Now Boarding Indian Airports 2006

Now Boarding Indian Airports 2006

Contents

Indian Airports 5

Robust Economy

Key Industry Drivers

Business Model

Airport Development and Modernisation 8

Objectives

Investment Needs

Current Plans

Investor Considerations 11

Privatisation Strategy

Revenue patterns

Policy and Regulations

Financing

Tax Structuring

Post Transaction Integration

Privatisation Approach 15

Privatisation Transaction

Lessons learned

The Next Step 17

New civil aviation policy

Privatisation Strategy

Independent Sector Regulator

KPMG’s Global Airports Team 19

KPMG in India 20

Foreword

2 Indian Airports 2006

The India story in the global economy has been about growth. In line with thegrowth of the economy the Indian aviation industry has also seen exciting growthin the recent past and has a promising future. The estimated total passengerthroughput for all airports in India in 2005-06 grew to 68 millions from 40 millionin 2000-01 and freight tonnage from 0.80 million to 1.40 million tons in the sameperiod.

Other indicators point out that the number of trips per capita in India is 0.02, anumber significantly below China (0.09 trips per capita) and dramatically belowUnited States (2.2 trips per capita). This emphasizes the need for urgentmodernization and development of Indian airports.

The Government is committed to revamping the airport sector and hasundertaken a variety of measures. Earlier this year, the AAI has handed overDelhi and Mumbai airports to private sector consortiums under the Operations,Management and Development Agreement. The AAI also plans to develop andmodernize 35 non-metro airports, with privatization for the city side developmentonly.

While there is a marked improvement in the Indian airport sector there are stillgaps and uncertainties to be addressed, keeping in view global benchmarks.

This white paper aims at providing a prudent insight into the opportunities,concerns, plans and achievements of the Indian Airpots privatisation era.

I hope you find the paper thought provoking.

Raajeev B Batra

Executive Director - Advisory SevicesKPMG in India

Indian Airports 2006 3

The Indian economy today is witnessing an era of phenomenal growth, rapidmodernisation and the emergence of a robust constitution for sustaineddevelopment. Country's economic growth is supplemented by an increase inpurchasing capacity and an increasingly mobile young middle class. Continuingwith the economic upturn, the Indian aviation industry has also seen excitinggrowth in the recent past with a promising future. With estimated passengertraffic to reach 100 million in 2009-10 from 68 million in 2005-06, Indian airportsare pitted to become the next generation of world class airports and facilities.

Statistics also suggest that the market will continue to grow at a rapid pace inthe near future with domestic traffic in India expected to grow at a CAGR of25percent p.a. and international traffic by 15percent p.a. over the next 5 years.These are exciting times for the Indian Aviation sector and the country is taking anumber of significant steps to achieve the required airport infrastructure. Whilethe airport sector is awaiting the New Civil Aviation Policy, the Government hastaken strategic initiative to address airport infrastructure need by recentlyawarding concessions for two Greenfield and two Brownfield airports.

With the country preparing to host the 2010 commonwealth games, there is nowan indispensable need to achieve rapid development for the airport sector withina strict time line; a challenge both the Indian Government and industry areconfident of achieving.

KPMG is committed to the development of the airport sector around the worldand specifically in India. Our areas of competence which have been built overmany years include airport privatization planning, bid advisory, post transactionintegration services, corporate management & governance systems and financialstructuring.

The following report is an attempt to summarize the opportunities and challengesfor modernization of Indian airports. I hope you find the study insightful andhelpful in facilitating you with a veracious perspective on the Indian airport sector.

Pradip Kanakia

Head - Risk AdvisoryKPMG in India

Messages


India has potential to move to a new GDP growth orbit of 10percent p.a. One ofmajor constraining factors to achieving this growth rate on a sustained basis isthe “infrastructure gap”. This infrastructure gap is costing the country at least1.5-2percent growth in GDP per annum.

The investment required in India's infrastructure in the next 5 years is USD 320billion. This implies an increasing role for private sector in transport infrastructuresuch as road, rail, airports and ports as well as other infrastructure includingenergy, telecom and urban infrastructure. In airports alone there is an investmentneed of over USD 9 billion over the next 5 years.

To attract active private sector participation there is clear need for a welldesigned and stable policy and regulatory environment, developing a critical massof bankable projects and a few early success stories.

No sector reflects the dramatic transformational impact of selective privatesector participation in infrastructure as telecom. Steady liberalisation under thetelecom policy has turned India into one of the world's fastest growing telecommarkets.

Such a transformation is possible even in the airport sector through appropriatemix of public and private sector investments. Some of the critical enablingrequirements to make this happen include a new civil aviation policy, a clear andtransparent long term privatisation policy as well as establishing an independentregulator for airports.

The KPMG whitepaper :Indian Airports 2006- reviews the current scenario in theairport sector and looks at opportunities and challenges going forward.

I hope you find this useful during your deliberations on Airport Development andModernisation.

Arvind Mahajan

Executive Director and National Industry Director (Infrastructure and Government)KPMG in India

Messages

Robust EconomyThese are buoyant times for the Indianeconomy and with GDP growthexceeding 8percent consecutively overthe past two years India is set tobecome one of the fastest growingeconomies of the world.

The recent budget has established atrajectory of 10percent growth and percapita income on a purchasing paritybasis has grown 70percent since 1998to approximately USD 4360. Thisrobust economic growth is largelyattributed to the growing young Indianworking population. According toestimates, out of the total population of1.1 billion in India almost 50percent fallbelow the age of 25 years.

The acceleration in economic activityhas seen the emergence of fast pacedindustry growth, increased movementof people and goods; factorscontributing to the mammoth growthwitnessed in recent times by air traveland freight movement.

Another compelling factor is the growthin tourism driven by India's attractionsfor its natural, cultural, business,leisure, spiritual and adventure

tourism. This has further increased thedemand on air travel. According toestimates, visitor numbers areexpected to cross 4 million in 2006,which would mean a further increase indemand on the sector.

Another related aspect is theemergence and growth of low costbudget carriers. Budget carriers, insome cases are directly competingwith other traditional modes oftransportation such as railways byoffering attractive travel terms topassengers. This has a direct bearingon passenger volume and in turnaffects infrastructure requirements.

As per industry estimates, passengersare expected to increase from 39million in 2000 - 01 to 77 million in2006 - 07; and Cargo is expected toincrease from 0.8 million tonnes to1.40 million tonnes during the sameperiod. This increase along with theproposed increase in fleet sizes from271 to 482 will further warrant theneed for improved and increasedairport facilities.

A year-wise passenger traffic trend isshown in the following table:

0

20

40

60

80

100

120

00-01 01-02 02-03 03-04 04-05 05-06 06-07 07-08 08-09 09-10

Metro International Metro Domestic Non Metro International Non Metro Domestic

Pas

seng

ers

in m

illio

n

Years

As per industryestimates, passengertraffic and cargomovement in 2006-07is expected to increaseto 77 million and 1.40million tonnes,respectively.

Indian Airports - Now Boarding for Growth


Key Industrial DriversOn an overall level the economicgrowth, increased fleet size, higherincome levels of the new generationworking population and a more awaretraveler, all have a significant impact onthe need for growth in the sector.Apart from the macro determinants,there are other more specific industryfactors which suggest that the demandfor airport services will continue togrow. Some of these factors are thegrowth in inbound tourism, outboundpassenger travel, inbound businesstravel, low cost carriers and increasedcargo movements.

Inbound Tourism

• In 2005, foreign tourist arrivalsgrew by 24percent; according toWorld Travel and Tourism Council,the number of tourists visiting Indiais expected to grow at 8.8percentCAGR over the next decade

• The tourist arrivals is expected togrow on the back of increasinghealth tourism and measures takenby Indian Ministry of Tourism topromote the tourism sector in India

Low Cost Carriers

• Growth in domestic travel andtourism is expected as a result ofgreater domestic airline capacityfrom the expansion of low costcarriers

• Greater access to low cost airtravel is expected to assist demandfor business travel

Cargo

• Spurred by the strong nationaleconomic growth, India's foreigntrade grew at a CAGR of27percent in exports and 28percentin imports from 2000 to 2005

• This growth is expected tocontinue at around 15percent fornext five years, which will lead toincrease in international cargomovement

Outbound Passenger Travel

• The number of Indians goingabroad increased 16percent in2005 to 7.2 million; on the back ofrising disposable income,increasing financing options andGovernment support, the outbound

tourism is expected to continue to rise

Government Policy and Regulation

• The Airport Industry has hithertobeen under Government control.The development of the airportswould be regulated by Civil Aviationpolicy and Airport EconomicRegulatory Authority to be setup by Government of India (GOI)

Inbound Business Travel

• The FDI increased rapidly in thepast two years by over 20percentgrowth rate annually reaching USD6.7 billion in 2005; the FDI isexpected to continue grow at aCAGR of around 11percent in thenext five years

• India's software services sector,which is expected to grow at aCAGR of 18-20percent from 2005-10, will also act as significantgrowth driver for outbound travel


The Indian Airports Business Model

• Landing and Parking• Passenger Service

fees

Passenger-related

Cargo-related

• Terminal Charges• X-Ray Charges• Demurrage

Retail

• Duty Free Shops• Royalty

Property

• Land Rent• Space Rent• Trading Concessions

Others

• Car Parking• X-ray Charges• Cute Counters

30percent

70percent

Aeronauticalrevenues

Non-Aeronauticalrevenues

AirportRevenues


The Indian airport business model categorises revenue streams into two

major parts- aeronautical and non-aeronautical. Aeronautical revenues are

mainly received from airlines, passengers and cargo facilities users. On the

other hand, non-aeronautical revenues mainly come from airlines and

commercial users of the airport facilities.

The diagram shows the relationship of various revenue streams:

The Indian airports are preparing itselffor an intensive modernisationprogram. Airport development andmodernisation had traditionally neverbeen on the Government's priority listand as a result, there is a hugedevelopment gap causing congestionsand inefficiencies at Indian airports. Tomeet this huge gap and theindispensable need for reform, theGovernment is now taking severalsteps for creating world-class airportsin a reasonable time-frame.

The development of airportinfrastructure may be categorised as

(a) Airside

(b) Terminal building, car park andcargo;

(c) City side (cargo complexes, hotelsand flight kitchens)

(d) CNS-ATM equipments

Objectives Airport development in India is focusedprimarily around two main objectives:

1) Enhanced Capacity: There is anurgent need to enhance thecapacity of airports to meet thegrowing demand created by

accelerated economic growth andtourism. There needs to be enoughcapacity to eliminate/reduce landingdelays thereby reducing trafficcongestion. In addition to airsidedevelopment the capacity of theterminal and city side facility needsto be enhanced.

2) Improved Services: There is nowa compelling need to provide worldclass service to users at anaffordable cost, the services ofairports should commensurate withthe user requirements. The airportservices may be categorised intoterminal management, groundhandling, aviation services, airtraffic services, safety and securityservices.

Investment NeedsThe Committee on Infrastructurechaired by the Prime Ministerestimated an investment of INR40,000 Cr. for development of airportsduring the period 2006-07 to 2013-14.Out of the total, it is estimated thatINR 31,100 Cr would arise from PublicPrivate Partnership (PPP). Projectedinvestments from PPPs in airports aregiven in the table below:

Airport Development and Modernisation -Revamping For Growth

Airport Private Investment INR in Cr

Delhi and Mumbai 11,400

Bangalore and Hyderabad 4,000

Chennai and Kolkata 5,700

Five Greenfield airports 8,500

City side development 1,500

Total 31,100

Source: Report of the task force - Financing plan for Airports by the secretariat for the committee oninfrastructure


Current PlansThe Indian Government is committed init’s effort for development of airports andhas put forth plans for various stages ofmodernisation and investment.

The capital requirements of the airportscan be broken down into three parts:

(a) Terminal building, car park andcargo;

(b) Airside; and

(c) City side (cargo complexes, hotelsand flight kitchens)

To meet the above objectives andinvestment needs, the Governmenthas planned development options forvarious airports in India (see tablebelow).

In addition to the above some stateGovernments have initiated withMinistry of Civil Aviation (MoCA) fordevelopment of green filed airports intheir respective states.

The Government plans to award allconcessions for the below-listed workby 2012 though actual investmentswould complete by 2013-14.

The Government has already madesignificant progress on airportdevelopment plans. Out of the totalplanned work, the Government hasalready awarded Greenfield airports inBangalore and Hyderabad and handedover operations, management anddevelopment of Delhi and Mumbaiairports. A brief description of thesetransactions is given in the followingparagraphs.

Bangalore International Airport

(BIAL)

Greenfield airport at Devanahalli is on aBuild Own Operate and Transfer(BOOT) basis for 30 years at a cost ofINR1930 Cr. The airport is expected tocommence operations in April 2008.

Shareholders include Karnataka StateIndustrial Investment DevelopmentCorporation (KSIIDC) and AAI-13percent each (AAI investmentCapped at INR 50 Cr), SiemensGermany - 40percent, Unique ZurichSwitzerland and L&T India Limited17percent each.

Equity -INR315 Cr., State Support -INR350 Cr., Debt -INR1265 Cr.

Hyderabad International Airport

(HIAL)

Greenfield airport at Shamshabad nearHyderabad is being developed on BuildOwn Operate and Transfer (BOOT)basis with PPP at a cost of INR1761Cr.The airport is expected to commenceoperations in April 2008.

Development options Place of development

Greenfield airports Hyderabad, Bangalore, Goa, Nagpur,Pune, Navi Mumbai, Greater Noidaand four North eastern states

Up-gradation and development of Four Metro airportsexisting airports thru PPP

City side development of airports 35 non metro airportsincluding up- gradation of existing airports

Airside development by AAI 35 non metro airports

Up gradation All existing airports other then 35airports

Equipment and Instrumentation All airports.

The Government hasalready awardedGreenfield airports inBangalore and Hyderabadand handed overoperations, managementand development of Delhiand Mumbai airports.


Shareholders include Govt. of AndhraPradesh and AAI 13percent equityeach, GMR Infrastructure Ltd. holds63percent and Malaysian AirportHolding Berhard (MAHB) - 11percent.AAI's investment in the equity iscapped at INR50 Cr. Estimated cost ofthe Project is INR1762 Cr

Equity-INR379 Cr., State Support-GrantINR107 Cr. Int. free loan INR315 Cr.Debt-INR961 Cr.

Delhi International Airport (DIAL)

Brownfield airport project awarded as aPublic Private Partnership ('PPP')between GMR Group - 51percent,Fraport AG - 10percent, MalaysianAirport (MAPL) - 10percent, AirportAuthority of India - 26percent, IDF -3percent

By virtue of the Operations,Maintenance and Development

Agreement (OMDA) with the AAI, theairport was handed over to the DIALon May 3, 2006. The concession is fora period of 30 years of operations withan option to extend the concessionperiod for another 30 years. DIAL willshare 45.99percent of its revenue with AAI.

The first milestone for submission ofthe Master Plan has been completedin October 2006. Estimatedinvestments for the project stands atINR 5270 Cr during the period 2006-07to 2013-14

Enhanced facilities at the existingairport including development of newterminals and runways are required tobe completed by March 2010(considering that 2010 CommonwealthGames are scheduled to be in India).

Mumbai International Airport (MIAL)

Brownfield project awarded as a PublicPrivate Partnership ('PPP') betweenGVK Group - 37percent, AirportsCompany South Africa (ASCA) -10percent, BID Services (Mauritius) -27percent and Airport Authority ofIndia ('AAI') - 26percent

By virtue of the Operations,Maintenance and DevelopmentAgreement (OMDA) with the AAI, theairport was handed over to the MIALon May 3, 2006. The concession is fora period of 30 years of operations withan option to extend the concessionperiod for another 30 years. MIAL willshare 38.70percent of its revenue with AAI.

The first milestone for submission ofthe Master Plan has been completed

in October 2006. Estimatedinvestments for the project is INR6130Cr during the period 2006-07 to 2013-14

Non Metro Airports

In addition to the bigger metros, thereis a need to meet the growingdemands of travel, business andtourism at other non metro locations inthe country. The Ministry of CivilAviation has proposed thedevelopment of 35 non-metro airportsin three phases:

Phase-I (10 airports): Ahmedabad,Amritsar, Guwahati, Jaipur, Udaipur,Trivandrum, Lucknow, Goa, Maduraiand Mangalore. In case of projectspecific problems, some airports mayneed to be substituted.

Phase-II (15 airports): Agati,Aurangabad, Khajuraho, Rajkot,Vadodara, Bhopal, Indore, Nagpur,Vishakapatnam, Trichy, Bhubaneswar,Coimbatore, Patna, Port Blair,Varanasi.

Phase-III (10 airports): Agra,Chandigarh Dimapur, Jammu, Pune,Agartala, Dehradun, Imphal, Ranchiand Raipur.

The airside and terminal buildingdevelopment would be done by AAIwhile investments for commercialdevelopment of land (city sidedevelopment) of non-metro airportsshall be made by private sector.

AAI is also considering the formationof wholly owned subsidiaries forsome select larger non-metroairports.


Privatisation StrategyThe Indian Government’s currentprivatisation strategy involvesprivatising four metro, seven Greenfieldairports and 35 non metro airports (cityside development). The modalities ofprivatising Kolkata and Chennai airportsare under consideration.

The AAI is also considering the creationof a wholly owned subsidiary fordevelopment and operations of selectlarger airports. The possibility of goingin for PPP in respect of few selectedairports is also under consideration.

From the investor's perspective,though there is a huge potential forinvestment and the Government's FDIpolicy is also in place, there remains aneed for a stable and firm strategyproviding the what, the how and thewhen for airport privatisation process.

Revenue PatternsRevenue Type

The current revenue pattern ofairports in India shows that70percent of income is derived fromaeronautical activates and 30percentfrom non aeronautical activities. Onthe flip side international trendshows that the major portion ofrevenue is from non aero activities.The following table shows thepattern of aeronautical vs. non-aeronautical services in othercountries.

Aeronautical revenues are largelydependent upon passenger traffic andtariff. These factors are largely externaland beyond an airport operator's directcontrol. However, by providing qualityservices including branding of airports,the airport operator can attract more

The current revenuepattern of airports in Indiashows that 70percent ofincome is derived fromaeronautical activates and30percent from nonaeronautical activities.

Investor Considerations - Making Sure You Pack Right

0% 20% 40% 60% 80% 100%

India

Los Angeles

Paris

Zurich

Heathrow

Kualalumpur

S ingapore

Toronto

Sydney

UK

Houston

Aeronautical Non Aeronautical

Aeronautical v/s Non aeronautical Revenue


passengers leading to enhancedrevenue.

Non-aeronautical revenue stream is aniche area with huge potential forexploring revenue enhancement as therates are not regulated. There arehowever certain constraints withinwhich activities can be carried out.

Policy and RegulationsAs per the current aviation policy ofIndia:

• 100percent FDI is permissible forexisting airports and FIPB approvalrequired for FDI beyond 74percent

• 100percent FDI under automaticroute is permissible for Greenfieldairports.

• 100percent tax exemption forairport projects for a period of 10years.

The civil aviation regulations aregoverned by Ministry of Civil Aviation.

The Need for independent regulator

AAI is currently both an operator andthe regulator for airports in India andInvestors have no recourse to anindependent regulator. At the timewhen AAI is partnering with privateairport developers for providingenhanced capacity and services itbecomes imperative to have anindependent regulator.

To provide the regulatory functions, anindependent and autonomous bodyacting in a transparent and participativemanner, a bill for creation of AirportEconomic Regulatory Authority (AERA)

is currently under consideration by theGOI.

The international experience testifiesto the fact that sound regulation pavesway for successful PPP's. Whileconsidering the proposal for anindependent regulator for airport sectorin India, the Government is consideringthe approach, functions, accountability,tribunal process and other experiencesof regulators in United States, UK,Australia and other countries.

In the absence of a regulator, theMoCA is currently regulating mostaspects related to aviation. A rapid andconsistent development of airportsector would get a huge impact fromsetting up of an independent sectorregulator.

Financing Investment in infrastructure involves along term commitment. Obtainingclear financial information is importantat the pre acquisition stage. It isimportant for the investor to includeboth financial and tax structuring aspart of the overall evaluation indeciding the investment in airports.

The key considerations that theinvestor will have to keep in mind are

Restrictions by AAI on development

of airports

The Attorney General of India hasgiven an opinion to AAI for not grantinga lease to any person in respect ofairport properties for the purpose ofconstruction of independent golfcourses, business parks, high-tech

To provide the regulatoryfunctions, an independentand autonomous bodyacting in a transparent andparticipative manner, a billfor creation of AirportEconomic RegulatoryAuthority (AERA) iscurrently underconsideration by the GOI.


parks, commercial offices, leisurefacilities, commercial arcades, sportscomplexes, shopping complexes andconvention centers. According to him,these activities have no relationshipwith the functions of the AAI undersection 12 of the AAI Act.

The private sector may perceive thistype of restriction as an impedimentfor privatisation and would have agreat impact on financial feasibilities ofthe development projects. This is allthe more important in view of the factthat most of the Airports are currentlyloss making.

Modernisation of the loss making

airports

As the non metro airports are lossmaking it will be difficult to obtainprivate funding for the development ofthese airports unless they areappropriately bundled and proposed fordevelopment or supported by ViabilityGap funding (VGF). As per theguidelines on financial support to PPPin Infrastructure, Government hasoffered VGF in the form of capital grantassistance up to 20percent of thecapital cost for making these projectsbankable and to mobilise privatecapital.

Tax Structuring Availability of Tax holiday

Incentives in the form of a 10 yeartax holiday have been extended toinfrastructure facilities (includingairports) to attract investors in thisspace. These benefits are availableto developing, developing,operating and maintaining any new

infrastructure facility. The term'new infrastructure facility'commonly refers to a green fieldproject.Therefore, the issue forconsideration is whethersubstantial modernisation, up-gradation, redevelopment, etc. ofexisting airports would qualify as a'new' facility. This is especiallyrelevant as substantial investmentsare being made towards up-gradation of airport facilities.

As such, the fact of creation ofnew assets (such as new terminalbuildings, runways, taxiways,loading and unloadinginfrastructure, safety devices etc.)shall support the tax holiday claimby a Brownfield project, the issueneeds to be looked into in greaterdetail.

Non-operational income

The tax holiday is in respect ofincome derived from the businessof developing and operating anairport. There has been intenselitigation on this issue in thecontext of various eligiblebusinesses, wherein the term'derived from' has been interpretedby the Courts to mean a directnexus or relationship with theeligible business. Typically, therevenue model of the airportscomprises of a very substantial partof non-operational revenuescomprising of real estatedevelopment and retailconcessions.

For a successful claim of a taxholiday in respect of such non-operational income, it needs to be

appropriately documented thatsuch revenues merely represent amode of computation of incomeresulting from the business ofdeveloping and operating an airport.

EPC Structuring

Modernisation and construction ofairports presents exciting businessopportunities for the EngineeringProcurement and Construction('EPC') contractors. Typically, suchcontracts comprising of offshoresupply, offshore services, onshoresupply and onshore services, maybe bundled or split contracts.While split contracts provide taxplanning opportunities, sometimesbundled contracts may be moresuited for the commercialimperatives of the project owner.Single point responsibility is a keycommercial concern for the projectowner and this is often achieved ina split contract, through a wraparound agreement.

However, there has beenconsiderable litigation in pastwhere the tax authorities havechallenged the tax benefits of agenuine split structure, by treatingthe arrangement as a compositecontract.

Such adverse tax treatment mayresult in taxation of incomestreams from offshore supplies andservices. Absolute clarity incontract structuring is thereforecrucial, to bring out anunambiguous delineation of the on-shore and off-shore activities.

AOP exposure

It is common for consortiums tobid for major EPC contracts. It is


crucial that the role of eachconsortium member is clearlydefined and there are clearlydiscernible revenue streams toavoid being taxed as an'Association of Persons' ('AOP').An AOP could have potential taxexposures for the consortiummembers and contractdocumentation could play a keyrole in building safeguards againstsuch characterisation. TheGovernment in order to promoteinfrastructure development throughprivate players has given taxincentives in the form of a 10 yeartax holiday. The infrastructuredevelopment includes airports andis available for 'new infrastructurefacility'. New infrastructure facilityin terms of airports would meanonly Greenfield airports. Due to thisambiguity the airport operators whowill take up modernisation ofBrownfield airports will not get the

benefit of tax incentive. Asubstantial enabling provisionshould be created which will allowthe other airport operators to getthe benefit of tax holiday.

Post transaction integrationSome of the post-transactionintegration challenges s in case ofprivatisation of existing airports are:

Up-gradation of airport processes,

skill set and IT tools:

Airports in India lack the modernprocesses, skill sets and latest ITinfrastructure. Brownfield airportprojects involve a massive transfer ofHuman resources to the JVCs. TheJVC needs to suitably upgrade andintegrate this staff with their system.The up-gradation and integration ofemployees is one of most criticalchallenges for the private operators tosucceed.

Coordination with external agencies

There needs to be smoothcoordination with several externalagencies working at the airport such asPolice, Customs, Immigration,Environment, Animal husbandry andSecurity can pose to be one of thebiggest challenges for private airportdevelopers and operators.

License period

In an effort towards operating theairport, the airport operator needslicense from DGCA but as per thecurrent policy the license can only begranted for a maximum period of 12months at a time. As the lease termfor an airport is generally for a longperiod say 30 years, the lessee willwant the assurance that they canoperate the airport for full term of theconcessions awarded to them.


Privatisations of airports gainedmomentum post the 1980s across theworld. Significant privatisations haveoccurred in the UK, Australia andCanada among other countries. TheAustralian Government privatised mostof its major capital city and generalairports between1994 to 2003 bygiving airports to private sector on long

term leases. Though the need andconcept of privatisation remain thesame in most cases, the approach toprivatise varies from country tocountry. The following table providesbrief information on methods variouscountries across the world haveadopted for privatisations

Privatisation Approach - An International Perspective

Privatisation Transaction

Name of Country Process Adopted Other Information

United Kingdom Full Privatisation Privatisation of British AirportAuthority, responsible foroperation of 7 airports

Australia Full Privatisation 17 airports sold on long-termlease of 50 years and with anoption for additional 49 years

Columbia Build, Operate and BOT contract to build second Transfer (BOT) runway and operate both runways

at El Dorado International Airport,Bogotá

Canada BOT Private entity invited to build andoperate a third terminal at PearsonInternational Airport in Toronto ona long-term lease basis

Thailand Strategic Partner/ A strategic partner is being soughtPartial Divestiture to participate in development and Schemes operation of a second international

airport at Bangkok

Hong Kong Management Contract Private company awarded Schemes for new management contract of Kai Tak airport

India BOT and BOOT Delhi and Mumbai airportstransferred on long term lease.

Greenfield contracts awarded forBangalore and Hyderabad airports


Lessons learned Extent of Privatisation

There are two approaches toprivatisation which help determine thespread of the privatisation process:

The complete privatisation of airportsis achieved when the airport involve anextensive degree of private controlover virtually all aspects of airportplanning, design, finance, operations,pricing and access.

In case of airports that have beenprivatised but remain under the controlof Government, the airports are unableto set their own standards ofperformance, price in the market andcannot restrict the access to theirservices.

In the privatisation process, to have acollaborative relationship, theGovernment should act as a partner fordevelopment of airport businesses.

Process of privatisation:

The privatisation process in case ofGovernment managed airports isgenerally time-consuming becausegovernmental operations exist in aweb of procedures and practices. Ittakes time and care to untangle theserelationships so that a particularoperation can be sold or otherwisetransferred to private operation.

For the countries where there isextensive experience in contracting forprivate investment in or operation offacilities, new privatisations canhappen in relatively less time.

The privatisation efforts should focuson incremental changes and thesechanges should be thought out andtested carefully to determine whatmodifications result in better overallchanges.

In the privatisation process,to have a collaborativerelationship, the Governmentshould act as a partner fordevelopment of airportbusinesses.


While the process of accelerating themomentum and covering the gaps isnow becoming exigent, the IndianAirports Industry is well on its way tobecoming a part of the big league inthe global aviation arena.

The key imperatives for India toachieve a sound privatisation processare:

The new civil aviation policy

These are exciting times for theaviation sector in India and passengertraffic and freight movement is onperpetual rise. This makes it equallyimperative to reinforce and developairports infrastructure. The airportsector is looking for an approval ofnew civil aviation policy, which ishopefully expected to address amajority of the challenges/ bottleneckswhich are faced during the privatisationprocess including setting up ofregulator for development ofindependent and robust regulations.

Privatisation strategy

It will also be helpful for the privatesector to position them if theGovernment formulates andannounces clear and transparent long-term privatisation strategy.

Independent Sector Regulations

Considering the fact the growth ofinfrastructure is directly linked with thepossible economic growth, the presentGovernment is determined andfocused to do everything that helps thedevelopment and modernisation ofairports in India.

The Next Step - Riding the Jet Stream


Airport Development plan - 2006-07 - 2013-14


Jammu

Amritsar

Chandigarh Dehradun

New Delhi

AgraJaipur

Udaipur

Lucknow

Varanasi

Khajuraho

Bhopal

Indore

Vadodra

Ahmedabad

Rajkot

Patna

Ranchi

Kolkata

Bhubaneswar

Raipur

Nagpur

Aurangabad

Pune

Mumbai

Vishakapatnam

Hyderabad

Goa

Agati

Mangalore

Coimbatore

Madurai

Trivandrum

Trichy

Bangalore Chennai

Guwahati

Dimapur

Imphal

Agartala

Port Blair

Mergers and acquisitions

Due Diligence

Financing and structuring

Valuation

Economic regulation

Level of service

Strategic and market assessment

Traffic forecasting

Facilities and capacities

Financial management

Commercial development

Privatisation and trade sale

Alternate Service Delivery (including DBOF,management contract and other schemes)

Bid preparation

Bid evaluation

Benchmarking and case studies

Performance measurements

Governance

Assets and property

Accounting and Taxation

Human resource

Our Services

The World of KPMG’s Global Airports Team


The member firms of KPMG International in India were established in September1993. As members of the cohesive business unit that serves the Middle East andSouth Asia (KPMG's MESA business unit), they respond to a client serviceenvironment by leveraging the resources of a global network of firms, providingdetailed knowledge of local laws, regulations, markets and competition. Weprovide services to over 2,000 international and national clients, in India. KPMGhas offices in India in Mumbai, Delhi, Bangalore, Chennai, Hyderabad, Kolkataand Pune. The firms in India have access to more than 1500 Indian and expatriateprofessionals, many of whom are internationally trained. We strive to providerapid, performance-based, industry-focussed and technology-enabled services,which reflect a shared knowledge of global and local industries and ourexperience of the Indian business environment.

KPMG in India

• Automotive (includingauto components)

• Textiles• Pharmaceuticals (e.g Rx

and OTC, clinicalresearch, medicalequipment, tertiaryhealthcare)

• Chemicals

• IT enabled services/ BPO• IT and software services• Telecommunications• Multimedia content

broadcasting anddistribution

• Radio broadcasting

• Food and beverages (e.gbiscuits, snacks, softdrinks)

• Consumer electronics(e.g television, watches,electrical equipment)

• Retail

• Banking• Non-life Insurance• Re-insurance• Life Insurance• Asset Management• Trading

• Oil and Gas• Electricity• State policies• Construction (e.g civil

engineering)

Information,Communication and

Entertainment

ConsumerMarkets

IndustrialMarkets

FinancialServices

Infrastructure andGovernment

KPMG India’s Lines ofBusiness (LoB) Expertise

Samples of recent experience…


Contact us

Pradip Kanakia

BangaloreMaruthi Infotech Centre11/1 & 12/1, East Wing, II FloorKoramangala-Inner Ring RoadBangalore - 560 071Telephone: +91 80 4176 [email protected]

Raajeev B Batra

MumbaiKPMG HouseKamala Mills Compound448, Senapati Bapat MargLower ParelMumbai 400 013Telephone: +91 22 3983 [email protected]

Narayanan Ramaswamy

ChennaiKPMG, Wescare Towers1st Floor, 16 CenotaphChennai 600 018Telephone: +91 44 3984 [email protected]

A Vishwanath

HyderabadII Floor, Merchant TowersRoad No. 4, Banjara HillsHyderabad 500 034Telephone: +91 40 2651 [email protected]

Gurvinder PS Arora

Delhi4B, DLF Corporate ParkDLF City, Phase IIIGurgaon 122 002Telephone: +91 124 307 [email protected]

in.kpmg.com

The information contained herein is of a general nature and is not intended to address the circumstances of anyparticular individual or entity. The content provided here treats the subjects covered here in condensed form. It isintended to provide a general guide to the subject matter and should not be relied on as a basis for business decisions.Although we endeavour to provide accurate and timely information, there can be no guarantee that such information isaccurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon suchinformation without appropriate professional advice after a thorough examination of the particular situation. Specialistadvice should be sought with respect to any individual circumstances.

KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are affiliatedwith KPMG International. KPMG International provides no client services. In addition, not all KPMG member firms areauthorised to perform legal services, and those that are so authorised may do so only in their local regions.

© 2006 KPMG, an Indian partnership and a memberfirm of the KPMG network of independent memberfirms affiliated with KPMG International, a Swisscooperative. All rights reserved. Printed in India. KPMGand KPMG logo are registered trademarks of KPMGInternational, a Swiss cooperative.

Date post:	13-Mar-2016
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Now Boarding Indian Airports 2006

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