Focus on regulation

Caps on contracts are only a partial solution for dealing with oligopoly in India's airports

Winds of change seem to be blowing from the Union finance ministry. These wafts are apparently aimed at enforcing the much-needed corrective measures to ensure competition and fair play in India’s civil aviation sector. According to a report in this newspaper, the finance ministry representative, present at an inter-ministerial meeting deliberating on the award of contracts to private sector players for developing as many as 11 airports, raised concerns over the “oligopolistic nature of the aviation sector”. The representative specifically asked what steps were being taken by the Ministry of Civil Aviation to prevent the possibility of a handful of players cornering the airports being auctioned and minimise the risks of concentration and over-leveraging. 

These were legitimate concerns. It is also reassuring to learn that issues arising out of the oligopolistic nature of the country’s civil aviation sector would get discussed and debated at an inter-ministerial meeting of the Public Private Partnership Appraisal Committee (PPPAC). Indeed, the representative of the ministry of civil aviation at the meeting outlined an action plan to address such concerns. The number of airports that may be awarded to a single bidder would be capped in accordance with the norms to be finalised, even though it was immediately unclear at what level the cap would be enforced. 

Of course, the bigger concern here is how the aviation sector has been allowed to become a playground for a couple of private-sector entities  in the country’s airports business. But the fact is that those legitimate concerns expressed by the finance ministry representative would not be addressed just by imposing a cap on the new successful bidders for airports. There is a more fundamental problem that afflicts the regulatory structure of the civil aviation sector that has over the last few decades given rise to the prevailing oligopolistic structure. 

In the airports sector, there are three large players — the state-owned Airports Authority of India (AAI), which manages 129 airports handling less than half of the country’s total air passengers; Adani Airport Holdings, led by Gautam Adani, which operates eight airports (including two in Mumbai) handling about 25 per cent of India’s air passengers; and G M Rao-led GMR Airports of the GMR Group, which operates Delhi, Hyderabad and Goa airports, among a few others, handling 27 per cent of passengers. 

Anticipating that the entry of private-sector airport operators will require independent regulation, the government in 2008 got Parliament to pass a new law — the Airports Economic Regulatory Authority of India (AERAI) Act. Its brief was quite large. All airports whose annual passenger traffic was more than 1.5 million came under the regulation of the newly created body. In about a decade after this legislation, AERAI was regulating as many as 33 out of the 102 airports that were operating at that time. These 33 airports included all the major airports in the country including those in the major metropolitan cities. 

Two developments took place in 2019. In February that year, the government decided to privatise six major airports: Lucknow, Ahmedabad, Jaipur, Mangaluru, Thiruvananthapuram and Guwahati. There was a competitive bidding process, but the outcome caused concern among experts, and many political leaders questioned the wisdom of the decision from regulatory and competition perspectives. That was because the bids for all the airports were won by the Adani Group, which meant it would run them for 50 years. AERAI kept quiet and allowed the process to be completed. Between October 2020 and November 2021, the Adani Group took over these six airports. 

The second development was a legislative change in the AERAI Act of 2008, which effectively reduced the regulator’s role and power. On an apparently specious ground — that AERAI’s burden of regulation should be reduced — Parliament approved an amendment to the AERAI Act to mandate that it would regulate only those airports whose annual passenger traffic was over 3.5 million and which were acquired by operators on the basis of tariff-based bidding or pre-determined tariffs. 

This was problematic. In one stroke, the scope of AERAI’s regulation fell from regulating 33 airports to just 16 airports. In the process, a couple of the airports, which had just been privatised, went out of the purview of AERAI. The government, however, defended its move in Parliament. It argued that the annual passenger traffic in most Indian airports had increased significantly in the previous decade since AERAI became a statutory regulator for airports. At the time of enacting the law in 2008, the criterion of 1.5 million annual passengers was set to ensure that AERAI regulated all but 1.3 per cent of total air passengers in the country. With the rapid growth in passengers, the enhanced criterion of 3.5 million passengers implied that only about 1.3 per cent of the total passengers fell outside AERAI’s regulation. Hence, there was no dilution in the power of the regulator, the government argued. 

However, the giveaway came from the amendment’s Statement of Objects and Reasons, which showed how the government was treating its statutorily created regulator. It stated: “Exponential growth of the Section has added tremendous pressure to the Authority on the one hand and various private operators are entering the Sector in the form of Public Private Partnership on the other hand, which requires regulatory certainty keeping in view long gestation of the Sector. To overcome this complexity, it is felt that if too many airports come under the purview of the Authority, it will be difficult on the part of the Authority to efficiently determine the tariffs and monitor the service standards of major airports with the limited resources available with the authority.”

In other words, the government did not believe that it was necessary to strengthen the manpower and regulatory capacity of AERAI to help it to undertake its increased responsibilities and supervise the airports sector. Instead, it was comfortable with the Airports Authority of India, a state-owned enterprise, exercising control over those airports. An arm of the government, a state-owned enterprise, was given more responsibilities and power, while a statutory body created to regulate a sector was left to deal with fewer airports. 

 Even regarding the amendment excluding airports that had been won on tariff-based bidding from AERAI’s supervision, the government’s flawed approach to regulation was evident. Of course, AERAI was assured of consultation by the government in advance before such tariffs were to be fixed, but this essentially meant that the regulator had little say in the determination of such tariffs. Even if one takes cognisance of the government’s argument that these tariffs should ideally be market-determined, the role of the regulator in ensuring independent monitoring and periodic reviews cannot be underestimated. 

It is reasonable to argue that it was this disempowerment of AERAI through a legislative amendment seven years ago that is largely responsible for the creation of an oligopolistic structure in India’s civil aviation sector today. If the regulator had been sufficiently empowered and the government had not diluted its scope and powers to operate through various legal means, the Union finance ministry representative perhaps would not have had to make those disturbing statements on potential risks of concentration and over-leveraging. 

More importantly, it is still not too late to review the legislative framework for AERAI, give it more power and responsibilities, strengthen its manpower and allow it to operate as a truly independent regulator. A cap on the number of contracts to be awarded to a single bidder will only be a partial solution, addressing only the symptom. The real cause is regulatory weakness and that should be addressed as well.