Seven ways to make airport privatisation a success

The Cabinet has given in-principle approval for the privatisation of seven operational airports. This is against the backdrop of in-principle approval already having been given for the development of 18 greenfield airports. While this is not the first time that the aviation infrastructure sector will receive private investments, it is something that both investors and the government have been trying to put on an accelerated path.

In fact, so far, privatised airports have attracted investments totaling close to $4.5 billion, and in the next couple of years additional investments of a similar amount are expected to be pumped in, taking the total to the tune of $10 billion. The process has its own set of issues and there were a couple of false starts in the recent past, when there were not many takers for the operation and maintenance tenders floated by the Airports Authority of India (AAI) for the Ahmedabad and Jaipur airports.

The timing couldn’t have been more perfect. India has become the third-largest aviation market in terms of domestic passengers flown, and we are in line to becoming the third-largest overall (domestic plus international) in the next three to five years. Although currently much of the passenger traffic is with the top five or six airports (most being privately operated) the ones identified are growing at a significant pace and are poised to hit capacity in the next five years or so. Privatising these airports when there is still some headroom gives operators a good view of the needs and time to settle in.

While the first step has been taken, there are quite a few issues which are yet to be resolved. It will be pertinent to note that although there are public-private partnerships (PPPs) in airports, only two or at best three bidders finally submitted bids, and in some cases the third was the AAI. This sector will need $8-10 billion over the next decade, and clearly, this cannot be met through only a couple of players. There are quite a few concerns amongst bidders and to have an inclusive play it will be good for the government to take care of them at the outset. 

First, the entire land must be made available at the time of bidding. This is an important, indeed a prime requirement. Significant investment commitments are made and the project gets stalled because of lack of full amount of land being made available at the appointed date.

Second, a clear exit strategy must be spelt out for all the stakeholders. Foreign players, though committed to the project, expect to have a clear exit strategy laid out at the start. Having a residual stake in the project till the end of the concession period is a model of the past, and for greater participation a time-bound exit strategy has to be facilitated at the time of bidding.

Third, extend the charging of a development fee to airports other than those managed by AAI, on a case-by-case basis. Unlike a user development fee (UDF), which is proposed for the operations of the airport, a development fee is charged for addressing any gap for the development of the airport. Currently, only AAI is permitted to charge this fee, on a case by case basis. Allowing the private player to levy a similar charge will help in widening the number of airports to be developed. Also, unlike the UDF, a DF will be a time-bound fee and will be withdrawn after a specified timeframe.

Fourth, oversight by the government or regulatory authority must be minimal. 

Fifth, termination proceeds must be linked to the total project cost actually incurred and not to the project cost determined at the time of bidding.

Sixth, the minimum concession period must be 30 years and the non-aeronautical part should have a longer concession period. 

Finally, there must be a robust industry-focused tribunal with expertise in airports to sort out differences. 

As the assets which are proposed to be set up will have a good track record in terms of traffic buildup, the authority can also look at fixing the bid parameter as a lump sum payment to be paid at the start of the concession. If the model is significantly de-risked and appropriate risk allocation has been done, such as in the case of the roads sector’s TOT (Toll-Operate-Transfer), the authority could get a significant premium to these assets.

The time is right. Traffic is growing, funds are seeking de-risked brown-field investment opportunities, and there is a need for wider participation. 

The government has taken a positive first step. Effective follow-through will determine the extent of success.  

  

The writer is Director, CRISIL Infrastructure Advisory