Inching towards one of the most dramatic changes in the aviation sector of India; the Central Government is Privatizing Airports. In February 2019, the Government of India had approved the privatization of 6 airports in India; Lucknow, Ahmedabad, Jaipur, Mangaluru, Thiruvananthapuram, and Guwahati. A unique public-private partnership (PPP) based model in collaboration with the Airports Authority of India (AAI) gained approval and, with this, Adani Enterprises will manage a total of 6 airports. The government also plans to privatize 30-35 more airports in the next 5 years. Will this lead to India having world-class airports in terms of infrastructure? or will it create a burden on passengers as private players’ eyes squeeze more money from them?
In this article, let’s discuss the various aspects related to this development.
What are the latest developments?
Currently, the first round of privatization is on. In this round, Jaipur, Thiruvananthapuram, and Guwahati airports got clearance by the Centre for operation, management, and development by the private firm Adani Enterprises via the PPP model. These three airports are actually part of the total six facilities that were auctioned last year for the process of privatization in which Adani Enterprises emerged as the highest bidder. In the second round, the AAI has chosen the Varanasi, Bhubaneshwar, Amritsar, Indore, Raipur, and Trichi airports. This year, Contracts for the Lucknow, Ahmedabad, and Mangalore airports gained ratification. The Adani Enterprises, however, is yet to take over the operations owing to the Covid-19 situation.
A graphical representation of growth in the number of passengers over the years:
Background of Privatizing Airports
The latest announcement comes a year after the Centre’s nod to the civil aviation ministry’s proposal. The proposal was to lease out Ahmedabad, Lucknow, and Mangaluru airports through PPP to the Adani group for 50 years. Following the successful privatization of Delhi and Mumbai airports back in 2006; given to private companies GMR Group and GVK Power & Infrastructure, respectively, it was the second-biggest airport privatization process.
The Adani group will operate the three airports, in addition to Jaipur, Guwahati, and Thiruvananthapuram, after the bid in Feb 2019. According to the terms, the Adani group is responsible for the management and operations of the existing airport assets. They will also take care of the designing, engineering, financing, construction, and development aspects of the additional air-side, terminal, city-side, and land-side infrastructure for the airports. The AAI will adopt the per-passenger fee model; a modification from the previous one.
Revenue-sharing model and the Government’s Stance of Privatizing Airports
Under this model, the airport operator (Adani Group) must pay fixed charges per passenger on a monthly basis to AAI. Let’s understand this with an example. Say, if 1 lakh passengers use a particular airport facility in a year; the operator will have to pay the charge multiplied by the heads of passengers to AAI on a monthly basis. The airport operator gets an incentive to multiply business as there is no sharing of profits with the government. Also, AAI benefits from the growth in the number of passengers in terms of rising in its revenue.
According to the Central, Privatizing Airports is not a permanent move as they are being leased out for 50 years. The AAI is committed to utilizing the revenue received through this model to develop airports in small cities across the country increasing the overall connectivity and boosting infrastructure. The Centre claims that privatization of the facilities will enable passengers to get better facilities and improved satisfaction.
Contribution of Delhi and Mumbai airports (operated under PPP model) to AAI’s total revenue:
Privatizing Airports: A boon or a bane?
Critics are of the view that the bidding parameter should include a minimal element of revenue sharing with the government; rather, it should give due weightage to cost minimization in the bidding process. The report suggests, structuring the bid to enhance the revenue for the government. This will be a way to let bidders get the upper hand in the system to win the contract and squeeze passengers for the extra charges. The share of revenue to be passed on to the government or per-passenger payment to the government, which is revenue share in disguise, does nothing to keep costs down. As a result, airplane ticket prices could increase in the near future, keeping the amateur lower-middle-class travelers out of its purview.
However, in a country like India, Privatization in today’s concept is more of a means of increasing output, improving quality, reducing unit costs, curbing public spending, and raising cash to reduce public debt. To achieve an increase in the output of the country there is a need for privatization at a rapid scale which will help in improving the quality of the products. Privatization always keeps the consumer needs uppermost, helping the government pay their debts, increasing long-term jobs, and promoting competitive efficiency and an open market economy. In a rapidly rising economy like India, there is a need for the government to realign its priorities in mobilizing the skills and resources of the private sector in the larger task of development.
A graphical comparison of non-aero revenue between AAI Airports and PPP Airports:
Image: Centre for Aviation
Analysis of the move: Will it Yield Expected Returns?
The P-P-P model of airports has proven itself to be an all-round success model for the major Indian Airports. It is also the right blend of government intervention and private business expertise. PRivatizing airports will mean airports will be run like a corporate business with strategies; will be designed, operated, and maintained on international standards attracting more passengers. Privatization, as a whole, is indeed helping in the development of world-class infrastructure which is ultimately boosting the economy. On the other hand; Government gets the opportunity to move upfront spending off its resources for their near-term financial commitments in sectors where it is more necessary.
The argument, however, cannot be denied that prices might increase under the administration of private players covered under the blanket of the profit-maximization objective of corporates. Now, only time can unfold how good a trade-off it is.