March 2004

Airport Privatisation in India

With a population of over
one billion and a landmass
of some three million
square kilometres, an
adequate transport
infrastructure is vital if
India's economic
development is to
continue.
Until recently, there was a bar on
private investment in the Indian
airport sector. In 1997 the
Government of India published a
policy document which set out broad
guidelines for the sector. Its "Policy on
Airport Infrastructure" recognised the
importance of combining public and
private resources to meet the
significant costs involved in
developing India's airports to keep
pace with the growth in air traffic.
Only now has the Government taken
positive steps to open up existing
airports to domestic and foreign
private investors by passing enabling
legislation.
The introduction of private
participation into the operation of
certain of its existing airports
represents the largest infrastructure
privatisation programme ever
undertaken by the Government of
India, and will offer tremendous
opportunities to investors.

In this briefing, we take a look at the

sector and give an overview of the
two projects that the Government is
now offering to the private sector.

The case for investment

The Indian aviation sector is
expanding fast. India's airports
currently handle around 42 million
passengers annually, of which the four
international airports - Delhi, Mumbai,
Kolkata and Chennai - together
account for two-thirds (and nearly half
of total revenue). Domestic and
international air traffic is projected to
grow at an annual rate of over
5 per cent.
The increase in the levels of passenger
and cargo air traffic has placed a
heavy strain on the four main airports
and has highlighted the need for
substantial investment to develop and
expand existing facilities. Current
projections are that by 2017, India's

Delhi and Mumbai airports will soon

face major capacity constraints. It is
estimated that the current airport
infrastructure can support a total rise
of only 20 per cent. in passenger
traffic and 10 per cent. in cargo,
pointing to the likely saturation of
Indian airports in the very near future.
In response to this, the Government is
now looking to lease out Delhi and
Mumbai to the private sector as part
of its extensive modernisation and
growth plan for the sector.

The proposed Delhi and

Mumbai projects
In September 2003, the Government
announced plans to carry out the
modernisation of Delhi and Mumbai
airports. It is envisaged that two
separate public-private joint venture
companies will be formed to manage

The case for investment

The proposed Delhi and Mumbai projects
The privatisation process
Risk factors
Conclusion
Ashurst's India and transport practices

Contents

airports will be handling cargo traffic

of one million tonnes.

the airports and each of these

companies will be granted a lease of
the particular airport it is to manage.
In order to allow adequate returns on
investment, the leases are expected to
run for a period of at least 30 years
with an option to extend the term by
a further 30 years.
Not every aspect of operations in the
privatised airports, however, will be
undertaken by the private sector. It is
widely expected that air traffic control
and airport security will remain the
responsibility of the Airports Authority
of India and the Government
respectively. The Government has not
yet decided whether to allow foreign
participants to undertake certain
ground-handling activities at Indian
airports, which is currently estimated
to be worth Rs. 500 crore (675
million). Global airport operators have
questioned the merits of participating
in the privatisation exercise if groundhandling is excluded.

The privatisation process

The investment structure. The

Government intends to form a
special purpose vehicle company
("SPV") for each airport. The private
sector can take up to 74 per cent.
of equity in the SPV, while the
balance will be held by the
Airports Authority and possibly by
other public sector bodies. It
seems likely that bidders will not
be allowed to bid for both SPVs.
Design. Bidders will be required to
submit a concept design of the
airports with their bids. The
successful bidder will then have to
prepare a master plan for the
development of the airport within
a year.
Employees. Mumbai and Delhi
airports currently have a total of
9,000 employees. Existing airport
employees will be seconded to the
joint venture companies for two
years, after which they will have
the option of returning to the

Airports Authority or remaining

with the new companies.
Financial. Financial details of the
project will be developed in the
coming months, but estimates put
the deal value at upwards of
US$440 million. It is expected that
private participants will be
required to pay an annual
concession fee to the Airports
Authority and that the fee will be
a key bid evaluation criteria.
Close of bids. The Government has
set September 2004 as the
deadline for completion of the
bidding process, although
commentators have suggested
that this timetable is ambitious
for a project of this magnitude
and complexity. Recent delays in
appointing financial advisers for
the privatisation process have
reinforced this view.

To speed up the process, the

Government has set up a committee
(comprising the Ministers of Civil
Aviation, Finance, Law and
Disinvestment) to oversee the entire
privatisation and modernisation
process. The committee will be tasked
with resolving various issues, including
the parameters on the basis of which
the bids are to be evaluated. The three
most likely routes are:

auctioning off each airport to the

highest bidder;
establishing a revenue-sharing
arrangement between the public
and private sectors; or
a combination of the above.

In terms of the privatisation

programme, the committee will be
looking at:

restructuring the airports with a

view to developing a world class
airport infrastructure including
one or more international hubs;
affordability and connectivity in
the domestic aviation sector;

the development of regional air

connectivity within the country;
establishing a mechanism for
providing an air service to interior
areas and the operation of
economically unviable but socially
essential routes;
establishing a regulatory
mechanism for technical and
financial issues; and
upgrading systems for air traffic
control and meteorological
information.

Reporting in November 2003, the

committee has endorsed the
concession-based approach to
privatisation. However, the report
emphasises the need for regulation of
airport charges and the importance of
competition in the provision of airport
services.
In the light of the committee's report,
it is expected that a Civil Aviation
Economic Regulatory Authority will be
established to oversee the tariffs that
will be charged at privatised airports
and to ensure that the full benefits of
privatisation flow through to airport
users.

Risk factors
A privatisation of this size will give rise
to a number of commercial and legal
issues which bidders need to consider
very carefully.
The general legislative framework
governing airports in India is
embodied in three pieces of legislation:
the Airports Authority of India Act,
1994 (as amended) (the "AAI Act"), the
Aircraft Act 1934 (as amended) and the
Aircraft Rules 1937 (as amended).
The newly-amended AAI Act appears
to give sufficient authority to the
Government and the Airports
Authority to establish public-private
joint ventures of the type
contemplated, although the exact
terms of the AAI Act will need to be

examined once the specifics of the

deal structure are known, to ensure
that the necessary powers exist for
the project to proceed without
challenge. The AAI Act aside, the
Aircraft Act, the Aircraft Rules and the
environment in which the projects are
to be undertaken present certain
difficulties, some of which are
examined below.

Licence period. An operator of a

public airport in India must be
licensed by the Government but
licences can only be granted for a
maximum period of 12 months at a
time. Bidders will be basing their
financial plans on a lease term of
around 30 years and will clearly
want assurances that they can
operate the airports for the full
term of the concessions awarded
to them.
Foreign exchange risk. The
Government regulates the charges
that can be levied on airlines and
others using the airport facilities.
The current tariffs are set
according to the Aircraft Rules and
are expressed in rupees. It is
common for some degree of
economic regulation to be
involved in competitive industry
sectors. The private operator,
however, will need to charge
airport users at rates that allow for
the recovery of capital costs and
returns on investment and where
appropriate (e.g. in the case of
take-off/landing charges and
aircraft parking fees) to levy
charges in foreign currencies in
order to allow the operator scope
to reduce its exposure to a
depreciating rupee.
Existing commercial contracts. As
the privatisation will involve the
transfer of existing undertakings

to new operating companies,

consideration will need to be given
to existing agreements awarded in
relation to the operation of the
privatised airports. This will
include airport duty-free
concessions and passenger
facilities. Bidders will need to
know whether they will have the
opportunity to award new, more
advantageous concessions or
whether they will be expected to
honour existing contracts.
Competing airport infrastructure.
Bidders will wish to be satisfied
that the privatised airport will
benefit from a virtual monopoly as
a "gateway" airport in the region
in which it is located. Any
development of new airport
infrastructure - not only in the
vicinity of the privatised airport
but also in other regions - which
has the potential to reduce
passenger traffic through the
airport will be of concern to
bidders.
Associated airport infrastructure.
Availability of associated
infrastructure, such as ground
access to the airports and
airport/en route aeronautical
navigation equipment, is another
important consideration for
bidders. They will want to know
what undertakings the
Government will provide in
respect of the availability and
condition of associated
infrastructure.
Fiscal incentives. Another factor is
incentives. Will the Government be
making available incentives to
overcome economic risks
associated with the operation of
the privatised airports, such as tax
breaks and concessionary rates of
duty?

Service standards. The

Government will wish to ensure
that private operators implement
agreed investment programmes
and deliver appropriate levels of
service. Private operators will
therefore want to examine
carefully the performance
measures they will be signing up
to.
Industrial relations. The
Government's announcement of
the privatisation of Delhi and
Mumbai airports did not meet
with universal acceptance. Shortly
after the announcement, airport
workers across India threatened
industrial action in protest at the
Government's plans. There are
some 9,000 staff employed by the
Airports Authority at Delhi and
Mumbai and some reductions in
the workforce will be needed if the
privatised airports are to operate
economically. Winning the support
of airport staff, while at the same
time finding a way to deal with
the problems of overstaffing, will
be key to the success of the
privatisation.

Conclusion
For the potential investor, there are
without doubt unique opportunities in
the Indian airports sector, but these
are not risk-free. In what will be a
complex process, there are a number
of very different considerations that
will need specialist advice. It is
therefore vital that the investor's legal
and commercial teams are not only
familiar with the transport sector and
the privatisation process, but also have
experience of domestic and foreign
laws enabling them to anticipate and
deal with the complexities and to
facilitate effective project planning.

Ashurst's India and

transport practices
Ashurst is an international law firm
with specialist India and transport
practice groups.

Our transport group advises clients in

all sectors of the transport industry:
rail, road and automotive, aviation,
maritime and ports. The group brings
together a wide range of legal experts
with extensive experience in
transport-related transactions,
including mergers and acquisitions,
privatisations, corporate finance,
commercial, finance, regulatory,
project development and finance,
taxation, competition, insurance,
employment and dispute resolution.
Given the range of skills that can be
required on a particular transaction,
the 40 lawyers who make up the
group are drawn from practice areas
and offices across the firm.

Raymond Beven, Partner

Head of transport group
Tel: +44 (0)20 7859 1897
raymond.beven@ashurst.com

Paul de Cordova, Partner

Transport group
Tel: +44 (0)20 7859 1431
paul.decordova@ashurst.com

Kalpana Unadkat, Solicitor

India group
Tel: +44 (0)20 7859 1981
kalpana.unadkat@ashurst.com

Stop press
On 17 February 2004 the Airports
Authority of India invited the private
sector to submit expressions of
interest for the privatisation of Delhi
and Mumbai airports. Interested
parties are required to respond by
4 June 2004.
The Government plans to have a twostage selection process. The first stage
involves the issue of the "Invitation to
Register an Expression of Interest". In

order to prequalify, interested parties

will need to show that they satisfy
certain minimum technical and
financial criteria and have, as a
consortium, a minimum net worth of
Rs. 5,000 million. In the second stage,
a "Request for Proposal" document
will be issued to short-listed bidders
inviting them to submit their
technical and financial bids.

It is confirmed that both airports are to

be restructured and modernised
through the formation of separate joint
venture companies in which the Airports
Authority and other public sector entities
of the Government will together hold
26 per cent. equity. The remaining equity
stake is to be held by the private sector.
The joint venture companies will have a
long-term concession to operate the
airports.

This briefing is not intended to be a comprehensive review of all developments in the law and practice, or to cover all aspects of those referred to.
Readers should take legal advice before applying the information contained in this publication to specific issues or transactions.
For more information please contact us at Broadwalk House 5 Appold Street London EC2A 2HA Tel +44 (0)20 7638 1111 Fax +44 (0)20 7638 1112
www.ashurst.com 2004 Ashurst Ref:DTP/2750ns Mar 04

Contacts

In 1994 Ashurst was the first - and

remains the only - European law firm
to open its own liaison office in New
Delhi. Our India practice, comprising
some 35 English and Indian lawyers,
has extensive experience of handling
and negotiating mergers and
acquisitions, joint ventures, projects
and other commercial transactions in
India in a wide range of sectors.

For further details on airport privatisation in India or about our India or transport
experience, please contact: