BAILing out of BIAL?

SHUTTING DOWN HAL AIRPORT

BAILing out of BIAL?

URL for this article http://citizenmatters.in/articles/view/88-BAILing-out-of-BIAL?

Pressure on the government to keep Bangalore’s HAL airport running is beginning to gain ground. While much of the angst is over traffic snarls, the arguments are substantive and deserve attention.

Even as the launch date of Bengaluru International Airport is nearing, a storm has risen over closure of the HAL airport. A public interest litigation petition filed by G R Mohan, B Krishna Bhat, R K Mishra and others in this matter, was admitted by the Karnataka High Court on Monday, Meanwhile, seven unions representing Indian and Air-India employees have given notice for a nation-wide strike against closure of the airports in Bangalore and Hyderabad.

The government on it’s part is committed to close the current airport. It has signed a concessional agreement (CA) with BIAL where one of the terms is to not allow any other airport within 150 kms radius of the new one. As per the agreement, HAL airport is to shut down operations on 30 March when the new airport becomes operational.

Bangalore City Connect, an initiative with membership from the IT/BT industry to address Bangalore’s infrastructure issues and the Bangalore Chamber of Industry and Commerce (BCIC) have proposed that the new airport share a traffic of about 4 million passengers with the current HAL airport to avoid congestion at the new airport. The motivation for this proposal is that BIAL cannot handle the projected traffic for 2008-9 anyway, because of rapid growth. In its revised estimates, BIAL has projected a traffic of 13.2 mn for 2008-09 and 23.6 mn for 2013-14. At the time of commissioning the project BIAL had estimated a traffic of only 10.1 mn passengers by 2010 and 13.9 mn by 2015-16.

Speaking to Citizen Matters, Devesh Agarwal, who heads the BCIC Committee on Infrastructure and is a member of the BCC, explained that sharing traffic with HAL is not going to affect BIAL revenues as the new airport will still function at 70 per cent capacity in the first year and over 80 per cent capacity from the second year. This is fantastic by industry standards, he argues. With both the airports functioning, the BCC estimates the traffic to reach 30.5 mn by 2013. Agarwal made a detailed presentation at the Center for Public Policy, IIM-Bangalore recently where he made out a case for keeping the HAL airport open.

“Going by the rate of growth of air traffic in Bangalore, which is much higher than what they had projected initially, BIAL is going to reap a windfall. They know it and is therefore unwilling to give it up,” says Agarwal. He is emphatic that they are not against BIAL. “We recognize their role in Bangalore’s future. But they should also get the goodwill of the citizens. Their high priced approach is going to have an impact on Bangalore’s economy as a whole,” he adds.

The Bengaluru International Airport is scheduled for takeoff on 30 March 2008. BIAL Chief Executive Officer Albert Brunner, in statements made to the media, is confident of the airport being fully functional by end of this month.

BIAL is the consortium representing Siemens, Larsen and Toubro, Unique Zurich Airport, the Karnataka State Investment and Industrial Development Corp (KSIIDC) and the Airports Authority of India (AAI) which has developed the new airport.

Among them, Siemens holds the maximum equity stake of 40 per cent, followed by 17 per cent each by Larsen and Toubro and Unique Zurich. The balance 26 per cent is shared equally by AAI and KSIIDC.

Asked to explain how, he says, “Not just passengers but cargo will also get affected since it is an integrated operation. Most of the perishable and other cargo that uses air transport will be impacted by the higher prices they have to shell out. This is eventually going to be passed down to the consumers.”

As things stand, unless the government renegotiates the CA there seems no way it can back out of the deal now without breach of contract. Not unless BIAL is willing to take a relook at the clause in the public interest.

There may be scope for renegotiation of the contract. The argument against closure of HAL airport hinges on the fact that the passenger traffic flow calculated by BIAL and presented to the government, was grossly underestimated. The first phase of BIAL, initially being designed to cater to a traffic flow of 5 million passengers has been modified to accommodate 10.3 million passengers, after the Civil Aviation ministry, realizing the higher-than-expected growth, mandated the changes. This modified capacity too is inadequate to handle the volumes expected this year itself.

On the other hand, HAL airport reportedly recorded a 33 percent growth in the nine-month period April-Dec 2007. According to latest reports, HAL airport registered a traffic flow of 9.93 million passengers during this period. It is given this rate of growth that the 2008-09 traffic could actually end up at 13.2 million, which, as noted earlier, places BIAL short of capacity. Many traffic forecasts, still missing the target

The traffic forecast which forms the basis of building any new airport, was in this case undertaken by two agencies; Simat, Helliesen & Eichner, Inc. (SH&E UK), appointed by KSIIDC (Government of Karnataka) in the year 1999 and later by Lufthansa Consulting (LHC). LHC is an independent subsidiary of the Lufthansa Aviation Group which also owns Lufthansa Airlines. SH&E had projected a traffic of only 8.4 million passengers by 2020. BIAL which was one of the bidders for the project, appointed LHC in 2002 to revalidate the SH&E traffic forecast. LHC had projected a traffic of over 8 million by 2010.

In the meantime, some key policy changes happened after 2002. In 2003 the then Vajpayee government announced an open-skies policy for ASEAN countries. What was started by the NDA government was then taken up by the UPA government in 2004, when a new and more liberalized aviation policy was framed. In April 2005 the open-skies policy was extended to the US by the Civil Aviation ministry. It must be assumed that while extrapolating passenger traffic growth, any study would take these factors into account.

By the time BIAL began work on the new airport, it was July 2005. BIAS says that it appointed LHC once more during that year to update the traffic forecasts and develop planning parameters. Yet, despite the rapid changes in policy, LHC seems to have stuck to it’s earlier estimates and projected a passenger traffic of only 8.5 to 10.1 million by 2010 and 11.3 to 13.9 million by 2015.

Furthermore, “The BIAL deal was signed during the NDA regime and it was said that HAL will be operating side by side. But, as soon as UPA government came to power it had to sign one more agreement about the closure of HAL airport, as UPA didn’t want to have any roadblocks in its policy on infrastructure,” says Rahul Chauhan, an aviation enthusiast and analyst. He blogs at review-airlines.blogspot.com.

In reality, air passenger traffic at Bangalore has shown accelerated growth rate back to back. The HAL airport catered to 4.1 million passengers in 2004-2005, 5.6 million passengers in 2005-06 and 8.1 million in 2006-07. Meanwhile, BIAL’s projections for 2015 is expected to be breached next year itself!

Concessional Agreement

One explanation for underestimating these figures could be that it gives BIAL more room while negotiating with the government for concessions. For example, let’s take the User Development Fee (UDF) that BIAL has been allowed to charge passengers.

In his presentation, Agarwal points out that BIAL will be collecting a UDF of Rs.758 and Rs.1073 for domestic and international passengers respectively. This includes a 12.24 per cent service tax but not the Passenger Surcharge Fare (PSF) levied by the government which is another Rs.225 being currently collected from both categories of passengers. Of this surcharge Rs.70 will go to the operator, in this case BIAL. So the total increase under this head for the passengers works out to a whopping 337 percent and 477 percent respectively!

“Based on the now revised traffic estimates for 13.2 million for 2008-09 and 21.4 million for 2012-13, the operator will collect a cool Rs.523-856 crores every year just from user charges. The total cost of the project is Rs.2500 crores which can be amortised in flat four years,” points out Agarwal.

This is unheard of since infrastructure projects of this size usually take anywhere upwards of 15 years to break even. While the business logic favors BIAL, the government has failed to ensure that it’s not biased against users of the airport. This is one of the concerns being voiced by citizens.

Member of Parliament from Karnataka, Rajeev Chandrashekar, speaking to leading financial daily Business Standard, on Monday drew a parallel to the Enron fiasco. They too had a contract with the Maharashtra government which involved a high cost of power. Citizens opposed it and the government had to eventually renegotiate the power purchase agreement. Countering the argument by BIAL that there should be no civil airport within a 150 km radius of the new airport, he asked them to be sensitive to the needs of the community they wish to operate in as a business.

It must be remembered that with Enron there was also a “Counter-Guarantee Agreement” with the Center. In the end of course the company itself imploded under the burden of its ambitions.

If you look at the concessions given to BIAL in totality, including the development rights over approximately 4,000 acres of land made available for the project, it starts looking like a huge subsidy. It must also be noted that the reported CA terms are similar to the ones granted to the consortium led by GMR group which has developed the new Hyderabad airport. There, the land allocation for the project is 5,495 acres.

Chauhan, for his part, disagrees with such contracts. “If there’s a requirement, there should be another airport for the city. For, Bangalore I strongly believe that it indeed requires HAL along with BIAL,” he says. He wonders whether the Aviation Ministry is helping it to grow or is it trying to halt the growth of the industry, with such kind of policies and agreements.

Accessibility – a rough ride ahead

Sheer economics apart, there is also a serious question mark on smooth access to the airport given the traffic and road conditions in Bangalore. The estimates of time taken by passengers from the city to reach the airport ranges from anywhere between 90 minutes to over 3 hours depending on where one is located. In a run from the city press club to the new airport at 7.50 am on Friday last, it took media personnel about 90 mins to reach the airport and 155 mins back into the city. Currently, however, the streamlining of Bellary Road is still on and the road-widening project, is not yet complete.

Frequent fliers, IT and BPO firms and other corporates are going to be hit the hardest, especially those located in the Electronic City and ITPL belt. For them it’s not only more operating costs but also a logistics nightmare of just trying to figure out how to get their staff to and from the airport in time.

All said, Agarwal makes a strong case for keeping the HAL airport operational. Given that every estimate of air traffic over the past several years has proven to be wrong by a significant margin, how can we ensure that BIAL will actually service the true demand in the city, he asks.

“It is hard to conceive shutting down a fully functional infrastructure like HAL airport and then discovering that demand outstrips supply, because little can be done at that time,” he flatly points out. �

Samuel Jacob

12 Mar 2008

Samuel Jacob is a Bangalore-based journalist. He writes on urban infrastructure, planning and development issues from a ecological perspective. (Note: Statistics used in this report has been culled from analyst presentations, DGCA statistics, and media reports over the past few years.)