BPAC urges Regulator to stop collecting User Development Fee at Bengaluru airport

USER DEVELOPMENT FEE AT KEMPEGOWDA INTERNATIONAL AIRPORT

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Pic: Sandeep Rao

Bangalore Political Action Committee (BPAC) submitted a detailed observation to Airport Economic Regulatory Authority (AERA) on the Consultation Paper No. 05/ 2018-19 in respect of Determination of tariffs for Aeronautical Services at Kempegowda International Airport. Revathy Ashok, Managing Trustee, B.PAC had earlier made these submissions in the Stakeholder Consultation meet held on June 18th, 2018.

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B.PAC in its submission has requested AERA to disallow the collection of User Development Fee (UDF) through the second control period for the following reasons:

  • Because of delay in hearing by AERA, excess UDF has been charged in the first two years of the second control period which has lead to significant profit margin for KIAL. Hence the question of UDF collection in the second control period does not arise.
  • The actual air traffic has far exceeded projections and the airport is making substantive profit.
  • The traffic projections for the second control period as per AERA’s own order should have been based on a survey conducted just before the beginning of the second control period, in order to reflect the most current market situation and not based on a 2010 study.
  • KIAL has been given free land by the Government of Karnataka (GoK) for the development of the aero and non-aero, airport/non airport activities. Sadly the non-aero / non-airport activities have not commenced leading to a significant lock up of precious land value in a prime location and loss of revenue to the exchequer

Following were the highlights of B.PAC’s submissions to AERA:

UDF Collection and KIAL profitability

  • KIAL has been operating with unchanged tariffs even after the completion of the first control period (2011-2016). AERA has been passing interim orders allowing KIAL to continue to levy the tariffs existing as on 31st March, 2016 for the past 25 months into the Second Control period (FY 2016-17 to FY 2020-21) which were based on air traffic projections made in 2010. This has led to a huge accumulation of additional revenue through UDF which is highlighted in the below table:

Table 1: UDF Collection by KIAL from 2013-2018

Source: Collated by B.PAC

  • During the FY 2016-17, the Earnings before interest, taxes, depreciation, and amortization (EBIDTA) margin was at 71 per cent and Profit After Tax (PAT) margin at 42 per cent as shown in Table 2. This clearly indicates that KIAL has made substantial profit and the PAT margin has increased from 10 per cent to 36 per cent during the first control period and moved up to 42 per cent in 2016-17, in the 3 years of the second control period. This kind of profitability is unheard of in any industry within the country or globally and clearly establishes that excessive UDF charges have fully contributed to KIAL’s higher profit margin.

Table 2: Profitability of KIAL (Rs in Cr)

Source: Collated by B.PAC

 

  • The Table 3 below provides details of the UDF charged in the first control period, further extended by AERA for two years and part of the third year of the second control period at these unreasonably high rates. B.PAC in its submission has also remarked that instead of completely eliminating UDF, KIAL has further proposed UDF charges of INR 79 for domestic passengers and INR 319 for international passengers for remaining part of the third year. This sharply increases during the last two years of the second control period and defies all financial logic.

Table 3: Existing and Proposed Tariff of User Development Fees for KIAL

Source: Addendum: Consultation Paper No. 05/2018-19 dated 17.05.2018

Capital expenditure proposed by KIA

  • Bengaluru is the fastest growing city in the world and the state of Karnataka attracts the second highest FDI in the country (US $6.4 billion). Further, Bengaluru Urban has the highest per capita income in the state, of INR 3.2 lakh per annum. The city which earlier was known as the ‘Silicon Valley’ has now become the ‘Startup capital’. Our research suggests that Bengaluru airport has seen the compound annual growth rate (CAGR) of 17.1 per cent for the years 2013-2018. This is higher than Delhi, Mumbai, Kolkata and Chennai airports. Bengaluru is a world class city with a significant number of global multinational and Indian corporations having their Head Offices/ R&D Centers/ Offshore Development centers based here. This is ample testimony to the demand for aero and non-aero service and it is evident that KIAL has the capacity to attract investments to expand the services to the passengers to world class levels.
  • 4008 acres of land has been allotted to KIAL from GOK under the State Support Agreement (SSA). A significant portion of this 4008 acre land parcel is lying unutilised, while the areas surrounding the airport have attracted both government and private investments and have become operational. KIAL has not taken any steps to monetize the land despite having the potential to do so. This has led to severe loss of revenue to the exchequer and is placing huge burden on the passengers via higher UDF and PSF for meeting the development needs of KIAL.
  • Non-utilisation of land given free by the government is leading to huge revenue loss and increased UDF charges. B.PAC urges AERA to direct KIAL to immediately draw up a Master Plan indicating phase wise development of aero and non-aero activities, along with the timeline and the cost for the entire land parcel of 4008 acres clearly demarcating aero and non-aero portions currently developed and yet to be developed. The same should be made available on their website and the information should be disseminated widely via English and vernacular dailies inviting citizen comments. KIAL should further hold a public consultation with citizens.
  • The KIAL in its submission to AERA has estimated cost of the Eastern Tunnel work connectivity at Rs 1121 crore. This estimated cost appears to be excessive. B.PAC has requested AERA to direct KIAL to furnish a detailed breakup of the estimated cost of the tunnel with reasons for such a design at such high cost. B.PAC also requests AERA to appoint an independent consultant, such as RITES, to validate the design and the cost estimated by KIAL before approving the same.
  • Further, the metro connectivity to the airport which has been estimated at an additional cost of approximately Rs 1000 crore will only end up increasing UDF and PSF fees. The UDF collected from the current users of the airport cannot be utilised for future metro connectivity. Our request to AERA is that, the positive cash flow generated from higher UDF collections needs to be set aside as a separate fund by KIAL and utilised for additional scope, such as, cost of metro connectivity and Eastern Tunnel works etc. Further, B.PAC requests that once the metro line is operational, all passengers travelling to and from the airport metro line should be charged a premium service charge by way of higher ticket fees as is prevalent in other parts of world. KIAL should enter into a revenue share model with BMRCL and fees from revenue share should be used to recover the incremental cost of metro line that KIAL is incurring.
  • Therefore, B.PAC has highlighted that any additional cost over and above the project cost and scope of KIAL should not be considered while calculating the tariffs such as UDF and PSF. AERA should look into the costs of the projects which are in the scope of GoK and such costs should be recovered separately from the government without burdening the users of the airport.
  • B.PAC has brought to AERA’s attention that Karnataka Cabinet took decision on June 22, 2018 to put off the loan repayment of interest-free loan of INR 333.50 cr which was given by GoK to the BIAL as part of SSA. The repayment of this loan was supposed to start this year, and the same has been put off by another 10 years. B.PAC in its submission to AERA, has requested AERA to take cognizance of this while truing up for the current fiscal year and for subsequent periods totaling to 10 years while fixing the tariff for second and third control periods.

Quality of Service at the KIA:

  • B.PAC requests AERA to appoint an independent Consumer Ombudsman to improve the quality of service and provide a platform for consumer grievances redressal. This will enhance the transparency in the operations and quality of service provided by KIAL.
  • In the best interest of citizens’ of Bengaluru who use the airport services, B.PAC has proposed to AERA to guide KIAL to nominate an eminent well-respected citizen of Bengaluru as an independent member to the Board of KIAL. Inducting such an eminent person on to the Board will help in ensuring service delivery at the most optimal cost which is in the best interest of the air commuters and the development of the city.

Revathy Ashok, Managing Trustee and CEO, B.PAC said: “Keeping the interest of citizens of Bengaluru and air passengers, B.PAC submitted a petition with detailed analysis as done in the past. We are urging the Regulator to protect the interest of air passenger by not allowing KIAL to levy UDF during the current control period”.

Click here to access detailed petition submitted by B.PAC to AERA.