Airport infrastructure

Attractiveness of airport projects vis--vis other infrastructure projects (power, ports and roads)

Highlights Contents

Limited size of investment opportunity Sections

in airport infrastructure due to fewer Executive summary 1
Attractiveness of airports vis--vis other infrastructure projects 2
projects on offer relative to other
Passenger and freight traffic movement 13
sectors

Box
Airport projects plagued by high Approach and methodology 3
gestation periods due to delays in
receiving environmental clearances Figures

Private investments (2004-05 to 2008-09) 4

Projected private investments (2009-10 to 2013-14) 4
Equity IRRs across the sectors 8
Timelines for clearances and project execution 10
Domestic + international y-o-y passenger traffic growth rate (January-
December 2009) 13
Domestic + international y-o-y cargo traffic growth rate (January-
December 2009) 14

Tables
Configuration and type of project for evaluation 3
Conversion of scores 3
Weights of the parameters 3
Scoring based on size of investment 4
NHDP programme 7
Reforms and regulations at a glance 7
Scoring based on policy reforms and regulators role 7
Project details 8
Scoring based on returns-equity IRRs 8
No. of bidders for infrastructure projects 9
Scoring based on extent of competition 9
Scoring based on gestation and delay period 10
Scoring based on equipment and raw material risk 11
Final ranking of the sectors 12

This document has been prepared by Jaimin Shah, Nimisha Agarwal, Rahul Prithiani and Ajay
March 2010 D'souza (Head of Research). For any queries, please get in touch with our client servicing
desk. (clientservicing@crisil.com; Phone: 022-33423561)
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Executive summary
Airports is less attractive than ports, power and roads projects for private players
Airport infrastructure projects rank the lowest among other infrastructure projects such as ports, power and roads
involving public-private partnership (PPP) and private models, according to a CRISIL Research study. Airport
projects scored the lowest in terms of investment opportunity and policy reforms as compared with other
infrastructure options.

The reasons are:

Investment opportunity for private players is significantly lower: The investment opportunity for private
players in the airport sector is estimated at Rs 204 billion as compared with Rs 2,200 billion in power
generation, Rs 1,285 billion in roads, and Rs 733 billion in ports.
Policy reforms: There has been limited push from the government after few airports were awarded for private
participation. Also, there are significant delays between project conceptualisation and project award.

Power projects rank the highest among the PPP and private infrastructure models, as investment opportunities for
private sector participation is high, projects have higher equity internal rate of returns (IRRs) and policy reforms
are encouraging.

Airports in India will witness buoyant passenger and cargo traffic growth due to sustained
recovery in global and Indian economies
CRISIL Research expects total passenger movement at airports to increase by 13.9 per cent in 2009-10 to 123.9
million, given the sustained recovery in the global and Indian economies. The sharp increase in market share of
domestic low fare seats to 70.0 per cent in 2009-10 from 52.0 per cent in the previous year, coupled with stable
ticket prices, have contributed to this growth.

Growth in cargo movement, which had decelerated in the first half of 2009, recovered strongly in the second half
of 2009, on the back of improvement in the global and Indian economies. Cargo movement is estimated to
increase by 8.7 per cent to 1.8 million tonnes in 2009-10.

In 2010-11, passenger and cargo movement at Indian airports is expected to grow by 15.9 per cent and 10.0 per
cent, respectively, driven by the continued strong recovery in the global and domestic economies.

CRISIL RESEARCH AIRPORT INFRASTRUCTURE UPDATE: MARCH 2010, 14 PAGES 1

Attractiveness of airports vis--vis other infrastructure
projects

Airport, port, power and road infrastructure projects have seen significant growth in private investments,
following opening up of these sectors to private participants. Private sector investments are either through the PPP
or direct route. Further, the majority of infrastructure companies have a presence across all four verticals, as part
of a strategy to diversify their portfolio and increase market share in each sector.

In this report, CRISIL Research has assessed the attractiveness of airports versus other infrastructure projects such
as ports, power and roads across various parameters for both PPP and private investments.

2 CRISIL RESEARCH AIRPORT INFRASTRUCTURE UPDATE: MARCH 2010, 14 PAGES

Box 1: Approach and methodology
Projects with the following configurations have been considered for evaluation:

Table 1: Configuration and type of project for evaluation

Parameters Airports Ports Power Roads
Typical configuration 12 million 25 million tonnes 1,000 MW thermal 4 lane, 100 km
passengers per per annum (4 power plant
annum berths)
Type of project Competitive bidding Private investment Competitive bidding for National Highway Authority
for new/existing in ports across power purchase of India project
airport project minor/major ports agreement (PPA) with
state electricity board
(SEB)
Size of investment (Rs bn) 25 22 45 9
Source: CRISIL Research

A sector is scored (on a scale of 1-4, with 1 being the lowest and 4 being the highest score) on each parameter,
based on its performance vis--vis the other sectors. The weights are assigned to reflect the importance of the
parameter, with the final ranking arrived at on the basis of consolidated weighted scores of the parameters.

Table 2: Conversion of scores

Score Perform ance of the sector
1 Below average
2 Average
3 Above average
4 Excellent
Source: CRISIL Research

Table 3: Weights of the parameters

Sr no.
1 Size of investment opportunity 20
2 Policy reforms and regulator's role 20
3 Returns-equity IRRs 20
4 Extent of competition 20
5 Gestation and delay period 15
6 Equipment & raw material risk 5
Total 100
Source: CRISIL Research

1) Size of investment opportunity

Investment opportunity in airport infrastructure is lowest among the sectors analysed due to
fewer projects on offer relative to other sectors

Airports: Between 2009-10 and 2013-14, CRISIL Research estimates private players to invest Rs 204 billion in
airport infrastructure projects, which is the lowest amongst the sectors analysed. This investment opportunity also
includes the four greenfield airports - Navi Mumbai, Greater Noida, Pune and Mopa (Goa).

CRISIL RESEARCH AIRPORT INFRASTRUCTURE UPDATE: MARCH 2010, 14 PAGES 3

Figure 1: Private investments (2004-05 to 2008- Figure 2: Projected private investments (2009-10
09) to 2013-14)
(Rs billion) (Rs billion)

Power 500 Power 2,200

Ports 272 Roads 1,285

Roads 189 Ports 733

Airports 90 Airports 204

0 100 200 300 400 500 600 0 500 1,000 1,500 2,000 2,500

Source: CRISIL Research Source: CRISIL Research

Ports: Private investments to the tune of Rs 733 billion is expected in the ports sector, between 2009-10 and
2013-14, spurred by the National Maritime Development Programme (NMDP) and significant expansion
projects undertaken by private players at non major ports.

Power: Due to the considerable demand-supply gap, sizeable investments are planned by private players in
power generation. According to CRISIL Research, private companies are expected to invest Rs 2,200 billion
during 2009-10 and 2013-14. The considerable investments are on the back of the Electricity Act, 2003,
which allowed private sector players to set up power plants without requiring licences from the government.

Roads: CRISIL Research estimates investments of Rs 1,285 billion in national highway projects by private
players during 2009-10 to 2013-14, with the government providing the required impetus to the sector. The
National Highways Authority of India (NHAI), under the National Highway Development Programme
(NHDP), awards stretches on build-operate-transfer (BOT) basis to attract large private investment and
ensure speedy implementation.

Table 4: Scoring based on size of investment

Airports Ports Power Roads
Scores 1 2 4 3
Source: CRISIL Research
The power sector is scored above other verticals as the sector has the highest investment opportunity.

2) Reform focus and regulators role

Limited push from the government and delays between project conceptualisation and
award puts brakes on private participation in airport infrastructure

Airports: There has been limited push to attract private participants after few major metro airports were awarded
to private players. The Airports Authority of India (AAI), which is responsible for the development and

4 CRISIL RESEARCH AIRPORT INFRASTRUCTURE UPDATE: MARCH 2010, 14 PAGES

modernisation of airports in India, has been undertaking modernisation of 35 non-metro and two metro airports on
its own.

In addition, there are significant delays between project conceptualisation and award of projects to private players.
Further, the process of getting the requisite approvals post the award of the project leads to delays. Also, in cases,
the player that has been awarded the contract has to contend with litigations from competing bidders. Currently,
aeronautical revenues are fixed by AAI for airports till AERA evolves.

Airport Economic Regulatory Authority (AERA), which was set up in 2009 for regulation of the sector, has yet to
provide direction. Roles that have been entrusted with AERA are:
Determining tariff structure for aeronautical services at private and government controlled airports.
Determining the airport development fees and user development fees at private and government controlled
airports.
Monitoring the performance standards relating to quality, continuity and reliability of services as specified by
the Central Government or relevant authority.
Take action for non compliance of orders of the authority.

Ports sector: The Tariff Authority for Major Ports (TAMP), which is the regulator for major ports, is responsible
for setting tariffs and ensuring adequate return on capital. The current RoCE is fixed at 16 per cent for
computation of tariffs. However, there is no control on tariffs at non major ports, thereby attracting several private
players.

The government, through the Ministry of Shipping, has initiated the NMDP to develop ports, shipping and inland
water transport during 2007-08 to 2012-13. A total of 276 projects relating to ports are planned at an investment
of Rs 558 billion.

The objectives of the programme are:

Increase capacity levels at major ports.
Improve quality of service and promote competitiveness among ports.
Modernise and increase efficiency of the ports, and improve rail-road connectivity of ports.

Key policies for attracting private investment in the sector are:

Major port trusts are permitted to form joint ventures with foreign port operators, minor ports and other
companies to avail of new technology and improve quality of construction.
100 per cent foreign direct investment (FDI) is permitted in the sector.
Various state governments are encouraging the development of ports by signing memorandum of
understanding (MoU) with private players for greenfield port development.

Power: The policy reform that led to considerable participation from the private sector has been the Electricity
Act, 2003. Also, driving the sector has been the governments thrust on setting up ultra mega power plants
(UMPPs).

Since the implementation of Electricity Act, 2003, over 150 gigawatts (GW) of capacities are being planned

CRISIL RESEARCH AIRPORT INFRASTRUCTURE UPDATE: MARCH 2010, 14 PAGES 5

during the Eleventh and Twelfth Plan periods through private sector participation. During 2004-05 to 2008-09,
reforms in the sector had translated into investments of Rs 500 billion in generation from private players.
Additionally, the increase in RoE from 14.0 per cent to 15.5 per cent has further incentivize players to invest in
the sector.

Electricity Act, 2003

The significant features of the Electricity Act, 2003 for the generation sector are:
No licence is required for generation by private companies.
Competition is encouraged through international competitive bidding.
Captive power generation and sales to third party is encouraged.
Provides direct access to retail consumers due to open access in transmission and distribution (T&D).

UMPPs

UMPP projects, with each plant having generation capacity of 4,000 MW and above, has attracted substantial
interest from private players such as Reliance Power, Tata Power, Torrent Power, Sterlite Industries, Adani
Power, and other international and domestic players.

However, while central regulators such as Central Electricity Authority (CEA) and Central Electricity Regulatory
Commission (CERC) are proactive in formation of policies for attracting private investments and promoting
growth of the sector, at the state level it remains sluggish. State level open access in generation and distribution is
not being implemented by majority of the states. Also, most state electricity boards (SEBs) have accumulated
huge losses, restricting their investment in the sector.

Roads: The government is providing impetus to the roads sector by levying a cess of Rs 2 per litre on petrol and
diesel, which goes to the Central Road Fund. Also, policy reforms taken by NHAI, which is the main
implementing authority on national highways, for promoting the sector have been encouraging, in turn attracting
large private investments. Some of the key policy initiatives of NHAI to attract higher investments and grow the
sector are:
NHAI will acquire and hand over possession of 80 per cent of the land at time of award of the project, with
the balance 20 per cent to be handed over within 90 days of awarding of the project.
The entire viability gap funding (VGF) will be provided during the construction period of the road. Also, the
VGF cap in Phase V has been increased from 5 per cent to 10 per cent, and in some projects to 20 per cent.
The concession period can be increased by 1.5 per cent for every 1.0 per cent shortfall in traffic, hence
mitigating traffic risk
Exit policy - The concessionaire has to hold at least 26 per cent of the equity even after 2 years of completion
date of the project.
Conflict of interest clause - Special purpose vehicles (SPVs), having any developer with shareholding of up
to 25 per cent, is allowed to bid for the same project.

The NHDP was formed for the upgradation, rehabilitation and broadening of existing national highways.

6 CRISIL RESEARCH AIRPORT INFRASTRUCTURE UPDATE: MARCH 2010, 14 PAGES

Table 5: NHDP programme
Phases Description Implementing Length
agency (km)
I Golden Quadrilateral Delhi-Kolkata-Chennai-Mumbai NHAI 5,846
Port connectivity Connectivity for 10 major ports NHAI 380
Others - NHAI 965
II North-South-East-West Srinagar-Kanyakumari (North-South) NHAI 7,300
Silchar-Porbander (East-West)
III Connecting state capitals, and places of economic and tourism importance NHAI 12,109
IV Improve 2-lane standards with paved shoulders MoRTH -
V 6-laning of existing national highway 5,600-km stretch under GQ NHAI 6,500
VI Expressways NHAI 1,000
VII Ring roads NHAI 700
MoRTH: Ministry of Road Transport & Highways; NHAI: National Highways Authority of India
Source: CRISIL Research

Airport is ranked lowest due to limited pro-activeness of the sectors regulator in policy reforms and attracting
private investments. Roads have been ranked better due to policy reforms that are attracting large private
investments to the sector. Port projects is ranked at the same level as roads, as free pricing prevails at non major
ports attracting huge participation from the private sector. The power sector, with slow state reforms is, therefore,
ranked marginally lower compared to roads and ports.

Table 6: Reforms and regulations at a glance

Airports Ports Power Roads
Limited push from Free pricing at non Central regulator Quick response of
Ministry of Civil major ports attracting brings out policy MoRTH in policy
Aviation to attract large private reforms favouring reforms along with
private investments investments private investments, efficient awarding and
after few airports have while state regulators implementation by
been awarded to are slow in policy NHAI have led to large
private players implementation private investments

Long delays between Healthy RoCE of 16 Electricity Act 2003

project per cent at major ports allowed private
conceptualisation and for private players investments without
completion the need for licences
Source: CRISIL Research

Table 7: Scoring based on policy reforms and regulators role

Airports Ports Power Roads
Scores 1 4 3 4
Source: CRISIL Research

CRISIL RESEARCH AIRPORT INFRASTRUCTURE UPDATE: MARCH 2010, 14 PAGES 7

3) Returns - Equity IRR

Average returns in airport infrastructure projects vis--vis power and ports

In order to compare the returns of different infrastructure sectors, we have considered typical projects that are
being awarded in individual sectors.

Table 8: Project details

Particulars Airports Ports Power Roads
Concession period (years) 30 30 25 20
Period of construction (years) 2.5 3.0 3.5 2.5
Capital expenditure (Rs million) 26,000 34,000 45,000 9,000
Equity (Rs million) 6,500 6,800 19,286 2,250
Debt (Rs million) 19,500 27,200 25,714 6,750
Gearing (times) 4.0 4.0 2.3 4.0
Source: CRISIL Research

Based on the projections of tariffs and traffic we have computed the equity IRRs of the projects for these sectors.

Figure 3: Equity IRRs across the sectors

(per cent)

Roads 18

Airports 18.6

Ports 20

Power 22.4

15 17 19 21 23 25

Source: CRISIL Research

Table 9: Scoring based on returns-equity IRRs

Airports Ports Power Roads
Scores 2 3 4 1
Source: CRISIL Research

Airports, which has an equity IRR of 18.6 per cent, is ranked lower as compared to power and ports, which have
equity IRRs of 22.4 and 20.0 per cent, respectively.

8 CRISIL RESEARCH AIRPORT INFRASTRUCTURE UPDATE: MARCH 2010, 14 PAGES

4) Extent of competition

Limited competition in airports, power and ports; roads acutely competitive

CRISIL Research analysed the number of bidders for infrastructure projects that are under bidding through the
competitive route to analyse the extent of competition in the sector. Higher competition adversely impacts the
returns of players.
Since roads is the least technology-intensive sector, and has the lowest entry barriers as compared to other sectors,
it witnesses high competition, with 8-12 bidders. The other sectors require technical expertise, which limits the
number of players during the competitive bidding process.

Table 10: No. of bidders for infrastructure projects

Airports 5-7
Ports 5-7
Power 7-9
Roads 8-12
Source: CRISIL Research

Table 11: Scoring based on extent of competition

Airports Ports Power Roads
Scores 3 3 3 1

Source: CRISIL Research

Road projects scored the least due to acute competition prevailing in the sector as compared to the other sectors.
Competition in the other sectors is limited to large infrastructure players due to higher cost and technical
expertise. Hence, other sectors have been ranked equal, whereas the roads sector has been assigned the lowest
rank.

5) Gestation and delay period

High gestation period seen in airport infrastructure projects due to delays in environmental
clearances
Airports: In the airport infrastructure sector, greenfield airport projects have seen delays on account of significant
time taken in obtaining clearances from the environment ministry, pollution board and defence ministry. Also,
there are delays in land acquisition for aero and non aero activities.

CRISIL RESEARCH AIRPORT INFRASTRUCTURE UPDATE: MARCH 2010, 14 PAGES 9

 Figure 4: Timelines for clearances and project execution
(in months)

70
55-65 55-65 55-65
60

50
39 36-42
40
30 30 30 30 30
30
21
20
10
10

0
Airports Ports Power Roads Airports Ports Power Roads Airports Ports Power Roads

Environmental clearance + Project execution Gestation period

Land acquistion issues +
Financial closure

Source: CRISIL Research

Ports: The ports sector has a gestation period of 55-65 months for resolution of land-related issues and delays in
getting clearances from the Ministry of Environment. Execution takes close to 30 months.

Power: A 1,000 MW power plant requires 55-65 months to construct, as it is technology-intensive, and
installation of equipments and networks require considerable time.

Roads: The roads sector has the lowest gestation period of 36-42 months. Also, some BOT projects in the sector
have been executed ahead of the scheduled completion date. Further, with recent policy changes by NHAI,
wherein 80 per cent of the land would be acquired by the government before awarding of the stretches, would
assist in quicker project execution.

However, the time taken across these sectors for achieving financial closure before the start of the project remains
around 6 months. Environmental and land clearances are carried out simultaneously, while financial closure is
achieved post receiving the requisite clearances.

Table 12: Scoring based on gestation and delay period

Airports Ports Power Roads
Scores 2 2 2 4
Source: CRISIL Research

The gestation period of airports, ports and power is much higher at 55-65 months in comparison to the roads
sector, which is between 36-42 months, due to which roads has been ranked best in this parameter while the other
sectors score low to medium in relative performance.

10 CRISIL RESEARCH AIRPORT INFRASTRUCTURE UPDATE: MARCH 2010, 14 PAGES

6) Equipment and raw material risk

Equipment and raw material risk lowest in airports

Infrastructure companies face the risk of timely availability of critical equipment during the execution of a project.
Also, companies face the risk of price fluctuations of key raw materials during the operation of the project.

Airports: Equipment risk such as radar, electronic security system, aerobridges, conveyor belts, etc required in
the setting up of airports is low due to large number of domestic and international suppliers. The sectors input-
related risk is lower as compared to the other sectors and limited to electronic equipment during the operation of
the project.

Ports: Input-related risk is in dredging, for which there are not enough players in India, and therefore bulk of the
contracts are executed by foreign dredging companies. Dredging is an important activity as it removes silt and
maintains the required depth at ports. The availability of skilled labour is another key input-related risk for the
sector.

Power: The requirement for several machines such as turbines, rotor and boilers, for which there are few
manufacturers in India, makes power generation companies vulnerable to timely availability of critical equipment.
The acquisition of critical technology is the main cause of delays for power projects during the execution phase.
Also, there is significant risk associated with volatility in coal prices and timely availability of raw materials
during the execution stage. This risk is, however, mitigated by coal linkages in domestic as well as international
markets.

Roads: The sector faces risk in terms of timely availability of construction equipment and material
(cement/bitumen) during the construction phase. Also, volatility in cement and bitumen prices poses a moderate
risk during operation.

Table 13: Scoring based on equipment and raw material risk

Airports Ports Power Roads
Scores 4 2 1 2
Source: CRISIL Research

Due to easy availability of electronic equipment and no raw materials required helps airports score better as
compared with other sectors. Conversely, as equipment and input-related risk is highest in the power sector, the
sector has been assigned the lowest score.

CRISIL RESEARCH AIRPORT INFRASTRUCTURE UPDATE: MARCH 2010, 14 PAGES 11

Conclusion

Airport infrastructure projects less attractive for investments in comparison with ports,
power and roads

Table 14: Final ranking of the sectors

Parameters Weights Airports Ports Power Roads
Size of investment opportunity 20 1 2 4 3
Reform focus and regulator's role 20 1 4 3 4
Returns - Equity IRRs 20 2 3 4 1
Extent of competition 20 3 3 3 1
Gestation and delay period 15 2 2 2 4
Equipment and raw material risk 5 4 2 1 2
Rank IV II I III
Source: CRISIL Research

In the final analysis, airport infrastructure projects scored the lowest in terms of investment opportunity and policy
reforms among other infrastructure projects involving PPP and private models. In contrast, the power sector has
been ranked the highest as investment opportunities for private sector participation are high, projects have higher
equity IRR and policy reforms are encouraging. Ports score on higher returns and reform focus parameters. Road
projects have a lower gestation period and higher size of investment opportunity vis--vis airport infrastructure
projects.

12 CRISIL RESEARCH AIRPORT INFRASTRUCTURE UPDATE: MARCH 2010, 14 PAGES

Passenger and freight traffic movement
Review

Strong increase in passenger and cargo movement due to sustained recovery in the global
and Indian economies
Passenger traffic movement (domestic and international) at Indian airports has increased sharply after July 2009
on the back of an improving economic environment. In 2009-10, the total passenger movement at airports are
expected to grow at 13.9 per cent to 123.9 million, driven by sustained recovery in global and Indian economies.
The sizeable increase in market share of domestic low fare seats, from 52.0 per cent in 2008-09 to 70.0 per cent in
2009-10, coupled with benign ticket prices has also contributed to the growth.

Figure 5: Domestic + international y-o-y passenger traffic growth rate (January-December 2009)
(per cent)

40

30

20

10

0
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

-10

-20

Source: AAI, CRISIL Research

The growth in cargo movement, which decelerated in the first half of 2009, has recovered on the back of an
improving global and Indian economy. Cargo traffic is estimated to rise by 8.7 per cent to reach 1.8 million tonnes
in 2009-10, propelled by strong growth in cargo movement during the second half of 2009.

CRISIL RESEARCH AIRPORT INFRASTRUCTURE UPDATE: MARCH 2010, 14 PAGES 13

 Figure 6: Domestic + international y-o-y cargo traffic growth rate (January-December 2009)
(per cent)

30

20

10

0
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

-10

-20

Source: AAI, CRISIL Research

Outlook

Strong growth in passenger and cargo movement expected to continue in 2010-11

Passenger movement at Indian airports is expected to grow by 15.9 per cent (y-o-y) to 141 million in 2010-11.
During the same period, cargo movement is projected to grow by 10.0 per cent to reach 2.0 million tonnes. The
growth momentum in passenger and cargo traffic is expected to be supported by strong economic recovery across
the world.

14 CRISIL RESEARCH AIRPORT INFRASTRUCTURE UPDATE: MARCH 2010, 14 PAGES

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