Bottling bottlenecks

By Kapil Kaul
CEO (Indian Subcontinent & Middle East), CAPA

There are three main needs for aviation infrastructure in India today - an established vision and accompanying roadmap for the next 10 years, time, and money.

The vision

• Working with the industry and establishing a way forward will be a major aid in developing what is otherwise in danger of becoming a gridlock system. The industry is so complex and multi-faceted that it requires a long lead time for each of the parts to coincide.
• Having a clear and transparent programme to move forward is essential to removing roadblocks
• CAPA's outlook for the scale of India's aviation sector in 2020 is such that the industry will require a completely transformed approach and way of thinking.

Time

The development of aviation in India is being seriously constrained by drastically inadequate infrastructure - airport, road access and airways systems. Solving this issue is important in terms of time, because every day that is lost in developing new infrastructure is worth millions of dollars to India's bottom line.

The fundamental issue is that the system was allowed to stagnate for decades, so that when the recent growth surge occurred, there was neither hardware nor plans in place. The government has done wonders in the past three years - moving to privatisation of airports, merger and restructuring of the once proud national airlines. But the system is again at breaking point.

We need to declare a state of economic urgency by introducing special procedures to fast-track aviation infrastructure development. Otherwise, the current system will simply not be able to deliver fast enough.

Money

For foreign investors, two main problems exist - the restrictive regulations on investment in the aviation sector and the need for certainty of process and policy in airport privatisation. The traditional reluctance to admit foreign funds to local entities has had clear outcomes:

• Under-investment in Indian companies
• Dominance by foreign companies in international markets
• Shortage of consumer options, and
• Loss of economic opportunities.

In a sector where the government cannot deliver the large levels of funding required - and where that shortfall prevents all the flow-on financial opportunities for tourism and other industries - there is a strong message:

• Admit foreign investors, and
• Permit higher levels of foreign investment in aviation enterprises.

This means relaxing rules on foreign ownership in a structured way; but with a clear path ahead and real, achievable targets for expansion. There is no simple way ahead. And no other country has in the past been confronted by such a bottleneck, with an eager travelling public. It is not easy, but, with will and vision it can be done.

The agenda for the long term is to improve the industry and investor climate. Some specifics which will assist in improving the investor climate are:

(1) In the airport privatisation area:

• A long term (five-year) strategic plan is needed to govern airport development post 2010
• Above all, provide a fast-track development mechanism for ensuring that airport developers can move ahead quickly to deliver the infrastructure essential to allow traffic growth
• Reduce the pre-development risk in airport privatisation. This could involve an incubation period, particularly in the light of delays which are almost inevitable in gaining various clearances and sanctions required (meanwhile working to accelerate the processes)
• Provide tax holidays, preferential interest rates and other financial support, to generate confidence in the market, particularly in sectors such as non-metro airports
• Install a clear regime for aeronautical and non-aeronautical pricing
• Provide a transparent bidding process with clear structuring of the bid process and careful monitoring at all stages
• Establish a stable revenue regulatory regime. Investors need a predictable investment horizon. This also applies to the airline regulatory system, unless it is possible to predict the growth rate and profile of the airline industry, projecting cash and profit flows for the long term becomes impossible
• Address short and medium term resources issues. The lack of skilled and experienced manpower is quickly putting a serious brake on development
• So that all of the regions can share in the aviation growth, there is a need to fast-track the modernisation of 35 non-metro airports. Lack of airport infrastructure is a major issue in developing regional connectivity and providing it quickly will not only bring economic benefits for the receiving regions, but also contribute greatly to social and political integration
• Air traffic control systems also need to be addressed as a matter of great urgency. Here, both human resources and infrastructure are in critical short supply. As a short term measure at least, foreign support should be used as widely as possible
• As a matter of priority, the Air Navigation Services provider should be corporatised and adequately funded. Procedures and funding should recognise that exceptional one-off measures are needed to give the system a generation leap
• Safety and security related issues need to be addressed, to ensure a viable longer term environment.

(2) In the airline sector:

• Investment by foreign airlines in Indian airlines should be permitted up to 49 per cent (as a first step, permitting 26 per cent would still generate some benefits). This would stimulate growth, financial viability and global connectivity. Several major international airlines have already expressed interest in partnering Indian carriers
• Regulatory restrictions on international network expansion for domestic airlines should be relaxed, in an accelerated and perhaps phased manner
• A high level procedural group should oversee airport and ATC costs and taxes, until formal regulation is put in place. This would include for example overhaul of industry-negative fiscal features such as withholding tax on aircraft leases
• Tax incentives and other encouragement should be provided to help address the constraints/costs imposed by the shortage of industry skilled resources
• Another area that is slipping under the radar but which can have serious implications on the economy is the extreme underinvestment in cargo and logistics infrastructure.