New privatization model to help airports take off

By Ashish Suman and Kartikeya GS, J. Sagar Associates
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Airports are set to be the stage for one of India’s largest infrastructure development and expansion initiatives. This comes on the back of a dramatic rise in passenger traffic, which has been witnessing double-digit growths for record periods and is set to grow three-fold by 2037. Notably, a good part of the growth is being driven by tier-II cities. The causes of this upswing in traffic are manifold:

  • India’s fast-growing population, which is estimated to reach 1.7 billion by 2050, is projected to become the largest in the world. The United Nations estimates that over half of the total population in India will be living in urban areas by 2050.
  • Rising incomes mean that a larger share of the population has access to the aviation market. By 2036, India’s per capita income is expected to increase five-fold compared to 2006 levels, and middle-class households are set to constitute 20% of all households.
  • The steep decline in airfares and an increase in the number of airlines have lowered the gap between air and rail fares.

In the coming years, it is estimated that India may have around 190-200 operational airports – the top 31 cities may have two airports and New Delhi and Mumbai are expected to have three each. This would require a capital investment of around US$40-50 billion. Many of these airports – greenfield or brownfield developments– will be done through private involvement in their development and/or operation and maintenance.

New model for development

Airports
Ashish Suman
Partner
J. Sagar Associates

The move towards increased private participation in the development or redevelopment of airports was kicked into high gear recently when six airports (Ahmedabad, Guwahati, Jaipur, Lucknow, Mangaluru and Thiruvananthapuram) were at the same time offered up for brownfield development by the Airports Authority of India. The bidding process received an enthusiastic and promising response from the market with over 30 bids received for the airports, which also saw several new players entering the fray.

The new model is notable for substituting the revenue share model with a per-passenger fee as the bidding criterion. Revenue share was the bidding criterion for the New Delhi and Hyderabad airports and more recently for the upcoming greenfield airports at Mopa (Goa) and Nagpur (Maharashtra).

The change in bidding criteria was considered because the revenue share model has been much-contested due to various challenges and disputes. Lack of clarity over classification of and accounting for revenues and fears of revenue leakage or masking (for example through innovative structuring and implementation models) were some of the challenges.

airports
Kartikeya GS
Principal associate
J. Sagar Associates

The per passenger fee is computed on the basis of the number of embarking and disembarking passengers at the airport. This figure can be more readily monitored and verified by both the concessionaire and the authorities, thereby reducing the scope for disputes over the amount owed to the authority by the concessionaire.

The new model for these six airports has some other interesting features. One change was that the termination payments are now based on a reference to the asset-side and not the debt-side. This change has been made since the independent economic regulator for the aviation sector, the Airports Economic Regulatory Authority, is responsible for determining aeronautical tariffs for airports based on an assessment of the assets and investments in the airport.

Another change is an increase in the concession term to 50 years considering the financial viability of increasing the period for financial returns. A third interesting feature of the new model is that there are no mandatory capital works prescribed to be undertaken by the concessionaire. Instead, the concessionaire is required to achieve certain pre-defined performance parameters at the airport and is given the freedom to assess for itself what capital work may be necessary to ensure compliance with these parameters.

Any model for private participation should balance predictability with customization. Change for change’s sake risks alienating investors wary of untested or new models. However, suspicions of new models should not come in the way of necessary evolution and risks stultifying the industry. Given the growth in India’s aviation market and demand for airport infrastructure, it is imperative that airports are developed by means of robust, long-term and viable frameworks.

Ashish Suman is a partner and Kartikeya GS is a principal associate with J. Sagar Associates. Their views are personal.

airports

J. Sagar Associates
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Contact details
Ashish Suman | Tel: +91 12 4439 0798
Email: [email protected]
Kartikeya GS | Tel: +91 12 4439 0697
Email: [email protected]
Website: www.jsalaw.com