POSITION PAPER ON

THE AIRPORTS SECTOR

IN INDIA

May 2009

Department of Economic Affairs Ministry of Finance Government of India

AIRPORTS SECTOR
EXISTING SCENARIO 1. The civil aviation traffic has seen an unprecedented traffic in the past few years on account of booming Indian economy, growing tourism industry, entry of low cost carriers in the private sector, liberalization of international bi-lateral agreements and liberalization of civil aviation policy. In future also the civil aviation traffic is expected to grow at the same pace despite current slowdown due to global recession. But airport infrastructure has not kept pace with the growth of the civil aviation traffic. This has resulted in congestion and inefficient services in major airports, limited landing slots, inadequate parking bays and congestion during peak hours for airlines. Development of quality infrastructure will have an impact on international competitiveness and economic growth. This requires faster development of civil aviation infrastructure on public private partnership mode. In tune with the requirement many initiatives have already been started in the 10th five year plan and they are expected to continue in the 11th plan also. 2. Of a total number of 454 airports and airstrips in India, 16 are designated as international airports. The Airports Authority of India (AAI) owns and operates 97 airports. A recent report by Centre for Asia Pacific Aviation (CAPA) states that over the next 12 years, India's Civil Aviation Ministry aims at 500 operational airports. The Government aims to attract private investment in aviation infrastructure. India has been witnessing a very strong phase of development in the past few years. Many domestic as well as international players are showing interest in the growth and development of the aviation sector with immense focus on the development of the airports. With the opening up of the domestic skies to private carrier in the second half of the Tenth Plan, air services have become affordable and are now competing with other modes of transport. Propelled by economic growth and liberalization, the sector experienced an unprecedented growth during the Tenth Plan, especially during the last three years. Indian private airlines Kingfisher, Jet, IndiGo, Spice jet, Go Air, Paramount - account for around 84% of the domestic passenger traffic. Some have now started international flights. For the next years to come India is poised with strong focus on the development of its airports to meet the international standards. The government is planning modernization of the airports to Page | 2

establish a standard. The newly developed airports will help releasing pressure on the existing airport in the country. 3. The passenger traffic has grown tremendously during the last five years. It has grown from 5.92 crores in 2004-05 to 11.68 crores in 2007-08 showing an overall growth (CAGR) of 25%. The main factors contributing to this growth include the growth of the economy, falling fares, and increasing capacities of domestic private airlines. Notwithstanding the slowdown in the year 2008-09 and in the current year, the passenger traffic over the next 12 yrs is expected to grow from 11.97 crores in 2010-11 to reach 31.66 crores by 2022-23 with a growth (CAGR) rate of 8.44%.

Growth of Air Passenger Traffic

35 30 25 Crores 20 15 10 5 0
2004-05 (A) 2005-06 (A) 2006-07 (A) 2007-08 (A) 2008-09 (A) 2010-11 (P) 2014-15 (P) 2019-20 (P) 2022-23 (P)

31.66 24.02 15.7 5.92 7.33 9.64 11.68 10.88 11.97

years

No of Passengers (Crs) (A=Actual, P=Projected)

(Source: Review of Traffic at Indian Airports 2007-08 by AAI & Jan-Mar 2009 Quarterly Review of Traffic, AAI )

4. Keeping with the growth of the Air Passenger Traffic the fleet size also grown (CAGR) at 28.74% during the period 2004-05 to 2006-07 from 184 aircrafts to 305 aircrafts. As of August 2009 the fleet size has crossed 400. Private sector is planning to add another 258 aircrafts in the near future. According to projections made by Boeing, over the next 20 years (2029-30), the Indian market would require 1,000 commercial jets valued at approximately $100 billion.

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Growth of Fleet
350 300 250 200 150 100 50 0 305 243 138 162 184

Size of Fleet

2002-03

2003-04

2004-05 Year Fleet Size

2005-06

2206-07

(Source: India Air Transport Statistics 2006-07 by DGCA)

5. Air Cargo Traffic grew (CAGR) by 10.27% in the last three years period of 2004-05 to 2007-08. Though there is a dip in the growth in the year 2008-09, the Air Cargo Traffic expected to grow (CAGR) by 8.14% in the next 12 year period of 2010-11 to 2022-23. This requires creation of additional cargo capacity. As on date there are only seven cargo aircrafts in India compared to 100 in China.

Growth of Air Cargo Traffic

60 50

50.52 38.5

Lakh Tonnes

40 30 20 10 0 2004-05 (A) 2005-06 (A) 2006-07 (A) 2007-08 (A) 2008-09 (A) 2010-11 (P) 2014-15 (P) 2019-20 (P) 2022-23 (P)

25.9 12.78 13.97 15.5 17.14 16.97 19.75

Year

Freight (Lakh Tonnes) (A= Actual, P= Projected)

(Source: Review of Traffic at Indian Airports 2007-08 by AAI & Jan-Mar 2009 Quarterly Review of Traffic, AAI )

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Market Share of Private Sector in Domestic Traffic 6. The private sector is now playing a crucial role in the development of both airline and airport sector. Its market share in the domestic traffic as on March 2009 reached 84%. Kingfisher Airlines has emerged as the market leader with a share of 27%. The details of domestic market share of Indian air carriers by passengers carried as of March 2009 is given below.
Market Share of Indian Air Carriers

Air India & Indian, 16% IndiGo, 13%

SpiceJet, 13% Jet Airways, 27% Go Air, 2% Paramount, 1%

Kingfisher , 27%

(Source: Jan-Mar 2009, Quarterly review of traffic, AAI)

Global Scenario of Airport Sector 7. Globally United States is leading the airport sector with 5146 Airports serving a population of 30 crores. Whereas India is having only 251 airports serving a population of 116 crores. Though the requirement of airports depends on percapita income, standard of living, Trade & Commerce etc.., going by the size of population covered by US airports, India requires around 22,328 airports to reach the same ratio of coverage.

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Details of Number of Airports in various countries

SN Country No of Airports Population (Crs) 30 19 14 133 116 8 6 12 Population Covered per Airport 60,000 2,61,000 2,38,000 32,25,000 46,48,000 3,76,000 3,11,000 8,86,000

1 2 3 4 5 6 7 8

United States Brazil Russia China India Germany Unite Kingdom Japan

5146 734 596 413 251 218 198 144

(Source: Economic Times dt 07 July 2009 and Wikipedia dt 25 July 2009)

POLICY FRAMEWORK ELEVENTH PLAN - Objectives and Strategies 8. The main objectives of the Civil Aviation Sector for the Eleventh Plan would be to provide (i) world class infrastructure facilities; (ii) safe, reliable, and affordable air services so as to encourage growth in passenger and cargo traffic; and (iii) air connectivity to remote and inaccessible areas with special reference to north eastern part of the country. The realization of above objectives would call for capacity building that will include modernization and expansion of major international and domestic airports, construction of new Greenfield airports including that of the NER, enhancement of cargo handling facilities at all airports, and up gradation / modernization of Air Traffic Management (ATM) System.

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POLICY INITIATIVES 9. The following policy and regulatory frameworks are being initiated / already initiated in the airport sector to ensure time-bound creation of world-class airports in India. 100% FDI is permissible for existing airports; FIPB approval required for FDI beyond 74%. 100% FDI under automatic route is permissible for Greenfield airports. 49% FDI is permissible in domestic airlines under the automatic route, but not by foreign airline companies. 100% equity ownership by Non Resident Indians (NRIs) is permitted. 100% tax exemption for airport projects for a period of 10 years. Open Sky Policy of the Government and rapid air traffic growth have resulted in the entry of several new privately owned airlines and increased frequency/flights for international airlines. A Model Concession Agreement is also being developed for standardizing and simplifying the PPP transactions for airports, on the analogy of the highways sector. Upgrading of the ATC services at the airports. Issues relating to customs,

immigration and security are also being resolved in a manner that enhances the efficiency of airport usage. A comprehensive Civil Aviation Policy is in the process of finalization covering different areas of the aviation sector. India has entered into bilateral Air Services Agreement (ASA) with 104 countries. Policy on Airport Infrastructure of India - 1997 10. This policy is developed for the use and development of airport infrastructure. The

objective of this policy is (a) to provide a boost to international trade and tourism, (b) to provide airport capacity ahead of demand, which includes development of Greenfield airports, (c) to enhance airport facilities, (d) to ensure total safety and security of aircraft operations, (e) to provide multi-modal linkages, (f) to provide a market orientation to the present structure by bringing in private sector participation and (g) to foster the development of a strong airport infrastructure. Page | 7

Greenfield Airport Policy - 2008 11. The Government on April 24, 2008 has promulgated the Policy for setting up of Greenfield airports. The Policy seeks to put in place detailed guidelines for establishment of new Greenfield airports, procedure for approval of such proposals. Greenfield airports at Hyderabad and Bangalore are in operation. Greenfield airports at Goa, Navi Mumbai, Kannur (Kerala) and Pakyong (Sikkim) are in the process of being set up. There are proposals to set up Greenfield airports in Bijapur, Shimoga, Gulbarga and Hassan (Karnataka), Chakan, Sindhudurg (Maharashtra) and Karaikal (Puducherry). The Airports Authority of India (AAI) Act, 1994 12. AAI Act, 1994 NO.55 OF 1994 As Amended by the Airports Authority of India (Amendment) Act 2003 to provide legal framework for airport privatization. As per the act it shall be the function of AAI to manage the airports, the civil enclaves and the aeronautical communication stations efficiently. It shall also be the duty of AAI to provide air traffic service and air transport service at any airport and civil enclaves. AAI expected to be revamped during the Eleventh Plan. It includes revamping of AAI in light of the strain on aviation infrastructure resulting in traffic congestions and delays at some of the airports resulting from the high growth in the sector. AAI would be revamped with multidisciplinary staff and expertise along with independent directors. AAI planning to go for up-gradation of technology from ground-based Communications, Navigation, and Surveillance-Air Traffic Management (CNS-ATM) to satellite based CNS-ATM facilities; installation of new facilities including security equipment at various airports; installation of safety and facilitation equipment; development of airspace capacity enhancement; and development of IT. (Eleventh Five Year Plan, PP.326) Airport Economic Regulatory Authority (AERA) 13. The Airport Economic Regulatory Authority (AERA) was established on 12th May, 2009. AERA is an autonomous body set up by an Act of Parliament. The functions of AERA include; fixing, reviewing and approving tariff structure for the aeronautical services and users fees which may be levied by the service providers for airport development and monitoring prescribed performance standards relating to quality, continuity and reliability of service. The Chairman has just joined on 1st August 2009. The members are expected Page | 8

to join in the due course. The Authority is in the process of devising its processes and procedures so as to discharge its functions. Once the processes and procedures are in place, the Authority is going to be fully operational. As one of its first step AERA is planning to review the hefty user development fee (UDF) charged by various airports. Its also planning to lay down soon standards for providing amenities and services that developers would be required to adhere to Essential Air Services Fund (EASF) 14. Under the new proposed civil aviation policy, the Ministry of Civil Aviation has suggested the establishment of an Essential Air Services Fund (EASF) to provide subsidy to airlines that operate on uneconomical but essential routes such as the North-east. With the success of Universal Services Obligation (USO) of the telecom sector, the government is of the view that the subsidy support from the fund should be provided through a transparent process of minimum subsidy bidding. Under this system, the bidder who asks for the minimum subsidy from the fund will win the maximum number of routes. This would enable subsidies to be paid to the most efficient operator at the lowest cost to the public and might lead to the development of specialized smaller airlines as well, the policy states. The fund, however, is to be created through a cess levied on both domestic and international air travel. After the new system is put in place, the route dispersal guidelines would be progressively replaced. The current route dispersal

guidelines of the Directorate General of Civil Aviation (DGCA) make it mandatory for all scheduled carriers to deploy at least 10 per cent of the total capacity of their trunk routes on Tier II routes comprising the North-East, Jammu and Kashmir, Andaman & Nicobar Islands, and Lakshadweep. Air India Restructuring
15. The share of Air India in the domestic market is 16%. The merged entity with fleet size of more than 140 aircrafts is among the top 30 airlines globally in terms of fleet size and ranks among top 10 in Asia. The merger is expected to create considerable synergy, since the domestic and international operations can feed traffic into each other. Air India had placed an order for the procurement of a total of 111 aircrafts. As of March 2009, 46 aircrafts have already joined the fleet. Others are expected to join in the next 3 to 4 years. Management Consultant Accenture was engaged to help the merger of erstwhile Air India Ltd and Indian Airlines Ltd. SBI Capital

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has been engaged as financial counsel for the current round of restructuring. In fiscal 2010, the airline plans to overhaul its operations and financial structures. Air India plans to save between Rs 1,300 crs and Rs 1,800 crs reducing costs in terms of fuel expenses, salaries and saving on expenses flying on unprofitable routes. It also plans to increase revenue by Rs 1,200 1,400 crs. This would be through a possible increase in passenger revenues, revenues from cargo and also revenues through alternative use of its real estate. The airline also planning to make Its also

redeployment of its 31,000 employees, review of performance-linked incentives. additional sale of shares to public, Indian financial institutions.

planning a low-cost model for domestic operations. In fiscal 2012, the airline plans to go in for

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INVESTMENT 16. During the Tenth Plan an outlay of Rs 12,928 crore was provided to the Ministry of Civil Aviation (MoCA) out of which 60% was spent. 17. The anticipated investment in infrastructure in airports in the Tenth Plan is Rs 6771 crs. The centers share is 56.46%, states share is 0.18% and the private share is 43.36%.
Chart 1: Tenth Plan Investments in Infrastructure of Airports

Outlay for the Eleventh Plan 18. The total projected outlay for the Eleventh Plan for MoCA is Rs 49267 crore at current prices. In addition, the sector is expected to generate private sector investment of Rs As per the data available with MoCA expenditure

93,493 crore during this period.

incurred at the end of 2nd year of Eleventh Plan is Rs 17,681 crores which is 35.89% of the projected outlay. 19. The projected investment in infrastructure in airports during Eleventh Plan is Rs 30,968 crs. The centers share is 29.99%, states share is 0.16% and the private share is 69.85%. The share of private sector investment in infrastructure is gone up substantially from 43.36% in Tenth Plan to 69.85% in Eleventh Plan.

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Chart 2: Eleventh Plan Investment in Infrastructure in Airports

20. The Development of Airports is undertaken historically with the Internal Resources, ADF/UDF charges, and budgetary sources. Now they are funded in addition to the normal funding sources, the resources from market borrowing, development of city side facilities, Private Financing and Viability Gap Funding. 21. According to the Civil Aviation Policy Vision for 2020 the air passengers are expected to reach 280 million by 2020. The number of aircrafts required to handle this traffic is going to be 1000. The expected increase in the number of aircrafts and the air passengers would require an investment of US$110 billion. Out of this $80 billion will be for acquiring new aircrafts and US$30 billion will be for development of airport infrastructure

PPP FRAMEWORKS / INITIATIVES 22. As on date six airports at Hyderabad, Delhi, Bangalore, Cochin, Kannur and Mumbai have been undertaken on PPP mode with a total investment of Rs 20,041 crores. Airport at Hyderabad only required the funding from VGF scheme. Recent invitation of calling of bidders for some of the airports did not elicit any response. As per the recent report by Centre for Asia Pacific Aviation (CAPA), over the next 12 years, India's Civil Aviation Ministry aims at 500 operational airports. To achieve this ambitious target more and more airport projects should be structured with VGF component and other incentives to make it

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attractive to the prospective bidders. Encouragement should also be given for utilizing the Fund from IIPDF for taking the help of Transaction Advisors for successful bidding out the airport projects PPP Projects In India 23. As per the details available from the PPP India data base maintained by DEA, 300 PPP Projects were undertaken on PPP mode with total project cost of Rs135876 crores. Overview of PPP Projects in India SECTOR
Sector

WISE

FIGURES
More than 500 crore Value of contacts (in Rs Crores)

Total Based Between Between Number on 100 to 251 to of 100 250 500 Projects crore crore crore

Airports Ports Railways Roads Urban Development Energy Total

6 38 3 186 35 32 300

4 86 28 13 131

5 1 23 4 4 37

1 6 2 54 1 7 71

5 23 23 2 8 61

20,041 43,053 1,007 47,756 6,218 17,802 135,876

(Source: PPP India Data Base)

PPP Projects in Airport Sector: Utilization of Funds from VGF and IIPDF: 24. Only Hyderabad International Airport utilized Rs 107 crores as VGF. No project has accessed funds from IIPDF scheme. The Project cost of the completed six projects is Rs 20,041 crores. The details of the completed six projects are given in Appendix I

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PPPs SUCCESS STORIES IN AIRPORT SECTOR Cochin International Airport Cochin International Airport was the first airport in India to be built in the joint sector with public-private participation. An innovative financial structure involving public deposits for non-resident Keralites was conceived to kick-start the project. The total cost of construction was about Rs 283 crore. Bangalore International Airport Bangalore International Airport Ltd was formed as a joint venture between the Karnataka government and private players like Siemens Project Ventures and L&T. The airport consists of a 4,000 meter long runway, taxiways and an apron area with aircraft stands and a terminal building. The airport has the capability to be further developed to handle 40 million passengers in future. Hyderabad International Airport The consortium of GMR Infrastructure Limited and Malaysia Airports Holdings Berhad was selected to develop Greenfield international airport at Shamshabad near Hyderabad. The airport site measures about 5400 acres and is expected to have an ultimate handling capacity of 40 million passengers per annum equipped to handle large aircraft, including the Airbus 380. The total cost of the project is Rs 2,370 crore. Mumbai International Airport Mumbai International Airport Limited, a consortium of GVK Industries Ltd and Airports Company South Africa was entrusted the project of modernizing the Mumbai Airport in February 2006. The Mumbai International Airport would cater to 40 million passengers per year and one million metric tonne of cargo per year by 2010. Delhi International Airport Fraport, Airports Authority of India, Eraman Malaysia and GMR Infrastructure have entered into a joint venture to upgrade the Delhi International Airport. The Page | 14

contract was on a BoT basis with a 35 year concession period. Two modernized terminals along with a brand new terminal, a new runway of more than 4400 m is part of the concession contract. Delhi Airport would have 500 check-in counters, 200 aerobridges, 150 immigration counters and the capacity to handle over 100 million passengers a year after the completion of the project.

NEW AIRPORTS AND OTHER RELATED INFRASTRUCTURE Kolkata and Chennai 25. Airports Authority of India (AAI) has been appointed towards modernization of Kolkata and Chennai airport. After Phase I is completed, the revamped airport will be able to handle 20 million passengers as against 5 million now. Though Tamil Nadu and West Bengal have opted for modernization of the Chennai and Kolkata airports through the AAI, the draft civil aviation policy envisages a role for the private sector in these ventures since the AAI itself is proposed to be restructured. The approval for the construction of an integrated passenger Terminal Building at NSCBI Kolkata Airport is already given. The work is expected to be completed by 2011. The approval for modernization and expansion of Chennai Airport amounting to Rs 1808 crores is given in August 2008. The entire project is expected to be completed by end of 2010 New Airport at Navi Mumbai 26. For Mumbai, air traffic projections for passenger traffic is 27.5 million passengers annually by 2010 which is expected to increase to 40 million passengers per annum in 2015 and peak at about 80 million in 2026. The Union Cabinet has accepted the proposal to build an international airport at Navi Mumbai on account of saturation of existing airport. The airport is to be developed as a Greenfield project through the PPP route and is slated to be operational before 2013.

New Airport at Greater Noida

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27. Delhi will soon have a second airport in suburban Greater Noida. The GMR Group, which is currently operating Delhi Airport, has the first right of refusal to develop the second airport that may come up near Delhi. The project cost is estimated at Rs 3505 crore as per the feasibility report submitted by the state government. This airport is going to be a full-fledged international-cum-domestic one. The Delhi-Noida Metro link is going to be connected to the Noida Airport. New Airport at Mohali, Chandigarh 28. The Punjab government has sent a proposal to the civil aviation ministry for setting up an international airport in Mohali, the second in the state after Amritsar near Chandigarh. Punjab has also witnessed a rise in the number of international flights. Non-Metro Airports 29. The AAI has decided to modernize 35 non-metro airports to world standards in a phased manner with a focus on air side and city side development and enhancement of nonaeronautical revenues at an estimated cost of Rs 41,000 crore. The government plans to select the joint venture partner or private consortia that would take up the development of these airports. Airports Authority of India is implementing the air side works at these airports including the terminal buildings. Of these, 34 airports have been selected for city side development through Public Private Partnership. The development works on the Airside and City side are likely to be completed by March 2010. (Annual Report 200809, MOCA, pp.09). The present status of 35 non metro airports is given in Appendix IV No-Frill and Low-Cost Airports 30. After low cost airlines, it is the turn of no-frill and low-cost airports. In a bid to

encourage regional airlines and provide air links to small cities and towns, nearly twentyfive Greenfield airport projects have been identified for development by various states. Planned in the tier-II or tier III cities, these airports would be developed in addition to the Ministry of Civil Aviations ambitious modernization programme for thirty five non metro airports. A no-frill airport is built at a minimum cost and allows operation of small jets as well as slightly bigger aircraft like Boeings B737 or Airbus A320. The

investment in such an airport could range from Rs 40 crore to Rs 100 crore. The places Page | 16

identified for the purpose include Hassan, Shimoga, Gulbarga, Bidar, Mysore (all in Karnataka), Shiridi, Jalgaon, Solapur, Akola (all in Maharashtra), Kannur (Kerala), Madurai, Tiruchirapalli (Tamil Nadu), Rupsi (Assam), Ajmer, Mount Abu, Kailashar (Rajasthan), Behala, Cooch Behar, Malda (West Bengal), Jharsuguda (Orissa),

Muzaffurpur (Bihar), Kamalpur (Tripura) and Passighat (Arunachal Pradesh). Merchant Airports 31. Merchant Airports are those airports which are conceptualized, created and run by private parties with their own resources and without any government funding. After private roads and ports, the country is all set for its merchant airports. Infrastructure developers such as Reliance Industries, Pragati Growth and Development, and Anil Ambanipromoted Reliance Airport Developers have already shown interest in owning and operating airports across the country. Internationally, merchant airports have been

developed as specialized low-cost airports, cargo centers of airports private business. Merchant airports would be especially useful as cargo hubs, thereby providing a thrust to freight handling. The merchant airport policy is being finalized. The private sector is showing huge interest in the merchant airport policy, being prepared by the civil aviation ministry for building dedicated cargo airports to boost logistics chain in the country. Such cargo specific small airports can also be built with a small investment of Rs 200 crs. The first Greenfield merchant airport is being set up in Durgapur in West Bengal. The project is being implemented by Bengal Aerotropolis Projects Ltd. Changi Airports International of Singapore has 26 stake in the project The project is expected to be

completed by 2011-12 with a project cost of Rs 10,000 crs on a land of 2,300 acres. The focus is on cargo, supply chain, logistic hub with maintenance, repair and night parking facilities. Air Cargo Ports 32. The government plans to raise the FDI cap in air cargo business to 74 per cent as part of efforts to further open up the sector for foreign investment. There is huge opportunity in the cargo business. According to the civil aviation ministry, Nagpur should be made the cargo hub of the country because of its geographical advantage. The central government may provide all required support to make it a truly world class cargo hub. Page | 17

Regional Airlines 33. To improve regional connectivity and create regional hubs, the Civil Aviation ministry has mooted a proposal to set up regional airlines, defined as carriers with aircraft having less than 80 seats and which operate exclusively on regional routes from any one metropolitan airport, which includes Delhi, Mumbai, Chennai, Kolkata, Bangalore and Hyderabad. The ministry has also suggested that the first airline to connect cities that are not linked by air should be exempt from all airport and navigation charges at both airports for the first year of operation. For regional airlines, navigation and landing charges often constitute up to 10 per cent of the overall costs (Source: India Infrastructure Report 2008. PP.28) New Opportunities 34. Private sector participation in airports has given rise to new opportunities for new businesses. GMR Infrastructure Ltd, which has MIAL concession, has made its first foray in the international arena. A joint consortium that includes the GMR Infrastructure Ltd has bagged the contract to develop Sabiha Goken International Airport in Instanbul. The BOT project includes not only the construction of a new international terminal within thirty months capable of handling 10 million passengers annually but also managing the existing domestic and international terminals. 35. The GMR Group plans to set up an airport based SEZ near the new Hyderabad International Airport, which it has the mandate to develop. Planned on the lines of free trade zones in Hamburg and Dubai, the SEZ will house aircraft component manufacturing industries and also see high end aircraft engineering support activities. Besides, the SEZ will house high end electrical and auto component manufacturing facilities and software units. The group also has plans to set up high precision

pharmaceutical equipment manufacturing to cash in on international air connectivity. If allowed, the GMR group has plans to develop aereotropolis-new cities springing up around airports a new concept which is seeded in an urban hubs. An aerotropolis offers operational convenience for companies and organizations to maximize benefits, while cutting down on expenditure significantly. The GMR group would like to give the concept concrete shape around the new Hyderabad airport. The airport is going to be the Page | 18

nucleus of the countrys first aerotropolis, a new urban form that would house business parks, hotels, residential units, and entertainment areas. The GMR group, which also bagged the international airport project at Delhi with Fraport of Germany, will develop the aerotropolis near Delhi airport as well (The Hindu, 12 February 2007). Maharashtra Airport Development Company (MADC) is also developing an SEZ at the Nagpur airport. Cochin International Airport (CIAL) has approved a 480 acres land utilization plan for an aircraft maintenance facility, an aviation academy, and a golf course, among other things. (Source: The Infrastructure Sector in India 2007, pp.29).

CONSTRAINTS SUPPLY SIDE CONSTRAINTS Long Term Funds: 36. The Infrastructure projects which are executed on PPP in Airport Sector are with a concession period of 30 years are more. The Project development takes around 24 to 36 months. Considerable revenue generation takes place only in the years 10 to 20. But the Financial institutions lending horizon is between 8 to 12 years due to average maturity of the deposits or the borrowed amount. This gap needs to be addressed on an urgent basis 37. The following recommendations could be considered to address the supply side constraints vis-vis long term funds Airport Finance Corporation Setting up of an Airport Finance Corporation on the lines of Power Finance Corporation is required. This can facilitate lower interest rates and longer

maturity of loans. Dedicated amount will be set aside for this sector. Non Taxable Bonds Long Term Funds may be allowed to be raised through Non Taxable Infrastructure Bonds by the financial institutions for funding in the airport sector. There may be certain period of lock in for the invested amount. This facility may be allowed until the required amount of gap in investment in airport sector is Page | 19

bridged. Range of Incentives The range of incentives available to the PPP projects in airport sector should be specified upfront. On a case to case basis, each PPP project will announce the bunch of incentives available for that particular project to make the project commercially viable. This brings clarity to all the parties to the project. The list of incentives can be increased or decreased as growth in the sector takes momentum. Separate limit for External Commercial Borrowing There should be separate sectoral limit for airport sector for utilizing External Commercial Borrowing. Because of the bunching with other sectors, the amount of inflow to the airport sector may not be that significant. The cap in the interest rate may also be raised in case the amount is for subordinated debt and Mezzanine financing. Separate limit for investment in debt market by FIIs There should be sectoral limit in investment in debt market by FIIs. This will stop crowding in some particular sectors. The sector limits brings in reasonable

allocation to all sectors. There will be balanced development in all sectors. Disinvestment of Equity and the Tax concession There should be separate and comprehensive guidelines in respect of disinvestment of equity by the developers and the tax treatment thereon. As most of the infrastructure projects are handled by Special Purpose Vehicles, the treatment in case of dividend declaration by parent company and the SPV should be seen holistically without the burden of double taxation.

DEMAND SIDE CONSTRAINTS Page | 20

Shelf of Bankable Projects

38.Shelf of Bankable Projects should be prepared on a continuous basis. These should be

bidded out as per the demand, risk appetite of the developers, present market scenario. These shelves of Bankable Projects should be kept in the website and intimated to the prospective developers. elicited any response. POLICY CONSTRAINTS Standard Documentation 39. Bidding documents like Request for Qualification (RFQ), Request for Proposal (RFP), Model Concession Agreement (MCA), and various Legal Documents should be standardized. This will reduce the time taken for the bidding process. This will also give a fair idea to the prospective developers about bidding criteria. Because of Depending on the number of hits or enquiries or interests

projects may be bidded out. Recently some of the bids called in the airport sector has not

standardization, the bidders time in preparation of bidding documents will come down, resulting in time and cost saving. Vision Document Airport Sector A comprehensive Infrastructure Vision Document for Airport Sector should be prepared with a investment of horizon of next 20 to 30 years. This document also should contain short term action plan of next 5 years and next 10 years. The document should clearly spell out the infrastructure gaps in the airport sector at present and possible areas of development. The linkage infrastructure investment should be spelt out. The total

investment requirement and how it can be raised should also be mentioned. Empanelment of Transaction Advisors 40. Certain sectors like Road sector, Tourism Sector, Urban Infrastructure sector have empanelled Transaction Advisors with core competency in that particular sector. This may be done in the airport sector also. This may reduce the time in selecting the Transaction Advisors; it may catalyze consultants to become sector specific experts. These TAs may be taken on nomination basis for initial handholding purposes up to a limit of certain amount. The present TAs empanelled with DEA can be used only to the Page | 21

projects whose cost is up to Rs 250 cr. The TAs are also general in nature and not sector specific. Land Acquisition and R&R Policy 41. Airports generally required large tracks of contiguous land. In case of international airports the requirement will be much larger. There is lot of criticism that more land is acquired than the required for the project. There is also lot of criticism that the amount paid as compensation is not adequate. There should be proper and comprehensive

guidelines in respect of how much land is required for a particular airport and the way to pay the compensation. The project affected people should be made as partners in the project. The guidelines also should include how to handle the issues in case land acquisition involves religious structures. It is a very sensitive issue. For example Kolkata Airport faced lot of problem in extending its second runway as an ancient mosque is situated next to the runway. Resistance to shift this religious structure forced the airport authorities to redraw the entire map to upgrade the Kolkata Airport. This involved acquisition of an extra 25,000 square metres of land, spending of crores of rupees on building a detour and payment of compensation to several high rise buildings. Replicable Models on Airport Sector 42. Data should be made available about the successful and replicable models both within the country and internationally. The lessons learned from previous experience should be well documented so that the possible pitfalls can be avoided. that particular model also should be made available. Single window approval 43. All the required approvals for the developing an airport should be through one government agency. Multiple agencies (Refer Appendix II) will delay the project. Since one approval is linked to other approvals, the entire chain gets delayed due to delay in one approval. Dedicated officer for the airport should be identified from the government to make the entire process smooth. STRUCTURAL CONSTRAINTS Integration of the Airport with Main City Page | 22 The documents used in

44. The major airports in India are mostly at considerable distance from the city centre. They are developed at one end of the city. Sometimes to connect to the other end of the city, the distance is as high as 50 to 60 kms. One of the major challenges at present for certain airports like Hyderabad International Airport is integration with the main city. The airport should be seamlessly integrated with the main city / important areas of the main city with dedicated rail, roads, Buses, Taxis, autos. The connecting infrastructure should be made available before the airport comes into operation. Delhi Airport is setting an example for rest of the airports by connecting Delhi Metro with Delhi Airport seamlessly. Passengers can check in with and without baggage at various designated stations of the dedicated Delhi Metro Line. Similarly a high speed rail link is being planned to connect the Bangalore Main City to the Bangalore International Airport. There will be airport check in counter in the city itself. Capacity Building 45. PPP being a new concept, there should be a mechanism for continuous up gradation of skills. Various cadres of officers should be trained in all aspects of the PPP Projects. There should be lot of sharing of information about both the successful models as well as failed models. Repository of information should be built continuously. Guiding

materials, tool kits should be made available to the participants.

Lead Financing

Institutions and Bankers should be involved in the capacity building exercise.

THE WAY FORWARD

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In addition to addressing the above mentioned various constraints, the following are some more initiatives which can further enhance the effectiveness and efficiency of service delivery. They will bring in growth in the air traffic and attract more investment through private players

Setting up of an Aviation University 46. The passenger air traffic is expected to increase from the present of level of 96 million in 2006-07 to 316 million by 2022-23. This tremendous growth requires large number of trained pilots, technicians, air staff, and ground staff. Setting up of a separate Aviation University will continuously produce trained manpower and also impart continuous training to the existing staff. Synergy between Aviation Industry and Tourism Industry 47. 97% of the countrys foreign tourists arrive by air and tourism is the nations second largest foreign exchange earner. There is a tremendous potential for tourism in national and international level. Setting up of Helipads in various tourist places and important religious places will increase tourism and will also increase the air traffic. The mainline air traffic and the feeder sector should be synchronized properly Demand Analysis 48. The closer the traffic numbers from the demand analysis, to the real numbers, the greater is the success of a PPP project. The robustness of a demand analysis depends upon how well the future developments in and around the PPP Project is factored into during the entire period of concession period. In airport sector, there are several developments expected to take place simultaneously. In addition to several new airports in major cities, 35 non-metro airports, several regional airports are expected to be developed in the next few years. As per CAPA report 500 operational airports are expected to be developed in the next 12 years from the current position of 97 airports. These airports not only cater to the additional air traffic, but eat away a portion of the existing air traffic.

Way of Fixing of the Project Cost Page | 24

49. If the project is developed completely by Government, the project parameters are set as per the requirement of the user public. If the same project is developed under PPP, project parameters are set at international standards. This will unnecessarily raise the project cost, user charges and the government subsidy. This aspect should be taken into consideration while fixing the project parameters Capturing the value created by the Airport 50. Generally the value of the land which is surrounding the project goes up substantially during the course of development of the project. If part of the value addition in the land & buildings is captured as project development fee though stamp duty, government could benefit substantially. projects. Cross subsidy in Development of an Airport 51. Many of the airports which are expected to be developed in non-metro areas, small cities and towns may not be financially viable. Here air side development may be done on BOT Annuity and the non airside and the Operation and Maintenance may be done on BOT revenue sharing basis. Permission for Foreign Airlines to participate in Equity With a view to attracting new technology and management expertise, permission may be given to Foreign Airlines to participate in equity of Private Airlines. Development of Integrated Cargo Infrastructure Today, about 40% of the worlds cargo business, in terms of value, moves by air. Although cargo traffic is growing steadily in recent years it has not kept pace with the passenger traffic growth because of shortcomings such as lack of facilities for transshipment of imports and exports; absence of integrated cargo infrastructure; deficiencies in gateway and hinterland connectivity through rail and road; complexities in custom procedures in air cargo; and need for technological up gradation and performance based service standards. Development of Maintenance, Repair, and Overhaul (MRO) Hub The captured amount can be utilised for other infrastructure

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At present, there is virtually no credible third-party MRO facility in India to support the requirements of the rapidly expanding aircraft fleets of private operators. Part of the maintenance is outsourced to foreign companies. Owing to the availability of skilled

manpower, India has the potential to emerge as an MRO hub in Asia Pacific region. India has become a manufacturing and exporting hub of automobiles in a short span of time. Airports should also look at becoming a global manufacturing and exporting hub of not only aircraft parts but also aircrafts itself on PPP mode. With availability of vast land around the airports and the plenty incentives available under the SEZ act this is quite possible. Investment by the private sector including foreign direct investment would be encouraged to this end. Making Route Dispersal Guidelines (RDG) Obligation Tradable 52. To make the air operation business more commercially viable and to attract more private air operators the obligation under RDG may be made tradable. Alternatively, the routes may be bifurcated into commercially viable and commercially non viable. commercially non viable routes may be offered with incentives or with subsidy. Air Connectivity in NER and Other Remote/Inaccessible Areas 53. To increase the reach and the air traffic, the remote and inaccessible areas in the North Eastern Region and other parts of the country should be encouraged with focus on infrastructure and subsidy to the air operators under a special scheme. The

Increasing Air Transport Security and reducing the chances of Air Accidents 54. To decrease the chances of air collision and to increase the air transport security, the legal and institutional framework for civil aviation security needs to be strengthened by evolving appropriate technology, training, and equipments. Value for Money (VFM) 55. Determining Value for Money (VFM) is very important before bidding out the Infrastructure Project to the private developer. A key tool in determining value for money is the Public Sector Comparator (PSC). The PSC tests whether a bid offers value for money in comparison with the most efficient and likely form of public sector Page | 26

delivery. The VFM test is important as the Airport Authority of India can compete with the private sector to redesign existing airports or build Greenfield airports Speeding up of PPP Projects 56. Initially six airports have come up on PPP mode. They are all successfully operated now. This momentum should be maintained on taking forward 35 non metro airports, no-frills and low cost airports, merchant airports, air cargo ports and other new airports at various places. The existing airport infrastructure gap needs to be filled up by bidding out

continuously more and more airport infrastructure projects on PPP. Conclusion 57. The task at hand is very huge. Though there is a temporary lull in the traffic due to global recession, but in the long run, growth in both the air passenger traffic and air cargo traffic is expected to leave a huge gap in desired airport infrastructure. This challenge can be addressed through formulation of a comprehensive airport infrastructure plan, formulation of policies and guidelines, changes in the existing policies and guidelines, formulation of comprehensive financing plan, Spelling out the range of incentives and concessions, coming out with standard documents, creation of shelf of Bankable Projects, empanelment of sector specific transaction advisors, continuous publication of replicable models, continuous updation of skills through capacity building. All these initiatives will enable the development of airport infrastructure on PPP to meet the growing demand of airport traffic and offer the globally comparable service standards at competitive rates. =======

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Appendix I

Projects Details of Airport on PPP mode

No. Project Name State Name Sector PPP Type Contract Authority Project Cost (Rs. Crore) 1 Hyderabad International Airport Modernization of Delhi International Airport Bangalore International Airport Andhra PradeshAirports BOOT Ministry of Civil Aviation, Government of India Airports Authority of India (AAI) Ministry of Civil Aviation, Government of India Airport Authority of India Department of Civil 2,478 Total VGF by Ministry of Finance (Rs. Crore) -VGF by Sponsoring Authority (Rs. Crore)

107

Delhi

Airports LDOT

8,600

--

Karnataka Kerala Kerala

Airports BOOT Airports Airports BOO BOT -

1,930 303 930

----

4 Cochin International Airport 5 Kannur AirPort Project Modernization of Mumbai International Airport

Annuity Aviation

Maharashtra Airports LDOT Airports Authority of India Total

5,800 20,041

--

0 107

(Source: PPP India Data Base)

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Appendix II Project Clearances

S.No. 1 Ministry of Civil Aviation, Government of India a. Clearance to establish the new airport Director General of Civil Aviation 2 a. Final approval for the site b. License to operate the new airport 3 Ministry of Defence a. NOC to establish the new airport Ministry of Environment and Forest 4 a. Environment clearance b. Approval for use of the forest land for non forest purposes 5 Department of explosives a. NOC for location of the aviation fuel depot Other Approvals and Clearances once the project awarded is 6 a. Municipal permissions, Permissions from Water, Power, Sewerage Departments, Permissions with respect to road connectivity, linkage infrastructure, Transport, Security etc.. Clearance Required

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Appendix III

Key Issues with respect to Hyderabad International Airport Brief of the Project Hyderabad International Airport is located in Shamshabad, which is around 20 km from the present Hyderabad airport at Begumpet. The initial capacity planned was 5 million passengers per annum. This capacity will be gradually escalated to 40 million passengers per annum. The airport is opened for public from March 2008. The initial estimated project cost was Rs 1760 crs. The estimated project cost was revised to Rs 2478 crs on account of construction of additional facilities including a common fuel farm and business hotel. Bidding Parameter The project is bided out on Built Own Operate and Transfer (BOOT) model. Bidders were selected through International

Competitive Bidding (ICB). The bid parameter is the percentage of share of revenue. The concession period is 30 years. The concession period may be extended to another 30 years at the option of the HIAL. It is the only airport under PPP which has used cash grant of Rs 107 crs from the government. As Concession fee in lieu of the concession granted, HIAL will pay GOI a fee amounting to four per cent of Gross Revenue annually.

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Details of Equity Participation Sn 1 2 3 4 Investor Airport Authority of India (AAI) Government of Andhra Pradesh GMR Group Malaysian Airport Holding Berhard (N|MAHB) TOTAL EQUITY Country India India India Malaysia % Holding Amount (Rs crs) 13 49.14 13 63 11 100 49.14 238.14 41.58 378.00

Key Issues or lessons learnt Connecting Road - 11.5 km long flyover: This flyover connects the main city to the new airport is not ready by the time the airport get opened to the traffic in March 2008. The work is still going on even one and half year after opening of the airport. Due to this lot of inconvenience is caused to the airport user public and also to the general public Connecting Road - Outer Ring Road (ORR): Around 160 km length 8 lane access controlled ambitious road comparable to the best in the world is being executed around the city. Around 30 radial roads, connecting the centre of the city to the ORR are at various stages of execution. Some of the stretches like the ORR connecting the Hitech City and the New Airport supposed to be ready by the time of opening of the airport. It got completed only recently. 5000 acres of Land: Voices were raised at various fora about allotment of 5000 acres of land for the airport in the initial stages. Though it may look justified with various plan to develop Cargo Hubs, SEZs and turning the new airport into aerotropolis which contains Malls, Hotels, Woking places, Residing places in addition to SEZs etc.

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Resistance to shift the Airport: Initially there was lot of resistance and widespread criticism from the employees and the general public to shift the airport from Begumpet to Shamshabad. There was pressure to operate both the airports

simultaneously. With great persuation and as per the conditions of the concession agreement the airport was finbally shifted to Shamshabad Resistance for increasing the user charges: There was lot of opposition and criticism for levying the user charges. With great amount of persuasion and convincing user charges are now being levied Hyderabad International Airport 1

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Hyderabad International Airport 2

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Key Issues or lessons learnt from other airports Absorption of Existing Staff: Delhi and Mumbai airports are facing a huge challenge of absorbing the existing staff from the airports. The existing staff is not interested in joining the private airport developer. There is a plan now to downsize the existing staff who are not willing to join the private airport developer through an attractive voluntary retirement scheme (VRS). This amount is expected to be born by the private airport developer. This issue is going to be there in other airports also. It needs to be dealt convincingly. There may be a comprehensive policy with regard to absorption, retraining, and separation through VRS.

Subsidies and Concessions: As the aviation industry is going through recession, there is a steep fall in the air passenger traffic. Private developers are now asking for various subsidies and concessions in the form of increasing User Development Fee (UDF). This is against the originally agreed terms and conditions. This may raise lot of litigations later. There may be a provision in the concession agreement in extending or removing the subsidies and concessions if the traffic numbers falls outside the expected or predefined range. So the entire risk of traffic is not born by the private developer.

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Delhi Indira Gandhi International Airport -1

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Delhi Indira Gandhi International Airport -2

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Chhatrapati Shivaji International Airport - 1

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Chhatrapati Shivaji International Airport - 2

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Appendix IV Status of Development of 35 Non Metro Airports (File is attached)

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