Zurich Airport International AG (Zurich International) which operates the Zurich International Airport and several other airports in Europe has recently been awarded the contract for the development of the Jewar Airport in Uttar Pradesh on a Design, Build, Finance, Operate and Finance (DBFOT) basis.

Zurich International submitted a bid in its individual capacity and was successful in outsmarting other bidders like Adani Enterprises Limited, known for otherwise aggressive bidding, and the GMR Group, which by virtue of the provisions of the Operation, Management & Development Agreement (OMDA) of the Delhi International Airport Limited (DIAL) had a right of first refusal if it had come within a difference of 10% of the winning bid.

It needs no gainsaying that the establishment of airports and providing air transport services in India is regulated by Airports Authority of India Act, 1994 (AAI Act). The AAI Act, by virtue of Section 1(3), applies to “all airports whereat air transport services are operated or are intended to be operated, other than airports and airfields belonging to, or subject to the control of, any armed force of the Union”.

Prior to privatization of airports in India, it is the Airports Authority of India (AAI) which was taking care of airports in India. Section 2(nn) of the AAI Act, defines a private airport as

‘private airport’ means an airport owned, developed or managed by -

(i) any person or agency other than the Authority or any State Government, or

(ii) any person or agency jointly with the Authority or any State Government or both where the share of such person or agency as the case may be in the assets of the private airport is more than fifty per cent.”

The term “Authority” used in AAI Act refers to AAI. In that context, DIAL is a private airport wherein the AAI has 26% stake in its shareholding. Though Jewar Airport would be a private airport, AAI has no stake in it. The bid for Jewar Airport was called by the Noida International Airport Limited (‘NIAL’) which is incorporated by Government of Uttar Pradesh for development of airports in the state. The winning bidder viz. Zurich International will have to incorporate a Special Purpose Vehicle which will sign a Concession Agreement and will be granted a license from NIAL for development and operation of the Jewar Airport. In fact, Zurich International has already created a SPV viz. Yamuna International Airport Private Limited (‘YIAPL‘) for this purpose wherein NIAL has a golden share that comes with certain controlling rights in YIAPL.

It is not as if Zurich International does not have any prior experience in developing airports in India. Earlier, it was part of the consortium which was awarded the project for construction, development and operation of the Kempegowda International Airport, Bengaluru (‘Bengaluru Airport’). However, though the Bengaluru Airport was also a green-field airport, the experience of Zurich International therein was not so challenging because:

1. Zurich International was a junior member of the Bengaluru International Airport Limited (‘BIAL‘) that signed the concession agreement for construction, development and operation of the Bengaluru Airport, yet further, Zurich International eventually chose to exit from BIAL as permitted after the lock in period; and

2. Generating traffic was not a major headache for BIAL as the old existing airport, operated by AAI in Bengaluru was completely closed and the entire cargo and passenger traffic was diverted to the new airport operated by BIAL.

However, the Jewar Airport will be a different ball-game because:

1. As a sole bidder, Zurich International shall have the primary responsibility for construction, development and operation of the airport from scratch and also to generate the cargo and passenger traffic in it.

2. Jewar Airport has Indira Gandhi International Airport (’Delhi Airport’), the busiest airport in India and operated by DIAL, within 150 km. of its air radius as a competitor. Owing to different management, there is likely to be a stiff competition between DIAL and Jewar Airport Operator for a share of the pie of the cargo and passenger traffic.

3. Delhi Airport, being an established airport, is already significantly ahead in the race and has substantially ramped up its cargo and passenger traffic handling capacity over the years.

Under the OMDA of the DIAL, the initial licensing period is 30 years and DIAL has an option (except in case of any default by DIAL) to extend it for another 30 years. However, in the case of Jewar Airport, the initial licensing period is 40 years from the appointed date after which it would be put for bidding for another 30 years wherein the Jewar Airport Operator will have a right of first refusal, if its bid is within a difference of 10% of the winning bid.

There are other critical elements also as far as the financing of the airport is concerned. AAI Act allows airports to charge User Development Fees (‘UDF’) from embarking passengers to fund a part of the development cost of the airport. Section 22A of the AAI Act states that:

22A. The Authority may, after the previous approval of the Central Government in this behalf, levy on, and collect from, the embarking passengers at an airport, the development fees at the rate as may be prescribed and such fees shall be credited to the Authority and shall be regulated and utilized in the prescribed manner, for the purposes of-

(a) funding or financing the costs of upgradation, expansion or development of the airport at which the fee is collected; or

(b) establishment or development of a new airport in lieu of the airport referred to in clause (a); or

(c) investment in the equity in respect of shares to be subscribed by the Authority in companies engaged in establishing, owning, developing, operating or maintaining a private airport in lieu of the airport referred to in clause (a) or advancement of loans to such companies or other persons engaged in such activities.

Since AAI has a stake in DIAL, it could raise UDF from the embarking passengers at Delhi Airport to fund a part of its development cost. However, since AAI does not have any stake in the Jewar Airport, it appears that Jewar Airport would not have a similar advantage. To add to that, the Jewar Airport Operator would not have an absolute discretion in deciding tariffs at the Jewar Airport as the tariffs (both aero and non-aero) at an airport in India are subject to approvals of the Airport Economic Regulatory Authority (‘AERA’) under the Airport Economic Regulatory Authority of India Act, 2008.

In exchange of grant of license for operation of the Jewar Airport, the Jewar Airport Operator shall have to pay a concession fee as premium per passenger handled at the Jewar Airport from the 6^th year of the Commercial Operation date (‘COD’) onwards. Zurich International has quoted Rs. 400.97/- per passenger as the first-year premium. The rate of premium for subsequent years would be increased as per the increase in wholesale price index of the relevant year. The term ‘passenger’ seems to include both embarking and disembarking passengers.

Though the payment of concession fee in both DIAL and Jewar Airport is based on revenue sharing, there is a significant shift of approach in both the concession agreements. Under the DIAL OMDA, the concession fee is a percentage of its “Revenue”, which in turn is defined as the pre-tax gross revenue of DIAL. As a consequence of this, DIAL has to first pay the concession fee from its gross revenue and use whatever is left to meet its expenses, including payment of taxes. On the contrary, in the case of Jewar Airport, the concession fee is on the basis of a premium per passenger handled at the Airport and not as a percentage of its revenue. Again, in case of DIAL the concession fee is paid in advance on the basis of a projected revenue whereas in the case of Jewar Airport the payment of concession fee would be paid in arrear, on the basis of actual count of passengers.

As the DIAL OMDA stipulates the payment of concession fee before meeting the expenses, the concessionaire therein has an incentive to create downline SPVs for reducing the expenses. However, in the Jewar model, as the concession fee is linked to the number of actual passenger handled at the Airport, the concessionaire has an incentive to focus more on and directly operate the cargo and other non-aero businesses like retail, real estate etc., the revenue of which is not liable to be shared.

The Jewar Airport will be a different experience, both in terms of the contractual as well as operational issues in comparison to the existing green-field airports in India. Whatever may be the issues and challenges ahead, with the Zurich International being a seasoned player in the airport business, air-travelers are well poised to experience an innovative phase of airport development in the days to come.

Priyabrat Tripathy is the founder partner at Apex Partners, a boutique law-firm focusing on infrastructure advisory services, and was earlier an in-house counsel with Delhi International Airport Limited.