Tariff determination for airports: Skepticism greets government’s proposal

By: | Published: September 17, 2018 1:36 AM

While sound in theory, the move to fix tariffs before airport bids are invited needs to be reappraised, say industry stakeholders.

NABH (NextGen Airports for BHarat) Nirman initiative, a new transaction system for greenfield airports built under the public private partnership (PPP) model. (Representational photo)

Since 2006 when the aviation sector was liberalised, tariff fixation has been fraught with delays and disputes, with airport operators and airlines even slugging it out in legal battles to ensure fair tariffs from the regulator. To pre-empt such disputes and push private investment, the ministry of civil aviation (MoCA) has proposed under the NABH (NextGen Airports for BHarat) Nirman initiative, a new transaction system for greenfield airports built under the public private partnership (PPP) model.

This offers predictability of tariffs to concessionaires and other stakeholders, with a pre-determined structure setting rates for services like parking and landing airlines and passenger service fee. Thus, airport tariffs would be set before the rollout of the bid document for construction of airports, a significant shift from the present practice of choosing the bidder which offers the highest revenue share to the government. At present, five PPP airports – Delhi, Mumbai, Bengaluru, Hyderabad and Kochi – operate under the revenue-sharing system, with tariffs being set by the Airports Economic Regulatory Authority (AERA) for five years.

In the existing system, AERA considers both aeronautical and non-aeronautical revenues to arrive at charges for airport use. The new model offers developers freedom to earn returns from non-aeronautical sources. The government thinks a longer concession period of 40 years and liberalised norms for real-estate development could help attract foreign investment.

However, not many are convinced about the efficacy of the new model. An airport industry executive says, “while a pre-determined tariff regime is a step in the right direction, it needs to be worked upon. We will have to see whether a one-size-fits-all (aeronautical yield) approach works in the Indian context or not.”

Speaking at the International Aviation Summit-India recently, Alexandre de Juniac, director general and chief executive officer, International Air Transport Authority (IATA), said, “we believe it makes no sense to fix a per passenger yield at the outset of a contract that is to run for four decades. We know from bitter experience in Brazil and elsewhere that selecting the company that simply proposes the highest concession fee does not yield good long-term results.”

Kuljit Singh, partner and industry leader, Infrastructure, E&Y, says, “theoretically, pre-determined concession parameters at greenfield airports are a good thing. But they can sometimes throw up extreme results. We have seen this in long-term concessions for toll roads in India and overseas. Hence, there has to be a mechanism by which the concession can be rebalanced to protect the interests of all stakeholders.”

While the draft of the proposed structure is up for public consultations, MoCA is keen on going ahead with the model, with bids for the national capital region’s second airport at Jewar in Uttar Pradesh likely to be invited under the new guidelines. Whether it would work for the world’s fastest growing domestic market, which requires a massive upgrade of its airport infrastructure – consultancy firm CAPA India has estimated the sector needs an investment of $45 bn by 2030—remains to be seen.

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