The airports regulator is on a collision course with the Ministry of Civil Aviation (MoCA) over the issue of tariff determination at airports — the charges private operators can levy on airlines and passengers, which in turn will determine profits they can make.
While the Airport Economic Regulatory Authority (Aera), set up in mid-2009, is in the process of determining a fair rate of return on equity for the private operators, the ministry seems to be of the opinion that operators be allowed to retain profits from non-aero revenues such as duty-free shops in the airport building, in addition to the fair rate of return.
The simmering war has escalated now with the ministry planning to put in place an economic regulatory policy to address the apprehensions of investors. It has also moved a proposal to suitably amend the Aera Act that will empower the government to give binding directions to the regulator. Towards this end, it has armed itself with a favourable opinion from the Attorney General.
The ministry has not offered any feedback to Aera’s February 2010 consultation paper on its regulatory philosophy and its subsequent order on this philosophy in January 2011.
The order does not apply to Delhi and Mumbai airports since these had detailed market discovered price mechanism before being handed over to the GMR and GVK-led consortia, respectively.
According to a MoCA official, investors first voiced their concern in November last year during a bidders meeting for the proposed Navi Mumbai airport. “KPMG said investors were concerned about Aera’s proposal (based on the consultation paper of February
A single till is like a purse into which both aero and non-aero revenues accrue. The costs to generate these revenues are deducted from the total revenues to eventually determine what operators can charge from users. In dual till, aero revenues accrue into one purse and non-aero into another. For determination of charges though, only the purse with aero revenues and associated costs are considered.
Typically, non-aero businesses such as retail sales, car parking, food and beverages and duty-free shops generate almost 45-50 per cent of total revenues in large airports. If these are excluded while determining tariff — as in dual till — the charges for both passengers and airlines will be higher.
In Aera’s opinion, PPP projects have to essentially follow public policy principles, especially when the state (state governments, generally) extends sops such as land at nominal costs, capital subsidies and basic infrastructure for making the project feasible for the private sector.
Arguing for a dual till, private airport operators in Delhi, Bangalore, Hyderabad, Mumbai and Cochin challenged Aera’s single till order and the tariff filing guidelines at the Aera Appellate Tribunal in February. While the appeals against single till were quashed, the one against guidelines is due to be heard on October 19, 2011. The tribunal asked these airports to file their tariffs by July 31. For failing to file their tariffs, the regulator then requested the tribunal that it punish Bangalore and Hyderabad airports.
Simultaneously, Bangalore airport appealed to the Delhi High Court against the tribunal’s disposal of the airport operators’ plea in August. Disposing of the company’s plea on September 5, 2011, the court ordered it to file tariff-related information by September 15, which the company did Just two days after the court’s order, on September 7, 2011, the ministry sought Aera’s views on the viability and sustainability of airports under the public private partnership (PPP) model in which its approach was cited as a constraint and “not conducive for healthy growth of PPP mode airports”. This was one of the several issues pertaining to the sector discussed by the ministry with the Prime Minister on September 8.
The regulator submitted a detailed response to the ministry justifying its single till stance.
In its note for the PM, Aera said single till will ensure a fair rate of return on the equity or in other words, reasonable profit and reduce burden on the passengers. New airports at Bangalore and Hyderabad received government grants, interest-free loans and surplus land to make these airports viable. Profits from surplus land through commercial real estate development — different from non-aero revenues — would lead to “unconscionable gains” for the operator, it argued.
Aera contended single till will capture all the benefits received by the airport. It cited the example of Hyderabad, Thiruvananthapuram and Ahmedabad airports where user development fee determined under the single-till mechanism ensured at least 40 per cent less burden on passengers. At the same time, Hyderabad airport, under single till regime, earned 18.33 per cent return on equity in 2010-11, after accumulating losses in initial two years up to Rs 295 crore. Along with Bangalore airport that turned profitable in its second year of operation, Hyderabad, too, became profitable in less than three years of its opening.
The ministry is, however, opposed to capping profits, and insists it may not be the right approach. “If at all, we can have a floor on returns to attract investors. Capping returns will push them away,” a senior official said, adding the ministry may issue orders to the regulator on the till issue. “After all, if the investment in the airport sector suffers, we will be answerable for the growth of the sector, not the regulator,” the official said.
Source : Indian Express
While the Airport Economic Regulatory Authority (Aera), set up in mid-2009, is in the process of determining a fair rate of return on equity for the private operators, the ministry seems to be of the opinion that operators be allowed to retain profits from non-aero revenues such as duty-free shops in the airport building, in addition to the fair rate of return.
The simmering war has escalated now with the ministry planning to put in place an economic regulatory policy to address the apprehensions of investors. It has also moved a proposal to suitably amend the Aera Act that will empower the government to give binding directions to the regulator. Towards this end, it has armed itself with a favourable opinion from the Attorney General.
The ministry has not offered any feedback to Aera’s February 2010 consultation paper on its regulatory philosophy and its subsequent order on this philosophy in January 2011.
The order does not apply to Delhi and Mumbai airports since these had detailed market discovered price mechanism before being handed over to the GMR and GVK-led consortia, respectively.
According to a MoCA official, investors first voiced their concern in November last year during a bidders meeting for the proposed Navi Mumbai airport. “KPMG said investors were concerned about Aera’s proposal (based on the consultation paper of February
A single till is like a purse into which both aero and non-aero revenues accrue. The costs to generate these revenues are deducted from the total revenues to eventually determine what operators can charge from users. In dual till, aero revenues accrue into one purse and non-aero into another. For determination of charges though, only the purse with aero revenues and associated costs are considered.
Typically, non-aero businesses such as retail sales, car parking, food and beverages and duty-free shops generate almost 45-50 per cent of total revenues in large airports. If these are excluded while determining tariff — as in dual till — the charges for both passengers and airlines will be higher.
In Aera’s opinion, PPP projects have to essentially follow public policy principles, especially when the state (state governments, generally) extends sops such as land at nominal costs, capital subsidies and basic infrastructure for making the project feasible for the private sector.
Arguing for a dual till, private airport operators in Delhi, Bangalore, Hyderabad, Mumbai and Cochin challenged Aera’s single till order and the tariff filing guidelines at the Aera Appellate Tribunal in February. While the appeals against single till were quashed, the one against guidelines is due to be heard on October 19, 2011. The tribunal asked these airports to file their tariffs by July 31. For failing to file their tariffs, the regulator then requested the tribunal that it punish Bangalore and Hyderabad airports.
Simultaneously, Bangalore airport appealed to the Delhi High Court against the tribunal’s disposal of the airport operators’ plea in August. Disposing of the company’s plea on September 5, 2011, the court ordered it to file tariff-related information by September 15, which the company did Just two days after the court’s order, on September 7, 2011, the ministry sought Aera’s views on the viability and sustainability of airports under the public private partnership (PPP) model in which its approach was cited as a constraint and “not conducive for healthy growth of PPP mode airports”. This was one of the several issues pertaining to the sector discussed by the ministry with the Prime Minister on September 8.
The regulator submitted a detailed response to the ministry justifying its single till stance.
In its note for the PM, Aera said single till will ensure a fair rate of return on the equity or in other words, reasonable profit and reduce burden on the passengers. New airports at Bangalore and Hyderabad received government grants, interest-free loans and surplus land to make these airports viable. Profits from surplus land through commercial real estate development — different from non-aero revenues — would lead to “unconscionable gains” for the operator, it argued.
Aera contended single till will capture all the benefits received by the airport. It cited the example of Hyderabad, Thiruvananthapuram and Ahmedabad airports where user development fee determined under the single-till mechanism ensured at least 40 per cent less burden on passengers. At the same time, Hyderabad airport, under single till regime, earned 18.33 per cent return on equity in 2010-11, after accumulating losses in initial two years up to Rs 295 crore. Along with Bangalore airport that turned profitable in its second year of operation, Hyderabad, too, became profitable in less than three years of its opening.
The ministry is, however, opposed to capping profits, and insists it may not be the right approach. “If at all, we can have a floor on returns to attract investors. Capping returns will push them away,” a senior official said, adding the ministry may issue orders to the regulator on the till issue. “After all, if the investment in the airport sector suffers, we will be answerable for the growth of the sector, not the regulator,” the official said.
Source : Indian Express
