1. How to make aviation industry fly? Here are 8 points for a win-win situation

How to make aviation industry fly? Here are 8 points for a win-win situation

This is an exciting time for the aviation sector in India, with passenger traffic and freight movement witnessing rapid growth.

Published: September 11, 2017 4:58 AM
aviation sector, aviation sector india, aviation sector in india, aviation industry, aviation industry growth factors, how to grow aviation industry, aviation industry india Growing population and economic growth in most emerging and developing countries will continue to drive the need for significant airport infrastructure investments in the years ahead. (Reuters)

This is an exciting time for the aviation sector in India, with passenger traffic and freight movement witnessing rapid growth. Passenger traffic during FY16 increased at the rate of 21.3% to 85.57 million, from 70.54 million in FY15. The Union Budget announced the need for additional airport infrastructure, laying an impetus on regional connectivity and bringing in private players to operate and manage many of these airports.

While public-private partnerships (PPPs) are not new, the pay-off hinges on how effectively PPPs are structured and executed. Globally, there are key dimensions of PPPs that characterise its uniqueness and structure.

– Single large airport versus cluster of airports: Contracts based on large capex and operations management like Brazil’s Guarulhos International Airport allow a bidder to make the most of its size and scale.

– Contract duration: Partnerships range from short 10-15 year contracts to 30-40 year contracts, depending on the level of investment expected from the private party. For instance, the contract for rehabilitation, expansion and operation of Queen Alia International Airport in Jordan was structured for a 25-year concession period, while Egypt’s five-regional-airport-cluster PPP contract was structured for a period of only six years.

– Scope of the contract: The scope of a PPP contract for a large or a small airport determines the complexity of the project. So, pure maintenance contracts can be executed even by mall operators, while complex concession agreements with long-term rights to operate, ownership of revenues and expenses, and financial and investment commitments to the government require the expertise of more experienced private players like Changi or Fraport.

– Contract inclusions: There is always the issue of what is in the public infrastructure owner’s power to delegate. Typically, the concessionaire is responsible for land-side while the government or owner for air-side. Then there are other aspects like determining the duties that fall under each category, determining responsibility for air traffic control, route agreements with airlines, and will customs immigration and security stay with the government or be handed over to the private partner.

Drawing on our experience from working with many PPPs around the world, we feel it is important to ensure that four key objectives are achieved.

– Shared costs and benefits: Good business sense and a fair public-private risk-allocation are important for a healthy PPP to be sustainable. It is imperative that both bidder and the asset-owner share the cost and benefits equally, and in no way should the agreement be lopsided, wherein one party bears a majority of the costs while the other benefits unduly from the expected traffic growth.

– Freeze on the perfect mix for contract terms: The duration of the contract must be considered carefully. Too short a duration with a high expectation of investment from potential bidders is likely to drive them away. Similarly, the inclusion of land parcel for development around the airport also must be carefully considered, based on factors like the airport location, size of the holding, etc.

– Ensure continuity of the asset management contract: A management contract is effective if there is continuity in party running O&M contract—to ensure there is sufficient incentive for bidders to continue post the end of the tenure and also prevent abuse of the airport asset towards the end of the term.

 Efficient project performance tracking and a robust dispute resolution system: From the design phase itself, it is imperative that a robust dispute resolution system is put in place. Particularly for long-term partnerships, it is critical to track operations and performance of the project. Setting the right key performance indicators and service-level agreements is an integral part of the process.

Growing population and economic growth in most emerging and developing countries will continue to drive the need for significant airport infrastructure investments in the years ahead. PPPs can help meet that challenge. The successful models across many projects and countries have created a broad knowledge base that companies can tap for future decisions. Applying the key lessons of these experiences will allow the public sector and the private sector make PPPs a win-win proposition and help the aviation industry achieve its true potential.

Suresh Subudhi & Gaurav Jindal
Subudhi is partner and leads the Infrastructure Practice at the Boston Consulting Group, India.
Jindal is project leader, the Boston Consulting Group

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