On March 14, Sonia Gandhi, chairman of India’s ruling United Progressive Alliance government at the Center, inaugurated the new private sector airport at Hyderabad in the southern state of Andhra Pradesh. It was a false start, though: Several airlines, citing the need for more time to move into the facility, delayed the airport’s launch for another week. Just a couple of days earlier, the government in Delhi had asked the country’s other high-profile, private sector aviation project — the Bangalore International Airport (BIAL) — to postpone its planned March 30 opening until May.

While delays on large projects like these are not unexpected, India’s program for privatization of airports has faced opposition from the beginning. On March 12, some 15,000 employees of the Airports Authority of India (AAI), which is responsible for civil aviation infrastructure in the country, went on strike to protest the privatization of the airports in Mumbai and Delhi and the decision to close the currently operational airports in Hyderabad and Bangalore when the new ones opened. Earlier in the month, airport taxi drivers had gone on strike to protest these changes as well.

Strikes may seem trivial in the larger mosaic of airport privatization, but they add weight to the growing opposition to the model of civil aviation infrastructure development that the government has adopted. Unable to fund these projects, the government has turned to public-private partnerships which, in theory, allow it to tap into the efficiency and entrepreneurial problem solving that private companies can offer. But delays, mounting project costs and concerns about monopolies are clouding the horizon of consortium-led projects to upgrade or build new airports. While many feel complete privatization might be the way to go, others argue that airports are a basic component of infrastructure, and as such should exist for public benefit, not profit. The debate is critical: According to the government’s own estimate, some 500 airports will have to be set up as greenfield projects or refurbished by 2018.

The two catalysts of India’s economic growth have been telecom and civil aviation. They have both speeded up the pace of doing business. But there is a difference. “Telecom has definitely been an incredible success,” says Milind Sohoni, professor of operations management at the Indian School of Business (ISB), Hyderabad. “But the wireless revolution has been the big story. Wireless technology has circumvented to a certain extent the infrastructural issues: One doesn’t need copper wires to be laid or huge telephone exchanges built. However, on the air transportation side, while liberalization has brought in private carriers and capacities are being added by the day, the need for more physical infrastructure is very high.”

Building airports requires a lot of money, and the government does not have it. The total project cost of the Hyderabad airport is $600 million. At Bangalore, the budget is $300 million. A GMR Group-led consortium, which has won the modernization project for the Indira Gandhi International Airport in Delhi, has recently increased its project estimate to $2.2 billion. A similar upgrade for the Mumbai airport by a GVK-led consortium has a budget of $1.3 billion. A new airport is also being planned at Panvel, about 35 kilometers from the existing Mumbai airport, at a projected cost of $2.5 billion. Moreover, these figures tend to be revised — always upwards.

With the rapid growth in the industry, further investments will be needed. According to the ministry of civil aviation, the number of flights at Indian airports went up from 636,947 in 2002-03 to 1,007,593 in 2006-07. The figure is expected to reach 1,420,130 by 2009-10. The numbers of passengers carried are 48.69 million, 96.40 million and an estimated 144.76 million, respectively.

The airlines have correspondingly increased their fleet acquisitions. The most ambitious is that of the National Aviation Company of India Ltd. (NACIL), the newly-formed entity coming out of the merger of the erstwhile domestic and international national carriers Indian Airlines and Air India. The company has a current fleet strength of 140 and has another 111 planes on order. Others are not too far behind. Air Deccan has 43 planes with 92 ordered, Jet Airways has 75 with 44 ordered and Kingfisher Airlines has 35 with another 60 on the way. Even minnow IndiGo Airlines, with 15 planes currently, has ordered 100.

Negotiating with Devils

The government is in no position to fund the infrastructure needs for this sort of growth, and many planners still belong to the “Hindu rate of growth” era — their projections are way below the mark. One example is the Delhi-Gurgaon expressway, which has just opened: Traffic on the first day was greater than that projected for 2013.

Public-private partnerships (PPPs) — all the new airports and upgrade projects fall in this category — have therefore been largely welcomed. Companies such as Delhi International Airport Ltd. (DIAL) and Mumbai International Airport Ltd. (MIAL) have a 74:26 shareholding pattern, with the private consortium holding the majority stake and AAI and the state government the remaining 26%. The revenue share, however, is loaded in favor of AAI; in Delhi, for instance, it is entitled to 46% of the earnings.

The initial opposition to the PPP arrangement came from the Left, which successfully stonewalled private sector leadership in the Chennai and Kolkata airports. The current model is an AAI-led PPP, which brings none of the private sector skills to the fore. The combined budget for the upgrades is $1.5 billion, so it is likely that the private sector will be given a greater role in the future.

Rajgopal Swami, chief financial officer and spokesperson for the GMR group, says that PPPs are the best way forward. “Traditionally, seaports have provided the impetus to growth in the hinterland around them,” he says. “In this century, in the context of globalization, airports are the gateways to a country and will act as catalysts for growth. Privatization provides a means of developing the airport infrastructure space rapidly by spreading the effort over several players. A PPP model allows efficient development of infrastructure by combining the strengths of the public organization with the entrepreneurial skills and business acumen of private enterprise.”

The first PPP airport to get off the starter’s block was the smaller $100 million Cochin International Airport (CIAL), in the southern state of Kerala. That’s been a success story; it has been making a profit since 1999. In 2006-07, on a turnover of around $40 million, its profit after tax (PAT) margin was 35%. While CIAL says such handsome returns are a result of efficient operations, critics contend the company has been overcharging in the absence of competition.

Critics have been more vocal about plans to close functioning airports that pose competition to the new private ones, as in Bangalore and Hyderabad. “The current noise [over the new Bangalore airport] is because a public sector monopoly has been replaced by a private sector monopoly,” says Devesh Agarwal, president of the infrastructure committee of the Bangalore Chamber of Industry & Commerce (BCIC). “A public sector monopoly is a relatively known devil and it is a devil with whom the industry and consumers can negotiate. In a public sector monopoly, there is some sense of public propriety. The private monopolies, on the other hand, are there only for profit. That is their guiding principle.”

The new Bangalore airport will charge a “user development fee” (UDF) of $22 per international passenger. There was a proposal to levy a similar charge on domestic passengers, but that may not happen as the budget airlines, which are opposed to adding the fee to their ticket prices, have threatened to walk out. CIAL, meanwhile, has stopped charging a UDF.

“The government should not subsidize the UDF,” says Agarwal. “It is the responsibility of BIAL to find its own funding and revenues sources.” Sohoni of ISB agrees. “Government subsidies [of the fees] may not be the solution,” he says. “One needs to think of different ways of funding such capital expenses, for instance, through bonds or private funding.”

‘No Such Thing as Free Money’

Sohoni feels that complete privatization of airports is not the answer to India’s needs, either, especially when it comes to the larger airports. “In fact, that is not the answer anywhere in the world. It has to be some kind of public-private co-operation. In the U.S., it is the local government or municipality that owns the facility, and it then subcontracts a whole bunch of activities to different private entities — from operations to the strategic management aspect to futuristic decision making.

“At the end of the day, the airports are for public benefit and, if it is complete privatization, there are a lot of issues around who is making the money and whether anything will be done for the public good.”

Swami of the GMR group disputes that premise. “While there is merit in the view that the airport is a public good, there is no such thing as free money,” he says. “Any government subsidies are actually paid out of government revenues — read taxpayers’ money. A subsidy actually ends up by having the non-user pay for a part of the user’s costs. UDF is a method by which the user pays for the use of the facilities.”

The revenue model is a very tricky question, according to Sohoni. “On the one hand, there has to be an incentive for private players to come in and there has to be a sustainable business model,” he says. “At the same time, it cannot be monopolistic pricing. One has to be careful about who is doing the pricing and how it is being done and what kind of regulations are in place to make it an even playing field.”

“Most good airports around the world make more money from their commercial revenues than from their airline revenues,” says Albert Brunner, CEO of BIAL. “In India, this is a potential that has not been tapped at all. BIAL expects to make 15% from commercial channels to begin with.”

A study by the Delhi-based Faculty of Management Studies points out that airports in India are looked upon as infrastructure providers, when they should be treated as businesses. AAI has not developed any non-aeronautical streams of revenues, and as private sector companies move in to rectify this, fees will eventually come down, say analysts. But that thought won’t prevent any unrest in the interim. At London’s Heathrow airport, the British Airports Authority, owned by Spanish construction company Ferrovial, has just won the right to hike passenger charges to pay for infrastructure improvements. As in India, the budget airlines are protesting loudly.

Needed: Easy Access

While some problems may be common to Heathrow and Bangalore, there are others that are uniquely Indian. The biggest complaint for fliers in Bangalore is that the new airport is too far away. Supporting infrastructure like roads to and from the airport’s location — the responsibility of the government — has not yet materialized. Taxis will be charging as much as $25 for an airport drop — a large sum by Indian standards. By comparison, the earlier airport was very accessible — as long as traffic jams didn’t intrude.

Swami of GMR feels that critics are putting the cart before the horse. “Basic infrastructure like roads, water and sewerage are, of course, needed to set up an airport,” he says. “But it is difficult for any other supporting infrastructure to precede the airport because most of this is led by private enterprise, which will wait for the market to mature before investing in anything other than real estate procurement.”

“Airports by their very nature have to be set up away from the main portion of the city,” says Sohoni of ISB. “Until now in India, air travelers were not a major part of the total traveling population. But now that it has been growing significantly, it is essential to have a simultaneous development of rapid, easy and affordable access to the airports.”

“It is the responsibility of the government to create the connectivity in parallel,” says Agarwal of BCIC. “But, as we have seen time and again in India, the government tends to abdicate its responsibility. Whoever is building the airport should also be responsible for creating the connectivity. It should be an integrated project.”

Agarwal said he may be calling for keeping the earlier Bangalore airport open. But that does not mean he is opposed to privatization. In fact, he feels the first step should be privatization of AAI. “The government needs to get out of AAI,” he explains. “In the telecom sector, Bharat Sanchar Nigam (BSNL) was corporatized and competition was introduced. But BSNL did not fold up. Instead it became a leaner, meaner organization and today everyone is benefiting, the operators as well as the consumers.”

Agarwal adds that the PPP agreements were handed out at a time when the government was desperate for private investment in airports. “The government has accepted unreasonable demands from the private sector investors,” he says, indicating that it may be time to reconsider the current plans. Others seem to agree: The Parliamentary Standing Committee on Transport, Tourism and Culture has recently submitted a report suggesting the government find ways to keep the Bangalore and Hyderabad airports open.

Adding a fresh dimension to this debate is the realization that even when the upgrades of Mumbai and Delhi are completed, capacity will not be adequate. A new airport close to the existing one in Mumbai has been a consideration for some time. Now, an airport has been proposed in Greater Noida, which is about 70 kilometers from the existing Delhi airport. Under the terms of the existing Delhi PPP, there are restrictions on any new airport coming within a range of 150 kilometers, so a reworking of the PPP arrangement is inevitable. One proposed solution may be to lower the AAI’s 46% revenue share to compensate the GMR consortium in charge of the Delhi upgrade for the new competition.

But will the new airport be competition? According to another clause, the GMR consortium will get the first shot at developing any new airport around Delhi, if its own bid is within 10% of the highest bidder.

Meanwhile, all of these issues are taking management time away from other issues — such as better airports.

Brunner of BIAL explains that the International Air Transport Association (IATA) rates airports on a scale of one to five on 27 different parameters, like accessibility, parking facilities and ease of check-ins. Some of the best airports, like Changi and Zurich, are in the range of 3.9 to 4.1. “In India, the best rating that any airport has managed to achieve until now is only 2.6,” he says. “According to our agreement, BIAL has to achieve a minimum rating of 3.5 for the new international airport. If we do not achieve this, we are obliged to return the airport to the government.”