The privatisation of airports has had negative consequences for regional airports and smaller carriers - something even the former transport minister responsible for their privatisation, the Nationals' John Sharp, recently acknowledged.
Now, as a Director of REX Airlines, Sharp is seeing airport privatisation from another perspective. Sharp's concerns come on the heels of Qantas CEO Alan Joyce's complaints that excessive aeronautical charges at Canberra Airport make it virtually impossible for carriers to offer discounted fares or for low-cost carriers to operate there. But what did Sharp and his colleagues expect when his government sold a monopoly to the private sector?
We have known about the dangers of monopolies since the 18th century, when economist Adam Smith warned about the need for government to regulate monopolies. We now know that typically monopolies make high profits, underinvest and treat customers badly. Surely Sharp's department advised their minister about the potential pitfalls of privatising a monopoly, especially when simultaneously reducing the level of public regulation? And perhaps they also warned that 99-year leases for the new owners might actually limit any government's capacity to fine-tune the privatisation arrangements for generations.
The former "owner" of airports, the Federal Airports Corporation, operated within a strong regulatory regime. it returned profits to the government, through both tax revenues and dividends to its government owners. In 1997 alone, the FAC paid $82 million just in taxes.
At the time of divestment, the government removed some of the regulatory controls which had applied to public airport operations by passing the Airports Amendment Act 1992. Wilson Tuckey, the then-minister for regional services, territories and local government, argued that this would remove unnecessary restrictions on the operation of general aviation and increase the scope for investment in airport operator companies. He neglected to add that there was a greater potential for airports to capitalise on their monopolies.
The arguments for airport privatisation were based around increased efficiency in aviation services, claiming that private owners would reduce costs and increase competitiveness. It would also enable government to avoid the large capital investments required by airports, making more resources available for other public programs.
John Howard made it clear that the decision was also political, arguing that it was better for private organisations to run airports, with governments regulating safety and air-traffic control. Channelling Thatcher and Reagan, he claimed that governments just got in the way of business and asserted that "the experience all around the world has been that privatised airports get run better". This claim had little support in fact.
Since privatisation, airports haves come under considerable criticism, in terms of both financial performance and service quality. There has been an erosion of the income-tax and dividend streams of government revenue, as few of the big airports made profits in the first decade after privatisation, despite increased airport activity. However, they did make substantial returns to investors through dividends. For example, Sydney Airport reported operating losses in the first decade since privatisation, though in the same period it chose to pay $798 million in dividends to its new owners.
During this time, aeronautical revenues grew by 158% while passenger numbers grew at 59%, and aircraft movements by 28%. Cash received from customers increased by a factor of about two and a half, representing a combination of increased charges per passenger and aircraft movements, as well as increased rents for retail outlets and car parking.
Concerns about service quality have since been raised by independent bodies such as the ACCC and the Productivity Commission. In one report, the ACCC concluded that Sydney Airport had increased profits by "allowing service quality to fall below that which could be expected in a competitive environment". The quality of service provided to airlines since privatisation has remained less than satisfactory on average, while over the same period the airport's average prices and profitability for those services have continued to increase.
The ACCC reported that airports were exploiting their capacity to extract monopoly rents. Among the loudest complaints about airports has been the cost of parking since privatisation, fuelling accusations of price-gouging. On average, 11 per cent of airports' revenue has been from parking, with Melbourne topping the list at 21 per cent.
The private sector should not be presumed or required to act in the public interest, as their primary accountability is to their shareholders. However, government intervention is required when private bodies fail to meet appropriate service standards, especially when they provide important services to the public. Unlike them, public enterprises are required to place public-interest protection as a key goal. We can speculate that the Wheat Board scandal or the Commonwealth Bank behaviours may have been less damaging had ownership been retained in the public sector, and/or had those involved been subject to stronger regulation.
In current discussions about possible privatisation of visa processing, the public is entitled to ask how the public interest can be protected by requiring government to provide a full outline of the proposed regulatory regime. The public also needs details of oversight protections that ensure Parliament has the capacity to interrogate the performance of the private providers of significant services to the public, and intervene should performance fall below agreed standards.
Visa processing is currently a public monopoly, and we must approach this, and similar privatisations, in a clear-eyed manner to avoid the kind of belated responses that John Sharp is now making about privatised airports.
- Dr Chris Aulich is an adjunct professor at the University of Canberra and an Honorary Fellow at the Institute for Governance & Policy Analysis.