Indian airports facing severe capacity crunch

<span style="font-weight: bold;">Amber Dubey, Partner and India Head of Aerospace &amp; Defence, </span>KPMG feels that a tough relook is required at the Land Acquisition, Rehabilitation and Resettlement (LARR) Act, 2013, as it has made land acquisition for public infrastructure projects such as airports impossible. He is of the view that both the Airports Authority of India (AAI) and the country would gain immensely, if the state-run entity leases out 15 of its leading airports to private operators. Dubey would also like to see some anomalies that exist in the taxation of the Indian maintenance, repair and overhaul (MRO) industry removed.
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<p> <span style="font-weight: bold;">Its been nearly a year-and-a-half since the NCAP policy was enunciated, is implementation on track?</span><br />
Regional Connectivity Scheme (RCS) has been the biggest success of NCAP 2016. This will lead to the expansion of airport capacity in the interiors. The bidding process for second airports at Mumbai, Goa and Visakhapatnam is completed. The hybrid system of tariff determination in NCAP 2016 has brought back domestic interest in the airports sector, though we have a long way to go in bringing in global investors. Given the overall growth prospects of the sector, funding of airports projects through equity and debt is gradually becoming easier. The impacts of the NCAP 2016 provisions on open skies and the arbitrary 5/20 rule removal will starting showing from mid-2018 onwards. </p>
<p> <span style="font-weight: bold;">What are your views on the issues that still need to be addressed? </span><br />
Although NCAP 2016 has been a great step forward, it is a guiding document. It needs to be implemented with a missionary zeal, if we wish to make the Indian aviation market bigger than that of China and the US. </p>
<p> <span style="font-weight: bold;">How well-founded are the fears of a capacity crunch at our major airport terminals?</span><br />
Very severe! Almost all of our top 30 airports are squeezed by overcapacity, or are on the verge of it. With passenger traffic growing and new aircrafts coming in by the dozens every year, we are fast running out of landing and parking slots at most major airports, especially during peak hours. This also creates risks of safety and security. One major accident can push us back by a decade. </p>
<p> <span style="font-weight: bold;">Will the plans to open 50 disused airports and to approve another 18 greenfield airports help in easing matters?</span><br />
To some extent. The harsh reality is that in all major countries, the 80û20 rule applies. That is, nearly 80 per cent of the traffic will be found in the top 20 per cent of the airports. So, while the revival of airports in the interiors under the UDAN scheme is necessary and politically rewarding, the real focus has to be on capacity augmentation at the top 30 airports. This has to include both expansion of the existing airports and land acquisition for the second and third airports in our major cities.</p>
<p> We do not see much traction there, since land acquisition has unfortunately become a hot potato, with a highly adverse risk-reward ratio for the politicians and bureaucrats involved. While it would make one unpopular with the land owners today, the inauguration of the airport would happen several years later, crediting another who is in power at that time. </p>
<p> We need a national consensus to amend the LARR Act, 2013, that has made land acquisition nearly impossible. Governments abroad acquire land for public infrastructure in a far easier manner under their ’eminent domain’ powers, with advance notice and fair compensation to the land owners.</p>
<p> <span style="font-weight: bold;">Foreign firms were permitted 100 per cent investment in brownfield airports in 2015 itself. However, why hasn’t there been any major movement on that front since?</span><br />
All brownfield airports, except a handful, are owned by the AAI. Given AAI’s reluctance and the government’s liberal attitude towards AAI, investments in brownfield airports have stopped. It is now limited to a handful of public-private partnership (PPP) airports only.</p>
<p> The recent bids for O&amp;M operators for Jaipur and Ahmedabad drew a blank with not a single bidder showing interest, despite the high traffic growth. The unprecedented concept of ceding partial control of the said airports to private sector with AAI retaining responsibility for air-side operations and capital investments was a non-starter. Three precious years have been wasted in this process.</p>
<p> Very few companies in the world own 125 airports. It is time AAI understands this and leases out its top 15 airports. AAI’s revenue would zoom, and so would competition, efficiency and user satisfaction. </p>
<p> <span style="font-weight: bold;">What will it take to enhance PPPs in the civil aviation sector?</span><br />
Pre-determined tariffs, light touch-regulatory approach, professional structuring of the PPP concession agreements, non-interference from various government agencies and a fair grievance handling mechanism are keys to attracting investors in future PPP airport projects. </p>
<p> <span style="font-weight: bold;">Do you agree that no significant investment in airport infrastructure will happen till the 49 per cent cap on ownership of Indian carriers is removed?</span><br />
Yes! Since we lack a strong national carrier like countries in the Gulf, ASEAN or EU, India cannot become a global aviation hub solely on the strength of its domestic carriers. Like most sectors, FDI cap in airlines is anachronistic and should go. Far more sensitive sectors like telecom, banking, energy and defence have been allowed 74 or 100 percent FDI. Even within aviation, all other sub-sectors like airports, cargo, MRO, ground handling and general aviation have been opened to 74 or 100 per cent foreign ownership.</p>
<p> To begin with, 100 per cent FDI for foreign airlines can be done on a reciprocal basis. The reciprocity clause can be dropped in future after analysing the benefits and pitfalls for India. The bilateral agreements shall have to be amended to allow foreign-owned airlines to get the same rights as an Indian carrier.</p>
<p> <span style="font-weight: bold;">It is also being said that the country needs mega airports of the scale that are currently under development in China and Turkey. What is your view?</span><br />
Given the challenges of land acquisition, multimodal connectivity and high population density in urban agglomerations in India, it may be advisable to have a distributed model of one primary airport and three or four secondary airports in major cities than having mega airports of capacity, 100û200 million passengers per annum. Since the airports of the future are likely to be in the PPP mode, and the aviation sector is vulnerable to many natural and man-made risks, it may be difficult to raise funds on such a mammoth scale. From a safety and security perspective also, it is advisable not to put all eggs in one basket. </p>
<p> <span style="font-weight: bold;">It is often said that developments in airport infrastructure have not been able to support the growth of the MRO industry. What can be done to rectify the situation?</span><br />
It’s an irony that while the growth of air traffic and aircraft fleet in India is one of the fastest in the world, the MRO sector is down in the dumps. The biggest reason is the tax anomaly that makes it easier for Indian carriers to take aircraft abroad than to get them repaired locally in India. Nowhere in the world are aircraft repairs taxed as the object being taxed can easily fly to a more tax-efficient location. </p>
<p> It is all the more puzzling since applying a zero rate of GST on MRO will have no adverse impact on the government’s GST revenues. Here’s how. Airlines pay GST in advance since passengers buy tickets in advance. The repair of the aircraft happens much later. If MROs levy no GST, the government will have to give no GST credit to the airlines. The government’s revenues are protected. It’s that simple.</p>
<p> NCAP 2016 clearly stipulated that MRO cannot be charged a royalty by airports as these royalties are over and above the high lease rentals paid by MRO operators. The unfortunate levying of royalty continues, even at the government-owned AAI airports. When asked, airport operators ask for a notification from the Ministry of Civil Aviation (MoCA) or Airports Economic Regulatory Authority (AERA). One hopes that either MoCA or AERA release the said notification soon.</p>
<p> The failure of MRO in India makes a mockery of the excellent government initiatives of ‘Make in India’ and ‘Skill India.’ The government should consider both tax incentives and coercive measures to ensure that not a single aircraft goes out of India for repairs, say after 2020. It’s not rocket science. All that are required are clear vision; removal of tax anomalies; close consultations with airlines, aircraft manufacturers and the MRO industry; and a razor-sharp focus on implementation. We’ll get there!</p>
<p> <span style="font-weight: bold;">- Manish Pant</span></p>