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'Economic regulations is key to avoiding an asset bubble'

india Updated: Feb 12, 2007 00:47 IST
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As India throws open its airports, it should enact economic regulations that are neither liberal nor too restrictive, said experts at an aviation seminar in Bangalore last week. Regulations can also help in preventing the "tears" and disruption of a boom and bust cycle in airport assets that are driven by higher valuations.

"Economic regulation is in the interest of consumers and airlines. It is also of direct value to the airports and their investors as a means of providing long-term stability," said Peter Bysouth, Assistant Director (Airport and ATC Charge) with International Air Transport Association while presenting a paper at the seminar.

The airline industry has always sought regulation of natural monopolies such as airports and air navigation service providers (they can be independent from the airports in other countries) but airports have actively resisted regulations arguing that they are reasonable managers with a reasonable outlook for returns.

While recent privatisation has brought further efficiencies, it has also brought unrelenting pressure for increased aeronautical charges and profits, especially among listed assets that are constantly chasing quarter returns, said Bysouth.

Economic regulations are critical as airports are natural monopolies, and there's no effective competition for India's airports. Plus, there's a government fiat, which says that new "greenfield" airports will not create competition for the incumbents. Therefore, it is important to ensure effective regulation of airports to ensure a fair outcome to all stakeholders — airlines, travellers, government, shippers and public.

Economic regulation is beneficial to investors as long-term agreements between providers and users can moderate the results of "cyclic" industry, said Bysouth. Airports are capital-intensive infrastructure projects that require investors with long-term horizons. "Traditional private equity, with its short-term focus on capital gains, may not be suitable investment vehicle for airports," said Bysouth.

Indeed, this is not the first time India has embarked on civil aviation liberalisation. In the early 1990s, a similar exercise ended in "tears" as unrestrained growth led to a boom and bust cycle. The subsequent "instability" has held up investment and progress for a decade, causing India to lag behind other countries.

"India now has both airline and airport privatisation to test stability and ongoing growth. The need for a comprehensive policy statement and a regulator for civil aviation have never been more apparent than it is today. The proposed Airports Economic Regulatory Authority has an enormous task and responsibility to husband future civil aviation growth in India," said Bysouth.

Email Ranju Sarkar: ranju .sarkar@hindustantimes.com