PPP in Indian airports


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privatization of indian airportsand its economical effects.

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PPP in Indian airports

  2. 2. ACKNOWLEDGEMENTIt’s a great pleasure and privilege to be associated with prestigious universityNALSAR. I am very thankful for IAAM for taking the initiative along withNALSAR to establish Aviation law and air transport management program, firstof its kind in India. I am gratified to Dr. P. C. K. Ravindran and Dr. V. BalakistaReddy for introducing such a brilliant course.My sincere gratitude to Prof. S. N. A. Shafi for his help, guidance andrecommendations in preparing this dissertation.I am grateful to Mr. Chinnarajan my colleague who encouraged me all the wayform the beginning of this program. 2 EMERGING CHALLENGES IN PUBLIC PRIVATE PARTNERSHIP IN AIRPORTS
  3. 3. CERTIFICATEThis is to certify that Mr. SIREESH P. Roll No __________ has submitted hisdissertation on “Emerging Challenges in Public Private Partnership”, as partialfulfilment for the award of PGDALATM degree in Aviation Law and AirTransport Management to NALSAR University of Law under my supervision. Itis also affirmed that, the dissertation submitted by him is original, bona-fide andgenuine.Dr. V. Balakista ReddySupervisorNalsar University of Law, Hyderabad 3 EMERGING CHALLENGES IN PUBLIC PRIVATE PARTNERSHIP IN AIRPORTS
  4. 4. DeclarationThis dissertation, “Emerging Challenges in Public Private Partnership”, hasbeen prepared and submitted by the undersigned to NALSAR University ofLaw, Hyderabad. As a part of requirement for an award of PGDALATM degreein Aviation Law and Air Transport Management, under the guidance ofDr.V.Balakista Reddy. It is to declare that, this dissertation is original, bona-fideand legitimate work of the undersigned, and has been pursued purely for anacademic interest. This dissertation shall not be used for any political purposeor connotations or as a testimony against any person or communities orregime. The views and ideas expressed in this dissertation are exclusively ofthe researcher and do not represent any person, organisation or community inparticular.Signed on: _____________________________________________.SIREESH P.Roll No:Aviation Law and Air Transport ManagementNALSAR-IAAM. 4 EMERGING CHALLENGES IN PUBLIC PRIVATE PARTNERSHIP IN AIRPORTS
  7. 7. CONTENT1.0 ROLE OF AIRPORT INFRASTRUCTURE IN NATIONAL DEVELOPMENT 1.1 Economy 1.2 Social Payback by Airports 1.3 Influence of Aviation on Tourism 1.4 Environment Benefits of Airports and Aviation2. AIRPORT ENVIRONMENT IN INDIA. 2.1 Present airport infrastructure in India. 2.2 Major Airports of India 2.3 Present Classification of Airports in India 2.4 Proposed classification of Airports in India 2.5 Greenfield and Brownfield Airports3 PUBLIC PRIVATE PARTNER SHIP 3.1 Introduction to PPP 3.2 Key drivers and enablers of PPP. 3.2.1 Conventional procurement issues. 3.2.2 Naresh Chandra committee 3.2.4 To meet the growing needs of airport infrastructure in India 3.2.5 Passenger Growth 3.2.6 Cargo Growth 3.2.7 To Meet Financial Requirements to Support Such Growth and to Infuse Private Fund in the Airport Infrastructure Sector 3.2.8 To Increase the Standards of India Airports-To International Standards 3.2.9 Drivers and enablers 3.3 Present Indian scenario 7 EMERGING CHALLENGES IN PUBLIC PRIVATE PARTNERSHIP IN AIRPORTS
  8. 8. 4. PROCEDURAL GUIDELINES FOR SETTING UP OF PPP AIRPORT. 4.1 Policy Framework 4.2. Promoters 4.3 Study stages a. Pre-feasibility Study Stage b. Detailed Feasibility Study Stage c. TECS d. approval decision 4.4 Site Selection 4.5 Detailed Design Stage and Approval 4.6 Project Implementation Stage 4.7 Setting up a Special Purpose Vehicle (SPV) 4.8 Public Private Partnership (PPP) Model 4.9 Bidding Process and Selection criteria 4.10 Viability Enhancement5.0 CONCESSION AGREEMENT FOR PPP 5.1 Need for a framework 5.2 Elements of financial viability 5.3 Technical parameters 5.4 Performance standards 5.5 Concession period 5.6 Selection of Concessionaire 5.7 Concession fee 5.8 Risk allocation 5.9 Financial close 5.10 User Fee 5.11 Construction 5.12 Operation and maintenance 5.13Reserved Services 5.14 Right of substitution 5.15 Force majeure 8 EMERGING CHALLENGES IN PUBLIC PRIVATE PARTNERSHIP IN AIRPORTS
  9. 9. 5.16 Termination 5.17 Monitoring and supervision 5.18 Support and guarantees by the Government 5.19 Real estate development 5.20 Miscellaneous6.0 RESERVED ACTIVITIES7.0 EMERGING CHALLENGES AND RISKS IN PPP 7.1 General Issues 7.2 Financial Challenges a) Financial Risk b) Project Finance and Revenue Streams c) Revenue Streams 7.3 Legal Challenges 7.4 Public Risk 7.5 Asset Risk 7.6 Operating Risk 7.7 Sponsor Risk 7.8 Default Risk8.0 EMERGING REGULATORY ISSUES 8.1 Amendment of AAI Act and Aircraft Rules Act 8.2 Regulatory authority for AERA9.0 THE CHANGED ROLE OF GOVERNMENT UNDER PPP AND NEW SET OF AGREEMENTS AND NEW LEGAL FRAME WORK10 .0 PPP airports and RTI Act 10.1 PPP airports public authority or not 10.2 BAIL case 9 EMERGING CHALLENGES IN PUBLIC PRIVATE PARTNERSHIP IN AIRPORTS
  11. 11. PREFACEOver the years, the basic infrastructure in India has been developed to anextent, which is not sufficient enough while considering India’s geographicalsize, its population and the pace of overall economic development.Infrastructure bottleneck has been a serious concern in India and basicinfrastructure like roads, railways, ports, airports, communication and powersupply are not comparable to the standards prevalent in its competitorcountries.To develop the Indian infrastructure to a world class and to remove theinfrastructure inadequacy in the country, the investment requirements aremammoth, which could not be met by the public sector alone due to fiscalconstraints and mounting liabilities of the Government. This would call forparticipation of private sector in coordination with the public sector to developthe public infrastructure facilities. In this direction, the economic reformsinitiated in the country provide forth the policy environment towards publicprivate partnership (PPP) in the infrastructure development. Sector-specificpolicies have also been initiated from time to time to enhance the PPP ininfrastructure building. While the PPP is spreading to develop basicinfrastructure world wide, in India, the participation of private sector in theinfrastructure building has not been much encouraging, despite several roundsof policy reforms.Against this setting, the rest of the paper is organized as follows. Section I andII assesses the Indian market and the need for PPP in the airport infrastructuredevelopment. Section III attempts to review the structure of PPP throughliterature survey. Section IV and V evaluates the status of private sectorparticipation in infrastructure development guidelines and concessionagreement. Section VI captures the Indian experiences in this regard. SectionVII reviews the investment requirements to bridge the infrastructure gap in thecountry. Section VIII focuses on the challenges of infrastructure projects withthe status of PPP and overall private sector participation along with sector-specific concerns. Generic issues while implementing the airport infrastructureprojects in the country with private participation and options thereon areanalyzed in Section IX, X and XI. Finally, concluding observations are drawn inSection XII. 11 EMERGING CHALLENGES IN PUBLIC PRIVATE PARTNERSHIP IN AIRPORTS
  12. 12. 1.0 ROLE OF AIRPORT INFRASTRUCTURE IN NATIONAL DEVELOPMENTAirports are the gateway for the country; they open doors for trade, tourism.Economy of a country depends on the trade and tourism, simultaneously thetrade and tourism depends on the airports. A country without national carrierscan still trade with other countries as well catch the fancy of tourists, but thecountry without an airport will be handicapped to advance economically. So itbecomes very important for every country to have an airport.The rapid growth of the trade and tourism between the nations has chosen theair transport mode for its Quick, Reliable, Efficient and Safe services. Therecent trends in the development of free trade, globalisation, liberalization andderegulation left the mankind to race with time and air transport is found to bevery appropriate, thus propelling the aviation industry to paramount.Airports also represent a country’s window on the world. Passengers form theirfirst impressions about a nation from the state of its airports. They can beeffectively used as symbols of national pride, if we pay sufficient attention totheir quality and maintenance.In many remote, hilly and inaccessible areas of the country, air transport is thequickest and sometimes the only mode of travel available. This is especiallytrue of sensitive regions on the borders with our neighbours in the west, northand north-east.Airports need to be integrated with other modes of transport like Railways andHighways, enabling seamless transportation to all parts of the country. 12 EMERGING CHALLENGES IN PUBLIC PRIVATE PARTNERSHIP IN AIRPORTS
  13. 13. 1.1 EconomyThe impact of air transportation on economic activity differs from othertransportation modes because of its distinctive characteristics speed, cost,flexibility, reliability, and safety. It is the only realistic long-distanceTransportation mode for high-value perishable commodities and time-sensitive.Airports being nuclei of economic activity assume a significant role in thenational economy. The quality of airport infrastructure, which is a vitalcomponent of the overall transportation network, contributes directly to acountrys international competitiveness and the flow of foreign investment. Theavailability of better air transportation services effectively increases the scopeof new business and industrial economic activity. The economy moves towardshigher value-added products, particularly in agriculture, an increasingproportion of the produce will have to move by air, both within the country andabroad. In addition, the more remote and inaccessible regions of the country,such as the North-east, can realise their true potential when such a transitionbecomes possible. Increasing economic activity in turn generates the need forpassenger travel and freight and drives the demand for air transportationservices. Cargo carried by air in India weighs less than 1% of the total cargoexported, it accounts for 35% of the total value of exports. Better cargohandling facilities lead to enhanced levels of imports, especially of capitalgoods and high-value items. Likewise, It is observed that 2% growth in aviationindustry leads to 1% growth in GDP. Export and Import Trade of India with World for Last Five Years EXPORT AND IMPORT DATA EXPORT IMPORT 160,000,000.00 140,000,000.00 120,000,000.00 100,000,000.00 INR 80,000,000.00 60,000,000.00 40,000,000.00 20,000,000.00 0.00 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009 FINANCIAL YAER (See Annexure –I for export and import data) Fig.1 13 EMERGING CHALLENGES IN PUBLIC PRIVATE PARTNERSHIP IN AIRPORTS
  14. 14. 1.2 Social Payback by AirportsAirport provides employment in the aviation sector and creates widersocioeconomic benefits through its potential to facilitate certain types ofactivities in a local development. Studies evaluate the direct, indirect andinduced employment impact of air transportation. Direct impact is employmentin the aviation industry, indirect impact is the employment in the industriesdown the aviation supply chain, and induced impact is the employmentsupported by the expenses of those directly and indirectly employed in theaviation industry, studies has been assessed that every job in the aviationindustry will create seven other jobs directly or indirectly through its catalyticimpact on tourism and business.At the macroeconomic level, airport impacts economy by providing employmentand by enabling effects including enabling access: to markets, to people, tocapital, to ideas and knowledge, to labour supply, to skills, to opportunity, andto resources.airport industry which in the past was considered to be a simple transit areasbut now the modern airports have become place where one works, eats, makespurchases, and even sleeps. The whole idea of modern airports is to provide apleasant reception area with increasingly commercial outlook; private rooms,game areas, religious facilities, malls, shopping canters.Air transport provides significant social benefits few of them as follows:• Air transport contributes to sustainable development. By facilitating tourismand trade, it generates economic growth, provides jobs, improves livingstandards, alleviates poverty, increases revenues from taxes, and fosters theconservation of protected areas.• Air transport is often the only means of transportation to/from remote areas,and promotes social inclusion by connecting those living in such communitieswith the rest of the country.• The air transport network facilitates the delivery of emergency andhumanitarian aid relief anywhere on earth, and ensures the swift delivery ofmedical supplies and organs for transplantation. 14 EMERGING CHALLENGES IN PUBLIC PRIVATE PARTNERSHIP IN AIRPORTS
  15. 15. • Air transport improves quality of life by broadening people’s leisure andcultural experiences. It provides a wide choice of holiday destinations aroundthe world and an affordable means to visit distant friends and relatives.• Air transport improves productivity, by encouraging investment andinnovation; improving business operations and efficiency; and allowingcompanies to attract high quality employees. And Cities always developtowards the airport because of its socioeconomic factor.1.3 Influence of Aviation on TourismTourism and Air Transport industry are complementing each other. Tourismdepends on transportation to bring visitors, while the transportation industrydepends on tourism to generate demand for its services. The growth in tourismindustry directly reflects onto the air transportation. Over the last 25 years, thenumber of international tourists has more than doubled. The expansion ofinternational tourism has a large impact on the discipline of transportgeography.Transport is the cause and the effect of the growth of tourism. To start with, theimproved facilities have stimulated tourism, and the expansion of tourism hasstimulated transport. Accessibility is the main function behind the basics oftourism transport. In order to access the areas that are mainly aimed, touristswill use any transportation mode. However, air transport is the main mode forinternational tourism. Air transport plays a dominant role in inter-regionalmovements of tourists, which normally entails travel over long-distance. Growthrates of international air traffic are pegged with growth rates of internationaltourism. Attractive package tours, competitive airfare attract more and moretourist day by days, therefore both the industry is expanding rapidly.Air transport is far advance than the transport mode. Air transport hasrevolutionized the geographical aspect of distances; the most remote areas cannow be attained, any journey around the world can be measured in terms ofhours of travelling. With jet that, can reach up to 1950 km/hrs, internationaltourism is no longer an on going adventure. 15 EMERGING CHALLENGES IN PUBLIC PRIVATE PARTNERSHIP IN AIRPORTS
  16. 16. Inducement tour - Tourism now a day not only the personal influence, but it alsois group affluence as well, many company to induce their work force arrangetour overseas, which is the significant reason of Group tour.“Whatsoever the reason of travelling people need transportation for movement,the next question arise which mode of transportation? The answer is affordable,time saving, convenient and safety. So, air transportation is the one meet mostall of the above”, which basically requires good airport infrastructureAirports provide the only worldwide transportation network, which makes itessential for global business and tourism. Airport alleviate poverty and helps toimprove living standards by facilitating tourism. Air transport improves quality oflife by broadening people’s leisure and cultural experiences. It provides a widerchoice of holiday destinations around the world and an affordable means to visitdistance friends and relatives. Air transport contributes to sustainabledevelopment not only by facilitating tourism and trade, it generates economicgrowth, provides jobs, increase revenues from taxes as well as facilitates thedelivery of emergency humanitarian aid relief and swift delivery of medicalsupplies anywhere on the earth.97% of the countrys foreign tourists arrive byair and tourism is the nations second largest foreign exchange earner.1.4 Environment Benefits of Airports and AviationAs with all human activity there is an environmental impact. Aviation is widelyunderstood to be responsible for 2% of worldwide man-made CO2 emissions;where as other transport provides 16%. The IPCC provides a comprehensive,objective, open and transparent assessment of climate change. Today, 80% ofaviation’s greenhouse gas emissions are related to passenger flights exceeding1,500km/900 miles for which there is no practical alternative. 16 EMERGING CHALLENGES IN PUBLIC PRIVATE PARTNERSHIP IN AIRPORTS
  17. 17. AVIATION: ONLY 2% OF MAN-MADE CO2 EMISSION Fig.2 AIRCRAFT TODAY ARE 75% QUIETER AND 70% CLEANER THAN 40 YEARS AGOAviation’s small contribution to CO2 emissions is not a coincidence, but ratherthe result of a constant focus on innovation. Manufacturers must strive toreduce fuel consumption to remain competitive, but it is much more than justgood business. Since the start of commercial jet services in the 1950s, aircraft,engine and other related manufacturers have been driven by a number offactors. Safety is understandably considered above all others, although the costof aircraft operations for the airlines has been and remains a criticalconsideration. Much of the airlines’ and manufacturers’ focus has always beento reduce fuel costs. Today, this can account for 36% of airline operating 17 EMERGING CHALLENGES IN PUBLIC PRIVATE PARTNERSHIP IN AIRPORTS
  18. 18. expenses, even though manufacturers have reduced the fuel consumption by37% per 100 passenger kilometres travelled, since 1987. Over the last 50years, aircraft have become increasingly efficient in terms of their individualimpact on the environment throughout their entire life cycle. This continues tobe driven by the demands of passengers and airlines, as well as bothinternational and local legislation.Today, aircraft are 20dB quieter than the closest comparable aircraft producedin the 1960s, which equates to 75% less perceived noise. Of the entirepopulation affected by transport noise, 79% live near roads, 14% near railwaysand only 7% live near airports. Similarly, everyone has seen pictures or film ofaircraft from that period taking off with plumes of black smoke billowing from theengines, which is not seen at the world’s airports today. In fact, today’s aircraftproduce 90% less smoke or unburned hydrocarbons than aircraft of the 1970s,with a carbon monoxide (CO) reduction of more than 50%.Furthermore, aircraft burn 70% less fuel and, therefore, emit 70% less CO2than aircraft flying in this period. Another trend having a significant effect isimproved aircraft load factors. In other words airlines have filled their planesmore efficiently, thereby effectively reducing the need for more aircraft orfrequencies, together with their associated fuel burn. Since 1970, airlines haveimproved load factors by an average of 0.6 percentage points per year, withindustry wide load factors averaging 76% in 2006. 18 EMERGING CHALLENGES IN PUBLIC PRIVATE PARTNERSHIP IN AIRPORTS
  19. 19. 2. AIRPORT ENVIRONMENT IN INDIA.2.1 Present airport infrastructure in India.There are 449 airports/airstrips in the country. Among these, the AAI owns andmanages 88 airports, 27 civil enclaves at defence airfields and 5 PPP airportsand provides air traffic services over the entire Indian airspace and adjoiningoceanic areas. Historically, air traffic at Indian airports has broadly followed aparticular distribution pattern, except that some airports have changed theirinter-se positions vis-à-vis volume of traffic.2.2 Major Airports of India“Major airport means an airport which has, or is designated to have, annualpassenger throughput in excess of one and a half million or any other airport asthe Central Government may, by notification, specify as such”Presently twelve (12) airports in the country have annual passenger throughputin excess of one and a half million as can be seen from the following table. Sl. No. Name of Airport Passenger Throughput 2008-09 (in million) 1 Mumbai 23.43 2 Delhi 22.84 3 Chennai 9.84 4 Bangalore 8.76 5 Kolkata 6.99 6 Hyderabad 6.22 7 Cochin 3.36 8 Ahmedabad 2.83 9 Goa 2.22 10 Trivandrum 1.95 11 Pune 1.77 12 Calicut 1.68 19 EMERGING CHALLENGES IN PUBLIC PRIVATE PARTNERSHIP IN AIRPORTS
  20. 20. • 2 airports – Mumbai and Delhi being leased airports of AAI under PPP management, with majority private participation; • 3 airports – Bangalore, Hyderabad and Cochin being private • 5 airports – Chennai, Kolkata, Ahmedabad, Trivandrum and Calicut being airports under the Airports Authority of India; and • 2 airports – Goa and Pune being Civil Enclaves at defence airfields, managed and operated by the Airports Authority of India.2.3 Present Classification of Airports in India i. International Airports: These are declared as international airports and are available for scheduled international operations by Indian and foreign carriers. Presently, Mumbai, Delhi, Chennai, Calcutta and Thiruvananthapuram are in this category. ii. Custom Airports: These have customs and immigration facilities for limited international operations by national carriers and for foreign tourist and cargo charter flights. These include Bangalore, Hyderabad, Ahmadabad, Calicut, Goa, Varanasi, Patna, Agra, Jaipur, Amritsar and Tiruchirapally. iii. Model Airports: These are domestic airports which have minimum runway length of 7500 feet and adequate terminal capacity to handle Airbus 320 type of aircraft. These can cater to limited international traffic, if required. These include Lucknow, Bhubaneshwar, Guwahati, Nagpur, Vadodara, Coimbatore, Imphal and Indore. iv. Other Domestic Airports: All other airports are covered in this category. v. Civil Enclaves in Defence Airport: There are 28 civil enclaves in Defence airfields.2.4 Proposed classification of Airports in IndiaReclassification of airports is proposed to develop the capacity of airports inaccordance with the future projections of air traffic:International Hubs: This category of airports will be that of International Hubs,which may cover airports currently classified as international airports, and thoseeminently qualified to be upgraded. These would at present cover Delhi,Mumbai, Chennai, Kolkata and Thiruvananthapuram. Airports at Bangalore, 20 EMERGING CHALLENGES IN PUBLIC PRIVATE PARTNERSHIP IN AIRPORTS
  21. 21. Hyderabad, Ahmedabad, Amritsar and Guwahati would be added to the listafter their facilities are upgraded to the desired level. International hubs wouldbe used for dispersal of international traffic to the hinterland. At these airports,the facilities would be of world-class standards, including convenientconnections for international and domestic passengers, airport-relatedinfrastructure like hotels, shopping areas, conferencing and entertainmentfacilities and aircraft-maintenance bases, among others.Regional Hubs: The government is keen to encourage the development ofregional airlines with fleets of small aircraft, to provide air-linkages witin theinterior areas of the country. Regional hubs will have to act as operationalbases for regional airlines and also have all the facilities currently postulated formodel airports, including the capability to handle limited international traffic. Theidentification of Regional Hubs will be made on the basis of origin-destinationsurveys, traffic demand and the requirements of the airlines. The stategovernment would be closely associated as co-promoters of regional airlines.Other Operational airports: These would be developed so as to be cost-effective on the basis of individual needs, to meet the requirements of traffichandled by them. Airports serving state capitals would be given priority. Thestatus of individual airports may be reviewed at five-yearly intervals, on therecommendation of a committee of experts. Grant of status as Internationalhubs would be with prior cabinet approval. It is clarified that international hubsshall have the status of an international airport for purposes of bilateralagreements.2.5 Greenfield and Brownfield AirportsGreenfield Airport means a new airport which is built from scratch in a newlocation because the existing airport is unable to meet the projectedrequirements of traffic. The word Greenfield originates from softwareengineering, meaning a project which lacks any constraints imposed by priorwork. Brownfield projects are the projects which are modified or upgraded fromexisting facilities. 21 EMERGING CHALLENGES IN PUBLIC PRIVATE PARTNERSHIP IN AIRPORTS
  22. 22. 3 PUBLIC PRIVATE PARTNER SHIP3.1 Introduction to PPPPPP can be defined as arrangements whereby private parties participate in, orprovide support for, the provision of infrastructure, and a PPP project results ina contract for a private entity to deliver public infrastructure-based services.The mechanics of the arrangements can take many forms and may incorporatesome or all of the following features•The public sector entity transfers land, property or facilities controlled by it tothe private sector entity (with or without payment in return) usually for the termof the arrangement;•The private sector entity builds, extends or renovates a facility;•The public sector entity specifies the operating services of the facility;•Services are provided by the private sector entity using the facility for a definedperiod of time (usually with restrictions on operations standards and pricing);and•The private sector entity agrees to transfer the facility to the public sector(with or without payment) at the end of the arrangement.3.2 Key drivers and enablers of PPP. 3.2.1 Conventional procurement issues.A lot of the blame for the poor record in the design and construction of capitalworks on the attitudes and culture of the public sector, which result in timedelays and costs overruns being commonplace. Since then, more completeand damning evidence has come to hand on the extent of cost overruns andrevenue shortfalls on infrastructure investments phenomena that have come tobe known under the heading ‘appraisal optimism’.Appraisal Optimism: Optimism bias is the tendency for a project’s costs andduration to be underestimated and/or benefits to be overestimated. It isexpressed as the percentage difference between the estimate at appraisal and 22 EMERGING CHALLENGES IN PUBLIC PRIVATE PARTNERSHIP IN AIRPORTS
  23. 23. the final outturn.National Audit Office (NAO) undertakes a rolling review of allgovernment procurement, including PFI procurement, PFI constructionoutcomes showed that in contrast to traditionally procured projects, the PFIprojects were largely being delivered on time or early (76 per cent versus 30per cent) and on budget (78 per cent versus 27 per cent).Construction performance of PFI and conventional projects Projects PFI projects NAO census Government (%) procurement survey (%) On time 76 30 On budget 78 27UK Green Book calls ‘optimism bias’ – the estimated difference between thebusiness case and the final outcome for each category of project. For allprojects, time overruns exceeded the estimated duration by 17 per cent.Differences between actual and estimated costs in large public works transportprojects. Project Type All regions Number of projects Average cost escalation (%) Transport 258 Naresh Chandra committeeThe Indian aviation industry took off on to a higher growth plane following theliberalization of the airlines industry in the late 1990s. In the decade followingliberalization, the growth was propelled further by the emergence of low-costcarriers, competition-induced decline in travel costs, and sustained economicgrowth. With that, renewed focus came to be placed on the aviation 23 EMERGING CHALLENGES IN PUBLIC PRIVATE PARTNERSHIP IN AIRPORTS
  24. 24. infrastructure segment, in which investments by the Airport Authority of India(AAI)—till then the monopoly owner of most of the Indian airports—hadhistorically been inadequate. The emphasis on further developing the country’saviation infrastructure meant opening up of airports to private investment, aswas one of the key recommendations of The Naresh Chandra CommitteeReport on the Road Map for the Civil Aviation Sector—November 2003.3.2.4 To meet the growing needs of airport infrastructure in IndiaIndia’s airports have suffered from decades of neglect and underinvestment.When the Naresh Chandra Committee presented its report to the Ministry ofCivil Aviation in November 2003, it remarked frankly that the country’s“passenger airports are for the most part an embarrassment”.The inadequacy of the state of airport infrastructure was exposed as air trafficexpanded dramatically from 2004 onwards, pushing several metro airports towell beyond their design capacity. Congestion in the terminals, on the runwaysand in the air, resulted in a deteriorating passenger experience and anincreasingly inefficient (and costly) operating environment for the airlines.3.2.5 Passenger GrowthIn the recent past, India has encountered an extraordinary growth in passengerair traffic. In India 87% of the total air traffic is generated by the 15 internationalairports (listed in annexure-I), of which a total of 84% of domestic traffic and93% of international traffic is generated from these airports.The growth of International and domestic passenger traffic is shown in theGraphs below. The statistics analysis follows the regression line of polynomialrepresenting the international and domestic passenger growth respectively. y = 95946x2 - 317907x + 4E+06 y = 464620x2 - 1E+06x + 1E+07 24 EMERGING CHALLENGES IN PUBLIC PRIVATE PARTNERSHIP IN AIRPORTS
  25. 25. International & Domestic Passenger Traffic INTERNATIONAL PASSENGER DOMESTIC PASSENGER 2 2 y = 95946x - 317907x + 4E+06 y = 464620x - 1E+06x + 1E+07 120 100 Passenger Traffic 80 Millions 60 40 20 0 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 Calender Year (See Annexure II for the passenger data) Fig.3The estimates from the graph represent a 100 and 20 million in Domestic andinternational air traffic by 2014. While passenger traffic in metros grew by anaverage of 31%, smaller stations like Port Blair, Nagpur and Raipur registeredtraffic growths of 41.8%, 94.8% and 70.3%, respectively.According to the Airports Authority of India data, of the top 45 airports, 9airports registered a 50% growth in passenger traffic. These includeHyderabad, Pune, Coimbatore, Mangalore, Nagpur, Port Blair, Raipur, Ranchiand Jaipur. Among the four metros, Kolkata registered the highest growth of39.5%, followed by Chennai, Delhi and Mumbai at 35%, 27.1% and 22.4%respectively.3.2.6 Cargo GrowthThe air cargo market in the country has also witnessed increased activity overthe last few years especially with the entry of number of new players in cargohandling market (terminal management, development and operation).International operators like Menezies (JV with Bobba group at Bangalore andGHIAL at Hyderabad) and SATS Singapore (JV with Air India at Bangalore)have made significant investments for offering newer and better services forcargo users. International express cargo operators like FedEx and DHL arealso increasingly establishing their presence in the Indian market. y = 1615.4x2 - 10948x + 114582 y = 195.64x2 +25 14984x + 131194 EMERGING CHALLENGES IN PUBLIC PRIVATE PARTNERSHIP IN AIRPORTS
  26. 26. International & Domestic Cargo Traffic 450000 INTERNATIONAL CARGO TRAFIC DOMESTIC CARGO TRAFFIC 400000 y = 1615.4x2 - 10948x + 114582 y = 195.64x2 + 14984x + 131194 350000 300000 Cargo in Tonnes 250000 200000 150000 100000 50000 0 1999- 2000- 2001- 2002- 2003- 2004- 2005- 2006- 2007- 2008- 2009- 2010- 2011- 2012- 2013- 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 Year (See Annexure-III for the cargo data) Fig.4Form the polynomial regression analysis and form the graph this is evident that400000 and 350000 tons of cargo is likely to reach by 2014.3.2.7. To Meet Financial Requirements to Support Such Growth and to InfusePrivate Fund in the Airport Infrastructure Sector Recognising the potential forairport infrastructure constraints to stifle the aviation industry, in 2005 theGovernment of India announced a USD10 billion airport upgrade andmodernisation programme over 5 years to 2010. A further USD20 billion ofinvestment is expected in the following 10 years. Acknowledging that itpossesses neither the expertise nor the capital to carry out such an undertakingby itself, the government has invited private sector participation in the process.3.2.8 To Increase the Standards of Indian Airports-To InternationalStandardsThe ICAO also standardizes certain functions for use in the airline industry,such as the Aeronautical Message Handling System AMHS; this probablymakes it an organization. The ICAO defines an International Standard 26 EMERGING CHALLENGES IN PUBLIC PRIVATE PARTNERSHIP IN AIRPORTS
  27. 27. Atmosphere (also known as ICAO Standard Atmosphere), a model of thestandard variation of pressure, temperature, density, and viscosity with altitudein the Earths atmosphere. This is useful in calibrating instruments anddesigning aircraft. The ICAO standardizes machine-readable passportsworldwide. Such passports have an area where some of the informationotherwise written in textual form is written as strings of alphanumericcharacters, printed in a manner suitable for optical character recognition. Thisenables border controllers and other law enforcement agents to process suchpassports quickly, without having to input the information manually into acomputer. ICAO publishes Doc 9303, Machine Readable Travel Documents,and the technical standard for machine-readable passports. A more recentstandard is for biometric passports. These contain biometrics to authenticatethe identity of travellers. The passports critical information is stored on a tinyRFID computer chip, much like information stored on smartcards. Like somesmartcards, the passport book design calls for an embedded contact less chipthat is able to hold digital signature data to ensure the integrity of the passportand the biometric data.3.2.9 Drivers and enablersDrives Enablers • Financial need, e.g. budget deficit • Political framework: stability explicit • Aging or poor infrastructure political will or commitment, e.g. a • Search for greater efficiency and dedicated unit, ability to push schemes creativity through, creative and willing local • Desire to introduce competition government • Shortage of domestic experience • Legal frame work: no roadblocks, and or skills documentation not excessively • Desire to educate national complicated contractors and remain • Public acceptance of private sector competitive involvement and specific impacts, e.g. • Bandwagon effect environmental impact of new airports • Quality practitioners: good quality, experienced project sponcers and lenders • Readily available finance, mature or sophisticated banking sector and capital markets culture 27 EMERGING CHALLENGES IN PUBLIC PRIVATE PARTNERSHIP IN AIRPORTS
  28. 28. 3.3 Present Indian scenarioThe privatization initiative that followed gained traction with the award of build-operate-transfer (BOT) concessions to private players for Greenfield airports atBangalore and Hyderabad in 2004 and the privatization of the internationalairports at Delhi and Mumbai in 2006. All these airports are now being operatedby separate joint venture companies (JVCs)The details including Type of PPP, Contract Period, Project Proponent,Contract Award method, Estimated Project Cost, Amount of GovernmentSupport - (VGF), Legal Instrument, Regulatory framework, financial informationincluding Equity, Debt, Other Financial Instrument, Market Structure andCompetition of these projects are included in appendix-(3)While the award of BOT projects for two Greenfield airports and privatization ofthe Delhi and Mumbai airports are positive steps towards involving the privatesector in development of the country’s aviation infrastructure, there is also agrowing need to put together a sound regulatory framework for the aviationindustry as a whole and have a functioning and independent regulator tobalance the often opposing demands of the airlines and aviation infrastructuresectors. The regulatory factor apart, the aviation infrastructure sector iscurrently facing the challenges of a weak global economy, declining trafficlevels, and deteriorating financial health of airlines. As a result, revenuegeneration by airports has been impacted severely, which, along with thepressures on liquidity, has caused funding gaps to arise both for private playersas well as the state-owned AAI. Another development that has hit the aviationinfrastructure segment has been the downturn in the real estate sector sincethe second half of fiscal 2008-09. The downturn has forced some private airportconcessionaires to look for alternative sources of funds, given that theirbusiness models rely significantly on the development and sale of land adjacentto the airports. An important issue in all airport privatizations and projects is thedegree of risk transfer to the private sector. To what extent will theconcessionaire or sponsor bear the risk in relation to matters such as existingasset condition (if privatization), construction costs, operational costs, trafficvolumes, revenues, change of law, non-insurable risks and financing risk? Thisis nothing unique to airport concessions and projects – similar issues arise inmost other contexts. Full risk transfer to the private sector is unlikely to be 28 EMERGING CHALLENGES IN PUBLIC PRIVATE PARTNERSHIP IN AIRPORTS
  29. 29. achievable. Certain risks, particularly those having a political dimension, willinevitably need to remain with the Government, such as changes in law, war,terrorism and expropriation. See annexure-IV for details Fig 5 (See annexure-V for details) Fig-6Development and use of PPPs for delivering infrastructure services has now atleast 11 years of precedence in India, with the majority of projects coming inline in the last 5 years. Policies in favor of attracting private participation as well 29 EMERGING CHALLENGES IN PUBLIC PRIVATE PARTNERSHIP IN AIRPORTS
  30. 30. as innovation with different structures have met with varying degrees ofsuccess. Some sectors like telecommunications, power, and ports and roads,have done very good progress compared to limited success in other sectors. Asfar as current status of projects in place, there have been at least 450 PPPprojects in our main sectors of focus where a contract has been awarded andprojects are underway – in the sense that they are either operational, havereached construction stage, or at least construction/implementation isimminent. The total project cost is estimated to be about Rs. 2, 24,175.75Crore. In this airport counts 19111 crore which is spent for only on five projects.We see that airport projects account for 1.1% of the total number of projectsand 8.52% by total value. In terms of contract award method the InternationalCompetitive Bidding yielded 39% of total investment in India followed byDomestic Competitive Bidding with 33% in PPP. However airport count 100%international competitive bidding which is mainly because of building airport tointernational standard and to achieve technically highest of design standard.Present Greenfield airport details were given in annexure-VII See annexure-VI for state wise PPP detail in India. % of total Total number of % of totalInvestor Type Investment projects project costForeign Investor 1725.85 7% 1%Indian Private Investor 134145.57 93% 99%Total 135871.42 100% 100%Sector-wise break-up of foreign investor participation in PPP projectsForeign Investor Versus No. of % of totalSector Projects Investment project costPorts 9 416.5 24%Roads 9 256.22 15%Airports 4 1053.13 61%Total 22 1725.85 100% 30 EMERGING CHALLENGES IN PUBLIC PRIVATE PARTNERSHIP IN AIRPORTS
  31. 31. Fig-6Foreign equity participation of 27 foreign companies in PPP projects was onlyat Rs 1,725.85 crore which is meager 1 per cent of the total project investment.Prominent PPP projects where foreign companies have an equity stake includemodernization of Mumbai and Delhi international airports, Delhi-Noida tollbridge, Papaya port, Bangalore international airports and JNPT containerterminal etc.Airport counts 61% of total foreign investment. 31 EMERGING CHALLENGES IN PUBLIC PRIVATE PARTNERSHIP IN AIRPORTS
  32. 32. 4. PROCEDURAL GUIDELINES FOR SETTING UP OF PPP AIRPORT.4.1 Policy Framework• Airport Infrastructure Policy of 1997 provides the following:-• In view of the fact that there are already a sufficient number of airports, many of which are not viable; Greenfield airports will normally not be taken up either in the public or private sector without the prior approval of the Government. In the case of the Other Airport category run by private operators, the approval of the DGCA would suffice as at present.• A Greenfield airport may be permitted where an existing airport is unable to meet the projected requirements of traffic or a new focal point of traffic emerges with sufficient viability. It can be allowed both as a replacement for an existing airport or for simultaneous operation. This aspect will have to be clearly spelt out in the notice inviting tenders.• No Greenfield airport will normally be allowed within an aerial distance of 150 kilometers of an existing airport. Where it is allowed as a second airport in the same city or close vicinity, the parameters for distribution of traffic between the two airports will be clearly spelt out.• The Government may, while permitting a Greenfield airport, decide whether it will be in the public or private sectors or be taken up as a joint venture.• Where the Government decides to set up a Greenfield airport through the AAI on social considerations even though the same is not economically viable, suitable grant-in-aid will be provided to AAI to cover both the initial capital cost as well as the recurring losses.”4.2. PromotersThe Central Government, Airports Authority of India, State Government, a localself Government Institution e.g. Municipality, Corporation etc., a privatecompany, a consortium or a group of individuals can act as the promoter for theGreenfield airport either individually or jointly.4.3 Study stagesa. Pre-feasibility Study StageThe promoter, after preliminary clearance of Ministry of Civil Aviation on his 32 EMERGING CHALLENGES IN PUBLIC PRIVATE PARTNERSHIP IN AIRPORTS
  33. 33. proposal in the first instance, will commission a pre-feasibility report to studythe overall potential of the project and see whether the project is attractiveenough to warrant detailed study. The study should cover demand, technical,manpower, financial, economic and social modules of the project. The studymay also utilize secondary research and information. The promoter shall submitthe pre-feasibility report to the Ministry for further approval. The cost of the pre-feasibility will be borne by the promoter.b. Detailed Feasibility Study StageBased on study of pre-feasibility report, the promoter shall again approach theCentral Govt. for preliminary clearance of undertaking a detailed Techno-Economic Feasibility Study (TEFS). The Central Govt. after due examination ofall modules of pre-feasibility study will determine whether the project showspromise of meeting the financial, economic and social criteria which have beenset for public investment expenditure. In case, the Govt. find it appropriate, itmay permit the promoter to take up detailed TEFS.c. The primary promoter will commission a TEFS including simulation study forconflict free operation by a competent professional body. Cost of TEFSincluding the simulation study will be borne by the primary promoter. During thisphase, the accuracy of variables will be further improved to see if the projecthas potential for success. This may require primary research etc.d. Upon establishing the technical / financial viability through sensitivity analysisof realistic traffic and revenue projections, as emerging from the TEFS, theprimary promoter will submit the proposal to the Ministry with full justification,inter alia, enclosing the TEFS and other studies in this regard. Such proposalshall cover the respective State Government’s commitments to the proposal inrespect of acquisition of land, supply of water and power, construction ofaccess roads and other financial support. It is only after TEFS that the mostimportant decision has to be made whether the project should be approved.4.4 Site SelectionSite selection for any Greenfield airport will be undertaken by the promoters atpre-feasibility stage only in consultation with Director General of Civil Aviation(DGCA) including AAI, Ministry of Environment & Forest, and Ministry ofDefence (MOD). In case, the Greenfield airport is proposed at a location, which 33 EMERGING CHALLENGES IN PUBLIC PRIVATE PARTNERSHIP IN AIRPORTS
  34. 34. has an existing airport, while taking the decision to accord approval for theGreenfield airport, the Government would also decide whether the existingairport would be closed down or the new airport would be a second airport withfull-fledged simultaneous commercial operations. In case, the existing airport isdecided to be closed down, the unrecovered investments of AAI in the existingairport will have to be compensated by a suitable mechanism such as share inthe concession fee to be given by the greenfield operator to the Govt. TheGovernment shall, in general, promote competition in setting up a greenfieldairport in addition to the existing one.If a Greenfield airport is established in lieu of an existing AAI airport, theexisting airport with all assets will revert to AAI. AAI may decide on the futureusage of the airport in consultation with Ministry of Civil Aviation. The issue ofproviding employment to AAI’s employees working at the AAI airport after itsclosure has engaged attention of the Govt. The JVC will absorb AAI employeessubject to merit and efficiency in operational/ management dep’t. Againstvacancies at the airport.4.5 Detailed Design Stage and ApprovalBased on the TEFS and State Government/Promoters’ recommendations, theCentral Government will consider giving approval for the airport project as perthe extant policy. The approval will be given by the Union Cabinet as per theCivil Aviation Policy. The Central Government after approval will then go aheadto develop detailed design of the project which should then result in formulationof operational plan. At this stage, the project can once again be reviewedwhether it shall meet required criteria.4.6 Project Implementation StageA Steering Committee is set up by State Govt. / promoter comprising of officialsof the State Govt. and the Ministry of Civil Aviation as this stage involvescoordination and allocation of resources. This Committee will oversee theimplementation of the project, funding proposal, and preparation of tender andother documents, bidding and selection of the preferred investor. The StateGovt./ promoter will designate an agency preferably a PSU to coordinate theactivities and assumes responsibilities and authority for moving ahead . 34 EMERGING CHALLENGES IN PUBLIC PRIVATE PARTNERSHIP IN AIRPORTS
  35. 35. 4.7 Setting up a Special Purpose Vehicle (SPV)The State Govt./ promoter shall set up a SPV wholly owned buy it to begin with.Later, on the selection of successful bidders, the private investor will beinducted in the SPV with 74% equity shares.4.8 Public Private Partnership (PPP) Model• The State Government as a primary promoter may consider joint venture (JV) with private investors through Public Private Partnership Model (PPP). In case it proposes to have a joint venture with private promoters, it shall be the primary responsibility of the State Government to choose private sector partners through a transparent competitive bidding process subject to the guidelines on foreign equity participation.• State Govt. / AAI may also participate in the JV with equity which will be limited to 13% each (Rs. 50 crores cap or 13%, whichever is lower in case of AAI)4.9 Bidding Process and Selection criteria• The Joint Venture Partner / Greenfield Operator shall be selected by the State Govt. through a transparent competitive bidding process based on technical and financial criteria. While inviting bids from prospective bidders by the State Govt. / promoters, the draft Concession Agreement (CA), Shareholder Agreement (SHA), State Support Agreement (SSA), Land Lease Agreement (LLA), (CNS/ATM) Agreement, principles of Finance Agreement, principles of Airport Operator Agreement along with format of commitment from lenders regarding debt/ equity will be furnished to the pre- qualified bidders. Before inviting technical and financial bids, these documents will be frozen in consultation with Pre- Qualified Bidders (PQBs).• It may be divided into technical and financial criteria. The technical criteria may include financial, development and management abilities. A broad list of these will be made part of the bid documents. The financial criteria could be the minimum bid for State Support and viability gap funding or maximum concession fee.• The successful bidder inducted into SPV through SHA shall use the Detailed Project Report (DPR) for realizing and operationalising the project. 35 EMERGING CHALLENGES IN PUBLIC PRIVATE PARTNERSHIP IN AIRPORTS
  36. 36. 4.10 Viability Enhancement: - The Greenfield airport project can be madeViable by following means:-(i) Land and external infrastructure provided by the State Government for theairport on lease through Land Lease Agreement with variety of combinationssuch as token lease, moratorium on lease, deferred payment of lease etc.(ii) The State Government may enter into a State Support Agreement inaddition to Land Lease Agreement with the greenfield airport operator providingfor State Support such as grant, infrastructure loan, interest free loan etc.(iii) Central Government may levy an Advance Development Fee (ADF) fromembarking passengers at the existing airport or for the development of newairport on terms and conditions as per ADF rules framed by the Ministry.(iv)The Greenfield airport operator may be allowed to levy a User DevelopmentFee (UDF) at the new airport, subject to the Regulatory regime in force.(v) Aeronautical Charges may be leviable at the airport shall be as approved bythe Govt. / Regulator.(vi)The Passenger Service Fees (PSF) levied at all airports would be applicableto the Greenfield airports also. ADF / UDF would be charged in addition to thePSF. PSF being levied through passenger tickets will have two components viz.(a) Security charges, (b) levy for Airport Maintenance and Upkeep. The PSFcomponents collected through airline passenger tickets will be passed on bythe airline to AAI as far as security component is concerned and the Greenfieldoperator for service component.(vii) Concessions have also been given by the Union Govt. through budgetpronouncement from time to time.• While Security will be the responsibility of the Central Govt. {through AAI/ Bureau of Civil Aviation Security (BCAS)}, the airport operator will be required to provide security equipments, operate and maintain as per standards laid down by the Bureau of Civil Aviation Security (BCAS), and meet the costs thereof.• Communication, Navigation and Surveillance (CNS) / Air Traffic Management (ATM) equipment along with allied infrastructure required for Greenfield airport will be provided by Airports Authority of India (AAI) at its 36 EMERGING CHALLENGES IN PUBLIC PRIVATE PARTNERSHIP IN AIRPORTS
  37. 37. cost and the revenue from (RNFC)/ (TNLC) accrue to AAI directly. The Greenfield operator will provide ATC tower, required buildings/ office accommodation, utilities on payment of rental on mutually agreed terms. The State Govt. / Operator will also earmark land for a residential colony for CNS/ATM personnel. The colony will be developed by AAI at its own cost. The Greenfield airport operator will sign a CNS / ATM agreement with AAI in this regard wherein AAI will commit performance standards also in terms of aircraft movement per hour.• If the selected Greenfield airport operator wants to take initiative in developing business strategies through traffic building at the airport, the Central Government may consider giving positive support keeping in view the overall bilateral requirements also as per the Civil Aviation Policy.• The airport operator would be allowed to optimize the use of land subject to the applicable land rules and regulations of the State Government on land use and encouraging non-aeronautical revenues. In this context, the concept of developing the entire area with an integrated approach may be encouraged. While the land given by State Govt. may be used to raise non- aero revenue, the JVC and the State Govt. will ensure that the airport does not assume real estate orientation. Hence, the land leased out will be first used for full length aero development over the concession period. Only the residual land will be subject to non-aero exploitation for those activities which are directly related with passengers, cargo, air transport industry/ services etc.• Landing, parking, housing charges will accrue to the airport operator.• The airport operator will provide requisite space and facilities for regulatory agencies like Customs, Immigration, Health, Plant and Animal Quarantine, Security and State Governments on terms and conditions as per CA.• The JVC while providing healthy corporate governance, will ensure that major contracts are awarded through a competitive bidding process, arm length method for related parties transaction and achieve the best value of money for JVC through a mechanism of independent engineer, auditors etc. The EPC Contract of the JVC shall also be awarded through transparent and competitive procedures by the JVC.• The Centre/ State Governments in due course will evolve following model 37 EMERGING CHALLENGES IN PUBLIC PRIVATE PARTNERSHIP IN AIRPORTS
  38. 38. agreements for the purposes of selection of JV partner through a Competitive bidding process:- (i) CA (ii) SHA (iii) SSA (iv) LLA (v) CNS-ATM• The sequence of signing agreements will generally be as follows:- (i) SHA amongst shareholders at the time of induction in SPV (ii) Stands deleted (iii) EPC contract process to firm up costs by SPV (iv)Selection of financial arranger and finalization of landing conditions by SPV (v) Financing Agreements (vi) Direct Agreements of lenders with GOI (vii) The work begins 38 EMERGING CHALLENGES IN PUBLIC PRIVATE PARTNERSHIP IN AIRPORTS
  39. 39. 5.0 CONCESSION AGREEMENT FOR PPP5.1 Need for a frameworkAccelerated economic growth, aided by expansion of air services in acompetitive environment, has manifested itself in a rapid increase in air traffic.For providing connectivity to regions hitherto not served by commercial flights, itis necessary to expand the network of air services by setting up new airports.Some of the State Governments have already taken steps for setting upGreenfield airports. Examples in the past include Cochin, Hyderabad andBangalore where Greenfield airports have been commissioned with the activesupport and participation of the respective State Governments. The policyrelating to setting up of Greenfield airports has since been liberalised by theCentral Government and several new projects are being planned in differentstates. The airport sector has been witnessing significant interest from bothdomestic as well as foreign investors following the policy initiatives taken by theCentral Government to promote Public Private Partnerships (PPP) on Design,Build, Finance, Operate and Transfer (DBFOT) basis. However, the actualinflow of investment has been less than expected, and future prospects willdepend on adoption of a comprehensive policy and regulatory frameworknecessary for addressing the complexities of PPP, and particularly forbalancing the interests of users and investors. Moreover, transformation ofrules will have to be accompanied by a change in the institutional mindset. Forbuilding and operating a Greenfield airport on DBFOT basis, a precise policyand regulatory framework is being spelt out in this Model ConcessionAgreement (MCA). This framework addresses the issues which are typicallyimportant for limited recourse financing of infrastructure projects, such asmitigation and unbundling of risks; allocation of risks and rewards; symmetry ofobligations between the principal parties; precision and predictability of costsand obligations; reduction of transaction costs; force majeure; and termination.It also addresses other important concerns such as user protection,independent monitoring, dispute resolution and financial support from theGovernment. The MCA also lays out a structure for commercialising airports ina planned and phased manner through optimal utilisation of resources on theone hand and adoption of international best practices on the other. The 39 EMERGING CHALLENGES IN PUBLIC PRIVATE PARTNERSHIP IN AIRPORTS
  40. 40. objective is to secure value for public money and provide efficient and cost-effective services to the users.5.2 Elements of financial viabilityThe four critical elements that determine the financial viability of an airport areconcession period; traffic volumes; user fees and other revenues; and capitalcosts. The concession period for such capital-intensive projects is normally inthe range of 50 to 60 years. This timeframe should enable a robust projectstructure and any further extension in the concession period would improvefinancial viability only marginally as the present value of projected revenuesafter 50 years would be very low from the Concessionaire’s perspective. For aGreenfield airport, the traffic projections are likely to be conservative as it wouldtake time for traffic to build up. As a result, user fees alone may not providefinancial viability, especially since they would have to be kept at affordablelevels. Additional revenues can, however, be generated from non-aeronauticalsources and real estate development to enable some cross-subsidisation ofuser fees. Three of the four parameters stated above could be virtually taken asgiven, and as a result capital cost is the variable that will determine the financialviability of an airport project. If the potential for non-aeronautical and real estaterevenues is inadequate, bidders may seek an appropriate capital grant/subsidyfrom the Government in order to reduce their capital investment for arriving atan acceptable rate of return. As such, reduction in capital costs and phasing outsome capital expenditure can help improve project viability significantly. ThoughPPPs undertaken so far in the sector have been financially viable and self-sustaining, the government’s initiative to build Greenfield airports in remoteareas may require cost-efficient designs as well as some capital subsidy.5.3 Technical parametersUnlike the normal practice of focussing on construction specifications, thetechnical parameters proposed in the MCA are based mainly on outputspecifications, as these have a direct bearing on the level of service for users.Only the core requirements of design, construction, operation and maintenanceof the airport are to be specified and enough room would be left for theConcessionaire to innovate and add value.In sum, the framework focuses on 40 EMERGING CHALLENGES IN PUBLIC PRIVATE PARTNERSHIP IN AIRPORTS
  41. 41. the ‘what’ rather than the ‘how’ in relation to the delivery of services by theConcessionaire. This would provide the requisite flexibility to theConcessionaire in evolving and adopting cost-effective designs withoutcompromising on the quality of service for users. Cost efficiencies would occurbecause the shift to output-based specifications would provide the privatesector with a greater opportunity to innovate and optimise on designs in a waynormally denied to it under conventional input based procurementspecifications.5.4 Performance standardsFor an airport project, the Concessionaire would not only procure the civil worksand equipment, it would also provide various passenger related services aswell as cargo handling. The efficiency of its operations would normally bereflected in the quality of service provided to the users. The MCA, therefore,identifies the key performance indicators relating to operation of theaeronautical assets, terminal building, cargo terminal etc., and specifiespenalties for failure to achieve the requisite levels of performance, especially inrelation to user services. The MCA includes a Passenger Charter that theConcessionaire should publish and implement for the benefit of users of theairport. This will add to the accountability of the Concessionaire to the users.5.5 Concession periodThe concession period should normally be long enough to enable theconcessionaire to recover its investment with a reasonable rate of return. In thecase of a Greenfield airport, the traffic build-up may be gradual and theinvestments in airport infrastructure as well as real estate may take long torecover. As such, a total concession period of 50 to 60 years has beenprovided. This would enable the Concessionaire to realise the full potential ofthe project and thus offer a competitive bid. A shorter concession period wouldrequire a greater capital subsidy and/ or higher user charges. The time requiredfor construction of the airport (about two to three years) has been included inthe concession period so as to incentives early completion that would maximisethe revenues of the Concessionaire. 41 EMERGING CHALLENGES IN PUBLIC PRIVATE PARTNERSHIP IN AIRPORTS
  42. 42. 5.6 Selection of ConcessionaireSelection of the Concessionaire will be based on open competitive bidding. Allproject parameters such as the concession period, user fees, price indexation,real estate development and technical parameters are to be clearly statedupfront, and short listed bidders will be required to specify the concession feethat they are willing to offer to the Government. The bidder who offers thehighest concession fee should win the contract. In exceptional cases whereinstead of offering a concession fee, the bidders seek a capital grant/ subsidyfrom the Government, the bidder who seeks the lowest grant would win thecontract.5.7 Concession feeConcession fee will be a fixed sum of Re. 1 per annum for the concessionperiod. The Concessionaire shall, commencing from the 20th year of theConcession Period, pay a Premium equal to 1 per cent of the total realisablefee which shall be increased every year by an additional 1 per cent of the totalrealisable fee. Where bidders do not seek any grant and are willing to offer ahigher Premium to the Government and/or an earlier commencement of itspayment, they will be free to do so, subject to a ceiling of 40 per cent of thetotal realisable fee. In case of an exceptionally viable project, the bidders wouldbe free to offer an upfront payment in addition to a share in the fee. Therationale for the above fee structure is that in the initial years, debt serviceobligations would entail substantial outflows. Over the years, however, theConcessionaire will have an increasing surplus in its hands on account of thedeclining debt service on the one hand and rising revenues on the other.Recognising this cash flow pattern, the concession fee to be paid by theConcessionaire will be based on an ascending revenue-share.5.8 Risk allocationAs an underlying principle, risks have been allocated to the parties that are bestsuited to manage them. Project risks have, therefore, been assigned to theprivate sector to the extent it is capable of managing them. The transfer of suchrisks and responsibilities to the private sector would increase the scope of 42 EMERGING CHALLENGES IN PUBLIC PRIVATE PARTNERSHIP IN AIRPORTS
  43. 43. innovation leading to efficiencies in costs and services. The commercial andtechnical risks relating to construction, operation and maintenance are beingallocated to the Concessionaire, as it is best suited to manage them. Othercommercial risks such as the rate of growth of traffic have also been allocatedto the Concessionaire. On the other hand, all direct and indirect political risksare being assigned to the Government. It is generally recognised that economicgrowth will have a direct influence on the growth of traffic and that theConcessionaire cannot in any manner influence the rate of economic growth.By way of risk mitigation, the MCA provides for extension of the concessionperiod in the event of a lower than expected growth in traffic. Conversely, theconcession period is proposed to be reduced if the traffic growth exceeds theexpected level. The MCA provides for a target traffic growth and stipulates anincrease of upto 20 per cent in the concession period if the growth in traffic isless than projected. For example, a shortfall of 6 per cent in the target traffic willlead to extension of the concession period by 9 per cent. On the other hand, areduction of up to 10 per cent of the concession period is stipulated in the eventof a higher than expected growth. For example, an increase of 6 per cent in thetarget traffic will reduce the concession period by 6 per cent.5.9 Financial closeUnlike other agreements for private infrastructure projects which neither definea time-frame for achieving financial close, nor specify the penal consequencesfor failure to do so, the MCA stipulates a time limit of 180 days for achievingfinancial close (extendable for another 120 days on payment of a penalty),failing which the bid security shall be forfeited. By prevalent standards, this is atight schedule, which is achievable only if all the parameters are well definedand the requisite preparatory work has been undertaken. The MCA representsa comprehensive framework necessary for enabling financial close within thestipulated period. Adherence to such time schedules will usher in a significantreduction in costs besides ensuring timely provision of the much-neededinfrastructure. This approach would also address the typical problem ofinfrastructure projects not achieving financial close for long periods. 43 EMERGING CHALLENGES IN PUBLIC PRIVATE PARTNERSHIP IN AIRPORTS
  44. 44. 5.10 User FeeA precise mechanism for determination of user fee has been specified for theentire concession period since this would be of fundamental importance inestimating the revenue streams of the project and, therefore, its viability. Theuser fee shall be based on the rates to be notified by the Government prior tobidding for the contact. The MCA provides for indexation of the tariffs to theextent of 60 per cent thereof linked to WPI. Since repayment of debt would besubstantially neutral to inflation, the said indexation of 60 per cent is consideredadequate. A higher level of indexation is not favoured, as that would require theusers to pay more when they should be receiving the benefit of a depreciatedasset. A higher indexation would also add to uncertainties in the financialprojections of the project. In respect of non-aeronautical services, however, theConcessionaire shall be free to determine the charges thereof.5.11 ConstructionHanding over possession of at least 90 percent of the required land as well asprocuring the environmental clearances are proposed as conditions precedentto be satisfied by the Government before financial close. The MCA defines thescope of the project with precision in order to enable the Concessionaire todetermine its costs and obligations. Additional works may be undertaken withina specified limit, but only if the entire cost thereof is borne by the Government.Before commencing the collection of fees, the Concessionaire will be requiredto subject the airport to specified tests for ensuring compliance with thespecifications and standards relating to safety and quality of service for theusers. The Schedules would include the master plan of the airport. The MasterPlan should specify the land use and other restrictions on development of theairport and should also earmark vacant land for future expansion of the airport.5.12 Operation and maintenanceOperation and maintenance of the airport is proposed to be governed by strictstandards with a view to ensuring a high level of service for the users, and anyviolations thereof would attract stiff penalties. In sum, operational performancewould be the most important test of service delivery. The MCA provides for anelaborate and dynamic mechanism to evaluate and upgrade safety 44 EMERGING CHALLENGES IN PUBLIC PRIVATE PARTNERSHIP IN AIRPORTS
  45. 45. requirements on a continuing basis. The MCA also provides for trafficregulation, security and rescue operations.5.13 Reserved ServicesCertain services at any airport are to be provided by government agencies. TheMCA specifically details the obligations of the Concessionaire in respect of thereserved services with a view to ensuring that the respective agencies are ableto provide such services without any obstacles from the Concessionaire.5.14 Right of substitutionThe project assets may not constitute adequate security for lenders. It is theproject revenue streams that constitute the mainstay of their security. Lenderswould, therefore, require assignment and substitution rights so that theconcession can be transferred to another company in the event of failure of theConcessionaire to operate the project successfully. The MCA accordinglyprovides for such substitution rights.5.15 Force MajeureThe MCA contains the requisite provisions for dealing with force majeureevents. In particular, it affords protection to the Concessionaire against politicalactions that may have a material adverse effect on the project.5.16 TerminationIn the event of termination, the MCA provides for a compulsory buy-out by theGovernment, as neither the Concessionaire nor the lenders can use the airportin any other manner for recovering their investments. Termination paymentshave been quantified precisely as compared to the complex formulations inmost agreements relating to private infrastructure projects. Political forcemajeure and defaults by the Government are proposed to qualify for adequatecompensatory payments to the Concessionaire and will thus guard against anydiscriminatory or arbitrary action by the Government. Further, the project debtwould be fully protected by the Government in the event of termination, exceptfor two situations, namely, (a) when termination occurs as a result of default bythe Concessionaire, 90 per cent of the debt will be protected, and (b) in the 45 EMERGING CHALLENGES IN PUBLIC PRIVATE PARTNERSHIP IN AIRPORTS
  46. 46. event of non-political force majeure such as Act of God (normally covered byinsurance), 90 per cent of the debt not covered by insurance will be protected.However, no termination payment will be due to payable if the Concessionairefails to commission the project owing to its own default. A different method ofvaluation has been adopted for the real estate. It will enable a more transparentand predictable valuation of real estate in the event of termination.5.17 Monitoring and supervisionDay-to-day interaction between the Government and the Concessionaire hasbeen kept to the bare minimum by following a ‘hands-off’ approach, and theGovernment shall be entitled to intervene only in the event of a material default.Checks and balances have, however, been provided for ensuring fullaccountability of the Concessionaire. Monitoring and supervision ofconstruction, operation and maintenance is proposed to be undertaken throughan Independent Engineer (a qualified firm) that will be selected by theGovernment through a transparent process. Its independence would provideadded comfort to all stakeholders, besides improving the efficiency of projectimplementation. If required, a public sector consulting firm may discharge thefunctions of the Independent Engineer. The MCA provides for a transparentprocedure to ensure selection of well-reputed statutory auditors, as they wouldplay a critical role in ensuring financial discipline. As a safeguard, the MCA alsoprovides for appointment of additional or concurrent auditors. To provideenhanced security to the lenders and greater stability to the project operations,all financial inflows and outflows of the project are proposed to be routedthrough an escrow account.5.18 Support and guarantees by the GovernmentBy way of comfort to the lenders, loan assistance from the Government hasbeen stipulated for supporting debt service obligations in the event of a revenueshortfall resulting from political force majeure or default by the Government.Guarantees and/ or compensation have also been provided to protect theConcessionaire, though for a limited period, from construction of competingairport which can upset the revenue streams of the project. 46 EMERGING CHALLENGES IN PUBLIC PRIVATE PARTNERSHIP IN AIRPORTS
  47. 47. 5.19 Real estate developmentProvision for development of real estate by the Concessionaire has been madein the MCA. The Concessionaire can grant sublicenses for the real estate andthe same would revert to the Government at the end of the concession period.Real estate in the form of developmental rights over adjacent lands could alsobe provided for improving project viability. While allowing sufficient flexibility tothe Concessionaire with respect to exploitation of commercial space at theairport, the MCA stipulates some limits and restrictions to prevent excessivecommercialisation.5.20 Miscellaneousa) A regular traffic census and annual survey has been stipulated for keeping track of traffic growth. Sample checks by the Government have also been provided for. As a safeguard against siphoning of revenue share by the Concessionaire, a floor level in present and projected traffic has also been stipulated. The MCA addresses other important issues such as dispute resolution, suspension of rights, change in law, insurance, defects liability, and indemnity, redressal of public grievances and disclosure of project documents.b) Security Issues Any other ground handling service providers selected through competitive bidding on revenue sharing basis by the airport operator subject to security clearance from Bureau of Civil Aviation Security and observance of performance standards as may be laid down by the airport.c) CNS / ATM The Airports Authority of India provides Communication, Navigation, Surveillance and Air Traffic Management (CNSATM) services at all the civil airports in the country which covers Indian airports measuring over 2.8 million square nautical miles (land area 1.05 million square nautical miles and oceanic area 1.75 million square nautical miles). CNSATM services are provided by AAI at 9 other airports also which are not managed by AAI i.e. Delhi, Mumbai, Bangalore, Hyderabad, Cochin, Lengpui, Diu, Puttaparthy and Vidyanagar airports. 47 EMERGING CHALLENGES IN PUBLIC PRIVATE PARTNERSHIP IN AIRPORTS
  48. 48. 6.0 RESERVED ACTIVITIESOn any Greenfield airport to be developed under these Policy Guidelines,activities relating to Air Traffic Services (ATS), security, customs andimmigration would be reserved for central government agencies. Provision ofthese services would be governed by the policy to be laid down by the CentralGovernment from time to time. Prior to grant of license, an applicant for licenseshall procure the following clearances Defence clearance: An applicant seeking a license would need prior clearance from the Ministry of Defence. Guidelines for this purpose would be issued by the Ministry of Defence from time to time. (b) Air Traffic Services (ATS): Functions related to ATS are being discharged by AAI. The applicant will have to enter into a CNS/ATM Agreement with AAI for the provision of ATS services at the proposed airport. ATS would be provided on a cost recovery basis and AAI would publish a standard agreement for this purpose. The Airport Company would also provide the required infrastructure to AAI free of cost for provision of ATS. (c) Security: The applicant will have to enter into an agreement for provision of security by the concerned authority. The cost of providing security will have to be borne by the Airport Company. Guidelines for this purpose would be issued by the Ministry of Civil Aviation from time to time. (d) Customs: In case of an international airport, the applicant will obtain clearance from the Department of Revenue for provision of Custom services. The cost of providing these services will have to be borne by the Airport Company. Ministry of Finance would issue the necessary guidelines from time to time. (e) MHA Clearance: The applicant seeking a license would need prior clearance from the Ministry of Home Affairs regarding location of the airport, acquisitions and installation of security equipment and verification of credentials of the developers. (f) Immigration: In case of an international airport, the applicant will procure clearance from the Ministry of Home Affairs for provision of 48 EMERGING CHALLENGES IN PUBLIC PRIVATE PARTNERSHIP IN AIRPORTS
  49. 49. immigration services. The cost of providing these services will have to be borne by the Airport Company. Ministry of Home Affairs would issue the necessary guidelines from time to time. (g) BCAS Clearance: The applicant seeking a license would need prior clearance from BCAS regarding location of the airport and acquisition and installation of security equipment. (h) Airport Meteorological Services: The applicant will have to enter into a CNS/ATN agreement with IMD for provision of meteorological services at the proposed airport to be provided by India Meteorological Department (IMD). The meteorological services would be provided on a cost recovery basis and IMD would publish a standard agreement for this purpose. The airport company would also provide the required infrastructure to IMD free of cost for provision of meteorological services. A memorandum of understanding would be entered into between the Airport Company and each GOI agency/department providing the following Reserved Activities, setting out the terms and conditions on which the said services shall be provided by the relevant GOI agencies/departments: Customs control Immigration services Health services Plant quarantine services and Animal quarantine servicesNOTE: MEMORANDUM OF UNDERSTANDING CAN BE CHANGED FROMTIME TO TIME 49 EMERGING CHALLENGES IN PUBLIC PRIVATE PARTNERSHIP IN AIRPORTS
  50. 50. 7.0 EMERGING CHALLENGES AND RISKS IN PPP7.1 General Issues1. PPPs are considered appropriate where private sector project management skills, more innovative design and risk management expertise can be brought in to give substantial benefits. In their opinion, however, PPP is unlikely to deliver value for money in other areas, for example where the transaction costs of pursuing PPP are disproportionate compared to the value of the project or where fast paced technological change makes it difficult to specify contractual requirements over the long term.2. The reality is that many things can go wrong, and often do, with difficulties in securing right of way, delays in meeting environmental impact process requirements, inadequate design, planning changes, slowness in securing permits, underestimation of project construction and operations costs, overestimation of traffic-based revenues, ‘teething’ problems, and a slow build-up of patronage. These problems are compounded by a failure of the contracting parties to adopt a realistic and cooperative approach to the assessment, mitigation and sharing of risks.3. The PPP are joint ventures of a number of private companies which agree in advance to subcontract each of the different activities and take equity stakes in the SPV to cement the relationship. two problems are thereby introduced. First, good constructors may be teamed with less good financiers. Superior knowledge of one activity may not carry over to other activities. Second, competition is limited to those bodies which are part of the group. Companies, especially local entities, with perhaps good technical know-how but poor financial capability are unable to bid because the activities are jointly, rather than separately, auctioned. Transparency and competitiveness in the bidding process are lost, or more correctly traded-off for innovation opportunities, which the authors consider may not always be the best solution.4. Cost of capital- In summary, most PPP/PFI projects involve substantial private sector finance and, in all but very exceptional circumstances, this finance in itself will be more costly than public sector borrowing, although 50 EMERGING CHALLENGES IN PUBLIC PRIVATE PARTNERSHIP IN AIRPORTS
  51. 51. there are many hidden costs in the latter. Clearly, governments are not immune from fiscal difficulties, which can lead to credit rating downgrades and higher project costs, but the main reason why the government’s cost of borrowing is low is that it can levy taxation to repay the debt. Due to these taxing powers, lenders to government consider that it is unlikely to default, and so demand a lower interest rate risk premium. But having the true risks hidden and passed on to taxpayers in the form of a contingent liability does not mean that public investments are risk-free. Project risks depend more on the project’s design than on the specific financing mechanism5. BUNDLING- The economic efficiency of ‘bundling’ from an ‘incomplete’ contracting perspective, in which imperfections arise because it is hard to foresee and contract about uncertain future events. PPPs are generally entered into for a lengthy period of time, usually 20 to 30 years, and are developed in an environment of uncertainty. As such they exhibit, as Hart suggests, the characteristics of ‘incomplete’ contracts, and their usefulness as integrated arrangements hinges on the nature of contracting costs.6. VALUE FOR MONEY-Value for money has been defined as ‘the optimum combination of whole life cost and quality (or fitness for purpose) to meet the user’s requirement’. Value for money is improved by the transfer of appropriate risk as the supplier is able to reduce either the probability that the risk will occur, the financial consequences if it does eventuate, or both. There comes a point, however, when this transfer becomes sub-optimal. If risks that, in fact, cannot be best managed by the private sector continue to be transferred to private bodies, value for money will decline since the premium demanded by the private sector will outweigh the benefit to the public procurer. Optimum, rather than maximum, risk transfer is the objective of the PPP arrangement.Over this issuers airport infrastructure face nine categories of specific risk• Technical risk, due to engineering and design failures;• Construction risk, because of faulty construction techniques and costescalation and delays in construction;• operating risk, as a result of higher operating costs and maintenance costs;• Revenue risk, e.g. because of traffic shortfall or failure to extract 51 EMERGING CHALLENGES IN PUBLIC PRIVATE PARTNERSHIP IN AIRPORTS