Capacity Development of
The Civil Aviation Authority
of Nepal
REVIEW OF THE INSTITUTIONAL FRAMEWORK
MAY 2012
TABLE OF CONTENTS
EXECUTIVE SUMMARY .................................................................................... 1
1.
INTRODUCTION: BASIC CONCEPTS ..................................................... 1
2.
SUMMARY OF THE CURRENT INSTITUTIONAL FRAMEWORK ........... 4
3.
INSTITUTIONAL FRAMEWORK and FUNCTION SEPARATION ............ 5
4.
AIRPORTS ................................................................................................ 7
4.1. Corporatisation ....................................................................................... 7
4.2. Commercialisation .................................................................................. 9
4.3. Privatisation .......................................................................................... 11
4.3.1. Basic privatisation modes ............................................................... 12
4.3.2. Ownership/Institutional typology ..................................................... 16
4.3.3. Evaluation of PPP experiences and ownership operation types ..... 18
5.
AIR NAVIGATION SERVICES (ANS) ..................................................... 20
5.1. Corporatisation ..................................................................................... 21
5.2. Commercialisation ................................................................................ 26
5.3. Privatisation .......................................................................................... 27
6.
SOME CONCLUSIONS: THE CASE OF NEPAL .................................... 28
6.1. Objectives and approaches .................................................................. 28
6.2. Airport and ANS differentiation ............................................................. 29
6.2.1. Airports ........................................................................................... 30
6.2.2. Air Navigation Services .................................................................. 31
6.3. Concluding remarks.............................................................................. 32
REFERENCES ................................................................................................. 34
Capacity development of the Civil Aviation of Nepal
Review of the Institutional Framework
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EXECUTIVE SUMMARY
This report provides background for the institutional review of the Civil Aviation
Administration in Nepal. I it is closely linked to the report on the review of the
civil aviation legislation in as much as it is such legislation that defines the
current institutions.
The purpose of this report is to present the most important options available for
institutional reform and set them in the context of international comparative
experiences. It does not attempt to address the legal or organisational issues
involved in any future reform, but rather to make available a condensed review
of current practices around the world.
The report is organised around three basic concepts which are commonly found
in all modernisation efforts in the field of civil aviation administration:
 Corporatisation
 Commercialisation
 Privatisation
To some degree, all three concepts involve the introduction of practices that
historically had been reserved for private firms, but which for the last thirty years
have been translated to some degree to certain domains of the public sector.
In the field of aviation, the main forces driving institutional reform are, and have
been for the last decades in many countries: a) the need to provide a clear
separation between regulatory and service provision activities; b) a desire to
improve efficiency and to improve the quality of the services provided; and c) the
financial realities of building and operating infrastructures and services requiring
large amounts of capital and undergoing constant technological renovation.
Understanding how the three basic concepts have been implemented in other
countries will provide some guidance for the discussion of these topics in Nepal.
The report covers each concept as it applies to airports and air navigation
services in a separate way. The reason for this separate treatment stems from
the fact that airports and ANS have followed rather different paths in their
institutional evolution. Despite their multiple commonalities, it can be said that in
many countries, airports have clearly evolved towards greater privatisation,
while the ANS provision has adopted some of the ways of the private sector, but
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has eschewed the introduction of private capital and the establishment of public
private partnerships.
The report summarises the experiences from a variety of countries, and
examines the opinions expressed by authoritative international bodies like ICAO
and CANSO. It concludes by presenting the basic objectives that may be
pursued in the review of the institutional framework, and explains how the
choice of objectives affects the alternatives for implementing corporatisation,
commercialisation and privatisation.
In the case of airports, a separation is established between existing and new
infrastructures, so the report delineates a possible gradual approach which
could lead to the introduction of private participation, but does not necessarily
have public private partnerships as a goal.
Regarding the ANS provision, the report does not contemplate the need to
introduce any private involvement, but considers commercialisation as a
necessity. It sees corporatisation as an avenue that could be avoided if the
current institutional framework could be made to implement financial autonomy
in actual practice.
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1. INTRODUCTION: BASIC CONCEPTS
The project “Capacity Development of the Civil Aviation Authority of Nepal”
includes amongst its goals the review of the current institutional framework
regarding civil aviation. This extends beyond the review of the current situation
to include the exploration of possible avenues leading to an improvement in the
operation of the civil aviation system as a whole.
This report focuses essentially on two issues. On the one hand, the need to
guarantee adequate separation between regulatory functions and service
provision tasks. On the other hand, the need to increase efficiency and
guarantee an adequate level of effectiveness in the delivery of regulatory and
service provision functions. In this context, the report uses the term
"modernisation" with a very broad meaning which encompasses both the
introduction of managerial and organisational practices usually associated with
the private sector. The term "privatisation" is used to denote the multiple forms
in which provision of aviation related services may be open to private investors.
Modernisation refers to management practices while privatisation focuses on
ownership.
Both "modernisation" and "privatisation" will be examined in relation to the
provision of air navigation services and the construction/operation of airports.
These two groups of services are considered separately since they have very
different characteristics, and comparative experience shows that they have
been treated very differently in most countries that have introduced some
degree of privatisation into their aviation systems.
Under the concept of "modernisation", the report examines available options
which may be classified under the notions of "corporatisation" and
"commercialisation". The first refers to the introduction of institutional changes
that bring the operation of the aviation administration, or part of it, closer to the
institutional models of the corporate world. The second designates those
changes intended to introduce a more commercial orientation, in the sense that
some, if not all, aviation-related functions should tend to be self-financed.
The term "privatisation", as used here, includes a wide range of options:
 Autonomous public organisations operating under private law rules.
 Public enterprises, operating under private corporation law.
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 Mixed corporations with public/private participation.
 Public/Private Partnership (PPP) initiatives.
 Full privatisation
In March 2011, the National Planning Commission issued the "White Paper on
Public Private Partnership (PPP)" in which the Government of Nepal clarifies
the official view on PPP, and proposes a road map for future action.
Page 12 of the White Paper presents a very clear graph of what can be
considered PPP:
Source: "White Paper on Public Private Partnership (PPP)". P. 12
A similar concept of privatisation can be found in the World Bank: "Private
Participation in Infrastructure Database"1, which provides the following
definition:
"Projects are considered to have private participation if a private company or
investor bears a share of the project's operating risk. That is, a private sponsor is at
least partially responsible for operating cost and associated risks. This could be by
either having the rights to operate alone or in association with a public entity or
owning an equity share in the project.
1
http://ppi.worldbank.org/resources/ppi_methodology.aspx
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"The Database classifies private infrastructure projects in four categories:
management and lease contracts
 concessions (or management and operation contracts with major private
capital commitments)
 greenfield projects
 divestitures"
The World Bank database emphasises the fact that private participation must
always entail the assumption of some degree of risk by the private sector.
"Management and lease contracts transfer at least partially the operational risk to a
private sponsor through contractual obligations. In greenfield projects and
divestitures, the operational risk is transferred to a private party through contractual
obligations and/or equity ownership in the project."
The White Paper on Public Private Partnership takes a somewhat stricter view
of PPP, and requires that "a substantial transfer of appropriate risk takes
place to the private party". Therefore, under the existing policy of the
Government of Nepal, management and lease contracts would probably not
qualify as PPP, although there is no denying that such arrangements constitute
a valid way to introduce some degree of private participation.
Each of these options may be better suited for a different situation or a different
type of service, as evidenced by the diversity of routes undertaken by other
countries regarding the provision of airport infrastructures on the one hand and
air navigation services on the other.
The International Civil Aviation Organisation (ICAO) does not recommend or
prescribe a specific form of organisation, but the Council has adopted a welldefined position which is presented in Doc 9082 “ICAO’s Policies on Charges
for Airports and Air Navigation Services”. Paragraphs 11 to 13 state the
following:
“11. The Council observes that experience gained worldwide indicates that where
airports and air navigation services have been operated by autonomous entities
their overall financial situation and managerial efficiency have generally tended to
improve. Many of these autonomous entities have been established by
governments although the operation of many such entities, in particular those
operating airports, has since been transferred partly or completely to private
enterprises.
12. The Council, therefore, recommends that where this is economically viable and
in the best interest of providers (airports and ANSPs) and users, States consider
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establishing autonomous entities to operate their airports or air navigation services,
recognizing that in some circumstances a single entity may operate both airports
and air navigation services, and that the entity may be in the form of an
autonomous civil aviation authority.
13. The Council emphasizes with regard to private involvement that States,
when considering the commercialisation or privatisation of airports and ANSPs,
bear in mind that the State is ultimately responsible for safety, security, and, in view
of the potential abuse of dominant position by airports and ANSPs, economic
oversight of their operations.”2
The official position of the international authority on civil aviation is to encourage
some degree of corporatisation with the establishment of autonomous bodies
for the operation of airports and air navigation services. Of particular interest to
countries like Nepal is the recognition that a single autonomous entity may
operate both types of services and, furthermore, that such entity may be an
autonomous civil aviation authority.
2. SUMMARY OF THE CURRENT INSTITUTIONAL FRAMEWORK
The bulk of civil aviation functions are discharged by the Civil Aviation Authority
Nepal, established under the Nepal Civil Aviation Authority Act, 2053 (1996), as
an "autonomous and corporate body with perpetual succession". The Authority
reports to the Ministry of Tourism and Civil Aviation, in which policy-making and
some of the regulatory functions still reside. Management of the CAAN is
entrusted to a Director General, but many of the main decisions must be
adopted by a Board of Directors made up of eight members and chaired by the
Minister. All members of the board, including the Director General, may be
removed at any time by the Government of Nepal.
The Authority performs regulatory/oversight duties, and acts as a service
provider in relation to air navigation services and airport related services,
including not only airport operation, but also fire prevention and groundhandling.
The CAAN Act empowers the Authority to collect a variety of fees and charges
and is entitled to enter into loans, in such a way that it could operate in a
financially autonomous manner and not depend on the transfer of funds from
ICAO. Doc 9082. ICAO’s Policies on Charges for Airports and Air Navigation Services. 2009.
p. 3.
2
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the general budget of the Government. In reality, the Authority depends on the
budget provided annually by the Ministry of Tourism and Civil Aviation.
It is not the purpose of this report to examine the current structure of the
Authority. Suffice it to say that regulatory and oversight functions are essentially
entrusted to three Departments reporting to the Director General, Aviation
Safety Department, Aerodrome Safety and Standards Department and ANS
Safety and Standards Department. Airport management is in the hands of the
Tribhuvan International Airport Civil Aviation Office and Domestic Airport
Department, while CNS and ATC services are handled by two additional
Departments. Meteorological services are provided by the Department of
Hydrology and Meteorology under the Ministry of Environment.
The current structure is designed to provide separation between service
provision and regulatory functions, but some staffing issues, together with the
fact that there is no financial differentiation, have prevented this goal from being
completely attained.
In a future stage of the project, the current structure of the CAAN will be
analysed in detail in order to provide clear grounds for the formulation of
reorganisation proposals in a revised institutional framework.
For the purposes of this report, the two basic features of the CAAN to be
emphasised are the inclusion within a single organisation of service provision
and regulatory functions and the theoretical, but not actual, configuration of the
Authority as an autonomous self-financing body.
This institutional arrangement would satisfy, in principle, the requisites set by
ICAO in the above-mentioned Doc 9082, because the CAAN meets, in theory at
least, the requirement of being an “autonomous civil aviation authority” and
operates both airports and air navigation services.
Bridging the gap between the legal provisions and the actual degree of
autonomy of CAAN, is the greatest challenge from the institutional point of view.
3. INSTITUTIONAL FRAMEWORK AND FUNCTION SEPARATION
In the field of aviation, the issues of modernisation and privatisation go hand in
hand with the concept of separation between regulatory/oversight functions and
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service provision functions. Such separation can be achieved without recourse
to any form of corporatisation, commercialisation or privatisation. However,
there is a tendency to link the separation of functions with an increase in
efficiency and in responsiveness to the needs of the aviation sector, and thus to
the introduction of a private sector managerial culture or the participation of
private initiatives.
This is the view advocated by the main international organisation in the field of
air navigation services. The Civil Air Navigation Services Organisation
(CANSO), in the Guide to Separation of Service Provision & Regulation, states
that:
"If providers of air navigation services will be empowered by their States to
concentrate on the “business oriented management of the service function” and the
delivery of safe, environmentally sustainable, efficient, cost-effective and seamless
services, they will be in a better position to respond to the different needs of their
stakeholders, in particular their customers. Further, this empowerment will enable
them to employ their choice of vehicles to improve their performance, e.g. enter in
agreements with other ANSPs and further industry partners to create regional
efficiencies".3
Separation and privatisation are also seen as interrelated concepts when
dealing with the provision of airport services, despite the fact that in this field the
reasons most often quoted for including some form of private participation in
airport management are always related to increased efficiency, better service
provision and financing. For example, ICAO Doc 9562 -Airport Economics
Manual- includes the establishment of "a clear separation between the regulator
and the service provider"4 among the advantages derived from the creation of
an autonomous entity to operate the airport..
The need to establish a clear separation between regulation and service
provision when privatisation is introduced has also been underlined by other
international organisations, like OECD, as an important concern to take into
consideration when devising a privatisation process in any field.5
When dealing with the issue of separation, nevertheless, one should keep in
mind the fact that this is not requirement that states are obliged to meet, but a
3
CANSO. Guide to Separation of Service Provision & Regulation. August 2011.
ICAO. Doc. 9562. Airport Economics Manual. 2nd Edition 2006, p.2-5.
5 OECD. Privatisation in the 21st Century: Summary of Recent Experiences. 2010. p.13.
4
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mere recommendation which ICAO itself admits can be disregarded in view of
the situation of each country. As a matter of fact, it can not be ignored that
some countries, like the USA, have never implemented the separation between
regulatory and service provision functions.
4. AIRPORTS
Airport management around the world started in a similar manner, being
handled in many cases by the aviation administration. Prior to WWII,
nevertheless, there were a few airports in Europe, like Frankfurt in Germany or
Milano-Malpensa in Italy, which were built entirely by private investors.
Following the war, the rule became that airports were built and operated by
public administrations because they were considered an essential service which
could easily fall prey to monopolistic practices. The tradition of government
owned and operated airports is still very strong, and is present in roughly half of
the world’s airports,. However, in many cases, public ownership does not
always mean that the operation is not conducted following business principles.
In fact, there has been a steady trend towards the introduction of organisational
or managerial principles promoting greater efficiency.
In the quest for greater efficiency, better performance and economic viability,
governments have resorted to multiple alternatives. As mentioned in the
Introduction to this report, the main approaches have been “corporatisation”,
“commercialisation” and “privatisation”.
Such approaches are in no way mutually exclusive. On the contrary, it can be
said that they can complement each other, and at times are seen as a
progression of steps towards better air transportation. Corporatisation may take
place as a preparatory phase in which the airport is transferred to a public
corporation that will later be offered to private investors: Commercialisation will
necessarily accompany any other measure if the economic viability of an airport
is to be assured.
4.1. Corporatisation
Corporatisation has become a widely used expression which can often be found
in studies and policy documents relating to airport management. For example,
the report "Policy on Airport Infrastructure in India", submitted by the Task Force
on Infrastructure of India, includes several mentions to the fact that "There is a
definite worldwide movement from monopoly state ownership of airports to
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corporatisation."6 This is a term which many use with profusion, but very few
define with precision. Few authoritative definitions of the term corporatisation
can be found in the literature, but most would authors agree that it refers to the
process through which the provision of some public service is entrusted to a
public entity operating, at least to some degree, on a commercial basis or
established under the rules of private law in a manner comparable to private
companies.
In the drive towards increased efficiency, and in order to reduce the burden on
public treasuries, the last quarter of the last century saw an increasing trend
towards airport corporatisation, and in many countries, some or all airports were
put in the hands of publicly-owned companies or autonomous entities charged
specifically with the provision airport services.
ICAO has endorsed this trend towards the creation of autonomous entities,
largely self-sustaining, for the operation of airports, both in the above-mentioned
Doc 9082 and in Doc 9562 “Airport Economics Manual”. It must be noted,
however, that corporatisation is not seen by this International organisation as a
universal panacea which should be applied in all cases. In this respect, the
second of the Manuals mentioned includes some specific considerations which
should not be disregarded when analysing this issue in countries like Nepal.
Paragraph 2.22 states:
“Assigning the operation of one or more airports to an autonomous airport entity
may not, in certain circumstances, be a good approach to improving airport
operating efficiency. For example, in a small State with limited aviation activity and
where the operation of an international airport is the dominant function of the civil
aviation administration, little if anything may be gained by separating the airport
operation from the civil aviation administration and assigning it to an autonomous
airport entity established exclusively for that purpose. In fact, costly duplication
could result if each of the two bodies carries out functions previously performed
more efficiently and at a lower total cost by the civil aviation administration. This
applies particularly to administrative costs and overheads.”7
ICAO’s words should be taken as a call to attention for all those approaching
the issue of institutional reform in Nepal. The Civil Aviation Authority is designed
already as an autonomous body operating all the airports in the country as well
as ANS, and carrying out the regulatory and oversight functions. Further
6
Task Force on Infrastructure of India. Policy on Airport Infrastructure in India. un-numbered
pages.
7 ICAO. Doc 9562 Airport Economics Manual, Second Edition – 2006. p. 2-5.
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corporatisation could take place by separating airport management functions
and entrusting them to a new entity operating under private law in order to
maximize flexibility and efficiency. However, in doing so, there may be a risk of
duplicating functions in a situation where resources of all kinds are very scarce.
There is obviously a need for a very careful evaluation of how the existing
resources are currently being allocated, what new resources is it reasonable to
expect in the future, and whether the duplication to which the ICAO document
refers is a real possibility.
4.2. Commercialisation
In the quest for greater efficiency and financial self-sufficiency, airports around
the world have also turned to commercialisation. Doc 9562 provides the
following definition for this term:
“Commercialisation. An approach to management of facilities and services in which
business principles are applied or emphasis is placed on development of
commercial activities”8
This definition includes the two elements which commercialisation may include,
although it is not necessary to contain both: on the one hand, the
implementation of “business practices”, and on the other hand, the
“development of commercial activities”.
Commercialisation usually goes hand in hand with corporatisation. It is difficult
to envision a purely administrative body operating strictly under public law
implementing “business practices” or developing commercial activities. The
constraints usually associated with the operation of any public administration
make it very difficult, if not impossible, to operate in any manner close to what
private firms or autonomous bodies can achieve, hence the need to resort to
institutional arrangements allowing the adoption of a commercial approach. In
what some have termed a “flight from administrative law”,9 not only airports, but
all types of public services have been handed over to publicly-owned
corporations or autonomous bodies operating under private law.
It goes without saying that privatisation will also always include a high degree of
commercialisation, because private investors will always require that economic
8
ICAO. Doc 9562. Attachment 1. p. ATT 1-1.
An expression, coined by Professor Manuel Clavero Arévalo and widely used in Spain to refer
to the ever-increasing trend towards the establishment of autonomous entities or public
companies operating outside the boundaries of administrative law.
9
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viability is assured by increasing all possible revenues. The link between
commercialisation, corporatisation and, increasingly, privatisation, becomes
increasingly obvious as we move away from the classical aeronautical functions
towards “non-aeronautical” sources of revenue. ICAO’s Policies on Charges for
Airports and Air Navigation Services expressly mention ofsuch a source when
stating that:
“The Council recognizes the continuing importance to airports of income
derived from such sources as concessions, rental of premises, and “free
zones”.10
Such a statement, nevertheless, does little justice to the fact that non- aviation
activities are increasingly important in many airports and tend, on average, to
approach 50% of the revenue. In a study conducted by the Air Transportation
Research Society (ATRS) in 2011 covering 156 airports around the world, the
findings clearly show how airports are increasingly turning to commercial
revenues to finance their operation and investments.
The following chart depicts the importance that non-aviation related revenue is
gaining in many airports in different parts of the world:
Source: Key Findings of 2011 ATRS Global Airport Performance Benchmarking project.
10
Doc 9082. p. 14.
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The Air Transport Research Society (ATRS)11
The findings presented in the chart may not agree completely with other
research studies, but this only goes to show the difficulty involved in defining
adequate indicators and methodologies. In another study conducted by SH&E,
it was found that concession revenue share of total airport revenue in 2009
could be estimated as 49% in Europe, 47% in Asia Pacific and Middle East,
41% in North America and 28% in Latin America.12
According to ICAO Doc 9562, non-aeronautical sources of revenue include
“fees for the right to operate business at the airport, rentals of leased land and
premises and, to a much lesser extent, from commercial operations operated by
the airport itself. Airports may also receive revenues from commercial activities
operating off the airport but relying on airport traffic for their customer base.”13
In addition to the most commonly found concessions which are oriented to
travellers and airport workers, this Document mentions cargo facilities, including
the so-called “cargo villages”, the provision of shopping and entertainment for
the nearby areas, and the creation of free zones and “airport cities” where
multiple sorts of development or economic activity can take place.
It should not come as a surprise that in the recent privatisation of some Indian
airports, the possibility of maximising commercial revenues has played an
important role. The greenfield projects approved in Bangalore (BIAL) and
Hyderabad (HIAL) include a considerable extension of subsidized land to
support the airport’s future viability through real estate development as
evidenced by the fact that BIAL has been allocated a 4050 acre plot and HIAL
5400 acres. This means, for example, that the new airports will have
substantially more area than Heathrow, with 3000 acres, while sustaining only a
small percentage of the traffic14.
4.3. Privatisation
While airport corporatisation and commercialisation can be introduced without
any transfer of ownership or management away from the public sector,
11
Prof. Tae Oum and others. Key Findings of 2011 ATRS Global Airport Performance
Benchmarking project. The Air Transport Research Society (ATRS). 2012.
12 Abbas Mirza. Ways of Maximizing Airport Commercial Revenues. SH&E. 2011.
13 ICAO. Doc 9562. Airport Economic Manual. 2006 p. 6-2.
14 Manuj Ohri. Airport Privatisation in India – A Study of Different Modes of Infrastructure
Provision. University of Delhi, 2009.
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privatisation implies that the private sector will own an interest or participate in
managing the infrastructure.
The term "privatisation" is used here in a broad sense that includes any form of
private participation in the design, construction, operation and ownership of
airport infrastructures.
4.3.1. Basic privatisation modes
There are many ways to classify privatisation modes, depending on the criteria
to be used. One could look at whether ownership is transferred or not, at the
duration of the agreement or the extent of the functions allocated to the private
sector.
For the sake of simplicity, this report will focus on the basic privatisation modes
mentioned in the White Paper on Public Private Partnership (PPP), namely:





Service Contract
Management Contract
Lease
DBFMO / Concession
Full privatisation
A brief description each of these modes follows.
a) Service and management contracts
Service contracts involve the least amount of private participation, and are not
considered by many as a form of privatisation because they entail a very limited
transfer of risk. Public sector retains ownership and management functions and
contracts out the provision of certain services, like restaurants, car parking,
ground-handling, security, etc. The duration of such contracts is rather limited,
and usually does not exceed five years.
This limited form of privatisation allows public managers to concentrate on the
core business of running an airport while providing the means to benefit from
specialised know-how and increased flexibility. If contracts are awarded for
reduced periods of time following competitive bidding procedures, this also
makes it possible to introduce a measure of competition in the provision of
some services.
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The contractual approach is widespread because it is simple and does not
require a large commitment of funds, but it can only be applied in cases where
obtaining access to funds is not an important consideration. It applies to the
management of specific services, including terminals, like in Budapest
Ferighery, but is not appropriate for building new infrastructures or substantially
developing existing ones.
b) Lease
Long-term lease agreements are often used when substantial investments are
required in an existing airport. The lessee undertakes to conduct the new
development or renovation, and assumes management for the duration of the
lease. Such duration is usually rather long, depending on the amount of
investment required and the amortization rate established.
The public sector retains ownership and control of the infrastructure, but the
private sector is in charge of all managerial functions and assumes the
operational risk in full or in part. Usually the airport operator collects all airport
fees, and pays the owner a fee which may be based on gross revenues.
Depending on how they are structured and on the law governing the contract,
lease agreements may be difficult to differentiate from concessions. The LOT
and LBOT approaches mentioned below are variations on the lease mode.
Long-term leases have been the instrument of choice for the privatisation of
airports in a number of countries, like Canada, Australia, Argentina, Peru,
Greece and the Philippines.
c) DBFMO / Concession
DBFMO (Design, Build, Finance, Maintain and Operate) is one of the many
variants of PPP modes which would fit under the provisions of Section 3 of the
Private Financing in Build and Operation of Infrastructures, 2063 (2006), which
include:
"(a) Build and transfer,
(b) Build, operate and transfer,
(c) Build, own, operate and transfer,
(d) Build, transfer and operate,
(e) Lease, operate and transfer,
(f) Lease, build, operate and transfer,
(g) Develop, operate and transfer,
(h) By other methods of similar kind."
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The main features of each of these modes are as follows.
(a)
(b)
(c)
(d)
(e)
Build and transfer: In this case, government merely contracts out
the design and construction of the facility. There is no risk transfer
to the private contractor. The duration is limited to the design and
construction periods.
Build, operate and transfer (BOT): This is one of the most common
modes of PPP. The private party assumes responsibility (and risk)
for the operation during a certain number of years, and then
transfers the operation to the administration. Ownership of the
facility always remains in the hands of the public sector. Usually the
operator collects all fees or charges arising from the use of the
infrastructure. In some cases, the public sector also participates in
the earnings, and in other instances, the operator may receive
additional income from government for the provision of some
services whose costs cannot be recovered from the users.
The duration of this mode may be limited if there is no financing
from the private party. It is usual to find 30-year terms for such
contracts when the operator also has to provide financing for the
construction and operation.
Build, own, operate and transfer (BOOT): In this variety, the private
party actually becomes the owner of the infrastructure for a period
of time. Usually the private party will obtain finance, and the
duration is also set at rather long terms of 30 years or more,
depending on the time needed for the amortization of the
infrastructure.
Build, transfer and operate (BTO): This is a mode which is not
commonly found in airport projects, where it is more frequent to
delay the transfer of the infrastructure until the end of the contract
term because this makes the contractor responsible for the
maintenance. BTO is more akin to a contracting-out approach in
which the construction and the operation are contemplated within a
single contract and usually involves a limited assumption of risk on
the part of the private party.
Lease, operate and transfer (LOT): This mode is a variation of the
lease approach. The operator is responsible for the maintenance,
and has to return the infrastructure in the same state as it was
received. The private party assumes the operational risk and the
maintenance obligation.
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(f)
Lease, build, operate and transfer (LBOT): A variation of LOT, this
mode is used when substantial new development is required. There
are some examples in Canada, where Government leased airports
for 60 years, but these are not really PPP projects inasmuch as the
Federal Administration leased the infrastructure to publicly- owned
local or regional non-for profit companies.
In the literature on PPP, it is common to refer to these approaches, in general,
as BOT (Build, Operate and Transfer) or BOOT (Build, Own, Operate, and
Transfer), despite the fact that each has its own features, and that in most
cases, such designation omits the fact that design, finance and maintenance
are more often than not included in the package. It is also common to consider
that all these approaches are variations on the concession concept, where
government never relinquishes ownership of the infrastructure.
In India, concessions to develop existing airports and operate them for 30 years
have been the model applied both for the Indira Gandhi International Airport in
Delhi and the Mumbai International Airport, whereas for the greenfield projects
in Bangalore and Hyderabad, private participation has been instrumented via
BOT.
d) Full privatisation
What separates the previous modes from full privatisation, or divestiture, is the
fact that the public sector maintains some interest in the venture. At some point,
all of these modes include the transfer of the infrastructure to the administration.
Full privatisation, on the other hand, means that the public sector no longer
holds any ownership title, and can only influence the operator by means of
regulatory powers.
Divestiture means that a public infrastructure will end up totally in the hands of
private parties and government will have no possibility of direct control. Airports
are considered to have strategic importance, so it is not common to find
examples of full privatisation in the aviation sector. This does not mean that
there are not any examples in this field. In fact, there exists a very important
one, The British Airports Authority (BAA), which was fully privatised in 1987 and
for many, signals the beginning of the privatisation trend in airport construction
and management.
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A variation on the theme of full privatisation is partial divestiture, when the
public sector sells or otherwise allocates ownership of only part of the
infrastructure to the private sector. Such a model has been applied in several
airports in Europe, notably Copenhagen, Frankfurt, Wien and Zurich, as well as
the international airports in Thailand and the Osaka Kansai Airport in Japan.
This is the model that is being applied in China to introduce private participation
in some of the main airports: Wuhan Airport, Xiamen Gaoqui International
Airport, Shenzhen International Airport, and Shanghai Pudong Airport.
Full privatisation also takes place in the case of BOO (Build, Own, Operate)
because the private party does not have to transfer the infrastructure to
government at the end of a certain period of time.
The following statistics, provided by the the World Bank provides, in the PPI
Database give an idea of the number of projects in the aviation sector using
each mode. The term "greenfield" in the table below designates new
construction projects under BLT BOT or BOO. Concession is defined as: "A
private entity takes over the management of a state-owned enterprise for a
given period during which it also assumes significant investment risk."
Projects by Region and Type 1991-2011
Region
Concession
Divestiture
Greenfield
project
6
12
41
3
4
5
71
11
4
1
0
0
3
19
9
7
6
4
4
3
33
East Asia and Pacific
Europe and Central Asia
Latin America and Caribbean
Middle East and North Africa
South Asia
Sub-Saharan Africa
Grand Total
Managmt.
and lease
contract
2
6
4
4
2
1
19
Total
28
29
52
11
10
12
142
Source: Private Participation in Infrastructure Database. PPIAF. World Bank Group15
Note: the Database covers only low and middle-income countries.
4.3.2. Ownership/Institutional typology
Except in the cases of service and management contracts, most other modes of
private involvement in airport operation, construction or development have been
based on some arrangement through which both private and public actors have
institutionalised their partnership.
15
Available at: http://ppi.worldbank.org/
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This is always the case in partial divestiture examples (Frankfurt, Wien, ADP,
etc.), but also applies in many greenfield or BOT cases. Hyderabad is owned
and operated by HIAL (Hyderabad International Airport Limited) in which private
partners hold 74% of the shares and Airports Authority of India (AAI) and the
State of Andhra Pradesh 26%. The same proportions apply in Bangalore, where
74 % of BIAL is also owned by private investors and the rest is divided between
AAI and the Government of Karnataka. In the case of Delhi's IGI Airport, Delhi
International Airport Ltd. (DIAL) follows a similar pattern with identical ratio of
public (26%) to private (74%) ownership.
According to Airports Council International (ACI), the basic categories of airport
ownership and operation can be summarized as follows:
"1.)
2.)
3.)
PUBLIC OWNERSHIP of airport operator
1.1) Public Airport Operator as part of the administration
1.2) Corporatised Public Airport Operator
MIXED PUBLIC-PRIVATE OWNERSHIP of airport operator
2.1) Public sector owning a majority share in the airport operator
2.2) Private sector owning a majority share in the airport operator
PRIVATE OWNERSHIP of airport operator
3.1) Fully privatised airport operator"16
The ownership/institutional categorisation is highly relevant inasmuch as studies
that have analysed airport performance put far more weight on who owns and
operates the airport than on the legal instrument through which public/private
participation is being materialised.
PPP modes and ownership/institutional categories have to be combined when
designing the way how any major airport project is to be approached. Even the
simplest case, which could be a government-owned and operated airport, will
entail some form of private involvement at the time of implementing any major
project, due to the fact that at the very least, the construction work will certainly
be contracted out.
Whether the owner or operator is a public or a private entity will have important
legal repercussions, but it may also have an important impact on the availability
of finance.
16
Airports Council International. The Ownership of Europe's Airports. 2010.
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4.3.3. Evaluation of PPP experiences and ownership operation types
Public Private Participation as well as the different types of ownership and
operation of airports have been the object of considerable scientific attention
during the past decades. The available literature shows, however, that
evaluating the respective advantages of each collaboration mode or operation
arrangement is not an easy task and can lead to contradictory conclusions.
Some analysts have applied complex statistical methods to evaluate airport
performance and indicate whether public or private airports are more efficient.
Others have applied less rigorous methods to describe whether some
privatization efforts have been successful or not.
Professor Tae Hoon Oum, of the University of British Columbia, is one of the
leading scholars in the discipline of airport performance evaluation. In a study of
116 airports conducted in 2006 on "Privatization, Corporatization, Ownership
Forms and their Effects on the Performance of the World’s Major Airports", the
researchers came to a number of interesting, and at times revealing,
conclusions which can be summarized as follows17:
 Airports with divided ownership/operation are less efficient than those
with single ownership/operation. This applies both when owner/operator
is mixed public-private as well as when it is totally public, but divided
among two or more administrations.
 Airports owned/operated by a single public entity belonging to a single
administration are equally efficient as those wholly owned by a private
firm.
 Mixed airports with private sector majority ownership/operation are not
more efficient than those owned/operated by a single administration or a
public entity belonging to a single administration.
 Airports wholly owned/operated by a single entity/administration from the
public sector are more efficient than airports owned/operated by a mixed
enterprise, regardless of whether the majority in the firm is public or
private.
 Public majority ownership and ownership by multiple administrations are
the two most inefficient ownership forms.
17
Tae H. Oum, Nicole Adler and Chunyan Yua: Privatization, Corporatization, Ownership Forms
and their Effects on the Performance of the World’s Major Airports. The UBC P3 Project.
Working Paper 2006-02. University of British Columbia, Sauders School of Bussiness. 2006.
Available at http://csgb.ubc.ca/files/p3/2006_02_oum.pdf
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 Mixed airports with private majority are more efficient than mixed
ownership/operation airports where the majority is public, but less
efficient than airports wholly owned by one public actor or one private
firm.
 Privatisation has not lead to airports charging monopoly prices.
The report concludes that “…it is important for governments to sell a majority
stake in airports when they wish to seek private sector financing or participation
in ownership and management of airports.”18 This recommendation appears to
hold particular relevance for the future privatisation now being considered in
Nepal.
Other authors have reached similar conclusions. After analysing the possible
impact of competition and different types of regulation, Nicole Adler and
Vanessa Liebert conclude in their study “Competition and regulation (when
lacking the former) outrank ownership form in generating airport efficiency” that
“Across the board, airports with less that 50% of shares traded privately prove to
be significantly less efficient than other ownership forms, a group which includes
Athens, Hanover and Vienna. Fully private airports do not prove to be statistically
significantly different in terms of cost efficiency than their fully public counterparts,
in line with Oum et al. (2006)”19
Other authors have argued that such findings are not conclusive due to the
inherent difficulties in this kind of research. Theyindicate that in the case of
airports, performance measurement should also take into consideration other
factors like the degree of vertical integration, economies of scale, regulatory
arrangements and charges20.
Other authors have adopted non-quantitative approaches in order to compare
the relative strengths of different privatisation efforts in the field of air transport
infrastructure. The World Bank PPIAF published a report entitled “Investment in
Air Transport Infrastructure: Guidance for developing private participation”. In it,
the authors analyse a series of case studies (prepared by Booz Allen Hamilton)
18
Oum et al. 2006, pp.14-15.
Adler, N., Liebert, V. (2010). Competition and regulation (when lacking the former) outrank
ownership form in generating airport efficiency. In The GAP workshop “Benchmarking of
Airports,” Berlin, Germany, 25-26 November 2010 (p. 27). Berlin, Germany: GAP (German
Airport Performance)
20 Jürgen Müller, Tolga Ülkü and Jelena Živanović. Privatization, restructuring and its effects on
performance: A comparison between German and British airports. GAP, Paper No. 16, 04/2009.
19
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and provide a table of summary performance assessment of the situation after
privatisation, presented in comparative terms. The table includes a summary of
the findings regarding investment, output, prices, finance, operating efficiency
and service level/quality. In most of the airports compared, the effects of
privatisation are considered positive, only a minority are rated as poor in the
majority of fields (Cameroon and Argentina), and the remainder are qualified as
good, and in some cases, excellent in most fields21.
Other studies conducted for single countries, like Canada or Australia, also
reach positive conclusions about the effects of privatisation on airports, but
there is no evidence in the literature that the improvements experienced in
privatised airports are due to a large degree to corporatisation and a more
effective commercialisation, and not solely to the changes in ownership
structure.
5. AIR NAVIGATION SERVICES (ANS)
ICAO Doc 9161. Manual on Air Navigation Services Economics, provides a
definition of Air Navigation Services, and in paragraph 2.3 contains the following
description:
“2.3 Air navigation services have traditionally been classified into the following five
major categories:
Air traffic services (ATS); aeronautical telecommunications service (COM),
which in turn is basically classified into aeronautical fixed service (AFS),
aeronautical mobile service (AMS), and aeronautical radio navigation service;
meteorological services for air navigation (MET); search and rescue services
(SAR); and aeronautical information services (AIS). With the implementation of
CNS/ATM systems the ATS and COM categories will be replaced by components
that are broader in scope, i.e. air traffic management (ATM) and
communications, navigation and surveillance (CNS).”22
The same manual goes on to explain that Air Navigation Services are often
provided by the civil aviation administration, but that there is a growing number
of states where some functions are being exercised by autonomous entities.
21
Mustafa Zakir Hussain, Editor, With case studies prepared by Booz Allen Hamilton.
Investment in Air Transport Infrastructure: Guidance for developing private participation. World
Bank, PPIAF, 2010, Table 9.2 pp. 146 to 151.
22 ICAO Doc 9161. Manual on Air Navigation Services Economics, 2007.
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The functions that most commonly have been transfered relate to ATS, ATM
and some CNS services.
The Manual also states that “MET services are usually provided by a separate
meteorological entity which in many States reports to another branch of
government.”
The aforegoing statements from the ICAO Manual accurately reflect the fact
that while in the airport sector there has been a steady trend towards the
introduction of business management practices or private investment, in the
field of ANS the move towards this sort of institutional change has been far
more restrained.
In the words of the Civil Air Navigation Organisation (CANSO):
“Privatisation in the provision of air navigation services has not been seriously
considered in most of the States. These services are considered as more
connected with safety of aircraft operations, and to have national defence and
external relation implications, and consequently less suited for privatisation. Air
navigation services are also perceived as closely related to the sovereignty of a
State as it provides for aircraft and air carriers of foreign States to enter
national airspace.”23
The fact that States have been generally reluctant to leave ANS in the hands of
the private sector does not mean that there has not been an important move
towards institutional arrangements aimed at guaranteeing the effective
separation between regulatory functions and service provision. In a number of
cases, reforms have also been introduced in order to reduce the costs to the
State generated from the provision of such services.
As in the case of airports, institutional reforms can be categorised as
“corporatisation”, “commercialisation” and “privatisation”. Each of these
categories is discussed separately in the following pages.
5.1. Corporatisation
Corporatisation options, as in the case of airports, are rather varied, and
depend to a large degree on the legislation in each State. According to ICAO:
23
CANSO. Guide to Separation of Service Provision & Regulation. August, 2011. P. 41.
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“2.10 There are three basic or core organizational structures for providing air
navigation services at the national level. These are as follows:
a)
a government department that is subject to government accounting and
treasury rules; its staff are employed under civil service pay and conditions of
service;
b) the autonomous public sector organization that is separate from an
executive arm of government but the government has total ownership of the
organization; and
c) the private sector organization that is owned by private interests either totally
or with the government holding a minority share.”24
The CANSO Guide to Separation of Service Provision & Regulation provides a
table in which the institutional setup for the provision of ANS in different
countries around the world is summarized as follows:
Government Department
Government Agency
State Enterprise
Corporatised Entity
Partly Private Entity
Developing countries:
Afghanistan, Algeria, Angola, Armenia, Bahamas, Bahrain,
Bangladesh, Barbados, Belarus, Belize, Bolivia, Botswana, Brunei,
Chad, Chile, Cook Island, Costa Rica, El Salvador, Ethiopia,
Gambia, Ghana, Guatemala, Iran, Iraq, Israel, Jamaica, Jordan,
Kenya, Kuwait, Laos, Liberia, China, Brazil, Mexico, Indonesia,
Malaysia, South Korea, Syria, UAE
Selected industrial countries:
France, Greece, Japan, Luxembourg, Kingdom of Saudi Arabia
Nigeria (NAMA), USA (FAA)
Australia (Airservice Aus.), Belgium (Belgocontrol), Bulgaria
(ATSA), Czech Republic (ANS CR), Denmark (Naviair), Egypt
(NANSC), Finland (Finnish CAA), Hungary (Hungarocontrol), Malta
(MATS), Netherlands (LVNL), Portugal (NAV EP), Poland (PL),
Romania (ROMANTSA), Russia, Slovakia (LPS), Spain (AENA),
Sweden (LFV), Thailand (AEROTHAI)
Austria (Austro Control), Croatia (Croatia Control), Estonia
(EANS), Germany (DFS), Ireland (IAA), Italy (ENAV), New Zealand
(Airways Corp), Norway (Avinor)
ATC at selected airports in UK, Canada (Nav Canada), United
Kingdom (NATS), Switzerland (Skyguide)
Source: CANSO. Guide to Separation of Service Provision & Regulation. August, 2011. P. 42.
This table can be completed by pointing out that ATC has been totally privatised
at certain airports in Spain, where services will be provided by private
companies without Government participation.
In most cases, corporatisation has been a means of establishing a clear
separation between regulatory and service provision functions. That goal has
24
ICAO. Doc 9161, p.25.
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been achieved through a variety of institutional arrangements which range from
government-owned entities fully integrated in the public sector to corporations
established under private law with some degree of private participation. Some
relevant examples include the following countries:

Australia: Airservices Australia, was established in 1995, and is defined in
the Airservices Act, 1995 as a “corporate body”. It has been configured as
an autonomous entity within the Administration, subject to administrative
law, but acts with a considerable degree of managerial autonomy.
The fact that Airservices is a public corporate body has not prevented the
organisation from acting like other business organisations and providing
services and consultancy outside Australia.

Belgium: Belgocontrol was established in 1998 as a limited company under
Government control. The company operates with autonomy and is selffinanced.

Canada: Nav Canada was incorporated in 1995 under the provisions of the
Canada Corporation Act, which means that it is a private company. Despite
being fully privatised, the company is rather peculiar when compared with
other corporations in the private sector. It is defined as a “not-for-profit, nonshare capital corporation”. Instead of responding to shareholders, it
responds to a board of directors representing the main stakeholders, namely
the air carriers association, pilots and other aviation industry
representatives, as well as the unions and the Canadian Government.

Germany: Deutsche Flugsicherung GmbH (DFS) was established in 1992
as a limited liability company operating under private law. The shares are
totally owned by the German Federal Government. There were plans to
privatise 74.9% of the capital, but constitutional issues have prevented the
process from going through, and the company remains totally in government
hands.

Netherlands: Luchtverkeersleiding Nederland (LVNL) is a corporate body
with legal personality, but it operates within the structure of the Dutch
Government. The entity operates following business practices, but is subject
to administrative law.
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
New Zealand: Airways Corporation of New Zealand Limited (Airways New
Zealand) was established in 1987 as a State-Owned Enterprise. The
company is fully owned by the government, but was created and operates
under private law like any other for-profit corporation. In 2004, it was
estimated that the company provided the New Zealand Government a return
of more than $ 10 million a year in dividends and taxes25.

South Africa: Air Traffic and Navigation Services Company Limited (ATNS)
was established in 1993 as a State-Owned Enterprise (SOE). The company
is fully owned by the Government of South Africa.

Switzerland: The current ANSP began its existence in 1921 as an
independent federal corporation under the name of Radio-Suisse, which was
changed to Swisscontrol and, in 2001 became Skyguide. 00.85% of the
shares are held by the Swiss Federal Government and 0.15% by the
aviation industry, including labour groups. Skyguide operates as a private
non-for-profit corporation under government control and the operation must
be entirely self-supported.

Thailand: Aeronautical Radio of Thailand Limited (AEROTHAI) was
established in 1948 by an Aeronautical Radio of Thailand Limited.
(AEROTHAI) is a State Enterprise under the Ministry of Transport and
Communications. In 1963, the Government acquired 91% share capital from
the founding airlines, and the company became a State-Owned Enterprise
(SOE). The remaining 9% capital is held by airlines operating scheduled
flights in Thailand. The Board of Directors includes nine members appointed
by the Government and two designated by the participating airlines.

United Kingdom: National Air Traffic Services Ltd. (NATS) started as a
company wholly owned by the Civil Aviation Authority. In November 2000,
the entire capital was transferred to the Secretary of State as a step towards
privatization, and in July 2001, following a competitive bidding process, a
consortium of seven British airlines acquired 46%, the Government retained
49% and the employees received 5%. The Government retained a so called
“golden share” to control the company if it was considered necessary. In
25
Ira A. Lewis and Roxanne Zolin. “The public to private continuum measure and the role of
stakeholder boards as a proxy for markets in the governance of air navigation services: a
comparative analysis”. International Public Management Review. Volume 5. Issue 2. 2004. p.
59.
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2003, there was a need for new capital and BAA plc. acquired 4.19% from
the airlines consortium which now hold 41.94%, while the Government’s
share is 48.87%.
The British Government announced its intention to fully privatise NATS by
transferring all the shares to private companies. This change has not yet
materialised, but there have been some expressions of interest. One of the
entities that has expressed interest in acquiring a participation in NATS is
the German Deutsche Flugsicherung GmbH (DFS). This would be the first
case of a national ANS provider owned in part by a company which is owned
in full by a foreign Government26. It remains to be seen whether there shall
be total privatisation of NATS, and how that would affect the current
agreement according to which current private partners are not profit
motivated.
Although the corporatisation drive has not been as significant with ANS as it has
been in the airport sector, there are a significant number of examples
evidencing how different governments have approached institutional reform by
means of establishing autonomous entities or corporations. A 2008 study
estimated that there were some 40 countries that had “implemented neo-liberal
administrative and management reforms in their Air Navigation Services
(ANS) in the past two decades. Modernisation’s preoccupation with structural
change has seen the provision of ANS increasingly move from public sector
organisations to autonomous entities whose organisational forms now
include performance-based agencies, Government Business Enterprises and
Corporations, Public-Private Partnerships (PPP), and private not-for-profit
models.”27
The fact that a number of countries have opted for the provision of ANS through
autonomous organisations or even private law corporations does not mean that
this is the only way to achieve proper separation between regulatory and
service provision functions. Evidence in some States, like France, indicates that
it is perfectly possible to achieve an adequate degree of separation while
maintaining both functions inside the regular administration. However,
organisational separation facilitates the required functional and financial
26
http://www.centreforaviation.com/analysis/dfs-looking-at-a-stake-in-nats-64577
Alan Jones and James Guthrie. Protecting ‘Public Interest’ in Modernised Skies. 5TH
International Conference on Accounting, Auditing & Management in Public Sector Reforms.
Amsterdam, September, 2008
27
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autonomy necessary to guarantee that both kinds of functions do not interfere
with each other.
Not all components of ANS have been the object of corporatisation efforts: the
most significant exception being meteorological services, which have remained
under government operation in the majority of States. The fact that these
services are provided by a separate organisation or branch of government can
raise cost allocating issues because it complicates the task of providing a
transparent system of charges and recovering all incurred costs from the
service recipients. A study linking structure to performance reached the
conclusion that ownership and control are not in themselves critical factors, and
that what is most important is that managers have control of resources, levels of
service and business decisions, and that they may be held accountable for
performance.28
5.2. Commercialisation
In the case of ANS commercialisation is not approached as a means of
generating commercial profits, but first and foremost, as the way to obtain
financial autonomy and alleviate governments financial constraints. Air
Navigation Services do not have the potential for commercial revenue
generation that airports may enjoy, but experience shows that this kind of
services can also be self-sufficient and that ANS organizations can expand their
activities to provide services and consultancy in the open market.
ICAO Doc. 9082, Policies on Charges for Airports and Air Navigation
Services, states in paragraph 36 that “The Council considers that as a general
principle, where air navigation services are provided for international use, the
providers may require the users to pay their share of the related costs.” The
Manual on Air Navigation Services Economics (Doc 9161) further develops this
policy and includes detailed guidance on how costs and charges can be
estimated for different kind of services.
The literature that has reviewed commercialisation in the provision of ANS has
focused on the cases of States where some degree of corporatisation had taken
place. So if the ANSP remained a government agency, it has been endowed
with a large degree of financial autonomy. Glen McDougall and Alasdair
28
Glen McDougall. ATC Commercialization Policy: Has It Been Effective? Presentation to the
World Bank. April 2006. p. 32.
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Roberts in their study “Commercializing air traffic control: Have the reforms
worked?”29 examined the impact of commercialisation on a number of ANS
providers, including the US FAA and the French “Direction des services de la
navigation aérienne,” all of which share the common trait of enjoying financial
autonomy. They concluded that the greatest positive impact could be found in
service quality, facility modernisation and financial stability. This has been
achieved without compromising safety or rising costs.
5.3. Privatisation
In previous paragraphs, it has already been stated that ANS provision has, in
general, followed a very different path from airport operation. In both cases,
there has been some degree of corporatisation and commercialisation, both
more evident in the case of airports, but when it comes to privatisation ,the
differences are much more notable.
Of all the case studies reviewed, only a handful have chosen to travel the
privatisation road, and then only four (Canada, Switzerland, Thailand and the
UK) have actually allowed access from private parties to the ANS provider
capital or to the board of directors. Even in these cases, private partners are in
a clear minority, and have been selected as representatives of the airlines or
other interests in the aviation sector. There is no example of private partners
having joined the capital of an ANS provider motivated purely by the profit. The
closest example would be BAA’s participation in NATS, with a substantial
investment, but even in this case the motives are more closely related to the
fact that BAA is the largest airport operator in the county than to purely
economic interests on the part of the investor.
As a general conclusion, it can be said that in the field of Air Navigation
Services provision, there has been a moderate degree of corporatisation
accompanied in most cases by a measure of commercialisation. However, there
has been no privatisation as governments tend to consider such services as too
close to the national interest to allow a significant participation from the private
sector.
Modernisation efforts in the form of corporatisation and commercialisation have,
nevertheless, proved to be generally successful, and have allowed
29
Glen McDougall and Alasdair Roberts. Commercializing air traffic control: Have the reforms
worked? Suffolk University Research Paper 09-11. February 17, 2009. Available for download
at: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1317450
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governments to ensure the separation of regulatory and service provision
functions while at the same time raising the quality of service and alleviating the
requirements placed on the public budget.
6. SOME CONCLUSIONS: THE CASE OF NEPAL
Comparative experiences provide evidence that there are many roads leading
to the modernisation of airports and air navigation services. Corporatisation,
commercialization and privatisation are the three main approaches, and they
are often considered complementary and mutually reinforcing. To some degree,
these three approaches can be seen as progressive steps in the same
direction. Corporatisation does not imply commercialisation, but it would be very
difficult to achieve any success in achieving greater economic autonomy and
increase funding availability without some degree of corporatisation. At the
same time, privatisation almost always involves the other two approaches: in
order to allow private participation, it will always be necessary to establish an
autonomous entity under private law rules or enter into a contract with a private
company. No one sets up this type of arrangement unless there is some form of
economic reward.
6.1. Objectives and approaches
Institutional reform in the fields of airport operation and the air navigation
services provision is commonly undertaken for one or more, if not all, of the
following objectives:
 Implement separation between regulatory functions and service
provision
 Increase efficiency and service quality
 Ease the burden on public finances
In the case of Nepal, achieving some of these objectives has become even
more important in recent times due to the pressure derived from two cumulative
factors:
 A commitment to fulfil the recommendation contained in the USOAP
Safety Audit Report regarding the separation of functions; and
 The need to adequate the legal, institutional and regulatory framework to
the requirements arising from the creation of a second international
airport designed as a PPP project.
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Achieving each of three above objectives can be approached in many different
ways, depending on where the emphasis is placed.
 If function separation is the only objective, the conclusion may be that the
current framework could be viable with minimal modifications.
 If increases in efficiency and service quality are also desired, then it will
be necessary to introduce a greater degree of corporatisation in order to
facilitate the adoption of more business-oriented management practices.
 In the event that financial considerations are also considered important,
the reform will have to be designed with an eye to commercialisation.
 If the goal is to attract private funding, then some form of privatisation will
be mandatory.
6.2. Airport and ANS differentiation
Institutional reform can be implemented in separate ways with regard to airports
and to the ANS provision. The choice of objectives and approaches will, to
some degree, have a bearing on whether these two issues are treated jointly or
separately.
Despite the fact that ICAO openly accepts the possibility that airport operation
and the ANS provision are entrusted to a single entity, it might be imperative to
set up different organisations if a significant degree of privatisation is to be
introduced.
Implementing or increasing corporatisation can be achieved within one common
organisation, although it requires special effort in designing an adequate
organisational structure in which both functions are properly separated.
Commercialisation could also be approached jointly for both kinds of functions,
although it becomes more complex because revenue sources and cost
accounting have to be kept totally separated.
It is when approaching privatisation that the separation may become inevitable,
unless Nepal is willing to be one of the very few States where the provision of
air navigation services is left in the hands of the private sector. Combining
airport operation and the ANS provision into a single company with significant
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private participation poses specific problems. For example, the increased
regulatory requirements. These arise from the fact that it would be necessary to
ensure that a private company did not perform ANS functions in such a way that
their particular airport’s interests received special treatment.
International experience shows that in all those countries where corporatisation,
commercialisation and privatisation have made significant inroads, airports and
the ANS provision have been treated in a separate way and have been the
object of distinct institutional arrangements.
Encharging a single organisation with both types of functions could be feasible
in the short to medium term as a provisional arrangement until airport
privatisation is implemented. However, it may be more complex to start with a
single organisation and then divide it than to create two sets of institutional
arrangements to begin with.
6.2.1. Airports
In the case of airports, corporatisation and commercialisation will have to be
implemented sooner or later if there is a desire to increase efficiency and raise
the quality of the services. Privatisation will only be required if it is considered
necessary to establish some degree of PPP in order to obtain private funds or
access to new funding sources.
For existing airports, the process will be different depending on the choice of
privatisation mode. If it is approached via lease, BOT or any of the
“concessional” varieties in which no public-private-private-partnership (PPP) is
envisaged, there would be no need to establish a new corporatised entity.
Private investors would be awarded a concession contract after a competitive
bidding process and would develop, maintain and operate the airport or airports
for a specified length of time. The relationship with the investors could even be
handled by the Civil Aviation Authority.
For new airports, and in case privatisation was envisaged under the PPP mode,
a possible gradual approach could be designed along the following lines:
 First, commercialisation would be reinforced by separating airport finances
from those of ANS, and making the financial autonomy envisioned in the
CAAN Act a reality. This could be difficult to achieve since experience
seems to demonstrate that putting the provisions of the Act into practice is
not easy.
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 Second, create a separate autonomous body for the purpose of airport
construction, development and operation. This corporatised body should be
designed in such a way that it could later be privatised. This suggests that
the best way to achieve this would be to create a state-owned enterprise
under the company’s law.
 In the meanwhile, work would also take place in the direction of establishing
the legal framework to be applied to private initiatives in the field of airport
operation. This would require that decisions be made on several issues, like,
for instance, the type of economic regulation to apply to privatised airports if
private partners are to obtain a majority capital.
 Finally, the corporatised body would be open to private capital in order to
establish the partnership with the private investors.
6.2.2. Air Navigation Services
In principle, the provision of ANS does not require the establishment of a new
separate autonomous body, since CAAN already has corporate status. It would
be necessary, nevertheless, to ascertain whether financial autonomy and
functional separation from regulatory functions can be achieved under the
present institutional/legal framework. The fact that financial autonomy has not
yet been achieved, seems to indicate that there are serious difficulties.
If there are no guarantees that functional separation and financial autonomy can
be achieved under the current institutional framework, it may be necessary to
raise the issue of establishing a new organisation operating under private law
which could collect revenues and raise funds in private markets.
International experience shows that where corporatisation has been
implemented so as to foster commercialisation, there has been an increase in
efficiency with concomitant increases in the quality of services and improved
customer satisfaction. Adequate corporatisation has also allowed access to
long-term funding in the private markets in order to maintain an adequate level
of investment in a field subject to rapid technological changes.
Privatisation, in principle, is not envisioned in any way for the provision of this
kind of services because it is not necessary and may conflict with how many
people view the national interest.
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6.3. Concluding remarks
This report should not be concluded without reiterating the need to plan the
process leading to institutional reform with great care. Careful consideration has
to be given to all aspects, including legal, financial, regulatory and personnel, to
mention only a few.
The process should not be started until a clear vision of the end result is
defined, and the different steps have been delineated. A gradual approach may
be useful in all cases, but it may become indispensable if the final goal cannot
be defined in detail.
Careful consideration must be given to the resources available, both human and
financial, and those that can be expected to be available in the near future. In a
country where resources are severely constrained, it may be wise to take into
account the opinion expressed in ICAO’s Airport Economics Manual when it
states that:
“Assigning the operation of one or more airports to an autonomous airport entity
may not, in certain circumstances, be a good approach to improving airport
operating efficiency. For example, in a small State with limited aviation activity and
where the operation of an international airport is the dominant function of the civil
aviation administration, little if anything may be gained by separating the airport
operation from the civil aviation administration and assigning it to an autonomous
airport entity established exclusively for that purpose. In fact, costly duplication
could result if each of the two bodies carries out functions previously performed
more efficiently and at a lower total cost by the civil aviation administration. This
applies particularly to administrative costs and overheads.”
In the same vein, CANSO has stated that in case of corporatisation or
privatisation of ANS:
“The existing ANS structure will need to be reorganised consequent to the
changes in the ownership and management structure of certain facilities and
services. The nature and extent of the reorganisation will primarily depend upon
what remains with the government after the change-over. In a normal situation
the air navigation services may continue with the government. This option may
be preferred by States with limited traffic.”
The review of the institutional framework of civil aviation must be approached in
a realistic way, taking into account these admonitions, the reality of existing
resources, and the need to obtain adequate funding for the performance of
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regulatory functions if and when those activities which have greater potential for
revenue generation are entrusted to separate bodies.
In the short run, the most viable options could focus on the implementation of
functional separation and financial autonomy within the current institutional
framework while setting in motion a concessional process for the development
and improvement of the airport system.
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