Should Airports Be Privatized - Literature review Example

Name: Institution: Tutor: Date: Should airports be privatized? Introduction Privatization can be defined as the transfer of business or enterprise ownership from the government/state to a privately-owned entity. According to brook.edu (2011, Pp1), the privatization of U.S airports has generated significant interest in recent years. More than thirty years after a bipartisan coalition approved the Airline Deregulation Act; the issue is being still strongly debated. 1Those in favour of airport privatization argue that a large number of the major commercial airports are able to operate on a sound economic basis with no government assistance. Moreover; supporters of privatization argue that it has worked out as predicted; fares fell down considerably in real terms as new competitors clamored to serve viable markets. On the other hand, critics identify numerous cases of bankruptcies, industry instability, and the ever-increasing miserable experiences faced by air travels as proof of its failings. This particular paper therefore seeks to evaluate whether airports should really be privatized. According to Diane Publishing Company (2011, Pp32), those in favour of privatization argue that privatized airports would optimize efficiency as compared to the public sector.2 Winston and de Rus (2008,Pp9),for instance, identify excessive travel delays in the U.S, as a significant manifestation of the failure of the state-owned and managed airports to implement policies as well as introduce innovations that could greatly enhance the air transportation system. Winston and de Rus (2008,Pp10) therefore contend that the key to reducing problems such as delays is to do away with major inefficiencies of the system that can only be realized through the privatization of the nation’s aviation infrastructure. 3 Winston & de Rus (2008, Pp9) further highlight that privatizing airports implies operating in a less constrained as well as a more competitive environment. As a result, privatized airports have the potential to enhance services offered to travelers as well as reducing the cost of carrier operations while maintaining the state’s excellent record of air travel safety regardless of an ever greater volume of traffic. For instance ; Diane Publishing Company (2011,Pp34) points out that the contract to manage the Indianapolis airport by a private company is cost effective because the company has pledged to cut down operating costs as well as increasing revenue by approximately $140 million over ten years. Advocates of privatization of airports also contend that privatization would offer significant benefits to local, state and federal budgets for a number of reasons (Diane Publishing Company, 2011, Pp34).First, they argue that if present restrictions regarding the use of airport revenue are amended, privatization of airports would directly generate lease proceeds which could be used for other purposes other than the airport. Diane Publishing Company (2011, Pp34) however, argues that the amount of proceeds generated from lease proceeds would depend on how the privatization is implemented. According to a privatization advocate, 87 largest airports are approximated to have a total market worth of $29 billion.4 Additionally, local state and federal governments would be able to benefit from a long-lasting benefit as a result of reduced airport demands for financial assistance. In this case, privatization would imply that responsibilities of the government are reduced such that policy makers would now focus more on key responsibilities, for instance, national security. Moreover, supporters of privatization draw attention to the fact that private airports would be paying taxes to the government (Diane Publishing Company, 2011, Pp34). According to (cato.org, Pp1), economic freedom has a significant impact in business growth. In view of this, advocates of airport privatization often refer to the competitive environment nourished by the practice as key to its success. According to privatization advocates, privatization implies that markets are opened up to greater competition in addition to widening the choice available to consumers. As a result, they contend that airports ought to be privatized as privatization has the potential to stimulate economic growth by opening new markets to entrepreneurs. 5 Furthermore private providers are believed to be motivated by competition coming from other prospective service providers.Competion between prospective private suppliers to win a given contract normally results in the lowest cost to the government as well as the taxpayer for a specific level of service. Moreover, competitive markets are derived from private property, and there is always no way to stimulate competitive conditions under the conditions of government financing or even government production. 6 Privatized airports are also often run as businesses; as a result, they intend to make profits by aggressively developing several profit centers, in addition to tailoring their services to different groups such as originating passengers, airlines and transfer passengers. As highlighted by Poole (2000,Pp1), approximately more than 30 years ago, the U.S government implemented a series of deregulation legislation relating to the airline industry intended to stimulate healthy competition as well as lower the inflated airline fares. To some extent, the deregulation did work, and the 1990s witnessed the continuous growth of the airline industry, with a large return rate of airline companies.7 Advocates of airport privatization also point to the fact that privatization has not had an unfavorable effect on the air transportation systems’ performance of those countries that have already experimented with it. According to Sparks (2008, Pp1), countries that have tried out airline privatization include Canada, New Zealand, the United Kingdom, China and Australia. In Australia, for instance, where airports are privately-owned so as to enhance efficiency, airport operators, under pressure from local interests, have had incentives to make excessive investments. Additionally, in Canada where major airports are owned by non-profit firms in order to boost investment, the investment goals have been largely achieved. However, the model has resulted in higher airport fees that might otherwise prevail. Alternatively, Sparks (2008, Pp1) argues that China also provides a significant example where six of its largest airports have been privatized since the mid-1990s so as to optimize efficiency. According to Sparks (2008, Pp1), the privatized airports have been able to perform better than the public ones. However, their performances have failed to meet public expectations due to the fact that the government of China still maintains a controlling interest in all the privatized airports. 8 Another argument to back the need for privatization of airports is based on the notion of productivity growth of airports. The Reason Foundation an organization that supports privatization of airports identifies labour productivity growth at the airports in the U.K following their privatization as an evidence of privatized airport’s ability to operate more efficiently and also expand in terms of productivity. Consequently; private airport lessees are able to generate profits as well as a return on their investment.9 On the other hand, various arguments have been raised to oppose the move to privatize airports. Privatization critics claim that it is not easy to predict how extensive privatization would have an effect on the local, state and federal government budgets simply because so many assumptions have to be made regarding how privatization might be put into operation. However, according to Sparks (2008, Pp1), a few general observations can be made on the basis of the present situation and possible scenarios. The effect of extensive privatization on the federal government budget, for instance, is dependant on whether the privatized airports are deprived of tax-exempt status as well as the federal allotment grants. Privatization advocates complain that providing such benefits to public airports but not private airports creates an unlevel playing field. A more extensive argument is that privatization may also have an effect on the funding level for airport grants. During the financial year 1995, for instance, the federal allotment grant funding level for airports was approximately $450.The effect on allotment grants may depend on whether grants that earlier went to a public airport would be redirected to other airports or the overall level of funding for grants program is cut.10 Another argument against the privatization of airports is based on the fact that the effect of extensive privatization on local governments is dependant on whether the restrictions on revenue diversion are changed and the municipalities could keep hold of all privatization proceeds. If they are able to carry out the privatization and keep hold of all privatization proceeds, they can expect to reap a financial boon. In addition, they would gain from adding airports to their local tax bases.11 Also, critics of privatization argue that there is no assurance that freer competition (the part that stimulates demand for airports) alone can solve the problems associated with government ownership such as inefficiencies. According to Sparks (2008, Pp1), freer competition can only stimulate more air travel.12 In addition, Ng & Seabright (2001, Pp 594) highlights that experimental results based on a team of 12 European and 7 major U.S airlines confirm that the effect of competition are more subtle and ambiguous. Zakrewski (2000,Pp1) also argues that , little evidence exists to back whether the underlying reasoning as well as the alleged results of privatization of airports, such as optimized efficiency and profitability is indeed correct. Zakrewski (2000,Pp1) argues that specialist in the field of airport performance measurement and strategic performance management propose that company performance measurements ought to take into account internal, external, in addition to operational factors. Therefore, the impact of privatizing the airports should be verified by analyzing the performance of airports through the eyes of stakeholders.13 Neufville (1999, Pp7) reveals that critics of privatization argue that privatization of airports is almost without a doubt, never going to be appropriate. This is due to the fact that there is always going to be a strong interest from the public regarding the operation of the private firms. As a result, the government will more often than not be forced to participate in the control of the airports either through posing regulations or through a mutual partnership. The public is always concerned about, and will always insist on being involved in various decisions concerning prices of services, size and level of service offered as well as the accessibility of the services to the public. According to Neufville (1999, Pp7) therefore, critics of privatization contend that major airports will therefore almost without doubt, and in any context be managed as well as operated with some form of control from the public.14 Conclusion From the above analysis, what is evident is the fact that various merits and negative aspects of privatization have acted as subjects of significant debates among businesspeople, leaders and public employees alike. Indeed, each aspect of privatization seems to be triggering strong reaction. However, in my opinion, airports ought to be privatized. The reason behind this is because, privatization, as a practice, is meant to end government monopolies and generate more competition. The discipline of competition leads to greater cost efficiency from producers who are keen to hold on into their existing market share. Moreover, competitive markets are founded on private property; therefore, there is no way to stimulate competitive conditions under the conditions of government funding or even government production. References brook.edu, 2011, Airline Industry, Retrieved on December, 8, 2011 from http://www.brookings.edu/topics/airline-industry.aspx, 2011, Pp1. Cato.org, Economic Freedom is Key: New Report Shows Strong Relationship between Economic Freedom and Human Development Indicators, Retrieved on December, 8, 2011 from http://www.cato.org/pressroom.php?display=news&id=56,2006,Pp1. Diane Publishing Company, 2011, Airport Privatization: Issues Related to the Sale Or Lease of U.S. Commercial Airports, Diane Publishing, 2011, Pp 32-34. Ng, Charles & Seabright, Paul, 2001, Competition, Privatization and Productive Efficiency: Evidence from the Airline Industry, Volume 111, Issue 473, pages 591–619. Neufville Richard de. Airport privatization issues for the United States. Massachusetts Institute of Technology. 1999,pp7-8. Poole, Robert.W. Another Reason for Airport Privatization: Government Ownership of U.S. Airports Thwarts Airline Competition, 2000, Pp1. Sparks, Evan, 2008, “Should We Privatize Airports?” 2008, Pp1. Winston, Clifford & de Rus, Ginés. Aviation Infrastructure Performance: A Study in Comparative Political Economy, Brookings Institution Press, 2008, Pp 9-11. Zakrewski, Dorothea.Airport Privatization-Success or Failure? The Airport Performance Scorecard-A Theoretical Assessment Tool, 2002, Pp 1-4 Read More