Vinayak Chatterjee: Prioritise privatisation of airports

Huge capacity expansion needs, enthusiastic investors and high expectations of service delivery point to a privatisation strategy

The National Civil Aviation Policy 2016 clearly states that the Ministry of Civil Aviation will “encourage development of airports by state governments or the private sector or in PPP mode”. However, in the case of the country’s largest airport operator, the Airports Authority of India (AAI), which operates 125 airports, the policy favours an approach in which it continues to run airports, but will “explore the possibility of giving out operations and maintenance (O&M) contracts for a cluster of existing and/or new airports”. Last year, a tentative decision to outsource management of operations at Chennai, Kolkata, Jaipur and Ahmedabad rather than bid them out in PPP mode is reflective of this approach. Interestingly, income from leasing of Mumbai and Delhi airports to the private sector accounts for well over 30% of the AAI’s annual revenue.

 
This O&M approach is overly conservative. A more ambitious approach, involving the bidding out of existing airports in PPP mode, would achieve a massive expansion in airport capacity that is sorely needed. It would also bring in efficiency and world-class service delivery exemplified by the experience of Mumbai and Delhi airports. It would enable the AAI to focus on its core role of expanding access to air services. It would also be in sync with government policy that now embraces an “asset recycling” strategy. For instance, the National Highways Authority of India has been authorised to lease road assets worth over Rs 70,000 crore to private investors in its recently announced toll-operate-transfer model.

 
The Centre for Asia Pacific Aviation (CAPA) has said that over $40 billion of investment is required in the sector, but that the actual capex pipeline in airports is only around $4.9 billion. In comparison, markets such as China and the UAE plan to invest many multiples of that in their airport infrastructure ($130 billion and $46 billion respectively). Top tier airports are all facing saturation over the next decade — indeed Chennai could reach that point as early as 2018. The report noted that among the 30 largest non-metro airports operated by the AAI, 40% are estimated to be operating above capacity. Yet investment in airport capacity in India has slowed in recent years, with capital expenditure by the AAI having fallen in absolute terms between 2009-10 and 2014-15.

 

The world over, private operators have proved themselves better suited to deliver customer service than state employees. Many parts of the operations of many Indian airports are already outsourced. Ground handling, parking, cleaning, and retail are often done by separate agencies. So, every airport that AAI owns already has a clutch of operations and maintenance contracts. These services will cost the same, irrespective of whether the airport is publicly or privately managed. Merely adding another layer of management does not help.
 
But enhanced customer service is more than about just clean toilets. It is about planning, providing adequate physical infrastructure to handle growth in passengers, and designing an airport to ensure that irrespective of any increase in traffic, customer service standards remain high. Indeed, outsourcing only O&M could lead to future conflicts between private operators and the AAI, with the private operator claiming that a fall in service standards is actually due to the fact that physical infrastructure of the airport has not kept pace with expansion in passenger numbers. Making the private operator responsible for not just customer service, but also the physical infrastructure of the airport, including building it out as traffic increases, ensures that private operators cannot dodge their responsibilities in this regard.

 
The last few years have seen a positive shift in the preference of large investors for airport projects. Deals in airport infrastructure have seen much interest and participation. Consider the following:

• France: In July, the government sold 60% stake in Nice Côte d’Azur and Lyon-Saint-Exupéry for about 1.8 billion Euro. The government sold 49.99% stake in Toulouse airport in early 2015.

 

•  Greece: The pace of privatisation in Greece accelerated in 2016, with the sale of 14 airports to German airport operator Fraport and its Greek partner Copelouzos Group.

 

• Japan: Privatisation of Kansai and Osaka (Itami) international airports was done to a consortium of ORIX Corporation and VINCI Airports in 2015. Further airport privatisations are also expected.

 

• Turkey: The build-operate-transfer deal of Istanbul New Airport, for $6.4 billion, was concluded in November 2015.

 

•  Great Britain: London City Airport was sold in February to a consortium of Alberta Investment, Ontario Teachers’ Pension Plan and OMERS. In 2014, Aberdeen, Glasgow and Southampton airports were sold in a £1-billion deal to a consortium of Spain’s Ferrovial and Australia’s Macquarie.

 

For airport privatisation to accelerate in India, concerns exist. They relate to apprehensions on the structure and modalities of the bidding process, the continuous reassessment of the model of privatisation that is best suited, uncertainty over the regulatory stance on airport charges, and the way regulators assess capital costs and returns of airport operators. These concerns will have to be addressed. Adversarial unions do not help either.
 
But clearly, the time for privatisation is now. Large institutional foreign investors are circling in anticipation of brownfield operating assets. Airports are very much on their shopping list. Domestic entrepreneurs are eager. The sector needs investment and the government is keen to monetise state-owned assets.

Do not waste time tinkering with O&M. Privatise!
The author is chairman, Feedback Infra.vinayak.chatterjee@feedbackinfra.com; Twitter: @Infra_VinayakCh