Aviation Infrastructure Performance: A Study in Comparative Political Economy

4. Airport Policy in Australia and New Zealand: Privatization, Light-Handed Regulation, and Performance

Australia and New Zealand moved to private ownership of their major airports between 1996 and 1998.After a period of formal price-cap regulation that ran from 1997 to 2002, Australia adopted New Zealand’s use of a lighthanded form of regulation. Currently in both countries prices are not explicitly regulated, but regulation could be imposed if performance is considered to be poor. Such a regulatory environment for airports is rare around the world—most regulation is much more prescriptive. Together Australia and New Zealand constitute a useful case study of how light-handed regulation works with airports. Under government ownership, a number of airport policy issues were resolved by the government acting without input from others. These matters included determining the extent of cost recovery, assessing major investment proposals,and resolving conflicts with environmental objectives.In the private, regulated environment,the solution to these issues depends on the firm’s objectives , the regulatory structure, and the pressures from competition. Governments still have a role in resolving issues, particularly those that concern environmental aspects, such as whether a new runway can be built in a sensitive area. Governments also still seek to influence decisions, perhaps working through a regulator to encourage major investments. Since privatization, however , it is private owners, operating within the regulatory framework, who determine airport prices, operating efficiency, and the investments airports in 4 Airport Policy in Australia and New Zealand: Privatization, Light-Handed Regulation, and Performance peter forsyth 65 I am grateful to Hans-Martin Niemeier for valuable comments on an earlier draft and to Nathalie McCaughey and Neelu Seetaram for helpful research assistance. 04-9395-3 CH 04 2/29/08 2:08 PM Page 65 Australia and New Zealand make. Thus, this chapter focuses primarily on airport ownership and regulation and their effects on pricing, efficiency, and investment. The motivations for privatization were several, and efficiency objectives were important. During the 1990s governments in Australia and New Zealand were privatizing many public enterprises, especially those in the transport sector, as part of a general push to improve microeconomic performance. While airport performance was not regarded as poor, policymakers considered that privatization would sharpen incentives for efficiency and induce the airports to pursue commercial opportunities, particularly from the nonaeronautical side of the business such as retail stores in terminals. There was little political opposition to privatization of airports. Air traffic control was not privatized, but the air traffic control authority was corporatized and subjected to a form of price monitoring. Some governments also saw privatization as a means of improving their budgetary position. While maximizing revenue from sale was not a main consideration with the earlier privatizations, it became a more important factor over time. By the time Sydney airport was privatized in 2002, the government had taken actions, such as almost doubling the aeronautical charges at the airport and promising a lighter form of regulation , which had the effect of raising the sale price. Granted that ownership and regulation are critical to performance, it is important to ask what the regulation seeks to achieve. Regulation could be about promoting economic efficiency, in the manner in which the incentive regulation literature stresses. Governments may have other objectives for regulation , however. In reality governments and regulators often stress minimizing profits and keeping prices close to cost. That may be an objective in itself, even though achieving it is very likely to impose a cost in terms of efficiency . Regulation that in reality is effectively cost-plus regulation is often clothed in the rhetoric of incentive regulation. Thus in Australia and New Zealand, while the regulation imposed on airports is light-handed, one can argue that it is oriented toward keeping prices at cost rather than promoting efficiency. Light-handed regulation is about process, not content—it is possible to have light-handed, cost-plus regulation. This chapter’s overall assessment of the Australian and New Zealand approaches to airport regulation is that they work quite well in most but not all aspects. —Privatization has resulted in airports that are more oriented toward profit, although the presence of shareholders with objectives other than profit influences their behavior. 66 Peter Forsyth 04-9395-3 CH 04 2/29/08 2:08 PM Page 66 —While prices are somewhat high at some airports, they are well below monopoly levels, and there are no major efficiency losses from this pricing. —The system is consistent with good incentives for...