Should part of the blame in the aviation sector's restrained growth and financial troubles go to the infrastructure around it? The long drawn-out development of smaller airports may offer real estate potential for private players, who may be eyeing that part of the non-aero revenues.The sustainability of this model is suspect unless states take the initiative in partnering in an overall growth.Manish Agarwal examines and explains.
Civil aviation market in India has witnessed an unprecedented rise in the past few years.Passenger traffic grew from 59 million passengers in 2004-05 to 123 million in 2009-10, an impressive growth (CAGR) of almost 16 percent.The growth in international passenger traffic has been over 14 percent per annum while domestic traffic grew at an even more impressive rate of 22 percent per annum during the period 1999 to 2008.Even assuming a conservative growth rate of 8 percent every year for the next 10 years, the passenger traffic is expected to reach over 260 million by 2020.This rapid growth of civil aviation in India and other Asian countries is permanently changing the face of global civil aviation industry (see Stats, p 75).
As per the Report of Working Group on Civil Aviation for formulation of the Twelfth Five Year Plan (2012-17), India has witnessed a significant growth in the number of non-scheduled airline operators with total number of operators having crossed 200 in 2011 from 36 operators in 2000.As per Directorate General of Civil Aviation, Government of India (DGCA), the General Aviation (GA) fleet in India comprises around 800 small aircrafts and 300 helicopters. Around 20 percent of this fleet size is expected to be more than 25 years old and may not be operational.The fleet of business jets has expanded from around 55 in 2007 to around 120 in 2010.Industry estimates indicate that revenues of the General Aviation industry in India are expected to grow to more than Rs 1,100 crore by end of 11th Plan growing at an impressive annual rate of 15 percent.
While India's air traffic and passenger numbers have grown rapidly, corresponding development in airport infrastructure has remained inadequate.Globally, the US has the highest airport density with one airport for every 60,000 persons (see table “Airports in major counÂtries” in Stats, p 75). Even in absolute terms, presence of more than 5,000 airports in that country is unparalleled worldwide. India, on the other hand, has only one airport for every 4.6 million people, behind many developing countries.
THE 35 SLIPS THROUGH THE CRACKS
The following airports were planned to be developed in three phases:
Under Phase I (2006-08), 10 airports were to be developed: Ahmedabad, Amritsar, Guwahati, Jaipur, Udaipur, Trivandrum, Lucknow, Goa, Madurai and Mangalore.
Phase II, 15 airports: Agatti, Aurangabad, Khajuraho, Rajkot, Vadodara, BhoÂpÂal, Indore, Nagpur, Vishakapatnam, Trichy, Bhubaneswar, Coimbatore, Patna, Port Blair,Varanasi.
Phase-III, remaining 10 airports: Agra, Chandigarh, Dimapur, Jammu, Pune, Agartala, Dehradun, Imphal, Ranchi and Raipur.
Indian government has been alive to the need for development of airport infrastructure in the country.Two busiest airports in the country, Delhi and Mumbai, have been successfully modernised under the PPP mode.The new Mumbai airport is also expected to be bid out for development by the private sector. In addition, Hyderabad, Bangalore and Cochin airports offer good examples of the success of the PPP model.However, most of these success stories have been confined to major metro cities and have failed to address the needs of our vast hinterland.
The Non-Metro Markets
Considering the vast potential of the non-metropolitan aviation market and the scope for utilising PPP model for upgrade of non-metro airports, Airport Authority of India (AAI), in 2006, proposed to modernise 35 non-metro airports, partly under PPP mode of implementation.AAI proposed to have world-class standards at these airports with focus on airside and city side development and enhancement of non-aeronautical revenue.The Global Technical Advisor (GTA) / Indian Financial Consultant (IFC) were appoinÂted for the purpose of evaluating various options, including PPP, for development of the initial 10 non-metro airports under Phase I.
The Techno-Economic Feasibility Reports (TEFR) submitted by the GTA / IFC estimated cost of Rs 1,110 crore for Phase I development with work due to begin in 2006 and to be completed by 2008; and Rs 764 crore in subsequent phases.The cost estimate for Phase I Aeronautical Services works was subsequently revised to an estimated cost of Rs 1,437 crore, which was to be undertaken by AAI from its internal resources.The proposed project development model envisaged the development of aeronautical infrastructure at these airports to be handled by the AAI, while a public-private partnership would be utilised for the development of non-aeronautical / city side activities at these airports.
Current Project Status: AAI initiated work on development of terminal building in 2007-8 timeframe. Out of the total 35 airports, work on development of aeronautical infrastructure (terminal building and allied structures) has been successfully completed at Amritsar, Jaipur, Udaipur, Mangalore, Aurangabad, Nagpur, Vishakapatnam, Trichy, Dehradun, Sirnagar, Dibrugarh, Barapani, Cooch Behar, Ahmedabad, Madurai, Pune and Thiruvananthapuram airports.The terminal building work is in progress at Lucknow, Khajuraho, Bhopal, Indore, Coimbatore, Ranchi, Raipur,Chandigarh, Cudappah, Puducherry, Bhubaneswar, Agatti and Goa airports.
In November 2010, the government approved development of city side infrastructure of 24 of the 35 airports. Together these airports have about 300-400 acres of surplus land from which AAI is looking to generate Rs 150-300 crore annually.
Subsequent to government approval, AAI along with the Planning Commission and the Department of Economic Affairs (DEA) began developing model concession documents (RFQ, RFP and Concession agreement) for undertaking city side or commercial development of non-metro airports through PPP. However, the process of development of city side infrastructure has not progressed.While there is a view that terminal buildings of the airport should be included in the scope of commercial development of the airports, there is also a security concern in transferÂring the maintenance of the terminal buildings to private operators.
Sustainability of Aero+Non-Aero Model for PPP
The PPP structure proposed by the GTA / IFC was done on the basis of the traffic profile of these airports and the lack of private sector capabilities in India in operating aeronautical services.Currently, a majority of the 35 airports witness limited passenger traffic which severely limits the financial feasibility of air side development. While the future growth potential of these airports is bright, current traffic acts as a dampener for private sector participation.
In addition, the airside aspect of airport is directly involved with the arrival and departure of aircraft and includes the runway, airstrips, terminal buildings, hangars, aprons, etc. Refuelling facilities for the aircraft, control towers, aircraft maintenance and repairs are also included in the airside infrastructure. In 2007-08 timeframe, when the development process of these airports began, there were limited numbers of companies in India with experience in operating aeronautical services.Lack of depth of domestic service providers along with limited passenger traffic convinced AAI (and the government) that the development of aeronautical services infrastructure should be kept with the Authority.
The city side constitutes commercial facilities around the airport for the benefit of passengers like development of property on the airports' land, building and maintaining car parking and cargo operations, hotels, cargo complexes, flight kitchens, malls and other entertainment centres.Private entities are more interested and suited for the city side development since they already have some level of experience and presence in similar kind of developments.
A major driving force for the private players participating in the city side development of airports is the real estate development potential. Real estate is a major investment opportunity with scope of earning non-aeronautical revenue from services like duty free shops, land and space rentals (for offices, retail stores and hotels), car parking and cargo complexes, etc.Real estate across India over the last decade has only heightened the interest of private players in city side development.
In addition, real estate sector is much less regulated as compared to aeronautical services, which adds to the lustre of city side development opportunity.In the Indian airports' context, non-aeronautical revenue forms about 30 percent of airports' earnings, whereas internationally non-aeronautical revenue constitutes the majority chunk of earnings of about 50-60 percent. In line with this, airports located in cities with well developed real estate markets such as Ahmedabad, Goa and Amritsar are expected to attract high developer interest.
By allowing private entities to only manage commercial operations, cargo management and city side development, and not coupling aeronautical and non-aeronautical services, AAI has aimed to maximise its own return from development of vacant land parcels and commercial operations.The ministry can also help sustain private sector interest by issuing clear guidelines for private participation and identifying the potential revenue sources right in the beginning, and avoid potential disputes.
Regional Airports Need State Push
In addition to the non-metro airports, there is a need to develop a larger number of regional airports. It is inevitable that the states will need to take a leadership role in driving this development. Karnataka, Maharashtra and West Bengal have taken the initiative and awarded greenfield private airports. Some other states (such as Gujarat) have also set up departments or corporations to promote airport development, while in Kerala the government and private initiative is pushing for development of more airports. As the development plans of Maharashtra Airport Development Corporation (MADC) show, the drivers of such airports are local industry, tourism, religious centres, etc.
While air cargo volumes have been rising fast, the proportion of air cargo in India is still significantly below its potential. The connectivity gaps, even with existing airports, are fairly significant. Regional airports acting as multimodal hubs can give a serious fillip to this segment, as also to industries that can benefit from air-connectivity to their markets.
The model for development of such greenfield airports has largely been such that the entire development and financing risk is left to the private sector, and the business model is hence typically driven by the real estate potential. So success stories are still few and far between.The need of the hour is for state governments to articulate the linkage between economic development and connectivity, and the role that airports can play in the transport mix of the state. The hands-on involvement of the state will then need to be as much as it is in case of PPP roads and ports.
The key initiatives that states will then need to take to enhance connectivity and improve the overall infrastructure would include:
–Linkage with economic activity: In addition to identifying the airport locations based on the current economic activity, the state policies can be directed towÂards furthering the economic activity in that area.
–Surface connectivity: Enhanced connectivity through road, rail, etc will widen the hinterland associated with the airport location, hence furthering it as an economic hub, and increasing the pace of traffic build up.
–Financing: This is a model of infrastructure leading development (rather than lagging development), and hence the financial paybacks of such investments will be much longer. In the absence of availability of long-term financing, financial support (other than or in addition to VGF) will need to be envisaged to address bankability challenges.
–Project development: As seen in many projects, issues of land acquisition, environmental clearances, etc need to be addressed upfront to bring predictability to project development timelines.
These are fairly serious challenges, and unless addÂressed in a focussed manner, many of the proposed regÂional airport projects will remain as plans.
The author is Executive Director and Head Infrastructure Advisory, PwC India.With inputs from Anshuman Chauhan and Malvika Gupta from the same division.
Leave a Reply
You must be logged in to post a comment.