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Privatising airports

Government needs to learn lessons from the earlier round

Business Standard Editorial Comment  |  New Delhi 

The ministry of civil aviation has set the ball rolling for another round of airport privatisation by announcing the request for qualification (RFQ) process for airports in Chennai and Lucknow. The metro airports of Chennai and Kolkata and smaller airports in Lucknow, Ahmedabad, Jaipur and Guwahati are also to be bid out. In contrast to the earlier privatisation of airports in Delhi, Mumbai, Hyderabad and Bangalore, the terminals on offer have all been modernised by the Airports Authority of India (AAI). The construction element is less, reducing chances of massive cost escalation, as occurred in Delhi and Mumbai.

The Airports Economic Regulatory Authority (AERA) has set the user development fee (UDF) for Kolkata and Chennai. UDF will also be set for non-metro airports before bidding is initiated, with UDF escalation indexed to inflation. The AERA will play a key role in ensuring reasonable handling and parking charges for airlines, issues that bother users of airports modernised under the earlier round of privatisation. The AAI is offering 30-year operation and management contracts for Chennai and Lucknow. Eleven firms have evinced interest. Bidders will offer revenue share to the AAI. No entity may receive more than two contracts; no entity may receive both metro contracts; no entity may receive more than one contract out of the three international airports at Ahmedabad, Chennai and Kolkata. The Chennai concessionaire must invest Rs 1,200 crore to complete a new runway and domestic terminal, while the Lucknow concessionaire will invest Rs 500 crore. Shortlisting after RFQ will occur at the end of October and bids will be received by late December. The awards have been scheduled for mid-January 2014. The concessionaires for Lucknow and Chennai would set up joint ventures, either with 100 per cent equity held by private operators (either alone or in consortium), or with the AAI holding 26 per cent stake in each joint venture. It may be assumed that the holding structures will be similar for the other airports. In Mumbai and Delhi, the AAI holds 26 per cent equity in the respective joint ventures; in Bangalore and Hyderabad, the respective state governments hold 13 per cent equity. The AAI receives 49 per cent revenue share in Mumbai and Delhi.

A public-private partnership model for the airports sector can be successful. There are multiple international instances where airport operators are profitable while delivering value for money and quality services. But the Indian experience has been mixed, with disputes, delays and losses marring the initial privatisation. Some contentious issues, therefore, will have to be addressed. There is a question mark about the fate of the labour force. Will they be absorbed by the new management companies or remain AAI employees? There have already been agitations by AAI employees and this could easily become a roadblock.

Another issue is that a new civil aviation policy is to be announced soon. The terms therein could change the playing field. It may have made sense to release the new policy before launching into RFQ processes. However, the government is plainly in a hurry to raise as much cash as possible. These contracts will have to be very well drafted to ensure easy dispute resolution in case of possible clashes with the new civil aviation policy.

The fate of this round will impact multiple ongoing and planned airport modernisation projects and also greenfield ones. Handled well, it could ensure investment for future projects, while allowing the AAI to raise revenues and offer better service to passengers. Unfortunately, it seems the lessons from the earlier rounds of privatisation have not been fully absorbed and this may turn out to be a case of bidding out in haste and repenting at leisure.

First Published: Tue, October 01 2013. 21:40 IST