Look Before You Board
Airport public-private partnerships need to tweak some basic issues to avoid current pitfalls
tors, there is need to regulate them to ensure quality and affordability of service, efficiency of operations and non-discriminatory practices.
With this backdrop, regulators in India recommended a method of letting the tariff increase every year by a factor less than the retail price inflation, depending on steady expected efficiency gains. According to this approach, tariff for a control period is set at the beginning and then increased annually at the rate of inflation (RPI) net of expected levels of efficiency (X) gain.
The X-factor is a forward-looking positive number indicating expected annual improvement in efficiency for a control period. It is exogenously determined by comparing the airport with best service providers in its category. The X-factor, so estimated, is the rate at which the said airport should increase its operational efficiency so as to be among the best in its class.
Thus, the private operator is mandated to reduce operating costs by X percentage points annually. This mandated improvement in efficiency is supposed to account for all positive network externalities that the private operator would enjoy as a result of transfer of monopoly power. For example, good air connectivity from City B to City C makes the airport at City B a possible hub for flights from City A to City C.
Expecting the private operator to increase efficiency or reduce operating costs by X% results in transferring the network benefits to the consumers in advance. The basic premise being that incentive-based regulatory contracts would motivate the private operator to be efficient and benefit the consumer by lower tariffs, thus infusing the spirit of competition.
The primary concern is of an incorrect precedence in determining the X-factor for setting aeronautical tariffs in privately operated Indian airports. While determining tariffs in the case of Mumbai and Delhi airports, the civil aviation ministry in its request for proposal determines the X-factor by way of equating the price to be charged to cost of operating these airports. This is an erroneous application of the RPI – X process because, in this way, any lack of efficiency can be provided for, if the X-factor is sufficiently negative.
A negative X-factor is an empirical possibility because of the incorrect way in which it is estimated. By equating prices to costs, the X-factor is no longer exogenous to the price calculations. In reality, the X-factor has to be determined exogenously by benchmarking performance of the said airport with the best in its class.
To put things in perspective, the Mumbai and Delhi airports were privatised in 2006. At that time, the aviation ministry was just about coming to terms with private airport opera- tors. There was no independent regulator and private operators were new to the business of operating airports. As a result, not only was the pricing mechanism flawed but there was also no revision in the airside charges till March 2012.
In April 2012, the X-factor was set at –334.63%, to adjust the base (2006) aeronautical charges reflecting a one-time increase. Further, to compensate for the delay in implementation beyond April 2012, the X-factor was revised upwards to –345.92%. A negative X-factor, a result of erroneous endogenous estimation, goes against the basic tenets of regulating prices to incentivise efficient operations.
With the upcoming privatisation proposals of Ahmedabad and Jaipur airports and others to come, the X-factor should be exogenously estimated by benchmarking them with the bestperforming airports in its category before applying it to price the service. If not, trust and objectivity of a PPP transaction won’t improve.
The writers are associate professors, IIM-Kozhikode
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