PRIVATIZATION OF AIRPORTS

WHY IN NEWS:

• In February 2019, Govt of India had approved the privatization of 6 airports in India: Lucknow, Ahmedabad, Jaipur, Mangaluru, Thiruvananthapuram and Guwahati.
• Out of them, Union Cabinet has given the green signal for Jaipur, Guwahati and Thiruvananthapuram on 20^th August 2020.

BACKGROUND:

• The Airports Authority of India (AAI), which works under the Ministry of Civil Aviation, owns and manages more than 100 airports across the country.
• At present, airports at Delhi, Mumbai, Bangalore, Hyderabad and Cochin are managed under the PPP model.
• The AAI will hold a minor stake in newly privatized airports
• As per the new PPP agreement, private party (Adani group) is responsible for operations and management of the existing airport assets as well as for designing, engineering, financing, construction and development of the additional air-side, terminal, city-side and land-side infrastructure for the airport.
• The AAI adopted the per-passenger fee model this time, which is a modification of the revenue-sharing model that was used earlier in the privatisation of airports such as Delhi, Mumbai, Bangalore and Hyderabad.
• Under the per-passenger fee model, the airport operator needs to pay fixed charges per passenger on a monthly basis to AAI.
• The security of these airports will still be with Government armed forces.
• India plans to privatize more airports as it seeks to accelerate efforts to boost infrastructure development.
• In the second round of airport auctions, AAI has chosen the airports at Varanasi, Bhubaneshwar, Amritsar, Indore, Raipur and Trichi

NEED FOR PRIVATIZATION:

• Trend towards privatisation has taken place in almost every corner of the world under various degrees of privatisation
  • Currently only 2 percent of the world’s commercial airports are managed by private parties.
  • However, since many of these have been successful, we can expect this trend to continue to increase.

• Inter-Ministerial Task Force on airports argued that Airport Authority of India (AAI) is unable to operate and manage airports due to inherent constraints of public sector.
  • It states that AAI is unable to exploit the non-aeronautical revenue potential, due to its inherent constraints.
• Model Concession Agreement for privatisation of Delhi and Mumbai airports allowed the concessionaires to generate huge revenue with minimum investment.
• A large number of sub-optimal service contracts being awarded by AAI can be eliminated if the operation and maintenance of the entire airport is granted to a single PPP concessionaire.

BENEFITS OF PRIVATIZING AIRPORTS:

• Equitable development of air infrastructure:
  • Revenues of the AAI generated through auction can be used to construct airport infrastructure in underdeveloped and developing areas.

• Improve efficiency:
  • PPP in infrastructure projects brings efficiency in service delivery, expertise, enterprise and professionalism apart from harnessing the needed investments in the public sector.

• Increase revenue of AAI:
  • The PPP in airport infrastructure projects has brought World class infrastructure at airports, delivery of efficient and timely services to the airport passengers, augmenting revenue stream to the Airports Authority of India without making any investment

• Past experience:
  • The PPP airports in India have been ranked among the top 5 in their respective categories by the Airports Council International (ACI) in terms of Airport Service Quality (ASQ).

• No Loss of taxpayer money:
  • Once airports are privatized, their source of revenue is based on collections from passengers, airlines, and advertisements. They do not receive any grants from the taxpayer money.
  • This brings the market mechanism into action. The rates are set based on demand and supply instead of being set by a bureaucrat resulting in loss of taxpayer money.

• Upgrades and investments:
  • Construction and management of airports is a capital-intensive business.
  • This is because newer technologies come in every few years and there are significant costs to update to more modern technologies.
  • The government cannot afford to upgrade all the airports simultaneously. However, private companies can improve the airports and keep recovering the costs from the customers.

• Increases the possibility of airports boosting local economic development:
  • When airports are run as businesses, they have a financial incentive to create more demand for facilities.
  • Thus, we can expect airport operators to work with local tourism boards and businesses to attract more travellers.

CHALLENGES:

• Less geographical expansion of air connectivity:
  • Standing Committee on Transport, Tourism and Culture report stated that downsizing of AAI through privatisation will impede the task of providing air connectivity across the country, especially to the remote areas and tourist destinations.

• Affect affordability:
  • Good facilities at airports should come at an affordable cost; this can only be done by the public sector and not by private entities.

• Threat to financial stability of AAI:
  • It was concerned that with privatisation of profit-making airports, AAI will be saddled with only economically unviable airports.

• Lack of government oversight:
  • Government amended the Airports Economic Regulatory Authority of India (Amendment) Act of 2008, wherein all such airports which the (private) operators got on long lease, based on predetermined fees, will be out of the purview of AAI.
  • This would mean that airports handed over to the private group, will have virtually no government control for the next 50 years.

• Vested Interest from Airlines:
  • Big airlines have a vested interest in keeping the airports in public hands.
  • They enjoy special privileges because of their size relative to the limited capacity.
  • The capacity addition would mean an increase in competition. This may impact the bottom line of these airlines negatively.

• Issue with bidding process:
  • Government have focused on short term financial gains from the airport sale or concession and often it is simply the highest financial bidder that is selected for the privatization, without the necessary focus on the quality of services to be provided.

• Lack of stakeholder consultation:
  • There is minimal consultation with users, during the privatization process, on the intended expectations and outcomes.

• Employees concerns:
  • AAI Employees Joint Forum claims that privatisation has encouraged monopolistic operation, exploitation of employees and putting additional burden on the general public

• International experience:
  • In United States, which is the single largest aviation market in the world, ownership of airports has remained in the hands of the state or its agencies.
  • All airports for public use are owned by the state or its agencies or utilities, though some may have contracted with private firms to manage airport operations or provide specific services.

• Privatization do not address the critical issues:
  • While there can be a lot of scope for private parties to benefit from the non-aeronautical side of an airport, the critical infrastructural issues are on the aeronautical side - length and strength of a runway to the height of an ATC tower to parking bays, provision for fuel supply, engineering/technical facilities etc.
  • Under the present circumstances, these aeronautical facilities are to be built by the state-owned AAI, which will invest its own resources to build or refurbish these airports.

WAY FORWARD

• Any privatization discussion should include stakeholder consultation
• Any privatization transaction is transparent and not just based on the highest bidder
• The right regulatory safeguards are in place to protect airlines and consumers.

PRACTICE QUESTION:

Q. “Airports are shifting from being seen as public services to being viewed as attractive private enterprises”. Analyse this statement in the light of government’s recent steps towards privatising airports in India?