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Privatization also has some adverse effects like it may create a private monopoly which charges extra for same or lesser standards of services, invests inadequately and gives less consideration to externalities like controlling environmental impacts and maintaining social justice. Less favorable employment condition may occur and redundancies may occur. From a point of view, airport privatization can be considered as just an evolutionary development of the aviation industry. Airports evolved from public sector utility to commercial enterprises and privatization can be considered as commercialization taken to its limits. Increased commercialization has brought about good profits and market oriented management.
The increase in number of airport privatization around the world has shown us that this method has successfully achieved ways to tackle some problems that could be faced by the airports in the 21st century. However, this in some countries where publicly owned organizations are considered as national or regional assets being transferred to private companies could be a sensitive political issue. It brings fear that the focus would be then shifted to private shareholders and the customer needs will be neglected. Privatization of airports may have different views among different groups and even between the local and national government. As a result, it should not be thought that commercialization always leads to privatization. A good example for this is the Manchester airport, which runs on a very commercial basis, but has no desire to undergo privatization.
Types of Privatization
Airports are one of the most attractive organizations for investors, for many reasons. Firstly, the aviation industry has a unique growth rate. Many airports, mainly the major airports have less or no competition, from the airports and also from other modes of transports. It is difficult to enter into the airport industry as it requires heavy capital investment and also difficult to find an appropriate and convenient locations where airport development is allowed. However, there are risks also available such as the political interference in the form of airport regulation and control over airport development as there is deregulation and greater collaborations through alliances.
According to the document prepared by Carney and Mew in 2003, the types of privatization can be broadly classified into 5 types:
Share floatation
Trade sale
Concession
Project finance privatization
Management contract
The selection of the most appropriate type of privatization for the airports is done by a series of complex decision-making process in which the reasons for privatizing is checked by fulfilling certain conditions.
Share Floatation
The first type, i.e., the share flotation or Initial Public Offering (IPO), where the airport share capital is issued, and traded on the stock market. The Management or the public owners are given options to acquire shares.
In this type, the government or the public owners give up the total or partial ownership according to the shares open, transferring economic control and risks to the new shareholders. Generally this type of privatization has shown positive results with promising economic growth rate and limited competition as the capital investments are too high for the risk to be taken. Even when total privatization occurs, the government has a certain degree of influence by issuing a golden share so that the national interests can be secured in extreme cases.
Trade Sale
In this type of privatization, some parts of the airport or the total airport is sold to a trade partner or a consortium of investors, through a public tender. The trade sales which took place in the 1990s had strategic partners involved rather than just passive investors. As a result, the managerial and technological expertise was considered while agreeing on a sale.
Concession
With this type of arrangement, an airport management company or consortium will purchase a concession or lease to operate the ‘privatized’ airport for a defined period of time, commonly between 20 and 30 years, again usually through a tendering process. Financial terms and the types of lease will vary but typically this option will involve an initial payment and a guaranteed level of investment and/or payment of an annual fee. Hence this tends to be a more complex approach, which has high transactions costs and needs to carefully designed and implemented to ensure that the private contracts achieve the government policy objectives.
Project Finance Privatization
With this option, a company will usually build or redevelop and then operate an airport or specific facility, such as a terminal, for a certain length of time, typically 20–30 years. This company may be totally private or may be a private–public partnership. At the end of this period, ownership will revert to the government owners. Thus this approach can be viewed as a particular type of concession agreement. Generally such an arrangement will not usually require a large upfront payment but the operating company will bear all the costs of building or re-developing the facility. When it is built, the company will have to cover the operating costs but will also retain most revenues (often after paying an annual fee to the government) until the facility is handed back. Thus, the airport company will take full economic risk for investment and operations. There are a number of project finance privatization methods with the most popular being build–operate–transfer (BOT) when, as the name suggests, the company will build the facility, operate it for a certain length of time and then transfer ownership back to the government. Other similar models include build–transfer (BT), build–rent–transfer (BRT) or design–construct–manage–finance (DCMF). Other options may actually involve the ownership of the facility such as build–own–operate–transfer (BOOT) or rehabilitate–own–transfer (ROT) projects. All these methods, however, are often referred to by the generic term BOT.
Management Contract
The least radical privatization option is a management contract when ownership remains with the government and the contractors take responsibility for the day-to-day operation of the airport, usually for a period of 5–10 years. The government either pays an annual management fee to the contractor, usually related to the performance of the airport, or the contractor will pay the government a share of its revenues. Normally investment will remain the responsibility of the government owner and so the overall economic risk is shared between the owner and the management company. For the government owner this may be politically more acceptable, whereas for the contractor such an arrangement may be attractive in countries where greater financial exposure, through a trade sale, for example, may be seen as too great a risk.
Overview
The overall reason for this report is to analyze the effects of ownership change on the economic growth of the industry. The main success of privatization is not by attaining maximum airport profits but by providing quality service with continuously improvising efficiency and maintaining cost of charges.
There are a number of lessons that can be learnt from this experience:
The cost of capital is found to be too high in the ‘plc’ privatization model.
Efficiency is optimized when the business is outsourced.
Performance can be improvised even without ownership change.
It is difficult to reach objectives to provide quality, cheap, and safe service simultaneously.
Privatization is not a successful option unless customer needs are not kept in priority for the growth and development.
Customers have gained some from privatization, in terms of lower prices relative to the public ownership organizations, but not by a lot.
Identifying Challenges
Vienna International Airport (VIA), Austria
Privatization resulted in inadequate investment and high charges for customers.
Before privatization, VIE had high costs. The weak economic regulation did not help much to change this providing no incentive to improve efficiency, provide adequate investment, or hold back monopoly profits. This is due to the direct regulation of charges from the government.
Due to the classic monopolist behavior, profit margins are restricted. As a result, insufficient incentives are being produced which cannot further pay for the cost-efficient investments for the future of the airport.
Zurich Airport (ZRH), Switzerland
The independent TRL Charges Index of the top-50 airports worldwide ranks Zurich Airport as the 10th costliest airport in the world.
Due to the collapse of Swissair, capacity constraints have emerged at the Zurich Airport. As a result it is the least profitable airport among the top 50 airports. |