Regulatory Role

AERA’s responsibilities in sector oversight

With the privatisation of airports during the early 2000s, the need for fixing airport tariffs was realised. In this context, the establishment of a sector regulator, that is both independent and neutral in its approach, was imperative. For the airports sector, regulatory oversight is undertaken by a number of organisations – the Directorate General of Civil Aviation for safety and the Bureau of Civil Aviation Security for security, while the Airports Economic Regulatory Authority of India (AERA) is the sector regulator.

AERA’s responsibilities

The role of AERA in Indian aviation is highly focused. It is primarily engaged in the regulation of airport charges, though fixing airfares does not fall under its scope. Further, AERA maintains that even though airport charges are fixed by it, they are not sacrosanct. Changes can be made to these charges, depending upon the extent of work involved. Meanwhile, some airport charges such as those for cargo, ground handling, etc., have a light-touch approach wherein AERA has very little involvement. Essentially, in a nutshell, it is the tedious task of fixing norms that falls under AERA’s ambit. For each of these norms, a lot of groundwork is undertaken. For instance, when the first norm of using the entire non-aeronautical revenue to subsidise airport charges (single-till model) was put in place, a lot of work went into making the choice between single till versus double till versus hybrid till. Now, the government, under the National Civil Aviation Policy,  2016, has stated that the hybrid till model will be used for the determination of airport tariffs. There has been a lot of debate on this norm and after much discussion and work, AERA has declared that 30 per cent of an airport operator’s non-aeronautical revenue will be used to subisidise airport costs.

Another aspect that falls under AERA’s domain is service quality levels. Normally, Airports Council International undertakes airport service quality benchmarking programmes for select airports. However, as AERA wants a more regular monitoring of service levels, it is planning to put in place a mechanism to receive feedback on service levels at all airports under its jurisdiction.

Meanwhile, two issues on which AERA did not want to establish norms are the debt equity structure and the capital cost of developing airport projects. The regulator has decided to stay away from fixing the debt-equity structure norm as the Airports Authority of India (AAI) does not usually follow it for its projects, while private developers do and remain highly leveraged. Hence, instead of fixing the structure, AERA chose to push AAI to adopt cheaper means of financing. Besides, the other controversial norm is for capital costs. About six months ago, AERA decided to regulate this cost as it was found to be varying hugely between Rs 50,000 and Rs 130,000 per square metre. Thus, to avoid costs being padded up, AERA has put a tentative ceiling on capital costs incurred by aerodrome operators and set it at Rs 65,000 per square metre after taking the cost incurred by an efficient airport operator – Cochin International Airport Limited. In case the cost exceeds the set ceiling, AERA involves a consultant who has the relevant expertise to suggest reasonable cost saving measures.

Conclusion

While regulation by AERA has had its share of controversy, the authority primarily works with the government and intends to remain in sync with the latter’s policy and priorities. In view of the congestion in existing and recently built airports, it recognises the need for modular, quick expansion. The authority currently regulates 24 airports; however, it might consider bringing this number down in the future to streamline its work. Going forward, it plans to support greater innovation and better methods of doing business in the sector. w

Based on a presentation by Machendranathan, Chairperson, AERA, at a recent Indian Infrastructure conference

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