In the post 1991 era, there has been a conscious effort to cut down the subsidy bill of the government. But some reports are suggesting that this exercise has largely been futile with the subsidy bill almost doubling in the past five years.
The Bangalore International Airport project has been in the news for a long time for its imminent launch, but recently, there has been an effort to speed up this process. The private consortium that won the bid to build the airport has threatened to pull out unless all concessions and agreements are not signed immediately. This article attempts to uncover and quantify a key subsidy element (also called concession), estimate this bill, and explore the legal and compensation regimes that make this possible.
The need for a larger international airport in Bangalore is hardly in doubt. The Valluri committee, which submitted its report in as far back as 1989, suggested four possible methods to address the growing congestion at the present HAL airport. They include:
1. Renovate the present terminal extensively
2. Expand/update the present terminal and simultaneously the apron on the air side.
3. Build a new terminal on the other side of the runway.
4. Shift the location and build a new airport.
The first and the second methods have been done in various measures since then. In pursuance of the fourth item, the state government acquired land in Devanahalli -- for the construction of a new airport. Despite the fact that the third option not being actively pursued, we assume that the recommendations 1-3 would not have been able to service the needs of city anyway, and therefore it is vital to have a new airport at Devanahalli for the city of Bangalore. Given that, let us examine some details of the Devanahalli project.
Bangalore International Airport Ltd (BIAL), the company that is to execute the project, is a consortium of the Government of Karnataka, Airports Authority of India, Siemens and Zurich airport. The airport is estimated to cost Rs. 1,200 crores (1 crore = 10 million). The Government of Karnataka through contribution in land (valued at approximately Rs. 375 crore) has an equity of 13%, with the Airports Authority of India with a similar equity stake in the project. While L&T and Zurich Airport will have a 17% stake each, the majority of the shares will be with Siemens Project Ventures at 40%.
Recent reports in the print media indicate that the state government has saved about 400 acres of prime land which it has reserved for development by its agencies. The total land requirement for the new airport has therefore been scaled down to 4,050 acres.
Even, after this savings of prime land, a quick comparison with other airports gives an idea on the shallowness of the land savings claim by the Government of Karnataka. To operate at a passenger capacity over 1400% of the proposed new airport at Devanahalli, the total land used by Londons Heathrow airport is about 35% less. The figures are similar for both Hong Kong International and Singapore Changi Airport. Any person who has travelled here will agree that these airports are spacious and comfortable.
For less than twice the passenger handling capacity and the same number of runways, why does Bangalores proposed airport require substantively more land than London's Heathrow airport? To answer this we need to look at revenue sources for the airports promoters.
Traditionally, landing fees have been the main revenue source (airport revenue) of airports around the world. In recent years, other revenue streams for airports have come to include rent from shops, restaurants, hotels and other business and recreation centres (non-airport revenues). While it is inevitable that non-airport revenue also play a vital role in driving projects like this forward, the business model that is being followed appears to be seeking viability from a very large (and possibly excessive) level of non-airport revenue as opposed regular airport revenue. This is the source of the concern on cross subsidisation.
Lets assume that the only non-airport revenue is from real estate and then estimate its size purely on the basis of the rentals from the excess land. To develop this estimate, the International Technology Park (ITPL) in nearby Whitefield serves as a realistic comparison. Whitefield is a fast developing suburban region east of Bangalore. ITPL involves an area of sixty nine acres houses (currently) with around 1.9 million square feet of office real estate, in addition to housing and further developments with need based expansion.
Assuming that the ratio of land area to office space for Devanahalli is the same as that of ITPL, and that no further development may take place, the total office area available to be leased or rented out from the excess land (over Heathrow) at the new BIAL airport is approximately 37 million square feet.
Calculation:
Total excess real estate available for development = (4050-2965)= 1085 acres
Total office space available = (1,900,000 sq ft in ITPL)/(69 acres in ITPL))*1085 acres
= 29.88 million sq ft
(Note: 4050-2965 is the excess land that BIAL has acquired over and above
that of Heathrow airport).
If this space is rented at a rate of just Rs.2 per square foot, the total rent payable to BIAL would then be in the order of Rs.6 crores per month. Since the initial lease of the airport is proposed to be for thirty years, over the life of the airport the total revenue from rentals works out to Rs.2,647 crores.
Calculation:
Rent per month = Rs.2/sq ft*36.76 million sq ft = Rs. 59.75 million
(Rs 5.97 crores
Total rent accrued for thirty years = Rs. 59.75*12*30 = Rs.21.51 billion = Rs. 2,151 crores
(Note: This is at a flat rate of Rs.2 per square foot per month for the
entire 30 year period).
The estimate of rent accrued is based only on the 'excess land' that BIAL has acquired over and above the total land area of Heathrow airport. Increase the rent to a more realistic rate of Rs.4 per square foot per month, and the revenues from the real estate component double to Rs. 4,302 crores.
EARLIER
From the above calculation, it appears that the real estate revenue from the excess land and
other non-airport revenue are implicitly cross subsidising the airport itself. Still, the argument usually
raised is that the airport would begin the development of the region around it and therefore the
subsidy will help to spur economic growth, and therefore, this subsidy is a small price to pay for
the development of Bangalore.
Even if we completely agree with this line of reasoning, we then need to ask the question if this financial structure for BIAL would actually benefit the city of Bangalore and the Government of Karnataka. The new airport must be advantageous to the city of Bangalore and its principal stakeholders: the citizens.
As per the current deal between stakeholders, the total foreign direct investment (FDI) for this airport is around Rs. 50 crores (a tiny fraction of the total cost of Rs. 1,200 crores). Over 95% of the funding is raised locally through equity stake from GoK, the loans from Indian financial institutions (lead by ICICI Bank) and an interest free loan from the Government of Karnataka. In addition, having ensured a risk-free project from the point of view of competition, (other airports in Bangalore will have to be closed to commercial traffic), the GoK has allowed an equity stake of 74% to a private consortium.
The GoK itself apparently is not constructing the airport as it is short of funds and does not have the expertise. The expertise is best found outside, perhaps, but even then the financial argument does not hold water. The terms of this deal for Bangalore airport are such that it might be financially prudent and fiscally responsible for the GoK to construct this airport buying whatever expertise is necessary.
Alternatively, the project could have been broken up into a real estate component and an airport component, with the profit of the real estate component providing a cash subsidy to the airport component. The real estate component then could have been built and managed by the Bangalore Development Authority (BDA) or any other agency of the Government of Karnataka that has a track record of good performance. However, by accepting the current deal for the project, the city of Bangalore has been saddled with an implicit subsidy of around Rs. 2151 crores, since the government could just as have gained this revenue.
Related to this is another important aspect. The GoK has acquired land for the airport at rates which can at best be described as low, and then transferred to a private company through a land lease agreement. The amount of compensation given to land holders (typically farmers) is often a lump sum payment, and does not compensate equivalently for livelihood losses from loss of the asset's revenue.
The fact is that stakeholders (in this case farmers) are forcibly disposed of their land and they have the right to their livelihood. They therefore may be given a choice of compensation regimes of one large cash lumpsum now and small amounts later or alternatively a lumpsum only. Giving people the ability to choose one or the other compensation alternatives is important.
Considering that the availability of the real estate itself then becomes a crucial part of the revenue stream of the company, it is a moot question on whether compensation to land holders should be based on a percentage of such revenues. It could for example be a percentage of the total expected real estate revenue of BIAL that then is split based on the total amount of land lost by a particular individual.
There is very little denying that Bangalore does need more capacity to handle more flights, passengers and freight. But the BIAL project throws up questions with regard to the nature of public financing in India itself. Is the reason for these massive subsidies that major revenue from airport traffic itself is expected to be a far lower proportion of total revenue, than other comparably sized and provisioned airports? In other words, are the real estate cross-subsidies making an otherwise unviable project viable? In addition, if public infrastructure projects piggybacking on real-estate development continue to take off around Bangalore, could the resultant glut in real-estate provisioning lead to a price collapse?
Much in the manner that the Bangalore-Mysore Infrastructure corridor was shown to be a real-estate project rather than a road project, the new Bangalore airport is a virtual replica. A private party is managing to corner a substantial portion of the benefits. Tax-payers are providing a massive subsidy for BIAL while at the same time not benefiting out of the investments made on their behalf by the Government of Karnataka. A re-look at the financial structure of the proposed new airport is necessary. At the very least, the stake of the Government of Karnataka must probably be revised from the present levels.