Review airport auction

Kerala has no case, but avoid a defective process

The Assembly of Kerala on Monday passed a unanimous resolution that demanded the Union government reverse its decision to grant private-public partnership (PPP) in Thiruvananthapuram airport to Adani Enterprises. Both the Left Democratic Front government and the Congress-led opposition are united in objecting to the decision. The Kerala Assembly wants the Union government to instead transfer control of the airport to a special purpose vehicle (SPV) controlled by the state government. This would be similar to the approach taken for two other major airports in the state, Cochin International Airport and Kannur International Airport.

The Kerala government has no case to put forward. While Adani Enterprises quoted Rs 168 per passenger in its bid, Kerala State Industrial Development Corporation (KSIDC) quoted Rs 135. Had KSIDC come within 10 per cent of the winning bid, it would have been awarded the airport, according to a pre-bid agreement. Instead it fell short by almost 20 per cent. Thus, the state has lost the bid by the rules that it itself agreed to, and has little to complain about.

That does not mean the auction was conducted properly. The Central government should have put in a condition on the maximum number of airports that can go to one bidder. The Adani group has now got control of as many as six airports in spite of having no real experience in the field and a debt pile that stood at Rs 1.3 trillion at the end of the last financial year, during which it also saw a 64 per cent decline in net profit year-on-year. Also, the Cabinet approved leasing three airports to the group — Jaipur, Guwahati and Thiruvananthapuram — even though it has sought to delay taking over the three other airports — Mangaluru, Ahmedabad, and Lucknow — for which it won bids in February last year. The six airports are being handed out in a mechanism that’s different from the privatisation of Delhi and Mumbai airports 15 years ago; rather than a joint venture and revenue sharing with the Airports Authority of India (AAI), Adani Enteprises will control the airport for 50 years and pay a per-passenger fee to the AAI. Naturally, this reduces the risk for the operator, and Adani Enterprises’ bids were particularly aggressive even as compared to those from the Union government-associated National Infrastructure and Investment Fund. 

It is clear that the auction process has not been as efficient as claimed. The mechanism design has been poor. Previous PPP auctions have been hampered by a strategy in which politically connected corporations overbid and then renegotiate once they have won. This will be a particular problem, now that the corporation has all six PPP airports — at least such an outcome should have been prevented. The per-passenger fee, while based on a transparent indicator, may not be a good idea for such a long tenure PPP. A defective auction could now end up with sub-optimal results, as has happened in several other sectors. The government should take lessons from this and re-examine the way future auctions should be held.