By Amitabh Chaturvedi and Sumita Chauhan
Infrastructure, the back-bone of economic development, is the foundation on which the fort of economic success is built. India, poised to embark on a new journey of economic liberalization and revolutionary growth has witnessed major reforms, brought forth with the aim of achieving planned and consistent economic development, thereby gradually causing a shift from the controlled to an open market economy where private players including foreign investors have assumed an imminent and important role.
In the Aviation sector, the government’s policy on Airport Infrastructure envisages provision of detailed master plans for upgradation and development of major airports in India by implementing recommended practices of the International Civil Aviation Organization. The importance of private participation for a sustained development of airport infrastructure has been recognised by the policy makers and endeavours are on to achieve, by way of corporatisation of the airports, with an aim to divest the government holding in future.
Although India has a well-developed legal system, the current legal and regulatory environment may, in certain situations, act as an obstacle to the sustained development of airport infrastructure. The Aviation sector is governed by specific statutes which clearly provide for modes and means of private participation, which is generally allowed through grant of licenses to the private developer or through a contractual relationship.
Legal & Regulatory Framework Governing Airports in India
Airports in India are governed, inter-alia, by Airports Authority of India Act, 1994, The Airports Economic Regulatory Authority of India Act, 2008, the Aircraft Act, 1934 and the Aircraft Rules, 1937. The above legislations allow private participation through issuance of licenses for an airport other than owned by the Central Government and formation of joint ventures by private participants with the Airports Authority of India. The scope and extent of private participation is determined by the concerned State Government and may be of varying degrees and dimensions. However, development of infrastructure in the Aviation Sector faces restraints and roadblocks.
Financial Challenges Facing the Aviation Sector
The aviation infrastructure sector, apart from the regulatory factor, is currently facing the challenges of a weak global and domestic economy and deteriorating financial health of airlines. As a result, revenue generation by airports has been adversely affected, which, along with the pressures on liquidity, has caused funding gaps to arise both for private players as well as the state-owned Airport Authority of India (“AAI”). Another development that has hit the aviation infrastructure segment has been the downturn in the real estate sector, which 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. Some measures also need to be taken to avoid delays caused by judicial procedures which come in the way of development. Such delays need to be visualized and remedied beforehand.
At present, even as the four major airports at Bangalore, Delhi, Hyderabad, and Mumbai are being run by private operators, an independent regulatory authority for the aviation sector, though constituted, is yet to formulate detailed tariff guidelines. The Airports Economic Regulatory Authority (“AERA”) is a statutory body constituted under the Airports Economic Regulatory Authority of India Act, 2008 (27 of 2008) notified vide Gazette Notification dated 5th December 2008. AERA was established by the Government through its notification no. GSR 317 (E) dated 12th May, 2009 with its head office at Delhi to regulate tariff for aeronautical services rendered at major airports in India. It also determines airport charges and monitors the performance standards of such airports. The extent to which AERA is able to balance the conflicting interests of airport operators and airport users will determine how conducive the environment is for private investment in the Indian Aviation Infrastructure sector. Aeronautical charges (levied on aircraft and passenger movement) are a major source of revenues for any airport.
The current slowdown in air traffic is also likely to impact the capital expenditure plans of AAI, the apex body of aviation infrastructure in the country. A large part of this capital expenditure was proposed to be funded through internal accruals, however, the slowdown in traffic and the subsequent moderation in revenues could lead to either curtailment of the expenditure initially proposed or increase in the debt funding requirements.
The airlines industry is the primary source of revenue for airports in India, given the high proportion of aeronautical revenues in their total turnover. Till about a year back, with traffic movement reporting robust growth, the airlines industry saw many private players entering the market and almost all carriers expanding their routes. However, the slowdown in traffic soon thereafter led to the industry being burdened by overcapacity even as increasing aviation turbine fuel (ATF) prices in the meanwhile pushed up costs, with the result that the domestic airlines industry reported sizeable cumulative losses.
The Challenge of Land Acquisition
One of the single largest roadblocks for development of infrastructure in the aviation sector is the acquisition of large parcels of land for airports, which more often than not results in conflict from local communities resulting in disputes and litigation due to the huge differences in the value offered and the actual market value of such land. Lack of proper dispute resolution mechanism adds to delays and these delays lead to prolonged litigation and substantial delays.
However, a new bill, the Land Acquisition and Rehabilitation & Resettlement Bill, 2013, has been introduced in the Parliament which may ease the process of land acquisition and reduce the number of litigations due to the Government’s detailed and improved provisions for compensation and rehabilitation. But, this would lead to a substantial increase in the cost of acquiring land, which may be severely detrimental to private investments in the long term, since sustainability of projects would definitely be adversely affected.
The regulatory framework must also meet the basic objectives of autonomy, transparency and predictability and at the same time regulation of aeronautical charges is necessary considering the monopolistic nature of airports. While aeronautical charges for all operational airports are being regulated by the Ministry of Civil Aviation (“MoCA”), the Operation & Management Agreements and various Concession Agreements between the joint venture companies and AAI/MoCA also allow for revision in these charges and the levy of special charges like user development fee. Significantly, some of these provisions, particularly those pertaining to the levy of UDF for greenfield airports, are not very clear on important issues such as the period of validity, amount and/or method of calculation of these charges.
Lack of regulatory framework causes delays in implementation of projects leading to loss of time and revenue. Often these projects require multiple sequential clearances at various levels of the government. Various categories of approvals required across the project cycle at every stage, right from the pre-tendering stage to post construction often leads to delays and obstacles. While it is important to have a rigorous procedure that ensures transparency and quality, administrative and bureaucratic complexities for securing approvals are often considered serious disincentives for developers and contractors and lead to loss of time and revenue.
Further Delays due to Environmental Issues
Environment-related issues often lead to delays caused by legal procedures. Environmental safeguards and guidelines have proven to be one of the major reasons for delay in infrastructure projects. While new projects need to obtain clearances from the environmental point of view and need to comply with these regulations, even projects under construction need to comply with revised standards from time to time midway through the execution stage. While the Ministry of Environment and Forests, Government of India states that the delays in seeking approvals may primarily be due to non-compliance with the procedures of the notifications and circulars issued in respect of mandatory Environment Impact Assessment (“EIA”) and Environmental Clearance (“EC”) and the terms of compliance involve a complex and time consuming procedure.
Another roadblock in infrastructure development is the Archaeological Sites and Remains Act 1958 as amended the Ancient Monuments and Archaeological Sites and Remains (Amendment & Validation) Act, 2010 which provides for the preservation of ancient and historical monuments and archaeological sites and remains of national importance for the regulation of archaeological excavations and for the protection of sculptures, carvings and other like objects. This Act prohibits construction and development work in a “prohibited area” and “regulated area” which means any area near or adjoining a “protected monument”, which the Central Government has, by notification in the Official Gazette, declared to be a prohibited area, or, as the case may be, a regulated area, for purposes of mining operation or construction or both.
Even industrial laws of India are impeding the development of infrastructure in the aviation sector as after the judgment dated 15.09.2011 passed by the Supreme Court of India in Airports Authority of India Vs. Indira Gandhi Airport TDI Karamchari Union and Ors. holding that notwithstanding the privatization of the Delhi International Airport, notification dated 26.07.2004 issued by the Union Government with respect to the abolition of central labour with respect to the Airports Authority of India (a government undertaking) would also apply to the private operator Delhi International Airport Limited, who must abolish all contract labours as per the terms of said notification and absorb them as regular employees of Delhi International Airport Limited.
Aviation sector in India faces many taxes on the inputs to production – fuel, aircraft leases, airport charges, air passenger tickets, air navigation service charges, maintenance costs, fuel material fees, into-plane fuel fees, and other items subject to service taxes. These fees and taxes on inputs are either not present in other matured aviation markets, or are much lower there. The Indian air transportation industry is thus laden with very high costs and larger operating losses than their other counterparts globally. This is not to say that air transport industry should be completely exempt from taxation – rather, it is the menace of distortion that needs to be addressed.
One of the key cost drivers for the airline industry, which is the pivotal segment of the entire civil aviation sector, is the price and taxes payable for aviation turbine fuel (ATF) by the scheduled domestic carriers in India. A number of representations received from airlines in India suggest that the rates of value added tax on ATF is high, which affects the financial viability of their operations. In most of the States, VAT applicable on ATF is in the region of 25-30%. Fuel cost alone constitutes nearly 40% of the operating cost of the airlines in India. There is no doubt that the current regime of aviation fuel taxation regime adversely impacts the financial performance of Indian air carriers, particularly in the domestic sector. If aviation fuel taxes are disproportionately higher without any basis, then it retards the industry development vis-à-vis the overall growth in the economy and limits its potential contribution to economic well-being of India. Multiple and higher levies on ATF impact the operating cost environment of air lines an need to be done away with.
There is an urgent need to also amend the laws so that even Defence/Military Airports can be upgraded and converted into civil airports.
Ironically, while overall infrastructure remains inadequate, there is also slack capacity caused by both internal and external factors. This must be squarely dealt with. Both problems need targeted outlays on equipment modernization and adoption of efficient management practices. To garner investments for upgrading the airports, particularly the second tier of airports, there is urgency to develop suitable PPP models.
There is also no standardisation in the concession agreements across the different infrastructure sectors. As a result, the development of aviation sectors in India has been hampered due to lack of adequate and co-ordinated planning. However, the approach of adoption of standardized documents, such as model concession agreements and bidding documents for award of PPP projects, has over a period of time been streamlined and there has also been an accelerated decision-making by agencies in a manner that is fair, transparent, and competitive.
Given the large investment needs of the Indian aviation infrastructure segment, private sector participation is critical. In the case of Airports, Green field airports have come up in the private sector. There are also successful cases of upgradation of metro airports under the PPP mode. Increased private participation has now become a necessity to mobilise the resources needed for infrastructure expansion and upgrading. The PPP model has been fairly successful in many advanced countries. PPP model in India is in a nascent stage, but is steadily gaining popularity and support given the dire need to improve infrastructure in the country. However, continued economic viability of private players operating in India’s aviation infrastructure sector hinges on several factors, including the penetration of air travel in the country, scope to exploit non-aeronautical and real estate revenue opportunities, favourability of regulatory environment, and the funding support available during the initial years of development (considering the fixed cost intensive nature of operations). The recent downturn in the global economy also poses additional challenges in the form of declining traffic levels, liquidity pressures and reduced inflow from real estate development. Major PP Projects are governed by concession agreements signed between public authorities and private entities. As is the case in many countries, there is no single regulator which formulates the policy for all infrastructure projects. The absence of a transparent and regulatory framework aggravates the risks and uncertainties for private investors and there is a pressing need for an equitable and transparent regulatory framework to be put in place. Although AERA has been set up under the AERAI Act, 2008, the Act does not provide a uniform and comprehensive legal and regulatory framework for promoting private investment in the aviation sector. Even the private operators like Delhi International Airport Limited and Mumbai International Airport Limited, which successfully overcame the aforesaid challenge to privatisation, has been facing further hurdles as the levy of development fees by these private operators upon passengers using the privatised airport facility was struck down on technical grounds by the Supreme Court of India on 26.04.2011 in the case titled Consumer Online Foundation Vs. Union of India & Ors.
Given the current environment, the extent to which private sector players would be interested in bidding for other greenfield airports that are proposed to be developed using the public-private partnership (PPP) model remains to be seen. More often than not, most PPP projects end up being challenged due to the bidding process. In the first instance, the challenge is to find reasons as to why a tender was rejected and, upon doing so, the second round of litigation is to challenge the reasons. The entire legal process could take anywhere between 3-5 years if not more, and therefore investors are often wary of investing in PPP projects that may end up into litigation thereby due to this. It is often that vexatious litigations are filed only with the intention to wrongfully restrain the successful bidder from commencing its operations. To illustrate, the tenders for privatisation of the Mumbai International Airport and the Delhi International Airport were challenged in the matter of Reliance Airports Developers Pvt. Ltd. Vs. Airports Authority of India & Ors before the High Court of Delhi on 02.02.2006 and the privatisation was finally upheld by the Supreme Court of India on 07.11.2006.
While cyclical downturns are inevitable, the current need is to have a legal and regulatory framework that would do away with the presently existing restraints on infrastructure development in the aviation sector and a paradigm shift in the manner of judicial interpretation of the existing law so as to facilitate private investment in the aviation infrastructure segment.
Amitabh Chaturvedi is the Managing Partner of the New Delhi based law firm Mine & Young. He can be reached at email@example.com.
Sumita Chauhan is a partner at Mine & Young. She can be reached at firstname.lastname@example.org.