1. Privatisation of airports: How to get policy right as management contracts won’t work

Privatisation of airports: How to get policy right as management contracts won’t work

A solution that involves garnering the efficiencies of the private sector, but without full-fledged privatisation.

By: | Published: November 3, 2017 5:53 AM
A solution that involves garnering the efficiencies of the private sector, but without full-fledged privatisation.

After several controversies surrounding the privatisation of major airports like the one at Delhi, and the resistance from labour unions who see cushy government jobs being hit by privatisation—and vested interests who gain from the current system—it is not surprising that the government is looking for a middle path. A solution that involves garnering the efficiencies of the private sector, but without full-fledged privatisation. So, in the case of Ahmedabad and Jaipur airports which are bursting at the seams and need fresh investment in expansion, the government put out tenders for, essentially, managing the terminals—the bidder was to pay the government a fixed rental based on the revenues it felt it could generate. The last date is over, and the government did not get a single bid. And that is after it tried to change many criteria to take care of what it felt were the concerns of the private sector. In most airport projects, both capital investments and operational expenses are so high that, if they are to be fully recovered by charging airlines—and passengers—for them, the airport will either shut down or certainly not grow fast. Airlines will prefer to use other airports and passengers may baulk at the costs and perhaps start using alternative forms of travel wherever possible.

The way airline/passenger costs are lowered is to make more money from developing shopping areas within the airport and hotels/commercial complexes in the airport area—just look at how the area in the Delhi airport has developed into a buzzing complex. To be fair, the government tried to address the issue of capital costs by stating that all capital investments would be made by the Airports Authority of India (AAI) that runs all commercial airports across the country. The problem with this approach, however, is that it makes things even more bureaucratic. Any bidder that wins the Ahmedabad airport, to use that example, has to get a terminal modernisation-expansion plan approved of by AAI, including each element of the cost and even the choice of contractors.

In any case, airport developers don’t make the bulk of their revenues from passenger/airline services, they make them from real estate and from running hotels,commercial complexes, etc. If this is taken out of the equation, and the government is looking at just a more efficient management of terminals, it is unlikely to attract bids from really big airport operators; the more likely bidders will be small-time contractors or firms that specialise in maintaining large properties. Since that will not result in top-class airports/services, the government simply has to get over its hesitation to fully privatise airports. If the existing staff getting redundant is a worry, this can be dealt with by stipulating a certain proportion of them have to be absorbed by the new airport developer.

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