Private airport operators led by GMR and GVK have started lobbying with the airport regulator for a higher rate of return on their investments while determining airport charges. The companies have written to the Airport Economic Regulatory Authority (Aera) proposing up to 20% annual return on their investment.
As per industry estimate, private developers in the port, road and power sectors are allowed 14-16% return on their investment by factoring in competition, debt, equity and risk factors among others.
Higher airport charges could result in additional burden on airlines which generally is passed on to consumers. The private developers already levy as much as R 1,700 on passengers to make up for shortfall in their pre-fixed investment.
Industry sources said that private airport companies under the banner of Association of Private Airport Operators (APAO) have got a fair rate of return (FRoR) analysis done by consultancy and accounting firm KPMG and has based its demand on it. ?There are various risks involved with greenfield projects. Investors should be allowed higher return, in the range of 20-25%, on their equity,? a private airport executive said.
Aera is following the capital asset pricing model, a mathematical formula that seeks to explain the relationship between risk and return, to determine rate of return on investment. Aera chairman Yashwant Bhave said that the regulator had given 18.3% return on ad-hoc basis in case of Hyderabad airport while determining the quantum of development charge to be collected from outbound passengers.
A GMR group official said that AERA had given 18.3% return on equity and that the overall return stood at 10-11%.
?The rate of return would vary from airport to airport depending upon risk, investment, debt, equity and other factors,” Bhave told FE. An industry expert with Delhi-based consulting firm said that the rate of return in the airport sector should be decided in line with other sectors like port and power. ?The 20% return is perhaps on the higher side,? he said.
Aera is expected to set airport tariff in the next four months after its five year control period kicks in beginning April. “In the nature of the timelines specified in the guidelines, it would not be possible to determine the tariff in respect of any of the major airports before April 1. In this light, the authority proposes to permit the concerned airport operators to continue charging the tariffs for aeronautical services provided by them, at the existing rates, in the interim period,” the regulator said in an order issued February 28.
According to an executive of a private equity firm, private developers are generally allowed higher rate of return during building of the project with return coming down after the project is complete.