The Government of India and the NITI Aayog recently announced a comprehensive plan for the national monetisation pipeline. The plan builds on earlier announcements by the government for investment in infrastructure and envisages investments of more than Rs 111 lakh crore over a five-year period. About 4% of this value will come from the sale of 25 airports to private parties in addition to divestment of residual stakes held by the government in the country’s four largest airports. It is an issue that no doubt will lead to intense debate.
The airport capacity challenge
Airports are key pieces of infrastructure and it is no surprise that they find themselves figuring in the national monetisation pipeline. Air travel in the country continues to be a story of contrasts until recently when the Indian aviation market was witnessing phenomenal growth. This was driven by an emerging middle class, increased propensity to spend and very low air-travel penetration. Rising household incomes and a middle-class expected to double in the next decade were key to this growth. The emerging consumer segment or the core middle class was expected to grow by 1.5X and this segment was increasingly taking to air as a mode of transport.
The market grew by leaps and bounds. From a mere 36 million passengers in 1996, passenger volumes doubled to 73 million in 2006. As more passengers took to the skies, passenger volumes quadrupled to 341 million in 2019. And despite a rapid growth in aviation, the market was far from saturation. The only challenge: airport capacity. Put simply, airports were just not able to keep up with the demand as witnessed by delays — across the tarmac and the terminal. And investment in airport capacity that included new runways and new access roads was the need of the hour.
India’s airports and operators
To build an airport capacity a significant capital investment and talent is required and the government chose the public-private-partnership route to divest stakes in major airports. As of this writing, the country has 17 airports that operate on a PPP basis. The first such project was that of the Cochin airport in Kerala tracing back to 1999 and the most recent greenfield project is the Jewar airport that was awarded to Zurich Airports in 2019 and is coming up in Uttar Pradesh. The operators vary, however, GMR and the Adanis have established a large presence. It is likely that both these groups will attempt to bid for additional airports.
As far as returns go, Indian airports have fared well even though most of these returns are driven by user fees levied on passengers, which is in direct contravention of stated policy goals. On all parameters, including return on equity, net margin and operating margins airports have done well – and the monopoly status granted and fiercely protected by airports only adds to these returns.
The latest round of airport privatisation
As airport investors have fared well, terms given to investors have progressively improved over the years. 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. These also are dependent on the traffic profile and traffic mix.
The latest round of airports out for bidding includes a mix of small and large airports across states with diverse traffic profiles. From Tirupati, which has a sizeable religious traffic to Coimbatore, which serves as a gateway; and from Chennai – one of the few remaining metro-airports to Hubli – a growing city; the list goes on.
Also read: https://www.news18.com/news/opinion/indian-airports-need-an-upgrade-but-next-round-of-privatisation-faces-unique-challenges-3522995.html
As far as investment amounts, the government has taken a Capex approach, which estimates extent of private investment required for capital expenditures towards expansion or enhancement of existing facilities. This assumption of Capex then considered as an indicative monetisation value. The principle is that were it not for the airport sale, this amount would have to be spent by the government as the asset owner. Monetisation value will form reserve price and the bidding will be according to new norms announced in 2018 where a per passenger fee is calculated and paid to the exchequer.
The outlook
For people looking at airports as an asset class, one must note that they carry unique risk that range from financing risk to technology risk to compliance risk and everything in between. Understanding risk is critical to project success and this often involves questioning aggressive forecasts, which consultants are all too happy to provide. On the financing front, the Reserve Bank of India (India’s Central Bank) guidelines force provisioning after pre-determined timelines. Equity IRR risk and cash-flow risk mitigation are possible but have to be structured adequately, and state support, real-estate monetisation and liberal policy atmosphere (both locally and nationally) are conducive to high returns. Finally, the reluctance of banks to lend to infrastructure is a reality that cannot be glossed over and the dearth of local capital does provide an avenue for private capital to come in. But this investment has to be structured adequately.
Consumers on the other hand will face a mixed scenario. While the country will have better airports, what is found wanting is total capacity. Fancy terminal buildings that are misaligned to market reality simply won’t do. And the past has seen a variance between intent and impact of airport projects. Whether it is the cost-overruns, the inequitable partnership or the fact that the consumers have had to pay additional fees without any recourse. This is an area that will have to be looked into especially given fundamental weakness in the market including stagnant growth, declining sentiment and job losses. After all an airport without a decent amount of traffic is only a loss-making entity.
As the airport monetisation plan gains traction, it is an issue that no doubt will lead to intense debate.
(The views expressed in this article are those of the author and do not represent the stand of this publication.)
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