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Vol.
XXVIII No. 33
August 15,
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Privatisaton
And FDI In Indian Airports
Raghu
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 nations 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,
Singapores Changi Airport and Germanys Frankfurt Airport have emulated the
BAA success, New Zealand is doing well, but Malaysias 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 States 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 Yorks
Kennedy Airport, Chicagos OHare or LAX at Los Angeles. Elsewhere in the
world, the privatised BAA operates several regional airports in the UK under
lease, and Amsterdams 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 airports 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.
