Airport Privatization in India

Airport Privatization in India

The Airports Authority of India (AAI) was formed on 1st April 1995 by merging the International Airports Authority of India and the National Airports Authority with a view to accelerate the integrated development, expansion, and modernization of the operational, terminal and cargo facilities at the airports in the country conforming to international standards. AAI is a major airport operator managing 125 airports across the country and also entrusted with the sovereign function of providing air traffic services in India.

Four of the six metro airports in the country — New Delhi, Mumbai, Hyderabad, and Bangalore are currently run by private operators. The previous United Progressive Alliance (UPA) government wanted more airports to be privatized, despite resistance from airlines who said passengers and airlines will have to pay more to use these airports with upgraded facilities.

Reasons cited for privatization

1. The AAI has invested substantial resources in modernizing the airports. However, there have been complaints related to the quality of work and management of operations at modernized airports.
2. Maintenance of Chennai airport has been far from satisfactory. A few days ago, some passengers were stung by bees that have built a hive on the premises. Although AAI has spent a huge money to modernize the airports, it has been argued that AAI cannot upkeep them because of lack of professional staff and being a government body. 
3. The government was keen on rope in the public-private partnership mode to professionally manage these airports. It has been argued that operation of large AAI airports through the public private partnership (PPP) model is a good idea. The airports at Delhi, Mumbai, Hyderabad and Bangalore are consistently ranked among the top by global agencies due to the PPP Model.

Arguments in Favor

1. Administration of AAI managed airports has been mired with poor maintenance, deficiency in service delivery, lack of sincerity on the part of staff, dominance of trade unionists, abuse of facilities by politicians in power etc. In such circumstances, privatization should be welcomed. 
2. Privatization needs to be seen in the context of boosting infrastructure. One of the reasons India’s economic growth has slowed is because the country hasn’t addressed its infrastructure gap. 
3. The AAI being a public body has not been efficient and professional in managing the airports so privatization needs to be accelerated, along with other hard and soft infrastructure. However, there is a need to identify the correct partners, have the appropriate business model and institute proper oversight. Since the government wishes to attract foreign capital via this move, it should speed up the pace of capital investment and infrastructure development. 
4. PPP has also helped maximize non-aeronautical revenues at airports, which ultimately bring down aeronautical tariffs for the passengers. In the short-run, the user charges in PPP airports are high, but that is more due to regulatory complications than due to the concept of PPP. AAI has been the biggest gainer – it has and will receive significantly large funds from PPP airports as revenue share. These funds can be utilized by AAI to provide air connectivity to far flung corners of the country where private investment may not be forthcoming due to long gestation periods.
5. For air passengers private administration of the airports could mean better facilities, though at a higherprices. 

Arguments against

1. It seems that the government has taken the decision in a hurry. It should be noted that two of the major airports viz. Chennai and Kolkata, which are first to get privately managed, have been recently been refurbished with huge costs. What was the motive to spend such a huge amount, if there was a privatization of these airports in the pipeline? 
2. India’s experience of handing terminals over to private control has not been very good. Companies involved in airport privatization have been allowed to develop land in and around the airport. While doing so, the private companies earn huge profits. 
3. For example, in 2012, the Comptroller and Auditor General (CAG) had slammed the government for giving out the Delhi Airport and its land with a potential earning capacity of Rs.1,63,557 crore to Delhi International Airport Ltd (DIAL) that’s controlled by GMR group, which made a total equity contribution of only Rs.2,450 crore. Despite the fact that GMR Group and GVK group invested at least Rs.12,000 crore each in the New Delhi and Mumbai airports, respectively; CAG pegged the DIAL’s share of this land revenue at Rs.88,337 crore. 
4. CAG criticized the levy of the user development fee on passengers using the Delhi airport and the formation of about a dozen joint venture subsidiaries under the operator. The private administrators of these six airports will charge the same as other AAI airports, but they are able to make money by monetizing land and various other revenue streams, including several Joint Ventures with other parties. Summarily, monetizing airport land has been centre of the privatization agenda. 
5. A better option could have been to empower AAI, by giving it mandate to either recruit the best talent—which the private sector player will recruit anyway—or give a management contract to the private player.

Key Lessons for successful Airport Privatization

1. Customers as key stakeholders should be engaged from the outset and involved in an ongoing and regular basis through agreed processes.
2. A strong focus should be placed on achieving a more efficient management of the airport assets through the transfer to private ownership.
3. Good governance is extremely important if the privatization is to be in the public interest.
4. Independent, robust economic regulation is essential in order to create incentives for efficiency improvements. Government interference in airport regulation automatically creates an unacceptable conflict of interest.
5. The economic regulator should also be overseen by an independent Competition authority to which airports and their customers have the right to appeal.
6. Economic regulators have, so far, been more effective at extracting efficiencies from existing assets rather than ensuring cost effectiveness from new investment.
7. Mechanisms to incentivize cost efficiency must be built in to the process from the outset. Regulation must avoid preserving monopoly profits or inefficiencies from the start.
8. Service level agreements (or similar systems) must also be put in place to deliver a good quality as well as a cost effective service.
9. Controls must be put in place to prevent unjustified asset revaluations or regulatory structural changes that burden airlines and their passengers with substantial charge increases.
10. Customer involvement in new investment is essential to ensure it is appropriate, cost effective and delivered on time and on budget. The ‘gold plating’ of investment must be avoided

Airports Authority of India