Wokay!

Ramesh Ramanathan is fuming about Bangalore’s new airport being underdesigned and underconnected (via Ajay Shah’s excellent roundup on infrastructure). As is happening far too often these days, Skimpy beat me to blogging about the main topic. However, that just gives me more stuff to discuss. In fact, I’ll make the whole post an outsider-layperson-dummy’s guide to the Bangalore airport, infrastructure design, infrastructure financing, and maybe even special check-in counters. So. Yeah. Let’s do this shit. In Q&A.

What’s the background here?

Okay. The IT and BPO industry really took off in Bangalore in the mid-1990s (I’m being approximate here). This has led to:

1. Lots of migration to Bangalore as engineers from all over the country come and settle here
2. Lots of business travel to India
3. Lots of other businesses and services springing up in Bangalore to serve this new set of people with disposable income – banks, real estate developers, and retailers. These in turn create more migration to Bangalore and more business travel.

What with all these migrants (who go home every once in a while), and business travelers, the demand for air travel in Bangalore grew rapidly. The problem is, the airport in Bangalore was really small and not suitable for all this air travel. The obvious thing to do was to build a new airport. However what with one thing and another – national politics, state politics, the dotcom bust, this took a while. The official memorandum to build an airport wasn’t drawn up and signed until 1999, bidders weren’t invited for a year after that, and the winning bidder wasn’t selected until 2001. After that, the contract wasn’t drawn up until 2004. Construction started in 2005, and the airport is going to open in a month.

So what’s the problem?

What isn’t the problem? The airport took years in coming, and it’s going to be horrifically inadequate when it does open a month from now. But there are three crucial problems. In no particular order of importance, these are:

1. The airport is built outside the city, and there’s no good road to it. Traveling from the city centre to Devanahalli will take at least an hour and a half, assuming (ha, ha) no traffic jams. Mint has a fabulous photo-essay on this.
2. The contract for the new airport specifies that the old airport has to be shut down. The idea behind this was to cut out competition and make the new airport more lucrative for people who wanted to build it. The problem is that the old airport is closer to the main city, and that there are so many Bangalore flights these days that it makes a lot of sense to continue operating the old airport, even if it’s only as a terminal for couriers or low-cost airlines.
3. BIAL (the company building the airport)’s traffic forecast turned out to be completely inadequate. They did a forecast in 2000, and then another one in 2002, based on which they designed the airport (including the runways, the terminal building, the check-in bays, the baggage handling infrastructure, and everything else). The problem is that they thought that the most likely situation would be 8.5 million passengers a year by 2010, and optimistically 10.1 million. Actually, there were 10 million passengers in 2007. The new airport is going to become cramped and congested as soon as it opens.

Congested from the word go? So passengers are screwed? Daamaal!

It’s not as bad as it sounds. The current airport (HAL Airport) is designed for even fewer passengers and even fewer flights. So you have flights circling Bangalore and wasting fuel for a huge amount of time before they get to land, and long, winding, hour-long queues for check-in and security check. Right now, it’s handling three times the planned capacity.

The new airport terminal is designed to handle forty million passengers a year, so the queues, the mad rush for seats in the lounges, and the airport rage at the baggage claim won’t be there. The problem is that the runway can only handle about ten million passengers a year. So the whole issue of flights circling Bangalore and waiting for landing slots is probably going to stay, but it’s not going to be as bad as it is right now.

The good news is that BIAL’s decided to start building a second runway to handle the fresh capacity as soon as they can. The bad news is that it won’t be completed until 2014.

Why did the forecast go so wrong?

According to Ajay Shah, it’s because the forecast was made when India was in an economic downturn and growth was actually slow. Now, India’s in an economic boom and traffic growth is wild. Ajay Shah thinks that nobody in India actually understands business cycles, and so forecasts are always going to be inaccurate, but that’s a different story.

If Ajay Shah is right, once we hit the downturn of the cycle, the airport won’t be quite as congested. Of course, if you’re in a business downturn, you’re probably going to have more pressing problems than how long your flight is circling the airport.

Dude, even if the forecast was low, why couldn’t BIAL have built capacity over and above it? It would just have gone unused.

See, the problem with that is that building extra capacity costs a lot of money. Huge amounts of money for infrastructure projects like airports and expressqays and ports. You don’t spend that much money unless you’re sure you’re going to make that much money too.

Doubling the capacity means doubling the money you spend. Doubling the money you spend means doubling the money you borrow. Doubling the money you borrow means doubling the interest you pay. If you’re not going to get double the traffic and double the landing fees, then death only are there. A congested airport is not as bad as a bankrupt airport.

BIAL started getting the money to build the airport between 2001 and 2005. It’s not actually going to make any money until 2008. When you’re dealing with long, risky timelines like that, you don’t want to take chances.

So why not run the old airport too if it’s such a good idea?

Can’t. It’s in the contract.

What kind of stupid-ass contract is that?

Okay, let’s go over this step by step. Building airports is expensive and risky. Private investors refuse to do it unless they’re sure they can make money on it. If there are two airports in a city, airlines can choose which one they’ll use. This pushes down fees and makes airports less viable. When you really need a new airport, granting the operator a monopoly makes sense.

It doesn’t make sense when there’s so much demand that both airports will operate to capacity, and the operator makes money anyway. But nobody thought about that when they drew up the contract. Ajay Shah points out that it’s important to learn from mistakes in previous contracts. – and this has been done. Sunil Jain’s Business Standard op-ed makes the point that when it came to Delhi’s airport upgradation, instead of granting the operator a monopoly, the contract just granted the operator the right-of-first-refusal on any new airport. Unfortunately, you’re stuck with the contract you wrote.

Why the Chuck can’t the government just tear up the contract?

Because:

1. It would infuriate the companies who signed the contract – Siemens, Larsen & Toubro, and Unique Zurich Airport – who are probably politically well connected and would give money to people campaigning against you in the next elections.
2. It would infuriate the people who financed BIAL – and who would respond by charging the government higher interest rates.
3. It would make India a less credible destination for infrastructure investment and financing, and that would lead to less investment and higher interest rates on infrastructure financing anyway.

Also, welshing on your contracts is wrong.

Okay, but what about that idea in the comment’s over at Skimpy’s blogpost? Why not renegotiate the contract, and let BIAL run the old airport too?

Good point. But it does raise the question – are you just going to hand it over to them, or are you going to demand they buy it? If you just hand it over, you’re giving them a free airport. As corporate welfare goes, it stinks. If you sell it to them, that raises the question of what a fair value is. And again, where are they going to get the money?

This is complicated.

That’s infrastructure for you.

And what about the road to the airport and the traffic jams?

Yeah. That’s nothing to do with the cost of borrowing money, or the difficulty of drawing up contracts. Well, it is that too. But mostly that’s because the Karnataka government is full of arseholes – and that’s when there is a Karnataka government.

So right now passengers are faaked because the drive to the airport is going to take twice to thrice as long?

Yep.

And airlines are faaked because they’re going to spend money on fuel circling while they wait for the flights ahead of them to land.

Yo baby. And let’s not forget the inflated landing fees BIAL is going to charge them because it’s a monopoly.

And the AAI is faaked because it’s losing an airport it owns and could run, while it’s only a 13% shareholder in BIAL.

Cha-ching!

Does anybody benefit from this mess at all?

The other shareholders in BIAL. And maybe Wuxi in China, which wants to be a Bangalore, and presumably has a better airport.

This entry was posted on Monday, February 18th, 2008 at 4:43 pm and is filed under Bangalore, Infrastructure. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.