Aviation sector in India needs to build a conducive environment for ideal PPP model, and user-friendly and well-equipped airports are the need of the hour. The sector needs an investment to the extent of US$ 110 billion by 2025.
An astronomical amount of US$ 110 billion will be required for the upliftment of the aviation sector in India. Out of the US$110 billion, about US$ 30 billion will be used for the development and sprucing up of existing airports, and about US$ 80 billion will be used for building new fleets, according to the Civil Aviation Ministry. In order to achieve this 10-year goal, the sector initially would require an investment of almost Rs 65,600 crore during the 12th Five Year Plan (2012-2017) of which around Rs 50,000 crore is likely to be contributed by the private sector.
Fasten seat belt
The aviation sector is in a ´rejuvenation´ mode as factors such as rapid urbanization with cash-rich, middle class, government´s open sky policies and approval to low-cost carriers reinstate that the industry is scaling up as one of the largest players in the market by 2030.
´The civil aviation sector seems to have found a new dynamism as more opportunities exist for designers, urban planners, engineers, architects, project managers, bankers, suppliers of goods and services, etc.,´ stated a report from the working group for Civil Aviation. Airport infrastructure needs to fasten its seat belts by making certain radical changes in policy and regulatory framework for a transformational growth to ensure that growth is real and sustainable. As per the International Civil Aviation Organization (ICAO), every Rs 100 spent on air travel results in Rs 325 worth of total benefits and every 100 direct jobs in aviation results in 610 new jobs overall.
´The Indian aviation is a booming sector. However, the Government needs to give more attention to areas like attracting more global investors. We are focusing on timely performance,´ says Dr. Mahesh Sharma, Minister of State (MOS), Civil Aviation. The public-private partnership (PPP) model has gained popularity and momentum as projects via this method have improved the economic environment in the sector. The Government expects about 70 per cent investments from private sector in 12th FYP.
PPP: A game changer
Well-structured PPP model with adequate Government support has proved to be a game changer in the aviation sector. It has delivered significant benefits for passengers, airlines and the government, and has helped in generating large cash inflow.
The four major PPP airports-Delhi, Hyderabad, Mumbai and Bengaluru-have accounted for 53 per cent of total passenger traffic handled by Indian airports in FY2014.
According to the Airports Authority of India (AAI), in the 12th FYP, investments of about Rs 65,600 crore is expected for airport development out of which approximately Rs 17,000 crore will be by AAI and balance through private participation.
According to the Centre for Asia Pacific Aviation (CAPA) India, the global aviation analysis data and intelligence group, AAI has earned US$ 1.7 billion in revenue share from PPP airports since FY2007. Without this income and its air navigation services division, AAI´s business model is enviable.
Elaborating on the PPP model, CAPA India informed that the four private metro airports have delivered a massive dividend of US$ 1.72 billion to AAI for the past decade or so. The annual amount payable to the AAI has been growing rapidly each year and in FY2014 it has reached close to US$ 460 million. This directly goes to AAI´s bottomline as the authority incurs no expenses in relation to PPP airports. CAPA has estimated that AAI has reported a profit of US$ 135 million in FY2014. Approximately 60 per cent of this profit was actually contributed by air navigation services and not by airport operations.
´All India passenger numbers are expected to triple over the next decade, which will require huge investments in airport expansion and construction. With PPP model, where private capital has a significant stake, the country has seen dramatic improvements in airport infrastructure at Delhi, Mumbai, Bengaluru and Hyderabad regions. This has transformed the passenger experience, improved efficiency and capacity for airline operators, and delivered a massive dividend to AAI,´ said Satyendra Pandey, Manager, CAPA India.
Airports in PPP model have fared well in the global arena. The Indira Gandhi International Airport (IGIA) at New Delhi has been ranked as the best airport (in the 25-40 million pa) by the Airport Council International (ACI) for 2014. Kempegowda International Airport Bengaluru (KIAB) has been ranked the best regional airport at the Skytrax World Airport Awards held in Paris. Mumbai and Hyderabad airports have consistently featured among the top 10 airports in ACI and Skytrax rankings over the last five years.
´PPP projects have shown the world that India can bring in investments of over Rs 30,000 crore. By creating world-class facilities for Indian and foreign travellers, the Government unlocked value especially in commercial revenue. It also generated thousands of jobs and contributed significantly to the economy through a positive impact on tourism, hospitality, manufacturing and Exim trade,´ said Amber Dubey, Partner and Head-Aerospace and Defence, KPMG.
Adding to the PPP kitty, four more airports in Chennai, Kolkata, Ahmedabad and Jaipur are likely to be modernized. Additionally, Navi Mumbai and Mopa (Goa) projects are developed as Greenfield projects. These airports will entail an estimated investment of about Rs 25,000 crore over the next five years.
With growing income levels and young demographic profile improving traffic density, the industry needs to cater the rising need for infrastructure. Even non-metros-tier I and tier II cities-are in need for better airport facilities. To address this situation, 14 new Greenfield projects are in various stages of conceptualisation, development and completion.
These 14 Greenfield airport projects are at Mopa (Goa), Navi Mumbai, Sindhudurg and Shridi (Maharashtra), Kannur, Arnamula (Kerala), Pakyong (Sikkim) Gulbarga, Bijapur, Hassan and Shimoga (Karnataka), Dabra, Gwalior/Datia (Madhya Pradesh), Durgapur (West Bengal), Kushinagar (Uttar Pradesh) Karaikal (Pudhuchery), Gangtok (Sikkim) and Itanagar (Arunachal Pradesh).
´Growth can only happen by creating capacity at major hubs, providing air connectivity to growing tier I and tier II cities and towns, developing reliable and efficient intermodal connectivity for seamless travel, and ensuring that air services are affordable for a price-sensitive market like India. Creation of airport capacity to support future growth has never been more important than now. While it is heartening to see many new projects in the pipeline, the speed of implementation is going to be the key,´ Dubey informed.
Regional connectivity [as of today] is mandated rather than incentivised. Budget airports will provide the infrastructure, but demand challenges must also be examined and each airport must be planned with a 40 year time horizon. The Government had asked the AAI to prepare a plan to develop 50 airports across India to encourage regional connectivity.
Commenting on this, Pandey said, ´This is a good idea, but bringing the vision into reality requires a more convincing and better thought-out plan.´
The real challenge lies in making regional or small airports viable through PPP model. These are not only essential for making air travel accessible to the common man but also in getting the private sector to invest in asset development. Skewed policy, high fixed cost of operations and a multitude of taxes have made this a high-cost and high-risk industry.
Perfect Time for no-frill airports
The other trump card to improve the regional connectivity and air traffic is in the form of no-frill airports. No frill airports (low-cost carriers) are said to improve regional volumes and connectivity. The domestic market in India is largely a price-driven market, and these airports should be built with a philosophy of low cost but high quality.
The Government has given a nod to construct five no-frill airports-Tezu (Arunachal Pradesh), Kishangarh (Rajasthan), Jharsuguda (Odisha), Hubli and Belgaum (Karnataka)-at an initial cost of Rs 50 crore with limited facilities for seating, lounges and air-traffic management.
Typically though, these low-cost airports would have low operating costs from the point of view of the airline (lower landing and parking charges and cheaper airport space rental compared to major airports) and improved connectivity. These airports would also require abolition of VAT on jet fuel, provision of free land, water, power and road connectivity, use of local police for security, and viability gap funding (VGF). Commenting on these no-frill airports, Pandey said, ´If no-frill airports are built within the budget with a tighter control over cost overruns and consequently lower airport charges, benefits of this accrue to airlines and eventually to passengers would drive down costs.´
For better volumes and improved connectivity, constant engagement with stakeholders coupled with an adequate assessment of demand, including the need to stimulate demand would have to be undertaken.
MRO yet to explore
The maintenance, repair and overhaul (MRO) sector still remains unexplored. Loss of MRO revenue to India´s neighbouring countries is a colossal self-goal by India. Though this industry is the lowest hanging fruit, but it is expected to grow about $1.6 billion (spending each year) in the next 10 years from the current market size of about $700-800 million. Despite these astounding figures, the sector is still ignored by the Government.
´To explore and fully leverage the potential of MRO businesses in India, structural reforms are required. Most importantly, taxation needs to be addressed. Bringing down the taxation on MROs is a key. However, the Budget 2015 did not address this, and thus it is our assessment that the MRO business would not see much success in India given the current conditions,´ Pandey added.
Currently, MRO services qualify as Works Contract Service, which attracts service tax at 12.36 per cent on 70 per cent of the service portion of the work. The present rate of abatement should be increased from 30 per cent to 90 per cent to reduce the service tax incidence, KPMG aerospace stated.
Land hurdle stall airport projects
Apart from an unexplored segment in the sector, certain neglected issues like land acquisition remains a major hurdle for the sector. Land disputes with breach of agreements and withdrawal of developers from projects on account of financial non-viability hampers the airport infrastructure segment.
Out of the 14 Greenfield projects, which have been given the nod by the Central Government, a few projects had an issue of land acquisition. For example, the Navi Mumbai airport project was delayed for eight years due to land issues. The setback has resulted in the increase of the project cost from around Rs 8, 000 crore to Rs 14,500 crore. Meanwhile, the state assembly of Maharashtra has assured that the airport tenders will be floated by May and the construction will begin in October and operations by 2019. Meanwhile Dabra Airport (Madhya Pradesh) and Aranmula (Kerala) regions have also had land acquisition issues.
´Despite the successes of PPP airports, there are certain areas for improvement, particularly in terms of economic regulation, land monetisation, 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,´ Pandey informed.
´According to AAI, out of 60 requests for allocation of land projects, which is being submitted to relevant state governments on airport projects, only 26 have been approved so far, with land being the core issue, the state government should look for more viable options,´ said Praveen Seth, former member, AAI. He also suggested that the states can use the airports that are not in use. ´We have about 20 airports that are not used. But we need to do a detailed study and see feasibility and increase the infrastructure of those airports accordingly so that it could be used,´ he added.
He also added that a ´Greenfield authority´ with representatives from developers, policy changes, environmental clearance agencies could help in land acquisition before opening bid can help to deal with the issue.
Unlike other infrastructure projects, the airport project requires a considerable amount of land at a particular location. Metros like Delhi, Chennai, Mumbai, Kolkata and Bengaluru will definitely need a secondary airport by 2022; the sector cannot afford to have delays due to land acquisition issues.
The way ahead
The Indian aviation sector, which is staring at rapid fleet expansion, procedural delays and land acquisition hurdles, should be able to tackle such infrastructure constraints to ensure that growth should not grind to a halt. Although, the sector is growing exponentially, but it is not in the profit horizon. To build a successful aviation sector, coordinated efforts of stakeholders, state government, private players, and manufacturers should be central. The Government needs to take a decisive action on reducing taxes, ensuring the capacity and keeping costs in check, cite experts. Aviation needs to be made financially sound, but in the Union Budget for 2015-16, the sector seems to have been ignored as most of the sectors demands such as giving airlines infrastructure status and bringing down taxation have been ignored, the CAPA India stated.
´Withdrawal of the service tax exemption drives up the costs for investors and thus potentially has an impact on overall airport costs, which then affects viability across the aviation value chain,´ CAPA stated.
As per aviation experts, certain other immediate changes, which would boost the sector, is to withdraw the 5/20 rule immediate effect. As per the rule, the Indian carriers have to complete five years of domestic operations and have a fleet of 20 aircraft before they are allowed to fly in international zone.
´First priority should be given to scrap the 5/20 rule, this is not the case globally. Airport tariffs need to be regulated under a shared or hybrid till framework to support the commercial viability of projects. The Governments should support investment by shifting its focus from taxing inputs to taxing profits, which is the only logical way to facilitate asset creation in a high apex industry and share gains meaningfully,´ Dubey added.
1.Machiwara, Ludhiana Airport, Punjab
2.Dholera Ahmedabad, Gujarat
3.Ongole, Prakasham District, Andhra Pradesh
1.Mopa Airport, Goa
2.Navi Mumbai International Airport, Maharashtra
3.Sindhudurg Airport, Maharashtra
4.Bijapur Airport, Karnataka
5.Gulbarga Airport, Karnataka
6.Hassan Airport, Karnataka
7.Simoga Airport, Karnataka
8.Kannur International Airport, Kerala
9.Durgapur International Airport, West Bengal
10.Dabra Airport, Gwalior, Madhya Pradesh
11.Pakyong Airport, Sikkim
12.Kushinagar, Uttar Pradesh
14.Shirdi in Ahmednagar District, Maharashtra
´We will connect our next phase of Metro project with new airport´
With 7 out of 8 required environmental permissions in place, the state-run City and Industrial Development Corporation (CIDCO), the nodal agency for the Navi Mumbai International Airport, is on the threshold of completing the land acquisition process. Sanjay Bhatia, Managing Director, CIDCO, gave a quick update on the project, in an interaction with INFRASTRUCTURE TODAY.
How much effort has gone into acquiring land for the Navi Mumbai International Airport (NMIA) project?
The proposed NMIA project has been held up since 1997 due to opposition from the people of the villages where the project is supposed to develop. These project-affected people (PAPs) are not ready to give their land for the construction of the project. CIDCO, the nodal agency for implementing the project, has started the process of land acquisition since last one and half years. We are endeavouring hard to convince these people that they will be entitled to 22.5 per cent of developed land in a modern township-Pushpak Nagar-being built near the airport, for every hectare of land acquired. At that time, we had given them the same offer. But it was not acceptable to them. Apart from the developed land offer, CIDCO also started employability programme from the Tata Institute of Social Sciences (TISS). In addition to this, we also executed Rs 200 crore social security programme in these villages. Since the last one year, I have been negotiating with villagers and various political parties on a daily basis. With these, PAPs were convinced that CIDCO means business and they agreed to 22.5 per cent developed land package. Right now, the consent of award has been passed.
NMIA is touted to be the biggest greenfield project when it comes to area and size of infrastructure required. How have you planned for the tendering process?
CIDCO has invited tenders for new small towns, which are planned for shifting these people to the assigned site. There are two parts for rehabilitation and resettlement of these PAPs; one is giving them 22.5 per cent package that will be given in a new town called Pushpak Nagar and second these people will be settled in new towns called Vadghar and Vahal. So, creating a better infrastructure for these three new towns and levelling of land are also parts of this job. CIDCO has already floated the tenders for this job. For Vadghar, we have already completed the process of levelling. For developing network of roads, tenders have been invited. For Pushpak Nagar also the tenders have been invited. Second part of the job is pre-development work that needs to be completed prior the commencement of the core development of the airport. CIDCO is involved in executing this pre-development work that consists of reclamation of the airport land, shifting of Extra High Voltage Transmission (EHVT) lines, removal of a hillock, diversion of Ulwe River. The estimated cost of this work is Rs 2,500 crore. This pre-development work needs to be completed before the airport partner comes in. For some parts of this work, tenders have already been floated.
What are the opportunities CIDCO brings in with such kind of project?
It is one of the biggest Greenfield airports in the country, which will open a galore of opportunities like ancillary activities, logistics, employment opportunities, shopping malls and catering services in aircraft. The facilities that are being planned are passenger and cargo terminal buildings, runway system, aprons, taxiways, airfield lighting, air traffic control tower, NAVAIDs, general aviation, cargo complex, maintenance hangars, long-term aircraft parking, catering, and infrastructure, including roads, car parking, power supply system, storm water drainage system, sewage treatment plant, etc. So, it will definitely create a lot of opportunities û both for developers and vendors.
However, when it comes to connectivity, the project has received a lot of criticism from the investors. What do you have to say about it?
The proposed Mumbai Trans Harbour Link (MTHL) would connect South and Central Mumbai to NMIA in a reasonable time span of 40 minutes. CIDCO has offered to become equity partners in MTHL, connecting Mumbai to Navi Mumbai sea link with the Mumbai Metropolitan Region Development Authority (MMRDA). It will be a joint project going to take off very soon and will be completed at the same time when the NMIA gets completed. CIDCO´s core role in the project will be acquisition of land. Apart from this, NAINA city, the biggest greenfield city of the country, will be developed with different themes. The first phase of this project that is going to be built is called Airport City, having three towns. Tenders worth Rs 10,000 crore will be floated for this project in the next eight months.
Can we see the new airport getting connected with metro rail?
Metro line phase I is under construction and it is expected to be completed by 2017. Metro II III, IV and V are in planning stages, which are going to be connected to the airport. CIDCO is fast-tracking the work on the connectivity. Multimodal corridor from Vasai to Alibaugh is also in the pipeline.
Project as big as this requires a considerable amount of funding. How has CIDCO planned to raise the same?
CIDCO is executing the pre-development work of NMIA. We are also involved in getting the land for the project. The company is 26 per cent partner in this project and the balance 74 per cent of the project will be developed by the one of the four developers who have evinced their interest in the project. Players like GMR Delhi, the GVK-led Mumbai International Airport Ltd, the Zurich Airport with Hiranandani Developers, and MIA Infrastructure of France (which developed Vinci airport in France) along with Tata Realty have already participated in the bidding process. The airport will be built through a public-private partnership (PPP) under a design, build, finance, operate and transfer (DBFOT) agreement.