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Airport privatisation plan back on the table

By Sharmistha Mukherjee
September 01, 2014 08:32 IST
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Mumbai AirportThe decision to award private operators contracts to manage airports appears to be back on the agenda, with the Narendra Modi-led government taking charge at the Centre.

An inter-ministerial group is scheduled to meet on Thursday and finalise the model concession agreement for award of contracts for six identified airports -- Chennai, Kolkata, Lucknow, Guwahati, Jaipur and Ahmedabad -- on the basis of a pre-determined rate.

The process to award management contracts for these six airports had been initiated last year by the previous government but the plan had to be put on the back burner following a difference of opinion between the Union civil aviation ministry, then led by Ajit Singh, and the Planning Commission, over the terms of the project-award agreement.

Several private and foreign infrastructure companies, such as IL&FS Transportation Networks, Essar Projects India, Cochin International, Essel Infraprojects, GVK, Fraport, Saudi Arabia, GMR Airports, Sahara Group and Turkey’s Celebi Habacilik Holding AS, had evinced interest in these projects.

A senior ministry official told Business Standard: “The IMG will meet on Thursday to freeze the model concession agreement for award of contracts.

"Most of the concerns have been addressed; we expect we will be able to start the bidding process soon.”

Of the six identified airports, at least four are expected to be awarded within the current financial year.

“Depending on the response we get from private operators and the airports’ readiness, we would award management contracts for at least four of the identified airports,” the official added.

The ministry has set for itself a realistic target of four airports in view of possible obstacles. For instance, there is a court case pending in relation with award of management contract for the Chennai airport to a private operator.

These management contracts are to be awarded to private operators at pre-determined rates, and not on a cost-plus basis, to protect passengers from high user charges after award of projects.

Another senior ministry official said: “We have studied several international models.

"The rates are pre-determined at most places, so that there is some certainty about the charges that might be levied on passengers.

"Airport operators would also be incentivised for increasing efficiency when there is a specified limit.”

The model being considered, in line with the Planning Commission’s recommendation, will determine landing and parking charges at the six identified airports before award of projects and link the increase in rates to the Wholesale Price Index.

According to the Planning Commission’s formula, the landing and parking charges at the airports will come down by around two per cent annually; the rate will then be indexed with the inflation rate.

In December last year, the ministry had raised the concern that the Planning Commission’s formula might lead to an upward bias, as charges would increase even after an operator has recovered its investment.

Additionally, the ministry had feared the formula might override and restrict the role of the Airports Economic Regulatory Authority.

Justifying the proposal to pre-determine the airport rates, the second ministry official said: “In any sector, when there is a transition of operations from the public sector to the private, state-controlled regulators come into play to safeguard user interests.

"But after a certain level of maturity has been attained, and to ensure efficiency in operations, it is best left to market forces to regulate rates.”

In keeping with this idea, the ministry is looking to incorporate such clauses in the model concession agreement that the market forces will keep rates under check.

Besides approving the proposed inflation-indexed rate structure, the IMG will also look into and determine the proportion of non-aero earnings to be included while determining private operators’ revenue-sharing with the Airports Authority of India.

The second official quoted earlier added: “Both aero (landing & parking charges and user development fees) and non-aero revenues (city-side ventures like hotels and retail outlets) will be taken into account while determining the proportion of earnings to be shared with AAI.

"Our effort will be to incentivise the operators for increasing non-aero revenues to the extent possible.

"This will lead to cross-subsidisation and guard against unwarranted increase in aeronautical charges and high user fees thereby.”

Infrastructure creation in the form of modernisation of existing airports and development of low-cost airports to promote air connectivity, particularly to remote and regional areas, is a major area of focus for the Modi government.

For the current financial year, it has set a target of developing five no-frills airports and awarding management contracts for four airports to private operators.


  • Sep 4: IMG meets to freeze model concession agreement for airport privatisation
  • Award of contracts: For at least four of the six identified airports -- Chennai, Kolkata, Lucknow, Guawahati, Jaipur and Ahmedabad -- to be awarded this financial year
  • Formula: Airports to be awarded at pre-determined rates, and not cost-plus basis, to prevent high user charges for passengers after the award of projects; increase in rate to be linked with the Wholesale Price Index
  • Incentives: The model concession agreement to be finalised is likely to incentivise private operators for increasing non-aero revenues through city-side development, so that aeronautical charges, and user fees thereby, stay under check

Image: Mumbai airport's stunning Terminal 2; Photograph courtesy: MIAL

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Sharmistha Mukherjee in New Delhi
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