Challenges of Privatization of Airports in Nepal

Privatization refers to the shifting of governmental functions, responsibilities, and sometimes ownership, in whole or in part, to the private sector. With respect to airports, “privatization” can take many forms up to and including the transfer of an entire airport to private operation and/or ownership.

 The term "privatization", as used here, includes a wide range of options:

• Autonomous public organizations operating under private law rules.
• Public enterprises, operating under private corporation law.
• Mixed corporations with public/private participation.
•  Public/Private Partnership (PPP) initiatives.

There are many ways to classify privatization modes, depending on the criteria to be used

• Service Contract
• Management Contract
• Lease
• DBFMO / Concession
•  Full privatization

 Civil Aviation Authority of Nepal is the sole entity to plan, construct, operate and maintain the airport and airport related infrastructure within Nepal. There are no private airports and military airports in Nepal.

Day by Day the air traffic demand is increasing and passenger growth rate is more than 6 percent over last 10 years. So the governmental organization CAAN only can’t operate the aviation sector alone. So the privatization to this sector is essential to develop in efficient, effective and the sustainable manner.

There are various challenges in the privatization of aviation within Nepal they are as follow:

• Government policy is not sufficient to facilitate for the initiation of privatization of airport.
• Underdeveloped aviation industry.
• There are not sufficient airports which are attractive for the revenue generation for private sectors
• There is no privatization economic policy to regulate the privatized airport.
• Only one international airport, which is good revenue source of CAAN.
• Sustainability versus operation.
• Governmental rules and regulation hurdles.
• Ministry of civil aviation does not have separate privatization unit with capable manpower to regulate and same situation in CAAN.
• Not fair and transparent process of privatization.
• Trade union and employee opposition due to the fear of security of job after privatization.
• There is not strong clear-cut rules and procedures in the forms of Act and regulation for the privatization except PPP policy and BOOT Act.
• If privatization is not performed competently and competitively, there is the fear of high cost with lower quality of service.
• During privatization, there is high chance of political influence on the bureaucracy decision making during privatization process due to the unstable and unethical government politics.
• Problems of transparency.
• Huge concern of public and media thinking the malpractice and corruption to the public property transfer to private company.
• Lack of foreign investment policy to attract foreign investment in the airport sector.
• What capital assets, debt obligations, legal liabilities are transferred to the new company.
• Restrictions and limitations to domestic/foreign private sector and sovereign wealth investment and the scheduling thereof.
• Lack of clarity over the regulatory arrangements from the private investor perspective: balancing level of service and capacity requirements with investment returns.
• Privatization also has some adverse effects like it may create a private monopoly which charges extra for same or lesser standards of services, invests inadequately and gives less consideration to externalities like controlling environmental impacts and maintaining social justice. Less favorable employment condition may occur and redundancies may occur.
• Privatization resulted in inadequate investment and high charges for customers

What need to be done ? (Solution)

Privatization is not a successful option unless customer needs are not kept in priority for the growth and development.

• For the regulator improve legal, regulatory and institutional framework before granting a comprehensive airport infrastructure concession programme. 
• Implement fair, cost efficient and regulated pricing. 
• User charges must be cost based
• Develop airport policy to guide potential private investors.
• Improve concession oversight in order to reduce re-negotiations and poor performance of vendor or private operator.
• Improve public perception of joint venture arrangement approach to airport management and operations.
• Framework legislation and a central privatization body ensure continuity and consistency
• To ensure the effective governance of privatization, the government needs to put in place laws to guide the process and create a central body to steer it:

•         Putting in place framework legislation provides three primary benefits

−        Increases transparency of the process, with clear rules for all participants

−        Provides consistency in the process, which is important to attract investors

−        Ensures that the money from the sale of the assets is only used to meet the goals of the programme

•         Creating a central body to drive the process will ensure:

−        Co-ordination of strategy

−        Precise, strong guidance and appropriate transfer of knowledge to all entities involved in the process

•  Regulatory framework needs to be clear before privatization is started.

• The best regulatory frameworks keep competitive aeronautical charges to encourage air-service development and protect airlines, while offering airport investors the ability to benefit from commercial performance improvements (generally meaning dual-till approaches). A balanced airport economic regulatory framework should also provide clear rules for operators regarding asset disposal, required investment, and other issues.

•  Key features of regulatory framework design
•  Keep competitive aeronautical charges to encourage air service development and airlines’ growth
•  O­ffer airport investors the ability to benefit from commercial performance improvements (i.e. dual-till approaches)
•  Provide clear rules regarding asset disposal, required investments, and other issues

• Communication with key stakeholders builds support for the transaction
• key lessons have been learned from successful transactions:
• Clear objectives are required to guide scope and transaction design
• Well-defined governance structures are needed, to ensure the initial strategy is followed
• Regulatory frameworks need to be established before privatization is lanched
• Transparent communication with stakeholders is required to build public support

• An efficient economic regulation is necessary to regulate the cost of capital, the asset and resource valuation and to control the service charges according to the quality of service provided. It is also needed to improvise the quality of service provided to airlines and customers according to the incentives.
• The price-caps are given a regular check in order to prevent the increase in airport profits in excess of the cost of capital. This avoids inefficient investment which would lead to excessive charging of customer services.
• Revision of incentives for better services keeps the quality of service good and also in improvisation. If neglected, it would lead to poor quality of service in order to increase airport profits.
• Effective economic regulation has been critical for the success of this privatization. This controlled the aeronautical revenue relatively low and quality of service high.
• Sufficient manpower trained for executing privatization process and tendering.
• Transparent tendering or competitive bidding should be followed.
• Provision of viability gap funding mechanism for the less beneficial social airport privatization.

Well-designed privatization transactions that take advantage of these key success factors reduce uncertainty for both investors and governments. In turn, the lower risk attracts more patient investors with lower return expectations.