You are on page 1of 14

Project Assignment-Aviation Law-II: AL-II

PPP in Indian Aviation Sector: Emerging Issues

Nikhil George

INTRODUCTION
Over the last decade, rise of India as an economic power and a country with long-term stability, has resulted in it being one of the preferred locations for the trade and commerce activities. This has resulted in development and expansion of various sectors, including the civil aviation. In 1990s, Indian government adopted the policy of open sky which resulted in the liberalization of the civil aviation industry and since then the industry has undergone a rapid and dramatic transformation. However, last couple of years has been very bad for the industry with all the players suffering huge losses primarily due to global recession, high fuel prices and lower fares due to market competition. Total losses are estimated at INR75 billion and it is believed that it will take three-four years for the sector to recover fully. Fiscal 2011-12 has started on a positive note with Indian economy witnessing a much faster recovery than anticipated and increasing passenger traffic. From a totally government owned sector, aviation today is a highly competitive market with private players like Jet Airways, Kingfisher, SpiceJet, etc, giving tough competition to the stateowned Air India. In 2010-11, passenger traffic carried by domestic carriers reach 58 million, growing by more than 250% over the decade; and over the next few years, it is expected to reach 100 million mark. Generally it has observed that the air transport grows at twice the rate of GDP1 growth. The international passenger growth has been growing at CAGR2 of over 14% and domestic growth has been an impressive 22% for last 6 years. Forecasts by AAI3 for the next 5 years have projected a sustainable growth rate of 16% for international and 20% for domestic aviation sector. AAI projects 105 million domestic passengers and 40 million international passengers by end of the year 2010.
1

Gross domestic product (GDP) refers to the market value of all final goods and services produced within a country in a given period. It is often considered an indicator of a country's standard of living

Compound annual growth rate (CAGR) is a business and investing specific term for the smoothed annualized gain of an investment over a given time period. CAGR is often used to describe the growth over a period of time of some element of the business. Airports Authority of India. See http://www.aai.aero/public_notices/aaisite_test/main_new.jsp

However, in order to achieve these targets, India will have to resolve issues like bad airport infrastructure, regional connectivity, safety and global standards, training a highly skilled workforce, among others. Off late, Indian government has also started showing interest in developing the sector and expects investments of around US$10 billion in aviation infrastructure. Foreign direct investments up to 100% are allowed in the airlines and in airport infrastructure projects. Airports are being developed using the pubic-private partnership model, attracting many private developers in the sector. Analysts believe that next decade will see India, establishing itself as a regional hub and will be an important global market presenting opportunities not only for airlines, but also for aircraft component manufacturers, air cargo companies, along with infrastructure developers.

AVIATION SECTOR IN INDIA


India is one of the fastest growing economies of the world with an average GDP growth of over 8.9 percent in last five years. For India to sustain its economic growth story it has to strengthen its infrastructure sector and in particular, critically improve its transportation infrastructure. Aviation is an important part of national infrastructure and one of the prime movers for economic growth and an important strategic element of employment generation. Aviation sector in India has been transformed from an over regulated and under managed sector to a more open, liberal and investment friendly sector since 2004. Entry of low cost carriers, higher house hold incomes, strong economic growth, increased FDI4 inflows, surging tourist inflow, increased cargo movement, sustained business growth and supporting government policies are the major drivers for the growth of aviation sector in India. Forecasts by AAI for the next 5 years have projected a sustainable growth rate of 16% for international and 20% for
4

Foreign direct investment (FDI) or foreign investment refers to the net inflows of investment to acquire a lasting management interest (10 percent or more of voting stock) in an enterprise operating in an economy other than that of the investor.

domestic aviation sector. Recognizing the exponential growth of air traffic in India, the Ministry of Civil Aviation has been following a very liberal policy in the exchange of capacity entitlements i.e., traffic rights. Domestic airlines have been allowed to fly overseas, forge partnerships with foreign carriers while foreign carriers in turn have been interlining with domestic airlines to access secondary destinations. The government has also tried to ensure an environment conducive for growth of all stakeholders associated with Indian aviation segment. With the rise in the number of airlines, growing passenger segment and route expansion, there is however a need for Indian airports to have their infrastructure in place, which unfortunately at present is the weakest link in the chain. Greenfield and modernisation projects are being developed on PPP5 model to develop facilities conforming to international standards and to encourage the domestic operators to shift base, so as to decongest major airports. Adoption of global standards has made aviation a safer way to travel.

AIRPORTS
There are around 454 airports/airstrips in the country which includes operational, non operational, abandoned and disused airports, In India, Airports Authority of India (AAI) is the authority for the development and management of airport infrastructure and air traffic management. With the rise in the number of airlines, growing passenger segment and route expansion, there is a need for Indian airports to have their infrastructure in place, which unfortunately at present is the weakest link in the chain. The Government has acknowledged the infrastructure deficiency and has wisely sought private sector participation to facilitate infrastructure improvements6. Greenfield airport projects have also been proposed at Goa, Navi Mumbai, Pune, Greater Noida and Kannur. The objective is to develop facilities conforming to international standards and try to encourage the domestic operators to shift base, so as to decongest the major airports. AAI is also planning to identify non operational airports that could be put to use to provide better air connectivity in the country. AAI is in the process of carrying
5 6

Public-Private Partnership

Modernization of Delhi and Mumbai airports, commissioning of green field projects at Hyderabad and Bengaluru, modernization of 35 non metro airports

out feasibility studies for this purpose. The Civil Aviation Ministry has set a target of getting around 500 airports operational in the country by 2020. This will include renovation of used airports, developing greenfield airports, establishing merchant and low cost airports and airports dedicated to movement of cargo and logistics.

PPP MODEL
Over the past few years, Government of India has been stepping up public investments in infrastructure and exploring alternative sources for funding infrastructure projects to inspire confidence of the private sector to invest money and technical expertise on a large scale. Further, it has been ensuring adequate checks and balances through transparency, competition, and regulation. Typically, a Public Private Partnership (PPP) project involves a public sector agency and a private sector consortium, which comprises contractors, maintenance companies, private investors, and consulting firms. PPP projects can be based on different types of models: BuildOperate- Transfer (BOT); Build-Own-Operate-Transfer (BOOT); Operate-Maintain Share-AndTransfer (OMST); concession; and joint venture and community based provision. The PPP model was conceptualised keeping in mind the following factors:

Maximising investments to tackle budgetary constraints: Providing efficient services at affordable prices through healthy competition; and Sharing as well. risks involved in development of world-class infrastructure assets. Globally, PPPs are the preferred mode for project execution and have a high success rates

NEED FOR PPP


Historically, the government invested in public sector infrastructure in keeping with its socioeconomic goals that linked infrastructure growth with the development of the nation. The infrastructure sector needed large resources, involved long gestation until completion, and offered uncertain return on investment. Further, infrastructure projects are exposed to political and event risks as well. The economy developed rapidly over the last decade; however, infrastructure did not grow at a matching pace. Moreover, the government also faced paucity of
5

resources to bring about speedy development of infrastructure. This created a suitable scenario for involving the private sector in bringing about rapid infrastructure development. Accordingly, Government of India, through the PPP model, partnered with the private sector to build infrastructure. India implemented the PPP model in road development in a big way and achieved financial closure of more than 270 projects as of Nov 2009. Most of these projects are real-toll contracts that require expanding existing capacity to four lanes or more along with a government subsidy. Some long-term road capacity contracts, known as annuity contracts, have also been used. Both these contractual models have proved attractive to the private sector and to financiers. After the successful implementation of the PPP model in the development of roads and highways, the Indian government is now developing a private investment program in the rail sector as well. Construction of cargo handling berths, container terminals and warehousing facilities, airport, townships, road and highways, ship repair facilities are some of the areas that have opened up to private operators Depending on the nature of facility or service, private operators have the option of entering a service contract, a management contract, a concession agreement, or a divestiture, to operate port services.

AIRPORT INFRASTRUCTURE
During the year 2009-10, the Civil Aviation Ministry has put infrastructure development on priority with a number of projects identified. The government has planned to take up projects worth Rs. 41,000 crore during the 11th five year plan (2007 2012) out of which government will fund Rs. 12,000 crore. Rest of the funds will be arranged by PPP mode. The Government plans to improve the conditions of the existing airports across the country via PPP route. The existing infrastructure at these airports is poor, characterized by inadequate parking space, insufficient terminal capacity, poor air traffic control systems and lack of facilities for passengers.
6

The Ministry of Civil Aviation has proposed development of 35 non-metro airports, keeping in view the potential for traffic, tourism, business etc. The project model would be such that all aeronautical activities at these airports would be handled by the AAI, while a public-private partnership (PPP) model would be followed for the development of non-aeronautical activities at the city side of these airports.

FINANCING PLAN FOR AIRPORTS


To accelerate and increase PPPs in infrastructure, some of the major initiatives that have been taken by the Government include: Provision of viability gap funding Setting up of a SPV, India Infrastructure Finance Company Limited (IIFCL) to meet the long term financing requirements of potential investors. India Infrastructure Initiative (US $ 5 bn. Fund) Enhanced annual External Commercial Borrowing ceiling Permission to foreign financial institutions and multilaterals to raise rupee resources Encouraging development of new instruments such as grading of PPP projects/SPV rating by the major credit rating companies

PUBLIC-PRIVATE PARTNERSHIP (PPP) IN AIRPORT INFRASTRUCTURE


Indian airports were managed by Civil Aviation Department, Government of India, till the creation of International Airports Authority of India (IAAI) in 1972 and National Airports Authority (NAA) in 1986. In 1995 Airports Authority of India (AAI) was established by merging both IAAI and NAA by an Act of Parliament i.e., The Airports Authority of India Act in 1994, for better and efficient management of all airports in India by a single Authority. This resulted in the Passenger AND Cargo Traffic Growth in Civil Aviation Sector Thus Increased traffic and cargo growth has led to congestion/ saturation at different airports in India, e.g. Mumbai, Delhi, Bangalore, Hyderabad, Kolkata, Chennai etc.
7

Hence, country requires New Airports, Expansion of capacity at existing airports, Induction of Technology for efficient handling of Passenger and cargo, Better Management Practices, The annual requirement of funds in the future is expected to be much more than the AAI can generate7.Thus the Need for Private Participation in Airport Infrastructure arise, to bridge the resource gap for achieving the following objectives To build world-class airports with modern technology and efficient management practices. To make the airport user friendly and achieve higher level of customer satisfaction. To lay special emphasis on the development of infrastructure for remote and inaccessible areas. To provide airport capacity ahead of demand. To encourage greater efficiency in Airport Operations. To provide multi-modal linkages.

Airports Authority of India Act, 1994 was amended in 2003, which, inter-alia, provides exclusion of Private Airports from the ambit of AAI Act .The Aircraft Rules, 1937, were also amended, which, inter-alia, provide conditions for grant of license, validity of license, tariff fixation including levy of Passenger Service Fee and User Development Fee, Ground handling provisions etc. Airport Development Process has taken off in the country. The process of development of airports through PPP in the country began with CIAL. Two new Green field airports were thereafter approved for Bangalore and Hyderabad. On 3rd May 2006 the Airports at Mumbai and Delhi were handed over to Joint Venture Companies. Of 35 non metro airports being taken up for modernization PPP has been approved for the city side development of 10 airports. Proposals for a number of green field airports have been received from various State Governments.

Projected Airport Development Fund Requirements Rs. 40,454 crores

PPPs SUCCESS STORIES IN AIRPORT SECTOR


Cochin International Airport Cochin International Airport is the first airport in the country through public-private partnership venture. The airport pioneered the concept of private investment in Airport sector by incorporating it as a public limited company and it received investments from nearly 10,000 nonresident Indians from 30 countries. The airport handled 3.9 million passengers and had air traffic movements of about 411 per week for the year 2009-10. The airport currently handles around 799 aircraft per week with 10,800 passengers each day. Eight domestic airlines and 16 international airlines connect Kochi with nearly 40 destinations nationally and internationally8. 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.

See http://en.wikipedia.org/wiki/Cochin_International_Airport

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 2011. 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 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.

SCALING NEW HEIGHTS


Indias strong economic performance over past couple of years has led to an impressive growth in aviation sector. The recent times have seen India being on radar of global aviation industry players. The growth story for Indian aviation, as experts believe, is going to continue over next decade. However, continuing this growth story would require many structural reforms and removing of bottlenecks from the system. Infrastructure in India still remains a major bottleneck and aviation sector is no different. To create world class infrastructure facilities for aviation industry, India would need gigantic investments to tune of US$ 51 billion. To make that happen, Indian government needs to formulate relevant policies, conducive regulatory mechanisms and provide a level playing field to all the players. This will create an environment which is conducive to business and to attract large investments from private sector in India as well as abroad. The Indian economy can capitalize on burgeoning opportunities in aviation sector if the current issues facing the industry are resolved appropriately.

10

GOVERNMENTS ROLE
The government has taken steps in the direction of structural policy reforms and is coming out with new policies which are liberal and encourage public-private partnerships. The government has embarked on a mission to create infrastructure with ambitious projects. At this point, it is worth noticing that policy formulation is one aspect while smooth implementation of it is another. India has a history of having rules and regulations in place but not putting emphasis on implementation of the same which has impacted its own interests many a times. Routing development through public-private partnerships presents different challenges in terms of delineation of responsibilities, effective monitoring and evaluation procedure in place and final transfer of rights. The future plan of action would leverage on the past experience with a priority to upgrade the infrastructure to accommodate further expansion. Given the size and the population of the country, air travel penetration is relatively low, providing an opportunity to sustain the growth rate witnessed in the aviation sector over the past few years.

ROLE OF PRIVATE SECTOR


In India, due to policy changes and reforms, Public Private Partnerships (PPPs) have increasingly become the preferred mode for construction and operation of airport infrastructure. Private sector is presently actively involved in airlines and airports and their contribution are expected to rise substantially in the coming years. PPP offers a distinct possibility for increasing total investments by using a limited amount of public resources to leverage a much larger amount of private investment. Such PPPs accordingly could also increase economic efficiency and lower the capital requirement, provided that regulatory mechanisms are adequate PPPs can be undertaken through a range of alternatives such as BOT, BOOT etc, with the Model Concession Agreement (MCA) being used to provide a stable regulatory and policy framework. The MCA regulates the PPP contracts by defining the rights and obligation of all parties concerned. In case a project is not viable due to either long gestation periods or inadequate returns, the government is committed to provide up to 40% funding by way of grants in some cases, called viability gap funding. The government has a non-interference approach on the
11

commercial matters of the aviation sector. However in the future airports, where the competition is limited will come soon under the purview of AERA9. With the number of PPP airports steadily increasing in India, the need of a regulator is felt necessary. The government on its part is continuing to provide a policy framework for the growth of the availability and accessibility of air travel.

THE WAY FORWARD


The Infrastructure projects which are executed on PPP in Airport Sector are with a concession period of 30 years or 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 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 With a view to attracting new technology and management expertise, permission may be given to Foreign Airlines to participate in equity of Private Airlines. 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.

The Airports Economic Regulatory Authority of India (AERA), has been established by the Government of India, to regulate tariff for aeronautical services rendered at major airports in India

12

CONCLUSION
Indias civil aviation is expected to continue with its high growth over the next five years; however, the sector is riddled with traffic congestion and delays at a majority of the airports, which strains the aviation infrastructure. To overcome this problem, the government initiated a modernisation programme in the aviation sector as well by encouraging private sector companies to modernise airports and increase traffic handling capacity. 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.

13

BIBLIOGRAPHY/ REFERENCE
1. Public-Private Partnership (PPP) in Airport Infrastructure, Ministry of Civil Aviation, 20th May 2006, Vigyan Bhawan, New Delhi, Available at: http://civilaviation.nic.in/ 2. Position Paper On The Airports Sector In India, May 2009, Department of Economic Affairs Ministry of Finance, Government of India, Retrieved from:

http://www.pppinindia.com/pdf/ppp_position_paper_airports_052k9.pdf 3. Airport Authority Of India, See: http://www.aai.aero/public_notices/aaisite_test/main_new.jsp 4. Public-Private Partnerships in India, See: http://www.pppinindia.com/ 5. Public-Private Partnership, Dun & Bradstreet India, See: http://www.dnb.co.in/InfrastructureCompanies2009/Public%20Private.asp

14