Privatization of airports was pioneered by Britain in the late 1980s. The example set by Britain was followed by many countries around the world, especially Europe. However, Britain’s example is better suited for developed countries. If there is any exemplary privatization for developing countries, it is the privatization of Argentine airports.
We have dedicated today’s article to presenting this example.
Why Did Argentina Privatize its Airports?
The privatization of Argentine airports took place in late 1990s – a period of time in Argentina characterized by great change in economic and political ideology. The ideology of liberalization of economy as prevalent in Europe and the United States was finally becoming more and more popular in Argentina.
Privatization of Argentine airports was part of the broader government reforms starting since the early 1990s that were aimed at decentralizing government control by delegating more and more power to local governments – and – privatizing business entities to minimize government intervention in business and promote growth of private sector.
The Government Reform Law was passed in 1989 that was based on the new pro-privatization ideology. The law also had a list of state-owned organizations and industrial sectors in which privatization was to be implemented. Aviation industry of Argentina was not included in the above referred law and Congress had to approve privatization of airports separately at a later stage.
The initiation of privatization in aviation sector of Argentina started with country’s national airline that was privatized in 1990. However, it took a long 7-years for privatization to reach the airports of Argentina.
In short, the context and the pretext of privatization of Argentine airports was ideological in nature where airport privatization was a part of a nationwide privatization of industry. Furthermore, privatization was justified by a lacking infrastructure of national airports in need of modernization, upgradation and renovation.
Although some infrastructure improvements had been made in airports during the 1978 football world cup, however it was limited to cities hosting the world cup. Most other airports in the country had the same infrastructure as when they were first constructed.
The idea was that airports be given in private ownership to take advantage of private capital and develop airports through private investment instead of public money.
These objectives were further emphasized by the state of growing aviation demands in Argentina throughout the 1990s such that passenger numbers increased almost by a 100% in a matter of 6-7 years. Therefore, privatization was considered necessary to meet the growing demands of airports to handle more and more air traffic. It needed improvement and development of airport facilities.
Cross Subsidy System – Ensuring Lifeline to Loss-Making Airports
The airport privatization process in Argentina started in 1997 when government approved plan for privatizing 33 Argentine airports. From amongst the three main types of airport privatization, Argentine government chose concession (or lease) agreement. The 33 airports so selected were selected on the basis of their location and economic feasibility. However, there was a catch.
If we look at the traffic numbers of Argentine airports at the time of the concession agreement, we find that the top 7 to 8 airports were making up 70-80% of the total Argentine air traffic. That meant that these airports were attractive from a financial point of view while the others were kind of a liability on the whole system.
A small bunch of airports were the bread winners while the others were dependent on these bread winners to run. Majority of the airports were not making enough money to sustain their operations. This aspect is very relatable to a lot of countries in the world where a handful of airports generate the revenue to sustain the entire airport industry of the country.
Due to the above reason, the government had to come up with a cross subsidy system to make the concession agreement workable. Cross-subsidy system was a system that ensured that profit-making airports financially take care of the small loss-making airports and not leave them behind in oblivion. The cross-subsidy system was at two levels.
First, the contractor (or concessionaire) will distribute the funds generated from profitable airports in his pool of 33 airports. It was made part of bidding documents to sustain smaller airports from income generated by large airports. It was necessary otherwise private sector would have chased profitability and leave smaller airports unattended.
The second cross-subsidy was at government level. Government was bound by law to spend the royalties received from the concession contract to develop airports falling outside of the concession agreement. It was necessary to bound the government to spend money generated by airports on airport industry instead of spending it on other political agendas.
The above strategy is also used by United States in privatization of its airports where the respective local government cannot utilize revenues generated from the airport anywhere other than the airport itself unless it obtains agreement of airlines – one of the four main stakeholders of airport privatization.
The cross-subsidy system made sure that all airports receive funds as well as attention for infrastructure development and improvement. It is a great lesson on how to develop a policy for keeping a lifeline of financial support intact for financially unattractive airports that the private sector would not be interested in.
It is a viable solution to a universal problem. Majority of the world countries have lots of airports as a sense of obligation to the public. However, only busy airports make enough money to be seen as an attractive commercial entity. Most countries, especially underdeveloped or developing countries adopting airport privatization can learn from this Argentine policy to keep support for loss making airports alive.
A Concession Agreement Well Drafted
Now let us look at the key points in the concession agreement developed by Argentine government for privatization of airports:
- The duration of the concession agreement was 30 years with possible 10-year extension i.e., whoever will win the contract will have complete control of the airport for the next 30 years with possibility of 10-year extension making it a total of 40-year period.
- The contractor (or concessionaire) would pay government a fixed annual sum of money known as concession royalty. During the bidding process, this royalty was set to be a minimum of 40 million Argentine pesos. The higher the royalty bid the better for government.
- The contractor will undertake government defined investments in the airports throughout the time concession agreement was intact. During the bidding process, the minimum investment in airports of Argentina over the whole concession period was set to be 2.2 Billion Argentine pesos. The Argentine government had come up with this figure with the help of Union Bank of Switzerland that was hired by government to provide estimate of funds required to achieve the modernization objective for Argentine airports.
- The concessionaires were given the authority to manage and operate the airport and take as much profits as they generate after paying government its annual royalty.
- The concessionaires were also free to undertake subcontracting i.e., if they wanted to contract out some airport services further, they were free to do so.
- The concession agreement also capped the price of airport charges the new private owners could set for the airlines. It was made to prevent privatization from making air travel expensive because of capitalistic nature of private owners. The public service element of airports was kept under consideration in the price cap of concession agreement. However, in order to keep the agreement fair and viable for business, the price cap was kept negotiable if air traffic falls more than 10% from forecast. It gave a fair business ground to potential bidders because air traffic is not under direct control of airport owners.
The concession agreement developed by Argentina exhibits the elements of a good and fair privatization approach. It bound the private owner to invest in airports while at the same time gave full authority of airport operation. It capped the price factor while keeping it negotiable under fair conditions.
It also included independent valuations and estimations for privatization of public assets, and offered a lengthy time period of contract to prevent private owners from treating the airport management as a short term project.
Airport Security – A Show Stopper in Airport Privatization?
There were some airport services that were not included under the concession agreement by the Argentine government i.e., not made part of the whole privatization process. These services included:
- Security services of airports
- Air traffic and navigation services including air traffic control
- Aeronautical communication services
- Search and rescue
These services were not given to the private owner. They were instead kept under the control of CRA, an organization under Argentine air force. In 2009, CRA was dissolved and the non-privatized services under its control were given to the new civil aviation body of Argentina called ANAC.
The reason for not privatizing these airport areas and services was the general perception and agreement that these services are prone to security threats and the Argentine government was not confident of the private sector with regards to security issues.
Therefore, the solution was to remove sensitive services from security’s perspective from the concession agreement. However, apart from these two areas of airport service, the entire commercial existence of airport was falling in the concession agreement.
There is often an argument of how privatization may pose security challenges for airports. However, privatization of Argentine airports is a good example of how airport privatization comes in all shapes and sizes and how concerns and reservations have solutions and way arounds. Airport security doesn’t have to be a show stopper in airport privatization. Government can transfer ownership of the airport to the private sector while keeping some services with itself.
Overcoming Fierce Political Opposition to Airport Privatization
Privatization was met with fierce opposition in Argentine political environment. It was considered against the law because the original Government Reform Law passed in 1989 did not include the airport industry in the list of industrial sector and state owned corporations to be privatized.
The matter was even brought to court of law and the government lost the case. It appeared as if the privatization is going to stop, but the government issued an emergency decree to legalize and proceed with airport privatization.
Such actions even put the government’s credibility at risk as people became apprehensive of government intentions. It was suspected that maybe government has some financial interests and it is trying to award airport concession agreement unfairly.
However, despite the opposition, bidding started in 1998 and four parties participated in the bidding process. The successful bidder was Aeropuertos Argentina, commonly referred to as AA2000. AA2000 was a consortium of:
- CAS, an Argentine origin company
- Ogden Corporation, a United States based airport ground handling company
- SEA, an Italian airport operations company and
- Simest, another Italian company that primarily dealt in supporting Italian companies to win international projects
Economic Oversight of Airport Privatization
Argentine government also created a new government organization ORSNA in 1997 as part of Department of Economy and Infrastructure of Argentine government to oversee the performance of new private owners after airport privatization. The organization functions to this date.
The portfolio of ORSNA includes:
- Setting airport’s aeronautical charges including what the airports charge airlines for landing and parking of the aircraft. It is effective because these charges have a direct impact on what airlines in turn charge passengers. By keeping a tab on airport charges, ORSNA is able to exercise control on air fare in Argentina.
- Approving airport development plans to keep a check on private owner whether it is properly developing national airport’s infrastructure or not.
- Checking quality of airport services to make sure the private owners don’t cut costs by compromising quality.
- ORSNA also acts as a mediator for resolving conflicts between airlines and airport operators.
- ORSNA has the authority to impose fines on the private owners if they don’t comply with set standards.
ORSNA is a great example of how a government can make a dedicated organization for overseeing airport privatization to make sure the privatization efforts don’t fail.
The Results – Winning an Uphill Battle in Airport Business
Three years into privatization, Argentina’s air traffic drastically went down disturbing the aviation industry of Argentina. The reason for downfall of air traffic was the severe economic and political crisis in Argentina in 2001-2 period.
The economic crisis’ severity can be judged from the fact that 40% of Argentina’s work force was unemployed or underemployed in May 2002. What it meant for the new private owner of the airports was less profits and bigger challenges.
As Argentine currency (the Argentine pesos) lost its value against the dollar, air travel became more and more expensive and less affordable resulting in sharp decline in international and domestic passengers.
However, the new private owner i.e., AA2000 carried out modernization of Argentine airports significantly. One of the most worked on airports was Ezeiza Airport. AA2000 built a new departure hall in Terminal A; a new parking area for over 500 cars and invested 138 Million Argentine pesos in development works of the airport.
The second most worked-on airport by AA2000 was Aeroparque Airport in which a 100 million Argentine pesos were spent for development of the airport. A new terminal for international flights was constructed as well as a new parking area for 1,200 cars to facilitate airport visitors and generate additional income at the same time.
Other improvements included development of a new terminal at Salta airport in 1998; remodeling of the San Fernando Airport terminal in 1999; re-adaptation of runway and terminal as well as re-pavement of the landing strip of Rio Gallegos Airport.
At Rio Grande Airport, AA2000 carried out terminal improvement in 2007 including installation of a jet bridge. Later in 2009, its landing strip was also widened and a new fuel plant was constructed. At San Luis Airport, AA2000 carried out landing strip re-pavement in 2007.
At San Juan airport, AA2000 carried out extension of pre-boarding passenger hall in 2008 as well as extension of office block to enhance sitting space for airlines, ground handling companies and other agencies working at the airport.
In short, despite having a tough time, the new private owner AA2000 managed to keep the airports operating and developing. Otherwise, the world of airport business has seen many privatization reversals like Cardiff Airport and Glasgow Airport in United Kingdom, and the New York Stewart Airport in United States.
The Flip Side of the Story
The National General Audit of Argentina did point out some irregularities in the concession contract of AA2000. Among the main observations was that the airport investment commitments were not completed i.e., although airport modernization was carried out after privatization, the magnitude of investments was not as per commitment in the concession contract.
The audit also pointed out that there had been overvaluation of investments by AA2000 i.e., the actual investments made were being perceived as more than actual. The audit also observed that the royalties that had to be paid to the government by the concessionaire were not fully paid and that there was a debt of 800 million Argentine pesos to be paid by the private owner to the government.
It appeared that AA2000 could have never paid the royalties it had filled in the bid and that the bid was based on expectation of a possible renegotiation in future.
In 2003, government did renegotiate the concession royalty and reduced it by 50% in the last term of existing government at that time. However, the new government annulled it as soon as it took power and restored the royalties back to their original value.
Conclusion – Confidence Restored
While it appeared that AA2000 was making a bad reputation, the new government expressed its vote of confidence in favor of AA2000 by granting it 400 million Argentine pesos for construction work with government backing. Despite having a rough riding journey from the start, AA2000 has remained the concessionaire of Argentine airports to this date.
The company has gained confidence of government such that the 30-year concession agreement that started in 1998 and was expiring in 2028, has been extended by 10 years. What’s more interesting is that this extension was not granted by the government towards the end of original period. AA2000 got the extension in its concession contract in 2020 i.e., 7 years before the expiry of original period. Now, AA2000 is the private owner of privatized Argentine airports till 2038.
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- Publication “The Privatization of Argentine Airports“ in Journal of Air Transport Management by Gustavo Andre´s Lipovich, 2008.
- “Case study on commercialization, privatization and economic oversight of airports and air navigation service providers: Argentina” by Air Transport Bureau, Economic Analysis and Policy (EAP) Section, ICAO.