PPP airports: The public gets a raw deal?

August 22, 2020 11:25 PM

The depressed demand and impact in terms of revenue shortfall will be made up by higher charges—paid for by the passengers. The “public” continues to be completely overlooked in the PPP model for airports

Take this economic regulatory model and couple it with misaligned incentives, and one is left with a market environment where passengers are forced to pay for largesse to airports.Take this economic regulatory model and couple it with misaligned incentives, and one is left with a market environment where passengers are forced to pay for largesse to airports.

By Satyendra Pandey

When it comes to airports, the Covid-19 pandemic has brought about a significant disruption. Passenger demand has fallen off the cliff, and is not expected to recover anytime soon. Several airlines are teetering on the edge of failure, and suppliers and other stakeholders stand to face significant defaults. Yet, as far as the airports go, their returns are secured. Because airport operators will be allowed to recoup the loss of revenue via increased charges. In the end, because of how airport development policies have been structured, it is the passenger that will pay, and carry the burden of making up the revenue shortfalls. The much advertised public-private partnership (PPP) model to develop airports continues to chug along—but the “public” continues to be short-changed.

Much of the challenge can be traced to the current economic regulatory model of Indian airports. Currently, the PPP airports are guaranteed a return on equity of 16%. The process involves the airports submitting traffic projections along with operating expenses, taxes, the cost of capital, any subsidies received and capex plans to the regulator. A target revenue figure is calculated, and the gap between the target revenue and the actual revenue is recovered via the levy of user development fees (UDF) charged to the passengers. That is not all, in cases where the airport is unable to secure adequate financing for capex, the funding gap between the financing secured and the financing required is again borne by the passengers via the airport development fees (ADF).

Take this economic regulatory model and couple it with misaligned incentives, and one is left with a market environment where passengers are forced to pay for largesse to airports. The market reality is one where, in a population of 1.3 billion, 84% survive on a per-capita income of less than $1,200. And, within the remaining segment that flies, more than 90% constitute extremely price-sensitive demand. A demand that simply will not fly beyond a price-point. A demand that asks for efficient airports that are low-cost, but high-quality, and enable folks to fly in and out while minimising time consumed. Airport development has to be aligned to this nature of demand. But, this has simply not been the case.

Consider these numbers: The Delhi airports final project cost was 3.8 times the initial estimate, and in the case of Mumbai, it was 1.7 times the initial estimate. The cost of these overruns was covered by the flying public. Both airports were allowed to levy development fees to the tune of nearly Rs 3,400 crore. The contribution via fees levied on passengers being 1.2x–1.4x the equity contribution in the case of Delhi, and 3x–3.2x in the case of Mumbai. Given the recent expansion at Bengaluru airport is estimated to cost in excess of Rs 10,340 crore, and the preliminary numbers that are being floated for the Jewar and Navi Mumbai airports, a similar outcome is all but certain.

The misaligned incentive structure also provides avenues for airports towards spending more. Airports are increasingly finding an excuse to construct, and it is no wonder that, while investment in excess of $5.5 billion has gone into airports, 55-70% of total project costs for airport development spends have gone to terminal buildings. Not because it is required, but because it provides for immediate returns. The design and utility of these buildings clearly demonstrate that they are geared towards driving capex rather than driving aviation growth. Throw in pliant stakeholders who tend to benefit from lucrative contracts, and the elements line up.

Between a focus on risks and a focus on returns, policy and stakeholders have been focussed on the latter. So rather than focus on the ever-increasing and complex land acquisition costs, construction costs, regulatory challenges, financing costs and overly optimistic forecasts, the focus has been on how to extract maximum value from the public via fees and charges enabled by monopoly positions. At times when the regulator has tried to intervene to correct, it has been unable to do so. And, while citing a focus on affordability, costs and convenience, the policy and regulatory interventions have failed to recognise that vision.

With the ongoing airport privatisation drive, the question of whether new airports will be able to attract investor interest and line up project financing is a one that remains. But, whether the public will continue to be short-changed in the PPP model at this time is not even a question. The depressed demand and impact to revenue shortfall will be made up by higher charges—paid for by the passengers. The “public” continues to be completely overlooked in this PPP model.

(The author is Former head of strategy, GoAir. Views are personal)

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