Aviation infrastructure in India: Overhaul strategy is what Centre must do

By: | Published: November 20, 2017 3:11 AM

Around 25 of the 126 airports operated by the Airports Authority of India (AAI) have reached saturation point, particularly tier-II airports.

The govt needs to intensify focus on the development of brownfield airports under PPP model.

In 2016, India witnessed 23% growth in domestic air travel demand, the highest in the world. From 131 million in 2016, the total passenger traffic at airports is expected to reach 378 million by 2026. As a result, six cities with metro airports will require additional capacity in the next 5-7 years. Around 25 of the 126 airports operated by the Airports Authority of India (AAI) have reached saturation point, particularly tier-II airports. To match the rising demand, India would need to triple its airport capacity over the next decade, requiring an estimated capital expenditure of Rs 2.4 lakh crore.

Over the past decade, the government has collaborated with the private sector, and delivered positive results. The four major airports (Delhi, Mumbai, Bengaluru and Hyderabad) which were transitioned to the PPP model have gained global recognition for their standards. However, the government’s recent privatisation plans have not taken-off as desired. It had invited bids for the privatisation of four major airports in 2014 after coming to power, but had to scrap the plan within a year due to aggressive deadlines and several breaches. Though it went ahead with the O&M privatisation of Ahmedabad and Jaipur airports, the contracts have not been awarded to date.

The progress on the privatisation of brownfield projects in India is slow mainly due to the following reasons:
• The government needs to come-up with innovative models to attract private players.
• The share of non-aeronautical revenue in total revenue for Indian airports is approximately 25%, much lower than the global benchmark of 40-50%.
• With the AAI having invested a lot in the modernisation of some major airports, the government is now reluctant to share the revenue streams with private players, better equipped to operate and manage the airports.
• A rise of 346% in Delhi’s IGI airport charges in 2012 had raised concerns on privatisation of airports. However, given that the regulatory approach evolves over time, there was no case for dumping of the PPP model for brownfield airport development.
The following measures are likely to push airport privatisation in the country:
• To improve their performance, AAI can sign separate concession pacts with the Ministry of Civil Aviation for each of its airports.
• With the private sector better equipped to deliver latest technologies and generate non-fare revenues from a project even as it maintains minimum operational standards, the responsibility for operations, management and maintenance should be passed on to the private sector.
• Concessions need to be designed in a way that reduces risky and overzealous bidding and addresses revenue leakage risks.
• In tier-II and tier-III cities, a different strategy for airport concession should be deployed in order to make the project viable in the initial years.
• The government or the regulator should consider the capitalisation of land or suitable return for the land cost for the purpose of a regulatory asset base.
• Airlines need to be incentivised to fly to regional airports to increase investment viability. The recently launched UDAN scheme somewhat caters to it, but it penalises airlines flying from major airports with extra levy to fund subsidised fares for regional airports.
• The government should consider various PPP models for airports used internationally, such as the Corporatisation of Singapore’s Changi Airport or Privatisation of various airports in Brazil.

Recent government actions do indeed serve as first steps in the right direction. However, the government needs to strengthen its focus on the development of brownfield airports under PPP model.

The writer is partner, Infrastructure & PPP, EY LLP India

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