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India Law News 1 Civil Aviation Issue 2013

India Law NewsA quarterly newsletter of the India Committee

VOLUME 4, ISSUE 3, FALL ISSUE 2013

ndia has experienced extraordinary growth incivil aviation over the past decade and isforecast to be on of the world’s largest aviation

markets in just a few years. To achieve (and afford) thepromise of civil aviation, India faces challenges posedby national and state policies, law, regulation andpractice. Crucial questionsare presented to policymakers, regulators, business leaders and to lawyerswho advise them.

Civil aviation in India may be taken as a study incontrasts. Despite extraordinary growth in traffic, mostof India’s airlines are in a precarious condition.

continued on page 8

ndian aviation has great underlying potential.However, the market continues to under-performdue to structural issues and the business models

of almost all the major carriers are under stress.

The fiscal and cost environment in which the civilaviation sector is operating has turned particularlyhostile at present as a result of stubbornly high fuelprices compounded by a sharp depreciation of theRupee and a punitive ad valorem sales tax.

There is a need to take a holistic view of the sectorand address concerns of all the stakeholders and allaspects of the civil aviation business.

continued on page 6

CIVIL AVIATION IN INDIA—THE VIEW FROM30,000 FEET

By VivekLall

SAVE THE DATE (FEBRUARY 13-15, 2014 – NEW DELHI, INDIA)

Come join your colleagues from the United States and India, ABA Section of International Law Leadership, ABA Leadership, and Leadership fromMajor Indian Bar Associations, government officials, and prominent Indian business personalities at a jointly sponsored conference of the

American Bar Association Section of International Law India Committee, Society of Indian Law Firms, and the Bar Association of India, as well asthe Indian Services Export Promotion Council to be held in New Delhi, India.

The conference will focus on trade and investment between the U.S. and India. MCLE credit will be requested.

For more information, including information about speaking possibilities, contact James Duffy ([email protected]) or Sajai Singh([email protected]).

THE MANY CHALLENGES FACING CIVILAVIATION IN INDIA

By Robert S. Metzger


ndia represents one of the largest markets for civil aviation in the world – butone that also possesses unique legal and business challenges. Between October29 – 31, a U.S.-India Aviation Summit will be held in Washington, D.C., to

examine such topics as air traffic management,aircraft environmental issues, safetycertification, airport sustainability and general aviation development, among othersubjects that are critical to an expanding aviation infrastructure.

Because India is a market of opportunity, but also challenge, there are many subjectsthat require attention of policy makers, legislators, regulators and lawyers. Theseinclude subjects such as taxation and import policies, limitation on foreign directinvestment, land acquisition, concession arrangements with airport operators, public-private partnerships, regulatory strategy, aviation safety administration, and therelationship between India’s national and state governments. The articles here providean introduction to many of these subjects as well as focused insight on several of themost pressing concerns.

In addition to guest editing this issue of India Law News, we have each contributedan article on different aspects of civil aviation in India. One article, The ManyChallenges Facing Civil Aviation in India (Robert S. Metzger), is intended to cover thebroad landscape of legal, business and regulatory issues that concern civil aviation inIndia. The second article, The Growth of Airports and their Environmental Impact—The India Perspective (Atul Sharma), looks specifically at the acute questions of how toreconcile necessary infrastructure growth with environmental protection. We thank alsoDr. Vivek Lall, who heads the aviation enterprise of Reliance Industries, for hisauthorship of the introduction to this issue with an article entitled Civil Aviation inIndia—The View From 30,000 Feet. Our other articles focus on infrastructure issues andare contributed by distinguished Indian lawyers with active practices involved inaviation regulation and infrastructure. William Vivian John and Sumithra Suresh ofLuthra & Luthra discuss regulatory challenges affecting airport development economicsfor private sector participation. Yogesh Singh, Pia Singh & Aditya Alok of the law firmTrilegalhave written on obtaining land for airports and infrastructure. AmitabhChaturvedi and Sumita Chauhan of Mine & Young discuss legal restraints oninfrastructure development in the aviation sector.

We hope you find the above articles interesting and useful.

Robert S. Metzger and Atul SharmaGuest Editors, Fall Issue 2013

Robert S. Metzger is a shareholder at the law firm of Rogers Joseph O'Donnell, P.C.,and is based in Washington, D.C. Mr. Metzger counsels leading U.S. andinternational companies in aviation and defense matters. He is a member of theDefense Executive Committee of the U.S.-India Business Council and has publishedseveral articles in international journals on the subject of the U.S.-India aerospaceand defense industrial relationship. Mr. Metzger was a Research Fellow at theCenter for Science & International Affairs, Harvard University Kennedy School of

ABOUT THIS ISSUE

CONTENTSOVERVIEW

2 About This Issue

4 Co-Chairs’ Column

________ ________

COMMITTEE NEWS

35 Submission Requests36 Join the India Committee

________ ________

SPECIAL FOCUS

1 Civil Aviation In India—TheView From 30,000 Feet

1 The Many Challenges FacingCivil Aviation In India

15 Legal Restraints OnInfrastructure Development InThe Aviation Sector

20 Obtaining Land For Airports& Infrastructure

26 Regulatory Challenges AffectingAirport DevelopmentEconomics For Private SectorParticipation

31 The Growth Of Airports AndTheir Environmental Impact—The India Perspective

________ ________


Government, and is a member of the International Institute of Strategic Studies(London). He can be reached at [email protected].

Atul Sharma is the Managing Partner of Legal Link, a New Delhi-based law firm.He has over 30 years of experience in civil and commercial litigation andarbitration in various sectors, including aviation, infrastructure, real estate,telecom and banking. He has wide experience in dispute resolution proceduresand domestic and international arbitration. Atul has advised and representedclients in shareholder disputes arising out of the acquisition and sale of companies,as well as contentious regulatory matters, insolvency proceedings, and real estateand tender-related disputes. He also specializes in the infrastructure sector andhas advised developers and contractors. In the last five years, Atul has advised onprojects at airports in Istanbul, Turkey and Male’, Maldives, and four majorairports in India—Delhi, Mumbai, Bangalore and Hyderabad, in addition to otherinfrastructure projects like ports, transportation, power and water. Atul can bereached at [email protected].

Editorial Boar


elcometo the India Committee. The Committee is proud topresent yet another outstanding issue of the India Law News,

on a topic that is rapidly gaining interest for Indo-U.S. legalpractitioners – civil aviation. Those of us who grew up in India in theeighties and early-nineties remember a time when flying to get fromcity A to city B within India was an expensive and cumbersome option,to be exercised only in the most dire of circumstances. Today, even themost cost-conscious of India consumers now has a range of flightoptions between most large and mid-size Indian cities. And thejourney isn’t over – the Indian Ministry of Civil Aviation appearscommitted to encouraging competition in the civil aviation industryand potentially open to revisiting the fleet, equity and other barriers toentry in this sector. The articles in this issue of the India Law Newscover a range of topics impacting this sector – from infrastructure toairport development, including the land acquisition approval process,as well as environmental regulations. Our grateful thanks to the co-guest editors of this issue, Robert Metzger and Atul Sharma, and, asalways, our heartfelt gratitude to BhalinderRikhye, editor-in-chief ofthe India Law News and the highly capable team of co-editors.Also,many thanks to PoorviChothani and her colleagues at LawQuest fordesktop publishing. The Winter(January) 2014 issue of the India LawNews will present part 2 of this two-part series on civil aviation whichwill focus on commercial issues in this sector.

Also to note on your calendars for the coming months is the IndiaCommittee’s biennial stand-alone program in India. On February13-15,2014, the ABA India Committee, along with the Society of Indian LawFirms (SILF), the Bar Association of India and the Indian ServicesExport Promotion Council is organizing a two-day program in NewDelhi on trade and investment between the U.S. and India. Theconference is topical; despite the slow-down of the India economy, thesignificance of U.S. trade and investment on India and vice versaremains strong. U.S. companies’ investment in India was a record $28billion in 2012 and Indian companies for their part invested $14 billionin the U.S. in 2012. According to the Reserve Bank of India, the U.S.remains India’s second largest trading partner in terms of export ofIndian goods, and among the top five in terms of imports to India. It iswith this background that the India Committee expects to lead a sizableU.S. delegation to India for this program, including key members of theIndia Committee and ABA Section of International Law leadership.Featuring experienced attorneys from the U.S. and India, the programwill provide an outstanding opportunity for networking andexchanging of news, views and developments from the intersectingU.S. and Indian legal and business worlds. Watch this column forfurther information or contact your co-chairs for registration and otherinformation on this program.

India Law News

EDITORIAL BOARD (2013-2014)

Editor-in-ChiefBhalinder L. RikhyeBartlett, McDonough & Monahan, LLP, New York, NY

Co-EditorsPoorviChothaniLawQuest, Mumbai, India

AseemChawlaMPC Legal, New Delhi, India

Antonia GiulianaKelly, Drye& Warren, LLP, New York, NY

Julia LuysterBogert&Rembold, PL, Coral Gables, FL

Sylvana Q. Sinha

Desktop PublishingLawQuest, Mumbai, India

India Law Newsis published quarterly by theIndia Committee of the American BarAssociation’s Section of International Law, 74015th Street, N.W., Washington, DC 20005. Nopart of this publication may be reproduced, storedin a retrieval system (except a copy may be storedfor your limited personal use), or transmitted in anyform or by any means (electronic, mechanical,photocopying, recording, or otherwise) without theprior written permission of the publisher. Torequest permission, contact the Co-Chairs of theIndia Committee.

India Law News endeavors to provideinformation concerning current, importantdevelopments pertaining to law in India,Committee news, and other information ofprofessional interest to its readers. Articles reflectthe views of the individuals who prepared themand do not necessarily represent the position of theAmerican Bar Association, the Section ofInternational Law, the India Committee, or theeditors of India Law News. Unless stated otherwise,views and opinions are those of the authors andnot of the organizations with which they areaffiliated. This newsletter is intended to provideonly general information and should not be reliedupon in the absence of advice from competentlocal counsel.

SUBMISSION DEADLINESFall Issue August 1stWinter Issue November 1stSpring Issue February 1stSummer Issue May 1st

Potential authors should review the AuthorGuidelines and send manuscripts via email to theEditorial Board.

© 2013 American Bar AssociationAll rights reserved

Produced by India Committee

CO-CHAIRS’ COLUMN


With such exciting developments ahead of us at the IndiaCommittee, a quick look at the past months. On August 6, weorganized a teleconference on “Raising Venture Capital in the UnitedStates: What Every Indian Entrepreneur Should Know.” Speakers gaveengaging and informative presentations on the legal regime for anIndian start-up to raise early-stage capital in the U.S., as well as whatIndian and U.S. incubators and venture capital funds would typicallylook for in a start-up. With more than 70 participants, both start-ups aswell as those who advise them, the program engendered a livelydiscussion and Q&A session.

In other news, just as we had given up hope that the IndianCompanies Bill 2012 would be passed before the upcoming nationalelections put an end to substantive legislative activities, the RajyaSabha, the upper house of the Indian Parliament, passed the Bill onAugust 8. One of the most controversial provisions of the Bill, whichrequires companies above a certain size to spend a portion of theirannual profits on corporate social responsibility (CSR) activities, hassurvived unscathed in the new Act. The new Companies Act has alsogiven effect to recommendations of various corporate governancecommittees on topics such as director independence and auditorrotation. India has also joined the ranks of the select few countriesacross the world that have legislatively enforced Board diversity byrequiring listed companies and companies above a certain size to havea woman member on the Board of Directors. The significant provisionof the new Companies Act, what the Act means to U.S. companiesoperating in India, and other legislative and judicial developmentsaffecting U.S. businesses operating or seeking to expand into India, willbe the focus of our next teleconference, slated to be held in winter 2013.Please visit the India Committee web page on the ABA’s website athttp://www.americanbar.org/ in the coming days for more informationon this upcoming teleconference.

We hope you will register for the teleconference, and we sincerelyhope to see a good number of our readers at the program in New Delhion February 13-15. In the meantime, and until the next India LawNews, we wish our Indo-U.S. community a safe and happy Diwali andThanksgiving!

Sajai SinghSanjay TailorRicha Naujoks


continued from page 1

Though it is difficult to build a consensus on certainissues due to differing opinions of variousstakeholders, there are many aspects of the businesswhere there is a unanimous demand from thecommunity for action.

A glaring example is the Maintenance, Repair andOverhaul sector. Despite the growing potential of theMRO market, India continues to represent achallenging environment with high taxation, expensiveinfrastructure, a shortage of skills and strongcompetition from neighboring markets such as SriLanka and the UAE.

Another potential opportunity on the policy front isthe current regulation requiring Indian carriers to havecompleted 5 years of domestic operations and have afleet size of 20 aircraft before being permitted to launchinternational services. It appears that this may alsorequire a policy re-look to ensure Indian carriers get alevel playing field.

We must also welcome certain positive steps in therecent past, especially the decision to allow foreignairline investment, which has the potential to be game-changing for Indian aviation.

The New Civil Aviation Act, 2012 will soon replacethe Aircraft Act of 1934, which does not cover issuessuch as viability and security, and has been severelycriticized in safety audits conducted by global aviationbodies. The new law will provide for a new regulator toreplace the Directorate General of Civil Aviation(DGCA). The Ministry for Civil Aviation is also in theprocess of setting-up a new Civil Aviation Authority of

India (CAA), which will operate through collectivedecision-making of a board.

The Civil Aviation Authority of India Bill 2013,recently introduced by the Minister of State for CivilAviation, would provide the CAA full operational andfinancial autonomy to regulate all issues concerningcivil aviation safety and protect the interests ofconsumers in a fast-changing aviation scenario. Withfull functional and financial autonomy, the proposedCAA would be able to recruit its own staff, decide ontheir pay structure and have powers to fix and collectfees for rendering services like safety oversight andsurveillance of air navigation services.

With regards to Aviation infrastructure,government has announced plans to issue tenders forthe construction of 50 low cost airports to improveregional connectivity. This could give boost to the civilaviation sector in India and all related ancillaryindustries.

A significant recent development is the decision bythe government to invite private internationaloperators to bid for operations and managementcontracts for Chennai and Kolkata airports (andeventually 15 profitable airports over subsequentyears), which are currently under the state-ownedAirports Authority of India (AAI).

I would also like to touch upon the area of GeneralAviation which has huge potential, but has been givenlow priority by successive administrations.Development of heliports is important to support thegrowth of general aviation in India, especially in areasthat cannot have runways for financial or terrain

CIVIL AVIATION IN INDIA—THE VIEW FROM 30,000 FEET

By VivekLall


related challenges. The disaster managementauthorities in Uttarakhand could have utilized such aninfrastructure if it was available to evacuate trappedcivilians and provide relief to locals in much less time.

There is a need to consider developing a public-private partnership (PPP) policy for development ofheliports. There is also a need to develop standardizedroute operating procedures for helicopters. Non-operational air strips need to be upgraded in places ofeconomic significance such as ports, mining areas,tourist places and industrial clusters. These need to bedone at the lowest possible cost without compromisingon safety. The air-strip may attract a small number offlights initially and if it has a strong business case, itmay ultimately lead to full scale operations in future,with significant benefits to the local economy.

The major concern today is of regulating safety,efficiency and viability in all aspects of aviation. Ibelieve that through a combined effort of thestakeholders we can unlock the huge potential in theIndian Civil Aviation Sector.

Vivek Lall is President and Chief Executive Officer,Reliance Industries Limited and specializes in thedefense and aerospace sectors. Previously, he wasVice President and Country Head (India), BoeingDefense Space & Security. Prior to that he wasManaging Director of Boeing Commercial Airplanesin India. Before joining Boeing, Vivek was withRaytheon and the NASA Research Center. He holds aMaster’s degree in aeronautical engineering and aPh.D. in aeronautical engineering & modeling. He isa founding Co- Chair of the U.S. - India AviationCooperation Program and President of theMathematical Society of America.


continued frompage 1

Despite forecasts that India will add more than athousand transport aircraft to civil fleets in the two nextdecades, India has too few airports and today lacks theaviation safety infrastructure required to handle thegrowth.

AKPMG report in 2012 cited a 15.6% increase in theCompound Annual Growth Rate (CAGR) in domesticpassenger throughput over the five year periodconcluding in FY 2011, and KPMG forecast domesticthroughput of 293 million passengers by FY 2020, upfrom 106 million (actual) in FY 2011, and 51 million(actual) in FY 2006. Late in 2012, the International AirTransport Association (IATA) predicted that India’sdomestic air traffic would experience double-digitgrowth between 2012 and 2016. For air cargo, Indiawas forecast by IATA to be among the five fastestgrowing international freight markets.

For a variety of reasons, however, growth hasslowed. IATA reported that domestic air traffic haddropped 9.1% in February 2013 versus February2012.The growth rate of India’s Gross DomesticProduct (GDP) has eased and disposable incomes havebeen pressured by inflation and the declining value ofthe rupee. Airline costs have been rising in partbecause of the reduced currency valuation, very highcharges for aviation fuel levied by Government PublicSector Undertakings (PSUs) and high sales taxesimposed by state governments. (One recent newsarticle asserts that the overall cost of airline operationsincreased by 20% in just three months in 2013 becauseof jet fuel prices and rupee devaluation.) The Indiandomestic air travel market is clearly sensitive topricing. Some of the growth in air travel has beenfueled by a “middle class” willing and financially ableto fly. There also may be price elasticity given the

availability of travel by rail, as India enjoys one of theworld’s largest rail networks.

Irrespective of the recent dip, Boeing’s 2013commercial aviation forecast, covering the periodbetween 2013 and 2032, estimates that Asia Pacificairlines will need 12,820 new airplanes, valued at $1.9trillion, over the next 20 years. Late in 2012, Boeingforecast that India would have the highest passengertraffic growth in the world – higher than China’s – andpredicted the Indian market itself would require 1,450new aircraft worth $175 billion by 2031.

But the Boeing forecast also cautions that India isone of several regions where “aviation growth outpacesplanned infrastructure development.”

Today, most of the civil air carriers in India are in afinancially distressed condition. India’s leading airlinesposted a combined loss of $1.65 billion between 2012and 2013, according to one report. The government-owned carrier, Air India, has a total debt of $6.4 billion(at the exchange rates as of this writing) and is expectedto post a net loss of nearly $625 million in the currentfinancial year. Just a few years ago, exploding demandbrought several new, low-cost carriers to the Indiamarket, leading to the purchase or lease of severaldozen modern single-aisle transport aircraft. Thefinancial results, taken as a whole, are discouraging.Only one Indian carrier, IndiGo, is expected to beprofitable in 2013. Several of the budget carriers(Kingfisher, Paramount and MDLR) have ceasedoperation.

At the same time, however, interest remains keenamong prospective entrants to join the Indian market,especially in the wake of Government decisionsallowing increased investment by foreign airlines in

THE MANY CHALLENGES FACING CIVIL AVIATION IN INDIA

By Robert S. Metzger


Indian carriers. (See below.) The Tata Group hasannounced its return to civil aviation. Through a link-up with AirAsia, a new budget carrier, AirAsia India, isexpected to start flying domestic routes in January2014.The Tata Group also has announced an intentionto partner with Singapore Airlines (SIA) to create anew, full-service airline, Tata SIA Airlines Ltd., withTata Sons as the majority partner with a 51 per centstake. These developments show confidence on thepart of the airline industry that there is as-yet unmetdemand for air traffic to be served to and from andwithin India.

Air carriers face other challenges in the web ofnational and state regulation and taxation. Indianairlines operate with some of the highest fuel costs inthe world. India imports a huge percentage of AviationTurbine Fuel (ATF) from foreign sources and prices areset by Government-owned PSUs that excludecompetition from private sources. State surcharges onfuel vary widely, from 4% to 30%, and are not undereffective control by the national Government. Furtherpressure is a consequence of the fall in the value of therupee relative to the dollar; according to someestimates, as much as 70% of the costs of airlineoperations in India are dollar-based.

The negative movement of the rupee may provetransitory. The central Government knows of thefinancial difficulties of Indian airlines and may showforbearance from new charges and efforts to mitigateexisting levies. Also, there are some signs of restrainton the part of state governments. Five states reportedlyhave agreed to reduce their taxes to as low as 4% andBengal recently announced a 3-year sales tax waiver onATF and a sales tax reduction as an incentive to bringmore flights to the Kolkata airport.

Apart from the distressed financial condition ofmost of India’s air carriers, and the availability of cheaprail transport, another constraint on the growth of civilair passenger traffic and cargo operations is therelatively small size of the aircraft fleet available fordomestic routes or international destinations. Onesource reports that the total fleet size for commercial

airlines in India was 371 as of February 2013. In recentyears, India has seen a dramatic increase in the numberof transport aircraft owned and operated by domesticair carriers, and more are on order. Nonetheless, actualcapacity compares unfavorably with other countries inSouth Asia whose domestic airlines own many moreaircraft to serve smaller populations. Indonesia, with apopulation of 240 million, about 20% that of India’s,has a substantially larger fleet in being and many moreaircraft on order.

The not yet resolved status of Kingfisher aircraftaffects the ability of Indian carriers to lease aircraft orobtain financing for purchase. India in 2008 ratified theso-called “Cape Town” agreement (formally, the“Convention on International Interests in MobileEquipment” adopted in Cape Town, South Africa, in2001). The Cape Town agreement is intended to assurefinanciers that they will have prompt ability torepossess collateral, such as airplanes, in the event offinancial default. Kingfisher Airlines, which leasedAirbus A320 aircraft from several lessors, suspendedoperations in 2012. Several lessors have encounteredstiff legal and bureaucratic obstacles in recovering theairplanes, in part because of demands by local airportand tax authorities for payments Kingfisher failed tomake. As a consequence of Kingfisher’s default and theobstacles encountered by aircraft lessors, the financiersnow are demanding a premium from the hard-pressedIndian carriers to cover added risks. However, all buttwo of the controverted airplanes have been recoveredas of this writing. The Government of India reportedlyhas agreed to consider legislative and rule changes toexpedite the ability of lenders to take possession ofaircraft. Until the Government completes these actions,however, the problems exemplified by Kingfisher willconstrain the financing of aircraft fleet growth.

At the level of the national Government, Indiasometimes has exhibited an ambivalent andcontradictory attitude towards civil aviation.Periodically, the Government has acted to increasecharges upon carriers and passengers as a revenue-generating device. But Civil Aviation Minister AjitSingh said, in May 2013, that the Government is


looking to reduce charges to land and park planes at 80smaller airports in India. The Government alsoindicated it is re-examining a long-standing rule thatIndian airlines are prohibited from flyinginternationally unless they have five years of domesticoperations and a minimum of 20 aircraft.

For some time, the national Government haspledged to take necessary steps to replace the DirectorGeneral of Civil Aviation (DGCA), criticized as lackingin authority and resources, with a new and morepowerful central aviation administration, the CivilAviation Authority (CAA). CAA would haveindependent funding and improve upon recruitmentand retention of trained aviation personnel. Though theUnion Cabinet has approved the proposal to replaceDGCA with CAA, and the commercial aviationcommunity has expressed widespread support for thischange, it will take several years to occur. DGCA hastaken several positive steps recently, however. Mostimportant is the decision to extend by one year theterm of Arun Mishra, the head of DGCA. DGCA alsohas announced it intends to hire 100 airworthinessofficers to improve its staffing of safety oversight.

Problems with DGCA figure into new concerns thatraised by international authorities about India’sattention to air safety. Late in the summer of 2013, adelegation from the International Civil AviationOrganization (ICAO) conducted fact-finding in India,and its scrutiny was followed by an audit by the U.S.Federal Aviation Administration. It is expected thatthese reviews will place pressure upon India to shoreup its aviation oversight,answer shortages of trainedaviation specialists and improve supervision of aircraftrepairs. There are indications that the Government isresponding promptly. If its efforts are not sufficient,then India’s status among countries in the aviationschema could be downgraded and there would berestrictions on the ability of Indian carriers to addflights to international destinations. This would beespecially harmful to Air India, which has announcedintentions to use its growing fleet of Boeing 787passenger aircraft on new international routes.

India’s approach to foreign investment in itsdomestic air carriers also has exhibited ambivalence,uncertainty and inconsistency. In 2012, the IndianGovernment announced that it would relax limits onforeign airline direct investment (FDI) in Indiancarriers, allowing a new maximum of 49%. Realizationof the benefits of the change has been beset bycompeting bureaucracies and frustrating delays. Earlyin April 2013, UAE-based Etihad Airlines announcedits intention to buy a 24% stake in Jet Airways. Thesubsequent processing of that investment has beentortuous, with allegations of impropriety as well asvarious interventions by multiple government agenciesand bureaus, among them the Prime Minister’s Office,the Central Vigilance Commission (CVC), the Securitiesand Exchange Board of India (SEBI), the ForeignInvestment Promotion Board (FIPB), the Department ofIndustrial Policy & Promotion (DIPP), the CompetitionCommission of India(CCI) and the Cabinet Committeeon Economic Affairs (CCEA).All have been involved inthe route to approval and many have intervened torequire changes to the commercial deal.However, itappears that this deal will be concluded in the nearfuture and the lessons learned should be instructive.Despite the travails of the Etihad-Jet Airways deal, therecently announced plans for AirAsia India and TataSIA Airlines suggest that the Government’s FDIchanges are working to bring foreign airline capital toIndia’s carriers.

There are many analysts who advocate furtherrelaxation of FDI limits on civil aviation. There areseveral sectors encompassed within civil aviation –among them domestic airlines, ground handling,setting up new airports and non-scheduled operations– that have different FDI limits. India, like manysovereign nations, naturally has a strong desire toassure that its nationals have an active role, if notcontrolling authority, in these vital commerce sectors.Due recognition of these national interests is India’sright, of course. However, India’s present experience isone where the pace of foreign investments has fallenand where the current account deficit has risen,together contributing to the decline in the rupee’svalue. Liberalizing FDI in all sectors of civil aviation


should encourage greater inflow of capital and couldhelp India to increase carrier fleets, improve carrieroperations and profitability, and enhanceinfrastructure.Stronger air carriers should bring morecompetition for domestic and international travel.

Infrastructure remains a continuing challenge andpotentially is the critical restraint upon the growth ofIndia’s civil aviation. Only 21 airports in India servedmore than 1 million passengers in 2012, according tofigures published by the Airports Authority of India(AAI) and some of these do not match Westernstandards. Six airports dominate the traffic statistics –Delhi, Mumbai, Chennai, Bengalaru, Kolkata andHyderabad. Considering a “middle class” populationvariously estimated at between 300 million and 600million, India is woefully short of airports.The potentialdemand for domestic air travel in India will not berealized without massive improvements in airportinfrastructure and there are reasons to questionwhether that can be accomplished on the scale requiredor in time to answer demand.

Despite the impressive recorded growth indomestic traffic, measured over the past ten years, airtravel “penetration”in India (total domestic passengersdivided by total population) has been reported at about5%, far behind developed countries and one-fifth thedomestic traffic of China (which is only 10% larger). A2009 DeloitteReport on India aerospace citesinfrastructure limitations as “the weakest link in thechain” and indicates that only 45% of the major citypairs in India have direct connectivity by air. Thesituation is even worse for the many “Tier II” and “TierIII” cities – which have adjacent populationsnumbering into the hundreds of millions. The problemof un-served or under-served smaller cities has drawnattention at the highest level of the central Government.Prime Minister Manmohan Singh, in late September,pledged that India would have 100 airports in smalltowns by 2020. The strategy to achieve this goal will beto privatize more of the larger airports so that theGovernment can focus on smaller facilities.

There has been considerable public discussion, inrecent months, over new airport initiatives, as wouldbe led by the Airports Authority of India (AAI).Various strategies have been promoted, includingprivatizing more airports and promoting more private-public partnerships for airport modernization and newairport development. Earlier this summer, the“Mayaram Committee” recommended 100% FDI inexisting airport projects. Also under consideration arereduced landing, route navigation and security chargesfor air services to Tier II and III cities.

A critical problem is in the limited availability ofland, except where unused land can be found anddedicated for “greenfield” projects. The process toacquire land is rendered daunting under the presentlegal regime, though the newly enacted LandAcquisition Bill may help to abate the problem.Another problem is that the national and stategovernments have imposed sizable fees and concessiondemands upon private airport operators, raising aquestion as to whether a business case for investmentcan succeed. It remains to be determined whether theprivate sector will answer calls for new airportprivatization initiatives without wholesale reform inthe way in which the national and state governmentsregulate and tax airport operations and economics.There is no doubt, however, that the private sectorremains very much interested in opportunities to investin the modernization of India’s airports. Elevencompanies, including several industry leaders, recentlyresponded to a call for expressions of interest inprojects to modernize airports at Chennai, Lucknow,Kolkata, Ahmedabad, Guwahati and Jaipur.

Apart from the challenge to provide the necessaryairports, air traffic management and securityinfrastructure, today the fleets of India’s civil carriersare optimized for high density passenger transportbetween primary city pairs. Although regional aircraft,especially turboprops, offer advantages in operatingefficiently with short runways and from relatively lessimproved facilities, India’s air carriers today haverelatively few regional aircraft (whether jets orturboprop). With uncertain demand and doubtful


basic infrastructure, Indian air carriers have beenreluctant to purchase aircraft optimized for regionalservice. However, Government officials have spokenof intentions to conduct a trial to subsidize airlines toincrease regional service. Air India has announced anintent to lease turboprop aircraft to enhanceconnectivity to non-metro cities.

India has not clearly articulated policies to promotebusiness and general aviation, and various DGCAactions imposefrustrating operational and regulatorybarriers. India’s use of rotary-winged aircraft issurprisingly small, considering the utility of helicoptersand their ability to serve areas lacking airports suitablefor conventional, fixed-wing aircraft. Pawan HansHelicopters Limited, a PSU, is reported to have lessthan 50 helicopters in its fleet.In 2012, the fleet size ofhelicopters operated by private concerns actually fellfrom 293 to just 266, according to a report published inSeptember 2013. The root causes are said to includehigh import duties and the regulatory environment,where complex rules frustrate helicopter operation andadd costs. The central Government has said itrecognizes the need for more heliports, in part to aid indisaster response, and has expressed an intent toimprove training of helicopter pilots. Until thesechanges are accomplished, the rate of induction intoprivate service of new private sector helicopters likelywill remain very low.

In recent months, the Prime Minister’s officeannounced an intention that India develop,indigenously, a 70-90 seat medium range turbopropaircraft, ostensibly to answer presently underserveddemand, and to assist the Indian military in tacticalairlift. The project also is intended to build up adomestic airframe and support industry. This is acommendable goal – but its commercial viability andtechnical realism are open to question. The notionalturboprop transport would face tough competitionfrom ATR and Bombardier, that already have productsin this space and are working on larger capacity, evenmore efficient aircraft. Moreover, the Indian mediumrange civil aircraft could face aggressive competitionfrom regional jets newlyavailable from Russia and

models soon to come from Japan, Canada, Brazil andChina.

Realism should temper national aspirations.India’s track record in the domestic development ofcivil or military aircraft is not distinguished. There isno establishedprivate sector resource with thenecessary competencies (or technology) to lead a newaircraft development program, much less to produce acivil aircraft in quantity that meets world-class safetyand reliability standards. Unless the IndianGovernment agrees to underwrite the developmentprogram, there is not likely to be sufficient assureddemand to justify the risk and expense of privatedevelopment.

Indian leadership would benefit from assessmentofthe experience of other “BRIC” nations in thedevelopment of national civil aerospace programs.Embraer in Brazil, of course, stands out as a shiningexample of how much can be accomplished. Thatexperience took decades to achieve, however, and maynot be replicable. China’s experience is instructive andshould serve to caution India. Creation of a domesticair transport industry has been a matter of highnational policy, priority and investment. But China,despite the expenditure of billions of dollars and yearsof effort, has experienced continuing frustration anddelays in three new civil aircraft that its state-supported enterprises have sought to bring to market:the XIAN MA60 turboprop, the Comac ARJ21 regionaljet and the new Comac C919 single-aisle transport.

There should be no question that India has thecapacity to develop and sustain a civil aviationindustry. The nation’s world-class accomplishments inmany technology-driven areas speak to its inherentabilities and the potential of its highly educatedworkforce. India has announced it will open anaviation university in September 2014. But Indiashould not underestimate the difficulty of “going italone” to achieve the desired result. India shouldactively promote aeronautics in the private sectorandencourage foreign investment. So long as Indialimits FDI, and presents an opaque maze of regulations


and approvals, it denies itself the opportunity to formsuccessful ventures with accomplished Westerncompanies to plan, design, develop and sustain acapable Indian civil aviation industry.

To foster a successful civil aviation industry willtake decades. A coherent and consistent nationalpolicy is needed. India should welcome rather thanfrustrate foreign partnerships; its domestic industrywill succeed only if it has access to technology andtechnical assistance from accomplished foreignpartners. Those foreign partners will not put at risktheir enterprise-critical technology without a highdegree of assurance of return on their investment andwithout confidence they can do business in Indiawithout threat to their intellectual property orcompromise to their business integrity. Continuingvigilance to eradicate routine governmental corruptionis essential to attract ethical global partners.

If development of new aircraft is a long-termobjective, India can focus with higher confidence ofnear-term success on creation of an aviation supplychain, e.g., specialized service and manufacturing.India should harness its prodigious informationtechnology and software development capabilities tocontribute to the design, development, manufacturingand sustainment objectives of the major players in theglobal aviation industry. Certainly, India shouldfacilitate and promote national resources formaintenance, repair and overhaul (MRO) of civilaircraft. All of these areas today are subject to rules,regulations, policies, taxes and levies that frustrateaccomplishment. For example, very high tariffs nowinhibit original equipment manufacturers fromimporting into India the parts that are needed for MROoperation.These barriers should be removed andreplaced with a responsible, businesslike, predictableadministration of civil aviation matters. Seniorgovernment officials recognize the huge opportunityfor MRO operations in India to service Indian aircraft,but coordination of the necessary actions amonginvolved ministries will be difficult, particularly whenthe Finance Ministry may be asked to reduce taxes andtariffs to promote the long term opportunity.

Moreover, and most important, India needs to givenational attention to civil aviation and should establisha holistic national policy to promote both the industryand infrastructure needed. There exists a correlationbetween the effectiveness of civil aviation – bothpassenger transport and cargo – and growth of thenational economy. Stronger civil air carriersand abetter aviation infrastructure will contribute to GDPgrowth. Successful nurturing of a civil aviationindustry will add manufacturing jobs for India’senormous population of skilled, younger workers.Over the longer term, a credible aerospace supply chainwill enable India’s airlines to buy aviation supplies andservices from domestic sources, and this will help toreduce the pressure on currency accounts by reducingoutflows to foreign sources. Aircraft that are operatedin Indiashould receive MRO within India.Indeed, thedevaluation of the rupee increases the appeal of Indian-sourced supplies and services where costs are in rupeesand receipts are in U.S. dollars.

For several years, much attention has been paid torefinement to the Defence Procurement Policies and theaccompanying “offset” obligation that foreign sellersmust buy from or invest in Indian sources in anamount equal to 30% of the equipment sale value.India has been disappointed with the results from theoffset program, as growth of indigenous capability hasbeen slower than hoped. Better results would beobtained if India opens up its offset program to permitdischarge by more transactions in the civil aviationsectors, including “dual use” projects where a productor service could be used either for military orcommercial purposes. Credit against offset obligationsshould be granted for work done by India-basedaerospace companies with more than 26% foreignownership. A fundamental restraint upon thewillingness of India’s domestic companies to invest inmilitary aerospace is that the size of the market islimited and the certainty of purchases is inherently indoubt. In contrast, the market for civil aviation islarger by orders of magnitude and its duration isessentially indefinite. The national Government wouldbe well-counseled to devote more of its attention andenergies to promotion of a civil aviation industry and


infrastructure in India. Benefits to India’s nationaldefense will follow.

The U.S. and India are natural partners in thepromotion of civil aviation in India. Since 2007, theU.S.-India Aviation Cooperation Program (ACP) hasoperated as a private-public partnership to promote thegrowth of the civil aerospace sector in India. In July2011, the countries signed a Bilateral Aviation SafetyAgreement (BASA) in July 2011, to facilitate reciprocalsafety and certification activities, and explicitly topromote an indigenous aircraft and aeronauticalproducts industry with U.S. cooperation and technicalaid. Through the ACP, the U.S. Government andleading American companies are cooperating andassisting Indian counterparts for the advancement ofcivil aviation across a broad spectrum. Several keyopportunities are on the horizon for coordination ofpublic and private sector initiatives between thecountries. A U.S.-India Aviation Summit, sponsored bythe U.S. Trade and Development Agency and theGovernment of India, is to be held on October 29-31,2013 in Washington, D.C. Planning now is underwayfor the 4th International Exhibition & Conference onCivil Aviation to be held on March 12-16, 2014, inHyderabad.

Robert S. Metzger is a shareholder at the law firmof Rogers Joseph O'Donnell, P.C., and is based inWashington, D.C. Mr. Metzger counsels leading U.S.and international companies on aviation anddefense matters. He is a member of the DefenseExecutive Committee of the U.S.-India BusinessCouncil and has published several articles ininternational journals on the subject of the U.S.-India aerospace and defense industrial relationship.Mr. Metzger was a Research Fellow at the Centerfor Science & International Affairs, HarvardUniversity Kennedy School of Government, and is amember of the International Institute of StrategicStudies (London).


nfrastructure, the back-bone of economicdevelopment, is the foundation on which thefort of economic success is built. India, poised

to embark on a new journey of economic liberalizationand revolutionary growth has witnessed majorreforms, brought forth with the aim of achievingplanned and consistent economic development,thereby gradually causing a shift from the controlled toan open market economy where private playersincluding foreign investors have assumed an imminentand important role.

In the aviation sector, the government’s policy onairport infrastructure envisages detailed master plansfor upgradation and development of major airports inIndia by implementing recommended practices of theInternational Civil Aviation Organization. Theimportance of private participation for a sustaineddevelopment of airport infrastructure has beenrecognised by policy makers. Corporatization ofairports is aimed at divesting government holdings infuture.

Although India has a well-developed legal system,the current legal and regulatory environment may, incertain situations, act as an obstacle to the sustaineddevelopment of airport infrastructure. The aviationsector is governed by specific statutes which clearlyprovide for modes and means of private participation,which is generally allowed through grant of licenses tothe private developer or through a contractualrelationship.

Legal & Regulatory Framework Governing Airports inIndia

Airports in India are governed, inter-alia, byAirports Authority of India Act, 1994, The AirportsEconomic Regulatory Authority of India Act, 2008, the

Aircraft Act, 1934 and the Aircraft Rules, 1937. Theabove legislations allow private participation throughissuance of licenses for an airport other than owned bythe Central Government and formation of jointventures by private participants with the AirportsAuthority of India. The scope and extent of privateparticipation is determined by the concerned StateGovernment and may be of varying degrees anddimensions. However, development of infrastructure inthe Aviation Sector faces restraints and roadblocks.

Financial Challenges Facing the Aviation Sector

The aviation infrastructure sector, apart from theregulatory factor, is currently facing the challenges of aweak global and domestic economy and deterioratingfinancial health of airlines. As a result, revenuegeneration by airports has been adversely affected,which, along with the pressures on liquidity, hascaused funding gaps to arise both for private players aswell as the state-owned Airport Authority of India(“AAI”). Another development that has hit the aviationinfrastructure segment has been the downturn in thereal estate sector, which has forced some private airportconcessionaires to look for alternative sources of funds,given that their business models rely significantly onthe development and sale of land adjacent to theairports. Some measures also need to be taken to avoiddelays caused by judicial procedures which come in theway of development. Such delays need to be visualizedand remedied beforehand.

At present, even as the four major airports atBangalore, Delhi, Hyderabad, and Mumbai are beingrun by private operators, an independent regulatoryauthority for the aviation sector, though constituted, isyet to formulate detailed tariff guidelines. The AirportsEconomic Regulatory Authority (“AERA”) is astatutory body constituted under the Airports

LEGAL RESTRAINTS ON INFRASTRUCTURE DEVELOPMENT IN THE AVIATION SECTOR

By Amitabh Chaturvedi and SumitaChauhan


Economic Regulatory Authority of India Act, 2008effective December 5, 2008. AERA has its head office inDelhi and regulates tariffs for aeronautical servicesrendered at major airports in India. It also determinesairport charges and monitors the performancestandards of such airports. The extent to which AERAis able to balance the conflicting interests of airportoperators and airport users will determine howconducive the environment is for private investment inthe Indian Aviation Infrastructure sector. Aeronauticalcharges (levied on aircraft and passenger movement)are a major source of revenues for any airport.

The current slowdown in air traffic is also likely toimpact the capital expenditure plans of AAI, the apexbody of aviation infrastructure in the country. A largepart of this capital expenditure was proposed to befunded through internal accruals.However, theslowdown in traffic and the subsequent moderation inrevenues could lead to either curtailment of theexpenditure initially proposed or an increase in thedebt funding requirements.

The airlines industry is the primary source ofrevenue for airports in India, given the high proportionof aeronautical revenues in their total turnover. Tillabout a year back, with traffic movement reportingrobust growth, the airlines industry saw many privateplayers entering the market and almost all carriersexpanding their routes. However, the slowdown intraffic soon led to the industry being burdened byovercapacity even as increasing aviation turbine fuel(ATF) prices were pushing up costs. The result wasthat the domestic airlines industry reported sizeablecumulative losses.

The Challenge of Land Acquisition

One of the single largest roadblocks fordevelopment of infrastructure in the aviation sector isthe acquisition of large parcels of land for airports.Attempts at land acquisition more often than notcauses opposition from local communities resulting inlitigation due to the huge differences in the valueoffered and the actual market value of such land. Lack

of proper dispute resolution mechanism leads toprolonged litigation and substantial delays.

However, a new bill, the Land Acquisition andRehabilitation & Resettlement Bill, 2013, has beenpassed in Parliament. The new law may ease theprocess of land acquisition and reduce the volume oflitigation. The Government is now required toestablished improved procedures for compensationand rehabilitation. But, this could lead to a substantialincrease in the cost of acquiring land, which may beseverely detrimental to private investments in the longterm, since sustainability of projects would definitelybe adversely affected.

The regulatory framework must also meet thebasic objectives of autonomy, transparency andpredictability. At the same time regulation ofaeronautical charges is necessary considering themonopolistic nature of airports. While aeronauticalcharges for all operational airports are regulated by theMinistry of Civil Aviation (“MoCA”), the Operation &Management Agreements and various ConcessionAgreements between the joint venture companies andAAI/MoCA also allow for revision in these charges andthe levy of special charges like a user development fee(UDF). Significantly, some of these provisions,particularly those pertaining to the levy of UDF forgreenfield airports, are not very clear on importantissues such as the period of validity, amount and/ormethod of calculation of these charges.

Lack of a regulatory framework causes delays inimplementation of projects leading to loss of time andrevenue. Often these projects require multiplesequential clearances at various levels of thegovernment. Various categories of approvals requiredacross the project cycle at every stage, right from thepre-tendering to post construction stages often leads todelays and obstacles. While it is important to have arigorous procedure that ensures transparency andquality, administrative and bureaucratic complexitiesfor securing approvals are often considered seriousdisincentives for developers and contractors and leadto loss of time and revenue.


Further Delays due to Environmental Issues

Environment-related issues often lead to delayscaused by legal procedures. Environmental safeguardsand guidelines have proven to be one of the majorreasons for delay in infrastructure projects. While newprojects need to obtain clearances from theenvironmental point of view and need to comply withthese regulations, even projects under constructionneed to comply with revised standards from time totime midway through the execution stage. While theMinistry of Environment and Forestsstates that thedelays in seeking approvals may primarily be due tonon-compliance with the procedures of thenotifications and circulars issued in respect ofmandatory Environment Impact Assessment (“EIA”)and Environmental Clearance (“EC”) and the terms ofcompliance involve a complex and time consumingprocedure.

Another roadblock in infrastructure developmentis the Archaeological Sites and Remains Act 1958 asamended the Ancient Monuments and ArchaeologicalSites and Remains (Amendment & Validation) Act,2010 which provides for the preservation of ancient andhistorical monuments and archaeological sites andremains of national importance for the regulation ofarchaeological excavations and for the protection ofsculptures, carvings and other like objects. This Actprohibits construction and development work in a“prohibited area” and “regulated area” which meansany area near or adjoining a “protected monument”,which the Central Government has, by notification inthe Official Gazette, declared to be a prohibited area,or, as the case may be, a regulated area, for purposes ofmining operations or construction or both.

Even industrial laws of India impede thedevelopment of infrastructure in the aviation sector.For example, in 2011, the Supreme Court of India inAirports Authority of India Vs. Indira Gandhi Airport TDIKaramchari Union and Ors.held that notwithstanding theprivatization of the Delhi International Airport, anearlier federal (Union) law abolishing contract labor at

the Airports Authority of India (a governmentundertaking) would also apply to the private operatorDelhi International Airport Limited. The privateoperator was required to absorb the contract laborers asregular employees of Delhi International AirportLimited.

The aviation sector in India faces many taxes onthe inputs to production – fuel, aircraft leases, airportcharges, air passenger tickets, air navigation servicecharges, maintenance costs, fuel material fees, into-plane fuel fees, and other items subject to service taxes.These fees and taxes on inputs are either not present inother matured aviation markets, or are much lowerthere. The Indian air transportation industry is thusladen with very high costs and larger operating lossesthan their other counterparts globally. This is not to saythat air transport industry should be completelyexempt from taxation – rather, it is the menace ofdistortion that needs to be addressed.

One of the key cost drivers for the airline industry,which is the pivotal segment of the entire civil aviationsector, is the price and taxes payable for aviationturbine fuel (ATF) by the scheduled domestic carriersin India. A number of representations received fromairlines in India suggest that the rates of value addedtax on ATF is high, which affects the financial viabilityof their operations. In most of the States, VATapplicable on ATF is in the region of 25-30%. Fuel costalone constitutes nearly 40% of the operating cost of theairlines in India. There is no doubt that the currentregime of aviation fuel taxation regime adverselyimpacts the financial performance of Indian air carriers,particularly in the domestic sector. If aviation fuel taxesare disproportionately higher without any basis, then itretards the industry development vis-à-vis the overallgrowth in the economy and limits its potentialcontribution to economic well-being of India. Multipleand higher levies on ATF impact the operating costenvironment of air lines and need to be done awaywith.


There is an urgent need to also amend the laws sothat even Defence/Military Airports can be upgradedand converted into civil airports.

Ironically, while overall infrastructure remainsinadequate, there is also slack capacity caused by bothinternal and external factors. This must be squarelydealt with. Both problems need targeted outlays onequipment modernization and adoption of efficientmanagement practices. To garner investments forupgrading the airports, particularly the second tier ofairports, there is urgency to develop suitable PPPmodels.

There is also no standardization in the concessionagreements across the different infrastructure sectors.As a result, the development of aviation sectors in Indiahas been hampered due to lack of adequate and co-ordinated planning. However, the approach ofadoption of standardized documents, such as modelconcession agreements and bidding documents foraward of PPP projects, has over a period of time beenstreamlined. There has also been an accelerateddecision-making by agencies in a manner that is fair,transparent, and competitive.

Given the large investment needs of the Indianaviation infrastructure segment, private sectorparticipation is critical. In the case of Airports, Greenfield airports have come up in the private sector. Thereare also successful cases of upgradation of metroairports under the PPP mode. Increased privateparticipation has now become a necessity to mobilisethe resources needed for infrastructure expansion andupgrading. The PPP model has been fairly successful inmany advanced countries. The PPP model in India is ina nascent stage, but is steadily gaining popularity andsupport given the dire need to improve infrastructurein the country. However, continued economic viabilityof private players operating in India’s aviationinfrastructure sector hinges on several factors,including the penetration of air travel in the country,scope to exploit non-aeronautical and real estaterevenue opportunities, favourability of regulatoryenvironment, and the funding support available during

the initial years of development (considering the fixedcost intensive nature of operations). The recentdownturn in the global economy also poses additionalchallenges in the form of declining traffic levels,liquidity pressures and reduced inflow from real estatedevelopment. Major PP Projects are governed byconcession agreements signed between publicauthorities and private entities. As is the case in manycountries, there is no single regulator which formulatesthe policy for all infrastructure projects. The absence ofa transparent and regulatory framework aggravates therisks and uncertainties for private investors and there isa pressing need for an equitable and transparentregulatory framework to be put in place. AlthoughAERA has been set up under the AERAI Act, 2008, theAct does not provide a uniform and comprehensivelegal and regulatory framework for promoting privateinvestment in the aviation sector. Even privateoperators like Delhi International Airport Limited andMumbai International Airport Limited, whichsuccessfully overcame the aforesaid challenge toprivatization, have been facing further hurdles. Thelevy of development fees by these private operatorsupon passengers using the privatized airport facilitywas struck down on technical grounds by the SupremeCourt of India in a 2011 case titled Consumer OnlineFoundation Vs. Union of India& Ors.

Given the current environment, the extent towhich private sector players would be interested inbidding for other greenfield airports that are proposedto be developed using the public-private partnership(PPP) model remains to be seen. More often than not,most PPP projects end up being challenged due to thebidding process. In the first instance, the challenge is tofind reasons as to why a tender was rejected and, upondoing so, the second round of litigation is to challengethe reasons. The entire legal process could takeanywhere between 3-5 years if not more, and thereforeinvestors are often wary of investing in PPP projectsthat may end up into litigation. Often cases are filedonly with the intention to wrongfully restrain thesuccessful bidder from commencing its operations. Toillustrate, the tenders for privatization of the MumbaiInternational Airport and the Delhi International


Airport were challenged in the matter of RelianceAirports Developers Pvt. Ltd. Vs. Airports Authority ofIndia & Ors before the High Court of Delhi in early2006, and the privatisation was finally upheld by theSupreme Court of India in November of that year.

While cyclical downturns are inevitable, thecurrent need is to have a legal and regulatoryframework that would do away with the presentlyexisting restraints on infrastructure development in theaviation sector and a paradigm shift in the manner ofjudicial interpretation of the existing law so as to

facilitate private investment in the aviationinfrastructure segment.

Amitabh Chaturvedi is the Managing Partner of theNew Delhi based law firm Mine & Young. He can bereached at [email protected].

Sumita Chauhan is a partner at Mine & Young. Shecan be reached at [email protected].


Several airports across the world that are owned bystate and national government authorities areincreasingly being operated and managed by privatedevelopers under various public private partnershipmodels and the Indian story is no different. Over thelast decade, the civil aviation sector in India has grownexponentially and is currently positioned as the ninthlargest market globally with an expected growth that islikely to place it within the top five aviation markets inthe world by the year 2020.

This article provides a broad overview of thelegislative and institutional framework governingacquisition of land for infrastructure projects andairports in particular. We have primarily focused oninstances of the government acquiring private land forinfrastructure projects, as this has been the generaltrend in India. Having said that, if a project developerwas to purchase private land for the project they couldface a number of issues such as ownership, title,number of sellers for the land, land owners demand forhigher prices due to proposed project activity and costimplications of resettlement and rehabilitation ofproject affected families.

Background

Until recently, the Airports Authority of India(AAI) had exclusively been responsible for developing,operating and managing airports in India. In 2004, thecentral government began an airport privatization andmodernization drive. The privatization drive wasprobably motivated by severe constraints in capacityand the magnitude of investments required for thismodernization. Growing interest from privateoperators led to the greenfield development of fiveairports in India i.e. Delhi, Mumbai, Bangalore,Hyderabad, Chennai and Cochin through the public

private partnership model. By 2017, the Ministry ofCivil Aviation has targeted the development of 17 newairports at various locations.

The development of an airport generally involvescomplex interplay between various governmentagencies and authorities. Some of the key playersinclude the Ministry of Civil Aviation, which isresponsible for the formulation and development ofpolicies and the administration of the Aircraft Act,1934, Aircraft Rules, 1937 and other legislations relatingto the aviation sector; the Directorate General of CivilAviation who is responsible for safety, the Bureau ofCivil Aviation Security, responsible for security and theAirport Economic Regulatory Authority to safeguardthe interest of users and service providers at airportsand set tariff for provision of aeronautical services.

Legal and Regulatory Framework for AcquiringLand

In India, broadly speaking, there are four categoriesof land (a) forest land; (b) government revenue land; (c)agricultural land; and (d) private land. It is the inherentright of every sovereign nation to acquire propertyfrom its citizens for public use. This right, also knownas “eminent domain” is contained in the IndianConstitution which provides the extent within whichsuch power should be exercised. Firstly, acquisition ofprivate property should be for public purposes onlyand secondly that, no property can be acquired withoutthe payment of compensation to the seller, under theapplicable laws.

The Land Acquisition Act, 1894 (LA Act) is theumbrella legislation detailing the procedure forinvoluntary acquisition of land from private landowners by the central government and/or any stategovernment. Under the LA Act, the definition of 'public

OBTAINING LAND FOR AIRPORTS & INFRASTRUCTURE

By Yogesh Singh, Pia Singh &AdityaAlok


purpose' is very broad and set out in inclusive terms.Public purpose includes provision of village sites,planned development or improvement of existingvillage sites, provision of land for town and ruralplanning, provision of land for residential purpose tothe poor or landless, educational and housing schemes,the provision of land for planned development of landfrom public funds in pursuance of any scheme orpolicy of the central government or state governmentetc.

The LA Act Procedure

The Central or State Government (as the case maybe) issues a notification in an official publication andtwo local newspapers stating it’s need to acquire aparticular tract of land for a “public purpose.”Consequently, any person interested in the notifiedland has a right and is given an opportunity to object tosuch acquisitions in the presence of the relevantgovernment official (in this case the Collector). Thisobjection must be given in writing, within 30 days fromthe date of the notification. Post hearing of any and allobjections and after making further enquiries, theCollector submits a report to the State Governmentstating the objections he or she has received, the recordof the proceedings held and its recommendations. Ifafter considering the Collector’s report, the governmentis satisfied that the specific tract of land needs to beacquired for a 'public purpose', it will make adeclaration in the official publication and two localnewspapers. Such declarations are made only after thegovernment is completely satisfied that thecompensation for the acquisition will be wholly orpartly out of public revenues or some fund controlledor managed by the relevant local authority. Finally,award letters are issued by the land acquisition officer(in this case the Collector) finalizing area, purpose,value and amount of compensation payable to eachinterested party.

It is noteworthy that a lack of adequatecompensation under the LA Act is one of the keyreasons for legal action against the government.Compensation payable to private landowners is

determined by the Collector on a case to case basis. TheCollector does so after holding a public consultationand determining market value of the land on therelevant date. Market value is not a defined termunder the LA Act. In land acquisition proceedings, saledeeds from previous land transactions are used tobenchmark the market value.

Apart from practical issues and delays faced byproject developers due to compensation assessment,other hurdles that are faced under the LA Act includethe requirement for prior permission from the relevantauthorities before the land can be mortgaged.Additionally that there is no time limit specified withinwhich the land has to be put to use for the purpose forwhich it has been acquired.

New Law Enacted - to be notified shortly

To address these and other issues, the CentralGovernment has proposed a new Land Acquisitionlegislation i.e. the Right to Fair Compensation,Resettlement, Rehabilitation and Transparency in LandAcquisition Bill, 2013 (the LA Bill). The LandAcquisition Bill, 2013 was deliberated and passed in themonsoon session of both the houses of Parliament andon receiving Presidential assent, will be enacted torepeal the LA Act.

Key Changes in the LA Bill:(a) A new integrated legislation, dealing with fair

compensation, land acquisition andrehabilitation and resettlement;

(b) Public purpose has been re-defined to includeamongst others, specific activities such asacquisition of land for strategic purposes (i.e.national security and defense); forinfrastructure projects including transport,energy, water and sanitation, communicationand social and commercial infrastructure; andfor project affected families. The acquisition ofland for airports will fall ininfrastructure/transport category.


(c) For land being acquired for public privatepartnerships (PPP) projects and for privatecompanies, the consent of 70% and 80%respectively from project affected families isrequired.

(d) The requirement of resettlement andrehabilitation of project affected families hasbeen extended to land acquired by privatecompanies through negotiations.

(e) Social impact assessment studies has beenmade compulsory in all cases where thegovernment intends to acquire land for publicpurposes;

(f) With a view to ensure equitable developmentfor land owners, a lease model has beencontemplated. However, at present, no leasemechanism has been provided for.

(g) Unless the land acquired has been renderedunusable, no change of purpose will bepermitted.

(h) If any acquired land remains unutilized for aperiod of 5 years from the date of possession, itshould be returned either to the original ownersor the government.

(i) The LA Bill will apply to acquisitionproceedings in some instances where the landacquisition process has not been completedunder the LA Act.

1. (h) Several layers of checks and balances havebeen introduced at a municipal governmentlevel to ensure for local participation andtransparency.

(j) As far possible, acquisitions in land owned byschedules castes and tribal areas should beavoided.

(k) In cases where a company or body corporateoffers its shares to the owners of the lands as apart of the compensation, for acquisition of landthen such shares cannot exceed 25% of themarket value determined by the Collector.

In spite of the State governments in India beingempowered to adjudicate on matters relating to land,the Central Government also has a role in the landacquisition process and this often leads to an overlapbetween the State and Central Government, oftencreating more layers in an already complicated landacquisition process.

Acquiring Land for Airports and InfrastructureProjects

The acquisition of land requires complexcoordination between several stakeholders includingthe Central and State Governments, local authoritiesand land owners. Land requirements for infrastructureprojects across sectors differ. Simply put, in largerinfrastructure projects and these include airports,roads, ports, land procurement is generally theresponsibility of the appropriate government.

Airports

The intention of the Government to lease land tothe private airport operator is provisioned for in theOperation, Management and Development Agreement(OMDA) (executed by the AAI and the private airportoperator) and this includes real estate developmentrights in and around airports. Additionally, the privateairport operator is granted this ‘right to use’ under along-term land lease deed, which also contains theright to sub-lease the project land. Airport propertydevelopment is divided into aeronautical and non-aeronautical activities. Aeronautical activities includedevelopment focusing on terminals, hangars,maintenance and fuelling facilities. Generally, privateairport developers outsource non-aeronauticalactivities include hotels, business parks, restaurantsand shops to third parties better qualified to operateand manage such activities.

Roads

In a road concession, the Central Government(empowered under a separate legislation – TheNational Highways Authority of India Act, 1988)


acquires land, if it is satisfied that the acquisition issolely for public purpose and that the land is requiredfor building or operating the infrastructure asset.NHAI’s obligation and risk of acquiring the land iscaptured in the model concession agreement developedby the Planning Commission for national highways.The land acquisition process for a roads project is verysimilar to that followed under the LA Act.

Ports

The ports sector in India is divided into 'majorports' and 'non-major ports.' Major ports are declaredas such by or under laws made by the Parliament ofIndia and are governed by the Major Ports Trust Act,1963. All other ports that are not major ports arecovered by the 'concurrent list' in the Constitution ofIndia, and both the Central Government and the StateGovernments can legislate on matters relating to suchnon-major ports. Land to develop major port projects isacquired by the Central Government, under the MajorPorts Land Policy which encourages privateparticipation by putting in place a procedure forallotment of land either by lease or license. Land forminor ports is acquired under the LA Act. Theconcessioning authority’s obligation to provide landhas been set out in two model concession agreements,developed by the Planning Commission and developedby the Ministry of Shipping.

Power

In some cases, arranging for land is the obligationof a private developer. For example for conventionalpower procurement in India which is increasinglybeing done through the competitive bidding route,procurement has been classified into two mechanismsi.e. Case I and Case II projects. Case I projects are thosewhere a power distribution utility calls for bids fromprivate developers to procure a specified quantum ofpower without specifying the location, technology orfuel of the source of supply. Case II projects are thosewhere a power distribution utility invites bids forsetting up projects on the basis of tariff, and alsospecifies the fuel and location of the project. In a Case I

project, the onus of arranging land is that of the projectdeveloper whereas in a Case II project the governmentarranges for the project land.

In the renewable space in India which generallycomprise of smaller projects, the obligation ofarranging project land is almost entirely on thedeveloper.

Challenges Faced In Land Acquisition

One of the key challenges in developing andfinancing infrastructure projects and airports inparticular, have been uncertainties and delaysassociated with the land acquisition process in India.

Encroachment

While the AAI has the authority to evict any personillegally occupying airport premises, this authority hasbeen of little value in the context of the Mumbai airportwhich has been massively plagued by illegalencroachments in the form of slums Given theproximity of the encroachments there is a risk tonational security. Also such illegal encroachments havemeant that non-aviation related developments havebeen stalled, which have then translated into lowerrevenues and profit for the concessionaire, a lesserannual fee (percentage of revenue) to the AAI and anultimately higher cost being passed on to the users inthe form of user development fees, as alternate meansof raising revenue.

Political Delays

Infrastructure projects in India tend to get caughtbetween the political agendas of the ruling parties andthe opposition. Examples include protracted landacquisition processes experienced by the steel companyPOSCO in the state of Odisha. This project wasinordinately delayed for 6 years and was theneventually abandoned. Another example was TataMotors moving out of West Bengal because of issueswith the land acquisition process, which includedmassive protests by displaced farmers. Illustrative of


the fact that, not only foreign direct investment (FDI)funded projects but, even projects funded by Indianentities have faced real time land acquisition issues.

Forest Land Related Approvals

If there is a component of forest land that comprisesa part of the project land, this can delay matterssignificantly. While administrative control of forestland in India lies with the relevant State Governments,the Ministry of Environment and Forests is that CentralGovernment ministry empowered under the ForestConservation Act, 1980 to grant final approval fordiversion of forest land for non-forest purposes andthis is a two stage process. In case the projectdeveloper starts construction on the non-forest land,the developer assumes the risk of the forest land userapprovals not coming through. If the developer waitsfor the forest clearance to come through upfront, it canlead to project financing delays and delays under theproject agreements.

Agricultural Land- FDI restrictions

It is important to point out that the FDI policy ofthe Central Government prohibits foreign investmentin agricultural activities (barring few exceptions). Thisrisk is not applicable to the government’s acquisition ofland so should ideally not be relevant in the presentcontext as we are discussing investment ininfrastructure projects. However, some officials seem tohave taken the view that the purchase of agriculturalland (especially using foreign funds) would amount toinvestment in agricultural activities even if the land hasbeen purchased for an infrastructure project and theintention is to use the land only after appropriate userchange approvals have been obtained. We are of theview that this is an incorrect stand but till the time thisissue is not clarified by the central government, it willcontinue to be a concern for various project landacquisitions. Till then, developers would be welladvised to seek a clarification from local authoritiesbefore they acquire any such private land.

Litigation

As mentioned above, assessment of compensationis estimated as the number one reason for complex andlong standing disputes. It is hoped that with theenactment of the LA Bill this will be remedied as it isproposed that compensation to be paid to thelandowners will not be less than four times the marketrate in rural areas and up to two times the market ratein urban areas. However, a potential downside is thatthis could result in a significant increase in projectcosts.

The second most important cause is not followingthe due process under the statute. The LA Act containsprovisions detailing steps that need to be followed forthe actual process for land acquisition. Often whenthese steps have not been completed or are not entirelyfollowed through, legal action is initiated bylandowners under protest. In fact, for this reason alone,it is estimated that due to such delays the cost of landacquisition specifically for airport projects may go upto $1 billion by 2018.

Resettlement and Rehabilitation Issues

Acquiring large tracts of land for infrastructureprojects has involved displacing several project affectedfamilies. Presently while the LA Act does not containany provisions relating to rehabilitation andresettlement of displaced persons, the LA Bill hasprovisioned for the resettlement and rehabilitation oflandowners. However, resettlement and rehabilitationis provided for land acquisitions made by privatecompanies in excess of a certain threshold which wouldbe specified by the appropriate government on a caseby case basis and all acquisitions made by theGovernment. This effectively excludes owners withsmaller pieces of land who will be displaced withoutany compensation.

Conclusion

India is one of the largest democracies in the worldand while the land acquisition process can be timeconsuming and fraught with issues, the government


doesn’t have the easiest task. The real issue is a lack ofsensitivity towards the needs of all stakeholders andthe government’s inability to comply with regulatoryprocesses’.

The involvement of multiple authorities does notalways lead to clear thinking and decisive action.Greater coordination between the governmentdepartments and/or regulators is essential. New metroswill soon require bigger and better airportinfrastructure including new terminals to avoid naturalbottlenecks beyond which they cannot be expandedand these should be planned for now.

As government authorities, private stakeholders,international consortiums and banks commit fundingto planning and development of new airports, theuncertainty (time and cost) attached to the landacquisition process must be curtailed if not eliminated.Unviable models for airport development will prove tobe deterrents to future airport development - aneconomic opportunity India cannot afford to miss.

Developers especially non-resident investorsshould consider some of the following steps that mayhave an impact on the process of acquiring and/ortransferring land in India (a) conducting a detailed duediligence of the proposed land covering nature of land,title, revenue records, physical verification,encumbrance and litigation checks; (b) examining if thecompensation process adopted for the land acquisitionis reasonable and has been duly complied with; and (c)commit funds to resettlement and rehabilitation ofproject affected persons. The latter will be crucial underthe new land acquisition regime when it comes intoeffect.

Yogesh Singh is an equity partner with Trilegal-which is one of the leading full service law firms inIndia. Apart from significant experience in strategicM&A and joint ventures for European and U.S.clients, Yogesh has acted for both investors andtarget companies on private equity transactions aswell as structuring and corporate aspects of anumber of infrastructure projects. In addition,

Yogesh regularly advises clients on generalcorporate issues, restructurings, FCPA compliancestrategies and employment issues. He can bereached at [email protected].

Pia Singh is a senior associate at the New Delhioffice of Trilegal and is part of the Energy andInfrastructure practice group. She has experience inprojects involving roads, railways, ports andairports on a Public Private Partnerships (PPP)basis. She can be reached at [email protected].

Aditya Alok is an associate at the New Delhi officeof Trilegal and is part of the Corporate practicegroup. Aditya has been involved in private equitytransactions as well as corporate aspects ofinfrastructure projects. He can be reached [email protected].


he recent transformation of the Indian airportsector and modernization of significant Indianairports represents the culmination of more than

a decade of effort by successive Indian Governments toupgrade airport infrastructure in India. Recognizingthe need to keep pace with steep traffic growth and thechanging expectations and profile of the Indian airtraveler, the Government undertook several initiativesto revamp the legal framework to encourage privateparticipation and reduce entry barriers for foreigninvestment into the nation’s airport infrastructure.These initiatives resulted in the privatization andmodernization of key Indian airports. While thisjourney has brought with it many lessons, there is stilla long way to go, with several new airport projectsremaining to be developed and older airportsrequiring an overhaul in their functioning,management and infrastructure.

We shall seek to examine what we believe were,and continue to be, key challenges in the legalframework, which affect airport economics and shouldbe re-evaluated, to continue to incentivize privatesector investment into future airport projects. Thesechallenges relate to the relatively recent Indian airporteconomic regulatory regime and the legal frameworkgoverning privatization of airports owned by theGovernment of India-controlled statutory corporation,the Airports Authority of India (“AAI”).

To set the context for this discussion: the preferredvehicle for modernization of Indian airports has beenthe Public-Private Partnership (“PPP”) model, theessence of which is a ‘concession’. In simple terms, aconcession is the grant of a right to undertake anactivity (frequently a public function discharged by agovernment authority) and collect the revenues

generated by such activity, in consideration ofpayment of a ‘concession fee’ to the grantor (frequentlythe government authority that is responsible for thatfunction). Under the PPP model, a concession istypically granted by a government authority, the‘public’ side of the partnership, to a private partyselected typically through a tender process, the‘private’ side of the partnership, which discharges theconcessioned functions within a framework defined bythe public side. The private side leverages its strengthsand resources to undertake the project and the publicside circumscribes, regulates and supports the projectand hence, the ‘partnership’.

In the case of airport infrastructure in India, whileany person could apply for an aerodrome license andestablish an airport, historically, airports in India wereset up by the Government of India and eventuallycame to be vested in AAI. Private participation inairports is a relatively recent phenomenon with CochinInternational Airport being the first Indian airport tobe set up by a private entity in 1999. In 2003, theAirports Authority of India Act, 1994 (“AAI Act”), theparent statute governing the establishment, powersand functions of AAI, was amended to permit AAI togrant concessions in respect of airports owned by it, toprivate parties for their operation and development.Subsequently, concessions to establish and operate anairport under the PPP model were granted to privateparties in consideration of a concession fee determinedas a percentage of the gross revenue of the airport. In2004, the concessions to establish new internationalairports at Bangalore and Hyderabad were granted byGovernment of India. These airports were set up asgreenfield projects at new locations on the outskirts oftheir respective cities, with the older AAI-run airports,which were by the time landlocked with little room forexpansion in the heart of these cities, being closeddown. Then in 2006, the Delhi and Mumbai airports

REGULATORY CHALLENGES AFFECTING AIRPORT DEVELOPMENT ECONOMICS FORPRIVATE SECTOR PARTICIPATIONBy William Vivian John and Sumithra Suresh


which were operated by AAI, were concessioned toprivate parties as brownfield projects for theirexpansion and modernisation.

In the case of airport infrastructure in India, whileany person could apply for an aerodrome license andestablish an airport, historically, airports in India wereset up by the Government of India and eventuallycame to be vested in AAI. Private participation inairports is a relatively recent phenomenon with CochinInternational Airport being the first Indian airport tobe set up by a private entity in 1999. In 2003, theAirports Authority of India Act, 1994 (“AAI Act”), theparent statute governing the establishment, powersand functions of AAI, was amended to permit AAI togrant concessions in respect of airports owned by it, toprivate parties for their operation and development.Subsequently, concessions to establish and operate anairport under the PPP model were granted to privateparties in consideration of a concession fee determinedas a percentage of the gross revenue of the airport. In2004, the concessions to establish new internationalairports at Bangalore and Hyderabad were granted byGovernment of India. These airports were set up asgreenfield projects at new locations on the outskirts oftheir respective cities, with the older AAI-run airports,which were by the time landlocked with little room forexpansion in the heart of these cities, being closeddown. Then in 2006, the Delhi and Mumbai airportswhich were operated by AAI, were concessioned toprivate parties as brownfield projects for theirexpansion and modernization.

The attractiveness of airport concessions, andindeed any other concession, for private participationlies in the difference between what you make, i.e., therevenue the concession can generate, and what youpay for the concession, i.e., the concession fee. Therevenue that can be generated from the concession istypically subject to regulation because mostinfrastructure projects are natural monopolies.

What is interesting to note is that while theconcession fees (arrived at through tendering process)in case of Bangalore and Hyderabad airports, was 4%of the gross revenue, in case of Mumbai and Delhiairports, the concession fee was an unexpected 38.7%and 45.99%, respectively, of the gross revenue. Oneobvious reason for this difference would have been

that Delhi and Mumbai were operating airports, withsteady revenue streams compared to Bangalore andHyderabad, which would yield revenues only after theconstruction phase. The other reason would have beenthe relatively higher potential for real estatedevelopment (an integral part of the airportconcessions), in these two cities, with the airportsbeing located in the heart of the cities, and therelatively higher importance of Delhi and Mumbai astravel destinations (one being the national capital andthe other the ‘financial capital’ of the country),compared to Bangalore and Hyderabad.

In case of airport concessions, revenue arises fromtwo types of sources and is broadly classified asaeronautical and non-aeronautical. Aeronauticalrevenue may be understood as that which arisesdirectly from the airport’s operations, such as landingand parking charges paid by airlines using the airport.Non-aeronautical revenue on the other hand is thatwhich arises from incidental activities such as theoperation of food and beverage and retail outlets,lounges and car parks at the airport. While the globaltrend has been of higher non-aeronautical revenue, inthe range of 40-60% of total revenue, in India, non-aeronautical revenue potential was long underexploited, with non aeronautical revenue constitutingonly 30-35% of the total revenue; a trend that is beingreversed only in recent years in privatized airports.

The tangible benefits of airport privatization inIndia have been many. These include new, improvedand modern facilities, evidenced by the significant risein rankings of privatized airports by Airport CouncilInternational (“ACI”), a global airports body, andincrease in revenues to Government; the revenue shareto AAI from the Mumbai and Delhi airports hassteadily increased and has contributed significantly toits ability to invest in infrastructure development at itsother airports. On the other hand however, privatizedairports have faced flak in recent times for increasingthe costs to passengers, airlines and service providersoperating at the airport. It is against this backgroundthat we discuss two issues, which can have asignificant impact on airport economics, viz., the singletill v. dual till debate and the issue of land use at AAIairports.


One of the distinguishing features of an airportconcession compared to those in other sectors such asroads or ports is that a significant portion of itsrevenue arises from non-core activities, i.e. non-aeronautical operations. It is in this context that thesetwo issues become extremely significant.

Single Till Versus Dual Till

Independent economic regulation of Indianairports came into effect after the privatization of theBangalore, Hyderabad, Mumbai and Delhi airports,with the establishment of the Airport EconomicRegulatory Authority (“AERA”) in 2008. Soon after itsestablishment, AERA, after consultation with variousstakeholders, issued regulations for fixation of tariffs atairports, under which it, inter alia, proposed to setairport tariffs on the single-till model as opposed to thedual-till model. These regulations were challengedalmost immediately by the privatized airports onseveral counts before the appellate authorities and theissues raised in these appeals are yet to be conclusivelydetermined.

Before we can understand ‘till’ in this context, wemay briefly delve into the capital asset pricing modelwhich forms the basis for airport economic regulation.Airport tariffs are set under this model, in verysimplistic terms, as follows. The capital expenditure increating fixed assets is determined - referred to as theRegulatory Asset Base (“RAB”). A fair return isallowed to the airport operator in the form of a fair rateof return determined by the regulator and applied tothis asset base. The aggregate revenue requirement(“ARR”) for the airport is then determined as a sum ofthe fair return, depreciation on assets, operation andmaintenance expenditure and tax, and the tariffs to becharged are derived from the ARR. It is at the stage of

arriving at ARR that the concept of till becomesrelevant.

‘Till’ in airport economics is used in the sense of amoney drawer. The fundamental question of till iswhether when ARR is determined, the non-aeronautical revenues of the airport should be set-offto lower the ARR and correspondingly lower theaeronautical tariffs. In other words, should non-aeronautical revenues subsidize the airport project? Ifthis question is answered in the affirmative, the modelis referred to as the ‘single till’ model i.e., one moneydrawer for all airport revenues aeronautical and non-aeronautical. If answered in the negative, the model isreferred to as the ‘dual till’ model, i.e. aeronautical andnon-aeronautical revenues are kept separate.

There are convincing arguments for both models.Proponents of single-till argue that the airport projectis one, and that non-aeronautical revenues are a by-product of the aeronautical operations of the airport.The customer visits the airport bookstore because hewas brought to the airport by the aeronautical serviceshe wishes to utilize. The arguments for dual till on theother hand are centered around incentivizinginvestments into airport infrastructure and that thereduction in airport charges to airlines (which it isargued in any case do not form an appreciable part ofthe airlines fare) due to adoption of single till, will notnecessarily be passed on to passengers by airlines,more so in congested airports, where air fares aredetermined by the scarcity value.

The Capital Asset Pricing Model and single anddual till are visually depicted in Figure 1:

RegulatoryAsset Base

Capex

O&M expensesFair return Depreciation Tax+ + + -Non-aerorevenues =

AggregateRevenue

Requirement

If this subsidy is applied - single tillIf not - dual till

Figure 1


A third model, which lies between the above two,referred to as the ‘shared’ or ‘hybrid’ till is where notall non-aeronautical revenues, but only a certain partof it is used to subsidize airport tariffs. This has beenfollowed in the case of Mumbai and Delhi airports,because the concession agreements for these airports,which anticipated the coming of airport economicregulations, included an obligation on the Governmentto make reasonable endeavors to ensure thataeronautical tariffs will be set on the basis of thehybrid till model elaborated in the concessionagreements. This turned out to be more favorable forthese airports, compared to the cases of Bangalore andHyderabad, where the concession agreements merelystated that tariff fixation should be consistent withICAO (“International Civil Aviation Organisation”)policies, as a consequence of which these airports weresubjected to the single till model.

From the perspective of encouraging private sectorinvestment into airport infrastructure, we are of theview that having a dual or hybrid till will attractprivate investors as these models allow the developerto benefit from the upside of non-aeronauticalrevenues – which acts as a hedge against theuncertainties and volatilities air traffic demand in agrowing aviation market like India. Also from theperspective of increasing revenue to government, inthe tenders for future airport projects, if the return toinvestor is to be capped by regulation, there will belimited flexibility for a bidder to propose a uniquevalue proposition and make a better financial proposalthan its competitors. This issue gains significance inthe context of upcoming projects such as Navi MumbaiAirport, which has already seen several delays, andenvironmental and land acquisition issues drive theestimated project cost up to about U.S. $ 2 billion.

Land Use at AAI Airports

The other issue that would have an impact on non-aeronautical revenues relates to the extent to whichairport land can be used for non-aeronauticalpurposes. This is relevant in case of AAI airports,because AAI being a creature of statute cannot domore than what is permitted under its parent Act.And since concessions to private parties are granted byAAI under the Act, the private party concessionairecannot do more than what AAI could have done.

The question therefore is what AAI can do underthe statute. This question first arose when the Mumbaiand Delhi airports, were privatized. Initially, in theconcession agreements for these airports it wasproposed to permit the concessionaire to develop onthe airport land: commercial offices, business parks,golf courses, shopping complexes, sports complexesand other similar facilities. However, there was adifference of opinion within the Government onwhether this was permitted and opinions on thematter were sought from the legal advisors to theGovernment of India. Two views emerged from this.One view essentially was that one of the functionsexpressly permitted to be undertaken under the statuteby AAI was the carrying out of ‘any other activity at theairports… …in the best commercial interests of theAuthority’, and therefore that AAI could undertakethese activities. The other, contrary view wasessentially that from the context of the statute, ‘airport’is meant to include only passenger facilities andtherefore ‘any other activity’ that AAI was empoweredto undertake under the above function was confinedonly to passenger facilities. This was the view that theGovernment eventually took and consequently the listof permitted commercial activities under theconcession agreements for Delhi and Mumbai werecurtailed to exclude the activities referred above. Thecurrent concession agreements for these airportsinclude only facilities relating to passenger services,such as hotels, restaurants, bars, refreshment facilities.Other facilities such as retail shops, business centersand conference centers are permitted, but only if theyare located within the terminals.

Without going into the merits of the view finallytaken, it can be stated that the result of this approach isthat a very limited set of real estate developmentactivities have been permitted on airport land.Between Mumbai and Delhi airport, about 400 acres ofland was available for real estate development. It isalso telling that when this view was taken some of thebidders, who were real estate firms, dropped out of thetendering process for the Mumbai and Delhi airports.

At present both Delhi and Mumbai airports havetendered out several sub-concessions for real estatedevelopment, which are almost entirely for hotels.Given the number of hotels already in the vicinity ofthese airports, it remains to be seen whether there will


be sufficient demand for the new hotels and whetherthe sub-concessionaires will be able to fruitfully exploittheir hotel sub-concessions. This is manifest inconcerns recently by the Delhi airport concessionaireabout the need to expand permitted land uses beyondthe limited activities like hotels and warehousing, asthere were already a significant number of hotelprojects on the lands developed so far.

Also relevant to this discussion is the concept of‘aerotropolis’ - a form of urban development centeredaround, and fuelled by, an airport - that is being heardof increasingly in the context of airport developmentprojects. This development is seen as arising out of theadvantages afforded by the location of certain types ofindustries and commercial activities near airports,such as offices for business people who travelfrequently by air, time-sensitive manufacturing,logistics, hotels, retail outlets, entertainment complexesand exhibition centers. Another observed effect is theincrease in real estate prices in the vicinity of anexpected greenfield airport development.

It is in this context that we submit: should theairport project, the very anchor for thesedevelopments, be prevented from partaking in thisgrowth in real estate value? Should not the legalconcepts of “airport” and “passenger facilities” be re-examined in light of the emerging concept ofaerotropolis?

The need for re-considering these questionsbecomes relevant in the context of AAI’s statedintention to concession Chennai, Kolkata and otherairports run by it, for what is expected to primarily becity-side development. The necessity for statutoryamendments should remain an impediment forairports being able to derive and appropriate somepart of the value that they bring to the urban economiclandscape to which they contribute.

In conclusion, we believe that the favorableresolution of the two issues highlighted above bysuitable policy intervention can dramatically improvethe viability and attractiveness of airport developmentprojects for private sector participants, and bring longterm benefits to the government, the AAI and otherstakeholders.

The importance of encouraging private sectorparticipation in airport infrastructure cannot beoverstated in light of Government of India estimatesthat Indian airports would require investments ofabout U.S. $ 12 million (close to 75% of which isexpected from the private sector) to meet the trafficgrowth projections, during the 12th Five Year Plan(2012-2017). More immediately, global tenders for theoverdue new airport at Navi Mumbai along with sixsignificant AAI-run airports including two in themetro cities of Chennai and Kolkata, is imminent.

William Vivian John is a Partner in theInfrastructure Practice of Luthra & Luthra LawOffices, specializing in the Airport sector. Prior tothis he was in-house counsel at GVK’s AirportsBusiness, where he was closely involved with theMumbai airport development and modernizationproject. William can be reached [email protected].

Sumithra Suresh is an Associate in theInfrastructure Practice of Luthra&Luthra LawOffices, and a graduate of NALSAR University ofLaw. He can be reached at [email protected].


he rate of growth of air transport is often seenas an indicator of the economic developmentof a country. India is no exception to this rule

and has witnessed an explosion in the number ofpeoplewho use air transport services alongside itseconomic growth over the last 23 years. The civilaviation sector has benefitted not only by increasedpatronization from existing air travelers but also fromconverts who are increasingly taking to the skies. Thisis a remarkable feat for the young Indian civil aviationsector, especially considering the fact that the Indiaboasts of one of the widest and most reliable railnetworks in the world thathas been providing cheapand reliable transport to the masses for over onehundred fifty years.

Open Skies-Impact on airlines and airports

India had its tryst with Open Skies in 1995 whenseveral Indian Private Airlines set up operations incollaboration with well known international carriers.While some of these joint ventures flourished, othersmet a cruel fate for many reasons, some of which wereattributable to government policies and a hangoverfrom the protectionist regime which survived until1990.

While airlines continued to grow and extend theirreach to tier-II cities, the Airports Authority of India(AAI) – the sole custodian and operator of airportassets in India – failed to keep pace with the increasingexpectations of air passengers, cargo operators and theair service providers. Indian airports were constantlyrated amongst the least efficient in the world, whichcaused great embarrassment to an otherwiseprogressive nation. It took the Government almost 15years after liberalization to implement reforms in thecivil aviation sector. In 2004, the Government for the

first time decided to adopt the Public-PrivatePartnership (PPP) model by granting concessions fordevelopment and management of two greenfieldairports at Hyderabad and Bengaluru (then calledBangalore). The PPP model was thereafter replicatedand adopted for the modernization of the twobrownfield airports at Delhi & Mumbai. The newpolicy spurred the growth of the civil aviation sector,and for the first time India was afforded theopportunity of building and maintaining world classairports. While these airports have achievedinternational recognition since their privatization, theyalso threw up novel challenges. One of these challengesconcerns the environment and juggling the exponentialgrowth in aviation infrastructure while protectingIndia’s diverse natural assets.

In this article, I intend to highlight two recent issuespertaining to environment protection:the need tobalance the scales between aviation relatedinfrastructure growth and protection of theenvironment from the effects of such growth.

The Delhi Airport And Noise Pollution

In 2009, the residents of localities surrounding theIndira Gandhi International Airport (IGI Airport)atDelhi filed certain class action Petitions in the HighCourt of Delhi alleging infringement of their rightsincluding their right to sleep in peace, held to be a partof the all encompassing right to life guaranteed by theConstitution of India. The Petitioners raised manyissues and alleged that overflying aircrafts wereroutinely breaching the prescribed noise norms therebydepriving these residents of peaceful sleep and areasonable quality of life.

The Environment (Protection) Act of 1986 is thefountainhead of most environment related legislation

GROWTH OF AIRPORTS AND THEIR ENVIRONMENTAL IMPACT- THE INDIA PERSPECTIVEBetween Greenfield and Brownfield—Green Is TheOnly OptionBy Atul Sharma


in India and, in addition to addressing variousenvironmental issues, enables the Central Government,by notification in the Official Gazette, to make rules forcarrying out the purposes of the said Act. In exercise ofsuch powers, the Central Government notified theNoise Pollution (Regulation and Control) Rules (the“Rules”) in 2000. In addition to other benchmarks, theRules laydown ambient air quality standards in respectof noise. The Rules recognize the need for differentnoise levels in industrial, commercial and residentialareas, including silence zones (hundred meters aroundhospitals, educational institutions etc.). While the Rulesprescribe an outer limit of 75 dB(A) Leq and 70 dB(A)Leq during day time and night time respectively inindustrial areas (being the highest permissible noisestandards amongst the four categories mentionedabove), they do not envision an airport zone or aseparate set of norms for such zones, as in certain otherjurisdictions.

During the pendency of the aforesaid action,various brainstorming sessions were held between allthe stakeholders including the petitioners, AAI and theDelhi International Airport Pvt. Ltd. (the Airportoperator). In order to reduce the impact of aircraftnoise, a basket of noise mitigation measures wereimplemented by the Airport operator in collaborationwith the AAI, the aviation regulator-DirectorateGeneral of Civil Aviation (DGCA) and the airlines.These measures included introduction of runwaymixed mode operations, phasing out noisy Chapter 2aircrafts, utilization of all available runwayssimultaneously to evenly distribute aircraft noise,adoption of low power-low drag landing proceduresetc. While these measures collectively reduced thenoise impact considerably, the residents consistentlydemanded clamping of a comprehensive night curfewon Runway 29/11– the primary runway at the IGIAirport. Although initially, the night curfew wasimplemented by the DGCA on a trial basis, it could notbe sustained on a long term basis for operationalreasons and was subsequently withdrawn.

Pertinently, many jurisdictions do not consider anight curfew on an airport’s primary runway as aviable operational alternative, least of all at airportslocated in developing countries which witnessdeparture and arrival of international flights during thenight hours due to different time zones. In its studies,

the International Civil Aviation Organization (ICAO)has observed that unilateral night curfews imposed bycertain European countries are not conducive tointernational air transportation. ICAO has noted thatthe need to continue with any kind of night restrictionis questionable in light of improvement in aircraft noisestandards over the years and that current aircraftengines are quieter than earlier ones. Airports withnight curfews are generally capacity constrainedduring the day and restrict the ability to open up newslots of traffic, which creates opportunity costs toairlines. This is all the more relevant for India, as airtravel is even more expensive considering the highprices of Aviation Turbine Fuel. Another relevantfactor which militates against imposition of nightcurfew is the fact that the establishment of the aviationindustry in Europe pre-dates by several years India’sdevelopment in the sector. India’s aviation industry isin its infancy as the Open Skies Policy was initiatedrecently. This has led to a situation where most flightsoriginate from Europe and the United States during theday and arrive at night at Indian airports. Anyrestriction on runway usage would restrict suchmovement of aircraft from such countries and wouldprove detrimental to the growth of civil aviation inIndia. This could also possibly encourage foreignairlines to use neighboring countries as their hub inpreference over India.

As per a report prepared by Deccanaires Ltd., anindependent aviation consultant, while a few airportsimpose some form of restriction on night-timeoperations, very few airports across the world imposecomprehensive night curfews on aircraft operations.Further, while some airports including Heathrow,Gatwick and Standsted have some form of nightrestrictions, many other airports have refrained fromcurbing night time operations as the same has provento be detrimental to civil aviation. Interestingly, invarious international for a including ICAO, India hastaken a stand opposing unilateral implementation ofnight time curfews by a few European countries.

Recognizing the need to have in place airport-zonespecific noise norms, the Central Pollution ControlBoard (CPCB), a body entrusted with variousenvironmental functions in its role as technicalconsultant to the Ministry of Environment and Forests,has commenced the exercise of formulating noise


norms for airports zones and is in the process ofdefining noise contours at various Indian airports forimplementation of such norms. As the exercise initiatedby the CPCB is a time consuming one, the High Courtof Delhi while hearing the Petitions, felt it necessary toimplement interim norms pending the outcome ofCPCB’s study and consequent implementation of itsfindings. Pursuant thereto, the High Court directed theaviation regulator DGCA to notify interim noise limits,which limits were implemented by the DGCA by wayof an Aviation Environment Circular. The Circularissued by DGCA fixes the interim noise limit at 105dB(A) and 95 dB(A) during day time and night timerespectively and is the existing noise benchmark at theIGI Airport.

While the Supreme Court of India and the variousHigh Courts routinely adjudicate matters concerningthe environment, the Parliament enacted the NationalGreen Tribunal Act (NGT Act) in 2010, which envisagessetting up of a specialized National Green Tribunalwhich shall have the exclusive jurisdiction to hear anddecide disputes pertaining to the environment. TheNGT Act empowers the National Green Tribunal todecide all civil cases where a substantial questionrelating to environment is involved, provided suchquestion arises out of the implementation of theenactments specified in Schedule-I of the NGT Act.Schedule-I to the NGT Act includes various legislationsincluding the Environment (Protection) Act of 1996(deriving power from which the Rules of 2000 havebeen notified). Pursuant to the National Green Tribunalcoming into place, the Supreme Court of India inanother environmental dispute in the case of Bhopal GasPeedith Mahila Udyog Sangathan & Ors. v. Union of India& Ors., I.A. No. 62-63/2011 in Civil Appeal No. 3187-88/1988, vide its Order dated August 09, 2012 directedthat “cases filed and pending prior to coming into forceof the NGT Act, involving questions of environmentallaws and / or relating to any of the seven statutesspecified in Schedule-I of the NGT Act, should also bedealt with by the specialized Tribunal, that is the NGT,created under the provisions of the NGT Act. TheCourts may be well advised to direct transfer of suchcases to the NGT in its discretion, as it will be in thefitness of administration of justice.”

In furtherance of the direction of the SupremeCourt in the Bhopal Gas Peedith Mahila Udyog Sangathan

case (supra), the High Court of Delhi sought to transferthe pending Petitions to the National Green Tribunal.The transfer was opposed by the Airport operator onthe ground that the interim norms implemented by theDGCA hold the field as far as the noise norms at theIGI Airport are concerned. The Airport operator alsocontended that as these interim norms have not beenimplemented under any of the enactments specified inSchedule-I of the NGT Act (but under the variouspowers vested in the DGCA under other legislations),the National Green Tribunal does not have thejurisdiction to decide the said dispute and the transferis bad in law.The High Court of Delhi, despite theopposition by the Airport operator, directed transfer ofthe class action Petitions to the National GreenTribunal. The Airport Operator challenged the Order oftransfer of the High Court of Delhi before the SupremeCourt of India, which directed an interim stay of thetransfer and is presently seized of the matter.

The Setting Up Of A Second Airport At Mumbai

Mumbai, the financial capital of India,is also one ofthe most congested cities in the world. The ChatrapatiShivaji International Airport (CSI Airport) isundergoing a major upgrade which will involve asubstantial capacity increase. However, due to severeconstrains of availability of land at the Airport site, theCSI Airport operates under severe limitation and isunlikely to be able to accommodate any furtherexpansion. Demandfor a second airport to cater toMumbai has been getting louder and louder over theyears. Setting up of a second airport in Mumbai hasbeen in contemplation for a considerable period.

While nobody denies the need for a second airport,a long debate has ensued as to whether the chosen siteis appropriate for building a world class airport. Theproposed site falls in the middle of a mangrove forestcomprising of trees and shrubs that grow in salinecoastal sediment habitats. Environmentalists haveargued that dislocation of the mangroves is likely tohave an irreversible effect on the ecology of Mumbaiand its surrounding areas which will have far reachingenvironmental consequences. In the face of stiffopposition from various quarters, the Ministry ofEnvironment and Forests (the body responsible forproviding environmental clearances for such projects)has dragged its feet on the subject.


After prolonged contemplation, the ForestAdvisory Committee of the Ministry of Environmentand Forests in June of 2013 has finally recommendedthat the project be cleared. However, the ForestAdvisory Committee has attached various caveats to itsclearance. For starters, the clearance is contingent uponforestation of mangrove species over an area equivalentin extent to the mangrove forest area being diverted.Such area would have to be raised and maintained bythe concerned “user agency” (read airport developer)at its own cost. Further, as the proposed site is locatednear a bird sanctuary, the Forest Advisory Committeehas mandated that no proposal for extension of theproject for extension of the project towards the birdsanctuary shall be entertained. In addition, theconcerned government has been directed to ensure thatsettlement of persons displaced by the project must nottake place on forest land. To ensure constant andcontinued compliance with the conditions based onwhich the clearance is proposed to be given, a speciallyconstituted committee of experts shall monitorcompliance with and shall submit its report every sixmonths.

While Mumbai desperately needs another airport,the cautious approach of the Ministry of Environmentand Forests and the Government of India shows theresolve to manage expectations of growth whileensuring that no damage is caused to the environment.The stringent conditions imposed by the environmentwatchdog is likely to have severe financialramifications on the project which are likely to affect itsviability and ability to compete with the existingairport.

In the context of the above, the conflict between theenvironmentalists and the protagonists of developmentof aviation in India becomes apparent. It is a settledprinciple of Constitutional jurisprudence that a balancebe struck between the larger public interest (read: theneed for aviation infrastructure for growth anddevelopment of the economy and the country, at large)and the environment. Indian judicial pronouncementsinclude a large number of precedents where the Indiancourts have played a pragmatic role and have acted likestakeholders in the economic growth of the county. Itwill be a challenge for the policy makers and the Indianjudiciary to do the fine balancing act when considering

development projects like airports vis-a-vis theirimpact on the environment.

Atul Sharma is the Managing Partner of Link Legal-India Law Services, a full service law firm withoffices in New Delhi, Mumbai, Bengaluru,Hyderabad and Chennai. He has over 30 years ofexperience in civil and commercial litigation andarbitration in various sectors, including aviation,infrastructure, real estate, telecom and banking. Hehas wide experience in dispute resolutionprocedures and domestic and internationalarbitration. He specializes in the infrastructuresector and has advised developers and contractors.In the last five years, Atul has advised on projects atairports in Istanbul, Turkey and Male’, Maldives,and four major airports in India—Delhi, Mumbai,Bangalore and Hyderabad, in addition to otherinfrastructure projects like ports, transportation,power and water. He currently focuses on policyand regulatory issues in various sectors in Indiaincluding civil aviation. Atul can be reached [email protected].


Annual Year-in-Review

Each year, ABA International requests each of itscommittees to submit an overview of significant legaldevelopments of that year within each committee’sjurisdiction. These submissions are then compiled asrespective committee’s Year-in-Review articles andtypically published in the Spring Issue of the Section’saward-winning quarterly scholarly journal, TheInternational Lawyer. Submissions are typically due inthe first week of November with final manuscripts dueat the end of November. Potential authors may submitarticles and case notes for the India Committee’s Year-in-Review by emailing the Co-Chairs and requestingsubmission guidelines.

India Law News

India Law News is looking for articles and recent Indiancase notes on significant legal or businessdevelopments in India that would be of interest tointernational practitioners. The Winter 2014 issue willbe Part 2 of our two-part series on civil aviation. Pleaseread the Author Guidelines available on the IndiaCommittee website. The deadline for submissions hasbeen extended to December 1, 2013. Note that, IndiaLaw News does not publish any footnotes,bibliographies or lengthy citations. Submissions will beaccepted and published at the sole discretion of theEditorial Board.

SUBMISSION REQUESTS


The India Committee is a forum for ABA International members whohave an interest in Indian legal, regulatory and policy matters, both inthe private and public international law spheres. The Committeefacilitates information sharing, analysis, and review on these matters,with a focus on the evolving Indo-U.S. relationship. Key objectivesinclude facilitation of trade and investment in the private domain,while concurrently supporting democratic institutions in the publicdomain. The Committee believes in creating links and understandingbetween the legal fraternity and law students in India and the U.S., aswell as other countries, in an effort to support the global Rule of Law.

BECOME A MEMBER!

Membership in the India Committee is free to all members of ABAInternational. If you are not an ABA International member, you maybecome one by signing up on the ABA website. We encourage activeparticipation in the Committee’s activities and welcome your interestin joining the Steering Committee. If you are interested, please send anemail to the Co-Chairs. You may also participate by volunteering forany of the Committee’s projects, including editing a future issue of theIndia Law News.

Membership in the India Committee will enable you to participate inan online “members only” listserv to exchange news, views orcomments regarding any legal or business developments in orconcerning India that may be of interest to Committee members.

We hope you will consider joining the India Committee!

UPCOMING SECTION EVENTS (India Committee)

SAVE THE DATE (FEBRUARY 13 - 15, 2014 – NEW DELHI, INDIA)

Come join your colleagues from the United States and India, ABA Section ofInternational Law Leadership, ABA Leadership, and Leadership from Major IndianBar Associations, government officials, and prominent Indian businesspersonalities at a jointly sponsored conference of the American Bar AssociationSection of International Law India Committee, Society of Indian Law Firms, andthe Bar Association of India, as well as the Indian Services Export PromotionCouncil to be held in New Delhi, India.

The conference will focus on trade and investment between the U.S. and India.MCLE credit will be requested.

For more information, including information about speaking possibilities, contactJames Duffy ([email protected]) or Sajai Singh ([email protected]).

INDIA COMMITTEE

LEADERSHIP (2013-2014)

Senior Advisors

Aaron SchildhausLaw Offices of Aaron Schildhaus, Washington, D.C.

Erik B. WulffDLA Piper, Washington DC

Immediate Past Co-Chairs

PritiSuriPSA Legal Counsellors, New Delhi, India

Co-Chairs

Sajai SinghJ Sagar Associates, Bangalore, India

Hon. Sanjay T. TailorCircuit Court of Cook County, Illinois

RichaNaujoksNixon Peabody LLP, New York, NY

Vice Chairs

Douglas Ochs AdlerVedder Price, Washington, DC

HanishiThanawalla AliMithras Law Group, Woodville, MA

Vishal GandhiGandhi & Associates, Mumbai, India

Kavita MohanGrunfeld, Desiderio, Lebowitz, Silverman, &Klestadt,Washington, DC

Bhalinder L. RikhyePeltz& Walker, New York, NY

VijayaSampathLakshmi Kumaran&Sridharan Attorneys, New Delhi,India

Kaviraj SinghTrustman& Co, New Delhi, India

ShikhilSuriSuri&Suri, New Delhi, India

india law news · desktop publishing. the winter(j anuary) 2014 issue of the india law news will...

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