Introduction:

The developments in India have been quite remarkable. Privatisation has changed the face of airports and / or air travel in India.

Why privatise:

Two reasons: Airport infrastructure is capital intensive and associated with a long payback period. Moreover, the world over, international airports rely on over 50% of their revenues coming from non-aeronautical resources. The Government and the Government owned PSUs are ill-suited to harness this potential of the non-aeronautical revenues (such as hotels, passenger amenities, entertainment venues, retail etc).

All this led the Indian Government to embark upon privatisation and surely it is a move which could not have brooked any further delay. Before privatisation the Indian airports were bursting at their seams. For instance, the old airport at Delhi had a capacity to handle 12 million passengers per annum but it was handling over 20 million passengers per annum.

Some statistics:

In the last 10 years the airport traffic in India has increased by more than 4 times and in the next 8 years (by 2020) it is projected to increase by about another 3 times. Currently India is the 9th largest civil aviation market in the world and the projections are that in the next 15 years it will become the 3rd largest i.e. after USA and China. Therefore, it is witnessing explosive growth and there is no way the airport infrastructure would have met the expectations of the nation without privatisation.

The Story so far:

The privatisation story started in July 2004 when the concession agreement for the Bangalore airport was signed. Six months later, an identical agreement was signed for the Hyderabad airport. Both these were in the greenfield sector. Then came the two major airports in the brownfield sector i.e. New Delhi and Mumbai. These were awarded to the concessionaire in the year 2006 on an "as is where is basis".

Airport privatisation started with a bang. Just these four airports between them account for over 60% of the market and therefore it made its presence felt so quickly. It was working!

The Delhi airport was completed on time; it has been adjudged the second best airport in the world by the Airports Council International in the category of 25-40 million passengers and in just about 5 years it has given a return of well over half a billion US$ to the Government in revenue sharing (and this when the non - aeronautical side has not yet taken off). With this sort of a resounding success the pace of privatisation should have, if anything picked - on the contrary it stalled and after these 4 airports no airport was privatised till very recently. The chief reasons for this stalling were, first an absence of a detailed policy document. The greenfield / brownfield concession agreements signed by the Government in 2004 and 2006 seamed to suffer from anomalies and inconsistencies. There was a marked difference in the structuring and approach of the various airports. This difference was in terms of project monitoring, monitoring of the standards, imposition of liquidated damages etc. Just to give a flavour: in the greenfield airports of Bangalore & Hyderabad a delay as large as six months in project commissioning could be condoned on the ground that the Government had failed to perform its obligations. Thereafter the concessionaire got another six months in which period liquidated damages (LD) were a mere US$ 2500 per day i.e. in six months it would amount to US$ 4,50,000 - less than half million dollars in LD. As against that in the brownfield sector for the Delhi and Mumbai airports, even if there is a delay in submission of the Master Plan the LD would be US$ 65,000 per day - mounting to US$ 11.7 million within six months, after which the concession agreement could be cancelled. Indeed the brownfield operators ran the risk of LD (ultimately leading to termination of the contract) on at least 20 different counts most of which were not there in the greenfield airports. Hence there was a need to work out a consistent transparent mechanism and policy. The Government did this to a large extent in the year 2008 by announcing a Model Concession Agreement for both the greenfield and brownfield sectors (its a unified policy on the subject).

The second reason for stalling was the absence of a Regulator. The four major airports privatised between 2004 and 2006 stipulated in the concession agreements that an independent Regulatory Authority would be set up in due course to approve charges, impose penalty, settle disputes between the Government and the concessionaire and balance the interest of the users (i.e. public) and the concessionaire. But for a long time this concept remained on paper. The Regulator was not constituted and the tasks envisaged for that body were being performed by the Ministry of Civil Aviation. This was of course only an ad hoc arrangement – neither independent nor transparent. An independent Regulator is essential to address the complexities in a long term PPP project such as airports and in its absence, it became difficult to attract investment, specially as the market was shifting to the smaller airports. Hence there was temporary stalling of India's privatisation efforts in these last few years. By February 2010 the Regulator and a judicial appellate authority to hear appeals therefrom were put in place by an Act of Parliament. Thereafter the momentum of privatisation seems to be picking up again.

Government has recently announced 14 new airports in the greenfield sector. A high powered Government Financial Task Force has concluded and recommended that the development and operations of virtually every significant in the country should be through PPP, whether they are in the greenfield or in the brownfield sector. The Government has realised that privatisation makes sense for a large number of reasons. They not only bring overall better airports but also help, generate larger revenues without imposition of high user fees on passengers. Two major airports in India (Kolkata and Chennai) were not privatised. These are now loss making, despite a 6-7 times increase in the user charges and have now been recommended to be privatised.

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Transcript of Talk Delivered in Dublin IBA Conference, 2012

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