Key Sectors for FDI in India: Airports and Ports

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Jun. 18 – Continuing with our series of key sectors for foreign direct investment (FDI) in India, this article will provide an overview of foreign investment in airports and ports throughout India. As the government prioritizes the development and refurbishment of national infrastructure, investment into India’s airports and ports is an increasingly attractive option for investors looking to tap into India’s market.

Airports

Including grass runways, India has a total of almost 500 airports, of which 16 have international status. Of these, the Airports Authority of India (AAI) manages 125. The AAI has stated it aims to upgrade all of these as well as adding new locations to better unify the country within the next 10 years. This will require significant infrastructure investment in terminals, runways and related construction to generate full operational and passenger management capabilities.

The government has stated several times its intention to attract private investment into this sector, and many domestic and multinational players have been showing interest in the projected growth of India’s aviation sector. Much of this is within airport development and management. Some of these include India’s private airlines, such as Jet, Kingfisher, Deccan, and Spicejet, who collectively account for upwards of 60 percent of India’s domestic passenger traffic.

India is now poised to meet international standards in the development and infrastructure of its airports as any recent traveler to Delhi, Mumbai or Chennai will testify. The government is planning modernization of the airports to establish a high standard, while newly developed airports will help release pressure on the existing airports in the country.

According to the AAI, development of Indian airports received US$8.5 billion in investments during the 11th Five Year Plan. The airports in Mumbai and Delhi have already been privatized and upgraded through an estimated investment of US$4 billion. The redevelopment of Mumbai International airport, taken up under the 11th Five Year Plan, is at an advanced stage of completion.

The 12th Five Year Plan stipulates the building of three new airports: Navi Mumbai Airport, the Goa Airport and the Kannur Airport. A policy to make some of the current airports into international hubs is also being considered.

The AAI plans to invest an additional US$3.07 billion between 2010 and 2015. From this, 43 percent will be for the three metro airports in Kolkata, Chennai and Trivandrum. The remainder will be invested in upgrading other non-metro airports and in the modernization of the existing aeronautical facilities, such as radar and related equipment upgrades.

The ‘open sky’ policy of the government and rapid air traffic growth have resulted in the entry of several new privately owned airlines and increased flights for international airlines. Foreign airlines currently have the lion’s share of passenger traffic into and out of India as the approvals procedures for obtaining a license to operate in India as a foreign airline is just two years, as opposed to five for Indian domestic carriers operating international routes.

The following statistics and figures have been reported by the Ministry of Civil Aviation:

  • The compound annual growth rate of passenger traffic in airports throughout India is projected to grow at over 15 percent over the next few years
  • Cargo traffic is expected to grow at over 20 percent per annum
  • 100 percent FDI is permissible for existing airports (approval by India’s Foreign Investment Promotion Board is required for FDI beyond 74 percent)
  • 100 percent FDI under the automatic route is permissible for Greenfield airports
  • 49 percent FDI is permissible in domestic airlines under the automatic route, yet not by foreign airline companies
  • 100 percent equity ownership by non-resident Indians is permitted
  • 100 percent tax exemption for airport projects for a period of 10 years

Ports

The ports situation in India offers tremendous scope for the development of international maritime transport both for passenger and cargo handling. There is a notorious delay in turnaround times at Indian ports. For example in Mumbai it typically takes about three days to turn a container ship around; in Shanghai it only takes eight hours.

Massive investment is required to combat problems with inadequate berths, road links, and related infrastructure constraints. The major ports highlighted for redevelopment are: Kandla, Mumbai, Mormugao, New Mangalore on the east coast, Cochin and Tuticorn to the south, and Chennai, Ennore, Vizag, Paradip and Kolkata on the east coast.

With 13 major ports and over 180 minor ports, the 7,517-kilometer long Indian coastline plays a key role in maritime transport amongst international trade capabilities. It is forecasted that by the end of 2017 port traffic will amount to 943.06 million tons for India’s major ports and 815.20 million tons for its minor ports.

The government has developed its port infrastructure through an investment of US$25 billion through public-private partnerships (PPP). An independent Crisil credit rating report focusing on Indian ports and maritime transport estimated that port capacity grew by 160 percent over the 2011–12 period. Cargo handling at the major ports grew at 7.7 percent annually during 2011-12, while cargo traffic reached 877 million tons by 2011-12. Containerized cargo is expected to grow at 15.5 percent over the next seven years.

India’s foreign trade policy expects its share of global exports to double over the next five years to US$150 billion. A large portion of newly generated foreign trade is expected to be via shipping, taking up an estimated 95 percent by volume and 70 percent by value of India’s total trade.

According to the Ministry of Shipping, infrastructure initiatives include the formulation of a national maritime development policy to facilitate private investment, improve service quality and promote competitiveness. Furthermore, there is permission for 100 percent FDI for port development projects under the automatic route, and 100 percent income tax exemption is provided for a period of 10 years for port developmental projects.

Whilst progress in the development of India’s major ports during the 11th Five Year Plan has been slow due to several unresolved institutional issues, expectations remain positive. An aggressive expansion of capacity in India’s major ports through PPP is central to the 12th Five Year Plan (spanning from 2012 to 2017). In addition, the central government has proposed two entirely new PPP ports: one in West Bengal and the other in Andhra Pradesh.

Ultimately, India is opening up all the areas of port operation for private sector participation. So far, the experience of operating berths through PPPs at some of the major ports in India has thus far been successful. It has been decided to expand the program and allocate new berths to be constructed through PPPs.

Dezan Shira & Associates is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in emerging Asia. Since its establishment in 1992, the firm has grown into one of Asia’s most versatile full-service consultancies with operational offices across China, Hong Kong, India, Singapore and Vietnam as well as liaison offices in Italy and the United States.

For further details or to contact the firm, please email india@dezshira.com, visit www.dezshira.com, or download the company brochure.

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