A recent Bombay High Court ruling against the Mumbai International Airport (MIAL), which is revamping the city’s Chhatrapati Shivaji International Airport, could have far-reaching consequences on the future of PPP investment in India.
To the consternation of investors, the ruling said that while the airport was being run by a private operator, it had the same responsibilities as any government agency and so had to follow the same rules.
The ruling followed a claim by a firm, Flemingo International, that it had been excluded unfairly from last year’s Mumbai duty free tender. The ruling ordered MIAL to call a fresh tender for the duty free contract at the airport.
Observers say the development could have a major impact on the future of PPPs in India, especially if the Supreme Court which has now stayed the case, agrees with the Bombay High Court judgement.
"If it goes the other way, the decision will endanger virtually all PPP projects in India – airports, roads, power, etc. All these other entities would have to change how they do business, and may be liable for actions taken in the past," says an official closely associated with one such PPP project. He felt it would deter future PPP investment.
MIAL is a 74:26 joint venture of a consortium of India’s GVK group, Airports Company South Africa and Bidvest Group with state-run airports operator Airports Authority of India (AAI). Netherlands Airport Consultants and Singapore’s Changi Airport are advisors to the consortium.
MIAL, which received charge of the Mumbai airport in May, will build, own and operate the airport for a period of 30 years. This can be extended by a further 30 years, before transferring the airport back to India’s state operator.
India’s airport privatisation plan has faced opposition from the beginning. In March, 15,000 employees of AAI, which is responsible for civil aviation infrastructure in the country, went on strike to protest the privatisation of the airports in Mumbai, Delhi Hyderabad and Bangalore.
Delays, mounting project costs and concerns about monopolies are clouding the horizon of PPP projects to upgrade or build new airports. And, court judgements are not helping matters.
While many in India feel complete privatisation might be the way to go, others argue that airports are a basic component of infrastructure, and as such should exist for public benefit, not profit, a view that was endorsed by the Bombay High Court judgement.
Building airports means huge funds which the government is unable to muster. The total project cost of the Hyderabad airport is $600m. At Bangalore, the budget is $300m. A GMR Group-led consortium, which has won the modernisation project for the Indira Gandhi International Airport in Delhi, has increased its project estimate to $2.2bn. A similar upgrade for the Mumbai airport by the GVK-led consortium has a budget of $1.5bn. A new airport is also being planned at Mumbai, about 35 kilometers from the existing Mumbai airport, at a projected cost of $2.5bn. With the rapid growth in the industry, further investments will be needed.
The government has therefore adopted the PPP model of civil aviation infrastructure development. All the new airports and upgrade projects are PPPs. Companies such as Delhi International Airport Ltd. (DIAL) and MIAL have a 74:26 shareholding pattern, with the private consortium holding the majority stake and AAI and the state government the remaining 26%. The revenue share, however, is loaded in favour of AAI; in New Delhi, for example, it is entitled to 46 % of the earnings.
Rajgopal Swami, chief financial officer of the GMR group, says that PPPs are the best way forward. "Privatisation provides a means of developing the airport infrastructure space rapidly by spreading the effort over several players. A PPP model allows efficient development of infrastructure by combining the strengths of the public organisation with the entrepreneurial skills and business acumen of private enterprise."
The first PPP airport in the country was the $100m Cochin International Airport (CIAL), in the southern state of Kerala. It has been a success, making profits since 1999. In 2006-07, on a turnover of around $40m, its profit after tax was 35%. While CIAL says high returns are due to efficient operations, critics say the company has been overcharging in the absence of competition.
Critics have also disapproved of plans to close functioning airports that pose competition to the new private ones, as in Bangalore and Hyderabad. Milind Sohoni of the Indian School of Business, Hyderabad, says that complete privatisation of airports is not the answer to India’s needs, particularly in the case of larger airports. "At the end of the day, airports are for public benefit and, if it is complete privatisation, there are a lot of issues around who is making the money and whether anything will be done for the public good."
Swami of the GMR disagrees. "While there is merit in the view that the airport is a public good, there is no such thing as free money," he says. "Any government subsidies are actually paid out of government revenues – read taxpayers’ money. A subsidy actually ends up by having the non-user pay for a part of the user’s costs. UDF is a method by which the user pays for the use of the facilities."
A study by the Delhi-based Faculty of Management Studies points out that airports in India are looked upon as infrastructure providers and not as businesses. That outlook was reflected in the Bombay High Court judgement.