The Indian aviation sector is truly taking off—with an unprecedented 18% annual passenger traffic growth over the last three years, the industry is on the cusp of breakthrough growth. At a market size of $16 billion today, the Indian aviation industry could be the third largest in the world by 2020. Every year, as many as 20-25 million Indians are experiencing air travel for the first time.
Favourable government policies, including the unveiling of the National Civil Aviation Policy (NCAP) 2016, will continue to provide further growth stimulus. Considering China and the US already have 700 million and more than 1.5 billion airport footfalls, respectively, it seems only an eventuality that India’s current airport passenger traffic of 220 million will exceed 1 billion by 2030. NCAP recognises this potential and has set a target of 1.4 billion annual passenger capacity by 2027 (0.25 billion currently). This will mean building five times more airport capacity in 10 years—a challenging feat to say the least.
Accelerated development of airport infrastructure, both new and existing, is the need of the hour, to ensure adequate capacity to manage the burgeoning passenger growth. This will also create significant ripple effects in the economy, as airports have one of the highest economic multipliers across infrastructure asset classes. There is a potential to create 25-30 million direct and allied sector jobs, while catalysing faster growth in allied sectors such as construction, retail, trade, logistics, hospitality and tourism.
Accelerated airport development: PPP is imperative
Building airport capacity for 1.4 billion annual passengers is estimated to require funds in excess of $30 billion. Funding this completely through the public exchequer may not be judicious, given multiple other equally important socio-economic priorities of the government. Also, the Airport Authority of India’s ability to undertake and execute this large-scale development within such a short time-frame is also likely to be a constraint. It is, hence, inevitable that private sector participation will be require to fund, construct and manage some of this enhanced airport capacity.
The public private partnership (PPP) model for airport development is a globally successful model, with over 40% of global airport traffic today being managed or financed by the private sector. PPP so far has been sparingly employed in India, though a much broader role for the private sector will be essential over the next decade. Besides bridging the funding gap, private sector involvement will also help improve customer service, operational efficiency and financial viability of airports.
PPP: One size will not fit all
Given India’s diverse portfolio of over 100 airports, a “one-size-fits-all” approach to PPP will not work. Certain airports are significantly sub-scale with only 1-2 daily landings, while at Delhi and Mumbai airports, which are at the other end of the spectrum, there are over 800 landings on certain days. Also, some airports have brand new terminals, while many others have not been upgraded in many years, and are severely choked. Thus, a common PPP model will not work across airports.
There are multiple PPP models that have been successfully deployed across the world. These can be classified into four main categories:
DBFOT, BROT and OMDA: For airports which have high commercial potential and also require capex;
O&M with revenue share or lease rental: For commercially attractive airports without any need for capex upgrades;
BOT, hybrid annuity or LPVR (least present value of return): For sub-scale airports with need for capex upgrades;
Fixed fee O&M: For sub-scale airports with no requirements for capex upgrades.
All of these models are likely to be relevant in the Indian context. Another strategy successfully used by some countries is to create a concession bundle for a mix of airports. This makes the process more efficient for the authority, as it can concession out multiple airports in a single tender; at the same time, it also enhances attractiveness by creating sufficient scale for the concessionaire and enables PPP for financially unviable airports by combining them with attractive ones. Mexico is a good example of such a model.
Making PPPs successful: Lessons from the past
While embarking on a journey of large-scale PPP can yield significant benefits, it is equally important to take cognisance of some of the major challenges and learnings from the past, and engineer a more robust PPP roadmap.
Regulatory clarity: To avoid regulatory uncertainty in large-scale PPP, a clear regulatory framework for pricing regulation, service regulation and capex regulation needs to be established in concession documents. This should balance the interests of the private operator, the government and the general public. Post facto regulatory interventions, as in the case of the Delhi and Mumbai airports, will only result in aggrieved stakeholders and reduce takers for future concessions.
Long-term development strategy for the portfolio: PPP has, in the past, been employed for select commercially viable assets, failing to take the entire portfolio into consideration. For example, in the highway sector, high traffic stretches were concessioned on BOT mode, while other interconnecting or feeder routes in the same region found no bidders at a later stage, due to low traffic. An overall bundle of a set of high-traffic and medium to low traffic highways would have still attracted bidders for the overall BOT package.
Fair valuation of assets: Land acquisition for many public infrastructure projects is the responsibility of the government. On multiple occasions, questions on fairness of the valuation have been raised—both from the government and private landowners’ perspective. It is hence essential that future PPPs are undertaken with a fair and transparent valuation of the assets being provided to the private player, so that no party stands to gain unfairly from the process.
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Competitive, transparent and best-cost tendering: A successful PPP bid warrants an adequate pool of technically qualified bidders. Roadshows and contractor engagement are essential to generate interest, especially if the project is not for a flagship asset of the authority. Further, the entire bidding process needs to be suitably orchestrated so that the qualification criteria are clear, and the disqualified bidders do not impede the process.
Balanced risk and returns in the concession structure: Concession structures must be suitably designed to balance risk and returns for both the private player and the government. Traffic risk is always a major factor in a BOT project, and hence the government needs to either insulate the operator (as is the case with BOT-annuity projects), or provide the operator adequately high returns commensurate with the traffic risk. Further, condition precedent needs to be suitably defined so that the project kicks-off only once adequate capital, land and resources are ensured.
Stakeholder management: PPP projects often result in discontent and outcry, both from the public and from internal stakeholders such as labour unions. A key reason for this is delayed communication and engagement, resulting in mistrust and incomplete understanding of the process. Towards that, effective public perception management is integral to the success of PPP, particularly in setting expectations early on—that while the new developed facility will provide a superior user experience, it will come at a proportionate cost.
The recent growth numbers are only a glimpse of the untapped potential and demand for air transport in India. An efficient, cost-effective and well-connected air network will be an important enabler in further integrating the country and accelerating economic development. A billion passengers are eagerly waiting to realise their dream of flying. Can we get our airports ready on time?
Saurabh Bakliwal is Partner & Director, Mario Gonsalves is Principal, BCG