Yes, PE ownership of airports works and there is research to show it

A new research finding should come as music to the Modi government's ears which has been slowly privatising a lot of public assets, including airports. But first, some background.

As of 2020, 437 airports had been privatised, about 18 per cent of all airports worldwide. 102 of them, the research says, were owned by PE firms at least once.

Thus, in the beginning, all things were private, and the state owned only some of the land. Then, after centuries, came Karl Marx in the 19th century. He said everything, including land, must belong to the state.

Next, in the latter half of the 20th century came the idea of sharing everything between private and public. This didn't work very well, especially the public part of it.

Thereupon came the idea of the two going into partnership. That, too, didn't work. So finally, everything has been going back to being wholly private. Thus the wheel has come around. The world has entered a new phase wherein the main question is who should own the newly privatised things and, more importantly, whether privatisation improves efficiency.

A recent paper by four economists on airport privatisation says quite emphatically that it does, no question about it. The authors are Sabrina T. Howell, Yeejin Jang Hyeik, Kim Michael and S. Weisbach.

They say that "…PE acquisitions bring marked improvements in airport performance along a rich array of dimensions such as passengers per flight, total passengers, number of routes, number of airlines, cancellations, and awards."

They have done the data analysis, modelling, and the rest of the callisthenics that professional economics requires. They conclude that how well an airport performs depends on how it has been acquired.

"Overall, we find little evidence that privatisation alone increases airport performance; instead, infrastructure funds improve performance both in privatisation and subsequent acquisitions from non-PE private firms."

They say that transferring ownership works far better than just controlling rights. Of course, it helps to have another airport nearby.

The authors ask an extremely important question about the "sales of government assets such as airports since there is concern about corruption leading to sales at prices below their value and rent extraction." Another important thing they say is whether enough private equity funds are available to acquire such huge infrastructure assets.

Assuming large PE funds are indeed available, the key question is to understand "what these funds do, whether they create or destroy value, and whether public infrastructure should be privatised at all…". Government policy has to be guided by the answers to these questions.

It turns out that PE funds while doing some nasty things like raising charges and sacking people, do manage to improve the efficiency of the airport and the services it offers. This improves traffic.

They say, "Our results suggest that privatisations, especially by PE funds, do well both for their investors and for the general public. They increase the fees they charge airlines but despite these higher fees, also increase the number of passengers flying through them."

So what's the recommendation? 

This is the key. "PE ownership increases productivity more than non-PE private without significantly different effects on prices (fees), suggesting overall benefits relative to non-PE ownership."

That still leaves the larger question: would other infrastructure assets benefit similarly if taken over by PE funds? The authors say much more research is needed.

But while that's happening, it must be hoped that when it is looking to sell off the public sector, the Modi government will add this PE criterion to the rest, namely, is a PE fund the buyer or not.