Debate over Airport Privatization - Essay Example

Debate over Airport Privatization Introduction The shifting of governmental operations and responsibilities to the private sector isreferred to as privatization where sale or lease of public assets constitutes to the most extensive functions (United States General Accounting Office, 1996). Airport privatization is a significant part of the aviation industry and the participation of private sector in the development and operation of airports is quite a conventional notion world-wide. This approach for privatization of airport and facility development is increasingly relied upon countries who find it intricate to develop and maintain their own airports. New airport facilities can be added by such a principal means. Historical roots depict that major highways, bridges, tunnels and telecommunication systems have been developed and progressed by the means of privatization. Theoretical researches reveal that airport privatization has become a world-wide trend since the year 1987 and the early-on of 1994 marked the agenda for privatization of airports for more than 50 countries of the world (Poole, 1994). The general concept for such an approach in developed countries includes the principal need of major modernization and expansion and the utilization of long-term franchise so as to possess private sector finance which would commence with the development of new terminals, or entirely new airports. It is an interesting fact of concern that airports are increasingly considered as enterprises rather than public services and around the world, private sector for airport management and development is being acquired by the government of both developed and developing nations. In order to improvise the airport operations, the municipal and state governments of a country can utilize the private sector in various ways. The simplest form of privatization comprises of contracting out the management of an airport on a short-term lease or sale. On the other hand, in order to generate new facilitations or entirely new airports, the private sector can be provided with a long-term franchise to finance, design and operate such facilities. In this way, military bases can be transformed in to commercial airports as well. Objectives of airport privatization are inclusive of a major factor which accentuates in its interest which is government fiscal stress. Since, government of the developing countries often lack the resources in order to develop new airport capacities, they involve private capital and expertise in their arena. Developed countries view airports as assets and businesses as they are more of non-core functions which can better be managed as businesses by private sector enterprises. However, airport privatization brings about the abdicating control of the government over the management of airports in the private sectors which is quite contemporary, or in other words, deregulatory to some extent. The transfer of an airport, through management or lease, to the private sector is subject to public interest in the airport and its services. Profit-obtainment from a service center is potentially foreseen as a non-profit governmental operation. The funds are harmonized from the pay for the privatization of public airports, the sources of which include the end users and the customers. It, as a whole, criticizes the merits of privatization of the airports as it provides an obstacle to the concept of privatization from both the users and providers of the air transportation services. One of the major problems lie with the failure of deregulation the components of air transportation network i.e. the airports and the air-traffic control system. The government, nonetheless, freed up the airlines to grow themselves, but the essential infrastructure was still left for implementation. This emerged with growing problems which include delays, congestion, thereby questioning the safety levels. Arguments for Airport Privatization The business of airport is increasingly heading towards multi-facets which extend in to real estate, commercial and other ventures. Activities in such business mainly comprise of the provision of aeronautical services i.e. runways, taxiways, aprons, terminals etc. and the provision of landside services such as the passenger and aircraft services, concessions on food and beverage, duty free shopping, parking and hotels (Juan, 1996). They mainly concentrate upon the areas where there is a possibility of a wide variety of suppliers. Airport economies work on the trend of reliability on the commercial operations in order to contribute to the increment in share to airport revenues. Developed countries generally seek to eliminate their requirement to invest resources in airports which can be operated commercially. On the other hand, developing countries seek world-class expertise in order to ensure modern and efficient airports. According to a research in the United States, since the year 1989, public officials in various cities have proposed the lease of air-carrier airports which include Atlanta, Boston, Indianapolis, Los Angeles, New York, Philadelphia, San Francisco, Syracuse and Worcester (Poole, 1994). One of the major benefits of airport privatization of substituting a private operator for a government department is the efficiency in operations. This is due to the various incentives at work in both the sectors. The evaluation of private sector managers is based on their economic performance on the enterprise, which seldom happens in the case of public sectors. Public sector excludes appreciable constraints like the civil service and cumbersome government procurement regulations and micromanagement from higher levels which are either departmental or political. All these constraints make it difficult to fire the incompetent staff or reward outstanding performances (Poole, 1994). The private sector also seeks benefits from economies of scales. For instance, a firm which operates multiple airports is able to purchase all supplies and operate on centralized accounting thereby, availing support services to serve all the airports, and hence, take advantage of all the economic benefits in a larger size. Private sector is likely to be less constrained, as discussed above, and can contract out the operations which are comparatively cost-effective. Hence, privatization of an airport can serve to depoliticize a host of smaller-scale decisions which might be inclusive of a political wrangle, had there been any involvement of the government department. For both smaller and larger airports, privatization offers the potential of turning loss into profit and the greater revenue potential under a private management may lead to increment in returns to the current governmental owner. One of the most drastic transformations which privatization tends to bring about is a new approach to the airport retail activities. The amount of retail space can be seen several times as much as in the other terminals in some airports. Moreover, the retailers also include numerous national and international brand outlets and, the prices charged there are the same as that in a shopping mall. Arguments Against Airport Privatization According to Goldberg, the distribution of ownership rights to the airports can be construed as a contractual issue as the price regulation is viewed as a transaction cost saving device which brings an end to the natural monopolies as they lock the seller's investment in to that transaction (Goldberg, 1976). As far as the airport authorities are concerned, they need to invest large sum of capital in airport services such as aprons, runways, and terminals etc. which represent investments as characterized by long working lives. Moreover, the expansion of major infrastructure facilities involves large and discrete steps. As a result, the regulator or the owner of the airport takes the responsibility of the fate of the regulated airport which is bound to future decisions, once the investments have been made. The airport regulator is unconventionally in tie-up with in the relationship with the airport authorities, since, the airports are uncontestable monopolies in their respective locations. Privatization increments the cost to users and would thereby, prohibit general aviation. Public provision concentrates upon the goods to be publicly provided, which is comparatively more efficient. As quoted by Joseph Stiglitz, a private firm, when charges for the services it facilitates, discourages the individuals from utilizing them (Joseph and Stiglitz, 1976). As a result, the cost per unit of production will rise due to the emanation of the discrimination, thereby, decrementing the efficaciousness. It is preferable and advisable to privatize in certain situations, but it should be limited at the margins. It would not be a valid statement that private management is superior than public management as the economics of airports states that aside from the large and medium hubs, most airports are not profitable as they are quite un-appealing as long-term ventures. Despite uncountable benefits of privatization of airports, it raises numerous concerns about the potential loss of public control. Through various mechanisms, this can protect public interest while still retaining the benefits of the private sector. Under the contract of management, the contract spells out the requirements and constraints which describe the operation of the firm. However, the contract can potentially be inclusive of any provisions desired, as it involves less scope for innovation and efficiency gains since, the conditions are more constrained. The selling of an existing airport or the development of a new airport from the initial as a private venture skips the protection of public interest. In such cases, the government can condition the sale on various factors. It can wish to retain a single share of ownership with special voting rights so as to protect specific public-interest concerns (Poole, 1994). Safety is another issue of concern in context of privately owned airports, as many raise a question regarding that. The answer is, regardless of the form of privatization, it is the FAA which would remain the airport's safety regulator and operator of its control tower. According to Payson and Steckler, the incentives which come across a private airport would be responsible for promoting concern for safety for various reasons (Payson and Steckler, 1992). In comparison with a municipal entity, an airport firm which provides strong incentives on safety would provide less protection against full legal liability. Moreover, any public perception regarding safety would happen to drive the business away to alternate airports. Also, the franchise agreement could be inclusive of specific provisions regarding the safety of passengers over meeting the FAA's minimum requirements which can even lead to penalties or termination, if breached. Similar to the case of safety, a private buyer or lessee would be charged with equal rules and regulations concerning issues on airport noise. The firm would have strong incentives to be responsive to the concerns over airport noise. As in the case of safety and noise, liability exposure of owning and operating a major airport has been another issue of concern. International reinsurance industries have developed to deal with such risks where the basic idea is to reinsure the primary insurance carrier for a particular risk by segmenting the exposure in to smaller pieces, say 5 percent. As a result, no single insurer would tend to bear more than a small portion of the cost. Conclusion Airport privatization is rapidly becoming the model for airport operations round the globe. Its dependence on the economic and political circumstances can offer huge benefits to tax-payers and airport users. If done properly, privatization can prove to be advantageous to all parties by valuating the airport's operations. Airlines can conceive assurances and travelers can avail high quality of service thereby, facilitating the airport agencies with new revenues and new source of businesses. Despite such services, there are certain disadvantages which hinder the growth of airport privatization in countries across the world. Massive and continuous improvements in information and communication technology intrude on both the business and travel markets. A small increment in the cost of an airline or any of its services may have a distinct effect on the airline's profitability. Moreover, it causes lack of communication with the local government and therefore, engages lack of individual consideration and protection in both intrinsic and extrinsic context. Airport privatization is the distribution of ownership rights to airports which means that it is bound to encourage profitability and not safety which leads to insecurity within a passenger or the airport as a whole. The pros and cons of privatization of airports imply that airport development is a mixture of advantages as well as disadvantages. Too often, airport infrastructures have been in progress where they may not have been developed. The barriers to competition have always involved loss in efficiency and requirement of flexibility. As far as flexibility is concerned, it has been implied through public interest view-point that airports which are developed and managed by the government sponsors seem to be more efficacious and comparatively more flexible as in the case of private sectors. The phoenix Sky Harbor Airport in Arizona is an excellent example of airports developed exclusively with public funds in the United States. As a final note, the concept of privatization of airport has both negative and positive aspects to ponder over and as a result, it is considered to be a continuous issue with powerful advocates on both the sides. Privatization of airports is totally dependent on the operational change of an airport and the circumstances in which it functions itself. The partnership between government and private enterprise may facilitate many entrepreneurial opportunities to gain profits, whilst adding to increment in the system capacity and generating an economic multiplier for the community through which both public and private sectors could benefit. References 1. Payson, William H. and Steckler, Steven A. 1992, Expanding Airport Capacity: Getting Privatization Off the Ground. Reason Foundation Policy Insight, No. 141. 2. United States General Accounting Office. 1996, Airport Privatization: Issues Related to the Sale or Lease of U.S. Commercial Airports. GAO/T-RCED-96-82. 3. Juan, E.J. 1996, Privatizing Airports-Options and Case Studies. Public Policy for the Private Sector; The World Bank. Note No. 82. 4. Poole, Robert W. 1994, Guidelines for Airport Privatization. Reason Foundation, How-To Guide No. 13. 5. Goldberg, V.P. 1976, Regulation and Administered Contracts. Bell Journal of Economics 7 (2): 426-452. 6. Stiglitz, Joseph E. 1986, Economics of the Public Sector. 7. Gesell, Laurence E. and Sobotta, Robin R. 2007, The Administration of Public Airports. Privatization and Public Entrepreneurship. Chapter 15, 5th ed. Read More