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ComprehensiveReviewOf

AirportBusinessModels

BIMAL GRMarketingManagerCochinInternationalAirportlimited


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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 inthe 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 oflegal 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 andMadras .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 theprivilege 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 isbecoming increasingly popular. The Open-sky policy came in April 1990. The policy allowed air taxi- operators tooperate flights from any airport, both on a charter and a non charter basis and to decide their own flight schedules,


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3cargo and passenger fares. The operators were, however, required to use aircraft with a minimum of 15 seats andconform to the prescribed rules.

Rapid economic growth in India has made air travel more affordable Several other foreign airlines connect Indiancities with other major cities across the globe. Kingfisher Airlines, Air India and Jet Airways are the most popularbrands in domestic air travel in order of their market share. These airlines connect more than 80 cities across Indiaand 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 pastfew years. More than half a dozen low-cost carriers entered the Indian market in 2004-05. To meet India's rapidlyincreasing 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 majorairports. 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, asaccepted by ICAO

Design, Development, Operation and Maintenance of International and Domestic Airports and CivilEnclaves.

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 Controlservices 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 isfurther worsened by the lack of resources with the Government. There is a recent thrust to the Airport Privatisationso 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 seachange in the travel pattern of the middle class where people started relying more on Air travel compared to Railwhich is time consuming and tedious.

The initiative of the Government to attract more private participation and to make the non aeronautical revenue moreimportant than the aeronautical revenue is attracting more investors and the airport projects feasible. On thefinancing front, airports in India range from 100% government funded to airports that have limited state governmentstakes. The control structure depends on the equity bought in by various partners and hence varies with thefinancing.
http://en.wikipedia.org/wiki/Airlinehttp://en.wikipedia.org/wiki/Kingfisher_Airlineshttp://en.wikipedia.org/wiki/Air_Indiahttp://en.wikipedia.org/wiki/Jet_Airwayshttp://en.wikipedia.org/wiki/Low-cost_carrierhttp://en.wikipedia.org/wiki/Air_Traffic_Controlhttp://en.wikipedia.org/wiki/Airspacehttp://en.wikipedia.org/wiki/Airspacehttp://en.wikipedia.org/wiki/Air_Traffic_Controlhttp://en.wikipedia.org/wiki/Low-cost_carrierhttp://en.wikipedia.org/wiki/Jet_Airwayshttp://en.wikipedia.org/wiki/Air_Indiahttp://en.wikipedia.org/wiki/Kingfisher_Airlineshttp://en.wikipedia.org/wiki/Airline


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4The 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 downthe 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 privateinitiative.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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5enterprise, 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 publicprivate partnerships

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

Publicprivate partnership (PPP) describes a government service or private business venture which is funded andoperated through a partnership of government and one or more private sector companies. These schemes aresometimes 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 apublic service or project and assumes substantial financial, technical and operational risk in the project. Typically, aprivate-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, itis typically allotted an equity share in the SPV.. It is the SPV that signs the contract with the government and withsubcontractors to build the facility and then maintain it. In the infrastructure sector, complex arrangements andcontracts that guarantee and secure the cash flows and make PPP projects prime candidates for project financing. Atypical PPP example would be a hospital building financed and constructed by a private developer and then leased tothe hospital authority. The private developer then acts as landlord, providing housekeeping and other non-medicalservices 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 increasinglevels of competition. Additionally, major investment programs are required to meet the expected growth in airtravel demand (particularly in some emerging regions, such as Asia). Nevertheless, governments and city airportauthorities 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, andhence both were regarded as public utilities. Due to this approach, operational and handling activities werecontemplated as being fundamental for the development of the airport business, and commercial activities had a lessimportant role to play. For that reason, airport assets and property have always been publicly managed andcommercial activities have occasionally been contracted or outsourced to private companies. Within such aframework, economic regulation was seen as superfluous. The traditional airport management model becomes
http://en.wikipedia.org/wiki/European_PPP_Expertise_Centre_(EPEC)http://en.wikipedia.org/wiki/Private_sectorhttp://en.wikipedia.org/wiki/Special_purpose_vehiclehttp://en.wikipedia.org/wiki/Ownership_equityhttp://en.wikipedia.org/wiki/Infrastructurehttp://en.wikipedia.org/wiki/Cash_flowhttp://en.wikipedia.org/wiki/Project_Financehttp://en.wikipedia.org/wiki/Project_Financehttp://en.wikipedia.org/wiki/Cash_flowhttp://en.wikipedia.org/wiki/Infrastructurehttp://en.wikipedia.org/wiki/Ownership_equityhttp://en.wikipedia.org/wiki/Special_purpose_vehiclehttp://en.wikipedia.org/wiki/Private_sectorhttp://en.wikipedia.org/wiki/European_PPP_Expertise_Centre_(EPEC)


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6visibly unsustainable when most governments begin to be concerned about the burden of airport financing and itslack of efficiency. However, for many years, a majority of airports around the world have continued to operateunder this model and some still remain attached to it. Since the 1980s, the industry started to evolve with changesbeing brought about in the traditional airport management model. Currently, governments are progressivelyregarding airports as potential profit-making enterprises rather than merely considering them as part of theinfrastructure suppliers.

There are three main potential economic gains obtained from privatization, namely improvements in operatingefficiency (the private for-profit business model more often leads to a further exploration for means to cut costs andboost revenues than public management), the introduction of new management styles and marketing skills directedto 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 presenceof a regulatory environment.

Regardless of all its potential benefits, privatisation also involves risks and requires prudent management from thepublic authorities. Several policy issues have to be contemplated by the governments if the public interest needs tobe 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 theairport operator after privatization should be carefully considered. In this respect, a regulatory regime (in terms ofcharges, safety, quality, and noise intensity or spatial planning) should be designed before privatization takes placeand 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 factorsthat 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 forecastsprovided- Growth in passenger traffic leading to improved profit margins resulting from economies of scale (the upwardtraffic 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 hardcurrencies 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 airportmanagement firms that acquire and manage multiple airport networks. These firms can be segmented into severalcategories. Some of these groups are:

- Global airport operators, such as the BAA, that take the responsibility for managing the whole airport. The BAA isbased in the United Kingdom, where it runs seven airports (particularly the three major London airports). It alsooperates the Indianapolis airport under a ten-year contract, several airports in Australia (including Melbourne), theNaples 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 facilitiesfor major airport developments, which single airports do not typically have. A good example is Hochtief. ThisGerman construction firm has been a major partner in several German airports, as well as, involved in theconstruction and operation of the major new airport at Athens.- Investment groups specialised in airports, such as Macquarie Airports. Macquarie is a private equity investmentfund that makes equity investments in airports and associated infrastructure. Its portfolio comprises interests in fiveairports, namely Sydney, Rome, Birmingham, Bristol, Copenhagen, and Brussels.- Specialist operators, such as Standard Parking that focus on specific activities. It operates approximately 1,900parking facilities in 280 cities throughout the United States and Canada. Standard Parking operates 60 airportlocations across the United States, notably the OHare International Airport in Chicago.


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7

Privatisation Process Worldwide

After 1987, when the United Kingdom privatised the BAA, the interest for privatization has been increasing acrossthe world. In fact, more than 20 countries have completed the sale or lease of airport facilities so far. Some of themare: 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, operatedlocally by local or regional authorities and highly influenced by private interests, specifically the airlines (withenough power to decide major facets of airport management and development). While the degree of participation ofprivate interests in airports differs broadly among states and cities, major U.S. commercial airports are operatedthrough 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 thosein Tokyo, Hong Kong, and several airports in India. Currently, the airport landscape in China can be defined by agroup of prospering big airports (especially those in Beijing, Shanghai, Guangzhou and Shenzhen). The ongoingstructural reform in airport sector has provided an opportunity for these airports to seek funding from capitalmarkets as well as strategic investors.

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

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

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 toimagine that just about six years back, privatization was virtually unknown in India.. It was only in this millenniumthat 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 theglobal growth of about 9% per annum. The growth is fuelled by the robust economy and indeed infrastructure leadsto economic growth thus completing the cycle. It is estimated that had the infrastructural gap not been there, India'sGDP would have been 2% higher per annum - and indeed would have been at about par with the phenomenalgrowth China has achieved.

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

Green Field Airports in India

The Bangalore International Airport:

The concessionaire for the Bangalore Airport is Bangalore International Airport limited, a Private limitedCompany.The Government through its agencies hold 26% share .The main aim of holding 26% share is to have the


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8power to veto in certain fundamental resolutions which require a minimum 75 % share holders vote.The privateplayers 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 secondrunway 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 worldclass international airport.. The concessionaire can develop up to 300 acres land commercially for any activity notconnected with the airport. In this 300 acres the concessionaire is free to set up not only hotels or malls - it can evengo for Special Economic Zones, manufacturing factories, country clubs, golf courses, power plant etc. Consideringthat this huge chunk of prime land comes to the concessionaire on a long term lease, virtually free of cost, it is easyto 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 agreementallows the concessionaire to develop, construct, operate and maintain the Bangalore International Airport for aperiod of 30 years, extendable at its sole option for another 30 years (i.e. total 60 years). The land for the same isleased by the State Government.

The concessionaire has the burden to independently evaluate the scope of the project and be responsible for all riskswhich 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 statesthat in so many words: ("GOI acknowledges and supports the implementation of the project"). It further states thatthe Government of India will not take any steps or action in contradiction with the Concession Agreement whichresults in or would results in its shareholders or the lenders being deprived or substantially deprived of theirinvestment or economic interest in the project. Further all statutory and non-statutory bodies under the control of theCentral Government will act in compliance with the concession agreement as if they are a party thereto and theGovernment of India shall ensure that all statutory compliances as may be required in relation to the project aregranted promptly. This is a unique feature of the Airport concession agreements In fact the concession agreements inthe Port sector or Road sector do not have similar obligations on the Government. The Concession Agreement alsoinsulates the concessionaire against competition by stating that no new airport would be allowed to be set up within150 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 (whichindeed is to fund and finance the project). The charges here are not subject to Government control and will be freemarket driven. However Airport Charges i.e. which ultimately fall on the passengers shall be fixed with the approvalof 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 beconsistent 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 andboth 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 totalcost of the project is INR 24.7 Billion (US$560 million). The airport is being built on an area of 5,400 acres (22km2).

The Rajiv Gandhi International Airport at Hyderabad is well set to establish the city prominently on the globalaviation 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 Repairand Overhaul (MRO) facility, being developed by the GHIAL-MAS Joint Venture. CFM International, a 50-50 joint
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9venture between Snecma (SAFRAN Group) of France and General Electric Company (GE) of the United States willalso be setting up its aircraft engine Maintenance Training Centre.

HIAL has plans to set up aerospace, hospitality, health, medical, logistics, convention, education and entertainmentports to make the airport a world-class one.A 500-bed hospital, an international school and a management schoolwith 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-privatepartnership.The group has about 1,000 acres at its disposal at the airport. With a view to developing an aerotropolisthere, 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 commercialdevelopment.

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 ForceStation for the Indian Air Force. Passenger operations were later shifted to the airport from Safdarjung Airport in1962 due to an increase in traffic

On May 2, 2006, the management of Delhi and Mumbai airports were handed over to the private consortia.DelhiInternational Airport Limited (DIAL) is a consortium of the GMR Group (50.1%), Fraport AG (10%) and MalaysiaAirports (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 toan 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 AirportsAuthority 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 withexperience and expertise spanning areas including power, roads, airports and urban infrastructure. Until date GVKhas 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. Themaster plan for CSIA has been designed to expand and upgrade the infrastructure to cater to annual traffic of 40million passengers and one million metric tons of cargo. The master plan builds on the comprehensive planningcarried 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 thespecific 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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10The objectives ofEconomic 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 directbeneficiaries to the airport. Air transport which is the latest in the transport service sector is the fastest growing andwhich is going to be the most popular mode of transport in the years to come. As more and more middle class peoplestart using the airports, there will be great demand for reduction of the costs associated with the airports andbetterment of services provided

In a PPP model where the Government and Other private business houses are shareholders, the major intention ofthe 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 thecountry . As government cannot interfere in the charges levied by the consortium, they will be mere onlookers inthis case. Also the vested interests of the private organizations will overshadow the main motive of Service to thepassengers using the airports.

Where as in PPI MODEL , only the government is the controlling authority and the rest individual share holdersdont have any say in the day to day administration of the airport, it will be in a better position to serve thecustomers 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 closeobservation of the framework of Cochin International Airport Limited clearly differentiates the PPP model and thePPI model being mentioned here.

The airport site proposed by State Government officials was inspected and found suitable by the Airport Authorityof India. The Ministry of Civil Aviation accorded its clearance to the proposal for developing the InternationalAirport put up by the Government of Kerala in March 1993. However in 1994 a major set-back came when AirportsAuthority of India decided to keep the project frozen, citing lack of funds. It was then, proposed the model ofprivate-public partnership which was unheard at that time. He suggested for raising funds from public, particularlyfrom Non-resident Indians (mainly Malayalees from Middle East who are the major beneficiaries of having anairport) by issuing shares and forming a public limited company.. The idea of owning stake in an airport was a novel


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11concept at that time, which helped to raise money from the public market. A society was formed to handle landacquisitions along with a master plan for an airport. The society with assistance of District administration, startedacquiring 1300 acres of initial land using provisions of Indian Land Acquisition Act. However unlike forcible landacquisitions elsewhere in India, CIAL authorities decided to pay pay enhanced price against the traditional priceswhich was comparatively low that time as well as adopted a policy of employment to one member per family wholost land in the acquisition as well as providing stock options of the company. This helped the company to acquireland 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 limitedcompany called Cochin International Airport Limited, better known as CIAL, floated by Government of Keralain 1993. The Kerala Government owns a stake of 26%, Central Government enterprises, general public and privateindividuals hold the balance share . The Chief Minister of Kerala, is ex officio chairman of CIAL. As KeralaGovernment holds 26% stake in the company, emerging as single largest stake holder, along with a combined stakeof various government controlled PSUs and nationalized banks that makes a total of 51% stake, the company isdefined 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 inrevenues.

Financial status

Cochin Airport is one of the most profitable airport in the country. The Airport company made its first profit in 2002on its third year of operations with meager Rs 2 Million (2 Crore . However the company management soon startedfocusing intensively on financial re-engineering, helping a constant and steady growth. The company recorded aprofit of Rs 77 Million (77.8 Crore) after taxes with a revenue of Rs. 2.1 billion (211.63 Crore) for the currentfinancial year of 2009-2010. This was a sharp increase of 30% in growth of profits from 2008. With EBITA marginsnearing to 73% of revenues Cochin Airport has been adjudged one of the best managed financial companies in theworld. 55% of revenues is generated from operational aeronautical sources whereas 45% from non-aeronauticalsources, 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 thetravellers. The company abolished charging UDF from its travellers since 2006 in-order to attract more travellersusing the airport without additional costs.

Advantages of PPI Model based on the study at Cochin International Airpor t 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.
http://en.wikipedia.org/wiki/Public-private_partnershiphttp://en.wikipedia.org/wiki/Chief_Minister_of_Keralahttp://en.wikipedia.org/wiki/Public_Sector_Undertakingshttp://en.wikipedia.org/wiki/Public_Sector_Undertakingshttp://en.wikipedia.org/wiki/Chief_Minister_of_Keralahttp://en.wikipedia.org/wiki/Public-private_partnership


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12All 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 theinfrastructure.

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

tariff

No concession agreement. Market forces

determine the tariff.

3. Concession agreement stipulates

revision /redetermination

Market forces determine.

4. Period of tariffs determined by

Concession agreement

Follows AAI for aero tariffs.

5. Land has been leased out to the

operators

Land has been purchased and owned by

the operator.

6. Viability Gap funding from

Government.

No funds from 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

aero and non aero is based on their

concession agreements.

No such classification exists. Industrys

best practices are followed.


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139. Part of their business Sole business

10. No rehabilitation activities undertaken. Extensive rehabilitation activities

conducted.

11. No job reservations for evictees for

airport

Offered job reservation and provided

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 theproject even before the target date of opening, it gets its reward automatically in the form of the extra concessionperiod it "earns" for itself and if he delays it, he eats into the concession period and therefore the profits.. This giveseasily up to 2 years or so to a defaulting concessionaire to extend the deadline without having the project cancelledon 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. Theconcession agreement divides and treats the subject of change of law in two categories the first is where a changein law entitles the concessionaire to some compensation and the second is where it does not entitle theconcessionaire to any compensation.Hence change of law under any of these statutes would not entail anycompensation to the concessionaire for any loss which may be occasioned to it. In tax laws however there is afurther refinement. If there is any tax benefit which is currently allowed to the concessionaire, it cannot be takenaway 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 15year period. Save for such current tax benefits, the Legislature is free to amend its tax laws to the detriment of theconcessionaire and the concessionaire has no relief against the same.

iii. termination of agreement due to default of either partyThe Agreement enumerates the "events" which would tantamount to "events of default" for either party. Oncean event of default (as defined) takes place, a 120 days cure, period is stipulated in the first instance. If there isno cure a notice of termination may follow. Once notice of termination is issued, two consequences wouldfollow: (i) Government would acquire the airport and all rights, interest and titles of the concessionaire relatingthereto, and (ii) have the option to acquire and take over the non airport activities. It is to be noted that theairport would be taken over even though the termination may be due to the Government's own default.


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14After take over of airport comes the issue of compensation. If it is the concessionaire's default then the onlycompensation allowed to it is: (i) 100% of the outstanding debt and (ii) value of investment of theconcessionaire 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 ismore 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 authorityIn infrastructure projects involving the public an independent regulatory authority has become necessary.Accordingly the Concession Agreement envisages that an Independent Regulatory Authority would be setup to regulate any aspect of the airport activity. Very vast powers are envisaged to be cast upon theRegulator. The Regulator would not only lay down or regulate standards, approve charges, imposepenalties etc. it would also settle disputes - not only between public and the Government and / orconcessionaire 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 Regulatorwill 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 theGovernment. Once the Cabinet approves it, a Bill will be drafted and placed before Parliament, which willthen be debated. It will go through several sub-committees of Parliament. So we are at perhaps 3 years orso away from the stage when an Independent Regulator is constituted. Further, the history of anIndependent Regulator in India is not very encouraging. Roads were the earliest to go for privatization andit was envisaged that they would have a Regulator but there is not even a draft Act in place here. Same isthe story for Ports and Oil and Gas. The radio broadcasting sector has been privatized for about 15 yearsnow but there is no Regulator there as well. In the power sector Regulators are there in the State as well asthe Centre level but the track record is not very encouraging. In short, we are years away from setting up anIndependent Regulator (ensuring foremost his independence) then providing for transparency,accountability etc. in its working. The nuances of airport governance through Regulators is yet to beworked out. What will be the regulatory philosophy has yet to be developed. There is yet to beconsolidation 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 formultiple sectors, we should have only 2 or 3 Regulators. One would for instance deal with all types ofcarriage e.g. roads, airports, ports and even transmission lines the other would deal with electricity, voicedata etc. Another theory is that energy, communication and transportation should be under one Regulator. Itwould seem that we are years away from having an independent Regulator as can fulfill the enormous andall compassing role visualized for it is under the Concession Agreement and till that happens there will bead hoc decision making lacking transparency and leading to disputes which may hamper the growth andprivatization in the sector.

v. dispute resolution.Normally one would not except to hear about Dispute Resolution on the subject of risk allocation but herewe 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 thevenue 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 independentRegulator is put in place, the arbitration agreement shall stand overridden and disputes shall be referred tothe Regulator. In other words, parties would no longer be able to go for arbitration. The only exceptionenvisaged (to resort to the Regulator) is where sums are payable under an indemnity guarantee by theGovernment of India, to the concessionaire relating to Airport Charges (as defined). Here resort toarbitration 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 inarbitration in a neutral country under the Rules of a neutral Arbitral Institute. This basic expectation istaken away under the airport Concession Agreement. The second issue is that once the Regulator is put inplace (even if it is assumed that it would be independent and would efficiently deal with the disputes) itwould naturally be subject to the hierarchy of the Indian legal system - which would mean that it would be


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15subordinate to and amenable to the Writ jurisdiction of the High Court. Besides, writs by High Court, anydecision of his can be appealed to the appellate authority. In short, one is therefore looking at three or fourstages in dispute resolution. First, the decision by the regulatory authority, followed by decision of theappellate authority, followed by a Writ to the High Court followed by a discretionary appeal to theSupreme Court. Given the delays under the legal system, dispute resolution would become inefficient andexpensive. Perhaps the Government should have segregated pure contractual disputes between theconcessionaire 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 onlywhere public interest is involved. Dispute Review Boards should have also been envisaged in theConcession 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 ConcessionAgreements do need a further in-depth study based on the run away success of the PPI model followed by CochinInternational Airport. The success can be measured from the fact that CIAL started paying dividends to the shareholders from the 5th year of inception whereas the other PPP models in the country are still in the nascent stages andmay take another 10- 15 years to break even. It should also be mentioned here that this model of airport generates asense of ownership to the general public using the services

paper cochin

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