“Senator Osmena cites an August 13, 2013 article in Forbes.com entitled ‘House of Debt’ which said that the GMR Group was one of the companies ‘that cannot even pay the interest on their debt on time.’ GMR’s own Audited Financial Statement reflects operating losses from 2011-2013.”
by Ducky Paredes
It was inevitable that the dispute over the bidding for the modernization and expansion of the passenger terminal of the Mactan-Cebu International Airport (MCIA) would reverberate in the halls of Congress.
It is also understandable that all the Cebuano lawmakers would be very much concerned about the controversy that is delaying the implementation of this P17.5 billion facility. The MCIA, after all, is a major contributor not only to the growth of tourism in Cebu but to the overall economic development of the province.
A few days ago, I received a copy of the privilege speech delivered by Cebu Senator Serge Osmeña who expressed strong reservations about the possible award of this project to the consortium of GMR Infrastructures of India and local firm Megawide Construction Corporation. This group’s offer of P14.4 billion was declared as the highest bid.
The Senator is questioning the technical and financial capability of GMR to undertake the project. As a result of his speech, the Senate Committee on Public Services will begin an investigation into several issues raised against GMR, particularly its supposed “questionable operating background and a currently unstable financial position.”
In the House of Representatives, two separate Resolutions on the subject were filed by nine Cebu lawmakers. House Resolutions 782 and 683 seek inquiries on delays, complaints of conflict of interest, questionable financial capacity and other possible violations on qualification requirements against the highest financial bidder.
But it is the points that Senator Osmeña raised in his speech that appear to have drawn blood.
Senator Osmena cites an August 13, 2013 article in Forbes.com entitled “House of Debt” which said that the GMR Group was one of the companies “that cannot even pay the interest on their debt on time.” GMR’s own Audited Financial Statement reflects operating losses from 2011-2013.
He called attention to reports in the Wall Street Journal which stated that the GMR Group is one of three biggest companies that banks in India have been pressuring to sell their assets to enable them to pay their debts. The report said that GMR is hobbled with a huge debt of $6.2 billion and has a very risky 4.9 debt-to-equity ratio.
One development which may or may not have direct significance to the MCIA project is the report last month in The Economic Times of India that the GMR Group has cancelled a $350 million IPO for GMR Infrastructure Ltd., the Group’s subsidiary involved in the MCIA bidding. Three officials of GMR had acknowledged the “difficulty of squeezing in a public share offering” at this time.
But what should really ring alarm bells among those who will choose the group that will construct and manage the MCIA terminal is Osmeña’s disclosure that the GMR Group has gone on a selling binge and has already disposed of at least six projects, three of which are in India. These are the Warora Power Plant in Maharashtra, for $1.2 billion; the Ulundurpet Highway project in Tamil Nadu for $110 million; and the Jadcherla Expressway project in Andra Pradesh for $44 million.
GMR also sold for another $1.2 billion its 50% share in InterGen of Denmark, which is one of the largest power companies in Europe; its 70% equity in GMR Energy Singapore for $482 million; and its 40% holdings in the Sabiha Gokcen International Airport in Istanbul, Turkey for $225 million.
Osmeña said that with its unsteady financial situation and its history of not staying for the long haul, GMR should not even be remotely considered as an investor to be entrusted with a long-term involvement in the Mactan Airport.
“I fear that GMR might merely flip its equity in this project for a profit. And where would that leave the Cebuanos?” the Senator asked.
Osmeña’s apprehensions seem to be well grounded. He referred to a recent statement of Grandhi Mallikarjuna Rao, founder and Chairman of the GMR Group which defined the new strategic direction of the conglomerate as a shift to what he called an “Asset Light, Asset Right” (ALAR) approach.
In a message to shareholders, Rao explained that the GMR Group is now following and implementing the principle of “Develop, Build, Create Value, Divest and Reinvest.” This strategy calls for regular portfolio reviews that identify those assets that have already created maximum value, as well as those which values are eroding, then selling these assets in order to release capital for better opportunities.
This change in business strategy explains GMR Group’s wave of divestments that included the Istanbul airport concession which it won in a bidding but sold after only six years. It was learned that GMR also sold its Jadcherla Expressway project after only four years of operation.
With this deviation in its business plans, it is clear that the GMR Group is now implementing a “Bid and Sell” strategy. With respect to the MCIA project therefore, it may not be entirely amiss for Osmeña, for Cebuano lawmakers in the House of Representatives, and for all the people of Cebu, to fear that GMR may only be in it for the quick profit that they can generate after only a few years.
It is also relevant to point out that GMR Infrastructure has been charging an Airport Development Fee on travellers using the Delhi and Hyderabad Airports in India where it won the biddings for these concessions. These charges are in addition to the regular Passenger Service Fee that passengers have to pay.
GMR has imposed these charges to augment the inadequate funds that it injected in developing these airport projects.
In the case of the Delhi Airport, GMR infused only 72.68% of the needed capital outlay and raised the financing gap through these additional fees. In effect, the travelling public shouldered more than one-fourth of the development cost of the Delhi Airport’s project.
GMR claims that the Supreme Court of India has upheld these additional fees on passengers. But they miss the point entirely. The point is whether it is fair and just to make the travelling public shoulder a big portion of the cost of developing the project. According to the “Report of the Comptroller and Auditor General of India on the Implementation of Public Private Partnership, Indira Gandhi International Airport, Delhi” the additional fee is contrary to the Operation Management and Development Agreement (OMDA) that GMR signed.
The Report said the Agreement “did not envisage the funding of the project cost through levy of Development Fee from the passengers since the entire funding was to be through debt and equity only.”
The MCIA project covers a concession period of 25 years. The final choice of the concessionaire will depend on the Post-Qualification review of the bids and on the results of the probes being conducted in the Senate and in the House.
Hopefully, the DOTC and the Mactan-Cebu International Airport will not allow a “bid and sell” concessionaire to saddle the Cebuanos for the next 25 years with a terminal that, according to Senator Osmeña, “looks like a poultry farm.”
Sadly, the ones in charge — the DOTC and the Department of Tourism seem — to be gung-ho on the project and seem to be totally committed to stick to the choice of the of the original bids and awards committee, which has been revealed as one that should have been disqualified outright, if the bidding committee had done its job right.
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hvp 03.19.14Readers who missed a column can access www.duckyparedes.com/blogs. This is updated daily. Your reactions are welcome at email@example.com or you can send me a message through Twitter @diretsahan.