The proposal made by consultancy firm EY with regards to fair rate of return (FRoR) for airport lands has been rejected by the airport operators, who now want the government to accommodate their recommendations before coming out with a final order on it.
The Airports Economic Regulatory Authority of India (AERA), which is a tariff regulator for aeronautical services charged by the airports, had recently asked all the stakeholders to offer their comments on a study done in order to ascertain a FRoR for upcoming airport projects. AERA had commissioned consultancy firm EY for conducting a comparative study of infrastructure projects in the country and outside and come out with a suitable formula. According to industry experts, the adaptation of the right model for getting a FRoR will go a long way in making airport projects viable for the operators without pinching the pockets of the fliers and cargos, as they are ultimately the ones to be affected.
The study has come out with two possibilities; the first is when a land is introduced against equity for airport development, it may be prudent to amortise the cost of land for a reasonable time period at a rate of 3% of the cost of land for the first 10 years. To account for the time value of money, index the rate of amortisation from 11th year onwards, until the historical land cost diminishes to zero and can be indexed at Consumer Price Index (CPI), a common indicator for inflation. In the second alternative, an independent assessment can be performed for select airports which will receive a FRoR on the cost of land based on criteria such as impact on tariffs, cost of land incurred, and passenger traffic forecast for the airport.
21/06/18 Shahkar Abidi/DNA
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The Airports Economic Regulatory Authority of India (AERA), which is a tariff regulator for aeronautical services charged by the airports, had recently asked all the stakeholders to offer their comments on a study done in order to ascertain a FRoR for upcoming airport projects. AERA had commissioned consultancy firm EY for conducting a comparative study of infrastructure projects in the country and outside and come out with a suitable formula. According to industry experts, the adaptation of the right model for getting a FRoR will go a long way in making airport projects viable for the operators without pinching the pockets of the fliers and cargos, as they are ultimately the ones to be affected.
The study has come out with two possibilities; the first is when a land is introduced against equity for airport development, it may be prudent to amortise the cost of land for a reasonable time period at a rate of 3% of the cost of land for the first 10 years. To account for the time value of money, index the rate of amortisation from 11th year onwards, until the historical land cost diminishes to zero and can be indexed at Consumer Price Index (CPI), a common indicator for inflation. In the second alternative, an independent assessment can be performed for select airports which will receive a FRoR on the cost of land based on criteria such as impact on tariffs, cost of land incurred, and passenger traffic forecast for the airport.
21/06/18 Shahkar Abidi/DNA
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