This is not the way to privatise airports

This is not the way to privatise airports

The government plans to privatise yet more airports.

This is welcome. But the terms on which the process happens has to be a whole lot more enlightened than in the past. The experience of privatising Delhi and Mumbai airports and the failure of Adani to take on the airports it had won in bidding offer lessons. The principal one is that the bidding parameter should not be how much revenue will be shared with the government. There should be an element of cost minimisation built into the bidding.

Airports are local monopolies. If an airport operator takes over an airport by offering to pay the government an exaggerated amount, it would win the auction, and then squeeze extra revenues from passengers and airlines. The Airports Economic Regulatory Authority (Aera) would blithely approve user development charges or passenger service fees or whatever the additional levy is called, because it would be justified in terms of the basic economics of the airport’s operations and the payments to be made to the government. Structuring the bid to maximise the revenue for the government is a way to let bidders game the system to win the contract and squeeze passengers for the extra payout to the government. Instead, the bidding parameters should constrain costs and, on the basis of constrained costs, maximise the take for the government. The share of revenue to be passed on to the government or per-passenger payment to the government, which is revenue share in another guise, does nothing to keep costs down.

A crude example of a parameter that would factor in costs and revenues both is the share of a weighted average of revenues and costs that would-be operators have to pay the government. Aera could use data from operational airports to fix the weights that would minimise the scope to game the bidding. More sophisticated bidding parameters can, no doubt, be identified. In any case, the government has to discontinue with the bidding system that allowed one bidder to win all the six airports on offer by offering unrealistically high fees per passenger to the government.