Udan — the new regional air connectivity scheme — is not likely to get the aam aadmi (common man) to fly, but it will correct the historical wrong done to the air transport business in India. The hallmark of faux socialism was the targeting of some services and goods as “luxury” and by implication, anti-common man, anti-growth and pro-inequality.
Air transport was one such service. It’s early face was to serve the rich or the privileged. But all this has changed. Indian workers travelling from Etawah in Uttar Pradesh to the Gulf travel by road or rail to Delhi before taking an international flight. Why not facilitate them to fly straight from Etawah to Delhi, thereby securing their luggage end-to-end and avoiding the choking of our inter-state roads?
Udan is refreshingly simple and timely in its objectives. It is not populist even though it is being marketed in that manner. The “hawai chappalwallahs” would prefer to get subsidy in hand rather than as a low-cost air junket. Udan is not about giving the poor a taste of luxury, Evita Peron style.
Air transport for growth and jobs
Udan is about growth and jobs as the policy note avers up front. It quotes the International Civil Aviation Organisation (ICAO) that every rupee invested in civil aviation add Rs 3.5 to the economy and every job created directly generates 6.1 jobs indirectly.
There is no reason to take the ICAO at its word. The ministry has been baking this scheme since November 2014. It should have estimated similar value and job multipliers in the Indian context. That could have better evidenced the benefits from the allocation of public funds on the “value for money” principle. But the economic rationale can be intuitively surmised.
What! India has more airports than commercial planes
There are as many as 398 “unserved” airports which have no commercial flights and 18 “under-served” airports host less than seven flights per week. One may well ask why this large number of airports exist if there are no commercial flights to them and who pays for their upkeep? Anecdotally, these airports have existed for the convenience of the elite political class for their infrequent “in and out” inspections, disaster surveys and election time visits to the hinterland. Less frequently India’s small business elite may also use a few.
Not all of them are owned by the Airports Authority of India (AAI), the Central agency which manages airports. Some are owned by the ministry of defence, others by state governments. It would have helped investors if the policy note had listed the ownership and management of each.
Democratise these public assets
So what are the likely benefits? First, commercialising these 416 airports will “democratise” publicly-owned sites which have hitherto been reserved for elite use. The average citizen would get a participative stake in their use and development. This is a vital aspect that policy note ignores.
Rationalise air taxes & spend on infrastructure
Second, the government has rightly slashed taxes and charges on regional connectivity flights to narrow the viability gap. AAI will not charge any landing or parking charge and only 42.5 per cent of the route and navigation facilitation charge. The owners of these airports will similarly exempt such flights from all charges whilst ensuring the full package of airport facilities. Most of these charges are exorbitant in any case and need to be rationalised. Consider that AAI earns a profit after tax of around `800 crores. This surplus is better used for regional air connectivity than to subsidise Air India, which should be privatised.
Kick start new businesses and services in rural areas
Third, whilst Udan is branded as a new passenger facility, an additional business opportunity is the potential for moving existing perishable cargo, fragile goods and high-value export-oriented products by air. It is only a combination of passengers and cargo which can make the scheme sustainable. Public investments should be leveraged via private management model used for major airports. Investor consultations in state capitals being planned should include potential investors in airport management and development.
Fourth, some of the additional economic value and jobs are from developing these airports as growth centres. Providing secure and high quality road links, 24×7 electricity, clean water and sanitation are key for private management to step in with malls, airconditioned warehouses, hotels and new businesses which need secure air connectivity.
Udan has got it right.
The Udan policy ticks all the right boxes. It retains the potential for business innovation by limiting the seats at the Udan price to 50 per cent of capacity. The remaining seats can be sold at market rates. Operators shall be chosen competitively via reverse auction for the minimum amount of “viability gap funding” (VGF) required. The policy is carefully and explicitly drafted to avoid ex-post disputes.
The policy is market driven. Flight operators must do their own due diligence and come forward with proposals which would then be put out to bid. If a proposer fails to submit the lowest bid, they could still win by agreeing to match the lowest bid. This provision preserves the incentive for initiating proposals, whilst retaining competitive energy in the bid process. In the past, in roads and telecom, irresponsible bids resulted in projects being abandoned subsequently. Most of these airports are challenges for business development rather than ready-baked money spinners. Hopefully, only responsible bidders would respond.
The policy carries forward the spirit of cooperative federalism. The Central government will fund 80 per cent (90 per cent in the Northeast) of the subsidy amount to be paid to the operators as VGF. The state government shall fund the residual marginal amount.
Udan targets medium term dividends
It is a policy reform which does not just eye the popular vote. It courageously demolishes the economic posturing of the past and the earlier demonisation of air transport. It looks, instead, towards medium-term economic growth and job creation. Habitual leftists, dyed-in-the-wool faux socialists and related do-gooders are likely to label this policy a sellout in the name of the poor. But young entrepreneurs yearning for growth opportunities and young workers looking for good jobs should support it. Even those who are ideologically bound to oppose this policy are sure to use these services as they travel “cattle class” to the hinterland.
Adaapted from the authors article in the Asian Age, October 28, 2016 http://www.asianage.com/columnists/will-udan-be-able-make-bharat-soar-536