Privatization and Regulation: A Review of Airport Industry Practices

Transcription

1 Privatization and Regulation: A Review of Airport Industry Practices Ferhan Kuyucak, Anadolu University, School of Civil Aviation, Eskisehir, Turkey Bijan Vasigh, Embry-Riddle Aeronautical University, Daytona Beach, FL USA ABSTRACT While airports were seen as purely public establishments for many years, today approaches to airport governance have been changing in many countries and private participation has become a part of many governments agenda. This study aims to examine methods, incentives and outcomes of private participation in airport management and operations and different regulation applications in different countries. Findings show that there are many similarities between countries both in incentives and outcomes of airport privatization. On the other hand, some country-specific reasons and results need to be examined in their contexts. INTRODUCTION The objective of airport management is to provide a variety of services and facilities to the travelling public and airlines. Due to their geographical monopolistic position and high capital requirements, airport services were seen as public utilities for many years, and airports have been governed as public institutions in many countries. Today, airports are faced with capacity constraints, increasing operational costs, decreasing aeronautical revenues, high customer expectations, and commercialization trends. All these factors are leading governments to transform airports into commercially focused business enterprises and in some cases to private entities. [37] [5] As governments have been reforming ownership policies and regulations affecting airport infrastructure, airport privatization has become a world-wide phenomenon. However, even though their monopolistic position is arguable, it is obvious that airports generate externalities and elements of natural monopoly can exist for the airports [16]. Therefore in many cases, control of airport charges and economic regulation of airports may be needed for the public welfare. Otherwise, public monopolies may turn to private monopolies. The objective of this study is to analyze different aspects of implementing various approaches for private participation in airport governance, and to point out how privatization affects the airport management practices. It also aims to reveal the regulatory framework of airport privatization. After a brief literature review, the study begins with a look at the airport industry and how it affects airport management and ownership practices. Airport privatization is described with the drivers, methods, advantages and disadvantages, and regulatory environment for airports. Then findings are discussed about privatization implementations in several countries. Finally, some summary conclusions are presented about how airport privatization affects the regulatory environment. LITERATURE REVIEW In the literature, there have been several studies on airport governance structures and the managerial aspects of airports. Carney and Mew (2003) discussed corporatization, privatization and other approaches to commercialization in airport governance. They underlined that policy-makers need to recognize the factors that can either encourage or discourage a strategic orientation, and that there should be a balance between the desired benefits. In their studies, Vasigh and Haririan (1996) analyzed airport privatization with a welfare point of view. One of the recent studies conducted by Gillen (2011) described an evolution of airport ownership and governance. Other studies relating to the subject area that examine airport management and privatization in different countries include Prins and Lombard (1995) in South-Africa; Humhreys, (1999) in the UK; Ohta, (1999) in Japan; Costas - Centivany, (1999) in Spain; de Neufville (1999) in the US; Hooper, Cain and White, (2000) in Australia; Hooper, (2002) in Asia; Forsyth (2002) in Australia and New Zealand; Lyon and Francis (2006) in New Zealand; Button

2 (2006) in developing countries, Yang, Tok and Su (2008) and Xiuyun and Hong (2010) in China; Lipovich (2008) in Argentine; Galeana (2008) in Mexico; Ohri (2009) in India. In the area of airport regulation, Starkie (2002, 2004 and 2006) examined different aspects of airport regulation in his studies while Forsyth et al. (2004) compiled various studies on economic regulation of airports. Oum et al. (2004) analyzed alternative forms of economic regulation and their efficiency implications for airports. Marques and Brochado (2008) examined how major airports are regulated in Europe and proposed a European Observatory. Bel and Fageda (2009) provided an empirical analysis of the relationship between privatization and regulation in European airports. AIRPORT GOVERNANCE, PRIVATIZATION AND REGULATION Air transport shapes the global environment physically, socially, and economically and may be considered the blood circulatory system on which today s global society is built. Airports as basic infrastructure providers of the air transportation industry operate as connection points between air transportation and different transportation modes that enable interchanging people and cargo. Traditionally, airports have been governed by central or local governments. It is commonly believed that airport infrastructure is a public utility that provides a public service to communities. [3] However, a reconsideration of the airport public management model has occurred, and the private sector has become more involved in airport operations, management, and in some cases, airport ownership. Privatization has been occurred by changes either the management, capital, or ownership structures of the entity. According to Poole and Fixler (1987) privatization is the transfer of assets and service responsibility from public to the private sector. Savas (2000) defines it as the act of reducing the role of government or increasing the role of the private institutions of society in satisfying people s needs. In airport governance, the term privatization has a variety of meanings, but they all involve a degree of entry of private capital and entrepreneurship into the airport business. Aviation is usually regarded as being of strategic importance to national security and to national, regional and local economies. Because of public service concerns stemming from geographic monopoly positions, governments usually do not prefer to transfer 100% of a public airport to private sector equity holders. For airports, privatization involves partial or complete disposal of airports (services, lands, and assets) that have traditionally been owned, controlled, and managed by the central or local state agencies. Airport privatization can be defined as any transfer of the risks, responsibilities, and rewards of core airport services from the public to the private sector for a given period or permanently. From this point of view, any ownership or control transfer to the private sector of airport business can include some degree of privatization, and outsourcing can also be termed as such. On the other hand, the term public-private partnership (PPP) is commonly used to describe a spectrum of relationships between public and private actors for the provision services. [19] It is also frequently used to characterize the new airport business models between purely public and purely private. Nowadays the range of possibilities for private sector involvement in airports is very wide. Airport management governance practices have a wide spectrum that is between pure public and pure private which can be seen in Figure 1. FIGURE 1 AIRPORT MANAGEMENT AND OWNERSHIP CONTINUUM FROM PUBLIC TO PRIVATE Public Private Partnership Schemes Fully Public Management and Ownership Management Contract/ Outsourcing Overall Management Contract Leasing (Concession) Joint Venture Project Finance Privatization Fully Private Management and Ownership Low Extent of private participation in airport management and ownership High

3 Airports are accepted as public utilities because their cost and demand characteristics are similar to industries such as energy, water, and telecommunications. [29] Since these industries have extremely high sunk costs, a service can only be provided at least cost if it is supplied by only one firm and this situation creates natural monopolies that need to be regulated. [14, p.63] [29] The term regulation can be defined as the employment of legal instruments for the implementation of social-economic policy objectives. [15] Although in theory and practice, different types of regulation exist, it is common to divide regulations into three categories: economic, social and administrative. In fact, aviation has always been subject to technical, safety, and economic regulations. Following the trends of commercialization and privatization of airports, governments have also begun to examine economic regulation of airports. Economic regulation is primarily considered for markets that have limited competition and natural monopolies. It intervenes directly in market decisions as pricing, competition, market entry, or exit. In airport governance, economic regulations are due to the danger of monopoly power becoming even stronger after privatization. [12] In airport governance economic regulation can be of several types. Rate of return (ROR) regulation adjusts overall aeronautical price levels according to the airport operator s costs and the cost of capital. It benchmarks the profitability of regulated activities to the average of reference airports or businesses and sets an allowed return on a defined asset base. [11] Under price cap regulation, the regulator controls the prices charged by the firm, rather than the firm s earnings, and determines an annual price cap formula (RPI-X or CPI-X). A central issue is how the efficiency requirements or X-factors are to be set. Benchmarking of utilities based on their relative efficiency is a widely favored approach. Two kinds of price cap regulation are evident for airports: single-till and dual-till. In the single till system, both aeronautical and commercial revenues and costs are considered in setting the price cap that determines the level of aeronautical charges. The dual till system separates aeronautical functions from non-aeronautical ones and only considers aeronautical revenues in the determination of airside prices for an airport. [11] Light-handed regulation has also been called price monitoring or shadow regulation. This regulatory form monitors prices without a direct determination on aeronautical charges but with a right to intervene if prices are judged to be too high. [11] While ROR regulation tends to be complex, unresponsive and expensive to administer [35] as well as providing motives for companies to over/under invest in airports, inflate costs, and cross subsidize, price cap regulation provides companies with incentives to cut costs. [9] It also dampens the effects of cost information asymmetries between companies and regulators. However, service quality and infrastructure development may suffer. In a dual till system, especially at a congested airport, aeronautical charges are likely to be set at a higher level. Although a single till system is recommended by International Civil Aviation Organization (ICAO), it can cause airports to be anticompetitive and unproductive [1]. Oum et al. (2004) found that single-till has more severe distortional effects on capacity investment than the dual-till. Under the dual-till price cap, the total factor productivity (TFP) is greater than under either the single-till price cap or the single-till ROR regulation [23] Recent regulatory reforms have tended to move away from traditional rate-of-return regulation towards incentive-based regulation models. METHODOLOGY This study uses a descriptive analytical multiple case study design, employing qualitative methods of gathering information: literature and publicly available data, including government and nongovernmental organization websites, reports, white papers, policy statements, regulations and guidelines, and reviews. Case study methodology is based on in-depth investigation of individuals, groups, institutions, and communities as individual or multiple cases. [31] In case study research, the case may represent an event, a decision, a program, an organization, an implementation process, an organizational change, a country s economy, an industry, or a policy. [40] [13]. Case studies are the preferred method when researchers seek answers for what, why, and how questions. [40] A literature review of related research notes the studies and the other documented sources that have appeared in recent years dealing with various aspects of airport management and different forms of airport ownership structures in different countries. It helps to explain how different countries approach airport privatization, as well as the incentives and outcomes of private participation in airport governance in these countries. The case study countries (United Kingdom, Australia, New Zealand, China, Mexico, Argentine and Spain) were chosen to include a variety of implementation stages of airport privatization and global perspective.

4 Spain Argentine Mexico China New Zealand Australia United Kingdom FINDINGS AND DISCUSSION Table 1 summarizes the findings of the research on airport privatization implementations in term of process, incentives, outcomes and regulation in selected case study countries. TABLE 1 AIRPORT PRIVATIZATION IMPLEMENTATIONS IN SELECTED COUNTRIES Incentives: 1985 traffic forecasts showed that double traffic increase by 2005 and this would generate a substantial burden on public sector funds and policy changes of UK government. to overcome inefficiencies of loss-making public sector industries: to encourage business philosophy and management efficiency in the operation of major airports by providing for the introduction of private capital Process: Pioneer of airport privatization 1986 Airports Act: Commercialization of airports: 1 st part: Government owned British Airports Authority (BAA) (owner of 7 airports) was transferred into a private company publicly quoted on the stock exchange. 2 nd part: airports with a turnover of more than 1 million in two of the previous three years to move from local authority undertakings to Companies Act companies. 16 airports transferred financially sufficient independent companies and commercialized. Outcomes: Freeing government sources for other public spending and no need for raising taxes. improved financial results especially profitability maximizing commercial revenues increased emphasis on marketing and new retail opportunities selling management expertise to other airports around the world development of a diverse range of new business approaches development of cost saving strategies, especially outsourcing Anticompetitive arguments: in 2006 Ferrovial bought BAA in 2008 UK Competition Commission forced BAA to sell three airports including Gatwick (sold), Stansted and one of Edinburgh or Glasgow. Regulation: In 1986, designated three London airports (Heathrow, Gatwick and Stansted) and Manchester airport price cap regulation according to the RPI-X formula monitoring for. BAA plc introduced price cap for Glasgow and Edinburgh airports voluntarily in January 2008, Manchester airport was de-designated. Review by CAA and Competition Commission, aeronautical charges in five years period the light-handed model applies to the UK airports whose turnover exceeds 1 million annually and which are not designated for the price-cap system Incentives: To increase economic and managerial efficiency financing increasing investment needs globally competitiveness and technology infusion Process: In 1997: Major airports Melbourne, Brisbane and Perth were privatized in 1998 another 14 airports privatized Sale of Sydney was completed in 2002 selling different owners so create a competitive environment most privatized airports serve major cities, some locally government owned small airports Outcomes: Problems stemmed from capacity constraints solved Regulation: In the beginning: Dual till profit volatility reasons, price regulation replaced by price monitoring for a period of five years: Light-handed regulation Incentives: As a part of government reform: Until 1960s central government, after Joint Venture Airport Scheme in 1961 sharing cost and revenues between central and local governments. But by the early 1980s significant capital expenditure needs but the airports could not borrow to funds their plans. Removing heavy fiscal loads from government Increasing their contribution to economy by being more efficient Decreasing their inefficiencies that have negative consequences for nation competitiveness Abolishing cost excesses and lack of innovation (indirectly affects costumers) Preventing unnecessary investments in airports Process: Policy changes and in 1985 government announced a scheme that allowed airports to become companies. Three largest airports became companies and most majors have moved company structure. in 1990s the government began to sell its shares to private sector or local governments partners in 1998 two major airports privatized but not completely, minority holdings stayed at local government Outcomes: Finance limitations problem solved Regulation: No regulation or shadow regulation Incentives: Reforming airport management and to create a market structure improving underdeveloped capital market, attracting foreign investment Establish links between local governments and airports (investments) Process: in 1984 Civil Aviation Administration of China established. in 1988 reforms started in three stages: : Separation airlines and airports and localization of some airports Three phased reform ( ): Localization-private capital-joint equity investment 1994: a foreign investment policy implemented : Joint equity reform, more localizations and several airports were listed on domestic and foreign stock market : some forms of internal governance structure established and airports became joint-equity enterprises. Except Beijing all airports management and operations transferred to local governments. Private capital and foreign capital were permitted. Outcomes: Greater autonomy in decision making more capital and cash flow new investment opportunities non-aeronautical revenue development increase operational performance sustainable and diversified risk for revenue because of diversified revenue sources competitive environment creation (Guangzhou-Hong Kong) small or medium sized airports have difficulties obtaining private finance not enough traffic and losses. Many airport operations still remains unprofitable Regulation: The cost-based regulation and a simple weight-based aeronautical fee ( ) Price-cap: Limited relaxation of economic regulation (since 2002) Incentives: Changing government policies: the Master Plan for the Air Transportation National System in 1998 airlines privatized and in 1995 airport privatization came to agenda raising demand for air transport large amounts of finance required and need for private investment in airports Process: A special committee defined initial public-private joint ventures. 58 federal airports were regrouped into five subsets of administrative entities One of the top 3 most profitable airports per group four of them was open to some degree of private participation the fifth formed from remaining airports, was declared not available for private participation was managed by government body (ASA) Government is 85% principal holder, and the strategic partner owned the remaining 15% which was selected by a bidding 50 years concession, with a further 50 years extension option Private groups have concessions in 34 airports of the 58 federal airports, ASA has 20 and some type of participation in the remaining 5. Outcomes: Steady growth of traffic across the system and favorable economic situation for all of the private groups increasing level of service and decreasing level of delay Development of commercial services Higher airport charges Regulation: Prices and tariffs may be subject to regulation depending on the opinion of the Regulatory Agency (SCT). The role of the Competence Commission is limited. Franchises are given for a 50 year period but could be revoked at any time if the operator does not fulfill the requirements of the regulatory agency. Incentives: Capacity constraints for both airside and landside due to exponential growth in air demand Lack of financial sources to carry out such a complex airport modernization process ideological and political-economical context change towards privatization Process: in 1997 establishment of National Airport System (SNA) Designated 36 airports to be granted under concession for 30 years with possible 10-year extensions. Concessions include: government defined investments, paying fixed annual royalty determined in the bidding process, non-discriminatory access to airport facilities and services, protection environment the concessionaries had the rights to operate, either per se or through third parties at their sole responsibilities Outcomes: Modernization of passenger terminals rapid construction process and renovated capacity Political and legal problems: inappropriate contract details: although regulator never penalized, National General Audit (AGN) reported some irregularities about the investment in the bid were partially fulfilled and even those overvalued. Further investigations showed that this overvaluation of investment was approximately 30%; failure to pay the annual royalty fee and subsequent debt, possibly because they offered unrealistic royalty fees in the beginning; lawsuits between government and the company More transparent agreement and ending lawsuits (because these and old contract would have more cost than benefits): after a public consultation a new contract had been held. Instead of royalty 15% annual fee of earnings from both aeronautical and commercial sources Regulation: The National Airport System Regulating Agency (ORSNA) was created and responsible for the regulation of airport charges Incentives: Terminal and runway capacity saturation and need of new and modernized airport infrastructure financial constraints to facilitate significant airport modernization relatively low airport charges cannot cover the costs and financial losses since 2007 Process: AENA established as an independent authority in 2010: government decided privatization of AENA 2011: a complete of 49% of AENA is set to be floated on the inventory market, the decision having been approved in Parliament in February Privatization is underway but protests have been going on Source: The authors own compilation based on various sources [30 [6] [18] [17] [16),] [21] [36] [39] [20] [10] [8)] [38]

5 Findings of this study show that, although the type and application of privatization methods are different across the countries, private sector involvement in airport governance has some similar reasons and results in different countries. Table 2 shows these incentives for airport privatization: TABLE 2 INCENTIVES OF AIRPORT PRIVATIZATION Growing infrastructure shortfall and new investment needs Public budget constraints, Efficiency, accountability and quality concerns on public management, Problems with political interference Changing national and global business environment Increased public sector experience in implementing airport privatizations Beyond these results, in some countries such as the UK, airport privatization has brought more advantages, including selling management expertise and know-how to other airports around the world. Likewise, after privatization it can be said that the following outcomes which can be seen on Table 3 have been obtained in the case study countries: TABLE 3 OUTCOMES OF AIRPORT PRIVATIZATION Positive Improved efficiency and productivity, Reduced financial burden on the public sector and easier access to finance sources, Reduced investment needs and modernization of terminals and airside facilities, Commercial focus and maximization of commercial revenues. Negative Increase in airport charges Underinvestment or overinvestment, Service quality problems, Conflicts between stakeholders The other results show that each country has its own methods and process for airport privatization such as group or individual privatization, block sale or joint-ventures, and selling same owner or different companies. While some countries have chosen single-till or dual-till regulation to overcome the current or potential problems of airport privatization, some other countries have preferred light-handed regulation approaches. Also, findings show that large and primary airports have been primarily considered for privatization, whereas small or medium-sized airports have difficulty obtaining private finance. CONCLUSIONS This research focuses on airport privatization and the changing nature of airport management. It shows that there are some different forms of private participation in airport governance, and each country chooses different methods of airport privatization for its own needs. The privatization process also brings a new regulatory environment for airports. For airports it is difficult to obtain generalizable facts. Even efficiency analysis results may depend on the methodologies of airport performance measurement. [24] Moreover, country specific factors such as geography and demand make it difficult to reach general results. For example, it is very difficult to reach the comparison conclusions between the UK airports that are congested European hubs and geographically dispersed Australian airports. Likewise developed countries and developing countries may seek different primary objectives. [26] Since a case study research does not focus on a generalizable truth, based on the country case analysis, this study is intended to contribute to discussions on the experiences and lessons learned from various ownership structures and private sector participation in airports and also emerging issues associated with privatization and regulation of airports. Diversity across the states and experiences of countries in airport privatization and regulation is expected to be helpful for other countries and governments that need to take actions for their public airports. But it is important to remember that airport management practices should be evaluated by their content and context.

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