Driving asset ancillary revenue through innovative tariff design

Kempegowda International Airport Bengaluru

Context

• Kempegowda International Airport Bengaluru (KIAB) is the first airport in India to be delivered via a public private partnership (PPP), under a build-own-operate-transfer (BOOT) model over a 30 year period extendible to 60 years
• The new airport (operated by the BIAL1 consortium) replaced the HAL Bangalore Intl. Airport (HBIA) which was unsuitable for brownfield expansion due to land constraints

Problem

• Prior to 2006, ancillary revenues were sub-scale across airports in India, lagging behind global peers
• Ancillary revenues accounted for c. 15% of total revenue for airports in India on average, compared to an average of 50% at comparably-sized airports elsewhere

Innovation

• The airport's tariffs were structured so that BIAL's earnings were ‘capped’ at 15% of net present value (NPV) of total airport profits, with varied contributions from different revenue streams
• 100% of profits from aero-assets contribute towards the 15% cap, while only 30% of profits from non-aero assets contribute to the cap, allowing BIAL to earn uncapped profits on 70% of non-aero assets

Stakeholders Involved

• Government of India – Project Owner
• Airport Economic Regulatory Authority (AERA) – Airport Regulator
• BIAL1– Concessionaire and Airport Operator

Results/Impact

• The airport has achieved significant commercial success, with non-aero revenues accounting for c. 40% of total revenues1 in 2018, while net profit grew by 33% year-on-year to USD 120M2
• The airport's passenger traffic capacity was increased to c. 12 million passengers annually via the expansion. A second expansion project that began in 2011, sought further that capacity to over 17 million passengers a year
• The first phase of the Terminal 2 expansion project is expected to be completed by 2021, with the duty-free business expected to be a key driver of commercial growth

Key lessons learnt

• Given that the tariff structure is flexible, evolves over time and rests on a foundation of strong baseload demand, such innovative structures can “nudge” concession owners into unlocking asset value through ancillary revenues and controlling user charges
• By standardizing tariff designs across sectors and
  ensuring the regulator reports to non-elected authorities, authorities e.g., AERA , can crowd in private investment as regulation outlasts political cycles (in contrast to typical examples)
• The systematic involvement of government officials5 at the project management-level enables political alignment and maintains government buy-in, streamlining project management efforts