PPP in Indian airports

EMERGING CHALLENGES IN
PUBLIC PRIVATE PARTNERSHIP
AIRPORT IN INDIA

A DISSERTATION SUBMITTED
TO
Dr. P.C.K.RAVINDERAN and Dr.V. BALAKISTA REDDY
IN PARTIAL FULFILMENT OF PGDALATM DEGREE
IN AVIATION LAW AND AIR TRANSPORT MANAGEMENT

SIREESH P.
Aerodynamics
Aircraft Research and Design Centre
HAL, Bangalore.

1

EMERGING CHALLENGES IN PUBLIC PRIVATE PARTNERSHIP IN AIRPORTS

ACKNOWLEDGEMENT
It’s a great pleasure and privilege to be associated with prestigious university
NALSAR. I am very thankful for IAAM for taking the initiative along with
NALSAR to establish Aviation law and air transport management program, first
of its kind in India. I am gratified to Dr. P. C. K. Ravindran and Dr. V. Balakista
Reddy for introducing such a brilliant course.

My sincere gratitude to Prof. S. N. A. Shafi for his help, guidance and
recommendations in preparing this dissertation.

I am grateful to Mr. Chinnarajan my colleague who encouraged me all the way
form the beginning of this program.

2


CERTIFICATE

This is to certify that Mr. SIREESH P. Roll No __________ has submitted his
dissertation on “Emerging Challenges in Public Private Partnership”, as partial
fulfilment for the award of PGDALATM degree in Aviation Law and Air
Transport Management to NALSAR University of Law under my supervision. It
is also affirmed that, the dissertation submitted by him is original, bona-fide and
genuine.

Dr. V. Balakista Reddy
Supervisor
Nalsar University of Law, Hyderabad

3


Declaration

This dissertation, “Emerging Challenges in Public Private Partnership”, has
been prepared and submitted by the undersigned to NALSAR University of
Law, Hyderabad. As a part of requirement for an award of PGDALATM degree
in Aviation Law and Air Transport Management, under the guidance of
Dr.V.Balakista Reddy. It is to declare that, this dissertation is original, bona-fide
and legitimate work of the undersigned, and has been pursued purely for an
academic interest. This dissertation shall not be used for any political purpose
or connotations or as a testimony against any person or communities or
regime. The views and ideas expressed in this dissertation are exclusively of
the researcher and do not represent any person, organisation or community in
particular.

Signed on: _____________________________________________.

SIREESH P.
Roll No:
Aviation Law and Air Transport Management
NALSAR-IAAM.

4


LIST OF ABBREVATIONS

PPP- PUBLIC PRIVATE PARTNERSHIP
GDP- GROSS DOMESTIC PRODUCT
AAI- AIRPORT AUTHORITY OF INDIA
NAO- NATIONAL AUDIT OFFICE
PFI- PRIVATE FINANCE INVESTMENT
GHIAL- GMR HYDERABAD INTERNATIONAL AIRPORT LIMITED
ICAO- INTERNATIONAL CIVIL AVIATION ORGANIZATION
AMHS- AERONAUTICAL MESSAGE HANDLING SYSTEM
RFID- RADIO FREQUENCY INDENTIFICATION
BOT- BUILT OPERATE TRANSFER
JVC- JOINT VENTURE COMPANY
VGF- VIABILITY GAP FUNDING
FDI- FOREIGN DIRECT INVESTMENT
DGCA- DIRECTORATE GENERAL OF CIVIL AVIATION
TEFS- TECHNO-ECONOMIC FEASIBILITY STUDY
MOD- MINISTRY OF DEFENSE
PSU- PUBLIC SECTOR UNIT
SPV- SPECIAL PURPOSE VEHICLE
CA- CONCESSION AGREEMENT
SHA- SHARE HOLDER AGREEMENT
SSA- STATE SUPPORT AGREEMENT
LLA- LAND LEASE AGREEMENT
PQB- PRE QUALIFIED BIDDERS
DPR- DETAIL PROJECT REPORT
ADF- ADVANCE DEVELOPMENT FEE
UDF- USER DEVELOPMENT FEE
PSF- PASSENGER SERVICE FEE
BCAS- BUREAU OF CIVIL AVIATION SECURITY
CNS/ATM- COMMUNICATION, NAVIGATION AND SURVEILLANCE / AIR
TRAFFIC MANAGEMENT
DBFOT- DESIGN, BUILD, FINANCE, OPERATE AND TRANSFER
MCA- MODEL CONCESSION AGREEMENT
ATS- AIR TRAFFIC SERVICES
5


IMD- INDIA METEOROLOGICAL DEPARTMENT
OMDA- OPERATION MANAGEMENT AND DEVELOPMENT
AGREEMENT
GOI- GOVERNMENT OF INDIA
HIAL- HYDERABAD INTERNATIONAL AIRPORT
BIAL- BANGALORE INTERNATIONAL AIRPORT
DIAL- DELHI INTERNATIONAL AIRPORT
CIAL- COCHIN INTERNATIONAL AIRPORT
AERA- AIRPORTS ECONOMIC REGULATORY AUTHORITY
RTI- RIGHT TO INFORMATION ACT
KIC- KARNATAKA INFORMATION COMISSION

6


CONTENT

1.0 ROLE OF AIRPORT INFRASTRUCTURE IN NATIONAL DEVELOPMENT

1.1 Economy
1.2 Social Payback by Airports
1.3 Influence of Aviation on Tourism
1.4 Environment Benefits of Airports and Aviation

2. AIRPORT ENVIRONMENT IN INDIA.

2.1 Present airport infrastructure in India.
2.2 Major Airports of India
2.3 Present Classification of Airports in India
2.4 Proposed classification of Airports in India
2.5 Greenfield and Brownfield Airports

3 PUBLIC PRIVATE PARTNER SHIP

3.1 Introduction to PPP
3.2 Key drivers and enablers of PPP.
3.2.1 Conventional procurement issues.
3.2.2 Naresh Chandra committee
3.2.4 To meet the growing needs of airport infrastructure in
India
3.2.5 Passenger Growth
3.2.6 Cargo Growth
3.2.7 To Meet Financial Requirements to Support Such
Growth and to Infuse Private Fund in the Airport
Infrastructure Sector
3.2.8 To Increase the Standards of India Airports-To
International Standards
3.2.9 Drivers and enablers
3.3 Present Indian scenario

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4. PROCEDURAL GUIDELINES FOR SETTING UP OF PPP AIRPORT.

4.1 Policy Framework
4.2. Promoters
4.3 Study stages
a. Pre-feasibility Study Stage
b. Detailed Feasibility Study Stage
c. TECS
d. approval decision
4.4 Site Selection
4.5 Detailed Design Stage and Approval
4.6 Project Implementation Stage
4.7 Setting up a Special Purpose Vehicle (SPV)
4.8 Public Private Partnership (PPP) Model
4.9 Bidding Process and Selection criteria
4.10 Viability Enhancement

5.0 CONCESSION AGREEMENT FOR PPP

5.1 Need for a framework
5.2 Elements of financial viability
5.3 Technical parameters
5.4 Performance standards
5.5 Concession period
5.6 Selection of Concessionaire
5.7 Concession fee
5.8 Risk allocation
5.9 Financial close
5.10 User Fee
5.11 Construction
5.12 Operation and maintenance
5.13Reserved Services
5.14 Right of substitution
5.15 Force majeure

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5.16 Termination
5.17 Monitoring and supervision
5.18 Support and guarantees by the Government
5.19 Real estate development
5.20 Miscellaneous

6.0 RESERVED ACTIVITIES

7.0 EMERGING CHALLENGES AND RISKS IN PPP

7.1 General Issues
7.2 Financial Challenges
a) Financial Risk
b) Project Finance and Revenue Streams
c) Revenue Streams
7.3 Legal Challenges
7.4 Public Risk
7.5 Asset Risk
7.6 Operating Risk
7.7 Sponsor Risk
7.8 Default Risk

8.0 EMERGING REGULATORY ISSUES

8.1 Amendment of AAI Act and Aircraft Rules Act
8.2 Regulatory authority for AERA

9.0 THE CHANGED ROLE OF GOVERNMENT UNDER PPP AND NEW SET
OF AGREEMENTS AND NEW LEGAL FRAME WORK

10 .0 PPP airports and RTI Act

10.1 PPP airports public authority or not
10.2 BAIL case

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10.3 In case of brown field airport –AAI act apply – the operator in
AAI shoes

11.0 RECOMMENDATION IN REGULATION FOR PPP

12. CONCLUSION

13. REFERENCES.

14. ANNEXURE.

10


PREFACE

Over the years, the basic infrastructure in India has been developed to an
extent, which is not sufficient enough while considering India’s geographical
size, its population and the pace of overall economic development.
Infrastructure bottleneck has been a serious concern in India and basic
infrastructure like roads, railways, ports, airports, communication and power
supply are not comparable to the standards prevalent in its competitor
countries.
To develop the Indian infrastructure to a world class and to remove the
infrastructure inadequacy in the country, the investment requirements are
mammoth, which could not be met by the public sector alone due to fiscal
constraints and mounting liabilities of the Government. This would call for
participation of private sector in coordination with the public sector to develop
the public infrastructure facilities. In this direction, the economic reforms
initiated in the country provide forth the policy environment towards public
private partnership (PPP) in the infrastructure development. Sector-specific
policies have also been initiated from time to time to enhance the PPP in
infrastructure building. While the PPP is spreading to develop basic
infrastructure world wide, in India, the participation of private sector in the
infrastructure building has not been much encouraging, despite several rounds
of policy reforms.
Against this setting, the rest of the paper is organized as follows. Section I and
II assesses the Indian market and the need for PPP in the airport infrastructure
development. Section III attempts to review the structure of PPP through
literature survey. Section IV and V evaluates the status of private sector
participation in infrastructure development guidelines and concession
agreement. Section VI captures the Indian experiences in this regard. Section
VII reviews the investment requirements to bridge the infrastructure gap in the
country. Section VIII focuses on the challenges of infrastructure projects with
the status of PPP and overall private sector participation along with sector-
specific concerns. Generic issues while implementing the airport infrastructure
projects in the country with private participation and options thereon are
analyzed in Section IX, X and XI. Finally, concluding observations are drawn in
Section XII.
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1.0 ROLE OF AIRPORT INFRASTRUCTURE IN NATIONAL DEVELOPMENT
Airports are the gateway for the country; they open doors for trade, tourism.
Economy of a country depends on the trade and tourism, simultaneously the
trade and tourism depends on the airports. A country without national carriers
can still trade with other countries as well catch the fancy of tourists, but the
country without an airport will be handicapped to advance economically. So it
becomes very important for every country to have an airport.

The rapid growth of the trade and tourism between the nations has chosen the
air transport mode for its Quick, Reliable, Efficient and Safe services. The
recent trends in the development of free trade, globalisation, liberalization and
deregulation left the mankind to race with time and air transport is found to be
very appropriate, thus propelling the aviation industry to paramount.

Airports also represent a country’s window on the world. Passengers form their
first impressions about a nation from the state of its airports. They can be
effectively used as symbols of national pride, if we pay sufficient attention to
their quality and maintenance.

In many remote, hilly and inaccessible areas of the country, air transport is the
quickest and sometimes the only mode of travel available. This is especially
true of sensitive regions on the borders with our neighbours in the west, north
and north-east.

Airports need to be integrated with other modes of transport like Railways and
Highways, enabling seamless transportation to all parts of the country.

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1.1 Economy

The impact of air transportation on economic activity differs from other
transportation modes because of its distinctive characteristics speed, cost,
flexibility, reliability, and safety. It is the only realistic long-distance
Transportation mode for high-value perishable commodities and time-sensitive.

Airports being nuclei of economic activity assume a significant role in the
national economy. The quality of airport infrastructure, which is a vital
component of the overall transportation network, contributes directly to a
country's international competitiveness and the flow of foreign investment. The
availability of better air transportation services effectively increases the scope
of new business and industrial economic activity. The economy moves towards
higher value-added products, particularly in agriculture, an increasing
proportion of the produce will have to move by air, both within the country and
abroad. In addition, the more remote and inaccessible regions of the country,
such as the North-east, can realise their true potential when such a transition
becomes possible. Increasing economic activity in turn generates the need for
passenger travel and freight and drives the demand for air transportation
services. Cargo carried by air in India weighs less than 1% of the total cargo
exported, it accounts for 35% of the total value of exports. Better cargo
handling facilities lead to enhanced levels of imports, especially of capital
goods and high-value items. Likewise, It is observed that 2% growth in aviation
industry leads to 1% growth in GDP.

Export and Import Trade of India with World for Last Five Years

EXPORT AND IMPORT DATA

EXPORT IMPORT

160,000,000.00
140,000,000.00
120,000,000.00
100,000,000.00
INR

80,000,000.00
60,000,000.00
40,000,000.00
20,000,000.00
0.00
2004-2005 2005-2006 2006-2007 2007-2008 2008-2009
FINANCIAL YAER

(See Annexure –I for export and import data) Fig.1

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1.2 Social Payback by Airports
Airport provides employment in the aviation sector and creates wider
socioeconomic benefits through its potential to facilitate certain types of
activities in a local development. Studies evaluate the direct, indirect and
induced employment impact of air transportation. Direct impact is employment
in the aviation industry, indirect impact is the employment in the industries
down the aviation supply chain, and induced impact is the employment
supported by the expenses of those directly and indirectly employed in the
aviation industry, studies has been assessed that every job in the aviation
industry will create seven other jobs directly or indirectly through its catalytic
impact on tourism and business.

At the macroeconomic level, airport impacts economy by providing employment
and by enabling effects including enabling access: to markets, to people, to
capital, to ideas and knowledge, to labour supply, to skills, to opportunity, and
to resources.

airport industry which in the past was considered to be a simple transit areas
but now the modern airports have become place where one works, eats, makes
purchases, and even sleeps. The whole idea of modern airports is to provide a
pleasant reception area with increasingly commercial outlook; private rooms,
game areas, religious facilities, malls, shopping canters.

Air transport provides significant social benefits few of them as follows:
• Air transport contributes to sustainable development. By facilitating tourism
and trade, it generates economic growth, provides jobs, improves living
standards, alleviates poverty, increases revenues from taxes, and fosters the
conservation of protected areas.
• Air transport is often the only means of transportation to/from remote areas,
and promotes social inclusion by connecting those living in such communities
with the rest of the country.
• The air transport network facilitates the delivery of emergency and
humanitarian aid relief anywhere on earth, and ensures the swift delivery of
medical supplies and organs for transplantation.

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• Air transport improves quality of life by broadening people’s leisure and
cultural experiences. It provides a wide choice of holiday destinations around
the world and an affordable means to visit distant friends and relatives.
• Air transport improves productivity, by encouraging investment and
innovation; improving business operations and efficiency; and allowing
companies to attract high quality employees. And Cities always develop
towards the airport because of its socioeconomic factor.

1.3 Influence of Aviation on Tourism

Tourism and Air Transport industry are complementing each other. Tourism
depends on transportation to bring visitors, while the transportation industry
depends on tourism to generate demand for its services. The growth in tourism
industry directly reflects onto the air transportation. Over the last 25 years, the
number of international tourists has more than doubled. The expansion of
international tourism has a large impact on the discipline of transport
geography.

Transport is the cause and the effect of the growth of tourism. To start with, the
improved facilities have stimulated tourism, and the expansion of tourism has
stimulated transport. Accessibility is the main function behind the basics of
tourism transport. In order to access the areas that are mainly aimed, tourists
will use any transportation mode. However, air transport is the main mode for
international tourism. Air transport plays a dominant role in inter-regional
movements of tourists, which normally entails travel over long-distance. Growth
rates of international air traffic are pegged with growth rates of international
tourism. Attractive package tours, competitive airfare attract more and more
tourist day by days, therefore both the industry is expanding rapidly.

Air transport is far advance than the transport mode. Air transport has
revolutionized the geographical aspect of distances; the most remote areas can
now be attained, any journey around the world can be measured in terms of
hours of travelling. With jet that, can reach up to 1950 km/hrs, international
tourism is no longer an on going adventure.

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Inducement tour - Tourism now a day not only the personal influence, but it also
is group affluence as well, many company to induce their work force arrange
tour overseas, which is the significant reason of Group tour.

“Whatsoever the reason of travelling people need transportation for movement,
the next question arise which mode of transportation? The answer is affordable,
time saving, convenient and safety. So, air transportation is the one meet most
all of the above”, which basically requires good airport infrastructure

Airports provide the only worldwide transportation network, which makes it
essential for global business and tourism. Airport alleviate poverty and helps to
improve living standards by facilitating tourism. Air transport improves quality of
life by broadening people’s leisure and cultural experiences. It provides a wider
choice of holiday destinations around the world and an affordable means to visit
distance friends and relatives. Air transport contributes to sustainable
development not only by facilitating tourism and trade, it generates economic
growth, provides jobs, increase revenues from taxes as well as facilitates the
delivery of emergency humanitarian aid relief and swift delivery of medical
supplies anywhere on the earth.97% of the country's foreign tourists arrive by
air and tourism is the nation's second largest foreign exchange earner.

1.4 Environment Benefits of Airports and Aviation

As with all human activity there is an environmental impact. Aviation is widely
understood to be responsible for 2% of worldwide man-made CO2 emissions;
where as other transport provides 16%. The IPCC provides a comprehensive,
objective, open and transparent assessment of climate change. Today, 80% of
aviation’s greenhouse gas emissions are related to passenger flights exceeding
1,500km/900 miles for which there is no practical alternative.

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AVIATION: ONLY 2% OF MAN-MADE CO2 EMISSION

Fig.2

AIRCRAFT TODAY ARE 75% QUIETER AND 70% CLEANER THAN 40 YEARS AGO

Aviation’s small contribution to CO2 emissions is not a coincidence, but rather
the result of a constant focus on innovation. Manufacturers must strive to
reduce fuel consumption to remain competitive, but it is much more than just
good business. Since the start of commercial jet services in the 1950s, aircraft,
engine and other related manufacturers have been driven by a number of
factors. Safety is understandably considered above all others, although the cost
of aircraft operations for the airlines has been and remains a critical
consideration. Much of the airlines’ and manufacturers’ focus has always been
to reduce fuel costs. Today, this can account for 36% of airline operating

17


expenses, even though manufacturers have reduced the fuel consumption by
37% per 100 passenger kilometres travelled, since 1987. Over the last 50
years, aircraft have become increasingly efficient in terms of their individual
impact on the environment throughout their entire life cycle. This continues to
be driven by the demands of passengers and airlines, as well as both
international and local legislation.

Today, aircraft are 20dB quieter than the closest comparable aircraft produced
in the 1960s, which equates to 75% less perceived noise. Of the entire
population affected by transport noise, 79% live near roads, 14% near railways
and only 7% live near airports. Similarly, everyone has seen pictures or film of
aircraft from that period taking off with plumes of black smoke billowing from the
engines, which is not seen at the world’s airports today. In fact, today’s aircraft
produce 90% less smoke or unburned hydrocarbons than aircraft of the 1970s,
with a carbon monoxide (CO) reduction of more than 50%.

Furthermore, aircraft burn 70% less fuel and, therefore, emit 70% less CO2
than aircraft flying in this period. Another trend having a significant effect is
improved aircraft load factors. In other words airlines have filled their planes
more efficiently, thereby effectively reducing the need for more aircraft or
frequencies, together with their associated fuel burn. Since 1970, airlines have
improved load factors by an average of 0.6 percentage points per year, with
industry wide load factors averaging 76% in 2006.

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2. AIRPORT ENVIRONMENT IN INDIA.

2.1 Present airport infrastructure in India.

There are 449 airports/airstrips in the country. Among these, the AAI owns and
manages 88 airports, 27 civil enclaves at defence airfields and 5 PPP airports
and provides air traffic services over the entire Indian airspace and adjoining
oceanic areas. Historically, air traffic at Indian airports has broadly followed a
particular distribution pattern, except that some airports have changed their
inter-se positions vis-à-vis volume of traffic.

2.2 Major Airports of India

“Major airport means an airport which has, or is designated to have, annual
passenger throughput in excess of one and a half million or any other airport as
the Central Government may, by notification, specify as such”
Presently twelve (12) airports in the country have annual passenger throughput
in excess of one and a half million as can be seen from the following table.

Sl. No. Name of Airport Passenger Throughput
2008-09 (in million)
1 Mumbai 23.43
2 Delhi 22.84
3 Chennai 9.84
4 Bangalore 8.76
5 Kolkata 6.99
6 Hyderabad 6.22
7 Cochin 3.36
8 Ahmedabad 2.83
9 Goa 2.22
10 Trivandrum 1.95
11 Pune 1.77
12 Calicut 1.68

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• 2 airports – Mumbai and Delhi being leased airports of AAI under PPP
management, with majority private participation;
• 3 airports – Bangalore, Hyderabad and Cochin being private
• 5 airports – Chennai, Kolkata, Ahmedabad, Trivandrum and Calicut
being airports under the Airports Authority of India; and
• 2 airports – Goa and Pune being Civil Enclaves at defence airfields,
managed and operated by the Airports Authority of India.

2.3 Present Classification of Airports in India

i. International Airports: These are declared as international airports and
are available for scheduled international operations by Indian and foreign
carriers. Presently, Mumbai, Delhi, Chennai, Calcutta and
Thiruvananthapuram are in this category.
ii. Custom Airports: These have customs and immigration facilities for
limited international operations by national carriers and for foreign tourist
and cargo charter flights. These include Bangalore, Hyderabad,
Ahmadabad, Calicut, Goa, Varanasi, Patna, Agra, Jaipur, Amritsar and
Tiruchirapally.
iii. Model Airports: These are domestic airports which have minimum
runway length of 7500 feet and adequate terminal capacity to handle
Airbus 320 type of aircraft. These can cater to limited international traffic,
if required. These include Lucknow, Bhubaneshwar, Guwahati, Nagpur,
Vadodara, Coimbatore, Imphal and Indore.
iv. Other Domestic Airports: All other airports are covered in this category.
v. Civil Enclaves in Defence Airport: There are 28 civil enclaves in Defence
airfields.

2.4 Proposed classification of Airports in India
Reclassification of airports is proposed to develop the capacity of airports in
accordance with the future projections of air traffic:
International Hubs: This category of airports will be that of International Hubs,
which may cover airports currently classified as international airports, and those
eminently qualified to be upgraded. These would at present cover Delhi,
Mumbai, Chennai, Kolkata and Thiruvananthapuram. Airports at Bangalore,

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Hyderabad, Ahmedabad, Amritsar and Guwahati would be added to the list
after their facilities are upgraded to the desired level. International hubs would
be used for dispersal of international traffic to the hinterland. At these airports,
the facilities would be of world-class standards, including convenient
connections for international and domestic passengers, airport-related
infrastructure like hotels, shopping areas, conferencing and entertainment
facilities and aircraft-maintenance bases, among others.
Regional Hubs: The government is keen to encourage the development of
regional airlines with fleets of small aircraft, to provide air-linkages witin the
interior areas of the country. Regional hubs will have to act as operational
bases for regional airlines and also have all the facilities currently postulated for
model airports, including the capability to handle limited international traffic. The
identification of Regional Hubs will be made on the basis of origin-destination
surveys, traffic demand and the requirements of the airlines. The state
government would be closely associated as co-promoters of regional airlines.
Other Operational airports: These would be developed so as to be cost-
effective on the basis of individual needs, to meet the requirements of traffic
handled by them. Airports serving state capitals would be given priority. The
status of individual airports may be reviewed at five-yearly intervals, on the
recommendation of a committee of experts. Grant of status as International
hubs would be with prior cabinet approval. It is clarified that international hubs
shall have the status of an international airport for purposes of bilateral
agreements.

2.5 Greenfield and Brownfield Airports

Greenfield Airport means a new airport which is built from scratch in a new
location because the existing airport is unable to meet the projected
requirements of traffic. The word Greenfield originates from software
engineering, meaning a project which lacks any constraints imposed by prior
work. Brownfield projects are the projects which are modified or upgraded from
existing facilities.

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3 PUBLIC PRIVATE PARTNER SHIP

3.1 Introduction to PPP

PPP can be defined as arrangements whereby private parties participate in, or
provide support for, the provision of infrastructure, and a PPP project results in
a contract for a private entity to deliver public infrastructure-based services.

The mechanics of the arrangements can take many forms and may incorporate
some or all of the following features

•The public sector entity transfers land, property or facilities controlled by it to
the private sector entity (with or without payment in return) usually for the term
of the arrangement;
•The private sector entity builds, extends or renovates a facility;
•The public sector entity specifies the operating services of the facility;
•Services are provided by the private sector entity using the facility for a defined
period of time (usually with restrictions on operations standards and pricing);
and
•The private sector entity agrees to transfer the facility to the public sector
(with or without payment) at the end of the arrangement.

3.2 Key drivers and enablers of PPP.

3.2.1 Conventional procurement issues.

A lot of the blame for the poor record in the design and construction of capital
works on the attitudes and culture of the public sector, which result in time
delays and costs overruns being commonplace. Since then, more complete
and damning evidence has come to hand on the extent of cost overruns and
revenue shortfalls on infrastructure investments phenomena that have come to
be known under the heading ‘appraisal optimism’.

Appraisal Optimism: Optimism bias is the tendency for a project’s costs and
duration to be underestimated and/or benefits to be overestimated. It is
expressed as the percentage difference between the estimate at appraisal and

22


the final outturn.

National Audit Office (NAO) undertakes a rolling review of all

government procurement, including PFI procurement, PFI construction
outcomes showed that in contrast to traditionally procured projects, the PFI
projects were largely being delivered on time or early (76 per cent versus 30
per cent) and on budget (78 per cent versus 27 per cent).

Construction performance of PFI and conventional projects

Projects PFI projects NAO census Government
(%) procurement survey (%)
On time 76 30
On budget 78 27

UK Green Book calls ‘optimism bias’ – the estimated difference between the
business case and the final outcome for each category of project. For all
projects, time overruns exceeded the estimated duration by 17 per cent.

Differences between actual and estimated costs in large public works transport
projects.

Project Type All regions

Number of projects Average cost escalation (%)

Transport 258 27.6

3.2.2 Naresh Chandra committee

The Indian aviation industry took off on to a higher growth plane following the
liberalization of the airlines industry in the late 1990s. In the decade following
liberalization, the growth was propelled further by the emergence of low-cost
carriers, competition-induced decline in travel costs, and sustained economic
growth. With that, renewed focus came to be placed on the aviation

23


infrastructure segment, in which investments by the Airport Authority of India
(AAI)—till then the monopoly owner of most of the Indian airports—had
historically been inadequate. The emphasis on further developing the country’s
aviation infrastructure meant opening up of airports to private investment, as
was one of the key recommendations of The Naresh Chandra Committee
Report on the Road Map for the Civil Aviation Sector—November 2003.

3.2.4 To meet the growing needs of airport infrastructure in India
India’s airports have suffered from decades of neglect and underinvestment.
When the Naresh Chandra Committee presented its report to the Ministry of
Civil Aviation in November 2003, it remarked frankly that the country’s
“passenger airports are for the most part an embarrassment”.

The inadequacy of the state of airport infrastructure was exposed as air traffic
expanded dramatically from 2004 onwards, pushing several metro airports to
well beyond their design capacity. Congestion in the terminals, on the runways
and in the air, resulted in a deteriorating passenger experience and an
increasingly inefficient (and costly) operating environment for the airlines.

3.2.5 Passenger Growth
In the recent past, India has encountered an extraordinary growth in passenger
air traffic. In India 87% of the total air traffic is generated by the 15 international
airports (listed in annexure-I), of which a total of 84% of domestic traffic and
93% of international traffic is generated from these airports.

The growth of International and domestic passenger traffic is shown in the
Graphs below. The statistics analysis follows the regression line of polynomial
representing the international and domestic passenger growth respectively.

y = 95946x2 - 317907x + 4E+06

y = 464620x2 - 1E+06x + 1E+07

24


International & Domestic Passenger Traffic
INTERNATIONAL PASSENGER DOMESTIC PASSENGER
2 2
y = 95946x - 317907x + 4E+06 y = 464620x - 1E+06x + 1E+07
120

100
Passenger Traffic

80
Millions

60

40

20

0
1999-00

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

2008-09

2009-10

2010-11

2011-12

2012-13

2013-14
Calender Year

(See Annexure II for the passenger data) Fig.3

The estimates from the graph represent a 100 and 20 million in Domestic and
international air traffic by 2014. While passenger traffic in metros grew by an
average of 31%, smaller stations like Port Blair, Nagpur and Raipur registered
traffic growths of 41.8%, 94.8% and 70.3%, respectively.

According to the Airports Authority of India data, of the top 45 airports, 9
airports registered a 50% growth in passenger traffic. These include
Hyderabad, Pune, Coimbatore, Mangalore, Nagpur, Port Blair, Raipur, Ranchi
and Jaipur. Among the four metros, Kolkata registered the highest growth of
39.5%, followed by Chennai, Delhi and Mumbai at 35%, 27.1% and 22.4%
respectively.

3.2.6 Cargo Growth
The air cargo market in the country has also witnessed increased activity over
the last few years especially with the entry of number of new players in cargo
handling market (terminal management, development and operation).
International operators like Menezies (JV with Bobba group at Bangalore and
GHIAL at Hyderabad) and SATS Singapore (JV with Air India at Bangalore)
have made significant investments for offering newer and better services for
cargo users. International express cargo operators like FedEx and DHL are
also increasingly establishing their presence in the Indian market.

y = 1615.4x2 - 10948x + 114582

y = 195.64x2 +25
14984x + 131194

International & Domestic Cargo Traffic
450000 INTERNATIONAL CARGO TRAFIC DOMESTIC CARGO TRAFFIC

400000
y = 1615.4x2 - 10948x + 114582 y = 195.64x2 + 14984x + 131194
350000

300000
Cargo in Tonnes

250000

200000

150000

100000

50000

0
1999- 2000- 2001- 2002- 2003- 2004- 2005- 2006- 2007- 2008- 2009- 2010- 2011- 2012- 2013-
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
Year

(See Annexure-III for the cargo data)
Fig.4

Form the polynomial regression analysis and form the graph this is evident that
400000 and 350000 tons of cargo is likely to reach by 2014.

3.2.7. To Meet Financial Requirements to Support Such Growth and to Infuse
Private Fund in the Airport Infrastructure Sector Recognising the potential for
airport infrastructure constraints to stifle the aviation industry, in 2005 the
Government of India announced a USD10 billion airport upgrade and
modernisation programme over 5 years to 2010. A further USD20 billion of
investment is expected in the following 10 years. Acknowledging that it
possesses neither the expertise nor the capital to carry out such an undertaking
by itself, the government has invited private sector participation in the process.

3.2.8 To Increase the Standards of Indian Airports-To International
Standards

The ICAO also standardizes certain functions for use in the airline industry,
such as the Aeronautical Message Handling System AMHS; this probably
makes it an organization. The ICAO defines an International Standard

26


Atmosphere (also known as ICAO Standard Atmosphere), a model of the
standard variation of pressure, temperature, density, and viscosity with altitude
in the Earth's atmosphere. This is useful in calibrating instruments and
designing aircraft. The ICAO standardizes machine-readable passports
worldwide. Such passports have an area where some of the information
otherwise written in textual form is written as strings of alphanumeric
characters, printed in a manner suitable for optical character recognition. This
enables border controllers and other law enforcement agents to process such
passports quickly, without having to input the information manually into a
computer. ICAO publishes Doc 9303, Machine Readable Travel Documents,
and the technical standard for machine-readable passports. A more recent
standard is for biometric passports. These contain biometrics to authenticate
the identity of travellers. The passport's critical information is stored on a tiny
RFID computer chip, much like information stored on smartcards. Like some
smartcards, the passport book design calls for an embedded contact less chip
that is able to hold digital signature data to ensure the integrity of the passport
and the biometric data.

3.2.9 Drivers and enablers
Drives Enablers
• Financial need, e.g. budget deficit • Political framework: stability explicit
• Aging or poor infrastructure political will or commitment, e.g. a
• Search for greater efficiency and dedicated unit, ability to push schemes
creativity through, creative and willing local
• Desire to introduce competition government
• Shortage of domestic experience • Legal frame work: no roadblocks, and
or skills documentation not excessively
• Desire to educate national complicated
contractors and remain • Public acceptance of private sector
competitive involvement and specific impacts, e.g.
• Bandwagon effect environmental impact of new airports
• Quality practitioners: good quality,
experienced project sponcers and
lenders
• Readily available finance, mature or
sophisticated banking sector and capital
markets culture

27


3.3 Present Indian scenario
The privatization initiative that followed gained traction with the award of build-
operate-transfer (BOT) concessions to private players for Greenfield airports at
Bangalore and Hyderabad in 2004 and the privatization of the international
airports at Delhi and Mumbai in 2006. All these airports are now being operated
by separate joint venture companies (JVCs)
The details including Type of PPP, Contract Period, Project Proponent,
Contract Award method, Estimated Project Cost, Amount of Government
Support - (VGF), Legal Instrument, Regulatory framework, financial information
including Equity, Debt, Other Financial Instrument, Market Structure and
Competition of these projects are included in appendix-(3)
While the award of BOT projects for two Greenfield airports and privatization of
the Delhi and Mumbai airports are positive steps towards involving the private
sector in development of the country’s aviation infrastructure, there is also a
growing need to put together a sound regulatory framework for the aviation
industry as a whole and have a functioning and independent regulator to
balance the often opposing demands of the airlines and aviation infrastructure
sectors. The regulatory factor apart, the aviation infrastructure sector is
currently facing the challenges of a weak global economy, declining traffic
levels, and deteriorating financial health of airlines. As a result, revenue
generation by airports has been impacted severely, which, along with the
pressures on liquidity, has caused funding gaps to arise both for private players
as well as the state-owned AAI. Another development that has hit the aviation
infrastructure segment has been the downturn in the real estate sector since
the second half of fiscal 2008-09. The downturn has forced some private airport
concessionaires to look for alternative sources of funds, given that their
business models rely significantly on the development and sale of land adjacent
to the airports. An important issue in all airport privatizations and projects is the
degree of risk transfer to the private sector. To what extent will the
concessionaire or sponsor bear the risk in relation to matters such as existing
asset condition (if privatization), construction costs, operational costs, traffic
volumes, revenues, change of law, non-insurable risks and financing risk? This
is nothing unique to airport concessions and projects – similar issues arise in
most other contexts. Full risk transfer to the private sector is unlikely to be

28


achievable. Certain risks, particularly those having a political dimension, will
inevitably need to remain with the Government, such as changes in law, war,
terrorism and expropriation.

See annexure-IV for details
Fig 5

(See annexure-V for details) Fig-6
Development and use of PPPs for delivering infrastructure services has now at
least 11 years of precedence in India, with the majority of projects coming in
line in the last 5 years. Policies in favor of attracting private participation as well

29


as innovation with different structures have met with varying degrees of
success. Some sectors like telecommunications, power, and ports and roads,
have done very good progress compared to limited success in other sectors. As
far as current status of projects in place, there have been at least 450 PPP
projects in our main sectors of focus where a contract has been awarded and
projects are underway – in the sense that they are either operational, have
reached construction stage, or at least construction/implementation is
imminent. The total project cost is estimated to be about Rs. 2, 24,175.75
Crore. In this airport counts 19111 crore which is spent for only on five projects.
We see that airport projects account for 1.1% of the total number of projects
and 8.52% by total value. In terms of contract award method the International
Competitive Bidding yielded 39% of total investment in India followed by
Domestic Competitive Bidding with 33% in PPP. However airport count 100%
international competitive bidding which is mainly because of building airport to
international standard and to achieve technically highest of design standard.
Present Greenfield airport details were given in annexure-VII

See annexure-VI for state wise PPP detail in India.
% of total
Total number of % of total
Investor Type Investment projects project cost
Foreign Investor 1725.85 7% 1%
Indian Private Investor 134145.57 93% 99%
Total 135871.42 100% 100%

Sector-wise break-up of foreign investor participation in PPP projects
Foreign Investor Versus No. of % of total
Sector Projects Investment project
cost
Ports 9 416.5 24%
Roads 9 256.22 15%
Airports 4 1053.13 61%
Total 22 1725.85 100%
30


Fig-6

Foreign equity participation of 27 foreign companies in PPP projects was only
at Rs 1,725.85 crore which is meager 1 per cent of the total project investment.
Prominent PPP projects where foreign companies have an equity stake include
modernization of Mumbai and Delhi international airports, Delhi-Noida toll
bridge, Papaya port, Bangalore international airports and JNPT container
terminal etc.Airport counts 61% of total foreign investment.

31


4. PROCEDURAL GUIDELINES FOR SETTING UP OF PPP AIRPORT.

4.1 Policy Framework
• Airport Infrastructure Policy of 1997 provides the following:-
• In view of the fact that there are already a sufficient number of airports,
many of which are not viable; Greenfield airports will normally not be taken
up either in the public or private sector without the prior approval of the
Government. In the case of the Other Airport category run by private
operators, the approval of the DGCA would suffice as at present.
• A Greenfield airport may be permitted where an existing airport is unable to
meet the projected requirements of traffic or a new focal point of traffic
emerges with sufficient viability. It can be allowed both as a replacement for
an existing airport or for simultaneous operation. This aspect will have to be
clearly spelt out in the notice inviting tenders.
• No Greenfield airport will normally be allowed within an aerial distance of
150 kilometers of an existing airport. Where it is allowed as a second airport
in the same city or close vicinity, the parameters for distribution of traffic
between the two airports will be clearly spelt out.
• The Government may, while permitting a Greenfield airport, decide whether
it will be in the public or private sectors or be taken up as a joint venture.
• Where the Government decides to set up a Greenfield airport through the
AAI on social considerations even though the same is not economically
viable, suitable grant-in-aid will be provided to AAI to cover both the initial
capital cost as well as the recurring losses.”

4.2. Promoters
The Central Government, Airports Authority of India, State Government, a local
self Government Institution e.g. Municipality, Corporation etc., a private
company, a consortium or a group of individuals can act as the promoter for the
Greenfield airport either individually or jointly.

4.3 Study stages
a. Pre-feasibility Study Stage
The promoter, after preliminary clearance of Ministry of Civil Aviation on his

32


proposal in the first instance, will commission a pre-feasibility report to study
the overall potential of the project and see whether the project is attractive
enough to warrant detailed study. The study should cover demand, technical,
manpower, financial, economic and social modules of the project. The study
may also utilize secondary research and information. The promoter shall submit
the pre-feasibility report to the Ministry for further approval. The cost of the pre-
feasibility will be borne by the promoter.
b. Detailed Feasibility Study Stage
Based on study of pre-feasibility report, the promoter shall again approach the
Central Govt. for preliminary clearance of undertaking a detailed Techno-
Economic Feasibility Study (TEFS). The Central Govt. after due examination of
all modules of pre-feasibility study will determine whether the project shows
promise of meeting the financial, economic and social criteria which have been
set for public investment expenditure. In case, the Govt. find it appropriate, it
may permit the promoter to take up detailed TEFS.
c. The primary promoter will commission a TEFS including simulation study for
conflict free operation by a competent professional body. Cost of TEFS
including the simulation study will be borne by the primary promoter. During this
phase, the accuracy of variables will be further improved to see if the project
has potential for success. This may require primary research etc.
d. Upon establishing the technical / financial viability through sensitivity analysis
of realistic traffic and revenue projections, as emerging from the TEFS, the
primary promoter will submit the proposal to the Ministry with full justification,
inter alia, enclosing the TEFS and other studies in this regard. Such proposal
shall cover the respective State Government’s commitments to the proposal in
respect of acquisition of land, supply of water and power, construction of
access roads and other financial support. It is only after TEFS that the most
important decision has to be made whether the project should be approved.

4.4 Site Selection
Site selection for any Greenfield airport will be undertaken by the promoters at
pre-feasibility stage only in consultation with Director General of Civil Aviation
(DGCA) including AAI, Ministry of Environment & Forest, and Ministry of
Defence (MOD). In case, the Greenfield airport is proposed at a location, which

33


has an existing airport, while taking the decision to accord approval for the
Greenfield airport, the Government would also decide whether the existing
airport would be closed down or the new airport would be a second airport with
full-fledged simultaneous commercial operations. In case, the existing airport is
decided to be closed down, the unrecovered investments of AAI in the existing
airport will have to be compensated by a suitable mechanism such as share in
the concession fee to be given by the greenfield operator to the Govt. The
Government shall, in general, promote competition in setting up a greenfield
airport in addition to the existing one.
If a Greenfield airport is established in lieu of an existing AAI airport, the
existing airport with all assets will revert to AAI. AAI may decide on the future
usage of the airport in consultation with Ministry of Civil Aviation. The issue of
providing employment to AAI’s employees working at the AAI airport after its
closure has engaged attention of the Govt. The JVC will absorb AAI employees
subject to merit and efficiency in operational/ management dep’t. Against
vacancies at the airport.

4.5 Detailed Design Stage and Approval
Based on the TEFS and State Government/Promoters’ recommendations, the
Central Government will consider giving approval for the airport project as per
the extant policy. The approval will be given by the Union Cabinet as per the
Civil Aviation Policy. The Central Government after approval will then go ahead
to develop detailed design of the project which should then result in formulation
of operational plan. At this stage, the project can once again be reviewed
whether it shall meet required criteria.

4.6 Project Implementation Stage
A Steering Committee is set up by State Govt. / promoter comprising of officials
of the State Govt. and the Ministry of Civil Aviation as this stage involves
coordination and allocation of resources. This Committee will oversee the
implementation of the project, funding proposal, and preparation of tender and
other documents, bidding and selection of the preferred investor. The State
Govt./ promoter will designate an agency preferably a PSU to coordinate the
activities and assumes responsibilities and authority for moving ahead .

34


4.7 Setting up a Special Purpose Vehicle (SPV)
The State Govt./ promoter shall set up a SPV wholly owned buy it to begin with.
Later, on the selection of successful bidders, the private investor will be
inducted in the SPV with 74% equity shares.

4.8 Public Private Partnership (PPP) Model
• The State Government as a primary promoter may consider joint venture
(JV) with private investors through Public Private Partnership Model (PPP).
In case it proposes to have a joint venture with private promoters, it shall be
the primary responsibility of the State Government to choose private sector
partners through a transparent competitive bidding process subject to the
guidelines on foreign equity participation.
• State Govt. / AAI may also participate in the JV with equity which will be
limited to 13% each (Rs. 50 crores cap or 13%, whichever is lower in case
of AAI)

4.9 Bidding Process and Selection criteria
• The Joint Venture Partner / Greenfield Operator shall be selected by the
State Govt. through a transparent competitive bidding process based on
technical and financial criteria. While inviting bids from prospective bidders
by the State Govt. / promoters, the draft Concession Agreement (CA),
Shareholder Agreement (SHA), State Support Agreement (SSA), Land
Lease Agreement (LLA), (CNS/ATM) Agreement, principles of Finance
Agreement, principles of Airport Operator Agreement along with format of
commitment from lenders regarding debt/ equity will be furnished to the pre-
qualified bidders. Before inviting technical and financial bids, these
documents will be frozen in consultation with Pre- Qualified Bidders (PQBs).
• It may be divided into technical and financial criteria. The technical criteria
may include financial, development and management abilities. A broad list
of these will be made part of the bid documents. The financial criteria could
be the minimum bid for State Support and viability gap funding or maximum
concession fee.
• The successful bidder inducted into SPV through SHA shall use the
Detailed Project Report (DPR) for realizing and operationalising the project.

35


4.10 Viability Enhancement: - The Greenfield airport project can be made
Viable by following means:-
(i) Land and external infrastructure provided by the State Government for the
airport on lease through Land Lease Agreement with variety of combinations
such as token lease, moratorium on lease, deferred payment of lease etc.
(ii) The State Government may enter into a State Support Agreement in
addition to Land Lease Agreement with the greenfield airport operator providing
for State Support such as grant, infrastructure loan, interest free loan etc.
(iii) Central Government may levy an Advance Development Fee (ADF) from
embarking passengers at the existing airport or for the development of new
airport on terms and conditions as per ADF rules framed by the Ministry.
(iv)The Greenfield airport operator may be allowed to levy a User Development
Fee (UDF) at the new airport, subject to the Regulatory regime in force.
(v) Aeronautical Charges may be leviable at the airport shall be as approved by
the Govt. / Regulator.
(vi)The Passenger Service Fees (PSF) levied at all airports would be applicable
to the Greenfield airports also. ADF / UDF would be charged in addition to the
PSF. PSF being levied through passenger tickets will have two components viz.
(a) Security charges, (b) levy for Airport Maintenance and Upkeep. The PSF
components collected through airline passenger tickets will be passed on by
the airline to AAI as far as security component is concerned and the Greenfield
operator for service component.
(vii) Concessions have also been given by the Union Govt. through budget
pronouncement from time to time.

• While Security will be the responsibility of the Central Govt. {through AAI/
Bureau of Civil Aviation Security (BCAS)}, the airport operator will be
required to provide security equipments, operate and maintain as per
standards laid down by the Bureau of Civil Aviation Security (BCAS), and
meet the costs thereof.
• Communication, Navigation and Surveillance (CNS) / Air Traffic
Management (ATM) equipment along with allied infrastructure required for
Greenfield airport will be provided by Airports Authority of India (AAI) at its

36


cost and the revenue from (RNFC)/ (TNLC) accrue to AAI directly. The
Greenfield operator will provide ATC tower, required buildings/ office
accommodation, utilities on payment of rental on mutually agreed terms.
The State Govt. / Operator will also earmark land for a residential colony for
CNS/ATM personnel. The colony will be developed by AAI at its own cost.
The Greenfield airport operator will sign a CNS / ATM agreement with AAI in
this regard wherein AAI will commit performance standards also in terms of
aircraft movement per hour.
• If the selected Greenfield airport operator wants to take initiative in
developing business strategies through traffic building at the airport, the
Central Government may consider giving positive support keeping in view
the overall bilateral requirements also as per the Civil Aviation Policy.
• The airport operator would be allowed to optimize the use of land subject to
the applicable land rules and regulations of the State Government on land
use and encouraging non-aeronautical revenues. In this context, the
concept of developing the entire area with an integrated approach may be
encouraged. While the land given by State Govt. may be used to raise non-
aero revenue, the JVC and the State Govt. will ensure that the airport does
not assume real estate orientation. Hence, the land leased out will be first
used for full length aero development over the concession period. Only the
residual land will be subject to non-aero exploitation for those activities
which are directly related with passengers, cargo, air transport industry/
services etc.
• Landing, parking, housing charges will accrue to the airport operator.
• The airport operator will provide requisite space and facilities for regulatory
agencies like Customs, Immigration, Health, Plant and Animal Quarantine,
Security and State Governments on terms and conditions as per CA.
• The JVC while providing healthy corporate governance, will ensure that
major contracts are awarded through a competitive bidding process, arm
length method for related parties transaction and achieve the best value of
money for JVC through a mechanism of independent engineer, auditors etc.
The EPC Contract of the JVC shall also be awarded through transparent
and competitive procedures by the JVC.
• The Centre/ State Governments in due course will evolve following model

37


agreements for the purposes of selection of JV partner through a
Competitive bidding process:-
(i) CA
(ii) SHA
(iii) SSA
(iv) LLA
(v) CNS-ATM
• The sequence of signing agreements will generally be as follows:-
(i) SHA amongst shareholders at the time of induction in SPV
(ii) Stands deleted
(iii) EPC contract process to firm up costs by SPV
(iv)Selection of financial arranger and finalization of landing
conditions by SPV
(v) Financing Agreements
(vi) Direct Agreements of lenders with GOI
(vii) The work begins

38


5.0 CONCESSION AGREEMENT FOR PPP

5.1 Need for a framework
Accelerated economic growth, aided by expansion of air services in a
competitive environment, has manifested itself in a rapid increase in air traffic.
For providing connectivity to regions hitherto not served by commercial flights, it
is necessary to expand the network of air services by setting up new airports.
Some of the State Governments have already taken steps for setting up
Greenfield airports. Examples in the past include Cochin, Hyderabad and
Bangalore where Greenfield airports have been commissioned with the active
support and participation of the respective State Governments. The policy
relating to setting up of Greenfield airports has since been liberalised by the
Central Government and several new projects are being planned in different
states. The airport sector has been witnessing significant interest from both
domestic as well as foreign investors following the policy initiatives taken by the
Central Government to promote Public Private Partnerships (PPP) on Design,
Build, Finance, Operate and Transfer (DBFOT) basis. However, the actual
inflow of investment has been less than expected, and future prospects will
depend on adoption of a comprehensive policy and regulatory framework
necessary for addressing the complexities of PPP, and particularly for
balancing the interests of users and investors. Moreover, transformation of
rules will have to be accompanied by a change in the institutional mindset. For
building and operating a Greenfield airport on DBFOT basis, a precise policy
and regulatory framework is being spelt out in this Model Concession
Agreement (MCA). This framework addresses the issues which are typically
important for limited recourse financing of infrastructure projects, such as
mitigation and unbundling of risks; allocation of risks and rewards; symmetry of
obligations between the principal parties; precision and predictability of costs
and obligations; reduction of transaction costs; force majeure; and termination.
It also addresses other important concerns such as user protection,
independent monitoring, dispute resolution and financial support from the
Government. The MCA also lays out a structure for commercialising airports in
a planned and phased manner through optimal utilisation of resources on the
one hand and adoption of international best practices on the other. The

39


objective is to secure value for public money and provide efficient and cost-
effective services to the users.

5.2 Elements of financial viability
The four critical elements that determine the financial viability of an airport are
concession period; traffic volumes; user fees and other revenues; and capital
costs. The concession period for such capital-intensive projects is normally in
the range of 50 to 60 years. This timeframe should enable a robust project
structure and any further extension in the concession period would improve
financial viability only marginally as the present value of projected revenues
after 50 years would be very low from the Concessionaire’s perspective. For a
Greenfield airport, the traffic projections are likely to be conservative as it would
take time for traffic to build up. As a result, user fees alone may not provide
financial viability, especially since they would have to be kept at affordable
levels. Additional revenues can, however, be generated from non-aeronautical
sources and real estate development to enable some cross-subsidisation of
user fees. Three of the four parameters stated above could be virtually taken as
given, and as a result capital cost is the variable that will determine the financial
viability of an airport project. If the potential for non-aeronautical and real estate
revenues is inadequate, bidders may seek an appropriate capital grant/subsidy
from the Government in order to reduce their capital investment for arriving at
an acceptable rate of return. As such, reduction in capital costs and phasing out
some capital expenditure can help improve project viability significantly. Though
PPPs undertaken so far in the sector have been financially viable and self-
sustaining, the government’s initiative to build Greenfield airports in remote
areas may require cost-efficient designs as well as some capital subsidy.

5.3 Technical parameters
Unlike the normal practice of focussing on construction specifications, the
technical parameters proposed in the MCA are based mainly on output
specifications, as these have a direct bearing on the level of service for users.
Only the core requirements of design, construction, operation and maintenance
of the airport are to be specified and enough room would be left for the
Concessionaire to innovate and add value.In sum, the framework focuses on

40


the ‘what’ rather than the ‘how’ in relation to the delivery of services by the
Concessionaire. This would provide the requisite flexibility to the
Concessionaire in evolving and adopting cost-effective designs without
compromising on the quality of service for users. Cost efficiencies would occur
because the shift to output-based specifications would provide the private
sector with a greater opportunity to innovate and optimise on designs in a way
normally denied to it under conventional input based procurement
specifications.

5.4 Performance standards
For an airport project, the Concessionaire would not only procure the civil works
and equipment, it would also provide various passenger related services as
well as cargo handling. The efficiency of its operations would normally be
reflected in the quality of service provided to the users. The MCA, therefore,
identifies the key performance indicators relating to operation of the
aeronautical assets, terminal building, cargo terminal etc., and specifies
penalties for failure to achieve the requisite levels of performance, especially in
relation to user services. The MCA includes a Passenger Charter that the
Concessionaire should publish and implement for the benefit of users of the
airport. This will add to the accountability of the Concessionaire to the users.

5.5 Concession period
The concession period should normally be long enough to enable the
concessionaire to recover its investment with a reasonable rate of return. In the
case of a Greenfield airport, the traffic build-up may be gradual and the
investments in airport infrastructure as well as real estate may take long to
recover. As such, a total concession period of 50 to 60 years has been
provided. This would enable the Concessionaire to realise the full potential of
the project and thus offer a competitive bid. A shorter concession period would
require a greater capital subsidy and/ or higher user charges. The time required
for construction of the airport (about two to three years) has been included in
the concession period so as to incentives early completion that would maximise
the revenues of the Concessionaire.

41


5.6 Selection of Concessionaire
Selection of the Concessionaire will be based on open competitive bidding. All
project parameters such as the concession period, user fees, price indexation,
real estate development and technical parameters are to be clearly stated
upfront, and short listed bidders will be required to specify the concession fee
that they are willing to offer to the Government. The bidder who offers the
highest concession fee should win the contract. In exceptional cases where
instead of offering a concession fee, the bidders seek a capital grant/ subsidy
from the Government, the bidder who seeks the lowest grant would win the
contract.

5.7 Concession fee
Concession fee will be a fixed sum of Re. 1 per annum for the concession
period. The Concessionaire shall, commencing from the 20th year of the
Concession Period, pay a Premium equal to 1 per cent of the total realisable
fee which shall be increased every year by an additional 1 per cent of the total
realisable fee. Where bidders do not seek any grant and are willing to offer a
higher Premium to the Government and/or an earlier commencement of its
payment, they will be free to do so, subject to a ceiling of 40 per cent of the
total realisable fee. In case of an exceptionally viable project, the bidders would
be free to offer an upfront payment in addition to a share in the fee. The
rationale for the above fee structure is that in the initial years, debt service
obligations would entail substantial outflows. Over the years, however, the
Concessionaire will have an increasing surplus in its hands on account of the
declining debt service on the one hand and rising revenues on the other.
Recognising this cash flow pattern, the concession fee to be paid by the
Concessionaire will be based on an ascending revenue-share.

5.8 Risk allocation
As an underlying principle, risks have been allocated to the parties that are best
suited to manage them. Project risks have, therefore, been assigned to the
private sector to the extent it is capable of managing them. The transfer of such
risks and responsibilities to the private sector would increase the scope of

42


innovation leading to efficiencies in costs and services. The commercial and
technical risks relating to construction, operation and maintenance are being
allocated to the Concessionaire, as it is best suited to manage them. Other
commercial risks such as the rate of growth of traffic have also been allocated
to the Concessionaire. On the other hand, all direct and indirect political risks
are being assigned to the Government. It is generally recognised that economic
growth will have a direct influence on the growth of traffic and that the
Concessionaire cannot in any manner influence the rate of economic growth.
By way of risk mitigation, the MCA provides for extension of the concession
period in the event of a lower than expected growth in traffic. Conversely, the
concession period is proposed to be reduced if the traffic growth exceeds the
expected level. The MCA provides for a target traffic growth and stipulates an
increase of upto 20 per cent in the concession period if the growth in traffic is
less than projected. For example, a shortfall of 6 per cent in the target traffic will
lead to extension of the concession period by 9 per cent. On the other hand, a
reduction of up to 10 per cent of the concession period is stipulated in the event
of a higher than expected growth. For example, an increase of 6 per cent in the
target traffic will reduce the concession period by 6 per cent.

5.9 Financial close
Unlike other agreements for private infrastructure projects which neither define
a time-frame for achieving financial close, nor specify the penal consequences
for failure to do so, the MCA stipulates a time limit of 180 days for achieving
financial close (extendable for another 120 days on payment of a penalty),
failing which the bid security shall be forfeited. By prevalent standards, this is a
tight schedule, which is achievable only if all the parameters are well defined
and the requisite preparatory work has been undertaken. The MCA represents
a comprehensive framework necessary for enabling financial close within the
stipulated period. Adherence to such time schedules will usher in a significant
reduction in costs besides ensuring timely provision of the much-needed
infrastructure. This approach would also address the typical problem of
infrastructure projects not achieving financial close for long periods.

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5.10 User Fee
A precise mechanism for determination of user fee has been specified for the
entire concession period since this would be of fundamental importance in
estimating the revenue streams of the project and, therefore, its viability. The
user fee shall be based on the rates to be notified by the Government prior to
bidding for the contact. The MCA provides for indexation of the tariffs to the
extent of 60 per cent thereof linked to WPI. Since repayment of debt would be
substantially neutral to inflation, the said indexation of 60 per cent is considered
adequate. A higher level of indexation is not favoured, as that would require the
users to pay more when they should be receiving the benefit of a depreciated
asset. A higher indexation would also add to uncertainties in the financial
projections of the project. In respect of non-aeronautical services, however, the
Concessionaire shall be free to determine the charges thereof.

5.11 Construction
Handing over possession of at least 90 percent of the required land as well as
procuring the environmental clearances are proposed as conditions precedent
to be satisfied by the Government before financial close. The MCA defines the
scope of the project with precision in order to enable the Concessionaire to
determine its costs and obligations. Additional works may be undertaken within
a specified limit, but only if the entire cost thereof is borne by the Government.
Before commencing the collection of fees, the Concessionaire will be required
to subject the airport to specified tests for ensuring compliance with the
specifications and standards relating to safety and quality of service for the
users. The Schedules would include the master plan of the airport. The Master
Plan should specify the land use and other restrictions on development of the
airport and should also earmark vacant land for future expansion of the airport.

5.12 Operation and maintenance
Operation and maintenance of the airport is proposed to be governed by strict
standards with a view to ensuring a high level of service for the users, and any
violations thereof would attract stiff penalties. In sum, operational performance
would be the most important test of service delivery. The MCA provides for an
elaborate and dynamic mechanism to evaluate and upgrade safety

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requirements on a continuing basis. The MCA also provides for traffic
regulation, security and rescue operations.

5.13 Reserved Services
Certain services at any airport are to be provided by government agencies. The
MCA specifically details the obligations of the Concessionaire in respect of the
reserved services with a view to ensuring that the respective agencies are able
to provide such services without any obstacles from the Concessionaire.

5.14 Right of substitution
The project assets may not constitute adequate security for lenders. It is the
project revenue streams that constitute the mainstay of their security. Lenders
would, therefore, require assignment and substitution rights so that the
concession can be transferred to another company in the event of failure of the
Concessionaire to operate the project successfully. The MCA accordingly
provides for such substitution rights.

5.15 Force Majeure
The MCA contains the requisite provisions for dealing with force majeure
events. In particular, it affords protection to the Concessionaire against political
actions that may have a material adverse effect on the project.

5.16 Termination
In the event of termination, the MCA provides for a compulsory buy-out by the
Government, as neither the Concessionaire nor the lenders can use the airport
in any other manner for recovering their investments. Termination payments
have been quantified precisely as compared to the complex formulations in
most agreements relating to private infrastructure projects. Political force
majeure and defaults by the Government are proposed to qualify for adequate
compensatory payments to the Concessionaire and will thus guard against any
discriminatory or arbitrary action by the Government. Further, the project debt
would be fully protected by the Government in the event of termination, except
for two situations, namely, (a) when termination occurs as a result of default by
the Concessionaire, 90 per cent of the debt will be protected, and (b) in the

45


event of non-political force majeure such as Act of God (normally covered by
insurance), 90 per cent of the debt not covered by insurance will be protected.
However, no termination payment will be due to payable if the Concessionaire
fails to commission the project owing to its own default. A different method of
valuation has been adopted for the real estate. It will enable a more transparent
and predictable valuation of real estate in the event of termination.

5.17 Monitoring and supervision
Day-to-day interaction between the Government and the Concessionaire has
been kept to the bare minimum by following a ‘hands-off’ approach, and the
Government shall be entitled to intervene only in the event of a material default.
Checks and balances have, however, been provided for ensuring full
accountability of the Concessionaire. Monitoring and supervision of
construction, operation and maintenance is proposed to be undertaken through
an Independent Engineer (a qualified firm) that will be selected by the
Government through a transparent process. Its independence would provide
added comfort to all stakeholders, besides improving the efficiency of project
implementation. If required, a public sector consulting firm may discharge the
functions of the Independent Engineer. The MCA provides for a transparent
procedure to ensure selection of well-reputed statutory auditors, as they would
play a critical role in ensuring financial discipline. As a safeguard, the MCA also
provides for appointment of additional or concurrent auditors. To provide
enhanced security to the lenders and greater stability to the project operations,
all financial inflows and outflows of the project are proposed to be routed
through an escrow account.

5.18 Support and guarantees by the Government
By way of comfort to the lenders, loan assistance from the Government has
been stipulated for supporting debt service obligations in the event of a revenue
shortfall resulting from political force majeure or default by the Government.
Guarantees and/ or compensation have also been provided to protect the
Concessionaire, though for a limited period, from construction of competing
airport which can upset the revenue streams of the project.

46


5.19 Real estate development
Provision for development of real estate by the Concessionaire has been made
in the MCA. The Concessionaire can grant sublicenses for the real estate and
the same would revert to the Government at the end of the concession period.
Real estate in the form of developmental rights over adjacent lands could also
be provided for improving project viability. While allowing sufficient flexibility to
the Concessionaire with respect to exploitation of commercial space at the
airport, the MCA stipulates some limits and restrictions to prevent excessive
commercialisation.

5.20 Miscellaneous
a) A regular traffic census and annual survey has been stipulated for keeping
track of traffic growth. Sample checks by the Government have also been
provided for. As a safeguard against siphoning of revenue share by the
Concessionaire, a floor level in present and projected traffic has also been
stipulated. The MCA addresses other important issues such as dispute
resolution, suspension of rights, change in law, insurance, defects liability,
and indemnity, redressal of public grievances and disclosure of project
documents.
b) Security Issues
Any other ground handling service providers selected through competitive
bidding on revenue sharing basis by the airport operator subject to security
clearance from Bureau of Civil Aviation Security and observance of
performance standards as may be laid down by the airport.
c) CNS / ATM
The Airports Authority of India provides Communication, Navigation,
Surveillance and Air Traffic Management (CNSATM) services at all the civil
airports in the country which covers Indian airports measuring over 2.8
million square nautical miles (land area 1.05 million square nautical miles
and oceanic area 1.75 million square nautical miles). CNSATM services are
provided by AAI at 9 other airports also which are not managed by AAI i.e.
Delhi, Mumbai, Bangalore, Hyderabad, Cochin, Lengpui, Diu, Puttaparthy
and Vidyanagar airports.

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6.0 RESERVED ACTIVITIES
On any Greenfield airport to be developed under these Policy Guidelines,
activities relating to Air Traffic Services (ATS), security, customs and
immigration would be reserved for central government agencies. Provision of
these services would be governed by the policy to be laid down by the Central
Government from time to time. Prior to grant of license, an applicant for license
shall procure the following clearances

Defence clearance: An applicant seeking a license would need prior
clearance from the Ministry of Defence. Guidelines for this purpose
would be issued by the Ministry of Defence from time to time.
(b) Air Traffic Services (ATS): Functions related to ATS are being
discharged by AAI. The applicant will have to enter into a CNS/ATM
Agreement with AAI for the provision of ATS services at the proposed
airport. ATS would be provided on a cost recovery basis and AAI
would publish a standard agreement for this purpose. The Airport
Company would also provide the required infrastructure to AAI free of
cost for provision of ATS.
(c) Security: The applicant will have to enter into an agreement for provision
of security by the concerned authority. The cost of providing security
will have to be borne by the Airport Company. Guidelines for this
purpose would be issued by the Ministry of Civil Aviation from time to
time.
(d) Customs: In case of an international airport, the applicant will obtain
clearance from the Department of Revenue for provision of Custom
services. The cost of providing these services will have to be borne
by the Airport Company. Ministry of Finance would issue the
necessary guidelines from time to time.
(e) MHA Clearance: The applicant seeking a license would need prior
clearance from the Ministry of Home Affairs regarding location of the
airport, acquisitions and installation of security equipment and
verification of credentials of the developers.
(f) Immigration: In case of an international airport, the applicant will procure
clearance from the Ministry of Home Affairs for provision of

48


immigration services. The cost of providing these services will have
to be borne by the Airport Company. Ministry of Home Affairs would
issue the necessary guidelines from time to time.
(g) BCAS Clearance: The applicant seeking a license would need prior
clearance from BCAS regarding location of the airport and acquisition
and installation of security equipment.
(h) Airport Meteorological Services: The applicant will have to enter into a
CNS/ATN agreement with IMD for provision of meteorological
services at the proposed airport to be provided by India
Meteorological Department (IMD). The meteorological services would
be provided on a cost recovery basis and IMD would publish a
standard agreement for this purpose. The airport company would
also provide the required infrastructure to IMD free of cost for
provision of meteorological services.

A memorandum of understanding would be entered into between the Airport
Company and each GOI agency/department providing the following
Reserved Activities, setting out the terms and conditions on which the said
services shall be provided by the relevant GOI agencies/departments:
Customs control
Immigration services
Health services
Plant quarantine services and
Animal quarantine services

NOTE: MEMORANDUM OF UNDERSTANDING CAN BE CHANGED FROM
TIME TO TIME

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7.0 EMERGING CHALLENGES AND RISKS IN PPP

7.1 General Issues

1. PPPs are considered appropriate where private sector project management
skills, more innovative design and risk management expertise can be
brought in to give substantial benefits. In their opinion, however, PPP is
unlikely to deliver value for money in other areas, for example where the
transaction costs of pursuing PPP are disproportionate compared to the
value of the project or where fast paced technological change makes it
difficult to specify contractual requirements over the long term.
2. The reality is that many things can go wrong, and often do, with difficulties in
securing right of way, delays in meeting environmental impact process
requirements, inadequate design, planning changes, slowness in securing
permits, underestimation of project construction and operations costs,
overestimation of traffic-based revenues, ‘teething’ problems, and a slow
build-up of patronage. These problems are compounded by a failure of the
contracting parties to adopt a realistic and cooperative approach to the
assessment, mitigation and sharing of risks.
3. The PPP are joint ventures of a number of private companies which agree
in advance to subcontract each of the different activities and take equity
stakes in the SPV to cement the relationship. two problems are thereby
introduced. First, good constructors may be teamed with less good
financiers. Superior knowledge of one activity may not carry over to other
activities. Second, competition is limited to those bodies which are part of
the group. Companies, especially local entities, with perhaps good technical
know-how but poor financial capability are unable to bid because the
activities are jointly, rather than separately, auctioned. Transparency and
competitiveness in the bidding process are lost, or more correctly traded-off
for innovation opportunities, which the authors consider may not always be
the best solution.
4. Cost of capital- In summary, most PPP/PFI projects involve substantial
private sector finance and, in all but very exceptional circumstances, this
finance in itself will be more costly than public sector borrowing, although

50


there are many hidden costs in the latter. Clearly, governments are not
immune from fiscal difficulties, which can lead to credit rating downgrades
and higher project costs, but the main reason why the government’s cost of
borrowing is low is that it can levy taxation to repay the debt. Due to these
taxing powers, lenders to government consider that it is unlikely to default,
and so demand a lower interest rate risk premium. But having the true risks
hidden and passed on to taxpayers in the form of a contingent liability does
not mean that public investments are risk-free. Project risks depend more
on the project’s design than on the specific financing mechanism
5. BUNDLING- The economic efficiency of ‘bundling’ from an ‘incomplete’
contracting perspective, in which imperfections arise because it is hard to
foresee and contract about uncertain future events. PPPs are generally
entered into for a lengthy period of time, usually 20 to 30 years, and are
developed in an environment of uncertainty. As such they exhibit, as Hart
suggests, the characteristics of ‘incomplete’ contracts, and their usefulness
as integrated arrangements hinges on the nature of contracting costs.
6. VALUE FOR MONEY-Value for money has been defined as ‘the optimum
combination of whole life cost and quality (or fitness for purpose) to meet
the user’s requirement’. Value for money is improved by the transfer of
appropriate risk as the supplier is able to reduce either the probability that
the risk will occur, the financial consequences if it does eventuate, or both.
There comes a point, however, when this transfer becomes sub-optimal. If
risks that, in fact, cannot be best managed by the private sector continue to
be transferred to private bodies, value for money will decline since the
premium demanded by the private sector will outweigh the benefit to the
public procurer. Optimum, rather than maximum, risk transfer is the
objective of the PPP arrangement.

Over this issuers airport infrastructure face nine categories of specific risk

• Technical risk, due to engineering and design failures;

• Construction risk, because of faulty construction techniques and cost
escalation and delays in construction;

• operating risk, as a result of higher operating costs and maintenance costs;

• Revenue risk, e.g. because of traffic shortfall or failure to extract
51


resources, the volatility of prices and demand for products and services sold
(e.g. minerals, office space, etc.) leading to revenue deficiency;

• Financial risks arising from inadequate hedging of revenue streams and
financing costs;

• Force majeure risk, involving war and other calamities and acts of God.

• Regulatory/political risks, resulting from planning changes, legal changes and
unsupportive government policies;

• Environmental risks, because of adverse environmental impacts and hazards;

• Project default, as a result of failure of the project from a combination of any
of the above.

7.2 Financial Challenges

a) Governments frequently have been motivated to enter into PPP
arrangements by the desire to reduce debt (and contain taxation), while
facing pressure to improve and expand public facilities. However, the PPPs
are the only way of delivering the public infrastructure (and the services)
that the community wants is exaggerated, for PPPs still draw on public
funds when user charges do not cover the cost of services. What differs is
that the public payments are made over a very different time frame. When
infrastructure is provided under a PPP, the government does not own the
asset but, instead, enters into a contract to purchase infrastructure and
related ancillary services over time from the private sector. These operating
payments must cover operating costs as well as giving the service providers
a return on risk capital, therefore a project delivered under a partnerships
approach will have a similar (although not identical) effect on the
government’s annual operating surplus to that if the asset was publicly
funded.

Figure 7.1 illustrates the cash flow differences between public funding and a
PPP project. From the public sector side, PPPs require little or no upfront
capital expenditure but involve a larger operating expenditure over time to
purchase the services. By contrast, the public asset approach requires a large

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PPP in Indian airports

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