Srinivas Bommidala, Group Director, GMR Group, talks about the long-term impacts of privatisation of airports, withdrawal of service tax exemption and the Â´Make in IndiaÂ´ campaign as well as the growth potential of the industry.
The government has announced privatisation of some airports. How will this help the sector?
Privatisation of airports in India has already delivered wide ranging benefits to travellers, airlines, government bodies and the national economy.
a)Post privatisation in 2006, Delhi Airport alone has contributed over Rs 8000 cr to the kitty of Airport Authority of India which can be used for the development of aviation infrastructure in the country.
b)Indian airports have set global benchmarks not only on infrastructure or facilities aspects, but also on service quality. Our airports are now rated amongst the top airports in the world on airport service quality by Airports Council International, with both Delhi and Hyderabad Airports having been rated as first in their respective traffic categories in recent years, and also sustaining the top rankings.
c)Airlines have benefited immensely as the new infrastructure addition has eased air-side congestion and reduced costs due to hovering. The enhanced infrastructure has allowed for faster aircraft turnaround time reflected in the higher asset utilisation factors of airlines.
d)The above developments have ultimately benefited the passengers who are experiencing the best of the facilities, services and air service through these airports. Private airports have taken the lead in aligning themselves with the Â´Digital IndiaÂ´ initiative by adopting new technologies for easing out archaic airport processes, providing a greater level of convenience and empowerment to the passengers, such as E-boarding process at Hyderabad and Delhi Airports.
e)With respect to benefits to community at large, I would like to highlight that National Council of Applied Economic Research conducted an in-depth study which showed that post development, Delhi AirportÂ´s contribution to the state GDP has jumped to 13 per cent and is set to increase to 22 per cent by 2020. Similarly, Hyderabad Airport study has indicated significant benefit and growth potential.
As a company, we are hopeful that privatisation of the AAI airports will lead to similar benefits. The actual outcome will depend on the privatisation model adopted by GoI which should be fair enough to attract required private capital for the development of airport infrastructure and overall growth.
How is the withdrawal of service tax exemption affecting investments?
Undoubtedly, this exemption will drive costs of airport development by about four-five per cent. With the government planning a number of greenfield airports, the move comes at an unfortunate time. The perception that airports and airlines are the playground of the rich has also hurt the sectorÂ´s ability to hold on to this exemption.
Having said that, I am sure the Finance Minister has taken this step keeping in perspective IndiaÂ´s fiscal situation as well as the governmentÂ´s stand to withdraw exemptions and implement lower tax rates across industries.
The government is developing no-frills airports. What kind of opportunities has it generated for the sector?
The no-frills airport concept is still in its nascent stages. While it is being touted as the panacea to all financial troubles for the sector, it is important to note that airport charges account for as little as three-four per cent of an airlineÂ´s overall cost structure.
The no-frills airport concept in general would imply doing away with expensive architectural design for simple boxy warehouse-like design, going for low ceilings, smaller area per passenger, doing away with the glass and steel finish to reduce air conditioning costs, opting for stairways instead of escalators, providing bus gates instead of aerobridges and so on. Essentially, itÂ´s a model which strips away the cost of amenities that passengers want so as to reduce the costs for airlines. The idea has not found many takers. In any case, airport charges are an insignificant portion of an airlineÂ´s cost and do not deterÂ¡mine an airlineÂ´s pricing strategy. Hence, I donÂ´t believe the concept will fundamentally alter the opportunities. Another important dimension on this subject is to recognise that no-frills airports is a model optimal only for smaller regional cities. The larger metro or hub airports that represent gateways to the nation have to provide world-class facilities in line with their global peers. Therefore, the concept of no-frills is more contextual rather than a uniform trend.
To what degree has the Â´Make in IndiaÂ´ campaign helped the sector?
The Â´Make in IndiaÂ´ campaign is one of the most progressive and thoughtful policy initiatives launched by the Government of India. It will boost foreign investment in India, help improve exports and also lead to job creation. The governmentÂ´s boos0t to manufacturing, especially in electronic products, pharmaceuticals, aerospace and defence, is in turn, expected to provide a tremendous boost to air cargo. Secondly, the growth of manufacturing will provide the required impetus to the growth of air cargo in India and also facilitate Indian airports to act as hub cargo airports. Till date, international carriers aggregate our exports at other airports like Dubai, Singapore, and Hong Kong. With the boost in our cargo volumes, Indian cargo airports can transition from feeder to hub airports.
What are the reasons due to which projects get delayed or stalled? Is there a huge chunk of delayed projects?
Land availability, environment clearances and security approvals tend to be the most prominent reasons for delay in completion of airport projects. GMR Group takes pride in the fact that we have delivered both Delhi and Hyderabad Airports within record timelines. The Navi Mumbai Airport is an example of projects delayed due to delay in land acquisition.
What steps do you expect to make the PPP model viable ?
The Government of India has setup the PPP committee under Mr Kelkar, aimed at overhauling the PPP model. I appreciate the governmentÂ´s intention and GMR Group has already shared its views with the committee. As far as airports are concerned, we want the concession document to clearly identify the regulatory till that will be applicable to the project along with clarity on aeronautical versus non aeroÂ¡nautical revenues.
As the airport economic regulator was setup after all four private airport concessions were awarded, the sectorÂ´s biggest concern has been the regulatorÂ´s stance on the economic regulation policy and classification of revenues as aero versus non aero. Having upfront clarity will ensure that the concessioning authority is able to derive maximum value from the privatisation process and ensure that the public and private bodies are not engaged in arbitration for prolonged periods.
What changes in terms of reforms or policies do you expect for bringing the sector on the growth path?
For the aviation sector as a whole, I would like the government to focus on:
a)Clarity on regulation as mentioned above
b)Viability of airports including fair returns that need to be ensured for future growth of the sector
c)Reduction of VAT on ATF to improve the financials of airlines
d)Allowing opportunities to fly abroad by relaxing the 5/25 rule and also promoting open skies with certain nationalities
e)Implementation of a hub policy wrt to metro airports
f)Rationalisation of the applicable tax regime for the sector
g)Facilitating development of airport driven economic centres or airport cities
What is the infrastructure required to realise the growth of the sector?
The Indian aviation sector is poised to emerge as the third largest global market by 2030. To achieve this growth, the sector needs a clear aviation policy which not only addresses the concerns regarding financial viability, but charts out the growth path. The government is well aware of this and consultations for drafting the aviation policy are underway. The top concerns that the policy should address are:
a)Financial viability of airlines
Indian carriers are in financial distress and with addition of new airlines, the market is likely to get more competitive. Since aviation fuel accounts for nearly one-third of airline costs, rationalisation of the taxes imposed on ATF which can range from 15-40 per cent will greatly alleviate the financial situation of airlines.
b)Addressing dampening investor interest
A key factor responsible for low air travel penetration is lack of airport infrastructure, both in state capital cities, prominent trade and tourist centres as well as remote areas such as the North East. Airports are capital-intensive developments which require availability of cheap long-term capital, given the long gestation period of the investment.
While the government has been seeking private investment for airport development, the stance adopted by the regulator has discouraged the foreign investors and they are looking to exit their investments in India, while Indian investors are wading through losses and the erosion of their net worth.
This situation can be improved through adoption of the following steps:
- There must be predictable regulatory regime for an airportÂ´s tariff either by way of dual till or hybrid till. A well-articulated policy which ensures the economic viability of the PPP Airports present and for future developments will incentivise investors.
- Adherence to assurances provided in the concession or project agreement has become a concern area. It is, therefore, very crucial that the government addresses this issue quickly.
c)Developing airports network in a planned manner to drive regional connectivity or feeder network; and at the same time emergence of international hubs in our country.
d)Excellent multi-modal connectivity to airports.
e)Focus on land-side developments to capitalise on growth potential that can be achieved through airport driven economic centres.
What are the projects in the pipeline?
GMR Group is actively exploring airport opportunities in India and overseas in line with our asset lite asset right strategy. India and Philippines are our primary markets. While the process of privatisation is ongoing in Philippines, we have submitted our pre-qualification for Goa and Navi Mumbai Airports and are awaiting the results for the same.