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Air transportation infrastructure in developing countries: Privatization and

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AIR TRANSPORTATION INFRASTRUCTURE IN DEVELOPING
COUNTRIES: PRIVATIZATION AND DEREGULATION

Kenneth Button
University Professor
Director of the Center for Transportation Policy, Operations and
Logistics School of Public Policy
George Mason University
Fairfax, VA 22030
USA
e-mail: kbutton@gmu.edu

To the Fundation Rafael del Pino conference on

Comparative Political Economy and Infrastructure Performance: the Case of

Airports

Madrid

September 18th–19th, 2006

 AIR TRANSPORTATION INFRASTRUCTURE IN DEVELOPING
COUNTRIES: PRIVATIZATION AND DEREGULATION

Kenneth Button

INTRODUCTION

The latter years of the twentieth century saw considerable move towards loosening economic
regulation across a wide range of industries. Initiated in higher income countries, this trend has,
albeit at different speeds and in a variety of forms, spread across much of the globe. This paper
looks at developments in the changing regulatory environments under which airports and
associated facilities are provided in developing countries. No firm line is drawn in defining a
developing country but most nations in Africa fall under the rubric, as do many countries in South
America and parts of Asia, along with some of the transition states in Europe1. The paper covers
all forms of economic regulatory change that has occurred 2, including that of ownership, and sets
these within the broader context of why air transportation infrastructure has become a more
important concern to developing countries.

Economic growth is unevenly spread and the econometric evidence indicates that convergence, at
best, taking place only very slowly (Barro and Sala-I-Martin, 1995). While there have been clear
leaps forward in some parts of the World, and in particular parts of Asia, many other areas
languish in a downward spiral of circular-and-cumulative causation3. In particular Africa, that has

1
The World Bank does provide a listing of ‘low income countries’ based on per capita income but
developing nations are seen as involving a larger group than this and, sadly many of the poorest nations
can hardly be said to be developing. This is not an unimportant distinction because the evidence suggests
that successful privatization depends heavily on country and market conditions (Kikeri et al, 1994).
2
A distinction is, though, drawn between economic regulation (often called quantity regulation in the
UK) and social regulation (often called quality regulation in the UK) with the focus entirely on the
former. Social regulation tends to involve such things as income distribution, racial equity,
environmental protection, labor laws, and consumer protection and there have been major changes in all
these fields in recent years. The concern here, however, is solely on matters of pricing, market access,
and ownership. There are inevitable overlaps between economic and social regulation but these are not
considered.
3
While the original circular-and-cumulative causation theory is largely associated with traditional
economies of scale, the ‘New Growth Theory’ of Romer (1990) and others focuses on knowledge
creation. In the longer term, the inability of developing countries to fully integrate into the global
knowledge
1
a population of over 800 millions but an aggregate GDP lower than that of Spain, has seen
relatively little economic growth in recent decades and many nations on that continent have seen
their GDPs fall. Initiating more dynamic economic growth paths in poorer countries has proved
challenging despite the emergence of multinational agencies, such as the World Bank, after
World War II as well as unilateral initiatives by individual developed nations.

One of the problems encountered in virtually all lower income countries has been inadequate
infrastructure, including transportation infrastructure. Indeed, much of the development, as
opposed to military or humanitarian, aid, that has gone to developing countries has been to
enhance their infrastructure and investment in better transportation systems has been a large part
of this.

More recently, there has been a general trend, not only to look at the amount and type of
infrastructure that a country has but also to examine the way that it is maintained and at the
efficiency with which it is being used and managed. This may largely be seen as a demonstration
effect emanating from more affluent countries where measures such as regulatory reform and
privatization in various forms have generally produced significant economic benefits4. The
rationale for the change of emphasis is often somewhat different, however, with developed
countries trying to squeeze more efficiency from an existing and expansion infrastructure as they
encounter social and environmental constraints to further expansion rather than, as with
developing countries, having an absolute shortage of infrastructure.

Air transportation has been a sector affected by such liberalizing reforms although most of the
changes have involved the operational side of the industry – e.g. the privatization of airlines and
the ‘deregulation’ of markets for their services – with other elements in the value change such as
airports and air navigation services5 being less affected to date. Only 2% of the world’s
commercial airports are, for example, managed or owned by the private sector, although where
this has taken place the results been sufficiently encouraging to stimulate further interest by the

economy because of inadequate modern transportation may prove even more of a challenge as they seek
to develop. There is a tendency for those involved in knowledge based industries to make greater use of
air transportation than those engaged in more traditional sectors.
4
The intellectual arguments for economic deregulation of markets involving private supplying agents
was, at least initially, more compelling than that for privatization of state owned companies operating
competitive conditions (Kay and Thompson, 1986)
5
This generic term is used through out to embrace a collection of activities that not only includes
navigation services but air traffic control and weather information systems.
private sector. In addition, the organization and management structure of airports that remain in
public control has changed significantly, often in efforts to mirror the types of approach a private
undertaking would adopt (DeNuefville and Odon 2003). Such developments tend to be
concentrated in developed countries, although they are spreading.

The analysis of air transportation issues in developing countries is relatively sparse. In part this
seems to be due to a long-standing focus by agencies such as the World Bank and the Asian,
African and Inter-American Development Banks on surface transportation modes, but it also
reflects the relatively small amount of air transportation in many developing countries. This, is
however, changing, and all the major international agencies are now putting more resources into
air transportation as well as national governments revisiting their own policies. Analysis of the
effects of different approaches is, however, still hampered by a dearth of good data and a shortage
of good case study material. Even basic information, if it exists, is often not easily accessed and
can be of questionable reliability.

AIR TRANSPORT AND DEVELOPING COUNTRIES

It is initially useful to consider the particular functions served by air transportation in developing
countries and how this often differs both in nature and degree to that found in more economically
advanced countries. Regulatory structures tend to be conditional and their effects depend not only
on their objectives, parameters and implementation but also on the background against which
they are established. Regulatory changes in airport policy in countries such as the UK came
against a backdrop of successful liberalization of many other markets, quite strong macro-
economic growth, and with fairly well defined objectives. Such conditions not always a feature of
developing countries.

Role of air transportation in developing countries

The traditional, classical view is that free trade maximizes economic welfare by allowing
countries to exploit their comparative advantages. While there are doubts as to the prospects of
ever meeting all the requirements for a genuinely competitive global market place, and a lack of
clarity as to appropriate second-best strategies, there are continuing efforts being made at the
multilateral level to remove the most severe constraints on trade. Much efforts has been paid to
removing tariff barriers, a traditional concern of international economist, but more recently it has
become clear that there are other limitations on the free movements of goods and factors of
production, most notably sub-optimally high transportation costs. For a variety of technical
reasons, and especially the development of containerized freight systems and supply-side
logistics, globally the costs of moving many types of cargo have fallen, but transportation costs,
both internal and external generally remain high for low-income countries.

It is also slowly becoming appreciated that air transportation has a particular role to play in the
long-term economic growth of developing countries. Air transportation offers the possibilities for
many lower income countries to exploit some of their comparative economic advantage in terms
of the production of what are often termed ‘exotic’ – generally tropical fruits and flowers that are
high-value but are also low-volume and low-weight. These require reliable, high-speed
movement to export markets. Good air transportation is also seen as a means for developing
tourist industries in many developing countries. It is also needed to move components and parts to
sustain many of the extractive industries that these countries often rely on for foreign exchange
earnings. Air transportation has the added advantage of not requiring large amounts of inflexible,
fixed track infrastructure that would often involve reliance on links through third party counties; a
particular problem for the land-locked countries of Africa and for movements across the South
American continent. The emergence of service driven activities has not entirely by-passed
developing countries and there is ample evidence that if this type of economic activity is to grow
further then adequate air transportation services are a necessary condition.

Two areas where air transportation has been playing an increasing role in lower income countries
are in the movement of perishable goods (generally ‘exotics’) and in the development of tourism.
It is estimated that about 15% of worldwide air cargo flows involve perishables and this is
growing at about 7.1% a year. From an economic development perspective, up to 80% of air
cargo exports from South America (e.g. 340,000 tons to the US and 150,000 tons to Europe in
2006) and African e.g. 310,000 tons Europe) are perishables with extremely short shelf lives.
From a logistics, overall supply-chain perspective this traffic requires specialized infrastructure
and an institutional setting that minimizes delays and ensures a smooth service flow. Appropriate
air transportation infrastructure is an element in this.

Regarding tourism, rising global incomes, increased leisure time, longer life expectancy, and
lower transportation costs are all contributing to its increase. Developing countries have benefited
from this with, according to UNCTAD estimates, them increasing their net earnings from $6
billion in 1980 to $62.2 billion in 1996 although in relative terms areas such as Africa (4.4% of
tourists in 2004) and South America (2.1%) are still relatively small markets. About 43% of
tourist arrivals came by air in 2004, and this was the main mode outside of Europe. A number of
lower incomes, and in particular smaller island economies, have made significant and successful
efforts to build up their tourists industries that not only can generate foreign income but also are
also often labor intensive. South Africa, for example, now has over 7 million tourists a year.
Nevertheless, the higher income countries tend to still enjoy by far the largest flow of tourists –
for example, 54.4% go to European destinations.

Despite these developments, the level of air transportation provision in less developed countries is
generally poor. Africa is a particular case. The continent accounts for less than 3% of the global
air market and the forecasts produced by Boeing Commercial Airlines (2006) suggest that with
the status quo, growth in passenger kilometers will continue to lag behind the global average to at
least 20256. While resource constraints are an issue, the fact there are 53 independent nations,
each with its own air traffic rights which many have traditionally chosen to exercise in a very
restrictive manner since the Chicago Convention of 1944, has hindered coordination. The market
is also very concentrated with some 65% of flight frequencies serving airport pairs in South
Africa – the wealthiest nation – and the remained between pairs in central and northern Africa.
Much of the traffic involves movements outside of the continent – e.g. in 2001 the majority of
cargo traffic was with Europe (65% of the tones carried) with only 7% being moved within
Africa.

Airport services in developing countries

The developing nations are not numerically short of airports. Many of the largest countries in
South America, for example have several thousand airports. The problem is that many of these
airports tend to be of extremely poor quality that can, at best, provide very rudimentary
commercial air transportation services. Many do not have concrete runways or recognizable
terminal buildings, and have no or very limited tower control or landing aids. Larger airports,
often the national hub for domestic services and international operations, vary in quality between
countries. Some are sophisticated modern pieces of infrastructure that can handle significant

6
The main growth markets are seen to be in Asia. The prediction for all aircraft purchases is that Africa
will account for some $40 billion of the $2.6 trillion forecast to be spent on a equipment over the period.
flows of tourist traffic, but many more are equipped with outdated and poorly maintained
equipment. Staffing can also pose problems. Activities such as tower control, and security and
safety oversight require trained staffs that are difficult to retain within a growing global market
for their services.

National ownership of air transportation infrastructure is still the norm in developing countries,
with a number larger countries having municipal or regional participation. In some countries there
is a tradition of a strong military presence. This tends to mean that facilities are not run on
commercial criteria but rather to meet wider objectives. In many cases airports provide a valuable
source of foreign revenue and are treated of something of a cash-cow for the exchequer, although
in others subsidies are need for their continued maintenance and operation. In some smaller,
frequently island economies; state provision is often justified because of the importance of
ensuring adequate facilities to allow air transportation to exist for tourism growth 7. The picture is
thus far from a uniform one.

The airports have in the past fitted within a value chain that was highly regulated throughout its
length, and often containing significant elements of state ownership. The deregulation and
privatization of airlines that has been spreading since the late 1970s have impacted on the
economics of airports and air traffic control. The need for airlines to act more commercially has
put increasing pressure on other elements in the chain to do the same – it is more difficult now for
airports to cream revenues from carriers that are not monopolies nor generally state owned.
Airlines can also exercise voice through a variety of channels and organizations expressing
concerns over the performance of air transportation infrastructure providers. This is as true in
developing as developed countries. Equally, the success of privatization of airports, and other
forms of infrastructure, elsewhere makes it difficult for developing countries, or at least those that
are open democracies, to maintain arguments that state ownership is preferable. The move
towards more private sector participation is, nevertheless a slow one8.

Wider international institutional settings

The Chicago Convention of 1944 established the foundation for the modern, global institutional

7
Airport facilities are often partly financed in these cases through hotel or tourist taxes with the complete
packages of tourist activities being treated as a composite ‘product’.
8
Kapur (1995) provides a picture of where we were in the mid-1990s.
structure under which international air services are provided. Although not a direct outcome of
the Convention, the result was some 40 years or more of regulated, bilateral air transportation
markets. The incentive structure under this regime was a little like 16 th century mercantilism with
countries trying to establish a strong transportation industry to reap the benefits of trade in air
services in duopoly markets; airport strategies being part of the game. The fact that the demand
for air services is derived from the benefits of person and goods seldom entered the equation. The
Open Skies initiatives of the US that can be traced back to 1979, but only really became
important about 15 years later, and the creation of the Single European market, moved developed
countries away from this approach.

The world has also changed with regard to the attitudes of some developing states and
institutionally there have been efforts, for instance, amongst some African nations to liberalize
their mutual air transportation markets. The 1988 Yamoussoukro Declaration began this process
but was largely ineffectual. In 1997 the Banjul Accord, involving six West African states,
initiated agreements covering airline operations, infrastructure, traffic rights, safety and security
and in 1998 Arab Civil Aviation Commission agreed to the total liberalization of bilateral air
service agreements by 2005 (17 ‘open skies’ agreements between ACAC states had been signed
by May 2006), and there have been a number of subsequent agreements to open the internal,
international air transportation markets in Africa; e.g. the 1999 Yamoussoukro II Decision and
the 2000 Abuja Treaty that created the African Union involving 44 member states that has,
amongst its aims, the creation of a multilateral free trade area in air transportation services.

Taking a wider geographical perspective many developing countries have signed liberal Open
Skies policies with the US and less restrictive agreements with other developed nations.
Implicitly if they are to benefit from these developments enhanced airport and air navigation
services will be needed.

Externally, there have also been move to both directly help lower income countries improve their
air transportation services and to bring many of them into line with developments elsewhere. The
US, for example, initiated the Safe Skies for Africa Program in 1998 to help improve the
extremely poor safety record of aviation in that continent, and has fostered Open Skies
agreements with many states to allow freer movement of air traffic between them and the US.
The international agencies have also gradually been recognizing the important role that air
transportation can play in economic development. The World Bank, for example, gives limited
funding to help some countries meet international security commitments – e.g., in 2006 two International
Development Association credits and two grants for a combined total of $33.57 million Burkina Faso,
Cameroon, Guinea and Mali for this purpose.

AIRPORT POLICIES

Traditional Approach

Traditionally, airports, airlines, and air navigation services were seen as an integrated system that
served a public interest. There was from the outset heavy government involvement is all three
aspects of air transportation although its degree and nature varied quite considerably between
countries. Airports and air navigation services, however, were generally viewed as public utilities
that should not, for welfare economic reasons, be evaluated only on their financial performance 9.
There were also monopoly considerations that raised questions concerning their potential pricing
and assess policies if they were allowed to operate freely in a market context. Policies were also
colored by perceptions of the technical nature of airports. Airports were also seen as single
entities rather than as composites made up of numerous activities each of which may or may not
be naturally monopolistic or serve a public utility function.

Airports in developing countries have, following the pattern elsewhere, been state, or more
unusually, municipally owned. They have usually been run through a ministry and partially
financed through the exchequer whenever fees and taxes failed to cover costs. The rationale for
this has been the need to finance the necessary infrastructure, or at least the initial investment,
through taxation and, on occasions, money from international agencies. There are also concerns
about the potential monopoly power of airports and how this may impede economic development;
in most developing countries there is limited competition between commercial airports for traffic
and the overall capacity of systems is not large enough. A similar pattern emerges with regard to
air navigation services with state owned and operated systems being the tradition.

The regulatory changes in transportation that began in the UK with the freeing up of the trucking
market under the 1968 Transport Act, and followed, somewhat belatedly, a decade or so later by

9
Kahn (1988) provides an overview of the traditional public policy approach to supplying public utilities,
while Train (1991) offers a more modern account of contemporary theory.
reforms to the domestic air transportation market in the US have been relatively slow to permeate
infrastructure even in developed countries, either in terms of how it if provided or operated 10.
Nevertheless, in the UK in particular, programs of privatization were initiated and gradually
airports, along with other elements of infrastructure such as seaports and air traffic control have
seen increasingly involvement of the private sector. From 1989, the demise of the Soviet Bloc
economies led to a dramatic acceleration in privatization and the withdrawal of large-scale
government involvement from microeconomic affairs.

The changes in the developing countries, with the notably exception of some transition nations in
Europe where a ‘Big Bang” approach was favored in a number of cases, have generally come
more slowly. It has taken time for the demonstration effects to work their way through the
system, and the institutional structures in most developing countries tend to move slowly because
of a lack of efficient governance. Changes in regulatory regimes are also not costless, and
especially given prevailing uncertainties about the details of the ultimate effects, many
developing countries have been unwilling to take-on the possibility of having to contend with
significant stranded costs in situations of large budget deficits and high unemployment11.

Constraints on reform in developing countries

Reforming the way that air transportation infrastructure is thought about and supplied has been
problematic in developed countries and the inherent challenges are even greater in most lower
income nations. Intellectually, there are confusions over such things as the economic nature of
airports and air navigation services – e.g. the degree to which they exhibit public good attributes.
Practically there has often been a large degree of capture in decision-making regarding their
provision involving powerful labor groups such as air traffic controllers and airport management
and frequently the military in developing countries 12. Such things take time to remedy even where
there is good governance and where resources are sufficiently abundant to withstand any

10
Evidence pertaining to the benefits of US Open Skies Policies versus improved air transportation
infrastructure and management indicate the latter generates greater cost savings (Micco and Serebrisky,
2004)
11
Much of the work on regulation tends to focus on comparative statics – comparing the before and after
equilibrium states – rather less analysis has been done on paths of reform and the overall costs of regime
change. Tye (2005) offers a review of transition issues.
12
The literature on regulatory capture is assessed in Stiglitz (1998) and it is clear that many of the
conditions leading to capture exist in most developing countries that have sought to reform their airport
policies.
stranded-costs associated with change. The situation in poorer countries makes reform, even if the
gains are potentially larger, even harder.

Resources availability.
One of the few cases where Adam Smith advocated public provision was that of large scale
infrastructure, and in particular transportation infrastructure which he saw as prerequisite for
economic growth. His rationale was essentially an institutional one; private finance markets were
neither larger enough nor sophisticated enough to handle the scale and the long payback period
associated with such investments. Ironically, in most developed countries, the modern world sees
governments increasingly going to the private financial markets to fund large-scale investments,
either in their entirety or in some form of partnership because they do not have the ability to raise
the necessary capital. Smith’s argument, however, may still have some validity regarding lower
income nations where capital markets are poorly developed, risk is high, and access to
international funds can be very expensive.

While there has been no work done looking at the direct correlation between the income of
countries and their access to funds for airport development, there is some evidence of the
difficulty that many countries are facing with meeting the related topic of air transportation safety
oversight, a large part of which is tied to airport activities. Button et al (2004), in examining the
compliance with the US International Civil Aviation Safety Assessment13 program, found a
strong link between the economic performance of a country14 and its ability to meet the
requirements of the program.

This lack of resources often means that commercial airports in developing countries are of poor
quality and in need of significant injections of capital. This is in stark contrast to most of the
cases of privatization in developed countries that have involved well-equipped, modern facilities
with demonstrable high levels of demand. This lack of quality in the ‘product’ to be privatized
and the need for any investor to take high levels of both commercial and political risk inevitably

13
This program essentially seeks to see if countries are complying with safety requirements set down by
the UN’s International Civil Aviation Organization with the intention of both facilitating movement
towards meeting these requirements but also limiting access to US airports and airspace when there are
significant deviations from the requirements.
14
Because of multi-collinearity issues amongst a large number of right-hand variables, principle
components analysis was used to isolate effects. The largest loadings were on a group embracing GDP,
imports, and exports.
pushes up the costs of any privatization and influences the subsequent regulatory structure that is
put in place.

Sources of non-private finance also have problems associated with them as vehicles to assist
privatizations. The multilateral aid and development agencies, although not certainly being
entirely absence from the scene, have historically contributed relatively little in terms of grants
and loans to the provision of air transportation infrastructure in developing countries – in the
transportation context, roads, railways, and ports have been the dominant concern. They have not,
therefore, developed the same level of experience in this sector in areas such as public private
partnerships although this is changing somewhat.

Governance.
Markets do not work in a vacuum; they are in a way contextual. As Ronald Coase (1992) pointed
out when looking at the particular context of the European transition countries, “These ex-
communist countries are advised to move to a market economy, and their leaders wish to do so,
but without the appropriate institutions no market economy of any significance is possible.” An
appropriate form of institutional structure is thus important as an enabling environment for
economic reforms.

Appropriate institutions that can offer the combinations of a reasonable degree of security over
property rights to private suppliers and a high level of integrity among government agencies
responsible for air transportation infrastructure policy are a normal prerequisite for successful
privatization. ‘Political risk’ is a major consideration when it comes to larger matters of economic
development but has particular relevance at the micro level for the private sector when making
investment decisions15.

In the past there has often been political instability in many developing countries, not only in
terms of coups d’etat but also involving appropriation of foreign assets be existing governments.
This has acted to deter both local private sector investment and the movement in of foreign
capital. It has reduced the absolute willingness for investors to directly put money in such
countries’ infrastructure and increased the costs for those doing so. The latter is largely because
of the need to obtain political risk insurance. The latter can be obtained from institutions such as

15
The literature on political risk and its implications for economic development is fairly extensive, see
Barro (1991) and Alesina et al (1996).
the Multilateral Investment Guarantee Bank (a World Bank affiliate) to cover contingencies
involving war, civil disturbance, and breach of contract but the cost, although possibly as low as
0.3% can be up to 1.5% and is limited to 90% of equity investment and 95% of principle debt up
to $200 million. Countries such as India and Peru, to facilitate joint public-private ventures in
airport privatization, have drawn upon this type of insurance facility. Even where there is current
political stability, the durable nature and long-term cost recovery nature of airport infrastructure
requires this to be demonstrably sustainable.

There is inevitably felt to be a need to regulate airports, most notably where they enjoy a degree
of monopoly power. In some cases this regulation may be seen as purely short-term to deal with
transition issues and can be phased out as competitive forces are allowed to build up 16 but in other
cases they may be needed for longer periods.

Social Attitudes
Any form of regime change, including that involving airports, has inevitable distributional
consequences, even those involving a Pareto improvement17. Air transportation in most
developing countries – those with a significant tourist industry being a possible exception – has
tended to be seen as some elite form of mobility outside of the reach of the vast majority of the
population. In democratic states it seems unlikely a candidate would gain many votes arguing for
improvements in airport efficiency – not only are there far more important concerns, but
efficiency may, in the case of an overstaffed airport, mean, whatever the ultimate outcomes are,
higher levels of unemployment in the short-term. In this sense they seldom create a large coalition
of interests concerned about the efficient provision of airport facilities – indeed often the
opposite. This gives an opportunity for capture of the airport system by those most closely
involved in its operation and whose interests seldom involve maximizing allocactive or X-
efficiency.

These types of situation differ to those that now pertain in many developed economies in Europe
and North America where low cost airlines have brought regular air travel within the reach of a
large proportion of the population and where there is thus a much larger constituency interested in

16
The quite widely used price-capping method of regulating airport pricing was initially seen as such an
interim measure to the limited short-term monopoly power of incumbent suppliers in the UK
telecommunications industry (Littlechild, 1983)
17
Birdsall and Nellis (2002) provide a survey of much of the generic literature on the topic.
optimizing airport service provision. The structure of coalitions of stakeholders and their interests
are different.

Military interest.
Many developing nations have powerful militaries and these often see air transportation
infrastructure as part of their domain. For example, before the move to involve the private sector,
the Comando de Regiones Aéreas (part of the air force) owned, administered, and operated 400
airports in Argentina. The Brazilian airport administration, Infraero, although not technically part
of the military, had managers from the Brazilian Air Force until 1998. Indeed, in very many cases
airports and associated infrastructure serve a dual civilian/military use that makes it difficult to
isolate property rights and the determination of priorities18.

While military involvement is gradually being reduced and is, in that sense, less of an
impediment to privatization and liberalization, there are important legacy effects that can
continue to slow the process. In particular, there is a shortage of commercial management skills
in many developing countries with former military controlled airports that have experience of
operating airports on a traditional public utility basis, let alone a commercial basis. This often
signals the need for public-private ventures that allow for the introduction of foreign management
expertise. Indeed, as a more general point, the use of concessions that bring in foreign participants
can provide a mechanism for partially solving this type of problem and may help explain why
developing countries use them in preference to issuing equity19. Much of the equipment and
facilities may also not be fully suited to commercial operations and capital refurbishment needs
can make attracting non-specialist private investors difficult.

Airport finances and the nature of air transportation growth

Airports can generate revenues through a variety of market mechanisms but which are available
differ according to a number of factors, and in many cases developing countries cannot pursue to
the same extent the range of the options open to private or more commercial driven state owned
airports in wealthier nations. This is largely a function of their position in the life-cycle of air
transportation market growth.

18
Indeed, even in European and North American countries the dividing lines between the military
involvement with airports and air traffic control is often one that poses major problems (Button and
McDougall, 2006).
19
For example, Aèroport de Paris, that has an interest in a number of Cameroon’s airports, moved a
team of 10 experts to the country in 1993 to help run them.
Despite the wide diversity in the countries that are seen as developing, and also the variations in
the nature and quality of their airports, there are also some general patterns that separate them
from the majority of developed countries. While the air transportation markets in the latter are
seen as approaching their saturation level, those involving less developed countries, and notably
those in Asia and South America, are seen as having considerable growth potential. This,
combined with the nature of the traffic they carry suggests somewhat different models are
appropriate for their airports in the future. Figure 1 offers a fairly simply representation of what
seems to be going on.

Traffic
Growth
Simple Developing countries
economic Š Increased capacity of the airport system
regulation Š Large share of revenues from airside charges

Developed countries
Š Maximum revenue base with limited passneger growth
Š Large share of revenues from commercial services

Complex
economic
regulation

Share of Commercial Revenues

Source: adopted from Juan (1995)

FIGURE 1. A generalization of airport trends in developing and developed countries

The forecasts of relatively slow longer-term growth in air traffic in and between the developed
countries (e.g. estimated at about 3.6% a year to 2005 within North America, 3.4% within
Europe, and 4.5% between North America and Europe by Boeing Commercial Airplane) means
that their major airports will increasingly become dependent on commercial or non-aeronautical
revenues to enhance their revenue stream20. This in turn can pose problems in terms of regulation
as has, for instance, already been seen in the debates over the imposition of the price-capping

20
Additionally, there are capacity issues in many developed markets that are unlikely, for a variety of
reasons, including environmental concerns, to be resolved through the provision of additional facilities.
regime used in the UK21. While still relatively small, the protected growth of many air markets
involving developing countries (e.g. 6.9% within Latin America, 8.8% between Latin America
and the Asia-Pacific region, and 8.7% between Latin America and Africa) offers the potential for
increased airside revenue in situations where there are potentially fewer social constraints on
building additional capacity or where there is already adequate capacity. The scope for raising
significant commercial income is mush less. It also suggests that the regulatory regime overseeing
a privatized airport system needs to be less sophisticated because it only has to deal with airside
issues. The potential for various forms of regulatory capture, a phenomenon not unknown in
many developing countries, is thus less.

The problem for many of the poorest developing countries, however, is that even though their
traffic flows may in aggregate be growing, they still seldom generate sufficient revenue to cover
the full costs of operations – airports are essentially decreasing cost entities where cost recovery
can be difficult especially in a situation where there is competition from other airports (Button,
2005). This makes pure privatization options less tenable and the need for outside assistance from
aid agencies more relevant22.

Nature of change

While large scale economic reforms generally attract the most attention – such as the privatization
and price-capping regimes initiated at the major airports (notably the BAA grouping) and the air
navigation service (NATS) in the UK many reforms are much smaller and affect particular
activities rather than an entire entity – outsourcing being the clearest example 23. While there is a
multiplicity of ways in which reforms can take place, there have emerged almost regionally
specific approaches to reform in developing countries. In part this stems from the starting points
of the various countries concerned but also has been affected by their wider approaches to
economic reform and their overall political, social, and economic proclivities. The problem with

21
The particular issue is whether the cap should be applied to the entire set of activities of the BAA (the
‘one-till approach’ or whether airside activities should be separated out and be regulated (the ‘two-till
approach’). For details see, Starkie (2001).
22
The International Air Transport Associated (IATA) has also argued that in some cases – e.g.
Uruguay’s move to a concession system for international airport of Laguna del Sauce in 1996 –
privatization has lead to dramatically higher user fees for airlines with potential adverse effects for traffic.
IATA did not offer any alternative methods to finance the facility other than existing subsidies.
23
A particular feature of the Australian reforms has been the letting of long-term leasing – normally 50
years with an option for another 49 – for the management of domestic terminals mainly to airlines in a
way akin to that found at some US airports (Forsyth, 2003).
assessing them globally is that, for a variety of reasons, most of the analysis to-date has been
focused on developments in Latin America. There is limited analysis of the cases in Africa and
potentially major reforms put forwards in India and several other Asian counties have taken time
to come to fruition.

Certainly the approach favored in Europe of using the equity market as the medium for
privatization is far from the norm in developing countries. The limitations of local stock markets
are the most obvious reasons for this. In addition, it also seems to stem from differences in the
motivation for privatization. Most actions in Europe, Australia, New Zealand, etc. have focused
on efficiency enhancement. In some cases, such as the policies of the Thatcher government in the
UK, these were entwined with notions such as the benefits of a share-owning democracy’ that
would, by allowing a wide dispersion of equity holdings, afford a larger proportion of the
population a say in how major assets are managed. Low-income countries, although not entirely
unconcerned with efficiency, have been more interested in privatization as a vehicle for financing
investment and, in some cases through concessions, as a mechanism for generating an on-going
revenue flow for the exchequer. There interest has, if anything, been heightened as the need to
meet new and enhanced international safety and security arrangements have emerged in recent
years.

In South American, for example, perhaps because of an inherent need to retain national
ownership and fairly well established regimes in many countries for imposing and operating
regulations, concessions are the usual way to involve the private sector in airports Table 124.
These concessions take a variety of forms that involve different ways of sharing commercial risk,
the length of the concession, and the nature of regulation over the behavior of the private concern.
The extent of airport concessions in 2003 is depicted in Table 1, although it should be noted that

24
There are many variations on the concessions theme but the underlying idea is that efficiency is
produced where there is no natural competitive pressure through the creation of mechanisms that
generate competition ‘for the market’ rather than ‘competition in the market’. The idea is that
undertakings tender for a limited duration monopoly with the tendering process designed to reveal the
supplier that would act most efficiency with all economic rent going to the government (Demsetz, 1968).
In practice, setting up the tendering process is not easy and designing appropriate auctioning
mechanisms has proved both theoretically and practically difficult. In the context of some experiments
that have taken place in countries such as Argentina, it soon became clear that the outcome of the tending
produced an unrealistic outcome suggesting that all parties involved saw the tendering process as the first
stage in a larger set of bargains – neither expecting the concessions arrangement to be durable. Button
(2007) provides an overview of the types of challenges that are encountered in the context of landing-slot
auctions, but they extend to airport concessions.
not all of the anticipated concessions have materialized, and some of the actual ones have
encountered trouble.

TABLE 1
Airport Concessions in South America in 2003

Country Concessions Planned concessions

Argentina 32 1
Bolivia 3 -
Brazil - 2
Colombia 3 1
Ecuador - 2
Paraguay - 2
Peru 1 1
Uruguay 1 1
Venezuela 1 1

Continuing with Latin America, there has been a widespread trend to use systems concessions as
means of privatization and this includes airports. The trend was initiated in Argentina in 1998
when it gave a 30-year concession, with a possible 10 extension, to a single consortium,
Aeropuertos Argentinia 2000 that includes the right to run 32 of its main airports25. A
commitment to major investments in the system and an annual, inflation adjust payment to the
government was required to attain the concession. Economic regulation of airside charges was
established to be overseen by a specific agency 26, but other revenue raising activities were left
outside of the regime. One practical problem has been that the form of concession has left the
Aeropuertos Argentinia 2000 with a large annual payment ($171.121 million in 1998 prices and up-
dated periodically for inflation) that has proved difficult to meet at approved fee levels and demand
if associated investment requirements are to carried out (Bosch and García-Montalvo, 2003;
Lipovish, 2007).

Similar concessions have been granted in Bolivia and Peru. In the former, three airports have
been privatized under 25-year concessions to the Servicios Aeroportuaroos Bolivianos S.A. with a
regulatory agency, the Superintendencia de Transportes having the responsibility of overseeing
fares and service quality. It also has a responsibility of guaranteeing competition in the industry

25
Some other airports outside of the main Sistema National de Aeropuertos were also concessioned out
to another group, London Supply.
26
The Organismo Regulador del Sistema Nacional de Aeropuertos is within the Department of Economy
and Infrastructure and has the remit to set airside fees and charges, approve development plans and
oversee the quality of service provided by the airports.
that also includes 34 state owned airports managed by the Administración de Aeropuertos y
Servicios Auxiliares a la Navegación Aérea. In 2001, Lima Airport Partners, SRL, a consortium
of Bechtel Enterprises International, Ltd., Flughafen Frankfurt Main AG, and Cosapi S.A.
obtained a 30-year concession contract to develop, manage, and operate the Jorge Chavez
International Airport. Over the concession period Lima Airport Partners plans to finance and
build a second runway and a new terminal complex, expand the commercial and retail strategy,
and develop new air cargo facilities to support development of other export activities. Under the
terms of the agreement, Lima Airport Partners will share revenues with the government and will
reimburse the government for its costs in the privatization process.

A narrower, build operate transfer option provides a more limited approach to concessions than
that adopted in Argentina in that it is often limited to only part of a facilities capacity 27. These are
essentially long-term concessions for private companies to build new capacity or significantly up-
grade existing capacity in return for them having control over its operations for a defined period.
Colombia used this method in the mid-1990s to finance the construction of additional runway
capacity at El Dorado Airport in Bogotá with the construction companies recouping their costs
from landing fees initially over a 20-year period, subsequently amended to 15 years in 1998 when
the administration of the airport changed. The country has also sought to extend this policy with
variation to embrace Cartagena and Cali airports28.

In some countries, such as Venezuela, the responsibility for airports has been transferred from
central to state governments and it has been the latter that have then engaged in trying to bring in
private finance. The initial Venezuelan experiments began in 1992 when three airports in Zulia
state were privatized but then subsequently taken back by the governor after a change in the state
government. More recently the Instituto Autónomo Aeropuerto Internacional Maiquetia, a semi-
corporatized agency has operated Simon Bolivar Airport in Caracas with the intention of ultimate
concessioning to an international consortium so that it may be up-graded.

27
A variant on the approach is that adopted in Jamaica with respect to Sangster International Airport at
Montego Bay that entailed a series of arrangements including a 49-year leasing agreement for the
existing terminal.
28
The government’s willingness to guarantee the revenue flow made this an attractive commercial
proposition for a private company, but similar initiatives involving Cali airport encountered problems
when such guarantees were not made. The method of guarantee for El Dorado involved the regulating
agency, the Columbia Civil Aeronautics Department, establishing a trust fund equivalent to 30% of
annual landing fee revenue to cover the guaranteed revenue flow.
The approaches adopted by African states to privatization and regulatory changes have been very
varied. There has often been more talk than action. Concessions akin to outsourcing have been
pursued by some countries whereby parts of an airport’s activities are given over to the private
sector. The Cameroon, for example, created the Aéroports du Cameroon as a company to operate
7 of its airports, including the new international facility at Yaoundé, for 15 years. The Aèroport
de Paris has a significant share holding in the company in conjunction with the Cameroon,
airlines, and banking interests. Regulatory requirements allow the company to vary charges but
only after consultation processes

EFFECTS OF REGULATORY REFORMS

The analysis of the implications of deregulation and privatization involving air transportation, and
particularly those involving airlines, has created its own mini-industry. Considerably less work,
however, has been done on airports and air navigation services29, especially in developing
countries. The more recent nature of such changes and the paucity of reliable data are perhaps the
main explanations for this. There are also, however, challenges in trying to define appropriate
counterfactuals. Those looking at the US domestic airline market have been particularly lucky in
having on-going federal time series data collection and an explicit formula used in the days of
regulation that can be used as a reference point; such data are not collected in most other
countries.

Even where there has been work of a quite sophisticated nature on airport reforms in high-income
countries the analysis has tended to be only partial. In particular, it has largely focused on the
impacts on the airport or airport system immediately affected rather than on the impact across the
entire airport network. For example, the privatization and price-capping regime adopted for BAA
in the UK has clear trade diversion effects (e.g. affecting major Continental European airports) as
well as trade creation effects for the UK, but the latter have been the focus of attention. Airports
are part of a network, as are airlines, but much of the analysis tends to treat them as stand-alone
entities.

29
There are a growing numbers of studies looking at privatization and regime changes involving airports
in developed countries. These include a literature on the BAA privatization and subsequent regulation in
the UK (Parker, 1995; Starkie, 2001; Holvad and Graham, 2003), assessing changes in Europe (Vogel,
2006; Pels et al, 2003), and comparing the efficiency of ownership regimes across European and North
American airports (Vasigh and Harrian (2003).
One reason that it has been possible to quantitatively examine the impacts of regulatory reform
over recent years in the developed countries has been the number of important methodological
advances, both in econometrics – e.g., making it easier to estimate total productivity measures –
and in programming – most notably the development of data envelopment analysis (DEA) – that
allow changes in economic efficiency to be more carefully assessed. These techniques have been
employed in a variety of airport studies in higher income countries and permitted more systematic
quantification of effects of institutional change30. There use in assessing the outcomes of reforms
in developing countries has been far more limited. Data limitations, including useful statistics on
pre-reform trends, and the recent nature of many regulatory changes in developing countries,
however, have curtained their usefulness in this context. Nevertheless, a number of studies, not all
including strict quantitative assessments, that embrace ex-post analysis of reforms have been
completed and some of these are listed in Table 2. Most relate to Latin America.

TABLE 2
Studies of institutional changes involving airports in less developed countries

Study Case Topic Findings

Juan (1995) Ten case studies. Institutional comparison

Privatization is more
of approaches being efficient that
adopted to privatization corporatization; the
including six lower need for different
income countries. approaches to
profitable and
unprofitable airports;
the specification of
concession contracts
needs to be carefully
thought through.

US General Assessment of Looking for lessons for Limited evidence

Accounting Office privatization of airports US privatization. regarding
(1996) in 50 countries including performance although
developing nations. privatized facilities
generated more
revenue.

Serebrisky and Presso

Argentinian airport Considered the vertical Vertical integration
(2002)
privatization. integration between can lead to market
airport and airline in a distortions of there
concession arrangement. are not appropriate

30
Transportation Research Series E, Logistics and Transportation Review, Volume 33, Number 4
provides a special issue on this topic.
 regulations to control
monopoly powers.

Hooper (2002) Asian airport

Financial aspects of There is a need for
privatization. an appropriate set of
privatization.
controls to be
established before
airports are
privatized.

Bosch and García-

Airport privatization in Review of issues of The problems of
Montalvo (2003)
Latin America. non- discriminatory Latin American
access to airports using airports are ultimately
secondary sources. similar to many of
those being
encountered in the
European Union.

Hanaoka and Phomma

Partially privatized Comparison of fully No clear-cut
(2004)
airports in Thailand. state owned and difference in
partially privatized productivity due to
airports. ownership.

Pacheco et al (2006) Brazilian privatization. Used DEA to look at

The performance of
efficiency of managerial Ifraero improved as it
changes in the lead-up prepared for
to privatization. privatization.

Lipovich (2007) Argentinian airport

Concession issues. Difficulties emerged
privatization.
in the concession
allocation process
that led to an
unrealistic financial
structure.

Low and Tang (2007) Asian airport

Degree of factor Outsourcing has
outsourcing. substitution as allowed airports to
outsourcing takes place. become more
adaptive to price
changes.

It is not altogether clear what one can conclude from these studies. Despite quite valiant efforts,
data limitations and the short time span over which the experiences were assessed reduced the
ability of most to produce anything but tentative results. What does perhaps come though is that
there is a learning process taking place, but that many of the dire consequences sometimes
predicted by opponents of change have not materialized. It seems that many of the difficulties
being encountered are similar to those found in the developed countries pursuing privatization
strategies.
It is also clear that the regulatory and institutional environment in which reforms take place and
subsequent changes to these environments affect the outcomes of privatization initiatives. The
ability to take the provision of airport services completely away from the political arena seems a
particularly challenging issue. Additionally, the studies largely relate to concessions rather than
full privatizations and the common motivation for adopting this approach, a concern on the part
of government to retain ultimate ownership, reflects an underlying political philosophy that does
not pertain to many of the privatizations that to-date have taken place in developed counties.

AIR NAVIGATION SERVICE ISSUES

Linked to the explicit reforms taking place regarding airports in developing countries are those
involving air navigation services providers. Globally, there has been a discernable, if limited,
trend using a range of approaches to increase private sector involvement in the provision of these
services. In some cases, as with the UK and more recently Germany, this has involved public-
private partnerships but more commonly the approach is to adopt measures to corporatized them
as not-for profit undertakings as, for example, in the cases of Australia, Canada, and New
Zealand31. These corporatized entities are take a variety of forms, often depending on the
experiences of countries to similar structures in other sectors.

While air navigation services are often treated separately to airports in their supply and
regulation, in some developing countries such as Brazil and Colombia there are overlaps in
funding and regulatory structures. Lack of adequate or compatible air navigation services pose
problems for many developing countries, not only in terms of domestic flights but also regarding
international services that frequently cannot take the most direct routes. It is also a major
contributor to the poor safety record of some countries, particularly some of those in Africa.
Additionally, some elements of air traffic control, and in particular tower control, are directly tied
to the operations of airports.

Most developing countries, however, still have state provided air navigation services, but there
are some exceptions. South Africa, for example, corporatized its system as a not-for-profit limited

31
Corporatization, because it allows access to private finance markets, is often seen as a vehicle for
ensuring adequacy of investment flows, a means of imposing financial discipline on managment, and as
a way of distancing the service providers from political interference.
liability company – Air Traffic and Navigation Services Ltd. – in 1993 with its rates regulated by
a Ministry of Transport regulatory committee. The evidence from for the period 1997 to 2004 is
the cost per instrument flight rules movement associated with Air Traffic and Navigation Services
is very much in line with 10 other providers from around the world, with a safety pattern on a par
as well (Button and McDougall, 2006). This should be taken in the context of a country that was
rapidly expanding its air transportation facilities after many years of de facto isolation from much
of the world.

CONCLUSIONS

As in the developed countries there have been moves to liberalize the institutional environment in
which airport services are delivered in developing economies. The motivations are, however,
often slightly different and the methods used generally fall short of measures such as full
privatization. As might be expected, individual countries vary in the nuances of their reforms and
such things as broader matters of regulatory philosophy; the physical and economic state of their
air transportation infrastructure, and the quality of governance in the country can also influence
their exact nature. Unlike most privatizations and regulatory reforms in developed countries,
equity markets have not been widely used but rather outsourcing and concessions have been the
norm.

There is relatively little formal analysis of the changing institutional structures of airports in
developing countries let alone a substantive body of work assessing the implications of these
changes. This makes it difficult to generalize and point to draw any hard conclusions other than
that the process has proved a problematic one in many countries. Most of the countries where
there have been significant efforts at reform, rather than an outflow of rhetoric, have been in Latin
America that are generally not the poorest in the world. They have also been in countries that
have relatively sophisticated financial systems, have taken measures of privatization and
liberalization in other sectors, and have, compared to many other parts of the world, relatively
stable political structures. They also often have large air transportation networks that transcend
their national borders. The experiences of South America may well, therefore, not carry through
to other parts of the world where conditions are different.
ACKNOWLEDGEMENT

I would like to thank Henry Vega for providing assistance in the preparation of this paper.

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