Why The Next Round Of Airport Privatisation Will Be Different

The pandemic notwithstanding, at the end of 2020, the Government of India signalled its intentions towards the next round of privatisation.

This time, 12 airports are likely to be in the list. There have also been indications that the privatisation bids will be solicited where the airports could come coupled as six packages of two airports each.

The shortlist includes the airports of Amritsar, Bhubaneswar, Tiruchirappalli, Raipur, Indore and Varanasi which will be clubbed with airports at Barmer, Jharsuguda, Salem, Jagdalpur, Jabalpur and Kushinagar.

Even beyond this, this next round of airport privatisation promises to be different from the previous ones.

The current wave of privatisation will build on the PPP model and, perhaps, attempt to correct past mistakes where the outcomes have been very different from the objectives.

Whether it is the cost-overruns, the inequitable partnership or the fact that the consumers have paid for much of the infrastructure by ways of fees and charges, in essence, airports which function as geographic monopolies have been guaranteed a rate of return — much of which has been serviced by an increasing burden on the travelling public — which in turn has led to a feeling of profits being earned rather than deserved, in addition to the unwanted phenomenon of cartelisation.

No doubt, we have better airports, yet the development model has been a mismatch for the market.

Over the last 20 years, the levy of higher User Development Fees (UDF), Airport Development Fees (ADF) or in some cases “arrival fees” has left much to be desired.

Concurrently, investors have fared well as terms have progressively improved over the years — almost totally in favour of investors.

Key elements that investors evaluate include the concession periods, the revenue sharing agreements, the till-structure that impacts how much of the regulated revenue can cross-subsidise lower user charges, property development rights and availability of financing.

Tracing the history of changes and tweaks, one observes that Cochin airport — the first PPP airport — had a concession period that was not defined and a revenue share that was in the form of a dividend to the government.

Next came Hyderabad and Bengaluru, where terms stipulated a 60-year concession with a 4 per cent annual concession fee and 26 per cent public ownership.

When it came to Delhi and Mumbai, the revenue share was 46.99 per cent and 38.7 per cent respectively and the concession terms were 30 + 30 years in the case of Delhi and 30 + 10 years in the case of Mumbai.

Both again had 26 per cent public ownership. Later, airports such as Goa had a 40 + 20 year concession period with a revenue share of 36.99 per cent but a five year revenue share holiday.

Most recently, the six airports won by Adani Airports have 50-year concession periods and per passenger payments to the government instead of the earlier revenue share agreement.

The public ownership has been taken away completely. This is likely to form the basis for the upcoming privatisations.

From an investor's perspective, elements that make airports attractive include the monopoly status often enshrined in the master agreements, long-term concession periods, low competition risk, stable cash-flows, a captive consumer base and guaranteed return on large portions of the asset base (currently PPP airports are guaranteed a return on the regulated asset base of up to 16 per cent).

Consequently, existing airports wield immense market power. Coupled with the Indian market growth, demographics and spending and travel behaviour, the profit potential is immense.

But the upcoming privatisations are different in that they don’t have the same traffic profile or growth profile as the earlier airports.

Additionally, spending at each airport is unique in its own way. Whether it is Varanasi, which has witnessed explosive connectivity growth and continues to be a hub of religious activity, or Amritsar, which has strong international flows, most of which fly in and out of Delhi, unique solutions have to be developed for each.

Solutions that require a key understanding of the market dynamics and solutions that may not always appear in numbers as Indian consumer preferences almost never show up in data trends.

Additionally, the appetite to lend to infrastructure projects at this point is muted at best.

Not because of the cash-flow profile, but rather, because of the commercial operation date which can vary anywhere from a month to two years.

Contract enforcement continues to involve long and arduous processes. Investors have also expressed concern over issues such as land acquisition and regulatory clearances.

As an example, Navi Mumbai airport has been 20 years in the making, and caught up in land acquisition issues, while Mopa airport (in Goa) was banned due to issues of regulatory clearances where the matter finally went to the Supreme Court.

For investors, the uncertainty translates to higher risk and thus higher return expectations. And at the same time, the challenge of contract enforcement and local challenges remain.

Finally, there is likely to be a shift towards a cautious approach, given the messaging challenges that have been experienced. Questions have cropped up regarding the last round of privatisation and regardless of basis, these do impact the narrative and sentiment — which in many cases is as important as the numbers because of impact to risks and returns.

With these upcoming privatisations, nearly 66 per cent-68 per cent of India’s travelling passenger flows will fly out of airports under a PPP model.

Yet, for this new wave of privatisation to deliver stated outcomes — a rethink of several aspects will be required.

Costs will require close monitoring, competition and value creation will need to be encouraged and rent seeking will need to be discouraged.

New innovative methods, health security measures, energy self-sufficiency, connectivity and collaboration will need to be encouraged.

The next round of airport privatisation promises to be very different from the past.