Privatisation of Amsterdam Airport Schiphol and the public interest

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Privatisation of Amsterdam                                                    Given these advantages, the onus is on those who wish to
Airport Schiphol and the                                                 regulate to make that case. The first such defence is one of politi-

public interest                                                          cal sustainability. If the prospective private owners do not believe
                                                                         that they will be left free to exercise commercial judgements, and
David Newbery*                                                           instead face the threat of subsequent regulation or direction, then
                                                                         the public owners risk not receiving full privatisation value, while
Schiphol Airport generates considerable social value to the              possibly creating a monopoly that is hard to control after privatisa-
Netherlands. The aim of public policy is to maximise that value.         tion. One of the lessons of regulation is that it may be desired by
Privatisation could be attractive if the private owners are able to      the utility to protect it against subsequent opportunistic behaviour
deliver either increased value (through better investment, market-       by the state. Setting up clear regulatory institutions with well-
ing and pricing decisions) and/or at reduced cost (through effi-         defined dispute resolution procedures before privatisation is, as
ciency gains). Canoy and Hakfoort (2000) have identified a num-          the authors argue, critically important to provide this assurance.
ber of key issues that should be resolved before deciding to priva-           The second argument for regulation is that Schiphol would
tise Schiphol.                                                           in fact have considerable market power, at least in some market

                                                                                                                                                   cpb Report 2001/1
      Airports create externalities, notably noise, whether or not       segments. Schiphol is relatively much larger in The Netherlands
they are publicly or privately owned. These externalities should be      than any single London airport is in the UK, yet the three London
regulated or charged to ensure efficiency. Charging aircraft for the airports (as well as Manchester) are subject to price-cap regula-
perceived noise damage provides better incentives to airlines, and       tion. If Dutch travellers have no convenient alternative, then even
it is important that legislation gives the authorities the power to      if Schiphol competes fiercely with Heathrow and other airports
impose such charges if the airport is privatised.                        for international traffic and hub status, it may be able to exploit its
      Dealing with potential market power is more complex, as the local voting citizens in various ways. If Schiphol could also prof-                57
authors recognise. The first question is whether general competi-        itably raise charges for international travel (and it is the fourth
tion law is adequate or whether ex-ante regulation by an inde-           largest European Airport), then some airlines might set up their
pendent regulator is necessary. There are obvious attractions of         major hubs elsewhere, to the detriment of local business and
avoiding regulation if possible, as it can be costly, distortionary,     some foreign investment. Regulation may therefore be required
and may discourage innovation. If Schiphol faced sufficiently            to guard against these various risks.
intense and efficient competition from rival airports in Western              This brings us to the questions of the “single till” and cross-
Europe, and if the unregulated choices of private owners were            subsidies, as well as slot pricing and trading, both highlighted by
politically sustainable, then competition law may be sufficient. It      the authors. If we were to follow the regulated utility model,
would also avoid the need to deal with the “single till” issue –         potentially competitive elements like retailing would be unregu-
whether regulation should force landing charges to be cross-sub-         lated (with assured free entry of competitors), and regulation
sidised from retailing profits. It should also handle the problem of would concentrate on efficient pricing of the monopoly part
pricing slots sensibly, for the airport would logically price slots to   (access to air movements). But it may be hard to ensure free entry
balance supply and demand at each time of the day, ensuring effi-        into a secure zone such as an airport, while granting a monopoly
cient use, and avoiding the need to wait for slot auctions. The          duty-free concession may be the least distortionary way of financ-
value of any scarcity rents (of slots for aircraft movements, profits    ing all the customs and security precautions needed by the inter-
from duty-free and other sales, etc), could be captured in the sales     national travellers. Allowing airport owners to keep the resulting
price at privatisation.                                                  scarcity rents on retailing may encourage them to maximise
                                                                         domestic passenger throughput, offsetting the temptation to
                                                                         exploit them as captive travellers, though it does little directly to
* Department of Applied Economics, Cambridge, UK                         encourage hubbing.
                         The main argument for the “single till” is that other airports       obvious advantages of a concession and clear problems of under-
                    use that as a competitive strategy. The practical question is             investment near the end of the concession period.1
                    whether one can rely on independent regulators to make the right
                    judgement on international competitive strategy, or whether that          Conclusion
                    is best left to the airport. Fortunately, that choice is still available to Canoy and Hakfoort identify the main issues to be addressed, but
                    The Netherlands, though it would be difficult elsewhere, for if           we need more evidence on the market power exercise by Schiphol
                    Britain abandoned the “single till” principle, it would give windfall before concluding that regulation is desirable. At present the
                    gains to the current owners. If Schiphol were privatised with only        main arguments for regulation depend too much on failures of
                    airline activities regulated, then the associated rents would be cap-     will by Governments to allow efficient pricing and expansion, but
                    tured in the sales price.                                                 it may still be the second-best solution for a privatised airport
                         The other (difficult) issue for regulation is slot pricing.          enmeshed in the web of international agreements, EU law, and
                    Efficiency requires pricing the scarce resources (time needed for         competition with distorted regulated prices imposed on rival air-
                    take-off and landing, access to convenient air bridges) according         ports.
                    to (fixed) supply and (time-varying) demand, giving differential
                    charges by time of day, type of aircraft and docking duration.            References
                    There are various possible constraints to efficient pricing -             Canoy, M. and J. Hakfoort, 2000, Privatisation of Amsterdam Airport Schiphol and the
cpb Report 2001/1

                    “unfair” competition from rival airports, badly designed rules on         public interest, CPB Report, 2000/4, pp. 31-34.

                    non-discrimination, international treaty obligations, and possibly        Starkie, D., 1999, A new deal for airports, IEA Regulation Lectures, 16 November (avail-

                    EU Directives. Would independent regulation secure a more effi-           able from

                    cient balance and level of charges than a profit-maximising air-
                    port? If the only problem is ensuring adequate supply so that the         Notes
                    market clears at the efficient price, then perhaps the real issue is      1
                                                                                                  BAA (the owner of all three London airports) has the restriction that no share-holder can

  58                how best to ensure adequate airport capacity, or who captures the         hold more than 15% of the shares, which Starkie (1999) observes, has been argued to be

                    rents resulting from the public wish to limit capacity (and envi-         in breach of EU rules and has been referred to the European Court of Justice. If it is not to

                    ronmental disturbance)? Would it be enough to grant the right to          limit undesirable future ownership changes, then perhaps there is some (small) merit in

                    expand airport capacity to new entrants?                                  a concession if it does provide such protection.

                         One can imagine that the best form of regulation is an price-
                    cap on a whole basket of charges, with the airport left free to alter
                    the balance between them, set at the marginal cost of expansion.
                    If the right level of expansion could be ensured without regula-
                    tion, and the competition authorities could investigate under-utili-
                    sation, then perhaps even this price regulation would not be
                    needed. One suspects that it is the lack of the Government’s con-
                    viction that the right level of capacity would be delivered that justi-
                    fies regulation as a second-best means of transferring the scarcity
                    rents to airlines (and hopefully their passengers).
                         The final question to address is whether there is any merit in
                    a concession rather than an outright sale. The short answer is no,
                    for more efficient operators can displace inefficient incumbents
                    by take-over bids. Provided the Government has the power to
                    restrict undesirable owners (those that would increase market
                    power or distortions, such as neighbouring airports or dominant
                    airlines) and this is stated clearly in the prospectus, there are no

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