Should the FDI cap in airports be reduced?

DEBATE

Swadesh Deb Roye
Secretary, Centre of Indian Trade Unions

"First, I think we have to address ourselves to the question of foreign investment: the relative merits of investments through the foreign direct investment (FDI) route and through the foreign institutional investor (FII) route.

Normally, FDI is welcomed by most countries because the inherent dangers of FII investment are not present in the investment through FDI.

But even in the case of FDI investment, what has been our experience in the past 12 years, since 1991 when the new economic policy was first put in place?

Mainly that, of the foreign investment that has come to India, a majority has been through FIIs. This is because owing to the crisis confronting the international capitalist system and the challenge posed by information technology, FDI has not really been forthcoming to emerging markets like India.

The only exception to this rule has been China. If China has attracted FDI, it is because of the fundamentals in the economy "" basic market conditions, purchasing power and so on.

People keep saying you must soften labour laws to attract FDI. But our Second National Labour Commission went to China to study its labour laws and noted that there is absolutely no flexibility in its labour laws. So, FDI doesn't come to countries not because of rigid labour laws but because of internal economic conditions in those countries.

Whether FDI caps should be reduced in India is an irrelevant issue because our research tells us that 80 per cent of FDI mobility is seen distributed among 20 countries in the world, mostly OECD countries.

So just consider what we are doing: going on surrendering our economic sovereignty in the belief that then FDI will flood India. This is rubbish. And most of all, you cannot blame the trade union movement for opposing this, because the trade union movement is the only one that sees things realistically.

Then we must ask ourselves the question: FDI for what? Is FDI coming in greenfield projects or brownfield ones? The issue in our country is unemployment. If FDI has to come, why should we have it in brownfield projects? How does it benefit us? If it is in greenfield projects, it will develop the area, provide employment and so on.

Second, is FDI real investment or do multinational corporations just want to exploit India's capital markets? Contrary to the general perception, multinationals don't bring truckloads of foreign currency and call it FDI. They play the markets.

In this context, we were particularly incensed by the N K Singh Committee recommendations, not just on FDI but also in power. You opened up the power sector, passed the Electricity Act 2003, which called privatisation by another name.

The N K Singh Committee wanted all kinds of things "" that investors' debt-equity ratio should be eased, that there would be no taxation for investors, that the government would give sovereign guarantees and so on. But still no investors came. I believe that no one has the right to put workers' rights in jeopardy for illusory gains.

Our opposition is not just to lowering FDI caps in civil aviation. We oppose privatisation of airports. I can understand that you want to modernise airports and that funds are necessary.

But our experience tells us that privatising Airports Authority of India (AAI) will not lead to airport modernisation. FDI is not bringing real investment, there is no locality development or employment as a result, and the project is a brownfield venture, not a greenfield one.

There is another concern. Seventy per cent of the total profits of the AAI come from the results of operations in the Delhi and Mumbai airports.

If these airports are privatised, you will be snatching them from a public sector undertaking (PSU) called AAI. And immediately, AAI will turn sick, which will give you an excuse to close it. So, you'll kill two birds with one stone: you privatise profits and nationalise losses.

How is privatising AAI consistent with the 1991industrial policy resolution, which, in turn, is the mother of the Common Minimum Programme? You had segregated some categories of PSUs in which private investment was not to be allowed at all. AAI comes in this category.

Assume that we agree for a minute that you have to privatise. AAI's performance "" dividend, turnover, return on investment and so on "" has been excellent. It is a revenue earning asset. By selling it, you are temporarily addressing the issue of a deficit. Where will this stop? When you run out of assets to sell?

We must heed the experience of other countries. We are not dogmatic about opposing privatisation. Selling AAI will be against the mandate of the people. Every government so far that has attempted economic reform has been defeated.

If it continues along this path, this government too is doomed to electoral defeat. The AAI has a free reserve of Rs 2,000 crore. With loan and equity, they can modernise airports themselves.

We will do everything we can to help their modernisation. After all, we too want modern airports. The government has to improve the functioning of the AAI and check inefficiency, not sell AAI.

(As told to Aditi Phadnis)

Kapil Kaul
Senior Vice President, Centre for Asia Pacific Aviation

"The government has issued new guidelines for the privatisation of its two biggest airports, ensuring majority control for domestic firms. The foreign equity cap in the two companies that will operate the Delhi and Mumbai airports has been cut to 49 per cent from 74 per cent announced earlier.

Private companies in India, including local financial institutions, will hold another 25 per cent, and the state-owned Airports Authority of India (AAI), the umbrella body that operates the country's 125 airports, will hold the rest. The idea behind the decision is to ensure that 51 per cent of the equity remains with Indian promoters.

Let me highlight some recent trends the world over as far as airport privatisation is concerned. Countries all over the world "" from Mexico to Russia to Argentina "" are selling their airports to private entrepreneurs.

The governments are happy to earn a profit and dispense with operation, maintenance and expansion costs. The new owners find that they can make money by expanding and refurbishing the airport facilities, and the travellers, too, are delighted with the new amenities.

Experts say that over the next few years, hundreds of airports are likely to be sold. With the number of passengers expected to quadruple in the next decade, it is estimated that up to $350 billion will be needed for airport improvements. And with national budgets stretched and given the lack of resources, governments see privatisation as an alternative to the huge public expenditures.

For a moment, leave airport privatisation and look at global privatisation over the past decade in the bigger context: some $800 billion worth of state-owned enterprises have been sold off by governments around the world.

The country's aviation sector, which is over-regulated and under-managed, has escaped the reform process. Successive regimes have failed to understand the cost of neglecting this critical sector and the results are there for everyone to see and realise.

The new regime was expected to reverse the decision to privatise the two main airports. However, the revised guidelines are a welcome relief and reflect the government's resolve to move forward with reforms, especially in the infrastructure sector.

The cut in foreign direct investment (FDI) from 74 to 49 per cent is not bad news. I believe the major formations will stay committed to this privatisation deal but the inability to resolve internal differences within the United Progressive Alliance is creating unnecessary apprehension among investors. This can be avoided.

Given the resource-crunch the government faces, and the increasing insolvency of all other airports, except the metro airports, it becomes clear that privatisation is attractive and, in fact, the only practical solution. FDI is a recognised driver in the country's growth, and is critical in developing a world-class airport infrastructure.

The profit of our airports in the metros "" mainly, Delhi and Mumbai "" is subsidising the losses of all other airports.

The country needs to make up for years of under-investment in airport infrastructure and the privatisation of Delhi and Mumbai airports will just be the beginning. We need to develop a long-term strategic plan for all our major airports.

Privatisation offers an alternative to attain the goal of an effective and efficient transportation system. It, however, becomes controversial when the political leadership fails to document the realities of privatisation.

One of the first and most successful cases of privatisation is the British Airport Authority (BAA) that owned the Heathrow and Gatwick airports near London. Privatised by Marget Thatcher, BAA is now bidding to run airports in Europe and the US. And while airside charges are lower at Heathrow than they were in 1987, the market value of BAA has increased threefold.

Argentina and Mexico have recently concluded successful privatisation with significant FDIs. In Brazil, Ecuador, Venezuela and Bogota, the privatisation process is on.

In Europe, some major privatisation deals have been concluded, which include airports in Copenhagen, Dusseldorf, Hanover, Rome, Stockholm, Vienna and the UK (18 airports). Several west Asian and African countries, too, are exploring privatisation. Australia and New Zealand have already privatised all their major airports.

India needs investments worth billions of dollars in airport infrastructure and new greenfield airports. Such huge investments are beyond the scope of domestic companies. Foreign capital is essential to build the infrastructure and provide world-class services.

But, at the same time, we must also understand that investors consider FDI in infrastructure a risky business, and investments in airports without any legal and policy framework also adds to the risk element. India has the potential to become one of the largest aviation markets in the next 20 years.

Undeniably, both the Delhi and Mumbai airports have bright futures and will stimulate massive aviation development in India.

However, without free flow of FDI in airport development, our aviation objectives cannot be realised.