AERA moots tentative ceiling for airports' capital costs

Airport tariff regulator AERA has come out with a tentative ceiling on capital costs incurred by aerodrome operators as it seeks to put in place a "reasonable benchmark" for determining the fee charged from users and curb possible 'gold plating' of expenses.
The move comes at a time when the government plans to revive and establish more airports in order to boost regional connectivity. As many as 25 regional airports are to be developed in the current fiscal.
The Airports Economic Regulatory Authority (AERA) has asked airport operators to relook at the costs proposed in their submissions and justify the increase that is above the tentative ceiling rates.

The regulator has set a tentative ceiling cost of "Rs 65,000 per square metre (sqm) of the terminal building and Rs 4,700 per sqm for the runway/taxiway/apron (excluding earthwork up to sub-grade level)".
Ceiling costs are being fixed as a "reasonable benchmark for evaluating capital costs to be incurred by airport operators of major airports for the purpose of tariff determination on a tentative basis", the watchdog said.
The limits would be in place till finalisation of a norm to decide on capital costs through a more rigorous process.

The tentative limit has been decided after taking the cost run up by Cochin International Airport Ltd (CIAL) -- the operator of Cochin airport in Kerala.

"... There is a need to have at least a tentative basis to fix the ceiling cost of terminal building and apron for the airports while evaluating the tariff proposals of various airport operators and determine the tariffs for the second control period, for which certain guidelines require to be formulated," the order issued on Monday said.
Putting a ceiling on cost per sqm of the terminal building would help mitigate the possibility of "gold plating", according to minutes of a meeting held in June 2014 between AERA and the stakeholders. The deliberations took place on a consultation paper regarding normative approach to building blocks in economic regulation of major airports, mainly with regard to capital costs.

Gold plating refers to inflating project costs due to avoidable expenses which are then sought to be passed on to the end-users.
In its latest order, AERA said major airports have
submitted their multi-year tariff plans for the second control period.
Tariff control period implies a time span to which a particular tariff is applicable.
"It would not be prudent to allow capital costs that are significantly higher than what has been incurred at Cochin," it noted.
"There may be certain variations due to cost of financing, locational advantages, etc. Even allowing for these variations, the costs are not likely to exceed the figure of Rs 65,000 per sqm as given in consultation paper dated June 12, 2014".

As per the AERA consultation paper put out in 2014, the cost per sqm of a modern airport terminal building in India varied between Rs 43,333 (Cochin) to Rs 1,45,000 (Bengaluru).
Significantly, the Airports Authority of India Employees Union has on several occasions in the past accused private airport operators of passing on the high costs to fliers.
Global airline's body International Air Transport Association (IATA) has also termed the Indian airports (primarily private ones) as the "most expensive" in the world.
At present, there are six airports -- Delhi, Mumbai, Hyderabad, Bengaluru, Cochin and Nagpur -- running in the PPP (public-private partnership) mode.

Stating that airport being a public infrastructure project, AERA on Monday said the related assets need to be created through "efficient costs on value for money basis".
The cost of Cochin International Airport (CIAL) can be taken as a reference level and considered as prudent cost benchmark while analysing tariff proposals of airport operators, it suggested.
In case rates are higher than the approved ceiling rate, the same would be examined by an experts' panel constituted by AERA before taking a final call.