Privatizing Airports
By Viggo Butler, President, Airport Group International, Inc., Glendale, California
Airport financing, development and operations - for many years considered the sole responsibility of governments - are now successfully being carried out by private companies organized for those purposes. The results are high-quality airport facilities built more rapidly at lower costs, thus, not placing financial burdens on governments. Consider the success of Airport Group International in providing Canada with its state-of-the-art Trillium Terminal 3 at Toronto's Pearson International Airport.
In this instance, the government came to us with a plan to build a new terminal that would meet the rising traffic demands at Pearson, but would not further burden the taxpayers. In addition to being part-owners of the terminal, we now operate the terminal under a 40-year lease with the government. The Trillium facility stands as a clear example of the innovation and ingenuity private entrepreneurs can bring to bear on even the most complex projects. It is a long-term, public-private partnership that draws from the strengths of both to create a truly unique passenger processing facility, constructed with private funds.
At Airport Group International, we believe that any government enterprise that responds to market forces is a candidate to be owned and/or operated by the private sector. Some government programs such as social services, police and fire are driven by community need, and therefore should be supported by the government, employing its tax powers. However, enterprises such as airports clearly respond to the marketplace: Consumers choose to fly, and then choose to use a particular airport, based on economic decisions.
Increased privatization of such market-oriented infrastructure assets would achieve significant benefits for both airlines and their passengers - and for the communities at large.
First, a private-sector investor in an infrastructure asset replaces government debt or equity with private capital, at no expense to the government. Privatization, therefore, provides a public owner the means to continue existing operations and develop new ones, regardless of the availability of government funds for infrastructure projects.
Second, the private sector, responding to market forces, best allocates infrastructure resources. Most public airport authorities do not respond to the market; so an airport may, therefore, be located in the wrong place altogether - where there is little demand - while another more logical location has no facility. Or, one airport may be over-built, while another is under-built. The private sector responds quickly to such inefficiencies.
Third, passengers and airlines benefit from the increased efficiency and low costs as a result of using the private sector. Private firms, with their own money on the line, will find the best deal and work quickly, both to save time and money and to secure the revenue the project is intended to produce. This market incentive clearly benefits the users of the infrastructure facility.
Increased private-sector activity at airports is also favored by recent trends in the airline industry, namely the crisis in airline profitability. Airlines are having to pay more and more attention to their costs in order to survive, and the ability of airports to control costs for airline tenants is ever more critical. Airports are not a driving cost problem - they are 3, 4 or 5 percent of overall airline costs - but airport costs are increasing faster than many other expenses the airlines have, and they come at the hands of government enterprise.
Again, I point to Toronto's Trillium Terminal 3, where the private sector, through a long-term ground lease from the government, took a risk by investing in the development and construction of a new terminal facility.
There are three major roles that a government should expect to play in a partnership. The first is control. Private investment cannot be at the sacrifice of national strategy, nor can a single airport be operated as separate from the national system. In each case, the government should articulate the policies necessary to guide the design, finance, construction and operation of each project.
Second, the government should share in the economic benefits of the partnership. In a lease transaction, when development is involved, the capital improvement - in this case, the terminal facility - should transfer to the government at the end of an agreed period. Other financial benefits may also be agreed upon, such as large incentive payments upon award of the contract, a percentage of the profits increasing over the years, or a lease payment for facilities.
Third, governments must allow the private operator to operate as a private investor seeking financial returns. This can be accomplished while still protecting the interest of the traveling public. A private operator must have incentive to develop revenues and achieve cost efficiencies in order to obtain profits. In order to create a "business environment" for the private operator, certain conditions typically present in a government operation must be relinquished. For example, lengthy and complicated procurement requirements and service agreements are all important aspects in managing a successful airport operation. Governments can still play a major role in all aspects through oversight and contractual arrangements. In most cases, airports represent excellent financial opportunities if the proper contractual and regulatory framework exists.