Airport PPPs on a crowded runway; private sector bids could be subdued

Last August, the government had announced its intent to sell stakes in four privately-run airports (Delhi, Mumbai, Hyderabad and Bengaluru) and lease 25 other airports owned by AAI under National Monetisation Pipeline.

Airports hold pride of place in the government’s National Monetisation Pipeline (NMP) programme to monetise public assets.

Private airport operators, including the Adani group, Fairfax, GMR and Zurich Airport, are expected to evince interest in the next round of public private partnership (PPP) development of state-owned Airport Authority of India (AAI) airports.

Industry analysts, however, do not expect bids to be as high as the last round, which saw Adani group gain control of six airports.

“We are open to further opportunities to invest in India.

“Zurich Airport International believes in the growth and continuous maturity of the Indian aviation sector.

“We are following the discussions about the next round of asset monetisation closely,” said Daniel Bircher, chief operating officer (CEO) of Zurich Airport International, Asia, which is developing the Noida International Airport and had developed the one in Bengaluru, which it exited in 2017.

“We are confident that AAI and the government will propose an equitable and competitive concession framework for further airport privatisation with a view to encouraging private sector investment in India’s aviation sector,” he added.

GMR and Adani group did not respond, and Fairfax declined comment.

Last August, the government announced intent to sell stakes in four privately-run airports (Delhi, Mumbai, Hyderabad and Bengaluru) and lease 25 other airports owned by AAI under NMP.

This programme is to be carried out between FY22 and FY25.

The following month, the AAI board cleared a proposal for PPP development of 13 airports by pairing seven small airports with six larger ones (see table).

Eight of the 13 airports have been identified in the NMP, while five — Kangra, Kushinagar, Gaya, Aurangabad and Jabalpur — are outside of the plan.

Though the project is set to begin this financial year, the Union cabinet is still to clear the proposal.

Bids for six AAI airports monetised in 2019 (Ahmedabad, Guwahati, Jaipur, Lucknow, Mangaluru and Thiruvananthapuram) were on the basis of per passenger fee model.

The winning offer for the six airports from the Adani group ranged from Rs 115 to Rs 177 per passenger, 12 to 155 per cent higher than the second-highest bidder.

In an email response, AAI said financial bid criteria for the 25 airports are yet to be decided.

This time the enthusiasm may be muted.

“Apart from GMR, Fairfax and the Adani group, there could be participation from two or three other Indian companies,” said Sidharath Kapur, aviation expert and former executive director of GMR Airports.

“But the Covid-19 pandemic has moderated the aggression among companies.

“Moreover, these are smaller airports with the additional complexity of being bundled with loss-making nascent airports.

“Developers also realise that quoting very high premiums would make it difficult to generate profits,” Kapur added.

In the two years preceding the Covid-19 pandemic, only 14 (in 2018-19) and 22 (in 2019-20) of the 128 AAI-operated airports made a profit, according to Ministry of Civil Aviation reply to the Lok Sabha in December 2021.

In FY 2020-21, only four of them (Bareilly, Kandla, Kanpur Chakeri and Porbandar) managed to make a profit as the pandemic disrupted air travel.

Industry experts, however, do not see AAI airport losses as a disincentive for the bidding process.

“Airports are dominant monopoly assets and are typically leased out for 40-plus years.

“Like airlines, you don’t find airports going bust. Building an airport also helps companies develop their brand equity.

“GMR group’s brand image rose significantly after the modernisation of the Delhi airport,” Kapur said.

“The experience of the private sector has been quite good in the airport sector.

“The last round of privatisation of AAI airports got a good response as well,” added Jagannarayan Padmanabhan, director at CRISIL Ltd.

“We expect the appetite to be good if the terms of engagement are clear, enough flexibility is given for operating and managing the asset and risk sharing is equitable.”

Another attraction for investment is growth in smaller towns and rural markets.

According to a recent PwC report, the number of airports handling more than 3.5 million passengers annually is expected to increase from 16 in 2020 to 45 by 2033.

Total traffic handled by Indian airports (including arriving and departing passengers) is expected to nearly triple from 341 million in 2020 to 959 million in 2033 and the fastest growth will be in tier II and III airports, the report said.

“AAI being the largest airport operator functioning under the Ministry of Civil Aviation has the responsibility of providing infrastructure for making air connectivity available to not only large cities but also remote places in the country.

“In the process, some of the AAI airports are prone to function under losses even after the most efficient management of airports,” the authority said.

It added that a transaction advisor carried out a study to find the best possible combination of airports that would generate optimum revenue for AAI over the proposed concession period of 50 years.

The authority also said it is incorrect to describe the process as privatisation as the proposal is only to award contracts for operation, management and development; the ownership of the airports will remain with AAI.

“In countries like Japan, Mexico and so on, bundling has proven to be successful in cross-subsidising and thus improving the viability of smaller airports with the help of viable anchor airports in the bundle.

“Bundling has also helped in meeting the strategic objectives of the government which include regional development, tourism sector growth etc,” PwC said in an email reply.

Kapur differs. “I believe the pairing of two airports (a large airport with a loss-making small airport) is not a good idea as it does not provide scale.

“Similar bundling of airports for privatisation was tried in the Philippines but it was withdrawn as there was not enough investor interest.

“In other countries, like Argentina, Greece and Mexico, a large number of airports had been bundled for privatisation, which provided scale,” he said.

Kapur added that the government should not place any restrictive conditions in bids such as a cap on the number of airports that a developer can operate.

The PwC report has also recommended the government to offer certain concessions to fast track airport monetisation.

These include moratorium in payment of concession fee for smaller airports, allowing flexibility in capital investments, continued government support for regional connectivity schemes and extending the list of permissible non-aeronautical activities at airports.

Given the scale of the project, this could be AAI’s most difficult test yet.

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