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Nabh Nirmaan: Towards 1 billion air trips

Nabh Nirmaan: Towards 1 billion air trips

India is one of the fastest growing aviation markets in the world. The traffic growth, in the last three years, has been in the range of 16-18 per cent per annum. India is expected to be amongst the top three aviation markets in 2020 along with the US and China.

The hidden potential of IndiaÂ’s aviation market comes from its 300 million strong middle class. Even if they fly just once a year, we are looking at 600 million trips. The 187 million trips that India recorded in FY 17-18 is barely scratching the surface.

Arun Jaitley, Finance Minister of India, in his FY 2018-19 Budget speech proposed to “expand the airport capacity more than five times to handle a billion trips a year, under a new initiative- Nabh Nirmaan.” To get there, India will need a significant investment in airports– in funding, construction and operations and participation by leading corporate groups from India and abroad.

New tariff model
The major challenges faced by the Indian airport sector includes lumpiness of investments, tariff uncertainty, low interest by foreign and domestic investors, lengthy legal disputes, long bidding process, challenges in fundraising, revenue leakage risk in PPP airports and sub-optimal exploitation of real estate. To address some of these, the Ministry of Civil Aviation (MoCA) and the Government of India on August 14, 2018 proposed a new tariff model for greenfield airports.

The huge fluctuation in aeronautical yield under the current cost-plus model makes investors, lenders and airlines jittery. So does the intrusive monitoring of capex, non-aeronautical revenue, operating cost and cost of capital, etc. by the regulator delays in tariff fixation and frequent legal disputes. The key drivers of the new tariff model are affordability, sustainability and predictability.

The government has, therefore, proposed a shift to a pre-determined Maximum Blended Aeronautical Yield (MBAY) in terms of Rs per passenger. The MBAY for greenfield airports is proposed as Rs 400 per passenger. The number has been arrived at on the basis of cash flow projections for greenfield airports of different capacities and the review of aeronautical yields at Indian airports in the recent past. The total annual allowable aeronautical revenue for the concessionaire shall be the MBAY multiplied by the total number of passengers at that airport.

The bid parameter shall be concession fee in terms of Rs per passenger. This has a near zero risk of revenue leakage as compared to the prevailing revenue share model. The latter involved an intrusive accounting process and invariably led to legal disputes.

Interestingly, if bidders feel that the proposed MBAY is not adequate to cover their expenses and business risks, the government proposes to allow them to quote a negative concession fee. This amount will be added back to the proposed MBAY to arrive at the MBAY applicable at that airport.

Once every five years, the concessionaire shall submit its proposed tariff card based on the MBAY and projected traffic for the five-year period to the regulator. The regulator may approve the same after due scrutiny and public consultation. Any excess or shortfall in aeronautical yield will be carried forward to the next five-year tariff block. The MBAY and concession fee are proposed to be indexed to 50 per cent of inflation. The concessionaire is expected to more than recover the balance cost of inflation by way of efficiency gains, traffic growth and higher price recovery in commercial revenue. Inflation will be calculated as the weighted average of the variation in WPI and CPI-IW in 70:30 ratio.

MBAY shall cap aeronautical revenues accruing to the concessionaire from services that are core aviation activities and where the concessionaire exercises significant market power. These include primarily landing, housing and parking charges, revenue of the concessionaire from aeronautical services providers, normative interest on security deposit from aeronautical stakeholders (RBI bank rate plus 3 per cent per annum), etc.

The concession period shall be 40 years. There will be moratorium on the concession fee for three years from the Commercial Operation Date (COD). The concessionaire shall not be allowed to have a common shareholding, direct or indirect, of more than 20 per cent with third party service providers at the airport.

Quality of service
Under the pre-determined yield approach, the monitoring of quality of infrastructure and service shall be of paramount interest. The regulator shall formulate the Key Performance Indicators (KPI) and may modify the same every five years. The measurement of KPIs shall be technology-driven and publicly available, so as to minimise the risk of human interventions and disputes.

The regulator may create a panel of Service Quality Auditors (SQA). The concessioning authority shall appoint an empaneled SQA to monitor and certify compliance with the KPIs. Every greenfield airport shall form an Airport User Consultative Committee (AUCC), headed by the secretary and civil aviation of the state, to monitor the concessionaireÂ’s overall performance.

The AUCC may recommend to the regulator a reward or penalty on the concessionaire, limited to 10 per cent of the prevailing MBAY. The power to approve a penalty or reward in terms of change in MBAY shall vest with the regulator.

Other transaction terms
The real estate development area in the city-side shall be limited to 10 per cent of the total airport area, so as to keep the focus on core airport operations and not real estate. Inside the passenger terminal building, there shall be no limit on the non-aeronautical commercial area, subject to the KPIs on passenger comfort, safety and security.

In years of financial distress, the concessionaire shall have the option of seeking financial support from the concessioning authority. This support shall be in terms of reduced concession fee or higher MBAY, but on a recoverable basis. The support period shall be limited to a sum total of five years during the first 30 years of the concession period. The amount received by the concessionaire as financial support shall be paid back by the concessionaire to the concessioning authority and passengers at the rate of RBI bank rate plus 3 per cent per annum.

It is proposed that that concessioning authority shall have no equity stake in the concessionaire. All equity members of a concessionaire, whose technical and financial capacity has been considered for assessing the consortiumÂ’s eligibility, shall have an equity lock-in period of five years from COD.

Public feedback
The government had fixed September 28, 2018 as the last date for receiving public feedback on the proposed transaction structure. It is in the process of reviewing the suggestions received and may incorporate the useful ones in the draft Model Concession Agreement (MCA). The MCA may be released for public consultation towards the end of October 2018. The AERA (Amendment) Bill 2018 is expected to be approved by the Parliament during its winter session in December 2018.

Overall, it is believed that the pre-determined yield approach will start a new chapter in the aviation growth story. The next batch of greenfield airports under Nabh Nirmaan will be simple, functional and cost-efficient. They will help India achieve its vision of growing air traffic five-fold to over a billion trips by 2035 and challenging the US and China for the top honours. WeÂ’ll get there.

Authored by Amber Dubey, Partner and India Head of Aerospace and Defence, KPMG. Assisted by Jodhbir Singh Sachdeva, Associate Director, Aerospace and Defence, KPMG .

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