Privatization of Airports

WHY IN NEWS?

• The board of Airport Authority of India has given approval to privatise 13 airports in September 2021.
• The smaller airports will be clubbed with the six major airports for scale and size, thereby making it attractive for investors. This is the first time the model of clubbing major airports with smaller ones will be used in the airport privatisation exercise
• This is the first major asset monetisation exercise by the government as part of the National Monetisation Pipeline.

BACKGROUND:

• The Airports Authority of India (AAI), which works under the Ministry of Civil Aviation, owns and manages more than 120 airports across the country.
• At present, airports at Delhi, Mumbai, Bangalore, Hyderabad and Cochin are managed under the PPP model.
• Union Budget since 2016-17 lays increased focus on Public-Private Partnership (PPP) mode in airport development for improvement of last mile connectivity that would eventually lead to a drastic reduction in logistics cost and pave way for sustainable growth.
• In 2020, under Atma-Nirbhar Bharat Abhiyan Government had conducted auction to privatize 6 more airports in India: Lucknow, Ahmedabad, Jaipur, Mangaluru, Thiruvananthapuram and Guwahati.
• In the second round of auction government decided to privatise 13 airports including - Bhubaneshwar, Varanasi, Amritsar, Trichy etc.
• The government is aiming for private investment of Rs 3,660 crore in airports by FY 2024. Government’s vision is to privatize 30 to 35 airports owned by AAI by 2025

FEATURE OF PPP AGREEMENT:

• The AAI will hold a minor stake in newly privatized airports
• As per the new PPP agreement, private party 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.

NEED FOR PRIVATIZATION:

• Inherent constraints of public sector:
  • 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.
• Majority of airports under AAI are in loss:
  • In 2018-19, only 13 of the total 113 operational airports made profits according to an RTI response from AAI
• International trend:
  • Trend towards privatisation in civil aviation sector has taken place in almost every corner of the world under various degrees of privatisation
• Performance of the privatized airports has always been better:
  • 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).
• Reduce administrative bottlenecks:
  • 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 ensured delivery of efficient and timely services to the airport passengers >> augmenting revenue stream to the Airports Authority of India without making any investment.
• 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.
• Investments and up-gradation of infrastructure:
  • 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.
• Boosting local economy:
  • 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:

• Limit 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.
• Increased charges at PPP airports
  • It is contentious issue for airlines. On some domestic sectors for example approximately 17% of the average gross fare now consists of taxes and fees, of which 10-12% is related to airport charges.
• Stalled projects:
  • Projects are stalled for several months due to a lack of preparedness with respect to the concession agreement and the revenue sharing and tariff structure framework.
  • The projects are also delayed due to land acquisition, cost overruns, long gestation periods and lack of funding and investment.
• Opposition from state governments:
  • For ex: Kerala government has opposed the privatization of Thiruvananthapuram airport.
• 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.
• Lack of clarity on risk transfers:
  • There is lack of clarity over the degree of risk transfer to the private players in areas such as asset condition, construction cost, operation risk, non-insurable risk etc.
• 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.
• Infrastructure deficit
  • Inadequate hangar space and unavailability of land to expand airports at their current sites, particularly in major cities, are two of the major constraints that face the sector.
• 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 does 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.
• Chance of monopoly:
  • For ex: In the last round of privatisation, Adani group bid aggressively to win all six airports- Ahmedabad, Jaipur, Lucknow, Thiruvananthapuram, Mangaluru, and Guwahati.
• Challenges posed by pandemic:
  • Pandemic has adversely affected demand for air travel and could potentially hamper investor interest. Non-aero revenue potential of airports is declined since the onset of pandemic >> this can act as a dampener to bidders.

WAY FORWARD

• Innovative model of bidding:
  • For ex: clubbing a profitable airport with a loss-making as a package >> to realise higher price.
• Wider stakeholder consultation:
  • Any privatization discussion should include consultation of different stakeholders including civil aviation regulators, airline industry, employees of AAI etc.
• Ensuring transparency
  • Any privatization transaction is transparent and not just based on the highest bidder
• Robust regulatory safeguards:
  • The right regulatory safeguards are in place to protect airlines and consumers.

CONCLUSION

• To conclude, despite the successes of the PPP airports there are certainly areas for improvement, particularly in terms of land monetization, management of project costs and at a broader level creating a more predictable operating environment on issues such as bilateral policy, airspace efficiency and airline viability.

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?