Aviation sector woes and infrastructure contracting in India

India's latest round of airport PPPs appears to have hit a roadblock.

The Adani Group has cited the force majeure arising from Covid 19 to inform the Airports Authority of India (AAI) that it cannot take over three (Lucknow, Manglore, and Ahmedabad) of the six airports it had won in the aggressive bids in February 2019. The Group has not taken over the remaining three airports at Jaipur, Trivandrum, and Mangalore since they are already stuck in litigation. In simple terms, we have now come the full circle on airport bids. None of the six airports have now been closed, and are likely to be so.

In this context, I had blogged earlier cautioning about the wisdom of handing over all projects to one developer and had suggested the active use of policy levers, with all its problems, to limit optimistic and excessively aggressive bids by developers in infrastructure sector. 

The argument about force majeure event is a bit rich since the Group had already been badly delayed before Covid 19 in formally taking over the assets in the three places. The agreement with AAI mandated that the assets be taken over within 180 days by paying around Rs 1500 Cr upfront to AAI. 

This is a good summary of the intentions of the group,

“Adanis have said they want to relook at the entire business as the prospects of aviation sector has changed drastically. They have appointed a consultant in order to take a fresh look at the business and hence wants an extension by six months. The group has cited the Force Majeure clause in the agreement which allows delaying takeover in case of extraordinary situation which is beyond control of both the parties,” said a person aware of the development... An executive of an infrastructure company said Adani had bid aggressively for the airports because it had a strategy to make money from non-aero sources. Non-aero sources of airport means any other revenue sources except core business like landing and parking charges... “The plan involved extensively developing aerotropolis, malls, hotels, airport villages to cash in from non-aero sources. Now with the pandemic, there is heavy uncertainty of traffic projection for the next two years. So all calculations and projections of the business must have overturned. It’s a prudent decision to take a relook at the business rather than getting stuck with something forever,” the executive said.

The company's decision to step back from the airports appears to have little to do with the merits of the original bid and contract entered into by Adani Group. Given precedents in PPP history from India and elsewhere, it is not difficult to imagine the Group's strategy - grab as much of the sectoral space as possible by bidding aggressively, then plan out your investments, and then renegotiate as required. It was following this strategy when Covid pandemic hit, calling to question the near-term viability of the sector itself. The Adanis have a track record of biting off large chunks and striving to dominate market segments. 

Further, in 2018, pointing to its aviation sector interest, the Group initiated efforts to buy the share of South African investor Bidvest in Mumbai International Airport Limited (MIAL) which was controlled by the GVK Group.

This brings us to the current problems facing the GVK Group arising from MIAL. With the recent anti-corruption investigations and charge sheets against it by CBI and ED, the GVK Group looks like another corporate group getting ready to bite the dust.

Couple of observations in this regard:

1. In recent years, the GVK Group has been trying to pay down its debts. Unsurprisingly, as is the case most often with such stake sales, the process has been caught up in litigations. The litigation-related delays in concluding the measures by the company to pare down debts is disturbing, and goes to the heart of the difficulty of doing business in India,

In the past three years, the lenders have taken a series of measures to recover their dues from the group, including clearing a proposal made by Deutsche Bank to buy out Goindwal Sahib power loans worth Rs 3,900 crore at a discount of 70 per cent. The deal is not closed yet and is being litigated by its bondholders in the Bombay High Court. In December last year, Axis Bank moved the National Company Law Tribunal, Hyderabad Bench, against GVK Power to recover dues. The matter is pending.

Litigation-related delays are also holding up Bidvest's efforts to exit MIAL,

In 2019, GVK sold its stake in its airport holdings companies to ADIA, NIIF and PSP of Canada, but the transaction is yet to close because of litigation initiated by its equity partner in Mumbai airport, Bidvest, which wants to exit India by selling its stake. The ADIA, NIIF and PSP deal is not yet closed.

One can understand, disputes between competing parties with obligations due. But the inordinate delays in such cases due to cascading litigation is something which destroys economic value. Imagine the plight of Bidvest, which for over two years has been struggling to exit an investment for which it has even secured buyers! And Bidvest is clearly not happy. See more here.

The related point is that the investigations will only make the groups sales and other measures to reduce its debt burden even more difficult. In other words, more economic value destruction.

The experience of Arcelor Mittal's takeover of the assets of Essar Steel as part of the insolvency and bankruptcy code process is only fresh in memory. 

2. Much as we may loath admitting, it cannot be denied that there may be a need to exercise caution and discretion while pursuing white collar crimes of a large company in an important market segment and with deep financial market exposures. Its collateral damage consequences need to be weighed appropriately.

While it is easy  to get into the criminal prosecutorial mode given the prevailing popular narrative on anti-corruption, in a deeply interconnected system high stakes prosecutions can have several unintended consequences. Given the Indian system, once the investigations are triggered they can take a dynamic of their own.

This is also especially because the practice of asset stripping by way of gold-plating investments, siphoning off money, preferential transactions with related parties, excessive leveraging up and so on are, unfortunately, widespread among all infrastructure groups in India. In fact, as the evidence from UK shows (see this, this, and this), it is widespread among PPP project developers and infrastructure funds. Also, in these cases, the lines where accounting manipulation becomes a criminal act are blurred. Regulatory oversight lapses have meant that these practices remain undetected for long time.

In a context where none of the major stakeholders are immune from these allegations, a high-profile investigation can end up spooking the system and freezing them up. One only needs to look back at the consequences of regulatory orthodoxy (see also this) on the stressed assets of the banking system.

It is quite possible that in the instant case, the lines are very clear and there has indeed been egregious criminal culpability. But I am not sure that the information available in the public domain (or grapevine) would reassure businesses that it is a case of such culpability and they need not fear a slippery slope of regulatory squeeze arising out of the GVK case.

As an aside, the prevailing corporate culture makes white collar crimes less reprehensible, even when the fraudulent intent is evident. One example is that of how certain tax management practices which would have been considered tax evasion a few years back has now come to be dignified as tax avoidance.

Update 1 (22.07.2020)

Bidvest moves the Delhi High Court against GVK's decision to invite investments from NIIF etc.

Update 2 (17.01.2021)

This is a good summary of the controversies with the Adani Group's engagement in Aviation sector.