Privatization

Story from Bloomberg.com:

Jan. 5 (Bloomberg) -- Now that we're all comfortable selling the streets, how about getting rid of the airports? That looks like the next question the nation's states, municipalities and public-policy makers will have to consider, with the inevitable billions of dollars at stake. There's too much money chasing too few deals, just like they say about the hedge-fund business, and that's good news for municipalities and taxpayers. The bad news is that the federal government's involvement in U.S. airports complicates things considerably.

Pennsylvania turned heads last month when it said it received 48 expressions of interest in its 537-mile (864- kilometer) turnpike from a variety of firms. They included Wall Street banks such as Bear Stearns Cos., Goldman Sachs Group Inc. and Merrill Lynch & Co., as well as the more usual suspects like Australia's Macquarie Infrastructure Group. It turns out that investors are desperate to put their money into U.S. infrastructure. Who knew?

``As much as $100 billion is waiting to be invested in public assets that produce their own revenue stream from tolls or fees,'' says Governing magazine in its current issue, nicely summing up the situation in an article titled ``Unloading Assets.''

Pros and Cons

There have been three major transactions so far where private operators have leased U.S. toll roads: the Chicago Skyway, the Indiana Toll Road and the Pocahontas Parkway in Virginia. Now the people who favor such things are wondering how long it will be before the cry goes up: Sell the airports!

It turns out that a lot of people are thinking the same thing, and have been for a while. When I typed ``U.S. airport privatization'' into the Google search engine, there were 1,150,000 entries, even more than for ``U.S. toll road privatization'' (823,000 matches).

Proponents of privatization say that private companies can run toll roads and airports more efficiently and provide a better level of service than the public sector can. Certainly it is hard to imagine something more afield of a municipality's core competency than running an airport.

Opponents say that private companies have little incentive to invest in capital improvements after a deal is made. They also point out that such assets are, more often than not, monopolies, and they are unwilling to grant monopolies to private companies.

GAO Report

People are talking about airport privatization, yet they haven't done much about it, at least in the U.S.

And the one airport that has been leased to a private operator, Stewart International Airport near Newburgh, New York, may be repurchased by the public -- the Port Authority of New York and New Jersey. The authority has been talking for decades about the advisability of building a fourth major airport to relieve congestion. The Stewart lease was purchased by London- based National Express Group Plc in 2000 for $35 million.

The reason that airport privatization hasn't taken off in the U.S. as it has elsewhere in the world (notably in the U.K.) is spelled out in one of those reports you can look up on Google -- the General Accounting Office's paper, ``Airport Privatization: Issues Related to the Sale or Lease of U.S. Commercial Airports,'' which dates from November 1996.

Airport Revenue

The Federal Aviation Administration ``has generally discouraged the sale or lease of an entire airport to a private entity,'' the report said. ``FAA is concerned that in selling or leasing an airport, the legal obligations that the airport had made to obtain a federal grant may not be satisfied.''

The biggest obligation is a restriction on the use of airport revenue, the GAO report said. ``These restrictions are intended to ensure that revenue is not diverted from the airport for other uses and are interpreted by FAA as not permitting public owners of airports to retain the proceeds from selling or leasing their airports.'' Nor can this obligation be extinguished by repaying the federal grants.

The GAO report noted that the FAA said it will consider privatization proposals on a case-by-case basis.

Under an ``Airport Privatization Pilot Program'' begun in 1997, limited to five participants, the FAA has done just that. The Stewart application was approved in 2000. The agency is looking at a proposal by Chicago to sell its Midway Airport, and another to privatize the New Orleans Lakefront Airport.

We have an awful lot to talk about on the subject of airport privatization. Why don't the airlines like it? Can private holders finance capital investments as easily and cheaply as municipalities can in the tax-exempt market? Will privatization enhance competition, or stifle it? Let's start with those.