Privatise for better

| Updated on August 13, 2013 Published on August 13, 2013

Revenue-sharing is not the best model for awarding of public-private-partnership contracts.

Allowing private players to manage the modernised state-owned airports at Chennai and Kolkata on an operate-maintain-transfer (OMT) basis is a good idea that must be implemented at the earliest. But choosing the private party that offers the highest revenue share to the Airports Authority of India (AAI) — which is what the Government is apparently planning — is not the right way to go about this. The principal objective of giving the task of running any publicly-funded infrastructure facility to private operators is to provide better services to consumers; it is not to generate the maximum revenue for the Government body owning it. It is well accepted that the public sector is most wanting when it comes to delivering consumer services; for proof, one needn’t look beyond the toilets in most state-run airports, even those in the now ostensibly modernised one in Chennai.

If the OMT route is intended primarily at improving consumer service quality, the most sensible thing for the Government is to lay down clear delivery specifications and invite bidders to quote the lowest user-fee they are ready to charge from passengers/airlines.

True, in the case of the Chennai and Kolkata airports, the AAI has spent well over Rs 2,000 crore each in their expansion and modernisation. Despite the huge cost overruns — thanks to shoddy planning and execution — it is arguable they should be allowed to recover the capital costs incurred. But that should be done through levying a separate cess on consumers that is independent of what an OMT contractor would be charging. The latter user-fee ought to be only for operating and maintaining a facility already created. In fact, the OMT model could be extended to a variety of publicly-funded infrastructure projects, including rural roads and irrigation. In many of these, the Government could bear the capital costs and ensure the full recovery of operation and maintenance expenses through private management contracts.

The revenue sharing mechanism route, on the other hand, has not worked well even in airports such as Delhi, where the entire modernisation was undertaken through private participation. The project was awarded to a company that offered to share 46 per cent of revenues from the upgraded airport with the AAI. The condition that the balance 54 per cent would have had to cover not only operation and maintenance, but also capital costs and a reasonable return on equity, was virtually impossible to fulfil. As it turned out, the company managed to secure permission to charge additional levies from consumers. If the consumer lost out here, the biggest beneficiary was the AAI, which got 46 per cent of revenues simply by owning the land where the new airport stands. If public-private-partnerships are meant to serve the interest of consumers, the most transparent method is to invite bids based on lowest user-tariffs rather than highest revenue shares to landlords.

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Published on August 13, 2013
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