Limited (DIAL), on the basis of an estimated loss of Rs 1,330 crore in FY21, against a profit of Rs 383 crore in FY20, has invoked force majeure to suspend revenue share (45.99%) with AAI during FY21. DIAL has also moved Delhi High Court to recover Rs 399.20 crore it has paid to AAI in FY21. In a major relief to Mumbai International Airport Limited (MIAL) the Bombay High Court restrained AAI from collecting 38.7% revenue share from MIAL in December 2020. It has also restrained AAI from transferring funds from the escrow account to itself. Enforcing contracts and ensuring sanctity of contracts should be a major thrust area of the government. India has one of the highest infrastructure deficits in the world. To bridge the infrastructure deficit and to attract private investment into infrastructure, India is trying to improve its position in the World Bank’s Ease of Doing Business rankings. Enforcing Contracts is one of the ten parameters considered for the rankings. India ranks 63 among 190 countries in the current rankings, but the country’s rank in “enforcing contracts” at 163 out of 190 countries is the worst among all parameters.

Any move to provide relief beyond what is provided in the OMDA would amount to privatising profits and socialising losses. It would give rise to a moral hazard, as no matter how reckless companies are in good times, there is always the government (and taxpayers) to bail them out during the bad. Such companies fail to build resilience in good times that could help them weather the inevitable downtimes that come. Some justify such demands as a mechanism to prevent systemic failure and further damage to the economy. In reality, this is lemon socialism, a political and economic system where profits are strictly the property of shareholders, and catastrophic losses are an externality to society (Thales Panza de Paula, World Economic Forum).

Any relief beyond what is provided in the concession agreement also sets a bad precedent. India is second in the developing world both by the number of PPP projects and the associated investments as per the World Bank. India currently has 1,103 PPP projects, amounting to an investment of $275 billion. The most number of projects have come up in the transport (555 projects), and within transport, in the road sector (486 projects). Most private investment has flown into the energy sector (mainly electricity generation) at $151 billion. However, the successful implementation of PPP projects across sectors in India also means that there would be unending demands from other sectors (roads, metro, ports, telecom, power, etc) once a precedent has been established by giving Covid relief beyond the concession agreement to the airport sector. Finally, the capacity of the Government to provide any such relief is severely attenuated with an unprecedented fiscal deficit of 9.5% in FY21.