Privatisaton And FDI In Indian Airports

ONE of the several developmental issues on which the CPI(M) and the Left in general on the one hand and the Congress-led UPA government on the other hand have differed has been in respect of privatisation of airports, in particular on foreign direct investment within such privatisation. While the position of the CPI(M) opposing privatisation and FDI in the major international airports has been made clear earlier (see PD, 4 June, 2004), in response to which the government rolled back the cap of 74 per cent FDI set by the NDA government to 49 per cent, this article seeks to discuss the various aspects involved in airport privatisation especially against the background of international experience in this regard.

AIRPORTS AND THE STATE     

Airports are part of a nation’s public transport infrastructure with major developmental impact on civil aviation and tourism, trade, services, government revenue, local employment, regional and local area development. In a modern economy, major airports have a significant influence on economic development both domestic and international, and are increasingly being seen not only as facilities handling passenger and cargo traffic, but as important hubs of economic activity.

For a variety of fundamental and historical reasons, such as the huge capital investments and costs involved in building and running major airports, the often dual military-cum-civilian use to which they were put, and the strategic role they were seen as playing with impact on numerous related areas, almost all airports the world over were traditionally fully state owned and controlled.

It was only in the 1980s, when emphasis started being placed on market forces for organising production and distribution, that some countries began deregulating the civil aviation sector and privatising their national carriers and, slowly, their airports. In this context, whereas earlier airports were viewed largely as tools for general economic and especially regional development, governments themselves came increasingly to view airports with a commercial orientation and, in some parts of the developed world, as requiring the special qualities that corporate structures can bring with them. But, and this is a big but. The word “privatisation” of airports covered an extremely wide range of relationships in which the private sector came to be involved.

It was Thatcherite Britain which took the lead in privatisation through outright sale of its major airports. The three London airports at Heathrow, Gatwick and Stanstead and the four major Scottish airports at Aberdeen, Edinburgh, Glasgow and Prestwick came under the umbrella of the British Airports Authority (BAA) which was converted in 1987 into a private company and its shares auctioned in the stock market. The BAA became a huge success and was held out as a beacon of Thatcherite policies. Thus the unmitigated disaster of the privatisation of British Rail is conveniently forgotten by those who recount this success story, emphasising that “privatisation” is an all-conquering mantra!

The BAA success led to a few, but not too many, other countries embarking on a similar route. France, Germany, Singapore, Malaysia and New Zealand took initiative to privatise major airports through outright sale of stock. Of these, Singapore’s Changi Airport and Germany’s Frankfurt Airport have emulated the BAA success, New Zealand is doing well, but Malaysia’s Kuala Lumpur International Airport has been limping along due to the Malaysian government and its private partners’ mistaken assumption, as with much else of Malaysian infrastructure, that an airport has only to be built for it to be profitable which was certainly not the case with KLIA being unable to compete with other regional hubs in Singapore, Hong Kong and Bangkok.

Those who think that the USA is a leader in airport privatisation may be forgiven for this mistaken assumption. In fact, the first US airport to be fully privatised was New York State’s Stewart International Airport, till then run by a state-owned corporatised authority, which was transferred as late as the year 2000 to a private company after a competitive bidding process. And even this “transfer” was not an outright sale, but a long-term contractual arrangement which gave full rights to the private operator as regards user charges, revenues, earnings from fresh investments and so on against certain one-time and annual payments to the local authority.

DIFFERENT MODELS  OF PRIVATISATION      

Indeed, long-term leases or contract operations have been the preferred mode of privatisation in a majority of cases in the US and even in Europe. Sizeable airports on lease in the US include Richenbacker Field in Ohio, Morristown and Teterboro in New Jersey and both airports in Atlantic City. Airports under contract operation in the US, besides Stewart above, include Burbank in California and White Plains in New York. Again, it is noticeable that these lists do not include the largest and key international hubs such as New York’s Kennedy Airport, Chicago’s O’Hare or LAX at Los Angeles. Elsewhere in the world, the privatised BAA operates several regional airports in the UK under lease, and Amsterdam’s famous Schiphol Airport is also operated under long-term lease.

The other route to privatisation has been the build-own-operate-transfer (BOOT) or build-operate-transfer (BOT) modality. Very few greenfield airports have been set up through this route, the rare cases including the Alliance Airport in Fort Worth Texas established by the maverick millionaire-politico Ross Perot and the small inter-city London City Airport in the downtown Docklands area. In most cases, BOOT/BOT privatisation has involved development of new Terminals such as at Birmingham Airport in the UK, Ataturk Airport in Istanbul, Turkey and Pearson International in Toronto, Canada. Management contracts are another route adopted by many airports.

It can be seen, therefore, that with a few exceptions, “privatisation” has not meant transfer of ownership or often even control. In most leases, issues such as user charges and landing rights continue to be decided upon by national or local authority within the framework of national policies or regulatory framework. It is evident that airports, especially major international hubs, are viewed as key or strategic national infrastructure assets which nations, even the most “liberalised” ones, are loath to relinquish control over. It is for this reason that most governments have placed explicit restrictions or maximum limits on foreign investment and therefore control over major airports. Australia, for instance, otherwise a champion of privatisation and globalisation, has adopted a National Policy on Airports which puts a cap of 49 per cent on foreign investment explicitly on grounds of defending national sovereignty.

It is quite another matter, however, that the exact opposite view is sought to be foisted upon smaller developing countries by international financial institutions especially under structural adjustment programmes. Governments in these countries are persuaded or arm-twisted into accepting that they badly need foreign investment for such large projects as airports, that private ownership and management of airports is the best option bringing in both investment capital and expertise. Thus many major airports in South America, Africa and the Caribbean, such as in Lima, Peru, or Quito, Colombia or Kingston, Jamaica, all under pressure from the IMF, IDB or World Bank, have been handed over to private corporations, mostly European or American multinational companies, whose role in undermining national sovereignty in this part of the world is notorious.

REGIONAL DEVELOPMENT  & PRIVATE PARTICIPATION

Even if we leave out extreme cases, what exactly is expected from privatisation of airports, apart from investment which can be brought in in myriad ways? Presumably, airports run by private entities would be more user friendly, both in terms of airlines and passengers, visitors and cargo merchants and be run more cost-effectively. It must be realised, however, that airports are by their very nature monopolies and there are certain areas where the user or consumer can exercise no choice. A passenger can hardly say I will not fly to Delhi but to Mumbai because the airport there is better! On the other hand, there are indeed many dimensions of an airport’s operations which are more amenable to the conventional idea of what the private sector can do better, particularly in areas where customer interface and choice may be involved.

Large international airports are far more than places where aircraft land or take-off disgorging or loading passengers and goods. Typically such airports have several restaurants catering to different budgets, variety of shops, personal care and entertainment facilities, banks and ATMs, quite apart from several nearby hotels, transport options and related facilities. Quite a few airports also have conference facilities, business centres and even art galleries. All these involve private parties who would bring in both investment and earnings, besides satisfying customer needs.

Besides facilities catering to passengers, airports are important hubs of trade and commerce. Many airports have successfully brought in private parties to invest in cargo handling facilities or even whole terminals, hangars and parking bays, servicing and overhauling facilities, marketing and shipping yards, export zones and so on. These have a catalytic effect on related activities and services in the region, bringing with it greater involvement of local government bodies, industry associations and chambers of commerce. Given the wide ramifications of major airports, in fact one of the major tasks undertaken by airport authorities is the preparation of a Master Plan envisaging and preparing the ground for such multi-faceted development of the airport and the surrounding region.

LOSE-LOSE  APPROACH IN INDIA

Unfortunately, the entire thinking on the part of the government and its airport authority in India regarding the role of the private sector, and therefore much of the debate on “privatisation” of airports, (as indeed in other infrastructure areas such as electricity or water supply extensively commented on in these columns) is confined to the narrow ambit of private investment, whether Indian or foreign, and participation in management. This latter is largely a euphemism for the government taking a back seat and becoming a sleeping partner even if its share of ownership represents a sizeable majority holding on behalf of the public, as in the case of the new Bangalore Airport where government (central and state) including state-owned financial institutions are likely to own close to 75 per cent of the shares!

Even at present capacities, Delhi and Mumbai airports cater to about 10 million passengers a year, not quite the scale of the 40 million at Bangkok but not very small either by international standards. Yet the facilities there are, to put it politely, rudimentary with barely one fancy restaurant and one snack bar both with 5-star prices to discourage all but the richest or most hungry passenger, car parks already overflowing, space just barely to sit. Cargo capacity is limited, there has been little attempt at synergising with regional products and export potential, export zones and commercial promotion has been minimal.

Airports belong to the public transportation infrastructure and, in India as elsewhere, also promote general economic and regional development. In India, as in other countries including developed nations a couple of decades ago, profits and revenues from major metropolitan airports are used to promote and support development of airports in other cities, smaller towns and more remote locations. In public transportation, profitability of one facility or route cannot be the only criteria as it would be for a private operator. Profits from trunk routes of state-sector airlines are used to cross-subsidise passenger traffic to more remote locations such as the North-East, like many non-profitable connections are made possible in the railways due to earnings from other sectors. Unless proper ground has been prepared and arrangements made for balanced development of all regions, haphazard privatisation of infrastructure and facilities regarded in an isolated manner, can do more harm than good.

The International Civil Aviation Organisation (ICAO) and the International Council of Aircraft Owners and Pilots Associations in separate papers on privatisation of airports make several important points. Acknowledging that major airports are monopolies, it is argued that, given their strategic nature and their importance to the national and regional economy, the public needs to control prices, access and long-term development. In the US, for instance, this is done through state regulatory bodies and mechanisms such as the Civilian Aviation Board while private entities or corporations run by State bodies (national, state-level or local) are involved in all or some of the planning, designing, financing and managing functions under overall governmental policy frameworks. ICAO states clearly that whereas privatisation may bring benefits, especially over the short and medium term, a long-term perspective must be taken and safeguards built-in.

Can problems of regional planning and development be tackled by a private party running airports? Cannot participation of the private sector be catalysed through opening up of the many potential areas for investment in infrastructure and services? Is private investment and management of airports viewed as isolated facilities the only answer?

The approach presently adopted by the Indian government is a lose-lose one — for the government, for airport users both domestic and international, for local area commercial and other infrastructure development and for the Indian people at large.

15th August 2004