Aviation Infrastructure in Tier-II and Tier-III Cities

It is indeed a remarkable fact of Indian civil aviation that almost two-thirds of the total scheduled airline domestic traffic is between the six metros. There are around five hundred airports strewn across the country and the majority are not in a useable state. The Airports Authority of India (AAI) manages 125 airports including those being run in a Private Public Partnership (PPP) model where it participates in management. According to the AAI’s official site, these include 18 International Airports, seven Customs Airports, 78 Domestic Airports and 26 Civil Enclaves at defence airfields. The government has, in the past, tried to goad airlines into increasing their flying operations to nonmetro airports but without much success. As the measure adopted was in the form of a stick (the Route Dispersal Guidelines (RDG), which mandate certain proportions of total flying to be carried out in remote and interior areas of the country) rather than a carrot (inducements and incentives in the forms of discounts and lower fees for those airports), regional connectivity has remained stunted. Growing realisation of the importance of regional and remote area connectivity and the instatement of a reform-oriented government has raised hopes that aviation infrastructure in Tier II/Tier III cities will be given the much needed attention in terms of development and growth so that their hinterland is bestowed with the benefits of passenger and cargo movement by air.

Public Sector Development

In a review meeting of the infrastructure ministries held in the second week of May, Prime Minister Modi reportedly directed the Minister of Civil Aviation, Ashok Gajapathi Raju to focus on improving air connectivity to smaller cities by promoting regional airports and airlines. The matter of inordinate delay in the development of Pakyong airport in Sikkim also came up during the review meeting (the original date of completion was in 2012 but the airport is nowhere near completion) and the Prime Minister issued instructions to complete its construction at the earliest. There are two main problems with airports developed by AAI. The internal inefficiency of the public sector is the first one, as highlighted in the case of Pakyong airport. The second one is even more debilitating - shortage of adequate government funds to develop all the airports that the AAI would like to. In the past, a study by Deloitte had identified 52 Tier II/Tier III cities which had potential to become busy airports in the future. However, the government has not been able to devote adequate funds towards operationalisation of those airports.

The 12th Five Year Plan (2012-2017) envisages an investment of Rs. 67,500 crore of which around Rs. 50,000 crore is planned to be contributed by the private sector for construction of new airports, expansion, modernisation of existing airports and development of low-cost airports to keep the tariff at its minimal at smaller airports. As the high proportion of planned private investment (three times the government investment) indicates, the government does not intend spending on airport infrastructure as much as it would like private entities to invest. Towards this end, it has indeed eased regulations for Foreign Direct Investment (FDI) as well as Indian entities and is encouraging private participation.

Private Participation

Private participation however, has not been an unadulterated delight so far for aircraft operators and passengers. The cost of operation at airports operated privately or on a Public Private Partnership (PPP) model has become exorbitant since their exit from the AAI fold and the incremental costs of operation have been passed on to the passengers by hapless airlines. Understandably, there has been severe criticism from airlines and their global representative body, International Air Transport Association (IATA), primarily on the grounds that it has led to massive hike in airport costs and charges. Nonetheless, privatisation is inevitable as the cost of development of all 500-odd airports and some new Greenfield ones is mind boggling and certainly not within the government’s reach despite the monopolistic regime exercised by the government over airport, landing, parking, navigation and landing charges levied on all aircraft operators.

As part of the second phase of privatisation, in the near future, airports at Chennai, Lucknow, Kolkata, Ahmedabad, Guwahati and Jaipur are slated to receive private investments of Rs. 4,250 crore for their development although union troubles are holding back some of these projects. According to the qualification documents issued by the Ministry of Civil Aviation, private players awarded the contracts for operations, management and development in this second phase of airport privatisation programme would have to make estimated investments in the range of Rs. 500-1,200 crore for development and upgrade at each of these airports. This move did not go down very well with AAI employees who allege that the government wants to develop only those airports as are expected to generate minimal revenue while the more lucrative ones are being privatised.

AAI Employees Union General Secretary Balraj Singh Ahlawat had asked a very pertinent question when he said, “The government says it plans to develop a network of 100 smaller airports. So, why should it not ask private companies to develop them instead of giving the revenue generating ones to corporate organisations.” He also feels that AAI revenue has gone down substantially consequent to the privatisation of Delhi and Mumbai airports. Despite opposition from within AAI and despite protests about extortionate charges by aircraft operators, the government appears to be focused on privatisation of a substantial number of airports.

The private route is not a perfect solution to the infrastructure problem. In Karnataka, the PPP model, espoused robustly by the state government for building infrastructure, has failed to deliver results in the aviation infrastructure sector. PPP projects to develop airports in Gulbarga, Shimoga, Hassan, Bija¬pur and Bellary are stuck at various stages of development due to problems with private parties. On the other hand, three other regional airports at Mysore, Hubli and Belgaum were developed and upgraded by AAI and are functioning. The government is now planning to partner with AAI to develop regional airports in the aforementioned five cities.

Interestingly, during the discussions on privatisation of additional airports, the Planning Commission had proposed a draft concession agreement based on a model linking landing and parking charges at airports to the Wholesale Price Index (WPI). This suggestion was rejected by the Ministry of Civil Aviation as it would have given those charges an upward bias. The Ministry feels that, on the contrary, there should be a new index introduced to progressively lower those charges as the airports progressively recover their construction costs.

State Government Role

The central government has been encouraging the participation of state governments in the development of airport infrastructure. Some state governments have handed over the required land for development of airports free of cost and free from all encumbrances as a token of state government participation. Cities where respective state governments have given land free of cost are Vishakhapatnam, Khajuraho, Amritsar, Pathankot, Dehradun, Lucknow and Varanasi.

The role of state governments in promoting and nurturing regional aviation is vital. However, on the issue of Sales Tax/Value Added Tax (VAT) on Aviation Turbine Fuel (which happens to be a state subject), states have been obdurate and the tax rate varies from four per cent to 30 per cent from one state to another. All pleas and ploys by the central government have failed to get the states to bring down the tax rate. The central government has also not had the spine (and the will) to place Aviation Turbine Fuel under the ‘declared goods’ category which would bring down the tax rate to four per cent automatically.

The only state which seems to have wisely understood the importance of promoting regional air connectivity is Madhya Pradesh which offers subsidy to regional flights. Currently, it provides financial backing to Ventura Airconnect, an intra-state air service which connects cities including Bhopal, Gwalior, Indore, Jabalpur, Satna, Khajuraho and Rewa. Other states are slowly waking up and may follow suit soon. Andhra Pradesh government has set up a Special Purpose Vehicle (SPV) along with the AAI to build four airports in smaller cities such as Vizianagaram, Chittoor, Kurnool and Nellore. The North East Region has been subsidising air operations for quite a few years now (for Alliance Air). On its part, the central government would like states to underwrite a fixed number of seats per flight operated by local airlines to boost intra-state connectivity.

Conclusion

While airlines are often exhorted or pushed by the government into operating more flights to Tier II/Tier III cities, the reluctance of airlines to do so is understandable as no airline wants to fly on an unprofitable sector. Flying to small cities with limited passenger availability and at the current costs of operations would be unattractive, to say the least. It is for the government to turn smaller cities into profitable destinations for airlines especially so as the metros have reached saturation points and civil aviation still has the potential to grow.