Amendments on the Anvil

Tweaking the AERA Act, 2008, for greater regulatory clarity

The Airports Economic Regulatory Authority of India (AERA), the statutory body constituted under the AERA Act, 2008, determines tariffs to be charged by airport operators for facilitating various aeronautical services at all major airports across the country. A total of 27 airports come under its ambit and the tariffs determined by it allow the operators to get an adequate rate of return on investments made by them at these airports.

For determining tariffs, all costs (capital as well as operating) which are incurred by the operator to provide aeronautical services such as cargo facilities, ground handling services, fuel supply, and air navigation services are taken into consideration. The tariff charged comprises a fee for parking and landing aircraft, common use terminal equipment charges and fuel throughput charges from the airlines. The tariff so calculated remains valid for a period of five years, known as the control period, which is passed on to airlines and is in turn paid by passengers in the form of user development fees (UDF).

Need to amend AERA Act, 2008

Though tariffs are fixed by AERA, which is an independent body, there have been instances of discord between airport operators and the authority. One such case is the ongoing battle between Delhi International Airport Limited (DIAL) and AERA where the former approached the Airport Economic Appellate Tribunal seeking a 775 per cent hike in tariffs to generate the targeted revenue.

AERA had fixed the tariffs for the first control period (2009-14). Later, in 2012, DIAL demanded a 775 per cent increase in tariff; however, AERA allowed a hike of only 346 per cent, which became applicable from May 15, 2012. However, GMR Infrastructure, the leader of the consortium operating Delhi airport, filed a petition with the tribunal seeking the original demand of 775 per cent on the grounds that the increased tariff of 346 per cent was inadequate to generate returns on the additional investments that were made during the control period, including capacity building and upgradation works. Moreover, GMR Infrastructure informed the tribunal that it had been incurring losses. Meanwhile, AERA initiated the process of fixing aeronautical charges for the second control period (2014-19) and decided to again grant a 346 per cent hike in tariff. Post this move, Air India filed a petition alleging that DIAL had realised revenues in excess of its target for 2014-19 and any further increase would undermine passenger interests. In the wake of this, AERA, in December 2015, brought down the tariff by 96.08 per cent leading DIAL to challenge the decision in multiple legal forums. This downward revision in tariff was finally implemented in 2017 on a Supreme Court order. However, the dispute between Air India and DIAL is still pending before the Airport Economic Appellate Tribunal.

To safeguard the interest of passengers and to remove regulatory uncertainties for upcoming airports, the Ministry of Civil Aviation decided to amend the AERA Act, 2008, by adding a clause for determining tariffs for greenfield airports prior to bidding.

AERA (Amendment) Bill, 2017

On December 15, 2017, the central government cleared the AERA (Amendment) Bill, 2017. AERA will continue to decide tariffs for airports that are currently in operation or for those where the projects have already been awarded. New airports at Jewar in Greater Noida and Pune in Maharashtra are likely to be among the first to be bid out under the proposed rule. Once enacted, the bill will have significant benefits for airport operators, passengers and airlines.

Limited scope of AERA

Airports that have an annual capacity to handle 1.5 million passengers come under AERA’s purview. Deciding tariffs for these airports and that too for various individual aeronautical businesses within the airports is a complex and time-consuming process because of which there are delays in tariff fixation. The amended bill, if enacted, will significantly ease the pressure on AERA and limit its scope of work. With the amendment, the definition of major airports will be changed to any aerodrome which has an annual passenger capacity of 3.5 million. This will help AERA perform its duties of fixing tariffs for airports with greater clarity and there will not be any delays in tariff fixation.

Increased investor interest

The proposed amendment will help eliminate regulatory uncertainty with respect to the potential revenue to be generated from an airport as the tariffs will be fixed prior to the bidding of the airport project. While the ministry is still working on the procedures to fix the charge in the pre-bid stage, it is likely to be fixed based on the work to be taken up at the airport and the estimated investments involved. Further, land cost, service standards and airport design will also be taken into account for deciding tariffs. The airport tariff will be indexed appropriately to factor in changes in inflation, foreign exchange rates and interest rates against future uncertainties. A clear regulatory stance will also significantly reduce litigation as the need to fix charges every five years will be eliminated.

Eliminate fluctuations in charges

As the tariff will be fixed beforehand, a sudden increase or decrease in charges will not occur. This will not only help the operator but will also ease the burden on passengers as they have to pay high UDFs. For instance, after increasing the tariff at Delhi airport by 346 per cent, passengers had to pay a UDF anywhere between Rs 232 and Rs 550 for domestic flights and Rs 518-Rs 1,270 for international flights. However, after reducing tariffs by 96.08 per cent, the UDF was slashed to just Rs 10 for domestic and Rs 45 for international passengers. Such sudden fluctuations undermine the trust of passengers and also become a point of contention for airlines. Moreover, developers of new airports will have certainty on the aircraft landing and parking fees that they can levy, as the government has decided to fix the rates before inviting bids.

Conclusion

Though the amendment to the act looks promising, the bidding document has to specifically spell out the outcomes for any cost or time overruns. Besides, significant emphasis has to be laid on clearly mentioning the scope of work for the developer to avoid any discrepancies in the future. Bidding for airports on tariffs would bring relief to both passengers and airlines as there will be respite from sudden increases in charges at private airports. However, the government needs to devise a mechanism through which the tariffs are reduced. Benchmarks for service levels have to be set for airport operators to follow. And, finally, proper forecasting methodologies need to be used while fixing tariffs.

Manpreet Kaur

 

 

 

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