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                         Comprehensive  
                                           Review  
                                               Of  

                        Airport Business Models 
 




BIMAL  G R  
Marketing Manager 
Cochin International Airport limited 
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Introduction



This paper deals with the most pertinent thought in the minds of aviation experts , world over – The Best Business
model of airports. There exists various business models in the planning, construction and operation of an airport in
the world. The study analyses the various business models and try to ascertain the importance of a business model
over the others with example of a new generation airport which is immensely profitable to the stakeholders. The
major differences of that airport over the other airports in the country in terms of model of construction.
Funding,operation and revenue sharing is mentioned in detail.

Airport ,as being fully privately owned enterprise is a very important problem . There were a lot of discussions ,
dedicated to this problem ,which tried to examine and study experience of world practice of privatizing and
shareholding of airports as one of means to increase effectiveness of work in conditions of market relations . Some
countries cannot make airports being fully privately owned enterprises because they don 't have legal securing in
governmental property of usage airports . Absences of legalized documents which give right of management by
governmental property don 't give opportunity to attract foreign investors , limit development of non-aviation
activity , and create a lot of other problems . In these conditions coordination of efforts in the country , forming of
legal regulations and regulation of activity of aircraft companies ,airports and other organizations of this field ,
directed at guaranteeing of safety flights and protection of customers ' interests is very important .

A new business model of Airport , PPI – Public –Private Investor model ( Peoples Airport Model ) which has
proven to be the most effective and profitable model of business in Cochin ( Kerala – India ) is subjected to detailed
analysis in this paper.

Aviation Industry and India

The history of civil aviation in India began in December 1912. This was with the opening of the first domestic air
route between Karachi and Delhi by the Indian state Air services in collaboration with the imperial Airways, UK.
Three years later, the first Indian airline, Tata Sons Ltd., started a regular airmail service between Karachi and
Madras .In early 1948, a joint sector company, Air India International Ltd., was established by the Government of
India and Air India (earlier Tata Airline) with a capital of Rs 2 crore and a fleet of three Lockheed constellation
aircraft. Its first flight took off on June 8, 1948 on the Mumbai (Bombay)-London air route. At the time of its
nationalization in 1953, it was operating four weekly services between Mumbai-London and two weekly services
between Mumbai and Nairobi. The joint venture was headed by J.R.D. Tata, a visionary who had founded the first
India airline in 1932 and had himself piloted its inaugural flight

The Civil Aviation Sector in India is undergoing a huge transformation over the last few years and is poised to take
another quantum leap in the years to come .This is mainly due to the changed travel mindset of the people .Air travel
become more affordable to the masses with the growth of the disposable income with the middle class. Indian
Middle class is comprising of youth in the age group 25- 40 and hence there is a promising future for the Indian
Aviation Industry in the years to come. A very sharp increase in the airtraffic is predicted as flying is no more the
privilege of the elite class and due to the liberalization of air travel services. The Indian Airports are not prepared to
handle the huge increase in the number of passengers and hence upgradation of the airports and construction of new
airports are the only alternatives left with the Controlling Authorities in India.



Indian aviation industry and airports in India

As Air transport is the most modern, the quickest and the latest addition to the modes of transport, travel by air is
becoming increasingly popular. The Open-sky policy came in April 1990. The policy allowed air taxi- operators to
operate flights from any airport, both on a charter and a non charter basis and to decide their own flight schedules,
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cargo and passenger fares. The operators were, however, required to use aircraft with a minimum of 15 seats and
conform to the prescribed rules.

Rapid economic growth in India has made air travel more affordable Several other foreign airlines connect Indian
cities with other major cities across the globe. Kingfisher Airlines, Air India and Jet Airways are the most popular
brands in domestic air travel in order of their market share. These airlines connect more than 80 cities across India
and also operate overseas routes after the liberalisation of Indian aviation. However, a large section of country's air
transport system remains untapped

India's vast un utilised air transport network has attracted several investments in the Indian air industry in the past
few years. More than half a dozen low-cost carriers entered the Indian market in 2004-05. To meet India's rapidly
increasing demand for air travel, most of the carriers in India have placed order for new aircrafts

This rapid growth of the airlines in the country demands quality airports across the country other than the major
airports. Regional Airports are gaining importance in the present scenario

Airport Authority of India

Government of India formed the AAI on 1st April 1995 with the aim of carrying out the following

Functions

    •    Control and management of the Indian airspace extending beyond the territorial limits of the country, as
         accepted by ICAO
    •    Design, Development, Operation and Maintenance of International and Domestic Airports and Civil
         Enclaves.
    •    Construction, Modification and Management of Passenger Terminals
    •    Development and Management of Cargo Terminals at International and Domestic airports.
    •    Provision of Passenger Facilities and Information System at the Passenger Terminals at airports.
    •    Expansion and strengthening of operation area viz. Runways, Aprons, Taxiway, etc.
    •    Provision of visual aids.
    •    Provision of Communication and Navigational aids .

Revenue

Most of AAI's revenue is generated from landing/parking fees and fees collected by providing Air Traffic Control
services to aircraft over the Indian airspace.


Evolution of Private Airports in India

The development of infrastructure of Airports is not an easy task which could be accomplished soon. The issue is
further worsened by the lack of resources with the Government. There is a recent thrust to the Airport Privatisation
so as to provide the passengers with world class facilities and ease in travel, based on the changing passenger
behavior and segmentation. The introduction of Low Cost Carriers in the country by Air Deccan induced a sea
change in the travel pattern of the middle class where people started relying more on Air travel compared to Rail
which is time consuming and tedious.

The initiative of the Government to attract more private participation and to make the non aeronautical revenue more
important than the aeronautical revenue is attracting more investors and the airport projects feasible. On the
financing front, airports in India range from 100% government funded to airports that have limited state government
stakes. The control structure depends on the equity bought in by various partners and hence varies with the
financing.
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The two catalysts of India's economic growth have been telecom and civil aviation. They have both speeded up the
pace of doing business. Air transportation side, while liberalization has brought in private carriers and capacities are
being added by the day, the need for more physical infrastructure is very high.

Building airports requires a lot of money, and the government does not have it. The total project cost of the
Hyderabad airport is $600 million. At Bangalore, the budget is $300 million. A GMR Group-led consortium, which
has won the modernization project for the Indira Gandhi International Airport in Delhi, has recently increased its
project estimate to $2.2 billion. A similar upgrade for the Mumbai airport by a GVK-led consortium has a budget of
$1.3 billion. A new airport is also being planned at Panvel, about 35 kilometers from the existing Mumbai airport, at
a projected cost of $2.5 billion. Moreover, these figures tend to be revised -- always upwards.

PPPs are the best way forward.In this century, in the context of globalization, airports are the gateways to a country
and will act as catalysts for growth. Privatization 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 organization with the entrepreneurial skills and business acumen of private
enterprise.

A public sector monopoly is a relatively known devil and it is a devil with whom the industry and consumers can
negotiate. In a public sector monopoly, there is some sense of public propriety. The private monopolies, on the other
hand, are there only for profit. That is their guiding principle.On the one hand, there has to be an incentive for
private players to come in and there has to be a sustainable business model"At the same time, it cannot be
monopolistic pricing. One has to be careful about who is doing the pricing and how it is being done and what kind of
regulations are in place to make it an even playing field."

.A great wave of privatization has swept the world in the past two decades, embracing the industrial economies, the
transition economies of East Europe and large parts of the less developed world, and it continues to roll on. It is
interesting, however, that its basis in theory was somewhat shaky to start with. Moreover, a sizable enough body of
empirical evidence, on which hypotheses about its impact could be tested, became available only several years down
the road. So much of the initial impetus to privatization entailed a leap in faith, and, as happens all too often in the
development of knowledge, attempts to explain its impact have followed on the heels of widespread existing
practice.


These objectives include one or more of the following:

1. to promote increased efficiency.
2. to raise revenues for the state (and thereby to bridge fiscal deficits).
3. to reduce government interference in the economy and promote greater private
initiative.
4. to promote wider share ownership and the development of the capital market.

Of these, the first objective, the need to promote efficiency in running commercial organizations, has arugably been
the dominant motivation. There is a sense that public ownership somehow leads to lower levels of efficiency than
are possible under private ownership; and inefficient enterprises, in turn, are seen as creating other problems such as
pre-emption of government revenues (badly needed for investment in social sectors in the less developed countries )
through subsidies or recapitalization and uncompetitive industries in the economy

In many ways, India provides an excellent testing ground for hypotheses about privatization and its impact, except
that so far privatization has not been attempted on a scale that researchers would like to see. The country has a large,
well- diversified public sector. Unlike many of the transition economies, it also has a long tradition of private
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enterprise, including big companies in the private sector, although there are certain sectors in which private sector
participation is quite new, these sectors having been reserved until recently for the public sector.
Privatization in India generally goes by the name of ‘disinvestment’ or ‘divestment’ of equity. This is because
privatization has thus far not meant transfer of control or even of controlling interest from government to anybody
else. The government has sold stakes ranging from one per cent to 40% in 40 PSUs, but in no company has its stake
fallen below the magic figure of 51% which is seen as conferring controlling interest.
The privatization program is itself relatively new to the country. It is part of an ambitious process of economic
reforms covering industry, trade, the financial sector and agriculture and also involving a program of macro-
economic stabilization focused on the federal budget, which commenced in 1991. Privatization is seen as a
necessary concomitant of deregulation of industry, necessary in order to enable firms in the public sector to compete
and survive in the new environment.



The importance of public–private partnerships

Over the past two decades more than 1400 PPP deals were signed in the European Union, which represent an
estimated capital value of approximately €260 billion. Since the onset of the financial crisis last year, best estimates
suggest that the number of PPP deals closed has fallen 30 percent. These difficulties have placed significant strains
on governments that have come to rely on PPPs as an important means for the delivery of long-term infrastructure
assets and related services. Moreover, this has occurred precisely at a time when investments in public-sector
infrastructure are seen as an important means of maintaining economic activity during the crisis, as was highlighted
in a European Commission communication on PPPs. As a result of the importance of PPPs to economic activity, in
addition to the complexity of such transactions, the European PPP Expertise Centre (EPEC) was established to
support public-sector capacity to implement PPPs and share timely solutions to problems common across Europe in
PPPs.

Public–private partnership (PPP) describes a government service or private business venture which is funded and
operated through a partnership of government and one or more private sector companies. These schemes are
sometimes referred to as PPP, P3 or P3.

PPP involves a contract between a public-sector authority and a private party, in which the private party provides a
public service or project and assumes substantial financial, technical and operational risk in the project. Typically, a
private-sector consortium forms a special company called a "special purpose vehicle" (SPV) to develop, build,
maintain and operate the asset for the contracted period. In cases where the government has invested in the project, it
is typically allotted an equity share in the SPV.. It is the SPV that signs the contract with the government and with
subcontractors to build the facility and then maintain it. In the infrastructure sector, complex arrangements and
contracts that guarantee and secure the cash flows and make PPP projects prime candidates for project financing. A
typical PPP example would be a hospital building financed and constructed by a private developer and then leased to
the hospital authority. The private developer then acts as landlord, providing housekeeping and other non-medical
services while the hospital itself provides medical services.


Economic Benefits of Airport Privatization


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
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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.

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

Currently, only two per cent of the worlds 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:

- Strong growth trend observed in air traffic during the last several years together with the optimistic forecasts
provided
- 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)
- Strong commercial opportunities that still remain to be exploited in this business
- Significant barriers of entry for newer companies that allows existing participants to improve their earnings
- 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

Towards Multinational Airports Operators

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:

- 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.
- 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.
- 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.
- 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 OHare International Airport in Chicago.
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Privatisation Process Worldwide

After 1987, when the United Kingdom privatised the BAA, the interest for privatization has been increasing across
the world. In fact, more than 20 countries have completed the sale or lease of airport facilities so far. Some of them
are: Argentina, Australia, Austria, Bahamas, Bolivia, Cambodia, Canada, Chile, China, Colombia, Denmark,
Dominican Republic, Germany, Hungary, Italy, Japan, Malaysia, Mexico, New Zealand, Singapore, South Africa
and Switzerland.

In the United States, commercial airports have traditionally been independent of the national control, operated
locally by local or regional authorities and highly influenced by private interests, specifically the airlines (with
enough power to decide major facets of airport management and development). While the degree of participation of
private interests in airports differs broadly among states and cities, major U.S. commercial airports are operated
through partnerships between the government, local interests and private firms.

In other Asian countries, many major airports are expected to be privatised in the near future. Among them are those
in Tokyo, Hong Kong, and several airports in India. Currently, the airport landscape in China can be defined by a
group of prospering big airports (especially those in Beijing, Shanghai, Guangzhou and Shenzhen). The ongoing
structural reform in airport sector has provided an opportunity for these airports to seek funding from capital
markets as well as strategic investors.

The Middle East has not been a region particularly active in airport privatisation. However, some projects are in
place to either upgrade or develop new facilities. In Latin America, the most common way of privatising airports
has been through concession contracts. Concessions allow a country to retain ownership of airport assets while
private promoters carry out the investments required. Additionally, the lack of developed capital markets presents a
major hurdle for other ways of privatisation.

The African airport sector has its own share of management, financing, safety, and security issues. There is a clear
need for upgrading installations in order to meet international standards, modify regulatory framework and to
incorporate new requirements in terms of security (airport certification). Substantial investments in airports
development are required in Africa to boost air transport that currently plays only a minor role in the world air
traffic.


Review of Existing Airport Models in India

When one looks at the current huzzle and buzzle around privatization of infrastructure in India, it is difficult to
imagine that just about six years back, privatization was virtually unknown in India.. It was only in this millennium
that privatization, as properly understood was adopted as a Government policy.

Airport Sector has witnessed a growth of 35% on an average year upon year for the last six years compared to the
global growth of about 9% per annum. The growth is fuelled by the robust economy and indeed infrastructure leads
to economic growth thus completing the cycle. It is estimated that had the infrastructural gap not been there, India's
GDP would have been 2% higher per annum - and indeed would have been at about par with the phenomenal
growth China has achieved.

Currently the airport infrastructure is totally inadequate. It is fairly common for flights to hover around airports due
to congestion, waiting to get landing permission or waiting at the ground in the queue to take off. To give an idea of
infrastructure gap, the Delhi Airport as of now has a capacity to handle 12 million passengers per annum but it is
actually carrying 16.5 million passengers per annum, which is expected to grow to 20 million passengers by next
year.

Green Field Airports in India

The Bangalore International Airport:

The concessionaire for the Bangalore Airport is Bangalore International Airport limited, a Private limited
Company.The Government through its agencies hold 26% share .The main aim of holding 26% share is to have the
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power to veto in certain fundamental resolutions which require a minimum 75 % share holders vote.The private
players in Bangalore include Bangalore Airport, Seimens of Germany , Zurich Airport.

Project Details

 BIAL is situated about 29 k.m. from Bangalore and covers about 4300 acres. The airport design allows a second
runway to come up in the near future with a separation distance of about 2 k.m. between the two run ways. The run
way would be approximately 4000 mtrs. in length with a width of 60 mtrs. The airport would be at par with a world
class international airport.. The concessionaire can develop up to 300 acres land commercially for any activity not
connected with the airport. In this 300 acres the concessionaire is free to set up not only hotels or malls - it can even
go for Special Economic Zones, manufacturing factories, country clubs, golf courses, power plant etc. Considering
that this huge chunk of prime land comes to the concessionaire on a long term lease, virtually free of cost, it is easy
to imagine that this would be the commercial backbone of the project.

Nature of the concession:

Basically the concession is for Development, Construction, Operation & Maintenance of the airport. The agreement
allows the concessionaire to develop, construct, operate and maintain the Bangalore International Airport for a
period of 30 years, extendable at its sole option for another 30 years (i.e. total 60 years). The land for the same is
leased by the State Government.

The concessionaire has the burden to independently evaluate the scope of the project and be responsible for all risks
which may exist in relation thereto. It is obliged to follow good industry practices and all applicable laws.

The Government on the other hand, undertakes to support the project. Article 5.4 of the concession agreement states
that in so many words: ("GOI acknowledges and supports the implementation of the project"). It further states that
the Government of India will not take any steps or action in contradiction with the Concession Agreement which
results in or would results in its shareholders or the lenders being deprived or substantially deprived of their
investment or economic interest in the project. Further all statutory and non-statutory bodies under the control of the
Central Government will act in compliance with the concession agreement as if they are a party thereto and the
Government of India shall ensure that all statutory compliances as may be required in relation to the project are
granted promptly. This is a unique feature of the Airport concession agreements In fact the concession agreements in
the Port sector or Road sector do not have similar obligations on the Government. The Concession Agreement also
insulates the concessionaire against competition by stating that no new airport would be allowed to be set up within
150 k.m. radius for a period of 25 years from the date of airport opening

Charges which can be levied:

As mentioned earlier the concessionaire is free to develop approximately 300 acres for non- airport activities (which
indeed is to fund and finance the project). The charges here are not subject to Government control and will be free
market driven. However Airport Charges i.e. which ultimately fall on the passengers shall be fixed with the approval
of the Ministry of Civil Aviation. This would include passengers fees, landing charges, user development fees etc.
These charges would be fixed on the basis of the current charges in place for other airports in India and shall be
consistent with the International Civil Aviation Organisation's policies on charges for airports.

Hyderabad International Airport limited

The airport project is a public-private joint venture between GMR Group, Malaysia Airports Holdings Berhad and
both Government of Andhra Pradesh and Airports Authority of India (AAI). GMR Group holds 63% of the equity,
MAHB 11%, while the Government of Andhra Pradesh and Airports Authority of India each hold 13%.The total
cost of the project is INR 24.7 Billion (US$560 million). The airport is being built on an area of 5,400 acres (22
km2).

The Rajiv Gandhi International Airport at Hyderabad is well set to establish the city prominently on the global
aviation map, thereby contributing to the prosperity, growth and all round economic development of the region

On the east of the airport is the 250 acre Aerospace SEZ, that will house, amongst others, the Maintenance Repair
and Overhaul (MRO) facility, being developed by the GHIAL-MAS Joint Venture. CFM International, a 50-50 joint
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venture between Snecma (SAFRAN Group) of France and General Electric Company (GE) of the United States will
also be setting up its aircraft engine Maintenance Training Centre.

HIAL has plans to set up aerospace, hospitality, health, medical, logistics, convention, education and entertainment
ports to make the airport a world-class one.A 500-bed hospital, an international school and a management school
with world-class standards will also be set up in the first phase .The maintenance, repair and overhaul (MRO)
facility, a joint venture between GMR and Malaysian Aerospace, will be operational soon

GMR holds 63 per cent in the Rs 2,478-crore airport project, which is being developed in a public-private
partnership.The group has about 1,000 acres at its disposal at the airport. With a view to developing an aerotropolis
there, the company has already formalised a subsidiary company called GMR Hyderabad Aerotropolis Ltd.

The group has similar plans for Delhi International Airport where it planned to develop 250 acres for commercial
development.

Brown Field Airports

Delhi International Airport limited

The airport, earlier known as Palam Airport, was built around the second world war and served as an Air Force
Station for the Indian Air Force. Passenger operations were later shifted to the airport from Safdarjung Airport in
1962 due to an increase in traffic

On May 2, 2006, the management of Delhi and Mumbai airports were handed over to the private consortia.Delhi
International Airport Limited (DIAL) is a consortium of the GMR Group (50.1%), Fraport AG (10%) and Malaysia
Airports (10%), India Development Fund (3.9%) and the Airports Authority of India retains a 26% stake.

GMR group who holds the major share and who runs the airport has plans to develop about 250 acres of land in to
an aerotropolis comprising of Hotels , Hospitals, Club houses etc

Mumbai International Airport Limited

Mumbai International Airport Pvt. Ltd. (MIAL) is a joint venture between the GVK-SA consortium and Airports
Authority of India. MIAL has been awarded the mandate of modernizing and upgrading India's busiest airport,
Chhatrapati Shivaji International Airport (CSIA). GVK is amongst India's largest infrastructure developers with
experience and expertise spanning areas including power, roads, airports and urban infrastructure. Until date GVK
has invested over Rs. 5,000 crore into infrastructure projects and has on hand projects in the pipeline of over Rs.
12,000 crore.

 MIAL's vision is to make CSIA a global benchmark among airports while lending it a distinct Indian character. The
master plan for CSIA has been designed to expand and upgrade the infrastructure to cater to annual traffic of 40
million passengers and one million metric tons of cargo. The master plan builds on the comprehensive planning
carried out over the last six months and encapsulates a blueprint for a major transformation of the airport by 2010.


ICAO Policy on Airport Economic Oversight

New economic oversight policy- ICAO

    •    ICAO recommends that States should select the appropriate form of economic oversight according to the
         specific circumstances, while keeping regulatory interventions at a minimum and only as required. When
         deciding on appropriate forms of economic oversight, State considerations should include the degree of
         competition, the costs and benefits related to alternative forms of economic oversight, as well as the legal,
         institutional and governance frameworks.
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The objectives of Economic Oversight include:

         •   Minimize the risk of airports engaging in anti-competitive practices or abusing their dominant position

         •   Ensure non-discrimination and transparency in the application of charges

         •   Ascertain that investments in capacity meet current and future demand, and

         •   Protect the interests of passengers and other end users (new objective, clarifying the purpose of
             economic oversight)


         To promote these objectives, ICAO calls on States to ensure that airports consult with users and that
         appropriate performance management systems are in place. It should also be noted that the policy refers to
         the 'monopolistic nature of airports'. It now refers to the 'potential abuse of a dominant position by an
         airport'. The new wording implies that economic regulation should be the exception, not the rule. The new
         policy also emphasizes that capacity must meet current and future demand, and that the purpose of the
         policy is not the protection of airlines, but of end users (i.e. passengers and shippers).



Proposal on new type of business models – advantages and disadvantages

PPI MODEL - Public – Private Individual Partner Ship Model OR Peoples Airport Model

PPI Model is a combination of the Government of the country and the association of general public who are direct
beneficiaries to the airport. Air transport which is the latest in the transport service sector is the fastest growing and
which is going to be the most popular mode of transport in the years to come. As more and more middle class people
start using the airports, there will be great demand for reduction of the costs associated with the airports and
betterment of services provided

In a PPP model where the Government and Other private business houses are shareholders, the major intention of
the Private players will be to maximize revenue by way of increased costs and maximized non aeronautical revenue.
There are instances where User Development Fee is charged from the passengers in the Green field airports in the
country . As government cannot interfere in the charges levied by the consortium, they will be mere onlookers in
this case. Also the vested interests of the private organizations will overshadow the main motive of Service to the
passengers using the airports.

Where as in PPI MODEL , only the government is the controlling authority and the rest individual share holders
don’t have any say in the day to day administration of the airport, it will be in a better position to serve the
customers and the wording of a true peoples airport come in to picture .

Benefits of a PPI Model


The first true peoples airport to get off the starter's block was the $100 million Cochin International Airport (CIAL),
in the southern state of Kerala. That's been a success story; it has been making a profit since 1999. But a close
observation of the framework of Cochin International Airport Limited clearly differentiates the PPP model and the
PPI model being mentioned here.

The airport site proposed by State Government officials was inspected and found suitable by the Airport Authority
of India. The Ministry of Civil Aviation accorded its clearance to the proposal for developing the International
Airport put up by the Government of Kerala in March 1993. However in 1994 a major set-back came when Airports
Authority of India decided to keep the project frozen, citing lack of funds. It was then, proposed the model of
private-public partnership which was unheard at that time. He suggested for raising funds from public, particularly
from Non-resident Indians (mainly Malayalees from Middle East who are the major beneficiaries of having an
airport) by issuing shares and forming a public limited company.. The idea of owning stake in an airport was a novel
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concept at that time, which helped to raise money from the public market. A society was formed to handle land
acquisitions along with a master plan for an airport. The society with assistance of District administration, started
acquiring 1300 acres of initial land using provisions of Indian Land Acquisition Act. However unlike forcible land
acquisitions elsewhere in India, CIAL authorities decided to pay pay enhanced price against the traditional prices
which was comparatively low that time as well as adopted a policy of employment to one member per family who
lost land in the acquisition as well as providing stock options of the company. This helped the company to acquire
land without much litigation and other issues. As there was a shortage of funds, the airport was proposed to be
constructed in low-cost model by adopting traditional architectural style along with reduced overhead operations.

Ownership

The airport is the first airport in India to be built in public-private partnership mode and owned by a public limited
company called Cochin International Airport Limited, better known as CIAL, floated by Government of Kerala
in 1993. The Kerala Government owns a stake of 26%, Central Government enterprises, general public and private
individuals hold the balance share . The Chief Minister of Kerala, is ex officio chairman of CIAL. As Kerala
Government holds 26% stake in the company, emerging as single largest stake holder, along with a combined stake
of various government controlled PSUs and nationalized banks that makes a total of 51% stake, the company is
defined as Public Authority by Public Information Commission

Even though CIAL can be defined a public authority, the management of CIAL is controlled by a Board of Directors
and the administration of the airport is in the safe hands which is evident from the steady and progressive growth in
revenues.

Financial status

Cochin Airport is one of the most profitable airport in the country. The Airport company made its first profit in 2002
on its third year of operations with meager Rs 2 Million (2 Crore . However the company management soon started
focusing intensively on financial re-engineering, helping a constant and steady growth. The company recorded a
profit of Rs 77 Million (77.8 Crore) after taxes with a revenue of Rs. 2.1 billion (211.63 Crore) for the current
financial year of 2009-2010. This was a sharp increase of 30% in growth of profits from 2008. With EBITA margins
nearing to 73% of revenues Cochin Airport has been adjudged one of the best managed financial companies in the
world. 55% of revenues is generated from operational aeronautical sources whereas 45% from non-aeronautical
sources, out which 33% is directly from Duty free sale, one of the highest percentage among Indian airports. The
airport is currently, the only major airport in India without charging User Development Fee (UDF) from the
travellers. The company abolished charging UDF from its travellers since 2006 in-order to attract more travellers
using the airport without additional costs.




Advantages of PPI Model – based on the study at Cochin International Airport Limited



         CIAL      is not formed or functioning based on any concession agreements unlike other PPP
         airports.
         In fact, Cochin International Airport            was formed as separate Company under Indian
         Companies Act 1956 with an objective of build, own , and operate an Airport at Cochin and
         develop other supporting aviation infrastructures.

         Its 26% of the equity shares are held with Government of Kerala and 74% of equity shares are
         held with 17000 shareholders consisting of NRI and General public.
                                                                                                        12 
 
          All across these years CIAL is owning, developing and operating the airport purely based on the
          market mechanism.

          The idea of airport itself is based on the market demand – demand from the NRI Passengers

          The entire project was developed and put to use in the most cost effective manner taking into
          consideration the capacity of Airport users to pay for it without compromising the quality of the
          infrastructure.

          The entire business process were developed and built up through open competitive bidding
          process, to get the best at the least cost

          Even after the completion of project, the day to day operation of the airport has been undertaken
          through market driven competitive factors.

          Fixation of tariffs/rates both aero /non aero was done through pure market mechanism, except
          adoption of landing, parking, and navigation charges at par with AAI

          No viability gap funding nor any other state supports has been obtained.




Differences between a PPP model and PPI model

    Sl.   PPP MODEL                                    PPI MODEL ( CIAL MODEL )

     1    State support agreement exists               No state support agreement.

    2.    Concession agreement determines the          No concession agreement. Market forces
          tariff                                       determine the tariff.

    3.    Concession agreement stipulates              Market forces determine.
          revision /redetermination

    4.    Period of tariffs determined by              Follows AAI for aero tariffs.
          Concession agreement

     5.   Land has been leased out to the              Land has been purchased and owned by
          operators                                    the operator.

    6.    Viability Gap funding from                   No funds from Government.
          Government.

     7.   Revenue sharing with government              No revenue sharing but for payment of
                                                       dividend to Government towards their
                                                       26% of equity capital.

    8.    Classification of particular revenue into    No such classification exists. Industry’s
          aero and non aero is based on their          best practices are followed.
          concession agreements.
                                                                                                                               13 
 
      9.       Part of their business                            Sole business

     10.       No rehabilitation activities undertaken.          Extensive rehabilitation activities
                                                                 conducted.

     11.       No job reservations for evictees for              Offered job reservation and provided
               airport                                           commercial licenses to evictees.

     12.       Connectivities were provided by state.            Other connectivities like road ,rail etc
                                                                 were provided by the CIAL

      11       Development fees exists                           No developments fees are collected from
                                                                 passengers.

     12.       Capital intensive airports were built up.         Economical and cost effective .



     13        Leased airport                                    Perpetuity/ No exit clause.




The risks associated with Green Field privatization can be further classified in to following

      i.       delays and consequences of delay in the airport opening;

The target date for airport opening is stipulated as 33 months from the date of financial closure and from this date
(i.e. date of airport opening) the concession period is to start running. if the concessionaire is able to complete the
project even before the target date of opening, it gets its reward automatically in the form of the extra concession
period it "earns" for itself and if he delays it, he eats into the concession period and therefore the profits.. This gives
easily up to 2 years or so to a defaulting concessionaire to extend the deadline without having the project cancelled
on account of delay

     ii.       change in law and the risks involved therein;

It is obvious that a concession agreement over a long period of time cannot guarantee against change of law. The
concession agreement divides and treats the subject of change of law in two categories – the first is where a change
in law entitles the concessionaire to some compensation and the second is where it does not entitle the
concessionaire to any compensation.Hence change of law under any of these statutes would not entail any
compensation to the concessionaire for any loss which may be occasioned to it. In tax laws however there is a
further refinement. If there is any tax benefit which is currently allowed to the concessionaire, it cannot be taken
away by change of law without corresponding compensation. For instance, one benefit the infrastructure sector
(including private airports) enjoy is a 10 year income tax holiday which can be availed of at any time during a 15
year period. Save for such current tax benefits, the Legislature is free to amend its tax laws to the detriment of the
concessionaire and the concessionaire has no relief against the same.

    iii.       termination of agreement due to default of either party

           The Agreement enumerates the "events" which would tantamount to "events of default" for either party. Once
           an event of default (as defined) takes place, a 120 days cure, period is stipulated in the first instance. If there is
           no cure a notice of termination may follow. Once notice of termination is issued, two consequences would
           follow: (i) Government would acquire the airport and all rights, interest and titles of the concessionaire relating
           thereto, and (ii) have the option to acquire and take over the non – airport activities. It is to be noted that the
           airport would be taken over even though the termination may be due to the Government's own default.
                                                                                                                        14 
 
      After take over of airport comes the issue of compensation. If it is the concessionaire's default then the only
      compensation allowed to it is: (i) 100% of the outstanding debt and (ii) value of investment of the
      concessionaire in the non-airport activities taken over by the Government consequent upon take over.

      If on the other hand, it is a Government's default (and yet the airport is taken over) then the compensation is
      more liberal. It includes: (i) the outstanding debt or "Settlement Amount" (as defined) whichever is higher.
      Settlement Amount would include the net current asset; gross fixed asset; intangible asset etc. (ii) value of
      investment in the non - airport activities which the Government decides to take over and (iii) damages

    iv.   The role of the regulatory authority

          In infrastructure projects involving the public an independent regulatory authority has become necessary.
          Accordingly the Concession Agreement envisages that an Independent Regulatory Authority would be set
          up to regulate any aspect of the airport activity. Very vast powers are envisaged to be cast upon the
          Regulator. The Regulator would not only lay down or regulate standards, approve charges, impose
          penalties etc. – it would also settle disputes - not only between public and the Government and / or
          concessionaire in relation to the airport but also between the concessionaire and the Government.
          Two points are noteworthy here – the first is that extremely vast powers have been cast upon the Regulator,
          to the extent which would ultimately lead to fading away of the parties contract. Ultimately the Regulator
          will be the bed rock on which would depend the fate of the project. The second point is that the Regulator
          is not yet in place. The draft for enacting the law in this regard is still at the discussion level with the
          Government. Once the Cabinet approves it, a Bill will be drafted and placed before Parliament, which will
          then be debated. It will go through several sub-committees of Parliament. So we are at perhaps 3 years or
          so away from the stage when an Independent Regulator is constituted. Further, the history of an
          Independent Regulator in India is not very encouraging. Roads were the earliest to go for privatization and
          it was envisaged that they would have a Regulator – but there is not even a draft Act in place here. Same is
          the story for Ports and Oil and Gas. The radio broadcasting sector has been privatized for about 15 years
          now but there is no Regulator there as well. In the power sector Regulators are there in the State as well as
          the Centre level but the track record is not very encouraging. In short, we are years away from setting up an
          Independent Regulator (ensuring foremost his independence) then providing for transparency,
          accountability etc. in its working. The nuances of airport governance through Regulators is yet to be
          worked out. What will be the regulatory philosophy has yet to be developed. There is yet to be
          consolidation and standardization in the field. The Government is still debating preliminary issues as to the
          constitution and composition of the Regulators. One set of thinking is that instead of multiple regulators for
          multiple sectors, we should have only 2 or 3 Regulators. One would for instance deal with all types of
          carriage e.g. roads, airports, ports and even transmission lines – the other would deal with electricity, voice
          data etc. Another theory is that energy, communication and transportation should be under one Regulator. It
          would seem that we are years away from having an independent Regulator as can fulfill the enormous and
          all compassing role visualized for it is under the Concession Agreement and till that happens there will be
          ad hoc decision making lacking transparency and leading to disputes which may hamper the growth and
          privatization in the sector.

    v.    dispute resolution.

          Normally one would not except to hear about Dispute Resolution on the subject of risk allocation but here
          we have a some what unusual situation. The Concession Agreement envisages that Dispute Resolution shall
          be through ad hoc arbitration, under the UNCITRAL Rules and under the Indian Arbitration Act with the
          venue at New Delhi. This is of course not unusual by itself – as ad hoc arbitration is more common in India,
          compared to Institution arbitration. The peculiar feature in dispute resolution is that once an independent
          Regulator is put in place, the arbitration agreement shall stand overridden and disputes shall be referred to
          the Regulator. In other words, parties would no longer be able to go for arbitration. The only exception
          envisaged (to resort to the Regulator) is where sums are payable under an indemnity guarantee by the
          Government of India, to the concessionaire relating to Airport Charges (as defined). Here resort to
          arbitration is permissible (but not otherwise). There are two types of problems I envisage. First,
          international parties committing huge funds in a foreign jurisdiction will have far greater confidence in
          arbitration in a neutral country under the Rules of a neutral Arbitral Institute. This basic expectation is
          taken away under the airport Concession Agreement. The second issue is that once the Regulator is put in
          place (even if it is assumed that it would be independent and would efficiently deal with the disputes) it
          would naturally be subject to the hierarchy of the Indian legal system - which would mean that it would be
                                                                                                                     15 
 
         subordinate to and amenable to the Writ jurisdiction of the High Court. Besides, writs by High Court, any
         decision of his can be appealed to the appellate authority. In short, one is therefore looking at three or four
         stages in dispute resolution. First, the decision by the regulatory authority, followed by decision of the
         appellate authority, followed by a Writ to the High Court followed by a discretionary appeal to the
         Supreme Court. Given the delays under the legal system, dispute resolution would become inefficient and
         expensive. Perhaps the Government should have segregated pure contractual disputes between the
         concessionaire and the Government and reserved these for international arbitration (which would have been
         as per the expectations of the international investing community also). The Regulator should step in only
         where public interest is involved. Dispute Review Boards should have also been envisaged in the
         Concession Agreement in a project of this type.

Conclusion:

To briefly conclude, India is firmly on the path of privatization in the airport sector. However the Concession
Agreements do need a further in-depth study based on the run away success of the PPI model followed by Cochin
International Airport. The success can be measured from the fact that CIAL started paying dividends to the share
holders from the 5th year of inception whereas the other PPP models in the country are still in the nascent stages and
may take another 10- 15 years to break even. It should also be mentioned here that this model of airport generates a
sense of ownership to the general public using the services

				
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