PROJECT ASSIGNMENTS ON AIR TRANSPORT MANAGEMENT-I: ATM-I :II

PGDALATM - II BATCH, ACADEMIC YEAR 2010-11I SEMESTER

AIRPORT PRIVATISATION -CHALLENGES: WAY FORWARD

BY :

IMRAN H ZAIDI WING COMMANDER DIRECTING STAFF, ATCOTE 03 NOV 2010 AFA-DUNDIGAL, HYDERABAD

AIRPORT PRIVATISATION -CHALLENGES: WAY FORWARD

INTRODUCTION

1. The air transport system is an important contributor to the quality of life of people and an essential part of world business globalization. Increasing passenger and cargo traffic places further demands on airports to provide adequate facilities and services to ensure safety, regularity and efficiency of aircraft operations. The average annual growth rate worldwide measured in passenger – kilometers over the period of ten years from 1995 to 2005 is estimated at 5 percent. To meet the ever-increasing growth of air traffic, airports need to expand as and when needed especially for handling larger aircraft carrying more passengers than before. The result is that airport administrations are faced with a heavy financial investment programme for improvement and development to meet these needs in the mostefficient manner possible. The rapidly changing economic scenario has led to the view that divestment of airports and air traffic services would bring in the much needed funds while facilitating the State to focus on development of other socially important sectors.In the past few decades, airports have been privatised in attempts to make them more efficient and for the government to find extra funding. Airports are shifting from being seen as public services to being viewed as attractive private enterprises. This trend towards privatisation has taken place in almost every corner of the world under various degrees of privatisation from outright sale of the airports to listing them as public companies on national stock exchanges.

2. Worldwide experience gained from these developments indicates that where airports (and air navigation services) have been operated by autonomous authorities, their overall financial situation and operating efficiencies have generally tended to improve. This has been more pronounced in the case of airports whose management has been passed on to the autonomous authorities whereas air traffic services have been retained under governmental controls. Consequently, ICAO generally recommends that States consider the desirability of establishing authorities to manage airports, air navigation services, or both, where improved efficiency and financial results would be achieved. There is a growing trend of privatisation of major autonomous airport authorities as well as government

operated airports as a whole or in part. Privatisation may offer significant benefits in certain cases. It could relieve States of the burden of heavy capital investment and could give airport management direct access to the open market for loans or capital for investments in new airports, expansion or rehabilitation projects. It may also offer significant benefits by freeing management from certain constraints, particularly regarding the development of non-aeronautical aspects of the airportbusiness. Privatisation of airports also has other advantages, from the government’s point of view, of making the government resources available for use in other important sectors such as health, education, agriculture and housing. Nevertheless, the need to ensure safety of operations at all times remains as the most important objective. To this end, the responsibilities of States for ensuring safety cannot be over emphasised.

3. India is at the threshold of emerging as an economic power. However, it is recognised that infrastructure holds the key to this transformation. The infrastructure gap in India is obvious to all. Of late the Government has dedicated itself to address this on a war footing. The task is huge. It involves not only harnessing financial resources but also technology and know-how. Around the world more and more airports are moving towards privatization. This is the trend in Asia, Europe and Latin America. In India too private participation is felt necessary and therefore the Government has opened up this sector to the Public Private Participation (PPP) route.

AIRPORT PRIVATIZATION : AN OVERVIEW

4. Of a total number of 454 airports and airstrips in India, 16 are designated as international airports. The Airports Authority of India (AAI) owns and operates 97 airports. Over the next 12 years, India's Civil Aviation Ministry aims at 500 operational airports. The Government aims to attract private investment in aviation infrastructure. India has been witnessing a very strong phase of development in the past few months. Many domestic as well as international players are showing interest in the growth and development of the aviation sector with immense focus on the development of the airports. Indian private airlines, Jet, Sahara, Kingfisher, Deccan, Spicejet - account for around 60% of the domestic passenger traffic. Some have now started international flights. For the next years to come India is poised with strong focus on the development of its airport to meet the international standards. The government is planning modernization of the airports to establish a standard. The newly developed airports will help releasing pressure on the existing

airport in the country. Additionally, the following factors account mainly to the tremendous growth potential resulting out of Airport privatization:

(a) High demand for investments in aviation infrastructure.

(b) Favorable demographics and rapid economic growth point to a continued boom in domestic passenger traffic and international outbound traffic.

(c) Greenfield airport projects planned in resort destinations and emerging metros such as Goa, Pune, Navi Mumbai, Greater Noida and Kannur.

(d) International inbound traffic will also grow rapidly with increasing investment and trade activity and as India?s rich heritage and natural beauty are marketed to international leisure travelers.

(e) Modernisation / upgradation of metro airports ? induction of partners for Chennai, Kolkata expected subsequently

(f) SME lending, a largely untapped market, presents a significant opportunity. This accounts for 40% of the industrial output and 35% of direct exports.

Economic Benefit

5. The airport industry is going through an exceptional transformation that has driven the market towards increasing levels of competition. Additionally, major investment programs are required to meet the expected growth in air travel demand (particularly in some emerging regions, such as Asia). Nevertheless, governments and city airport authorities are becoming more reluctant to support airport projects, since they have major budgetary constraints. Airports and airlines have historically been considered as essential components of the national aviation system, and hence both were regarded as public utilities. Due to this approach, operational and handling activities were contemplated as being fundamental for the development of the airport business, and commercial activities had a less important role to play. For that reason, airport assets and property have always been publicly managed and commercial activities have occasionally been contracted or outsourced to private companies. Within such a framework, economic regulation was seen as superfluous. The traditional airport management model becomes

visibly unsustainable when most governments begin to be concerned about the burden of airport financing and its lack of efficiency. However, for many years, a majority of airports around the world have continued to operate under this model and some still remain attached to it. Since the 1980s, the industry started to evolve with changes being brought about in the traditional airport management model. Currently, governments are progressively regarding airports as potential profit-making enterprises rather than merely considering them as part of the infrastructure suppliers.

5. There are three main potential economic gains obtained from privatization, namely improvements in operating efficiency (the private for-profit business model more often leads to a further exploration for means to cut costs and boost revenues than public management), the introduction of new management styles and marketing skills directed to serve users with a more consumer-oriented approach, and better investment decisions. However, in many cases, these investment decisions might also imply under investment or capacity reductions, which mandates the presence of a regulatory environment. Regardless of all its potential benefits, privatisation also involves risks and requires prudent management from the public authorities. Several policy issues have to be contemplated by the governments if the public interest needs to be safeguarded. Specifically, the eventual externality, negative or positive effect imposed by airport users over non-users or other users, generated by the provision of airport services or strengthened market position gained by the airport operator after privatization should be carefully considered. In this respect, a regulatory regime (in terms of charges, safety, quality, and noise intensity or spatial planning) should be designed before privatization takes place and the regulatory role ought to be delegated to an independent body.

Airports : An Increasingly Attractive Industry

6. Currently, only two per cent of the world's commercial airports are managed or owned by the private sector. However, the success achieved by private investors so far is encouraging others to enter the market. Various factors that make the industry attractive for investors are listed below in their order of relevance:

(a) Strong growth trend observed in air traffic during the last several years together with the optimistic forecasts provided

(b) Growth in passenger traffic leading to improved profit margins resulting from economies of scale (the upward traffic trend is also expected to have a positive impact)

(c) Strong commercial opportunities that still remain to be exploited in this business

(d) Significant barriers of entry for newer companies that allows existing participants to improve their earnings

(e) Reduced risk related to exchange rate fluctuations due to the fact that airports generate substantial revenues in hard currencies and both travel and tourism industries are dominated either by the dollar or the euro

Multinational Airports Operators

7. The airport industry is under strong influence of multinational airport operators, especially the specialized airport management firms that acquire and manage multiple airport networks. These firms can be segmented into several categories. Some of these groups are:

(a) Global airport operators, such as the BAA, that take the responsibility for managing the whole airport. The BAA is based in the United Kingdom, where it runs seven airports (particularly the three major London airports). It also operates the Indianapolis airport under a ten-year contract, several airports in Australia (including Melbourne), the Naples Airport (Italy), and besides it manages a group of other properties.

(b) Airport development groups that offer project financing services and the ability to manage and provide facilities for major airport developments, which single airports do not typically have. A good example is Hochtief. This German construction firm has been a major partner in several German airports, as well as, involved in the construction and operation of the major new airport at Athens.

(c) Investment groups specialised in airports, such as Macquarie Airports. Macquarie is a private equity investment fund that makes equity investments in airports and associated infrastructure. Its portfolio comprises interests in five airports, namely Sydney, Rome, Birmingham, Bristol, Copenhagen, and Brussels.

(d) Specialist operators, such as Standard Parking that focus on specific activities. It operates approximately 1,900 parking facilities in 280 cities throughout the United States and Canada. Standard Parking operates 60 airport locations across the United States, notably the O'Hare International Airport in Chicago.

Alleviates budget constraints

8. These days, governments face increasing financial obligations in all sectors of public services. If airport development can be done through commercial means, state funds can be redirected to other public financial obligations. This point is highlighted by the case of Sydney’s Kingsford International Airport, which was privatised in order to finance part of the Australian government’s debt.

Diverts increasing investment costs and enhances effeciency

9. As airports get older and passenger flow increases, more investment is needed in infrastructure to maintain service levels. As discussed earlier, governments’ fiscal responsibilities are stretched far enough, so using private party funds to improve necessary state facilities becomes attractive. Changing airport operation to an enterprise, rather than a public service, creates a financial incentive for companies to deliver the best possible services.

IDENTIFIED CHALLENGES

Economic regulatory policy of the Government

10. The move to privatization by any country requires an understanding of an airport's value to a bidder. A government must know what to expect in the bidding process, and anticipate the value of the airport concession which it hopes to realize. Developing countries have a number of factors which must be considered in the decision of regulatory approach. If airports are to be privatized, how would the government be able to protect airport users (principally the airlines) from monopolistic tendencies of an airport operator. The government must understand the best practices of other countries throughout the world so that it could develop its own regulation appropriate to local conditions. Will the government require active or passive economic oversight of a third party operators? What is the level

of independence of the regulator? What is the level of historical information available to evaluate the performance of a third party operator? How does the government establish quality of service standards where there have been none in the past? What burden of expense can the aviation system support in funding economic regulation? What is the tradeoff between regulation and the value of investment which the government wishes to accept?

11. These are some of the questions which will be asked to developing countries like ours which grapple with airport privatization. The answers are to be found in understanding the practices of regulation used around the world, and to use this knowledge to design a local approach.

Capacity constraints

12. The historical increase of demand for air transportation has put pressure on the air transportation infrastructure system -mostly airport infrastructure system- at which the ability to add capacity is increasingly limited. This growing demand and limited capacity at some key airports result in the generation of delays and its propagation through the air transportation network, impacting passenger’s quality of travel and ultimately local, regional and national economy. Given the projections of future demand for air transportation around the world, this problem of congestion and more generally the ability to meet demand is going to remain a key problem over the next decades. There are several ways by which capacity can be added to existing airports; increasing airport physical capacity through the construction of new runways and/or terminals, improving operational efficiency. However, there are constraints on the ability to use these mechanisms, such as land use constraints, airport physical limitations, and environmental constraints. The development of multi-airport systems has been a key mechanism by which capacity was added at the regional level in the past and the ability to meet future demand will rely on this mechanism.

13. While one of main criticism of privatization of airports is the abuse of monopolistic position by private investment and management groups that can derive monopoly rents -because of the lack of competition in single airport systems- the privatization of airports in the case of multi-airport systems can be a stimulating event in the development of future secondary airports that emerge as alternative air transportation nodes in the region and increase competition between players at the regional market level. The analysis of the forms of ownership and management of airports showed that a wide array of combinations of ownership and management of airports. The effects of privatization differ according to the

configurations of multi- airport system (i.e. whether it is the primary airport or secondary airport that is privatized) and the geographic location of these multi-airport systems. It was found that, in some cases, the privatization of airports had positive effects on the development of multi-airport systems; provision of capital for the development of under- utilized airports that result in the successful emergence into secondary airports. In Europe, a dominant pattern was observed; privatization of under-utilized airports -especially converted military bases- and the successful attraction of low-cost carriers that allow the airport to emerge as successful secondary airport that compete or complement the service offered at the primary airport. More generally, the privatization of airports in the context of multi-airport systems has the potential to offset the monopolistic situation of single airport systems and allow the private sector to share the risk of airport development, not necessarily justified and feasible by the local public sector. While several cases of successful emergence of new secondary airports were observed and analyzed, the privatization and investment in non-utilized airports comes with significant risk. It was also found that the process of privatization of airports –especially the privatization of major airports- can have limiting effects on the development of multi-airport systems, such as the development perimeter rules (e.g. case of India) that limit the construction of new airports in the region in order to protect foreign investments.

Bid Structure

14. Based upon the experiences during the privatization of Mumbai and Delhi airports, certain challenges that need to be considered, and, which would merit attention before such a concessioning of an airport is attempted again in the country can be discussed hereunder:

(a) Is there a danger of over-determination in the contractual parameters? (One of the interested parties with rich experience walked out of the bidding process because they did not receive a satisfactory answer on how some of the parameters would be monitored and penalized for non-compliance). This would also depend on the maturity of the sector.

(b) Is the pool of bidders being restricted by requirements such as Foreign Direct Investment caps, a foreign player having to be a constituent of the bid consortia, and limits on airline participation? These issues, however, need to be examined in the broader context of the national policy on foreign exchange flows, ability to bring in new technology and processes, and scope for economies between airlines and airports versus conflict of interest,

respectively. In the latter case, the maritime sector in India has permitted bids for container terminals both by shipping lines and by the then monopoly container rail operator. What are appropriate requirements for pre-qualifyingbidders?

(c) Is economic regulation required, especially for tariff setting of aeronautical charges?

(d) What are the implications for the next round of airport privatization bids? What are the implications for the privatization process in other infrastructure sectors?

(e) In this context, are revenue shares of 38-46 per cent sustainable? Are these reflective of early entrant strategies? (The minimum revenue share had been set at 5 per cent).

15. India has managed to award longterm concessions to private consortia something many other countries in the world aspire to do but have not yet attempted. This is all the more significant, given that the two airports having been concessioned out are Delhi and Mumbai, the political and commercial capitals of the country respectively.

COMPACTING STRATEGIES

Commercialization of Air Traffic Control (United States Model)

16. Many aviation experts predict serious trouble in coming years as air travel demand grows faster than the ability of the U.S. air traffic control system to expand capacity. NextGen will be a major redesign of the ATC infrastructure. The new system is designed to accommodate up to three times the volume of current air traffic by making more efficient use of both the national airspace and airport facilities. The new air traffic control system would be more decentralized than the one currently in place in the United States. Guidance systems on planes would work in conjunction with satellites of the Global Positioning System (GPS) to supplement direct supervision by ground-based controllers and radar stations. It is estimated that by not expanding the ATC system's capacity will be cost the U.S. economy $40 billion per year by 2020 because the overburdened system will force significant rationing of flights. That rationing would increase prices and eliminate some trips entirely.

17. The remedy lies in taking the ATC system out of the federal budget process and make it a self-supporting entity, funded directly by its customers. Variants of this commercialization approach have been recommended by a series of federal studies and commissions over the past 15 years. As part of Vice President Al Gore's efforts at "reinventing government" in the 1990s, for example, the Clinton administration proposed turning the ATC system into a separate, self-funded, nonprofit government corporation within the Department of Transportation. The 1997 National Civil Aviation Review Commission, which was chaired by Norman Mineta, similarly proposed moving toward a self-supporting air traffic control organization. Commercialization would entail shifting from aviation-related taxes paid to the U.S. Treasury to fees for ATC services paid directly by customers to a new self-supporting Air Traffic Organization. This change would allow fees to grow in proportion to the growth of flight activity, rather than being tied to a less-stable variable, such as fuel prices or airline ticket prices. Moreover, a predictable revenue stream that was not subject to the federal budget process would provide the basis for the ATO to issue long-term bonds for funding capital investments.Commercialization would also address the management problems that have plagued the FAA's efforts to modernize. A non-civil-service ATO could attract the best private-sector managers and engineers skilled at implementing complex technology projects. Such an ATO could hire, fire, and compensate its employees as other high-tech businesses do. Private sector managers would have an incentive to ask tough questions about whether new investments offered real value for the money, a process that often doesn't occur at the FAA or in Congress.

18. Separate, self-supporting ATO—no longer part of the FAA—would be overseen at arm's length for aviation safety by the remaining FAA. Numerous studies have pointed out that the FAA's air-safety role is compromised when it comes to the ATC system, since that system is operated "in-house" by a different branch of the same FAA. All other players in aviation—pilots, mechanics, aircraft manufacturers, airlines, and so forth—are regulated at arm's length for safety by the FAA. This separation of ATC operations from safety regulation is especially critical given the major changes entailed by shifting to the semi-automated NextGen, where numerous safety versus capacity questions will need to be addressed in a rigorous and transparent manner. Finally, a self-supporting ATO would address the political obstacles to improving system efficiency, such as making decisions to close facilities. By passing the enabling legislation for ATC reform, Congress would delegate such contentious issues to the customer-oriented ATO organization. During the past two decades, nearly 50 governments have commercialized their air traffic control systems. That means they have separated

their ATC activities from their transport ministries, removed them from the civil service, and made them self-supporting from fees charged to aircraft operators. These new air navigation service providers (ANSPs) are usually regulated at arm's length by their government's aviation safety agency. In 1996, Canada set up a private, nonprofit ATC corporation, Nav Canada, which is self-supporting from charges on aviation users. The Canadian system has been widely praised for its sound finances, solid management, and its investment in new technologies.

19. The Canadian system is a very good reform model not only for the United States, but also for countries like India to consider. A number of studies have found that ATC commercialization has generally resulted in improvements to service quality, better management, and reduced costs. At the same time, air safety has remained the same or improved in the countries that have pursued reforms to set up independent ANSP organizations. For the United States, a commercialized ATC organization would be more likely than the FAA to efficiently implement the major aviation infrastructure advances that the nation desperately needs. Air traffic control is more complex and dynamic than ever, and it needs to be managed in the sort of efficient and flexible manner that only a commercialized environment can offer. Countries like Canada have shown the way forward for countries like ours to follow.

Transfer of Ownership

20. The simple view of the privatization of governmental activity focuses on the transfer of ownership. It refers to selling government owned properties to private interests -- in this sense it is the opposite of the nationalization of private interests, as practiced by the socialist Labour Government of Britain in the late 1940’s. This simple view incorporates an important implicit assumption -- that ownership defines control, so that when ownership changes so does the control of all important management and strategic issues. This simple view of privatization focusing on ownership can be misleading. Control depends not just on the ownership of an operation, but also on its management and strategic direction. The more realistic view of privatization is that it involves the transfer of some control from the public, governmental direction to the private, commercial sector. This can happen either through the transfer of ownership, or the transfer of control. Privatization can thus also occur through the transfer of management control from government to private groups. For example, the privatization of airports in

Australia is being implemented in exactly this way: the Australian federal government has entered into long term, 50 year, leases with consortia of privatebusinesses. In this case the government cedes control over day-to-day and year-to-year operations to the commercial enterprises, while clearly maintaining control over what kinds of long-term facilities and changes to the airport can be made.Management and strategic direction can be exercised over a variety of factors. These would normally include the:

(a) Planning for the future expansion of the activity;(b) Design of the specific projects;(c) Financing of the construction and operation of the facilities;(d) Operation of the facilities;(e) Pricing of the services; and(f) Availability of the services to the public; as well as(g) Ownership of the properties.

CONCLUSION

21. The fundamental choice in the privatization process appears to be how the government should exercise its control to sustain the public interest in open access to and fair rates for airport services. The major alternatives are between:

(a) Government regulation, an inherently adversarial process; or(b) Government ownership and partnership in the development of airports, a more collaborative approach.

22. On balance, the partnership approach as practiced by numerous airport authorities throughout the world seems most suitable for both assuring the public interest in fair operations and, most importantly, in assuring that the local community can express its desire for sufficient airport capacity for its purposes.The exact way that privatization should be accomplished, and the right balance of public and private involvement in the development of airport properties would seem to depend on the precise context of the project, the potential users, the region and the moment in time.

23. Some Interesting Findings that have arisen out of the study clearly portray the benefits of privatization as follows:

o Privatisation is mainly successful because it leads to investment and modernisation in infrastructure.

o For every increase of a million passengers, one thousand employees are required.

o The modernisation of Delhi airport was denied to AAI on the basis of technical reasons and the fact they did not do it earlier.

o AAI’s total yearly revenue from Mumbai and Delhi airports will be Rs. 280 crore more than if AAI were to run the airports.

o It is the importance that businesses give to profit which will maintain the safety levels at privatised airports.

IMRAN H ZAIDI WING COMMANDER DIRECTING STAFF, ATCOTE 03 NOV 2010 AFA-DUNDIGAL,HYDERABAD

REFERENCES

www.icao.int ; www.aci.aero ; www.iata.org

Dr.PCK Ravindran, Airport Management: World Class and Beyond

Graham,A, Managing Airports-An international perspective

Airport Report (1998) “Brown Field (Calif.) Seeks Privatization," Vol. 43, No. 1, Jan. 1, p. 3.

American Association of Airport Executives and the Airport Research and Development Foundation (1997) Airport Privatization: An Update, Alexandria, VA, January.

Calgary Airport Authority (1998) “Calgary Airport Authority," web page: http://www.airport.calgary.ab.ca/Canada, Transport Canada, (1998), “The National Airports Policy and Regional/Local Airports," web page: http://www.tc.gc.ca/airports/nap/ FitzGerald, G. P. (1994) “Public/Private Sector Partnerships: The Port Authority of & NJ Example."

Jane’s Airport Review (1997), Issue Focused on Privatization, Vol. 9, No. 7 Sept.

U.S. Congress, Government Accounting Office (1996) Airport Privatization: Issues Related to the Sale or Lease of U.S. Commercial Airports.

AAI (2004). Restructuring and Modernization of Delhi and Mumbai Airports—Invitation to Register an Expression of Interest (ITREOI), Airports Authority of India, February 17, 2004.

Jain, Raghuram and Gangwar (2007). Airport Privatization: Bidding Process for Delhi and Mumbai (A, B, C, D, and E), Indian Institute of Management, Ahmedabad.

Information Memorandum: Indira Gandhi International Airport, Airports Authority of India, April 01, 2005.