By Deepak Kumar Thakur and Puspak Chamariya
August 27, 2021
The inadequacy of the airports to handle congestion, the slow movement of the infrastructure development, inefficient services, tackling passenger’s discomfort as well as commercial considerations, has not beenO very profitable for the Government. These issues, coupled with covid, are reflective of a government owned public sector commercial ecosystem that is calling for privatization.
Hence, in the footsteps of the past with evident improvements through liberalization, the Central Government vehemently believes that privatization of airports (among other sectors) has become essential in the current scenario. The quality of airport infrastructure is a vital component of the overall transportation network and it contributes directly to a country’s international competitiveness and the flow of foreign investment.
Conventionally, privatization is the process of moving from a regime-controlled system to a privately run, for-profit system (“Privatization”). However, the nuances of the shift in regime from public sector to private sector and the parameters of the collective effort, under the Public-Private-Partnership (“PPP”) model has the propensity of raising many questions.
Some argue that this is a hasty decision by the Centre to privatize the airports due to the deteriorating condition of the industry. It is their contention that the privatization will make Airport Authority of India (“AAI”) to lose crucial monetary assets and resources for transient additions to the treasury. Further, All Airports Employee Union (“AAEU”) has vowed to endlessly protest the privatization. In the midst of this ongoing battles for supremacy on the privatization debate, there are some legal nuances that are underpinning the argumentation.
While this may be seen in light of hasty moves to gather funds, some experts marvel at the possibility of infrastructure development. According to the Central Government, the decision to hand over the airport to a private concessionaire will help improve the quality of services and bring in global standards.
Privatisation of Airports
The Government of India had commenced the process of privatising airports in the year 2006 only. However, that privatisation spree remained limited only to four metropolitan cities namely, Delhi, Mumbai, Bangalore and Hyderabad. The next round of privatisation was much awaited and took place only in the year 2019 with quite different fundamental understandings then the previous round of privatisation.
Upon following the rigorous international competitive bidding process, the Government of India, acting through Ministry of Civil Aviation and Airports Authority of India, awarded the concession for the six major airports of Jaipur, Guwahati, Mangalore, Lucknow, Ahmadabad and Thiruvananthapuram under public-private partnership (“PPP”) framework on (operate, maintain, develop model) for a duration of 50 years, to Adani Enterprises Limited (“AEL”).
With the huge success for the Government in this recent round of privatisation of airports, it is expected that the Government will continue with the privatization process in the coming times. Infact, the recent amendment in concerned legislation is aimed in this direction only.
Earlier this year AEL had asked for an extension of at least half a year for assuming control over Lucknow, Ahmedabad and Mangaluru airports referring to vulnerability because of the pandemic. The extention was allowed by the AAI and it is still unclear whether the private entity will actually be able to take over within the mandatory six-month time frame.
There is political opposition against the ruling party’s intentions, as members of Congress arranged a protest at different locations against the Centre's decision to privatize it. The AAEU has been agitating since the Centre chose to privatise the Guwahati, Jaipur and Thiruvananthapuram airports.
However, in reference to the earlier rounds of privatization of airports in Mumbai and Delhi awarded to GMR and GVK, the case of Reliance Airports Developers Private Limited v/s Airports Authority of India (2006) 10 SCC 1) had multiple pointers noted by the Supreme Court of India regarding the discretion of the relevant authority in granting the concession. Adequate discretion had been given to the authorities in that judgment for the award of the concessions, as well as the timelines for the implementation for such concessions. If the past legal history is to be considered, the privatization route has considerable merit.
Legal Issues and Determination
As is the norm in India, privatisation of airports is also marred with set of litigations from various quarters.
More specific to the present round of privatisation of the 6 airports, the Karnataka High Court, in February 2021, issued a notice in a writ petition filed by AAEU challenging the decision of the Central Government and AAI to grant concession and hand over the operation and management of Mangalore International Airport to AEL.
The petition filed by the AAEU challenges the Central Government’s decision to privatize six airports, while alleging the said process as being illegal, arbitrary and beyond the scope of the Airport Authority Act, 1994 (“AAI Act”). The AAEU’s contentions attack the legal basis of the bidding process while stating that the AAI Act does not provide for any type of transfer of property other than a lease. It is contended by AAEU that by virtue of the concession agreements, the Government of India is trying to overreach and throw away the intent and object of the AAI Act.
Further, analysis of Section 12 of the AAI Act does not envisage handing over the entire Airport in the name of lessee, and that too not for anything beyond 30 years, as the government has done for 50 years. It has been alleged by the AAEU members that the entire process of award of concession adopted by AAI is arbitrary and illegal due to the alleged disregard for procedures.
It would not be out of place to mention here that a case was filed by the Government of Kerala as well in the Kerala High Court substantially on the similar grounds against the Central Government’s decision to privatize Thiruvananthapuram International Airport. The Government of Kerala had moved the Hon’ble Kerala High Court against the privatization of the Thiruvananthapuram Airport. The Hon’ble High Court rejected all the challenges made by the Government of Kerala and upheld the bid process and award of concession for the Thiruvananthapuram by the Government of India/ AAI as valid and enforceable.
Some of the major points, having larger legal implications with respect to the privatization of airports and discussed in the above referred judgement of the Hon’ble Kerala High Court are discussed below:
(a) Extent of Lease term and consideration
There had been allegation that huge parcels of profitable government-owned land are being handed over for-profit to private entities, with the apprehension that all costs and fees shall be passed on to un-suspecting passengers for profit motive. In response to this, the Kerala High Court has clarified that such a narrative is not the case. Only legitimate portions of the land, as required for the concession, are being legitimately given for lease.
The Kerala High Court has settled the speculation with analysis of the relevant provisions of the AAI Act. The Kerala High Court has acknowledged that profit participation is a fulcrum of privatization, and the private party shall be responsible for development fee under Section 22A of the AAI Act (which shall not be levied to the passenger), and the amounts payable by the lessee under Section 12A of the AAI Act (which shall be in lieu of the services provided).
With respect to the duration of the lease, contrary to the allegation that the AAI Act does not provide for leasing out the airports for over 30 years, it is decided that a 50-year lease is not contrary to the AAI Act, provided the Central Government has permitted the same. Considering the RFP is originated from the Ministry of Civil Aviation, the apprehension is that such permission is granted.
(b) Legitimate Expectation and Promissory Estoppel
With respect to privatization of the Thiruvananthapuram Airport, as a part of the 6 airports consented for privatization, the State Government of Kerala, through the Chief Minister, offered to match the bid of the highest bidder at the same price as AEL. The bid was awarded to AEL as per the bidding process, and not to the State Government of Kerala. The Kerala High Court clarified that there was no entitlement of the State Government to receive the concession if it had matched the highest bid amount.
In appeal against the Kerala High Court judgment, the State Government of Kerala has asserted that the AAI land has been given free of cost for airport development on the affirmation that the State Government would be associated in the forming of a SPV. This was a "legitimate expectation", according to the Kerala Government.
The Kerala High Court has elaborately decoded that the correspondences did not indicate any promise or estoppel towards the State government. The State Government was not able to prove any estoppel or promise, to claim domain over the airport. Interestingly, the Kerala High Court also opined that the State government does not have the right to challenge the RFP after having participated in the bidding. The petitioners of the case have themselves lost the bid in a fair manner and is called a classic example of “sour grapes”.
With respect to the Thiruvananthapuram Airport (alike others), the biggest allegation levied by the Kerala Government as well as other opposition political parties, activists etc. has revolved around the ‘arbitrary’ manner of bidding, which was allegedly tailor made to favour the AEL, on two broad grounds: i) the financial capacity of INR 3,500 crores; and ii) the absence of experience in development of airports. While these criteria are unlike the criteria that was employed for the first round of privatization of Mumbai and Delhi airports which required prior experience, however, the Kerala High Court did not find substance in these allegations. The mandatory requirement of prior airport experience creates a monopoly market, which is not suited for fair competition, especially when multiple eligible bidders placed bids.
Further, the Kerala High Court unequivocally iterated that the judicial review process is to check the ‘legality’ of a decision, and the veracity of it. It is intended to prevent arbitrariness, irrationality, unreasonableness, bias and malafides, and not to check whether choice or decision is sound.
(d) Public Interest
The alleged lack of public interest in the petition was rebuked with a variety of commercial and legal reasonings by the High Court. The Kerala High Court observed that there shall be no profit erosion for AAI (contrary to the political opposition), and the domino effect on infrastructure development is a larger public benefit, while the AAI stands to gain monetarily.
The re-focussed abilities of the AAI (financially and operationally) to completely devote the efforts and expertise towards the smaller airports and improving quality infrastructure there (like currently done at Chennai and Kolkata Airports), would help in increasing the passenger satisfaction level and in turn increasing the footfalls at the Airport and number of passengers.
Even the specific resistance raised by employees has been dealt with. The Kerala High Court has opined that the fear of retrenchment or loss of emoluments is sans substance, as the provisions of the concession agreement is said to adequately cover this contingency.
(e) Jurisdiction of the Kerala High Court
The Kerala High Court has dismissed the jurisdictional challenge of the Central Government on the ground that there is no question arising as to the relationship between the Union Government and the State in the federal set up, as envisaged in the Constitution of India. There is no question arising which involves overlapping of the power, authority or right of the Central Government and that of the State Government. The policy of the Central Government is not under challenge and even the State's bid for the lease under the RFP, could be maintained only under Section 12A of the AAI Act. Therefore, the contention that the Supreme Court is the only relevant forum is sans substance. The High Court has assumed effective jurisdiction.
Legislative Reform While Focussing on Privatization
Both the houses of Parliament have passed the Airports Economic Regulatory Authority of India (Amendment) Act, 2021 (“Amendment”). The erstwhile Airports Economic Regulatory Authority of India Act, 2008 (as amended from time to time) (“AERA Act”) defines a ‘major airport’ as one which has, or is designed to have, annual passenger throughput in excess of 35 lakh passengers, or any other airport that the Central Government may specify by notification. Under the same AERA Act, the legislature bestowed upon the power to AERA to regulate tariffs and other aeronautical charges (like landing charges, parking charges and passenger service fees) at ‘major airports’.
Now, in light of the renewed interest in privatization of the airports, the AERA Act has been amended vide the Amendment, which seeks to extend the scope of the term ‘major airport’ by adding after “or any other airport” the words “or a group of airports”. The implication is that AERA can now determine tariff and other charges for aeronautical charges levied at small airports by grouping them together into one entity, with other airports, for the purpose of aeronautical charges.
Now, smaller and less-busier airports from remote parts of the country (sometimes under-developed or loss-making) can be clubbed with larger or mid-tier airports to meet the threshold of 35 Lakh annual passenger count, to be classified as a ‘major airport’.
In an attempt to sweeten the pot for private bidders as well as the Central Government, the Amendment seeks to include a larger sample set of tier-2 and tier-3 airports available to be regulated by the AERA, and privatized.
A lot of criticism was received that the AAI would be left with insignificant and loss-making airports upon the completion of the privatization process, making this a burden on the government to rejuvenate the non-performing infrastructure. However, with this clubbing provision, that apprehension is averted, with the private sector mandated to pull the back-benchers along.
In the background of the ongoing tussle between the Central Government’s adamant push for privatization of airports across the country and the consequent backlash from various stakeholders, this Amendment comes in a veiled manner to give another push to the Privatization process. While there may be the possibility of a financial burden to be added to airlines and customers, the larger underlying commercial rationale that the development of smaller airports can be facilitated where there is low traffic, through their being clubbed with the profitable ones could be a winner for better infrastructure and development.
The government is looking to privatise the airports at Amritsar, Bhubaneshwar, Indore, Raipur, Tirchi and Varanasi, and it seems like the proposed Amendment is to the AERA Act will pave the way for clubbing some loss-making airports with these six, thereby making the deal sweeter for the Government, and the overall infrastructure health of the aviation sector. The success of this move remains to be seen, as it is a big ambitious move.
We will have to await and see if there is any challenge from the state governments against the reasonableness of these classifications of ‘Major Airports’. The acceptability of commuters and airlines for the probable higher fares and prices, aeronautical charges and the management could face resistance. There is lack of clarity on the parameters of these clubbing of airports to consider them ‘major airports’, and the nuances of this exercise shall determine the consequence going forward.
The ‘efficiency of the private sector’ is not in doubt given the fact that private sector firms are subject to the discipline of market forces while its managers are subject to considerable incentives and discipline different from and more demanding than those which apply to public sector managers. However, as many other policy decisions of the present Government face opposition from various factions, the legal questions answered at this inception point of the privatization debate would have immense precedential value in the years to come, not just for airports.
Deepak Kumar Thakur is Partner, L&L Partners.
Puspak Chamariya is Associate, L&L Partners.
The views or opinions expressed are solely of the author.