New Transaction Structure for Future Greenfield Airports Proposed

Tuesday, August 14, 2018

New Delhi: Sh Suresh Prabhu, Minister of Civil Aviation today unveiled a new transaction structure for future greenfield airports proposed under NABH Nirmaan 2018. Sh. Jayant Sinha, MoS, Civil Aviation, Shri R N Choubey, Secretary, MoCA and other senior officers of the Ministry were also present on the occasion. Sh. Prabhu said that the new approach, to be finalised after due consultations with the stakeholders, will help boost investment and unlock the huge potential in the Indian aviation sector.

The new approach

New transaction structure for future greenfield airports is being proposed under NABH Nirmaan 2018. Its guiding principles are: affordability, sustainability and predictability.

The ‘Maximum Blended Aeronautical Yield’ (MBAY) in terms of INR per passenger shall be pre-determined by the Concessioning Authority at the beginning of the Concession Period. It shall undergo minor adjustments to account for inflation and certain eventualities over the Concession Period.
The MBAY for greenfield airports for the year FY 18-19 is proposed to be INR 400 per passenger. The number has been arrived at on the basis of projected cash flow analysis for greenfield airports of different capacities and a review of aeronautical yields at Indian and global airports in the recent past.
The bid parameter is proposed to be the ‘Concession Fee per passenger’ payable to the Concessioning Authority in terms of INR per passenger. The bids will differ for each airport in line with its projected traffic, financial returns and risk profile.
In certain airports, where the proposed MBAY may not be adequate to cover expenses and risks, the Concessioning Authority may permit bidders to quote a ‘Negative Concession Fee’. The lowest negative fee will be added back to the proposed MBAY to arrive at the revised MBAY for that airport.
The Concession Period is proposed to be 40 years. There will be a moratorium on the Concession Fee for a period of three years from the Commercial Operation Date (COD). The base rate of MBAY and the Concession Fee shall be indexed to 50% of inflation.
Once every five years, the Concessionaire shall propose the base rate of MBAY for the next five years, adjusting for inflation and the difference between the MBAY and the Concessionaire’s actual aeronautical yield in the previous five-year period. The Concessionaire shall submit its proposed tariff card as per the MBAY and obtain the Regulator’s approval.

Quality assurance

Under the pre-determined aeronautical yield approach, quality assurance will become critical. The Regulator may formulate the Key Performance Indicators (KPI) for greenfield airports and modify them once every five years. The Regulator may create a panel of Service Quality Auditors (SQA). An SQA shall monitor Concessionaire’s compliance with the KPIs using technological tools, real-time data analysis and minimal human intervention.
Every greenfield airport shall constitute a Airport User Consultative Committee (AUCC). The Chairman of the AUCC shall be the aviation secretary of the state (or equivalent) and comprise representatives of the Concessioning Authority, MoCA, DGCA, AAI, airlines, sub-concessionaires and passenger groups.
AUCC may recommend increase or decrease in MBAY to Regulator (limited to 10%) based on the Concessionaire’s performance. A cumulative financial penalty of 25% on the Concessionaire may lead to termination.

Financial support to Concessionaire

There is a possibility that the Concessionaire may face financial challenges during the course of the Concession Period. The Concessioning Authority may provide an opportunity to the Concessionaire to seek financial support on a recoverable basis. The DF and UDF paid to Concessionaires as financial support in the past used to be non-recoverable.
The financial support period shall be limited to a sum total of five years anytime during the first 30 years of the Concession Period. The five years may be in continuity or in blocks of years.
During the financial support period, the Concessionaire shall not be required to pay the Concession Fee, in part or full. Should that be inadequate, the Concessionaire may approach the Regulator for levying a higher aeronautical yield per passenger, limited to 50% of the base rate of the prevailing MBAY.
The amount received by Concessionaire as financial support shall be paid back by the Concessionaire to the Concessioning Authority and passengers at the rate of RBI Bank Rate plus 3% per annum. The payback shall be in the form of higher Concession Fee to Authority and/or lower MBAY, as the case may be.
At no point during the Concession Period, the increase in MBAY for various interventions such as revenue shortfall loan, traffic variance, service quality incentives or change in scope etc. shall exceed 50% of the base rate of MBAY for that year.
Benefits of the new approach

9With MBAY capped, future airports in India will be simple, functional and cost-efficient. There will be no incentive to enhance Capex and Opex to demand higher tariffs. The era of high revenue share (30-50 percent) for the Concessioning Authority may end. All these, along with growing traffic and increased competition among airports will bring down the cost to passengers.
By linking Concession Fee to number of passengers, the disagreements around ‘gross revenue’ and the risk of ‘revenue leakage’ will be significantly reduced.
The Regulator and Concessionaires will gain from the end of the long-drawn tariff setting process involving an intrusive auditing of capital expenditure, operating expenses and non-aeronautical revenue of the Concessionaire.
The reduction in controversies and litigation are likely to attract more investors and funding institutions into airports, starting with upcoming projects at Jewar, Bhogapuram and Pune.

Stakeholder feedback

A detailed note on the proposed transaction structure shall be put up on the MoCA website for stakeholder feedback. We welcome feedback till 5 pm on 14 Sep 2018. The same shall be incorporated in the draft Model Concession Agreement (MCA) and shared for further stakeholder consultation.