PPP for development of Greenfield airports – the success story

With the new ministry helming at the centre, the prospects for innovation and improvement for greenfield airport infrastructure look better than ever before
The overwhelming response of International Terminal 2 of CSIA Mumbai Airport has brought back the topic of public-private partnership in airport infrastructure. Even GMR have implemented dramatic improvements in airport infrastructure in Delhi Airport. These two airports have dramatically transformed the passenger experience and delivered a massive dividend to the state-owned Airports Authority of India (AAI).
With the new ministry helming at the centre, the prospects for innovation and improvement looks better than ever before. Even traffic growth has made a significant contribution to local and national economies. This improved airport infrastructure has put India into a brighter limelight in the global market.
However, there are some major issues to be addressed as the charges on airlines and passengers are increasing. And growing uncertainty about the economic regulatory framework and operating challenges in the aviation industry have made some investors wary.
India and PPP airports In India, there are four major PPP airports: Delhi, Hyderabad, Mumbai and Bengaluru. Delhi and Hyderabad are operated by GMR-led consortia, whereas Mumbai and Bengaluru are operated by GVK-led consortia. These four airports accounted for 53 per cent of total passenger traffic handled by Indian airports in FY2014.
Under the PPP concession agreements, the airport operators have to pay a share of gross revenue to the state-owned Airports Authority of India (AAI). The specific share varies by airport to airport.
Since FY2007, AAI has received a massive dividend of $1.72 billion from these four private metro airports. Even the annual amount received by the AAI has been growing rapidly each year. In FY2014, AAI received close to $460 million which goes directly to the AAI’s bottom line.
Although AAI incurs no expenses in relation to the PPP airports, the authority reported a profit of around just 135 million in FY2014. AAI earned 60 per cent of this profit from air-navigation services and not by airport operations. If the PPP airport revenue and air navigation services are removed, AAI’s business model is unviable.
PPP: only way to boost India’s airport infrastructureWith infrastructure constraints as one of the biggest obstacles to the growth of Indian civil aviation, a good deal has already been invested in airport development. “The Indian Civil Aviation Ministry’s Vision 2020 plan stresses a need to develop the country’s infrastructure,” says I. Prabhakara Rao, CEO, Delhi International Airport (P) Limited (DIAL). “It has a particular focus on well-equipped, user-friendly airports to handle as many as 280 million passengers per year.”
The country’s plans to develop and modernise airports in secondary cities are yet to pick up momentum. PPP models will be instrumental in timely completion and realisation of these projects provided the government makes some remarkable improvement in policies. Mr Rao has nicely outlined some important policies:• Regulatory framework to ensure economic viability• Ecosystem to provide low-cost, long-term funding for development of infrastructure• Tax reform for sustainable growth in aviation sector• Support mechanism during the project lifecycle, including project development, project implementation and operations.The four private metro airports handle around 15 per cent more passengers than all the AAI airports combined. Interestingly, their non-aero revenue is about three times as much and the gap is increasing. These private airports are achieving strong revenue growth due to a combination of increased traffic, higher aeronautical charges and the development of non-aeronautical revenue opportunities. In the past, AAI has poorly leveraged these opportunities.
Challenges to overcomeAAI was planning to award PPP concessions at an additional six airports, for long. However, its lack of commercial orientation is hurting the economies of key cities and destinations in the country – such as Chennai, Kolkata and Goa – due to its inactivity in terms of attracting passenger and cargo services. Due to a lack of preparedness with respect to the concession agreement and the revenue sharing and tariff structure framework, the tender process has been stalled for several months.
The first wave of PPP airports has been definitely a success story; however, there are so many lessons to be learned. AAI should try to improve areas like economic regulation, land monetisation, management of project costs and at a broader level creating a more predictable operating environment on issues such as bilateral policy, airspace efficiency and airline viability.
Some experts even feel there is an urgent need of corporatisation of AAI. Given the increasing complexity of the AAI’s role and the need to enhance organisational capabilities, it is desirable that AAI move towards a corporate structure in the near future.
Then there is increased charges which has been a contentious issue for PPP airlines. For example, on some domestic sectors about 17 per cent of the average gross fare now consists of taxes and fees, of which 10-12 is related to airport charges.Upgrading airport infrastructure to global levelWhile talking about upgrading airport infrastructure to global level, Mr Rao says private and PPP airport models will be the way forward and the government should make policies to promote private investment in new airport projects. In order to attract private capital, a transparent and equitable economic regulatory framework must be defined.
The government needs to create an eco-system to provide low-cost, long-term funding for development of infrastructure. The responsibility dop4esnt end there, the government should also ensure fair of return on equity. The sustainability depends upon the fair rate of return on equity and security deposits from the commercialisation of land.
According to Mr Rao, here are some of most important policies government should concentrate on:• Inter-Ministerial Group on Aviation (IMGA): Establish an IMGA to facilitate faster decision making across government ministries like home, defence, finance, tourism, environment for improved coordination and faster decision making to bring efficiency in the whole value chain.• Enhance Regional Connectivity: Focus on enhancing regional connectivity to have an equitable development of air connectivity across the country.
Way aheadContinuing the government’s high pitch for public private partnership (PPP), Finance Minister Arun Jaitley announced developing of new airports in smaller cities and towns under PPP. India plans to build 200 low-cost airports in the next 20 years to connect Tier-II and Tier-III cities.
The aviation industry presently supports about 0.5 per cent of the India’s GDP, and the potential is massive. The aviation sector is likely to see investments totalling $1.5 billion by 2020.
If proposed Essential Air Services Fund (EASF) by the Ministry of Civil Aviation is established as quickly as possible, Indian airports would be the world’s envy.

33