The Hindu : Grounded... for now

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Sunday, Jan 12, 2003

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Grounded... for now

Whatever the intention of the Cabinet in turning down a proposal for the privatisation of the airports in the four metros, it has sent the wrong signals to foreign investors, writes Gargi Parsai.

THE PROCESS of privatisation of the four international metro airports received a jolt last week when the Union Cabinet meeting, chaired by the Prime Minister, Atal Behari Vajpayee, returned a proposal of the Civil Aviation Ministry for joint-venture partnership with a 95 per cent FDI. The Cabinet asked the Finance Ministry and the Civil Aviation Ministry to take a re-look at the idea and come back with a proposal to restructure the international airports at Delhi, Mumbai, Chennai and Kolkata to world class standards in a record time. This would require an estimated Rs. 16,000 crores.

Whatever the intentions of the Cabinet in turning down the proposal, it has sent the wrong signals to foreign investors, including consortiums from Malaysia, Germany, Switzerland, Austria, Britain, Singapore and the Middle East. Apart from this, it has only made the position more hazy. As it is, the Government and the Airports Authority of India (AAI) are cagey about parting any information on airports privatisation, as though it is classified. Now with this latest Cabinet decision, a shroud of secrecy has fallen over the entire exercise.

However, reliable sources say the AAI has suddenly raised the issue of the metro international airports, which earn 70 per cent of the its profit and are cross-subsidising the non-profitable airports. The question is: if these profit centres were given on a platter to a private player, how will the AAI survive? The AAI, which manages a total of 122 airports in the country, last year earned a revenue of Rs. 2,200 crores from aeronautical and non-aeronautical sources with an estimated profit of Rs. 260 crores.

Obviously, the Cabinet found some merit in this argument and asked the Finance Ministry to explore the possibility of the Government funding the AAI to get into areas such as construction and restructuring of terminals which could then be handed over to a strategic partner for management and running them as joint ventures.

It now appears that the Government and the AAI plan to get together to construct world class facilities at the four airports and also run them or else bring in a domestic player as a subsidiary of the AAI to manage the airports on payment of user charges to the AAI. It goes without saying that much of the charges would have to come from passengers who will use the facilities. The issue of stakeholding between various partners is what the two Ministries are working out. The third possibility is of the Government giving a grant to the investor.

The Civil Aviation Ministry's Policy on Airport Infrastructure provides for foreign equity participation in the airport sector up to 74 per cent with automatic approval and up to 100 per cent with special permission. According to the Secretary, Civil Aviation, K. Roy Paul, "the idea of private investment in airports has not been given up. It is only a question of modalities and how best to do it in a fast track mode."

To raise the four metro airports to world class standards was conceived about the time of the economic liberalisation when airports were included in infrastructure development. The strong co-relation between the growth in economy and growth in trade, tourism and air traffic was recognised. This is demonstrated well by Southeast Asian countries by strengthening their air transport sector.

In India, airports are under-managed and over-regulated. An International Air Transport Association (IATA) passenger survey of world airports published in the Global Airport Monitor in 1999 ranked the Mumbai and Delhi airports among the three least favourable airports in the Asia-Pacific region. It is also estimated that a one per cent increase in exports has a concomitant 1.5 per cent increase in the demand for air cargo.

It is recognised the world over that airport development and modernisation should aim to double the annual handling of freight and passengers besides offering constant technological upgradations for smooth operations. For this, integrated development of airports is required with regional partnership. India has a great potential of becoming an important hub in the region. The Malaysian interest in the Chennai airport is believed to be in this direction.

The construction of world class airports is a capital intensive exercise with a fairly long gestation period. The initial idea, in 1999, was to corporatise each international airport and make it a separate profit-making centre with privatised ownership and management. In 2000, the Infrastructure Task Force recommended that the privatisation of the airports be done through a long-term (30 years) leasing method — a popular mode the world over.

In this process, the ownership of the airports would remain with the AAI and the lease income would accrue to it enabling it to develop other airports without budgetary support. For this, after Cabinet approval, the AAI appointed KPMG as its Global Consultant. Under this proposal the lessee was to give an "upfront amount'' to the AAI and annual rentals based on passenger and cargo traffic. Among the criterion for the selection of the private investor was the "upfront amount".

The Government decided that no investor could invest in more than two airports and that the Mumbai and Delhi airports would be offered to different operators. On the issue of the AAI's 8,000-odd employees, it was proposed that they be compulsorily deputed by the lessee for three years after which they could either continue with the lessee or be offered Voluntary Retirement Schemes. It was also decided that the Government would mandate certain investments in the first five years as per the requirements at the four airports.

Setting up of an Economic Regulatory Authority was being envisaged. But more important, the AAI wanted a veto power in management decisions. This was under consideration. With these guidelines, the AAI held two road shows, one in New Delhi and another in London. It was preparing to call for an Expression of Interest when questions were raised about whether under the Airports of Authority of India Act, 1994, the AAI could transfer the airports on long-lease to private investors.

Amendments were introduced in the Act and it was tabled in the winter session of Parliament. Amendments were also required to include State Governments in the Bill as having the right to develop airports as in Hyderabad and Bangalore.

Meanwhile, the Parliamentary Standing Committee came down heavily on the Centre for not taking Parliament's prior approval to lease the airports to a private investor.

It recommended that the amendments be more comprehensive, the functions of the lessee be more explicit and it be mandated that the Air Traffic Control and security functions remain with the AAI. It also regretted that the AAI had put on hold all developmental works at the four metro airports since the privatisation moves intensified. Against this backdrop, with the Government's protective instincts to the fore, it has now been decided to invite architectural and planning concepts from well-known designers to restructure the four airports on the lines of those at Singapore, Hong Kong, Seoul and Dubai. With these structuring details in hand and the five-year investment mandate, the Government might invite private investment including domestic.

According to Government sources, the idea is not just to construct profitable airports but ones that are "prestigious" and show up as "gateways" to the country, "this being a sovereign concern".

However, one principle is clear and that is that foreign airlines would not be allowed in such a venture. Sometimes, to attract airline operations, airports build partnerships with airline operators but these could lead to creation of monopolies by airlines in airport slots and parking to rival airlines, sources said.

The other aspect is security. While it is agreed that the Air Traffic Control and perimeter and periphery security will be the AAI's responsibility, there is no clarity on ground handling.

Ground handling involves cleaning of the aircraft, catering, loading and off loading of baggage from the plane as well as on the conveyor belt and cleaning of toilets. Normally, ground handling is out-sourced to a leased agency.

At present, Air India and Indian Airlines look after the ground handling. However, recently security concerns have been raised about out-sourcing ground handling to unknown agencies. Again there are two thoughts on this: whether ground handling should be handed to the airport manager after security clearance by the Home Ministry or be handled by the AAI.

Civil Aviation Ministry sources said the joint-venture proposal put before the Cabinet has not been withdrawn. As it happens, this is a developing story, with the main players as confused as the ones who might want to invest.

* * *

Airports as business centres

NORMALLY, AIRPORT revenue accrues from two sources — aeronautical and non-aeronautical. An airport, whose lifetime is generally 15 to 20 years with a rate of return 12 to 17 per cent, is highly capital intensive with a long gestation period. With an investment of Rs. 1,000 crores, for example, with 4 million domestic passengers (at Mumbai) and an average growth rate of five per cent, it could be 15 to 20 years before the airport would become viable. Cost recovery would almost definitely be from high Passenger Service fee and airport charges from airlines.

Aeronautical revenue is from flight-related activities including aircraft landing and parking, passenger and air cargo charges. The aeronautical revenue generation at world class airports is less than 40 per cent, as against 65 to 75 per cent from non-aeronautical sources. In India, the revenue from aeronautical sources is about 75 per cent to 22-23 per cent from non-aeronautical resources, which speaks volumes about the duty free shopping at Indian airports.

According to official figures, the total number of passengers that passed through the airports in the four metros and at Thiruvananthapuram in 2001-01 was 27.27 million, while cargo movement was 7.10 lakh tonnes.

Private project financing, based on analysis of the project revenues or the project cash flow, determines the potential of an airport for growth. However, experts say that since the cash flow from an airport project is limited in terms of the high volume of investment required for new construction or upgradation of existing facilities, financial gaps would have to be filled. Normally, these gaps are filled by the Government either through granting land use rights or as a grant.

Modern airports, however, no longer depend on aeronautical charges for revenue. The focus is on traffic, trade and commercial activities such as hotels, food outlets, recreation centres, racing tracks, games, video parks, golf courses, hospitals and even metered multi-storeyed parking facilities.

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