Navi Mumbai Airport — an economic perspective

Navi Mumbai Airport is in news for all the wrong reasons – another instance of crucial infrastructure project delay, environmental concerns, political parties divided on the airport etc. Just recently, the Ministry of Environment asked CIDCO (the nodal agency reposnsible for development of Navi Mumbai) to draw the plan again. There were some errors.

However, the project is of a lot of interest  for people interested in  Indian infrastructure. The project shows once again how our infrastructure projects are mired with controbversy and delay. One has been hearing about the new airport for some years now but nothing has hapenned so far.

 What is also disappoininting is lack of any study to understand the issues. Even if there is, it is hardly put up on any website. So, if you go through websites of CIDCO, Ministry of EnvironmentPlanning Commission’s Infrastructure Secretariat etc you just don’t find anything useful. After searching Ministry’s website, you just get this useful information. It talks about coastal regulational zone (CRZ):

Prohibited Activities within CRZ:-
3.1 The following are declared as prohibited activities within the CRZ:- 
(i) Setting up of new industries and expansion of existing industries except,- 
a) those directly related to water front or directly needing foreshore facilities;
b) projects of Department of Atomic Energy;
c) non-polluting industries in the field of Information Technology and other service industries in the CRZ of Special Economic Zone (SEZ);
d) facilities for generating power by non-conventional energy sources and setting up of desalination plants in the areas not classified as CRZ-I(i); 
e) development of green field Airport at Navi Mumbai shall be undertaken subject to detailed scientific study for incorporating adequate environmental safeguard measures required for neutralizing damage to coastal environment as may be appropriate to the Navi Mumbai region.

 These are important issues – what are the likely costs, sources of finance, project time, private parties  involved etc. As I was writing this post, I realised there is some interesting work on the same.

First, there is a study on the airport (full report in heavy pdf file here; around 17.7 MB)  by Observer Research Foundation. It is written by Mr Hormuz Mama, an expert on aerospace issues. In sum, he says Navi Mumbai airport is a project which comes in too late and is too little.

Mama points that Navi Mumbai airport is likely to be too small and not worth the investment. At best it will handle 60 million passengers/year which is much smaller than the international standard of 100 million passengers/year. The capaicity is likely to be exhausted in 25 years whereas airports worldwide are scaling capacities to last atleast 100 years. And then as airport is between two rivers future expansion might not be possible. A third airport might not be possible in future as there will be no vacant land.

The entire debate on Mumbai’s new airport is currently focused on the likely environment impact of the Panvel site at Navi Mumbai. While environmental issues are certainly important, it is sad that very little attention is being paid to the undesirability of having a new airport which would not be world-class in terms of capacity, and could reach saturation in just about 25 years of operation. This is a strong possibility at Panvel, which faces severe land constraint. When that happens, there will be no land available for the development of a third airport and that will be a disaster for Mumbai.

Given the developments taking place at mega airports all around West Asia and Asia Pacific, it is important that the government takes a long-term view to ensure that an ultimate capacity of at least 100 million passengers a year is achieved at Mumbai’s new airport. This is the norm for all major airports in the world, including the one at New Delhi. By contrast, the 1,140-hectare site at Panvel provides an ultimate passenger capacity of only about 50 million passengers a year, which could prove to be grossly inadequate to serve the financial capital of the world’s second-most populous country. According to the Government’s own traffic projections, Mumbai’s two airports will together handle a total of 119 million passengers in the year 2031?]32. However, their total capacity will be only 90 million passengers – or less. How is Mumbai going to handle that traffic?

Looking at world airport passanager handling figures in 2009, Atlanta airport was at top and had handled 88 mn passangers. In the top 15 list, eight airports are from Asia! So, it is not just abbout developed economies, but small Asian economies have really large airports with Beijing handling 65.3 mn. Delhi comes 14 in the Asia list with 25.2 mn passangers.

So, most countries alerady have airports which are already handling more passangers than what Navi Mumbai airport plans to achieve. After so much delay, this is what we get. But again if you read the paper you hardly get any useful references. You can’t blame the author as there uis hardly any.

Now, I was more interested to understand all this from an economic perspective. I cam across this amazing paper from Jeffrey Cohen (University of Hartford) and Cletus Coughlin (of St Louis Fed). The paper is very interestingly titled as – Congestion at Airports: The Economics of Airport Expansions.

We begin our analysis by providing a discussion of how congestion arises and how it can be dealt with. Because the air transportation services provided by one airport are related to the services provided by many airports, delays at one airport have adverse effects on the movement of passengers and freight at other airports.  Thus, the expansion of one airport can assist the movement of passengers and freight at other airports. This  interdependence provides an economic justification for a decisionmaking authority above the level of individual airports, such as a governmental body, to be involved in the approval as well as the financing of expansions. However, when both congestion and network externalities are present, the appropriate government actions may be to levy a tax, to provide a subsidy, or possibly to refrain from any intervention.

To justify a specific airport expansion, its benefits must exceed its costs. We examine how the benefits and costs of expansions are measured. We use the expansion of Lambert–St. Louis International Airport to illustrate many of the key points.

We also examine two controversial aspects of expansions—the displacement of people and the environmental effects. The controversy as well as the cost of expansion projects has spurred the search for alternative ways to reduce congestion. One alternative that we examine, which reduces congestion by using existing capacity more efficiently, is congestion- based pricing of landing fees.

This paper is excellent as it explaisn the airport congestion using marginal cost-marginal benefit graphs. This Navi Mumbai airport is not a case of airport expansion but atleast helps think about these issues. Now through this post, I also want to highlight a few issues. Because of the hype over the navi mumbai airport, what has happened is house prices have increased substantially. What was made as an area to decongest Mumbai and provide low cost home options has just become the opposite. It is increasingly getting congested  and low cost homes is now meant for museum.  The airport talks have been going on for years but we still have nothing. But house prices keep rising on the airport hype. So much so, most brokers/builders show their property plans as so many kilometres from airport.

 Now one can undersatnd that airport leads to development and hence price appreciation is natural. But it also leads to a lot of noise. The areas closer to airport like Kharghar, Ulwe, Panvel should be looking at these issues as well. As per Couglin-Cohen paper:

The expansion of an airport likely leads to additional noise in the area surrounding an airport. Some of the affected area is likely to be acquired by the airport as part of the expansion. To the extent that remaining residential areas must endure increased noise, one can argue that these residents and homeowners should be compensated. Not surprisingly, there is often opposition from local community groups when an airport in an urban area plans to expand. Healy (2002) notes one example of this resistance in the Boston area, which has led to the stipulation that the new runway be used only on “days when northwest winds blow at 11.5 miles per hour or more.”

Housing prices are likely affected by airport noise. Because noise becomes capitalized into property values, it is an example of a pecuniary externality.   Consequently, an airport expansion leading to additional noise should be countered with a one-time compensation of property owners to account for this capitalization, or property owners should be helped to take defensive action against the noise. Those who choose to live near airports should not be compensated further, since they receive relatively inexpensive housing and they choose to live there. Local government in Chicago provides an example of city assistance to homeowners: In 1996, mayor Richard M. Daley began a program that has led to the soundproofing of nearly 4,000 homes and 75 schools in communities surrounding O’Hare Airport. In the case of the Lambert expansion, homeowners in a designated area likely to be adversely affected by increased noise were offered three options: sales assistance, sound insulation, or a cash payment. In exchange the airport received the right, known as an avigation easement, to generate increased noise.

We see nothing of this happening around Navi Mumbai. In fact it is all getting so idiotic. In these areas huge towers are coming up in the name of luxury housing and top floor apartments being sold for highest prices. Well, once the airport comes up what will happen to the people living on these top floors? I doubt whether anyone has looked into these issues.

An important reason why all these issues are ignored is that bulk of the apartments belong to investors. They hardly have any interest in staying in these places. The objective is just one- price appreciation.

Another area of concern is how the rise in prices is leading to development of black market transactions. And people are paying for it as there is hardly a choice. Very few builders take everything as a pure white money transaction. Actually there is a puzzle here. One is quoted market rates for buying an apartment. He pays up using both white and black component. And since property registration happens at white money, it is at a much lower rate. And all this is just ignored.

Scanning Navi Mumbai property market leaves one really dejected. I was also wondering don’t the regulators/income tax people buy their own houses? Don’t they see these problems? If not, then please try and buy a house in Navi Mumbai (or in Mumbai). It just leaves you shocked and appalled. It is a pure investment game.

The game has refuelled by teaser rates which continue. I mean talk about lessons from the crisis and you see none. 

 All in all, the Navi Mumbai airport is just sch bad execution. It has led to multiple problems for the once planned city of Navi Mumbai.

7 Responses to “Navi Mumbai Airport — an economic perspective”

  1. Kunal Medhe Says:

    Thank you for such an insightful information and also for other blogs that you post.
    It’s not just about the information but the analysis which is rare to find.

  2. Tweets that mention Navi Mumbai Airport — an economic perspective « Mostly Economics -- Says:

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  3. Navi Mumbai airport cleared on hope! « Mostly Economics Says:

    […] only gets to see these things in India. Despite many criticisms against the Navi Mumbai airport site, it gets final clearance from Environment Ministry.  The […]

  4. A Ranade Says:

    If you look at Heathrow on googleearth, you will see that it is somewhat larger, but not much larger.

    It would seem that the 10s of thousands of rupees needed to build a new airport could be used to clear out the slums to the east, at least so that 2 proper parallel runways could be obtained. In addition, there should be better scheduling of flights (“Heathrow minute”) so that the available capacity is used best.

    Ideally, we should have a comparative assessment of all such alternatives, as well as detailed analysis of costs including those to travel to Panvel from Mumbai, in this green age.

    • Amol Agrawal Says:

      I fully agree on this comparative assessment. But that is not how infrastructure projects are done here. Even if there is such anaysis it is hardly public. One does not even know how much the nwe airport will cost, the funding structure and above all assumptions.

      On top of that we have our aviation minister saying in the next ten years Mumbai will need another airport and there is nothing unusual about it as all mega cities have multiple airports. But where would there be any land for another airport?

      It is pretty obvious why this airport has been cleared despite many things against it. It is just a corruption bogey inflating land prices in the region. I mean who cares how people will travel to the airport…

  5. B. W. Fox Says:

    Now let me know if I heard this correctly, the proposed location of the Navi Mumbai airport will require the literal moving of several mountains, the rerouting of rivers, the filling in of lakes and ponds, the acquisition of huge areas of land, the resettlement of thousands of citizens and the raising of the overall ground elevation. All of this is to be done before construction begins and the airport is to be open and ready for business in 2014. I DO NOT THINK SO. Has anyone actually visited the actual site proposed for the airport? No serious airport developer will have any interest in this airport project once they participate in a site visit unless however the brain trust that is CIDCO is willing to pay truck loads of money to a developer instead of receiving truck loads of money from a developer. Somebody got this one wrong. A reliever airport is needed for Mumbai International but a better location for the reliever airport is best suited for someplace other than Navi Mumbai.

    • Amol Agrawal Says:

      I have not read in detail on the needed changes to bring about the airport as none of this information is available.And why would it be as the airport is clearly a political ploy. But yes the newspapers etc keep pointing to the several environmental and villagers relocation issues with the airport. Who cares really about all this when the whole interest is just to push prices of land and property. It is amazing to see we develop a new airport after so many years of delay which is unlikely to decongest the existing airport.

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