Is privatisation the solution?
Expanding and modernising airports is imperative in the wake of ever-increasing passenger growth
Air travellers across the world have been experiencing bottlenecks at major airports which are increasingly becoming more and more crowded. Aeroplanes are forced to hover over an airport due to air traffic congestion before they can land. Precious time, fuel, man-hours and resources are lost. International Air Transport Association (IATA), recently surveyed air travellers and found that 70 per cent of them pointed to overcrowding at airports as a major irritant. And all this is so true for India.
But there is a flip side to this. The Civil Aviation Ministry informed Parliament that the public sector Airports Authority of India (AAI) has spent more than Rs 2.5 crore in the last financial year on the maintenance of its 27 airports where no flights operate!
So, on one hand, there are overcrowded airports, but on the other, there are airports in India which do not have a single flight. That is the critical paradox. "There are 27 airports of AAI where no takeoff or landing of flights take place. AAI has spent Rs 2.61 crores on maintenance of these airports during the financial year 2017-18," Minister of State for Civil Aviation Jayant Sinha said in a written reply in Lok Sabha. He also said that 73 (17 underserved and 56 unserved) airports have been identified in the initial rounds of bidding for their revival under regional connectivity scheme UDAN. The question which arises then is why has the state-run Mini Ratna AAI being forced to spend so much for the upkeep of such airports and why are the airlines not flying there. The Minister himself replied to this question, telling the House that the revival of airstrips or airports is '"demand driven". An airport's success depends on a firm commitment from airline operators to fly as well as the state governments to provide various concessions to attract the air carriers. Sinha said the ministry had launched the UDAN scheme in October 2016 with the objective of facilitating regional air connectivity to the underserved and unserved airports by making it affordable. Has this worked? The crucial issue is that there is a large chunk of airports under UDAN where flights have either not started or the services have been stopped due to lack of demand.
The question is how can the Indian airlines be attracted to launch operations from these Tier-II and Tier-III destinations and how best can the airports do this job. The reply is simple. The airlines have to take a call on launching new routes. They decide this by estimating whether there would be enough passengers who are willing to pay a sufficient price for the flights. In recent years, airports across the globe have become active participants in this aviation equation by engaging with the airlines at the network planning level and holding discussions with local business and tourism interests besides offering incentives for the launch of new air services. In the Indian context, it would also have to be seen whether Indian carriers have the necessary smaller or narrow-body aircraft to operate on the smaller and regional routes. Were such matters taken into account when UDAN was launched?
Government is moving ahead with privatising six major airports just like Delhi and Mumbai. Last week AAI issued a request for proposal (RFP) for the airports at Lucknow, Jaipur, Ahmedabad, Guwahati, Mangaluru and Thiruvananthapuram, all of which it has modernised and upgraded earlier. As per the RFP, the state-run airport operator wants to hand over these six growing airports to private players for the next 50 years. AAI has given a tight timeline for the bid, for which the last date for submission is February 14, 2019. Technical bids will be opened two days later to decide the winner who will get the letter of award on February 28. AAI had disputes in the past with private airport operators in Delhi and Mumbai over revenue-sharing. To avoid such disagreements, it has now opted for a new model of revenue generation from the prospective bidders for these six airports. "The concessionaire shall pay to the Authority, on a monthly basis, a fee in respect of each passenger (both domestic and international) handled at the airport in accordance with the concession agreement … the concessionaire shall be entitled to collect charges from users of the airport in accordance with the concession agreement," says the RFP document.
Following up on government's directive to develop, modernise and upgrade other airports, AAI is planning to rope in merchant and foreign bankers to raise long-term loans for the purpose. The national airport operator has plans to invest over Rs 17,500 crore in the next five years. Development is significant as India looks to add 100 new airports for one billion fliers by 2035. AAI sources said that the development of airports requires massive capital investment and therefore commercial and foreign banks, investment and merchant bankers are being roped in to assess various options available to raise long-term capital and identify the best available routes for the same. As per the latest estimates, capital expenditure plans up to Rs 65,000 crore have been finalised by AAI — around Rs 22,000 crore for brownfield expansion in Delhi, Mumbai, Hyderabad and Bengaluru by private operators and around Rs 21,000 crore for greenfield airports. An estimated Rs 52,000 crore has already been invested over the last decade at various airports and the projected investment requirement is over four times the amount. Analysts have said that the past model of funding plans for airports including debt and equity, deposits from real estate and long-term concessionaires, securitised debt and airport development fees are unlikely to work in future. Hence, it will require a new approach like bonds backed by securitisation of user development fee receivables, listing of airports, greater funding from states and private equity. As per rating agency ICRA's estimates, AAI's financial position gives it the capability to raise debt of around Rs 20,000 crore. But that is too low given the scale needed. Private players' participation has slowed down after the initial burst of 2004-06 when Delhi, Mumbai, Bangalore and Hyderabad airports were privatised.
The privatisation move naturally has been opposed by the AAI Employees' Union (AAEU), which has decided to intensify its agitation against it. Their opposition is pegged on how AAI has invested huge sums to upgrade these airports and has been incurring the running costs but not getting any return on the investment. This would increase the financial burden on AAI and render it sick. AAEU leaders also contend that privatisation of Delhi and Mumbai airports has only led to high cost and this burden is borne by the passengers who are forced to shell out huge amounts in the form of various fees.
At a global media event at Geneva last week, IATA officials stated that, globally, the aviation industry was approaching "an infrastructure crisis". "Decisions must be made today if we want the necessary infrastructure available a decade from now," IATA's Director General and CEO Alexandre de Juniac asserted. "It is a long-term mistake to forego the economic benefits that a major hub would generate…our projections are for 8.2 billion air journeys in 2037 (about 4 billion more than today). And planning by most governments is not ambitious enough to meet that demand," he warned, adding how it has become inevitable that airport facilities are expanded and modernised to take in the passenger growth.
Regarding privatisation of airports, IATA chief said that governments globally were seeking alternative funding mechanisms to solve the problems by applying different privatisation or concession models. Urging governments to take a cautious approach while considering airport privatisation, de Juniac said "we are in an infrastructure crisis. Cash-strapped governments are looking to the private sector to help develop the much-needed airport capacity. But it is wrong to assume that the private sector has all the answers." Noting that the airlines have not yet experienced airport privatisation which has fully lived up to its promised benefits over the long term, he said "airports are critical infrastructure … It is important that governments take a long-term view focusing on solutions that will deliver the best economic and social benefits. Selling airport assets for a short-term cash injection to the treasury is a mistake." IATA research has shown that "private sector airports are more expensive. But we could not see any gains in efficiency or levels of investment." Only about 14 per cent of airports globally have some level of privatisation. And, as they tend to be large hubs, they handle about 40 per cent of global traffic. Currently, the global aviation industry transports about 12 million people a day, 180,000 tonnes of cargo a day and generates about one-third of global trade by value — about US$20 billion on a daily basis.
It has to be noted that the airports in the US are in public hands. They are owned by the state, local governments, municipalities or even universities. According to the global statistics portal Statista, in 2016, there were about 5,136 public-use airports in the United States, while the number of private-use airports stood at 14,112. All airports for public use are owned by the state or its utilities, though some may have contracted with private firms to manage airport operations or provide specific services. US Congress had enacted an Airport Privatisation Pilot Program way back in 1996, which had miserably failed to take off. The Trump Administration's recent bid to privatise airports has also lacked support from a large majority.
All major airports in India's immediate neighbourhood, which attract a very substantial number of Indian travellers, are owned by the respective governments or the government-controlled airports or civil aviation authorities. These include the airports in Singapore, Kuala Lumpur, Bangkok, Dubai, Doha, Sharjah, Muscat or even Istanbul. It is imperative here that the government keeps these facts in mind before going in for outright sale of such crucial and valuable assets for a short-term cash injection into its treasury. Otherwise, its ambitious plans to make the commoner fly may just crash-land.
(The views expressed are strictly personal)