A PROJECT ON

KOCHI AIRPORT –PPP MODEL STUDY

SUBMITTED BY :

SANKHA GHOSH

1 MBA –B

1020131
Preface:

India ranks low on governance and a PPP structure has the advantage of combining
better governance with effective implementation and delivery systems. It enables the
Government to shift its focus from controlling cost to monitoring delivery standards.

India will need investment of over $500 billion up to fiscal 2011-12 to upgrade its
infrastructure if it wants to maintain close to 9 per cent growth, the Finance Ministry’s
annual Economic Survey 2007-08 had noted. Numbers aside, India’s constraints in
infrastructure are obvious in our daily lives — evidenced by clogged airports, poor roads,
inadequate power and delays at ports.

The requirement of the hour (and for many more to come later) is a good system
through which every rupee spent on infrastructure derives maximum value, minimizing
spillage. Fortunately, the solution is also at hand: Governments around the world have
used public-private partnerships (PPPs) as a means for improving their service delivery
across infrastructure(as seen in UK).

The 9th largest aviation market in the world is India. Taking the help of the statistics
from the Ministry of Civil Aviation, approximately 29.8 million passengers traveled
to/from India in 2008, showing a surge of 30% from 2007. The prediction stated that
international passengers will touch 50 million by 2015. More opportunities in the
aviation industry in India are likely to make way for about 69 foreign airlines from 49
countries.

The liberalization of the Indian civil aviation industry began in 1986 with
the introduction of the Air Taxi system to boost the development of
tourism. The announcement of a new Airport Infrastructure Policy in
November 1997, gave a boost to public private participation.

Cochin International Airport is the first private venture in the history of

Indian civil aviation. The Rs.2.3 billion project has taken six years to
complete. The airport is owned by Cochin International Airport Limited
(CIAL), a public limited company in which the Government of Kerala is the
single largest shareholder.
Introduction:

PPP in Airport Infrastructure:

Indian airports were managed by Civil Aviation Department, Government of India, till
the creation of International Airports Authority of India (IAAI) in 1972 and National
Airports Authority (NAA) in 1986.

In 1995 Airports Authority of India (AAI) was established by merging both IAAI and
NAA by an Act of Parliament –The Airports Authority of India Act in 1994 –for better
and efficient management of all airports in India by a single Authority.

There are 449 airports/airstrips in the country. Among these, the AAI owns and
manages 92 airports and 28 civil enclaves at defense airfields and provides air traffic
services over the entire Indian airspace and adjoining oceanic areas.

Uniqueness about a PPP project:

First and foremost, it brings accountability and transparency in government spending.

In comparison with other countries, India ranks low on governance and a PPP structure
has the advantage of combining better governance with effective implementation and
delivery systems.

It enables the Government to shift its focus from controlling cost to monitoring delivery
standards. It also allows better assessment and focus on whole-life solution for the
construction and maintenance of the assets rather than a piecemeal approach to
construction and operating costs.
Future Trends:

Considering the forecasts made by different organisation and taking a reasonably

pragmatic view, the expected traffic scenario upto the year 2010-11 has been projected
by the Foundation for Aviation and Sustainable Tourism. These projects have been
extended upto the year 2016-17 by AAI.

Projected Domestic Traffic Upto 2013-2014

Domestic Percent International Percent

Passengers increase Passengers increase
(In lakhs) (In lakhs)

2009-10 341.46 233.33

2010-11 365.36 246.51

2011-12 390.93 259.70

2012-13 414.39 6.0% 272.20 4.9 %

2013-14 439.25 285.78

  Forecast upto 2010-11 based on study by "Foundation for Aviation and
Sustainable Tourism - April 1996".)
 Forecast from 2012 is taken at the rate of 6% based on a report of AAI.

During the next twenty years, there is a quantum jump in the projected traffic - four
times in passenger and six times in cargo traffic. It will, therefore, be necessary to take a
host of measures so that the ground infrastructure keeps pace with the growth of traffic.

ICAO forecasts predict worldwide growth in air traffic at 5% a year or doubling in the
volume of traffic once in 14 years. The Asia Pacific region is set for higher than average
growth. According to an AUTC study, it might account for more than 50% of the world
air traffic by the year 2010. It is imperative that our procedures improve and facilities
grow to match the increase in volume of traffic.

It is expected that adequate capacity will be deployed by the operators to meet the
growth cargo traffic requirements in the years to come. Capacity induction in this sector
is expected to be determined by market forces. The only aspect which needs to be
planned and developed is the infrastructural facilities at the airports to handle various
types of cargo traffic with efficiency and speed.

The PPP model:

Looking at the vast possibilities in PPP, this model of funding is planned for ‘softer
areas’ of infrastructure like healthcare, education and other local services. There are
even efforts to develop slums in urban areas through the PPP route. Currently,
infrastructure investment works out to about 4.6% of GDP. At this rate, in the next five
years, there will be a gap of $130 in the investment targets for the sector. It is feared that
unless infrastructure investment levels increase to 8% of GDP, the 9% GDP growth
expectations cannot materialize.
In infrastructure projects, typically, funding requirements are huge and gestation
periods are long. A review of projects funded by the World Bank and other major
international lending agencies reveals successful use of PPP in different parts of the
world. The partnership has taken different forms: management contracts, leasing,
design-build-finance-operate, build-operate-transfer concession, and divestiture and
build-own-operate. Sometimes, a PPP may be structured as a joint venture, with control
and management resting with the private sector. Ultimately, however, there are only two
sources of revenue: consumers, through user charges, and taxpayers, through subsidies.
Private financiers also need to be repaid with adequate returns.

A wide array of infrastructure areas was covered under the scheme. The projects have
been expected to provide a service against payment of a predetermined user charge. To
receive viability gap funding, which is restricted to 20% of the project cost with scope for
another 20% grant, a project must prove that the viability gap cannot be eliminated by
raising user fees, increasing the project term, or reducing capital costs, and that the
project is based on normal standards and specifications.

The popularity of PPP is on the rise. Many southeast and East Asian countries have
extensively used this route to develop infrastructure. Different sectors, including
telecommunications, roads and drinking water, have benefited from this. Projects
substantially funded through user charges have found wide acceptance even in China.
While India always recognized the potential of PPP, such investments have been
proportionately less.

One of the best cases of a PPP involving an innovative approach is that of the Cochin
International Airport that became operational in 1999.

The Kochi Airport - a new initiative:

Cochin International Airport was set up with equity participation of a large number of
NRIs from Kerala as well as of the state government, among others. The venture was
incorporated as a company, with the Cochin International Airport Society formally
spearheading its birth. Its structure gave the company some reprieve against political
intervention despite the government nominees (mostly ministers) on the board and the
chief minister’s presence as chairman.

The project was partially funded through borrowing, while both public and private
sector companies that subsequently became service providers at the airport also
supplied capital in the form of interest-free deposits. When the Airport Authority of
India expressed its inability to fund a new airport at Cochin, VJ Kurian, its founding
managing director, suggested funding it first through public deposits and later through
public equity participation.
The airport management showed tremendous determination, leadership, management
capabilities and financial discipline. In the early days of implementing the project, in
fact, the airport was mired in controversy and massive agitations by landowners and
evictees. If it wasn’t for the determined stand taken by the management the project
could not have been completed in such a limited time and at minimum cost. The airport
has been running at a profits and paying dividends from its early years.

The experience of Cochin International Airport reveals a formula for successfully

implementing projects on PPP within short time periods, at significantly lower cost and
with ample profit. Success is assured when the project is well conceived, its
implementation is properly planned, is funded through imaginative but cost-effective
means, is led by someone with vision, and it is operated with dedication to basic
commercial objectives. By following the Cochin International Airport model in every
segment, we can pull infrastructure development out of its current dismal state.

Details of the project:

Cochin International Airport is the first green field airport in private sector in India,
planned and constructed from scratch and capable of expansion on a modular basis.
Around 1500 acres of land was acquired for the airport and the airport has been
constructed with facilities on par with International Standards.

The total project cost for the airport is around Rs.315 Crores financed through a paid up
equity capital of Rs.85 Crores and term loan of Rs.218 Crores. The balance has been tied
up through interest free security deposits from various airport service providers. The
project cost is very low compared to the cost of other similar airports.

Cochin is strategically located in the international air map. Three major international air
routes intersect near Cochin. The 3400 meter long runway of Cochin Airport is capable
of handling any type of aircraft including the most modern JUMBO. There are two
separate centrally air-conditioned terminals for domestic and international operations
measuring a total area of around 4.5 lakh sq.ft. The integrated cargo complex at the
airport is capable of handling perishable/non perishable and dangerous cargo.
CIAL commenced its ‘Duty Free’ operations in May 2002. Cochin Duty Free Shop is
managed and operated by the UK-based Alpha Retail, one of the renowned Duty Free
Operators in the world.

Air India is responsible for the ground handling operations at the airport. Bharat
Petroleum Corporation Limited operates a state-of-the-art Hydrant Refueling System
for the aircrafts calling at this airport.

The airport company has at its disposal, around 400 acres of land in prime location for
commercial deployment. A comprehensive plan to develop an airport township with all
facilities to enable the company to earn substantial non-aeronautical revenue is
underway.

The CIAL model:

The entire text of white paper(a consulting process initiated by AERA) looks into Indian
airports basically into two categories, one Government Controlled AAI airports and new
generation PPP airports constituted based on a concessionaire agreement between a
Pubic body and a Private entity. Even though CIAL being a PPP airport, it is not formed
or functioning based on any concession agreements unlike other PPP airports. In
fact, Cochin International Airport was formed as  separate Company  under Indian
Companies Act 1956 with an objective of build, own , and operate  an  airport at Cochin
and develop other  supporting aviation infrastructures. Its 26% of the equity shares  are
held with  Government of Kerala and 74% of equity shares are held with 17000
shareholders consisting of NRI and General public. At that time , Government of India
has approved such a unique project  to ensure   mobilizing of entire project finance by its
own  resources and in turn Government  allowed to collect  aeronautical charges as per
then existing regulations and  allowed collection of  non  aero nautical charges as per
CIAL ‘s policies  for ensuring adequate return on investment which was intended to
ensure  a new environment and confidence building mechanism for a unique airport
infrastructure PPP model.

The owning , developing and operating of this airport has been completely market
driven all these years. Few instances are quoted as follows:

 ·         Idea of airport itself conceived due to market demands ie, constant requests
from the NRI passengers for an International airport in this locality.
 ·         We have purchased entire 1300(approx) acres of freehold land for the
airport purpose. Extensive rehabilitation schemes have been executed by CIAL
including providing direct and indirect jobs to all evictees.
 ·         The entire project was developed and put to use in the most cost effective
manner taking into consideration the capacity of airport users to pay for it
without compromising the quality of the infrastructure.
 ·         The entire business process were developed and built up through open
competitive bidding process, to get the best at the least cost.
 ·         Even after the completion of project, the day to day operation of the airport
has been undertaken through market driven competitive factors.
 ·         Fixation of tariffs/rates both aero /non aero was done through pure market
mechanism, except adoption of landing, parking, and navigation charges at par
with AAI.

So, a request is made to make the PPP airports without any Concession/OMDA
agreement shall be treated as a subclass within the private airports and whereever
policies are framed on issues which are applicable/comparable to all private airports, we
may also be treated at par with them.
Conclusion:

PPP in infrastructure was envisioned by the government to harness the power of

technology, flexibility, project financing and execution capabilities of private
infrastructure companies. The PPP model has not only helped the government share its
burden of developing capital-intensive infrastructure projects such as power, road,
ports, airports, oil & natural gas etc which are the lifeline of any developing economy,
but it has also allowed the government to retain its control over the national assets being
built by private entrepreneurs in such joint ventures. In the Indian scenario, where there
is rampant red tape, the PPP model is a boon for the general public and the overall
development of industry. With the emergence of PPP projects, instances of time and
cost overruns have drastically reduced with most of the projects being completed either
on time or even ahead of schedule.

Public Private Partnerships (PPP) are critical to enabling massive infrastructure

creation in India. They are unavoidable. That PPPs are required to drive our country’s
growth and creation of infrastructure is undeniable. The idea of PPP was born as a way
to ensure private capital flows and management capacity to augment and complement
public capital and public investment.