Photo: Satish Bate
Photo: Satish Bate

Opinion | Policy tweaks for investment in airports and roads

Both airports and roads are at an inflection point and have generated interest among stakeholders

India’s roads sector has turned more attractive for investments in the recent past. Now, airports, too, are becoming so, after a raft of initiatives by the government. A significant recent announcement was the Cabinet approval for privatization of six airports. It comes at a good time—when investment in the sector is improving. The Crisil InfraInvex—an index that tracks the development and investment attractiveness of the infrastructure sector—score for the aviation sector has already risen to 6.5 in October 2018 from 6.1 a year ago (on a scale of 10, where 1 indicates least attractiveness).

As such, the approval to privatize six airports is significant for Indian aviation.

For several quarters now, growth has flown north and, in the process, India has become the third-largest aviation market in the world. For both Indian developers and international investors, this presents a huge opportunity. Privatization of metro airports undertaken earlier had yielded good returns for developers. The latest announcement has to be seen in this context.

At present, much of the air passenger traffic in the country is concentrated in the top 5-6 airports that are mostly operated by the private sector. The six airports identified for privatisation now are growing significantly and would reach peak capacity in the next five years, or so. Thus, the decision to privatize them comes at the right time as it is this potential that gives prospective operators a good business case. However, there are a few issues that need to be taken care of at the start:

1) The government should make sure that all the land required for development is made available at the bidding stage itself.

2) It should provide an easier exit option on achieving the commercial operations date.

3) It should have more clarity on the bidding parameter—whether to follow a revenue sharing model, as in cases of brownfield airports, or as suggested by the consultative paper, to cap the yield and make concession fee as the bidding parameter.

4) The risk should be apportioned equitably among partners.

5) A robust industry-focused tribunal should be put in place for expeditious resolution of issues.

At the sector level, things are broadly positive. To wit, domestic airlines will together boast of one of the largest fleets anywhere in the short to medium term. As of August 2018, they have ordered 1,055 aircraft, with orders for another 100 wide-body aircraft expected over the next 12 months. Airlines need to pump in close to 3.5 trillion for fleet expansion by 2027. The number may look daunting considering many leading airlines have been pushed into the red because of escalation in aviation turbine fuel (ATF) prices and a depreciating rupee. However, with easing ATF prices, stabilization of the rupee, and healthy passenger growth rates, things should look better.

Fleet expansion also opens up a huge potential to develop India as a maintenance, repair and overhaul (MRO) hub. The $776 million MRO business in India is estimated to grow to more than $1.5 billion by 2020. We estimate the overall investment potential for Indian aviation (airlines and airports put together) at a whopping $100 billion over the next 12-15 years. Addressing some of these easy wins will definitely get the sector rolling.

On the other hand, the roads sector has seen significant policy changes in the past couple of years and the average construction done per day has quadrupled. New public-private partnership (PPP) models, such as the hybrid annuity model (HAM), and asset monetisation programmes, such as toll-operate-transfer (TOT), have been set in motion and have achieved initial success.

The Crisil InfraInvex score for roads has risen to 7.4 (in October 2018) from 6.9, primarily because of the successful launch of the TOT programme, which brought a new class of investors into the sector. Also, bringing out the next five-year-plan as envisaged in the rollout of the Bharatmala programme. Increased award and construction have also helped boost the investment attractiveness of the sector. However, there are still teething issues, which need to be ironed out. Some of the critical ones are:

1) As in the case of airports, here too the government should be ready with all the land required for construction. In other words, it should make available shovel-ready projects for the bidders. This is important given the problems faced while acquiring land for industrial use.

2) About 50% of all projects awarded in fiscal 2018 are under HAM. Given the challenges in terms of budgetary resources, the time is ripe for getting built-operate-transfer (BOT) back in the fray. At present, the share of BOT projects is not even 10% compared with the government’s decision to execute future projects through HAM, engineering-procurement-construction (EPC) and BOT in a ratio of 60:30:10.

3) Address the banking sector’s concerns over funding of HAM projects.

4) Encourage more developers to come up with infrastructure investment trusts (InvITs), which are an excellent exit strategy tool.

To summarise, both airports and roads are at an inflection point and have generated the interest of a varied category of stakeholders. A continued policy push and a clear road map of development will increase stickiness among the investing community.

Jagannarayan Padmanabhan is director and practice leader—transport and logistics, Crisil Infrastructure Advisory

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