AAI's flight plans: Privatising smaller airports is a good idea

The Centre has finally come round to a decision that should have been taken at least a decade ago, to privatise airports. At least eight government-owned airports are expected to be put up for bidding by the Airports Authority of India (AAI). Sharp increases in the number of domestic air passengers — the numbers crossed 100 million in 2017 — warrant not just an expansion of airport space within existing properties but also an exponential improvement in the quality and efficiency of service. The eight airports slated for privatisation, including Chennai, Kolkata, Pune, and Guwahati, have seen 10 to 26 per cent annual increases in passenger footfalls in 2017-18. Despite the initial hiccups over contracts and revenue share agreements, the early privatisations — in Delhi, Mumbai, Hyderabad and Bengaluru — undoubtedly set a higher bar for quality standards in airport management.

These airports continue to compare well with global competition, principally on account of tie-ups with foreign airport developers. To be sure, the AAI did achieve a quantum improvement in aesthetic standards and management efficiency of the newer airports that were built by drawing on the templates set by the private sector. But with heavy commitments towards building and expanding small airports for its regional connectivity plans, the airport regulator is unlikely to have the wherewithal to take the next big leap in airport development, so the decision to go in for full-scale public-private partnerships (PPPs) for developing airports along other major routes is, in a sense, an inevitable one.

In order to make this proposal viable for the private sector, however, much will depend on the nature of the model revenue-share agreement that the ministry of civil aviation offers. The NITI Aayog and the AAI are currently working on some options for 30-year concessions. One is the “forward bidding” method, which involves quoting a tariff per passenger that the private bidder will share with the AAI. Another is the “reverse bidding” mode, which involves quoting landing and user charges, with the bid being awarded to the lowest bidder. The first method has risks embedded in terms of cost inflexibility, since it entails the landing and user charges will be fixed upfront by the ministry. The second runs the same risk that afflicted ultra mega power projects under the United Progressive Alliance, when unrealistically low tariff bids rendered several projects unviable and later required controversial tariff revisions. 

Again, experience with earlier airport PPPs could come in handy. Initial agreements, with GMR and GVK, proved controversial because the high upfront revenue commitment to the AAI from gross revenue reduced the developer’s return on investment, causing sharp increases in passenger charges. This apart, the failure to work out an agreed level of capital expenditure saw hefty cost overruns, for which passengers principally bore the brunt. If airport PPPs are to achieve any critical mass, open-ended agreements on capital investment must be avoided at all costs as much as the concept of “fixed tariffs”. Prospective private developers are also likely to look for opportunities for real estate development, a factor that was omitted from the earlier operation and maintenance (O&M) contracts that, unsurprisingly, yielded scant response. The biggest challenge, however, will be the AAI’s ability to manage the heavily unionised workforce that has fiercely opposed privatisation. This factor alone could be the biggest obstacle to the AAI’s ambitions.