Look Be­fore You Board

Air­port pub­lic-pri­vate part­ner­ships need to tweak some ba­sic is­sues to avoid cur­rent pit­falls

The Economic Times - - The Edit Page -

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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