9.Cochin International Airport - AERA

CIAL/FIN/AERA/2009-10
23/03/2010
Shri Sandeep Prakash
Secretary
Airport Economic Regulatory Authority
Room No 58, B Block ,Rajiv Gandhi Bhavan
New 111003
Dear Sir,
Subject : CIAL’s response to the Consultative paper –thereof
On the outset itself, we welcome the continuing efforts of AERA to bring a consistent and
predictable regulatory regime to the Indian Airport sector. As regards CIAL response to the
consultative paper is concerned, we would first like to reiterates our stand taken by us vide this
office letter no CIAL/AERA/2009-10 dated 05/10/2009 which was issued in response to the
white paper issued by AERA.
Having considered the consultative paper issued by AERA, we would also like to submit the
following additional response to you, which may also be looked into by AERA before issuing the
draft regulatory policies and guidelines for Indian Aviation sector.
1. There exists an ambiguity as to whether the regulatory philosophies will be made
applicable uniformly to all private sector airports in India. As pointed out by us in our
earlier letter, the private sector airports in India are not a homogeneous group. Some of
them are based on a concession /OMDA agreements which are basically leased airports
from AAI /Government and some others are green field airports. Within the green field
airport, CIAL is the only airport without any concession agreements and the ownership,
management structure, size, nature of business etc varies greatly with that of other
airports. Unlike other private sector airports, the entire airport land was purchased by
CIAL and holds it as a freehold. The company has constructed the airport and
maintaining it without any support from state or central government. All major capital
investments were made years back and the airport is in a matured life cycle. However,

the consultative paper is silent as to whether all categories of airports will be treated at
par in the new regulatory regime or not. We requests for separate regulatory frame
work for Greenfield airports without any Concession agreements.
2. Adoption of Single till: We would like to record our deep concern regarding the
proposal for introduction of single till concept for Indian airport regulation. Under this
scenario all airport assets are put under the scope of single till. In fact, para 2.2 to 2.42
of consultative paper spells arguments in favour of adoption of a dual till in airport
industry ,but, it concludes its assessment in the very next paragraph 2.43 by stating that
in Indian scenario ,single till being the most appropriate basis in general for the
regulatory regime for major airports in India. However, the arguments in favour of single
till for Indian scenario do not seem to follow a detailed explanation or justification other
than the following three factors.
(a) Non aeronautical revenue is clearly a function of aeronautical activity at an airport.
Therefore, there is a persuasive case for non aeronautical revenues to be taken into
consideration for fixation of aeronautical charges.
(b) A single till approach protects interest of users by ensuring service provision
commensurate with the respective tariff /charges.
(c) Avoids complications relating to the cost allocation.
All the above three factors do not seems to be free of conceptual errors. For eg, CIAL is
having unique non aeronautical revenues like golf course, hospitals, trade fair centres,
convention centers, amusement parks etc, which are not necessarily a function of
aeronautical activity at an airport.
Similarly, empirical evidences show that user’s interests were protected well under the
dual till basis on long term basis. Examples are Torronta airport &Paris Airport .Further,
gradually all US airports are brought under dual till basis.
Cost allocation does not seem to be complicated process in the Indian Airport, but the
only problem in existence is of a clearly laid down parameters/basis for allocation which

can be easily brought out by regulatory body or can be entrusted to the professional
statutory accounting bodies of India.
3. Even if, AERA recognizes the need for a single till in Indian scenario and proceeds with it,
the revenues earned out of activities on the land owned by the airport company ,which
are not located in the operational area of the airport and/or generated not out of the
functions of aeronautical activities in the airport warrants an exclusion from the
definition of Regulatory Asset base and non aero nautical income. A company
exclusively formed for airport operations may derive income out of its real estate and
through its investment activities. This is especially applicable to those airport
companies which own freehold land in their books of accounts and that land is used for
various ambitious real estate activities of the airport company. Similarly capital
investment cycle is different in various airports and gradually airport companies will
have income from its investment activities. It is not clear from the consultative paper
whether all these income like income from real estate, income from the capital assets
created in the land owned by airport which is outside the operational area of airport,
income from the investment activities of Airport Company etc will fall under the
category of non aeronautical revenue. Any company earns income from other sources
and investments which cannot be considered as the income from the operations of the
company. Probably, in case of an airport company income from operations can be made
out of aero revenues and non aero revenue but there can also be a category of income
which is in the nature of non operating incomes of an airport company.
4. Therefore, we requests to exclude all assets which are falling in the own land of an
airport company other than located in the area earmarked for the operational area of
the airport and it may be kept outside the ambit of Regulatory Asset base.Similiary, an
airport company may earn non operating incomes like investment income and other
miscellaneous income which are not a function of airport activities and which may not
be the core income of the company. All these revenue shall be explicitly excluded
from the non aeronautical revenues, if the tariffs are determined on a single till basis.

5. We also suggest for a legal examination at this stage itself whether considering the non
aero assets for aeronautical tariff fixation is inconsistent with AERA Act as it has
excluded the non aero nautical revenues from its jurisdiction.
6. Price Cap Regulation: Under the proposed regime, airport operators would be required
to propose specific tariffs which will be considered and approved by AERA based on
considerations like cost relatedness etc and a price cap would prescribe a ceiling on the
aeronautical charges so that it shall not exceed the prescribed price cap. However, the
factors that will determine the first tariff cycles and the uniform methodology under
which all airports are expected to approach the AERA for tariff fixation is not made
clear.
7. It is also stated that a Performance measurement plan will need to be developed and to
be submitted by the airports as a part of the tariff proposals for approval of the
authority as per the guidance provided in that respect. Adequate time may be given to
the airports for implementation of these performance measurement mechanisms as the
proposed one is very complex and extensive. We would request that during the first
tariff cycle, submission of such an extensive performance measurements may be
dispensed with as the installation of proposed comprehensive performance system is
time consuming, requires additional investments on infrastructure and warrants
modification of the existing agreements with various stakeholders.
8. The tariff approval cycle due to CIAL is not presently aligned with the capex cycle. In our
case, all major airport capital investments were made years back. The assets are in place
and the debts were repaid, restructured or retired by infusion of additional equity
capial.Therefore, next major expansion related capital projects are in its planning stage.
Therefore, the approach to be followed for tariff fixation which is not aligned with any
capex approval cycle is not known.
9. Regulatory Asset base: The AERA’s position in regarding work in progress is that it
would not be considered for inclusion in the Regulatory asset base, however, a
capitalized financing approach will be adopted by including an allowance for the fair
rate of return .But it is stated that fair rate of return for WIP assets will be its

assessment of cost of debt . This is highly objectionable. Either the WIP should be
included in total for computing the regulatory asset base or the fair rate of return on
WIP assets will be return on capital employed (ROCE) .
10. Operating Expenditure: Authority’s assessment of operating cost shall invariably cover
all matching costs of related aero or non aero revenues considered for opex calculation
in the regulatory assets block. Say for eg, if the duty free sales are considered as non
aero revenue income and taken into consideration in the RAB block, the Opex shall also
include the cost of goods sold of the sale of duty free goods.
11. Consultation protocol: Consultative process envisaged in the consultative paper
suggests submissions of all detailed information to users including the business plans,
project investment files, detailed plans etc. Consultation also encompasses the
exchange of information and subsequent discussion between airport operators and
users with the objective of achieving agreements, wherever possible within an
appropriate time frame. CIAL has been doing the consultative process for all major
investments decision. From our experience, the very detail consultative protocol
brought out is counterproductive for the reason that ,in real situation there shall not be
any exchange of information amongst users, but whatever, information airport operator
furnishes to users shall be used in favour of them without any reciprocal basis and
when there are multi user’s involvement, it is difficult to gain acceptance of proposals
within a time limit and to reach to an agreement ,which will defeat the objective of the
consultative process. The consultative protocol proposed is also silent as to how the
decision is to be taken if there is no consensus for major capital project decisions. Taking
into consideration, we suggest that, when ever, major capital investment decisions are
mooted to AERA, consultation of various stake holders may be conducted in the
presence of AERA as an intermediary and the airports may be permitted to exchange
the project related plans only to the stake holders as information , not the entire
business plans of an airport company .
12. The consultation protocol also stipulates for incorporation of information on the asset
disposals, including any of its land or building, where through sale, partial sale, long

term lease or Joint venture including disposals by the airport company to other entities
.The information should also incorporate timing of such disposals and highlight the
impact on airport operation. These clauses are highly unacceptable. As the multi users
may include parties interested in the above affairs, it will impact airport company’s
effort to have a proper price discovery of assets to be disposed or acquired.
13. Quality of service parameters and benchmarks suggested in the consultative paper
seems to unrealistic in the Indian context. Service parameters like security check within
05 minutes for 95% of passengers, Checking time in queue within 10 minutes for 95%
passengers ,Check in time suggested etc are unrealistic ,hence requires modification.
Further, it may be noted that security check, CIQ, Check In , baggage delivery etc are not
those activities directly undertaken by the airport operator, hence operator alone
should not be penalized .Similiarly , time taken from aircraft arrival to kerbside in the
International arrival involves customs and immigration agencies. Hence the prescribed
time of 45 minutes for 95% passengers are possible only with cooperation of sovereign
agencies. Hence the service parameters which are purely under the control of an airport
operator may only be included with realistic benchmarks in the proposed quality of
services.
Trust you will consider the above facts also while framing the draft regulations.
Thanking you in anticipation,
Yours Faithfully,
(A C K Nair)
Executive Director (Operations)