Financial Issues concerning the implementation of PPP in Aviation Sector in India
1. FINANCIAL ISSUES CONCERNING THE
IMPLEMENTATION OF PUBLIC PRIVATE PARTNERSHIP
(PPP) IN AVIATION SECTOR:
AN EMPIRICAL EXAMINATION
Presented By
SURESH RANA
1
2. Outline of the Research Paper
1. Introduction
2. Conceptual Framework
3. Literature Review
4. Research Methodology
5. Data Analysis & Interpretation- Aviation
Infrastructure scenario (Objective 1)
6. Funding & Financing of Airports (Objective 2)
7. Data Analysis & Interpretation- Case study of
5 PPP Airports (Objective 3)
8. Fin. issues & challenges in implementation of
PPP in Airports (Objective 4)
9. Findings, Recommendation & Conclusion
2
3. Introduction
The Civil Aviation Industry comprises various aviation sub-sectors i.e Airports, Airlines,
Cargo, MRO Services, Helicopter services, Ground Handling services, etc. (NCAP-2016)
Transformation of airports from a ‘public enterprise’ to a ‘commercial enterprise’ is a
revolutionary path.
A factor which has contributed largely to this transformation is ‘Private Partnership’.
Privatisation is adopted specially to tap private sector expertise, technology and financing
capabilities.
PPP is used for both greenfield and brownfield airport projects.
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4. Statement of the Problem
Govts. increasingly turn to the private sector as an alternative additional source of funding to meet the
funding gap.
PPP opens new avenues of investment and modernization. It also brings greater productivity and efficiency
to the deployed capital.
Apropos of airport sector, as of now, about 55% of total passenger traffic in India is handled by five PPP
airports.
GoI has granted “in principle” approval for setting up of 18 Greenfield airports which total estimated cost
comes out to approx. INR 30,000 crore. Recently, six existing airports of AAI have been leased out for O&M
and development under PPP.
PPPs, the panacea for infra funding, today face a plethora of issues/challenges such as poor project
preparation activities, lack of equity and absence of dedicated policy/regulation.
There is an imminent need for continuous evolution of the PPP framework .
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5. The Current Study
Since huge financial and physical assets are involved in PPP airport projects, there are various
issues/challenges are emerged before all stakeholders.
Issues pertaining to PPP lifecycle are broadly classified into three categories: 1. Financing issues and viability
constraints, 2. Capacity and procedural issues, and 3. Policy, regulatory and institutional gaps.
Among these, the financial issues are the root cause and barrier to the projects, the current study has aims
to (a) Understand the existing and operational airport infrastructure in India (b) Exploring the funding and
financing mechanism adopted by PPP airports (c) It intends to examine the importance of financial factors
that hinder the success of PPP and (d) To investigate the differences in the perceptions of the Govt. and the
private players.
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6. Objective of the Study
The study intends to examine, in details, the process of development of PPP airport infra in India through case
study, explorative and empirical study.
With the help of literature review and conceptual framework, the study focuses to find out the main problem
areas especially financial issues in overall process of PPP airport projects.
What more can be done in the area and how to solve parallel issues are the objective.
In which area PPP projects are doing well and how to shape it in all future PPP projects.
So, to investigate financial issues concerning the PPP, four objectives have been determined based on the
specific research questions (RQs) for each objective.
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7. Literature Review
Existing literature of the subject matter is discussed to understand the foundation and quantum of work
done in the area.
The systematic review of existing literature has led to the development of the research design of the
study.
Summary of literature review
It is found that PPP has emerged as the favoured model for infrastructural projects.
It gives foundations of a neoliberal, market-driven and growth-oriented state.
Since various risks and management techniques are attached with PPP, PPP model and
Concession agreement between a govt. and a private party is very essential for a successful PPP
project.
As per literature review, it is apparent that prior studies are generally conducted on specific
issues and case to case basic. A comprehensive study on financial issues pertaining to implementation
of PPP in airport project has not been conducted.
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8. Research Methodology
Research Gap
A few studies have been undertaken on financial issues on implementation of PPP in airport sector.
They hardly concentrated on the funding and financial issues in PPP.
The studies undertaken mostly to focus on individual case study and are user specific.
Research Methodology
The study is focused on the purpose but the ultimate findings of the study requires descriptive and
empirical analysis of the core issue in order to discover concrete finding/result. Thus, the objectives have
been segregated in four parts for level study and for achieving ultimate goal of the study. Objectives are
based on specific research questions.
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9. Description of data and methodology
adopted for analysing data
The study uses a combination of methodologies to meet the objectives.
Though it predominantly uses descriptive research and empirical research.
It also uses case study research and explorative research to analyse the financial issues and problems
identified for research and arriving at the possible conclusions.
Sampling Design- 1. GDP, CapEx of AAI, Air traffic in India have been taken for analysis.
three Greenfield airports i.e.. CIAL, BIAL & GHIAL and two Brownfield airports i.e. DIAL & MIAL are taken for
case study.
Data Sources- DGCA & AAI database (traffic data for 10 years i.e. 2009 to 2019), ProwsessIQ (Financial data
of PPP airports for 5 years 2014 to 2019) and Annual Reports, Reports of respective authorities.
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10. Outline for analysis of Objectives
10
Objective 1
To evaluate the existing
aviation infra including
airports infra in India
Objective 2
To assess the PPP model
for funding and financing
airport infra
Objective 3
To conduct financial assessment &
other performance measures of 5
PPP airports
Objective 4
Detailed study on issues
concerning implementation of
PPP in airport and suggestion
thereof
Type of
Research
Empirical &
Descriptive
Descriptive Case Study Descriptive & Explorative
RQs &
Hypothesis
H0- The CapEx on PPP airport infrastructure by AAI is not influenced by GDP
H1 = The CapEx on PPP airport infrastructure is influenced by GDP
Tools for
Analysis
Regression Analysis
(SPSS), Exponential
Smoothing forecast
and graphic analysis
(MS excel)
Graphic analysis
(MS Excel)
Multiple Regression Analysis
(SPSS) and comparative
analysis
Explored basically issues
and challenges at various
stages and solution
thereof
Variables GDP (Ind)
CapEx of AAI
- Financial Ratio- Net Profit
Ratio (NPR (Dependent) &
Domestic Passenger Ratio
(DPR) and Domestic Cargo
Ratio (DCR)
-
11. Limitation of the study
The study is restricted to greenfield and brownfield airports constructed under PPP model.
The study is restricted to available/secondary data. The lack of data in the field of study has restricted the
analysis.
Out of the three performance measurement indicators i.e. Core indicators, productivity indicators and financial
indicators, two indicators except productivity indicators are used.
Passenger traffic and cargo traffic components are used for analysis. For financial inference only domestic
traffic aspect is analysed. Aircraft movement data has not been taken.
The financial analysis and operational efficiency are restricted up to the year 2019.
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12. Data Analysis and Interpretation- Objective 1
Evaluation of prevailing aviation infrastructure in India
RQs- 1. What is the role of aviation infrastructure in Indian economy and its transport system? How many airports are operational in India?
2. What is the role of various authorities and regulators in aviation sector in India?
3. Analyse the air traffic by giving growth trends for both passenger and cargo traffic.
GDP and Civil Aviation CapEx by AAI * Regression Analysis
H0: CapEx on airport infrastructure is not influenced by growth in GDP. H1: CapEx on airport infrastructure is influenced by growth in GDP.
The model is good fit with an R squared of 0.475 i.e. 47.5.% and a ‘p’ value of 0.027262, which means that independent variable explains the dependent variable at middle
the alternate hypothesis is accepted. Hence, it could be statistically inferred that with increased growth of GDP it would be highly essential to invest more amount on
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Variable Coefficients
Standard
Error
t-
Statistic P-value
Intercept -6419.699 10680.94 -0.60104 0.564449
GDP (in Million
US$) 0.0129124 0.00479 2.695524 0.027262
R-squared
0.475954406
Adjusted R-squared
0.410448706 Significance
F value
0.027262
14. Data Analysis and Interpretation- Objective 1
• The Growth Rates (%) and Related Events Analysis
14
Year
IP
(G)
DP
(G)
IC
(G)
DC
(G) Phases and events
In 2008 Global Financial Crisis. Acquisition of Air Deccan by King Fisher. High Competition and turbulence
phase
2009-10 11.07 14.87 15.20 6.26
Phase-I (Turbulence) Surge of fuel price, High
operation costs
2010-11 9.35 18.76 18.02 13.46 Phase-II
(Consolidation)
Expansion of IGIA, Delhi
2011-12 8.67 12.99 -2.58 -5.61 Civil Aviation Act 2012
2012-13 5.65 -4.88 -0.22 1.50
Crisis in Spice Jet, ownership
change
2013-14 6.90 4.84 12.60 1.87 Closure of Kingfisher Airlines
2014-15 6.08 15.52 16.30 8.40 Phase-III (Recovery) Air Asia start,
2015-16 8.94 21.57 5.35 2.65
UDAAN, Regional
connectivity Scheme (RCS)
2016-17 9.82 21.77 2.28 7.77
National Civil Aviation Policy-
2016, Jet Airways to merge
with JetLite i.o.t. complete its
exit from LCC segment
2017-18 10.80 18.86 9.21 14.59
Phase-IV
(High growth)
India become 3rd largest
domestic aviation market in
the world. Combined efforts
of Govt. and Private sector in
capacity building.
2018-19 5.44 13.80 9.26 3.77
Phase-V (Slow
down)
Jet airways went out of
business in April. Sudden
vacuum in capacity. Worst
year in the past six years
15. Data Analysis and Interpretation- Objective 1
• Forecasting Air Passenger Traffic Movement in India
Exponential smoothing forecast- Best fitted for non seasonal data.
• The smaller alpha (larger the damping factor), the more the peaks and valleys are smoothed out. The larger alpha (smaller the damping factor), the closer the
smoothed values are to the actual data points.
• Formula: Ft= αAt-1+(1-α)Ft-1, Where: Ft is the forecast for next year passenger t, α is the smoothing constant or (1- damping factor), At-1 is previous year’s
actual passenger, Ft-1 is previous period’s forecast passenger , Where, 0≤ α ≤1 is the smoothing parameter.
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Year DP IP DC IC
2010 45.34 32.10 1139.07 394.00
2011 53.84 35.10 1292.44 465.00
2012 60.84 38.14 1219.99 453.00
2013 57.87 40.30 1238.35 452.00
2014 60.67 43.08 1261.54 508.94
2015 70.08 45.70 1367.56 591.92
2016 85.20 49.79 1403.84 623.56
2017 103.75 54.68 1512.93 637.80
2018 123.32 60.58 1733.65 696.53
2019 140.33 63.88 1799.00 761.00
2020 157.60 67.76 1864.92 777.17
2021 174.86 71.63 1932.22 816.17
2022 192.12 75.50 1999.53 855.16
2023 209.38 79.37 2066.83 894.15
2024 226.64 83.24 2134.13 933.15
2025 243.90 87.11 2201.44 972.14
Passenger Cargo Year
CAPA International 8.40% NA 2014-2023
Domestic 11.90% NA
Total 11.00% NA
AAI International 6.0% to 7.0% 5.0% to 8.0% 2014-2023
Domestic 5.0% to10.0% 5.0% to 8.5%
Total 5.3% to 9.2% 5.0%to 8.2%
Researcher’s
Forecast* International 6.40% 5.00% 2020-2025
Domestic 11.60% 4.10%
Total 9.00% 4.55%
16. Data Analysis and Interpretation- Objective 2
PPP Airports Funding and Financing
RQs:
1. What are the financing and funding mechanism for infrastructure in Indian aviation sector?
2. What is funding gap? How is it gratified by implementing the PPP mode in airport
infrastructure?
3. What are the sources and instruments that are used for funding and financing in airport
infrastructure?
4. What are the financing models used for airports in India?
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17. Data Analysis and Interpretation- Objective 3
Case Study- To conduct a detailed financial assessment and other performance measures of PPP airports in
India
RQs
1. What is the status of major PPP airports in India since its inception?
2. What is the funding structure of these PPP airports?
3. Analyse air traffic of these airports so that adoption of PPP could be examined.
4. How the performance of these airports is measured and what are the variances and similarities among PPP airports?
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16%
80%
4%
Equity Capital
Debt
15%
81%
4%
Equity
Capital
Debt
VGF
14%
5%
41%
12%
0%
28%
Equity Capital
(GMR)
Equity Capital
(AAI)
Debt/Loans
Interest free
Security Deposits
from Airport
Service Providers
Internal Accruals
12%
43%
22%
23%
Equity
Capital
Debt
Interest
Accrual
Deposits
from Real
Estate
Develop
ment
CIAL BIAL GHIAL DIAL MIAL
18. Data Analysis and Interpretation- Objective 3
Comparison of funding and size of 5 PPP airports &
Comparison of Growth of Passenger and cargo traffic of 5 airports and Pan India PPP airports
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Airport PPP-
BOT
type
Pvt.
Secto
r
Public
Sector
Land
area
(acres)
Final
project
cost
(crores)
Terminal
area
(Million
square
feet)
Present
Capacity
(Million)
Passenge
r
Traffic/To
tal Pax
2018-19
(Million)
CIAL BOO 57.9% 42.1% 1300 320 0.57 4 10.1
BIAL BOOT 74% 13+13% 5130 2300 1 12 33.3
GHIAL BOOT 74% 13+13% 5500 2920 1.17 12 21.4
DIAL LDOT 74% 26% 5436 12857 4.84 69 69.23
MIAL LDOT 74% 26% 4800 12380 5.8 40 48.81 -30.00
-20.00
-10.00
0.00
10.00
20.00
30.00
40.00
50.00
2015
2016
2017
2018
2019
2015
2016
2017
2018
2019
2015
2016
2017
2018
2019
2015
2016
2017
2018
2019
2015
2016
2017
2018
2019
2015
2016
2017
2018
2019
CIAL BIAL GHIAL DIAL MIAL PANINDIA
DP(G) IP(G) DC(G) IC(G)
19. Data Analysis and Interpretation- Objective 3
Efficiency measurement of 5 PPP airports
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Descriptive Statistics of variables
N
Mean
Standard
Deviation
Co-efficient of
Variance (%) Minimum Maximum
NPR 25 18.36656 24.76784 613.446 -44.9631 56.43742
DPR
25
69.83501 13.71872 188.2034 40.25974 86.48649
DCR 25 32.81476 9.732948 94.73028 14.15465 45.90909
Correlation among variables
NPR DPR DCR
Pearson
Correlation
NPR 1.000 -0.006 -0.146
DPR -0.006 1.000 0.871
DCR -0.146 0.871 1.000
Domestic Passengers and Domestic Cargo influencing Net Profit Ratio
Variables
Unstandardized
Coefficients Standardized Coefficients
T value Sig. (P value)
95.0% Confidence Interval for B
B Std. Error Beta Lower Bound
Upper
Bound
1 (Constant) 3.691 28.420 0.130 0.898 -55.248 62.631
DPR 0.909 0.751 0.504 1.210 0.239 -0.649 2.468
DCR -1.488 1.060 -0.584 -1.404 0.174 -3.687 0.710
a. Dependent Variable: NPR
R= 0.287 R Square = 0.082 F = 0.986 Significance = .389
Observations (N) = 25
It reveals that the value of R square (R2=0.082 or 8 per cent) which indicates that the independent variables explain 8 %
variation in NPR. As the statistic value of ‘F’ is 0.986 (sig=.389) is significant, hence the model is fitted. The result indicates
that DPR and DCR influence the NPR to a limited extent.
20. Data Analysis and Interpretation- Objective 4
To present detailed study on issues/challenges concerning the implementation
of PPP airports and suggestions thereof.
RQs
1. What are the financial issues, challenges concerning in implementation of PPP airports?
2. What are the impacts of financial issues and potential risks on setting up and operation of PPP airports?
3. What can be suggested for resolving financial issues with private parties for setting up of PPP airport infrastructure in
India?
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Issues
•* Pre-operational task
issues
•* Construction phase issues
•* Operation phase issues
•* Handover issues
Challenges
•* Private party may only be interested in areas
where there is huge scope for growth and profits
•* All the members of the consortium might not be
the best in their field
•* PPP is cost effective than public infrastructure in
the beginning but has greater challenges in terms of
finance in the long run.
Risks
•* Construction Risk
•* Operating Risk
•* Market Risk
•* Interest rate Risk
*Foreign Ex. Risk
* Payment risk
* Regulatory risk
* Political risk
21. Financial issues in implementation of a PPP project in
aviation sector- Objective 4
Liberal norms of GoI to PPP
airports for revenue
streams
•Feasibility based on Multiple Revenue
Streams
•* Limitations of revenue streams for
PPP airports
•* User Pays Principle in PPP airports
•* Airport Charges & Airport
Development Fees and UDFs
•* Issues of Affordability of Services
and Economic Regulation
Steps taken to resolve
financial issues and viability
constraints
VGF scheme set up to fund
economically justifiable but financially
unviable projects
IIFCL was created to reduce the
financing cost for infrastructure projects
Infra Debt Funds act as vehicles for
refinancing existing debt of
infrastructure companies
Rupee denominated bonds or masala
bonds were launched to eliminate
foreign exchange risk
In 2016, RBI allowed to set up Infra Invt.
Trust (InvIT) to GMR and others which
would act as an enabling vehicle for
refinancing stressed assets
Suggestion and lesson
learnt from PPP experience
in airport
Government’s responsibility still continue
* Lust to Private parties
* Robust Stakeholder mgt.
* Innovative financing method
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22. Findings
22
Objective 1: To evaluate the existing aviation infrastructure including airports infrastructure
CapEx on Civil aviation infra by public sector and the overall GDP have grown in the same direction.
It is statistically inferred that with increased growth of GDP, it would be highly essential to invest more amount on
development of airport infrastructure in India.
There are 125 airports currently operating in India. Out of which, majority of them are maintained by AAI.
It is found that domestic traffic was in acceleration trend after inception of LCC during the period 2009-11 after that it
drastically went down till 2013-14. After introduction of RCS-UDAN it had improved but due to a major turbulence i.e. Jet
airways went out of business, sudden vacuum in capacity worsened the growth trend and started to fall.
The growth trend raised in 2015-16 is not sustained in 2018-19 (5th Phase in the study).
23. Findings
23
Objective 1: To evaluate the existing aviation infrastructure including airports infrastructure
Passenger Traffic: The growth of domestic passenger is predicated 11.6%.
Cargo Traffic: The growth of domestic passenger is predicated 4.1%.
Inefficiency of aviation policies, surging air turbine fuel (ATF) price, growth in Indian economy are the major issues that
hinder in achieving the forecasted growth rate in air traffic.
Objective 2: To assess the PPP model for funding and financing airport infrastructure in India
The study found that funding gap between infrastructure requirement and the funds available is huge.
Govt. must be ready to study, discuss, think, and develop a detailed outlook regarding every aspect of PPP airport
projects
Thoroughly analysis of suitability of national framework, background to private engagement and raising awareness to
the structural changes are needed for holding this paradigm shift.
24. Findings
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Objective 3: To conduct a detailed financial assessment & other performance measures of PPP airports.
All the 5 PPP airports are trend setters in their own manner.
The struggles of these airports, their management and efficiency measures can be used in future to overcome issues in coming up with
new airports.
The analysis indicates that domestic passenger and domestic cargo influence the net profit to a limited extent.
Objective 4: To present detailed study on issues/challenges pertaining implementation of PPP in airport infrastructure.
The major issues of PPP mode include delayed schedule, delayed approval, penalties, land acquisition and lack of resources.
Others issues and challenges in terms of managing the cost of development, escalation in costs due to delay and stake holder
management.
Need for innovative financing methods are essential to meet the high growth of traffic.
Both public and private parties should find suitable model that best meets the social, financial and economic goals.
The private players are only attracted to the profitable routes. So, AAI could disinvest from existing successful airport routes and use the
same funds for developing regional, non-metro airports.
25. Recommendations
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The airport infrastructure in India is not adequate to support the expected surge in the passenger traffic.
GoI may concentrate to develop more world class airports using PPP models .
The funding gap in infrastructure is widening, the GoI needs to concentrate on innovative methods of raising airport infra finance rather
than depending upon the conventional sources.
PPP can be a lucrative option for the private players only if the revenues expected from the project is high and consistent.
GoI may also consider in developing new hybrid instruments to develop effective financing and encourage the private players.
Financially viability to meet the requirement in airport infrastructure is not in India, thus, a robust and innovative mechanism is required.
RCS-UDAN and the NCAP are a welcome move of GoI. However, efficient management along with innovative sources of finance are
essential for the success of PPP’s highly ambitious projects.
To provide more power to regulating authorities like AERA and also to set up single window system for approval and clearance to reduce
time and conflict between both parties.
26. Conclusions
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It is concluded that better preparation before the process of bidding for a PPP project is the key to stop various issues.
Civil aviation sector should prepare long-term investment and financing plans to identify revenue sources.
Bridging funding gap would require additional revenue sources or capital subsidy.
With an increased trend towards the engagement of private partners. The reality, however, lies in the fact that there are severe
inefficiencies in public services due to budget constraints.
The future of PPP in the aviation sector in India looks bright as the country aims for a higher growth trajectory through strong
infrastructure investments.
Unprecedented issue in aviation sector- COVID-19 effect
Airport revenue streams have been paralysed by the unprecedented drop in passengers and commercial activity.
The estimated decline in total airport revenues on a global scale is estimated to be $39.2 billion (USD) in the second quarter and more
than $97 billion for 2020. At global level, more than 1/3 of total airport costs are capital costs. Compensation towards CapEx during this
pandemic is very crucial (By ACI).
27. Scope for Further Research
27
Though an attempt has been made to make the study intensive and concentrated by taking the
data of airports in India for a period of 10 years data, 5 years data for measurement of financial
efficiency, still more analysis can be undertaken by taking more determinants.
The study is based on secondary data. Efforts can be made to collect primary data through
questionnaire to include managerial view and satisfaction level of all stakeholders to find out
appropriate determinants so as more conducive conclusion can be taken.
Study may also include comparative analysis of global practice of PPP in aviation sector comprising
all financial factors like tax policies, inflation rate, foreign exchange rate fluctuations, capital market
conditions, etc.
28. 28This Photo by Unknown Author is licensed under CC BY-NC-ND