The era of AERA in India’s airports

By Sakya Singha Chaudhuri, Trilegal
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The Airport Economic Regulatory Authority (AERA) has recently been constituted to regulate tariff and other charges for aeronautical services and to monitor performance standards of major airports in India. AERA’s role as the regulator for airport charges will be significant in encouraging private participation in the airport sector and bringing efficiency in investments in airports.

Sakya Singha Chaudhuri Counsel Trilegal
Sakya Singha Chaudhuri
Counsel
Trilegal

Airport charges are generally fixed by regulators around the world either by defining a cap on the increase in charges during a particular regulatory period or by regulating the level of charges to ensure that the developer recovers its cost and is guaranteed a reasonable return on its investment. Regulators in some countries, e.g. New Zealand and Australia, maintain restraint in interfering with airport business and act as monitoring agencies to ensure that airport charges are fixed by the airport operator in a reasonable manner, which does not result in abuse of its monopoly. A consultation paper issued by AERA recently shows its inclination to adopt a price cap method for fixing airport charges.

It will perhaps be a good idea for AERA to adopt a light-handed approach towards regulation where charges for non-competitive services (e.g. landing and parking charges) are fixed by AERA while allowing the charges for competitive services (e.g. cargo handling) to be determined by market forces.

Landing and parking services are provided exclusively by the airport operator while multiple agencies are generally involved in cargo handling and ground handling services. A light-handed approach will encourage free and fair competition in competitive services while at the same time curbing any monopolistic tendencies of the operator.

An important aspect of tariff fixation is the cross-subsidization of aeronautical costs with non-aeronautical revenues. Typically, the aeronautical and non-aeronautical assets and services are either treated as an integrated business to allow non-aeronautical earnings to offset the cost of aeronautical assets (single till approach) or they are treated separately and the charges reflect the actual cost of assets (dual till approach).

AERA, in its consultation paper, has indicated its inclination to adopt the single till approach. However, given the present requirement to encourage development and large-scale investment in non-aeronautical assets, it is advisable to develop a tariff framework that encourages and incentivizes investments. Non-aeronautical revenues (which are not regulated under the AERA Act) are viewed as a major source of revenue for driving the profitability of an airport. The use of the single till approach will discourage investment in non-aeronautical assets since the profits will be used to cross-subsidize aeronautical charges. AERA should consider options that encourage and award efficiency and investment in non-aeronautical services while discouraging the tendency to cross-subsidize aeronautical services.

Enforcement

The Indian government has already leased out two of its major airports, in Delhi and Mumbai, to private operators while greenfield private airports have been developed in Hyderabad, Bangalore and Cochin under concession agreements.

The adoption of the single till approach will raise serious concerns for the operators of the Delhi and Mumbai airports where the concession agreements provide for a shared till for airport charges. The shared till approach is a hybrid of the dual till approach where a small percentage of the non-aeronautical revenue is used to subsidize aeronautical costs.

While the AERA Act gives sufficient leeway to the AERA to structure the tariff around such concession agreements, it remains to be seen how the regulator works out the tariff for the concession airports. The Supreme Court of India, while dealing with the privatization of the electricity distribution sector, held that the regulator cannot deviate from the terms and conditions on which projects were privatized by the government.

AERA is also responsible for monitoring the performance standards of the airports. It has said that it will consider the performance standards of operators on various parameters that it has identified for the purpose of airport charges in the form of penalties and disincentives. However, AERA has indicated that these should not include services that are beyond the control of operators such as security check-in which are handled by government agencies.

AERA may need to reconsider its approach towards a single till tariff to allow airport operators to maximize their returns on non-aeronautical assets. This will help in making available to the operators substantial funds required for large-scale investments in the aeronautical assets. The aeronautical assets in the existing and greenfield airports in India will require significant development and modernization in the coming years. Operators should be allowed a free hand to maximize their revenues to be able to fund such expansion and modernization.

Sakya Singha Chaudhuri is a counsel in the Delhi office of Trilegal. Trilegal is a full-service law firm with offices in Delhi, Mumbai, Bangalore and Hyderabad. The firm has over 120 lawyers, some of whom have experience with law firms in the US, the UK and Japan.

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