Changes in airport tariff mechanism a booster: ICRA

By: | Published: June 25, 2016 12:37 AM

To ensure uniformity and level-playing field across various operators, the government, in its newly-announced civil aviation policy, said the future tariffs at all airports will be calculated on a hybrid till basis, unless otherwise specified for any project being bid out in future. (Reuters)

To ensure uniformity and level-playing field across various operators, the government, in its newly-announced civil aviation policy, said the future tariffs at all airports will be calculated on a hybrid till basis, unless otherwise specified for any project being bid out in future. (Reuters)To ensure uniformity and level-playing field across various operators, the government, in its newly-announced civil aviation policy, said the future tariffs at all airports will be calculated on a hybrid till basis, unless otherwise specified for any project being bid out in future. (Reuters)

The standardisation of tariff mechanism is expected to improve cash accruals for existing greenfield airports besides attracting investments for the future projects under the PPP mode, ratings firm ICRA said today.

To ensure uniformity and level-playing field across various operators, the government, in its newly-announced civil aviation policy, said the future tariffs at all airports will be calculated on a hybrid till basis, unless otherwise specified for any project being bid out in future.

There are broadly three approaches in regulatory till methodology (to calculate charges at airports) — single till, dual till and hybrid till.

In the hybrid model, the charges are calculated by taking all the aeronautical and 30 per cent of the non-aeronautical revenue into account.

“ICRA sees the standardisation of tariff mechanism, in particular the ’till factor’ for all airports in the government’s new aviation policy, as a move that would improve cash accruals for existing greenfield airports and attract future investments for developing airports under the PPP model,” the ratings firm said in a report.

Noting that the new policy was likely to clear the uncertainty on the regulatory runway, ICRA said, “The national civil aviation policy provides ample clarity on the regulatory till to be adopted for future tariff determination at all airports.”

Regulatory till for tariff determination has been a point of contention for long, especially in case of the greenfield airports developed under the PPP mode, it said, adding the sector has been grappling with regulatory uncertainty, given the lack of an established tariff mechanism.

“The shift from single to hybrid till is expected to improve cash accruals in the range of 16-19 per cent, depending on the share of non-aeronautical revenues to total operating income,” ICRA senior vice president Rohit Inamdar said in the report.

According to Inamdar, in case of Bengaluru and Hyderabad airports, for which non-aeronautical revenues account for 23-25 per cent, the cash accruals would improve by 16 per cent resulting in better debt protection metrics.

Further, this policy directive is much needed for both these airports given the substantial capex plans as it would help in better internal fund generation, he said.

Currently, there are five major airports — Delhi, Mumbai, Bengaluru, Hyderabad and Cochin– in India which were developed under the Public-Private Partnership (PPP) mode.

Till now, tariff determination for greenfield airports has been more ad-hoc in nature, the report said.

At the same time, Airports Economic Regulatory Authority (AERA), in one of its orders recently, came out with a tentative ceiling on capital costs incurred by aerodrome operators.

Under this, the allowable project cost is capped at Rs 65,000 per sq mtr in case of the terminal building and Rs 7,000 per sq mtr in case of the runway.

Even in case of existing terminals at the major airports which were constructed 8-10 years ago, the cost incurred was more than two times the figures prescribed by AERA.

“If implemented, this order would help rationalise future capex and consequently lower the burden on the passenger in the form of UDF; however, adhering to these capex norms without compromising on the quality of development would be a challenge for developers,” AERA said in the report.

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