Priyabrat Tripathy charts the legal and regulatory hurdles that were overcome in the long-awaited privatization of Delhi airport
Many modern airports don’t make the majority of their money from flight-related activities. Retail, hospitality and other ground-based services can, if well managed, generate more revenue than aircraft landing and parking fees.
This has not been the case in India where the majority of revenue generated by the country’s antiquated airports has come from flight-related activities.
The emergence of private operators may change this. Furthermore, the hope is that the airport privatizations in Delhi and Mumbai will yield dramatic improvements in services and facilities while streamlining an industry that has been less than efficient in the past.
These groundbreaking privatizations are the testing ground for the liberalization of a sector that has only just begun to undergo significant reform.
In February 2004 the Airports Authority of India (AAI) kick-started the long-pending opening up of the airport sector in India when it invited expressions of interest from private bidders in the privatization of the airports in Delhi and Mumbai.
Opening up
The move was a sequel to the government’s “open-skies” policy initiated in the early 1990s that allowed private airlines to operate in Indian airspace.
The drive towards privatization is fuelled by two key factors.
First, a rapid increase in passenger traffic has created an urgent need to expand existing capacity and invest in new facilities. However, increasingly strained government budgets make it difficult to invest in airports. Competition for tax revenues is growing and investments in airport infrastructure often take a back seat to more urgent infrastructure needs.
Second, declining operational efficiency and the apparent inability of government operators to run airports in a cost-effective manner make a strong case for involving the private sector.
The privatization of airports has already taken off in Europe and Latin America while the US and countries in the Middle East and Africa are moving more slowly. Most countries in Europe have opted for private ownership of airport infrastructure to varied degrees, whereas developing countries have typically opted for concession contracts, long-term leases or management contracts.
A pressing need
More than 40% of passenger traffic in India passes through one of the two main international airports in Delhi and Mumbai. According to a 2003 report by a government committee set up to study airport reforms, the majority of the country’s other airports are either inactive or underutilized.
This has led to congestion, the bunching of flights and frequent delays.
High costs and not-so-friendly government regulations have also left a legacy of outdated infrastructure, inadequate ground handling systems and poor passenger amenities.
The only solution is reform … and more reform.
Following a lengthy debate and many stalls in the political process, the government settled on a policy of privatizing the existing airports operated by the AAI and building new airports with private sector investment.
To privatize existing brown-field airports, the government opted for a long-term concession contract model which has been used extensively in other countries. As a first step, it decided to privatize the airports in Delhi and Mumbai, two airports with infrastructure already under severe strain and in need of urgent facelifts before the 2010 Commonwealth Games in Delhi.
Legal turbulence
The Airport Authority of India Act, 1994, created the AAI to bring about integrated development, expansion and modernization of India’s airports. It also gave the AAI responsibility for managing India’s airspace and providing air traffic services.
A legal hurdle in the privatization process was removed in 2004 with the amendment of the AAI act to allow for the delegation of some of the authority’s powers to private operators.
The privatizations of the Delhi and Mumbai airports were to be carried out using joint venture models of public-private participation.
The plan called for the establishment of two separate special purpose vehicles (SPVs) to modernize the two facilities. The AAI would retain a 26% equity holding in each of the SPVs and the successful bidders would take the remaining 74%. The AAI would give the new joint venture companies the right to operate, manage and develop the airports for an initial period of 30 years on a revenue-sharing basis.
Easy in theory, but the process has been anything but smooth. It turned out to be one of the most turbulent privatizations in India to date.
After a nationwide protest by different parties, two of the pre-qualified consortium bidders – led by L&T and Bharti Enterprises – withdrew, citing stringent financial conditions.
Six other consortia continued. Five of them – Pan Paryatan-TAV, GMR-Fraport, DS Construction-Munich, Macquarie-ADP and Reliance-ASA Mexico – bid to operate both airports. A sixth – GVK-ACSA – bid for Mumbai Airport only.
A group of ministers, led by then defence minister Pranab Mukherjee, made the decision on the winning bid. The group referred the issue to a committee of secretaries who, in turn, appointed a technical sub-committee headed by E Sreedharan, the well-respected head of Delhi Metro Rail.
This was a departure from the process outlined in the original guidelines given to the bidders and was later challenged in court. But the Supreme Court put an end to the controversy when it dismissed the challenge and upheld the selection of the GMR group and the GVK group to run the Delhi and Mumbai airports respectively.
Cleared for take-off
The next step was to establish two joint venture companies to run the airports: Delhi International Airport Limited (DIAL) and Mumbai International Airport Limited (MIAL) came into being.
The operation, development and management rights held by the AAI were transferred to the new companies through operation, management and development agreements (OMDA) dated 26 April 2006. The AAI also entered into a lease deed with the two companies, leasing out existing airport land and buildings.
Other agreements also had to be signed due to the public and economic importance of the airports. A State Support Agreement with the Government of India and a State Government Support Agreement with the respective state governments were also executed to address matters such as economic regulations, approvals under various applicable laws, assistance with licensing and coordination with government agencies, etc.
Fasten your seatbelts
It was not until all the papers were signed that the real challenges began.
On 3 August 2006, after a transition phase of only three months, the operation, maintenance and development of Delhi Airport was completely handed over to DIAL.
DIAL’s first challenge was to start integrating the employees of the AAI with its own workforce. According to the OMDA this process has to be completed within three years of the agreement coming into effect.
Under the terms of the agreement, the AAI has to provide operational support for three years but the new company is obliged to absorb 60% of all AAI employees working at the airport. This put DIAL in the awkward position of having to allay the fears of existing employees about their futures at the end of the three-year period. To clear the air, DIAL offered to absorb 100% of AAI employees working at Delhi Airport within six months of taking full control.
Another challenge facing the new management was getting clear possession of the airport land, an issue that has a direct bearing on the amount of land available for development.
When DIAL took over management, much of the land was in dispute or in the hands of squatters.
Under the terms of the lease, DIAL took over roughly 5,000 acres of airport land, 10 acres of which was occupied by squatters. The formal acquisition of another 75 acres was being challenged. All this required smooth coordination with different government agencies, including the AAI, and a deft handling of various litigations pending in different courts.
The first step was to arrange for the relocation of the squatters and the payment of their relocation costs. This paved the way for resolving the other land-related disputes.
The next step was to get involved in the lawsuits that were pending in various courts. By effectively pooling the resources of DIAL and the government authority, many of the outstanding land issues in Delhi were resolved.
But one of the most pressing problems still remains: Time.
With the Commonwealth Games coming to New Delhi in 2010, the OMDA has laid down a tight time schedule for the completion of certain capital work projects at Delhi Airport.
These include the completion of a new terminal and runway. Under normal circumstances this work would take five to six years to complete. The lack of time is compounded by the fact these developments and renovations have to be completed without disturbing the present operation of the airport.
Defining the roles
Under the terms of the OMDA, while the operation, management and development of Delhi Airport have been handed over to DIAL, certain activities such as customs, immigration, security, air traffic control and other statutory and sovereign functions have been kept separate. Furthermore, much of the legal framework regulating airlines and airports has not been updated to deal with the now-necessary allocation of roles and responsibilities between government authorities and private operators.
In terms of defining who is responsible for particular activities, the existing civil aviation laws leave much scope for interpretation.
In India, there is no precedent for many of these interpretations and the approaches taken in Delhi and Mumbai are likely to have far-reaching effects on guidelines for future joint ventures and the privatization of other airports.
There may even be a need to amend existing laws to facilitate better airport operation and management by private operators.
Huge potential
Aviation is different from other economic sectors. Its operations incorporate many distinct, yet inter-related, commercial functions in different business sectors.
Accordingly, an airport operator’s revenue can come from flight-related activities such as landing, parking and air traffic charges or from ground-based services such as retail and hospitality. Most international airports derive a significant part of their revenue from these ground-based services. In India, however, the majority of revenue has come from flight-related activities.
As a result, Delhi Airport has huge potential to increase its revenue by moving into ground-based services and also by capitalizing on real estate transactions. However, these require innovative revenue models and the careful selection of business partners.
Uncertain flight paths
Considering the relative monopoly that airports enjoy, the government is considering creating a new regulatory authority to control prices at different airports, particularly for flight-related activities. The exact scope of the proposed Aviation Economic Regulatory Authority (AERA) has yet to be determined and this uncertainty represents a significant risk for private airport operators.
Another uncertainty is the possibility that the government will allow new airports to be developed in close proximity to existing ones.
The government recently moved to review the provisions of the National Policy on Airports, 2002, which state that “no green-field airport will normally be allowed within an aerial distance of 150 kilometres of an existing airport”.
The policy review may pave the way for new airports to be built close to the existing ones in Delhi and Mumbai.
New airports would create competition among operators and give airlines and consumers more choice.
However, given the limitations in India’s airport infrastructure, they may also pose a significant threat to the investment and revenue models of existing airport operators.
Clear skies ahead?
The success of future public-private partnerships in the infrastructure sector, and the ability of the sector to attract new investment, depends to a large extent on the long-term success of the newly-privatized airports in Delhi and Mumbai.
One thing seems certain, however.
With India’s fast-growing economy and even faster-growing appetite for air travel, the opening of the airport sector to private investment offers huge potential for future growth.
