Taking Flight: Tracing the sector's policy and regulatory evolution

Tracing the sector's policy and regulatory evolution

Over the past two decades, the civil aviation sector has been transformed into a well-regulated one. After numerous legal battles between airport operators and the authorities over tariffs, the regulatory environment has now become more conducive. Notable changes in policies and the evolution of new business models have augured well for the sector. Beginning with the introduction of public-private partnerships (PPPs) in brownfield and greenfield airports, the government has now moved towards the privatisation of six airports in the country. Further, capacity augmentation has emerged as a key focus area with the introduction of schemes such as NABH [NextGen Airports for Bharat] Nirman and unveiling of the Vision 2040 document by the Ministry of Civil Aviation.

However, changes in tariff structures from the revenue share model to predetermined tariffs are being mooted which will disrupt the regulatory equilibrium. Challenges such as lack of standardised documents (concession agreements) and lopsided requests for proposal (RfPs) heavily weighted in favour of the Airport Authority of India (AAI) still remain unresolved.

At the India Infrastructure Forum 2019, a panel discussion was held to discuss the experience so far, issues related to airport policies and programmes and the steps that are needed to improve the existing scenario. Excerpts…

Noteworthy evolution

The experience with PPPs in the airport sector has been far better than in a number of other infrastructure sectors. The only gap is the way in which the regulatory aspects of tariff fixation work. The role of the Airports Economic Regulatory Authority of India (AERA) has been confined to looking at service standards and measuring key performance indices. Regulation of economic parameters such as treatment of aeronautical and non-aeronautical revenues has essentially been overlooked. This has led to conflicts between operators and the regulator due to a mismatch between operator agreements and tariff regulations. Tariff fixation has always been fraught with delays and disputes, with airport operators and airlines slugging it out in legal battles to ensure fair tariff fixation.

On a positive note, there have been radical changes in the regulatory and policy environment and AAI has done a commendable job in bridging the gaps. Measures such as tariff fixation by AERA, privatisation of airports and the introduction of the National Civil Aviation Policy [NCAP], 2016, are welcome changes. Further, steps such as the launch of NABH Nirman to expand existing airport capacity by more than five times (so as to handle a billion passengers annually) are noteworthy.

In addition, Vision 2040 that envisages an increase in the number of operational airports to around 200 by 2040 is a key step to overcome capacity constraints. As part of the vision, capital investment of $40 billion-$50 billion, excluding the cost of acquiring land, has been planned.

Scepticism looms

The stakeholders are, however, far from satisfied with the overall progress and changes in the sector. The proposed amendment to the AERA Act and the new transaction structure for greenfield airports have not gone down well with the industry. There is a common belief that promulgation of such a system would disrupt the stable economic environment. This would result in a loss of investor confidence. Further, projections about revenue streams and determination of tariffs for a period as long as 50 years before bidding out an airport project is infeasible.

Another concern is with regard to the need to build second and third airports in about 32 cities when the existing airports have not been fully utilised. Full sweating out of existing assets/airports needs government attention. For instance, before the privatisation of Delhi airport, it operated at a capacity of 17 million passengers per annum (mppa) while post

privatisation the airport operated at about 72 mppa which is a remarkable operational improvement. The privatisation of six airports – Jaipur, Thiruvananthapuram, Guwahati, Mangaluru, Ahmedabad and Lucknow – for which the Adani Group is the shortlisted bidder, is a much-needed measure as it will help exploit their full potential. As per plans, a capital expenditure of $2 billion will be incurred to build a handling capacity of about 200 mppa. Currently, these airports are working at a capacity of about 30 mppa. With privatisation, the need to have another airport is likely to be eliminated thus saving massive investments.

Another issue is with respect to lopsided bidding documents and concession agreements and vulnerability with respect to termination of contracts in case of a breach on the part of the operators. The solution will be to have standardised concession agreements to attract investors.

Need for an institutional reboot

The panellists reiterated the need to form an independent airports commission to accomplish the gigantic task of catering to 1 billion passengers by 2040 as envisaged in the Vision 2040 document. It has been noted that while the roadmap has been prepared, meticulous planning is the need of the hour. Without proper planning, systemic risks will linger, hampering overall progress. At present, while airport infrastructure development has picked up pace and second airports in cities such as Navi Mumbai and Mopa in Goa are being developed, fundamental issues of last-mile connectivity and multimodal integration persist. Further, land acquisition will continue to pose difficulties in executing upcoming greenfield airports due to higher prices per square foot of land.

According to industry experts, what the sector needs is an institutional reboot. Creation of an independent authority with distinct verticals to be handled by industry experts is required. A master plan with a clear vision for regional integration could be the next logical step. Further, adequate power needs to be vested with the authority so that informed decisions can be taken and coordination with central and state governments ensured. This will help overcome the challenges of getting clearances and right of way and acquiring land.

The creation of an independent dispute resolution wing will also play an important role in expediting dispute resolution and will support the law tribunal by taking part of the burden off its shoulders.

Airline embargo

The current scenario in the airline industry is marked by an increasing debt burden, financial uncertainty and inability to generate working capital. This calls for a change in policy of issuance of air operator permits (AOPs). Strict measures for determining the eligibility of a potential airline operator have to be taken. The criteria of Rs 300 million paid-up capital for setting up an airline needs to be done away with. Instead, a sound business model which assures payment of salaries and dues to all stakeholders involved in case of a collapse is required. In financial terms, 20 per cent liquidity has to be mandated for an airline to operate. Further, the AOP should be renewed only after diligent monitoring of the airline’s financial health.

In this highly dynamic and complex sector, and where infrastructure needs to continually evolve to meet demand, the proposed measures would help streamline the system.

Future holds potential

In the next few years, a greater number of AAI airports will get saturated, necessitating expansion and infrastructure development. However, AAI does not have the adequate capacity to bring in structural changes. That said, any proposal for bringing about a change in tariff structures that is half-baked will have a negative impact on the system. To this end, an independent authority is necessary. Privatisation is also critical for enhancing the capacity and quality of services being provided at the airports. The Delhi and Mumbai airports are incredible success stories in this regard and should be replicated across other greenfield airports.

Clarity as to what needs to be done and how it has to be implemented on the ground is the need of the hour.