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Thillai Rajan A.
Balaraman Rajan
Megha Malhotra

History of sorts in civil aviation was made recently in India. The event was the opening of the Rajiv Gandhi International Airport in Hyderabad and the Bangalore International Airport on March 16 and May 24, respectively. In no other country have two large private sector green-field international airports started operations within a span of just 78 days.

In a way, this is a clear signal that India is on the threshold of a new era of private participation in civil aviation. Though Bangalore was the first private sector airport to be conceptualised way back in 1994, Hyderabad edged out Bangalore close to the finishing line, when it became the first private sector commercial airport to start operations in the country.

It might be surprising to know that green-field private sector airports constitute less than a handful of the 50,000 commercial active airports present globally. Government-owned, contractor-operated arrangement has been the standard for the operation of commercial airports in most countries.

However, with the private sector airlines having as good if not a better safety track record as that of the public sector airlines, there is growing acceptance to involve the private sector. Similarly, with the availability of better technology and regulation to monitor air space and development of exclusive defence airfields, the role of commercial airports in national security has gradually got reduced.

Simultaneously, two other developments can be observed. First, airports have metamorphosed from just destinations of flight operations to hubs of commercial activity. Second, passenger comfort is becoming more important.

These two developments are being reflected in the income stream of airports. Broadly, there are two revenue streams for airports: aeronautical revenue and non-aeronautical revenue.

As airports become hubs of commercial activity with a thrust on passenger comfort, non-aeronautical revenues constitute a higher share of the total airport income for major international airports. The targeted revenue share for BIAL significantly differs from the Airports Authority of India (AAI) average and is in line with the international trend.

With the increasing importance to non-aeronautical revenues, it seems but natural that airport ownership and operation will be most suitable for private sector investment, because of its higher efficiencies and service orientation as compared to that of the public sector.

With India becoming a focal point in the world economy today and more and more Indians taking to the skies, there has been a buoyancy in air traffic growth in recent years. While the global passenger traffic growth rates were 7.4 per cent in 2007, in India the growth rate was 22 per cent, about three times that of the global average. Projections made by the Bangalore and Hyderabad airports (an average 15 year CAGR growth rate of 8 per cent) indicate that the passenger growth rate in India is expected to be very robust in the coming decade. Investment in new airport capacity is essential to meet the requirements of growth in air traffic.

With reports such as those submitted by the Naresh Chandra Committee, highlighting the low operational efficiencies in the existing Indian airports, the government saw an opportunity to encourage private investment in the sector.

The new airports at Bangalore and Hyderabad are a big leap from the previous airports in these two cities. In the first year of its operations, the passenger handling capacity in the new airports is almost twice that of the older airports, and when the expansion is fully complete, both the airports put together would have the capacity to handle 90 million passengers per annum, about seven times the capacity of the older airports.

In 2007, the total passenger capacity of these two airports was about 82 per cent of the design capacity of all the four airports in Chennai, Mumbai, Delhi and Kolkata. Though both the airports are the earliest public-private partnership (PPP) projects in this sector, they incorporate some of the ingredients necessary for the successful implementation of such a project.

First, BIAL and RGIAL have adopted a PPP structure that is appropriate for an airport project. PPP projects can have different project formats. The key difference in these structures is the issue of ownership of assets.

In a build-own-operate (BOO) structure, the ownership of the assets vests with the private sector in perpetuity whereas in a build-operate-transfer (BOT) and build-own-operate-transfer (BOOT) format, the assets are transferred to the public sector at the end of the concession period.

Since airports have strong public good characteristics and also form a part of strategic national assets, a BOOT structure would be most appropriate as the government can take over the assets at the end of the concession period. It may be remembered that when BIAL was originally conceptualised in 1994, it was proposed as a BOO project, which was not an appropriate structure for a PPP in airport. The unsuitability of a BOO structure was one of the main reasons for the inordinate delays that the project experienced during its formative years.

Second, though the majority shareholding in the airports is with the private sector, government has a strong presence in both the airports. Government has a shareholding of 26 per cent, the minimum threshold level required to retain important investor rights. The government also has a strong representation on the board of both companies. Out of the 14 members on the board of BIAL, there are five nominees representing the government. Similarly, out of the 16 members on the board of RGIAL, six nominees represent the government. The air traffic control in both the airports is regulated by the AAI. After the expiry of the concession agreement, the assets revert to the government. Both the airports, thus, have the twin benefits of government oversight and private sector efficiency.

Third, the contractual structure has appropriate features to ensure superior performance and reduce opportunistic behaviour. For example, the main contractor and operator of BIAL, L&T, Siemens and Zurich Airport, have been given majority shareholding in the company. This would ensure that there is a long-term alignment of interests between shareholders and the operators.

Further, the concession agreements for both the airports have clearly specified standards for performance. It has been indicated that yearly passenger surveys have to be conducted from the third year of airport operations to measure the airport’s performance according to the IATA Global Airport Monitor service standards.

The concession agreement specifies the need to undertake remedial measures if the IATA rating is less than 3.5 on a scale of 1 to 5. The service levels expected from the BIAL and RGIAL become even more evident when we consider the fact that the existing IATA ratings for Mumbai and Delhi airports are only in the range of 2.3-2.6.

Governments have displayed tremendous political will and panache in dealing with the new challenges that have emerged closer to the operations start date, such as the closure of existing airports, the consequent impact on the employees, the implementation of user development fee, and providing connectivity to the airport.

The private sector, on the other hand, has learnt the virtues of transparency and patience for long-term success in the infrastructure sector. The opening of these two airports has resulted in a gradual thought convergence among many stakeholders on the benefits of involving private sector in airport operations.

While the eventual financial and economic success of these two airports would depend on many factors such as economic growth, fuel prices, and air traffic growth, the initial mission of bringing private airports into operation stands accomplished.

With the government planning for more airport capacity, even in smaller towns, wisdom from this experience would be a big help in developing more robust project structures and contracts for the upcoming and ongoing projects. To paraphrase Victor Hugo, private airports seem to be an idea whose time has come.

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