The Hindu Business Line : ‘Private sector incentive in airport development should not be jeopardised’

Chennai, July 7 By approving the Airport Economic Regulatory Authority (AERA) Bill, the Cabinet has ushered in a new institutional mechanism for independent regulation of airport services in the country. However, regulators should ideally step in only when there is evidence of market failure, not in anticipation of it, says Mr S. Vasudevan, Manager in the Infrastructure Advisory Group at KPMG Advisory Services.

Speaking to Business Line on the contours of airport regulation, he said that regulators have a role only when airlines, airport operators and other airport users are unable to negotiate an agreement on pricing or a settlement of op erating/service delivery issues between them.

According to him, the most important and pressing issue is to create capacity through newer, bigger and better airports, as air traffic demand and airline operations continue to challenge capacity at most major airports as never before.

“Therefore, what we certainly don’t want is a situation where the Government’s overt enthusiasm in establishing tough pricing and capacity utilisation norms for airport services jeopardises private sector incentive in airport development.”

AERA will soon appoint a regulator, whose principal mandate would be to review and determine tariffs for aeronautical services, besides monitoring compliance of airport operators on pre-set performance standards.

Prior approval

Airport operators would need prior approval from the regulator for fixing airport development charges, user fees and other levies. The regulator would also keep a check on the economic and operational viability of airports.

Stating that regulation of airports is not a new phenomenon, Mr Vasudevan cited the case of several privatised airports in the UK, Australia, Europe and the US being subject to regulatory supervision on price and performance parameters.

“Again, the focus of the regulator is on ensuring best value for money to users not necessarily in terms of the lowest cost of services for users but in effectively ensuring a reasonable rate of return for airport operators and investors.”

In his view, the underlying rationale for any regulatory supervision in public service provision is to prevent abuse of monopoly power or “dominant position” by service providers.

“The key concern clearly emerging from private sector service providers and stakeholders is that of independence of regulators, and the design of the regulatory framework in ensuring this consistently over a period of time.”

Stating that most regulatory mandates have the principal objective of providing the best possible service at the best price to the largest number of users, he said that all elements that go into operationalising the regulatory system are intended to achieve this objective in the most equitable manner possible. “And that’s where the debate really starts and ends – on the question of equity, or in common parlance, ‘fairness’.”

Traditionally, regulation of airport charges follow single till or dual till approaches. The single till approach takes into account only revenues realised from aeronautical services to evaluate rate of return to investors, whereas a dual till approach factors both aeronautical and non-aeronautical revenues – retail, car parking, commuting services, etc., – into the rate of return.

Light-handed dual

In Mr Vasudevan’s opinion, a light-handed dual till approach would be appropriate in the Indian context; it could possibly be re-examined if the markets do not provide the necessary incentives for optimal pricing in privately managed airports.

“A dual till approach is seen as being advantageous to airport operators, since they enjoy substantial leverage on developing non-aeronautical infrastructure and the revenues that accrue thereof.”

He added that proponents of this approach believe it would promote better use of available capacity and help align the interests of airport users and service providers better, by raising the effective return on investment.

Airlines would be happier with a single-till approach, since it forces focus on development, operations and maintenance of principal aeronautical infrastructure, “the reasons why airports exist in the first place.”

Mr Vasudevan believes that the regulatory challenge arises in providing the right incentives for operators to continually invest in upgrading the capacity and service levels of aeronautical assets.

“This would allow for optimal pricing and operating efficiencies on one hand and sufficient latitude for augmenting non-aeronautical revenue streams on the other, without jeopardising expected return on overall investment.”

Pointing out that airport investments are capital-intensive and with long gestation periods, he said investors are typically prepared for the long haul prior to making such investment decisions.

“Hence, to assume that airport operators will necessarily resort to abuse of monopoly power in their pricing decisions would be wrong. Such behaviour would certainly not be market-savvy and could actually be counter-productive to business in the long run.”

Besides, he said, such decisions are bound to incur the wrath of Government, regardless of the presence of a regulatory framework.

“Further, there has been little evidence of this phenomenon in privately operated airports anywhere in the world till date.”

Since airports and airlines have always shared a strong symbiotic relationship, the relationship will only assume greater significance in an environment where profitability of airline and airport investments is largely determined by the strength of that relationship, he added.

Stating that the sovereign power of Governments to override, side-step or renege on commitments will continue to rankle investors, Mr Vasudevan said that regulation is also sometimes perceived as a “strategic tool to deter/temper private sector ‘excesses,’ and by design make the stick far more punitive, while holding the carrot dispassionately.”

The success of regulation would also depend on Government policy on development of new airports and opportunities for private sector participation in such initiatives.

Referring to the issue of regulating airline fare policies, he said that the low-cost airline sector is showing clear signs of consolidation, “which emphasises the imperative need for an independent regulatory mechanism that resolves pricing and performance issues.”

It is not clear from the AERA Bill whether this issue will form part of the independent regulator’s mandate.

“Any regulatory mandate in the Indian context should preferably be prescriptive and parameters that go into defining the scope and extent of regulation should pass the test of objectivity and independence to give comfort to stakeholders. An open-ended mandate would leave too much discretion to regulators, which tends to make stakeholders circumspect and destroys their confidence even before the process has actually begun.”

Mr Vasudevan holds a doctorate in economics from IISc, Bangalore. He was also Jawaharlal Nehru Fellow at the National University of Singapore during his Ph.D tenure. Prior to his current assignment, he served as Principal Associate at the Infrastructure Development Corporation (Karnataka) Ltd, a joint venture between IDFC, HDFC and the Karnataka Government.