PROJECT ASSIGNMENTS ON AIR TRANSPORT MANAGEMENT-I: ATM-I :II PGDALATM - II BATCH, ACADEMIC YEAR 2010-11 I SEMESTER

AIRPORT PRIVATISATION -CHALLENGES: WAY FORWARD

BY :

03 NOV 2010

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

AIRPORT PRIVATISATION -CHALLENGES: WAY FORWARD

INTRODUCTION
1. The air transport system is an important contributor to the quality of life of people and an essential part of world business globalization. Increasing passenger and cargo traffic places further demands on airports to provide adequate facilities and services to ensure safety, regularity and efficiency of aircraft operations. The average annual growth rate worldwide measured in passenger kilometers over the period of ten years from 1 ! to "##! is estimated at ! percent. To meet the ever$ increasing growth of air traffic, airports need to e%pand as and when needed especially for handling larger aircraft carrying more passengers than before. The result is that airport administrations are faced with a heavy financial investment programme for improvement and development to meet these needs in the most efficient manner possible. The rapidly changing economic scenario has led to the view that divestment of airports and air traffic services would bring in the much needed funds while facilitating the &tate to focus on development of other socially important sectors.In the past few decades, airports have been privatised in attempts to make them more efficient and for the government to find e%tra funding. 'irports are shifting from being seen as public services to being viewed as attractive private enterprises. This trend towards privatisation has taken place in almost every corner of the world under various degrees of privatisation from outright sale of the airports to listing them as public companies on national stock e%changes. ". (orldwide e%perience gained from these developments indicates that where airports )and air navigation services* have been operated by autonomous authorities, their overall financial situation and operating efficiencies have generally tended to improve. This has been more pronounced in the case of airports whose management has been passed on to the autonomous authorities whereas air traffic services have been retained under governmental controls. +onsequently, I+', generally recommends that &tates consider the desirability of establishing authorities to manage airports, air navigation services, or both, where improved efficiency and financial results would be achieved. There is a growing trend of privatisation of ma-or autonomous airport authorities as well as government operated airports as a whole or in part. .rivatisation may offer significant benefits

in certain cases. It could relieve &tates of the burden of heavy capital investment and could give airport management direct access to the open market for loans or capital for investments in new airports, e%pansion or rehabilitation pro-ects. It may also offer significant benefits by freeing management from certain constraints, particularly regarding the development of non$aeronautical aspects of the airport business. .rivatisation of airports also has other advantages, from the government/s point of view, of making the government resources available for use in other important sectors such as health, education, agriculture and housing. 0evertheless, the need to ensure safety of operations at all times remains as the most important ob-ective. To this end, the responsibilities of &tates for ensuring safety cannot be over emphasised. 1. India is at the threshold of emerging as an economic power. 2owever, it is recognised that infrastructure holds the key to this transformation. The infrastructure gap in India is obvious to all. ,f late the 3overnment has dedicated itself to address this on a war footing. The task is huge. It involves not only harnessing financial resources but also technology and know$how. 'round the world more and more airports are moving towards privatization. This is the trend in 'sia, 4urope and 5atin 'merica. In India too private participation is felt necessary and therefore the 3overnment has opened up this sector to the .ublic .rivate .articipation )...* route.

AIRPORT PRIVATIZATION : AN OVERVIEW

6. ,f a total number of 6!6 airports and airstrips in India, 17 are designated as international airports. The 'irports 'uthority of India )''I* owns and operates 8 airports. ,ver the ne%t 1" years, India9s +ivil 'viation :inistry aims at !## operational airports. The 3overnment aims to attract private investment in aviation infrastructure. India has been witnessing a very strong phase of development in the past few months. :any domestic as well as international players are showing interest in the growth and development of the aviation sector with immense focus on the development of the airports. Indian private airlines, ;et, &ahara, <ingfisher, =eccan, &pice-et $ account for around 7#> of the domestic passenger traffic. &ome have now started international flights. ?or the ne%t years to come India is poised with strong focus on the development of its airport to meet the international standards. The government is planning modernization of the airports to establish a standard. The newly developed airports will help releasing pressure on the e%isting

airport in the country. 'dditionally, the following factors account mainly to the tremendous growth potential resulting out of 'irport privatization@ )a* 2igh demand for investments in aviation infrastructure.

)b* ?avorable demographics and rapid economic growth point to a continued boom in domestic passenger traffic and international outbound traffic. )c* 3reenfield airport pro-ects planned in resort destinations and emerging metros such as 3oa, .une, 0avi :umbai, 3reater 0oida and <annur. )d* International inbound traffic will also grow rapidly with increasing investment and trade activity and as IndiaAs rich heritage and natural beauty are marketed to international leisure travelers. )e* :odernisation B upgradation of metro airports A induction of partners for +hennai, <olkata e%pected subsequently )f* &:4 lending, a largely untapped market, presents a significant opportunity. This accounts for 6#> of the industrial output and 1!> of direct e%ports. Economic Benefi !. The airport industry is going through an e%ceptional transformation that has driven the market towards increasing levels of competition. 'dditionally, ma-or investment programs are required to meet the e%pected growth in air travel demand )particularly in some emerging regions, such as 'sia*. 0evertheless, governments and city airport authorities are becoming more reluctant to support airport pro-ects, since they have ma-or budgetary constraints. 'irports and airlines have historically been considered as essential components of the national aviation system, and hence both were regarded as public utilities. =ue 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. ?or that reason, airport assets and property have always been publicly managed and commercial activities have occasionally been contracted or outsourced to private companies. (ithin such a framework, economic regulation was seen as superfluous. The traditional airport management model becomes

visibly unsustainable when most governments begin to be concerned about the burden of airport financing and its lack of efficiency. 2owever, for many years, a ma-ority of airports around the world have continued to operate under this model and some still remain attached to it. &ince the 1 C#s, the industry started to evolve with changes being brought about in the traditional airport management model. +urrently, 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$profit business model more often leads to a further e%ploration for means to cut costs and boost revenues than public management*, the introduction of new management styles and marketing skills directed to serve users with a more consumer$oriented approach, and better investment decisions. 2owever, in many cases, these investment decisions might also imply under investment or capacity reductions, which mandates the presence of a regulatory environment. Degardless of all its potential benefits, privatisation also involves risks and requires prudent management from the public authorities. &everal policy issues have to be contemplated by the governments if the public interest needs to be safeguarded. &pecifically, the eventual e%ternality, 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. Ai!"o! # : An Inc!e$#in%&' A !$c i(e In)*# !' 7. +urrently, only two per cent of the world9s commercial airports are managed or owned by the private sector. 2owever, the success achieved by private investors so far is encouraging others to enter the market. Earious factors that make the industry attractive for investors are listed below in their order of relevance@ )a* &trong growth trend observed in air traffic during the last several years together with the optimistic forecasts provided

)b* 3rowth in passenger traffic leading to improved profit margins resulting from economies of scale )the upward traffic trend is also e%pected to have a positive impact* )c* &trong commercial opportunities that still remain to be e%ploited in this business )d* &ignificant barriers of entry for newer companies that allows e%isting participants to improve their earnings )e* Deduced risk related to e%change 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 +*& in$ ion$& Ai!"o! # O"e!$ o!# 8. 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. &ome of these groups are@ )a* 3lobal airport operators, such as the F'', that take the responsibility for managing the whole airport. The F'' is based in the Gnited <ingdom, where it runs seven airports )particularly the three ma-or 5ondon airports*. It also operates the Indianapolis airport under a ten$year contract, several airports in 'ustralia )including :elbourne*, the 0aples 'irport )Italy*, and besides it manages a group of other properties. )b* 'irport development groups that offer pro-ect financing services and the ability to manage and provide facilities for ma-or airport developments, which single airports do not typically have. ' good e%ample is 2ochtief. This 3erman construction firm has been a ma-or partner in several 3erman airports, as well as, involved in the construction and operation of the ma-or new airport at 'thens. )c* Investment groups specialised in airports, such as :acquarie 'irports. :acquarie is a private equity investment fund that makes equity investments in airports and associated infrastructure. Its portfolio comprises interests in five airports, namely &ydney, Dome, Firmingham, Fristol, +openhagen, and Frussels.

)d* &pecialist operators, such as &tandard .arking that focus on specific activities. It operates appro%imately 1, ## parking facilities in "C# cities throughout the Gnited &tates and +anada. &tandard .arking operates 7# airport locations across the Gnited &tates, notably the ,92are International 'irport in +hicago. A&&e(i$ e# ,*)%e con# !$in # C. These days, governments face increasing financial obligations in all sectors of public services. If airport development can be done through commercial means, state funds can be redirected to other public financial obligations. This point is highlighted by the case of &ydney/s <ingsford International 'irport, which was privatised in order to finance part of the 'ustralian government/s debt. Di(e! # inc!e$#in% in(e# men co# # $n) en-$nce# effecienc' . 's airports get older and passenger flow increases, more investment is needed in infrastructure to maintain service levels. 's discussed earlier, governments/ fiscal responsibilities are stretched far enough, so using private party funds to improve necessary state facilities becomes attractive. +hanging airport operation to an enterprise, rather than a public service, creates a financial incentive for companies to deliver the best possible services.

IDENTIFIED CHALLENGES
Economic !e%*&$ o!' "o&ic' of -e Go(e!nmen 1#. The move to privatization by any country requires an understanding of an airport9s value to a bidder. ' government must know what to e%pect in the bidding process, and anticipate the value of the airport concession which it hopes to realize. =eveloping countries have a number of factors which must be considered in the decision of regulatory approach. If airports are to be privatized, how would the government be able to protect airport users )principally the airlines* from monopolistic tendencies of an airport operator. The government must understand the best practices of other countries throughout the world so that it could develop its own regulation appropriate to local conditions. (ill the government require active or passive economic oversight of a third party operatorsA (hat is the level

of independence of the regulatorA (hat is the level of historical information available to evaluate the performance of a third party operatorA 2ow does the government establish quality of service standards where there have been none in the pastA (hat burden of e%pense can the aviation system support in funding economic regulationA (hat is the tradeoff between regulation and the value of investment which the government wishes to acceptA 11. These are some of the questions which will be asked to developing countries like ours which grapple with airport privatization. The answers are to be found in understanding the practices of regulation used around the world, and to use this knowledge to design a local approach. C$"$ci ' con# !$in # 1". The historical increase of demand for air transportation has put pressure on the air transportation infrastructure system $mostly airport infrastructure system$ at which the ability to add capacity is increasingly limited. This growing demand and limited capacity at some key airports result in the generation of delays and its propagation through the air transportation network, impacting passenger/s quality of travel and ultimately local, regional and national economy. 3iven the pro-ections of future demand for air transportation around the world, this problem of congestion and more generally the ability to meet demand is going to remain a key problem over the ne%t decades. There are several ways by which capacity can be added to e%isting airportsH increasing airport physical capacity through the construction of new runways andBor terminals, improving operational efficiency. 2owever, there are constraints on the ability to use these mechanisms, such as land use constraints, airport physical limitations, and environmental constraints. The development of multi$airport systems has been a key mechanism by which capacity was added at the regional level in the past and the ability to meet future demand will rely on this mechanism. 11. (hile one of main criticism of privatization of airports is the abuse of monopolistic position by private investment and management groups that can derive monopoly rents $because of the lack of competition in single airport systems$ the privatization of airports in the case of multi$airport systems can be a stimulating event in the development of future secondary airports that emerge as alternative air transportation nodes in the region and increase competition between players at the regional market level. The analysis of the forms of ownership and management of airports showed that a wide array of combinations of ownership and management of airports. The effects of privatization differ according to the

configurations of multi$ airport system )i.e. whether it is the primary airport or secondary airport that is privatized* and the geographic location of these multi$ airport systems. It was found that, in some cases, the privatization of airports had positive effects on the development of multi$airport systemsH provision of capital for the development of under$ utilized airports that result in the successful emergence into secondary airports. In 4urope, a dominant pattern was observedH privatization of under$utilized airports $especially converted military bases$ and the successful attraction of low$cost carriers that allow the airport to emerge as successful secondary airport that compete or complement the service offered at the primary airport. :ore generally, the privatization of airports in the conte%t of multi$airport systems has the potential to offset the monopolistic situation of single airport systems and allow the private sector to share the risk of airport development, not necessarily -ustified and feasible by the local public sector. (hile several cases of successful emergence of new secondary airports were observed and analyzed, the privatization and investment in non$utilized airports comes with significant risk. It was also found that the process of privatization of airports especially the privatization of ma-or airports$ can have limiting effects on the development of multi$airport systems, such as the development perimeter rules )e.g. case of India* that limit the construction of new airports in the region in order to protect foreign investments. Bi) S !*c *!e 16. Fased upon the e%periences during the privatization of :umbai and =elhi airports, certain challenges that need to be considered, and, which would merit attention before such a concessioning of an airport is attempted again in the country can be discussed hereunder@ )a* Is there a danger of over$determination in the contractual parametersA ),ne of the interested parties with rich e%perience walked out of the bidding process because they did not receive a satisfactory answer on how some of the parameters would be monitored and penalized for non$compliance*. This would also depend on the maturity of the sector. )b* Is the pool of bidders being restricted by requirements such as ?oreign =irect Investment caps, a foreign player having to be a constituent of the bid consortia, and limits on airline participationA These issues, however, need to be e%amined in the broader conte%t of the national policy on foreign e%change flows, ability to bring in new technology and processes, and scope for economies between airlines and airports versus conflict of interest,

respectively. In the latter case, the maritime sector in India has permitted bids for container terminals both by shipping lines and by the then monopoly container rail operator. (hat are appropriate requirements for pre$qualifying biddersA )c* Is economic regulation required, especially for tariff setting of aeronautical chargesA )d* (hat are the implications for the ne%t round of airport privatization bidsA (hat are the implications for the privatization process in other infrastructure sectorsA )e* In this conte%t, are revenue shares of 1C$67 per cent sustainableA 're these reflective of early entrant strategiesA )The minimum revenue share had been set at ! per cent*. 1!. India has managed to award longterm concessions to private consortia something many other countries in the world aspire to do but have not yet attempted. This is all the more significant, given that the two airports having been concessioned out are =elhi and :umbai, the political and commercial capitals of the country respectively.

CO+PACTING STRATEGIES
Comme!ci$&i.$ ion of Ai! T!$ffic Con !o& /Uni e) S $ e# +o)e&0 17. :any aviation e%perts predict serious trouble in coming years as air travel demand grows faster than the ability of the G.&. air traffic control system to e%pand capacity. 0e%t3en will be a ma-or redesign of the 'T+ infrastructure. The new system is designed to accommodate up to three times the volume of current air traffic by making more efficient use of both the national airspace and airport facilities. The new air traffic control system would be more decentralized than the one currently in place in the Gnited &tates. 3uidance systems on planes would work in con-unction with satellites of the 3lobal .ositioning &ystem )3.&* to supplement direct supervision by ground$based controllers and radar stations. It is estimated that by not e%panding the 'T+ system9s capacity will be cost the G.&. economy I6# billion per year by "#"# because the overburdened system will force significant rationing of flights. That rationing would increase prices and eliminate some trips entirely.

18. The remedy lies in taking the 'T+ system out of the federal budget process and make it a self$supporting entity, funded directly by its customers. Eariants of this commercialization approach have been recommended by a series of federal studies and commissions over the past 1! years. 's part of Eice .resident 'l 3ore9s efforts at Jreinventing governmentJ in the 1 #s, for e%ample, the +linton administration proposed turning the 'T+ system into a separate, self$funded, nonprofit government corporation within the =epartment of Transportation. The 1 8 0ational +ivil 'viation Deview +ommission, which was chaired by 0orman :ineta, similarly proposed moving toward a self$supporting air traffic control organization. +ommercialization would entail shifting from aviation$related ta%es paid to the G.&. Treasury to fees for 'T+ services paid directly by customers to a new self$supporting 'ir Traffic ,rganization. This change would allow fees to grow in proportion to the growth of flight activity, rather than being tied to a less$ stable variable, such as fuel prices or airline ticket prices. :oreover, a predictable revenue stream that was not sub-ect to the federal budget process would provide the basis for the 'T, to issue long$term bonds for funding capital investments. +ommercialization would also address the management problems that have plagued the ?''9s efforts to modernize. ' non$civil$service 'T, could attract the best private$sector managers and engineers skilled at implementing comple% technology pro-ects. &uch an 'T, could hire, fire, and compensate its employees as other high$tech businesses do. .rivate sector managers would have an incentive to ask tough questions about whether new investments offered real value for the money, a process that often doesn9t occur at the ?'' or in +ongress. 1C. &eparate, self$supporting 'T,Kno longer part of the ?''Kwould be overseen at arm9s length for aviation safety by the remaining ?''. 0umerous studies have pointed out that the ?''9s air$safety role is compromised when it comes to the 'T+ system, since that system is operated Jin$houseJ by a different branch of the same ?''. 'll other players in aviationKpilots, mechanics, aircraft manufacturers, airlines, and so forthKare regulated at arm9s length for safety by the ?''. This separation of 'T+ operations from safety regulation is especially critical given the ma-or changes entailed by shifting to the semi$automated 0e%t3en, where numerous safety versus capacity questions will need to be addressed in a rigorous and transparent manner. ?inally, a self$supporting 'T, would address the political obstacles to improving system efficiency, such as making decisions to close facilities. Fy passing the enabling legislation for 'T+ reform, +ongress would delegate such contentious issues to the customer$oriented 'T, organization. =uring the past two decades, nearly !# governments have commercialized their air traffic control systems. That means they have separated their 'T+ activities from their transport ministries, removed them from the civil

service, and made them self$supporting from fees charged to aircraft operators. These new air navigation service providers )'0&.s* are usually regulated at arm9s length by their government9s aviation safety agency. In 1 7, +anada set up a private, nonprofit 'T+ corporation, 0av +anada, which is self$supporting from charges on aviation users. The +anadian system has been widely praised for its sound finances, solid management, and its investment in new technologies. 1 . The +anadian system is a very good reform model not only for the Gnited &tates, but also for countries like India to consider. ' number of studies have found that 'T+ commercialization has generally resulted in improvements to service quality, better management, and reduced costs. 't the same time, air safety has remained the same or improved in the countries that have pursued reforms to set up independent '0&. organizations. ?or the Gnited &tates, a commercialized 'T+ organization would be more likely than the ?'' to efficiently implement the ma-or aviation infrastructure advances that the nation desperately needs. 'ir traffic control is more comple% and dynamic than ever, and it needs to be managed in the sort of efficient and fle%ible manner that only a commercialized environment can offer. +ountries like +anada have shown the way forward for countries like ours to follow. T!$n#fe! of O1ne!#-i" "#. The simple view of the privatization of governmental activity focuses on the transfer of ownership. It refers to selling government owned properties to private interests $$ in this sense it is the opposite of the nationalization of private interests, as practiced by the socialist 5abour 3overnment of Fritain in the late 1 6#/s. This simple view incorporates an important implicit assumption $$ that ownership defines control, so that when ownership changes so does the control of all important management and strategic issues. This simple view of privatization focusing on ownership can be misleading. +ontrol depends not -ust on the ownership of an operation, but also on its management and strategic direction. The more realistic view of privatization is that it involves the transfer of some control from the public, governmental direction to the private, commercial sector. This can happen either through the transfer of ownership, or the transfer of control. .rivatization can thus also occur through the transfer of management control from government to private groups. ?or e%ample, the privatization of airports in 'ustralia is being implemented in e%actly this way@ the 'ustralian federal government has entered into long term, !# year, leases with consortia of private

businesses. In this case the government cedes control over day$to$day and year$to$ year operations to the commercial enterprises, while clearly maintaining control over what kinds of long$term facilities and changes to the airport can be made. :anagement and strategic direction can be e%ercised over a variety of factors. These would normally include the@ )a* )b* )c* )d* )e* )f* )g* .lanning for the future e%pansion of the activityH =esign of the specific pro-ectsH ?inancing of the construction and operation of the facilitiesH ,peration of the facilitiesH .ricing of the servicesH and 'vailability of the services to the publicH as well as ,wnership of the properties.

CONCLUSION
"1. The fundamental choice in the privatization process appears to be how the government should e%ercise its control to sustain the public interest in open access to and fair rates for airport services. The ma-or alternatives are between@ )a* 3overnment regulation, an inherently adversarial processH or )b* 3overnment ownership and partnership in the development of airports, a more collaborative approach. "". ,n balance, the partnership approach as practiced by numerous airport authorities throughout the world seems most suitable for both assuring the public interest in fair operations and, most importantly, in assuring that the local community can e%press its desire for sufficient airport capacity for its purposes. The e%act way that privatization should be accomplished, and the right balance of public and private involvement in the development of airport properties would seem to depend on the precise conte%t of the pro-ect, the potential users, the region and the moment in time. "1. &ome Interesting ?indings that have arisen out of the study clearly portray the benefits of privatization as follows@

o Privatisation is mainly successful because it leads to investment and modernisation in infrastructure. o For every increase of a million passengers, one thousand employees are required. o The modernisation of Delhi airport was denied to AAI on the basis of technical reasons and the fact they did not do it earlier. o AAI s total yearly revenue from !umbai and Delhi airports will be "s. #$% crore more than if AAI were to run the airports. o It is the importance that businesses give to profit which will maintain the safety levels at privatised airports.

03 NOV 2010

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

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'merican 'ssociation of 'irport 4%ecutives and the 'irport Desearch and =evelopment ?oundation )1 8* 'irport .rivatization@ 'n Gpdate, 'le%andria, E', ;anuary. +algary 'irport 'uthority )1 C* L+algary 'irport 'uthority,J web page@ http@BBwww.airport.calgary.ab.caB+anada, Transport +anada, )1 C*, LThe 0ational 'irports .olicy and DegionalB5ocal 'irports,J web page@ http@BBwww.tc.gc.caBairportsBnapB ?itz3erald, 3. .. )1 6* L.ublicB.rivate &ector .artnerships@ The .ort 'uthority of M 0; 4%ample.J ;ane/s 'irport Deview )1 8*, Issue ?ocused on .rivatization, Eol. , 0o. 8 &ept.

G.&. +ongress, 3overnment 'ccounting ,ffice )1 7* 'irport .rivatization@ Issues Delated to the &ale or 5ease of G.&. +ommercial 'irports. ''I )"##6*. Destructuring and :odernization of =elhi and :umbai 'irportsK Invitation to Degister an 4%pression of Interest )ITD4,I*, 'irports 'uthority of India, ?ebruary 18, "##6. ;ain, Daghuram and 3angwar )"##8*. 'irport .rivatization@ Fidding .rocess for =elhi and :umbai )', F, +, =, and 4*, Indian Institute of :anagement, 'hmedabad. Information :emorandum@ Indira 3andhi International 'irport, 'irports 'uthority of India, 'pril #1, "##!.