Privatizing Australian Airports: Ownership, Divestmentand Financial Performance

Chris Aulich & Mark Hughes

Published online: 8 May 2013# Springer Science+Business Media New York 2013

Abstract This article addresses the performance of the three largest Australianairports following their privatization. The airports represent cases of divestment ofgovernment business enterprises into privately-owned businesses each with differingownership arrangements. The performances of the privatized airports are consideredusing financial data obtained from general purpose financial reports of the entities.There are significant implications for future divestment policies, including the valueof divestment as a policy response in uncompetitive environments, the use ofparticular infrastructure investment models, and the nature of the linkage betweenownership structure and financial performance.

Keywords Privatization IDivestment IAirports I Financial performance IGBEs IAustralia

Introduction

Traditionally, major city airports in Australia were owned and operated by the FederalGovernment.1 In 1986 the national government decided to corporatize these cityairports and run them as commercial entities through the Federal AirportsCommission (FAC), while retaining public ownership. In 1996, it was announcedthat the airports would be privatized by way of divestment. This article addresses the

Public Organiz Rev (2013) 13:175–184DOI 10.1007/s11115-013-0226-y

1Other airports have also been owned and operated by departments of central governments and at othertimes they have been variously developed, owned and operated by local governments and by privateinterests (Wettenhall 1996).

C. Aulich (*)ANZSOG Institute for Governance, University of Canberra, Belconnen, A.C.T. 2617, Australiae-mail: chris.aulich@canberra.edu.au

M. HughesFaculty of Business, Government and Law, University of Canberra, Belconnen, A.C.T. 2617, Australiae-mail: mark.hughes@canberra.edu.au

question of whether financial performance of publicly-owned entities has improvedwith privatization, as predicted by the then Prime Minister. The analysis has used theGeneral Purpose Financial Reports (GPFR) of Australia’s three largest airports sincedivestment. These reports are prepared under Australian and InternationalAccounting Standards and, therefore, provide an independent metric by which thefinancial performance of entities can be compared through longitudinal andcross-sectional analysis.

Previous analyses of the effectiveness of privatizing airports have tended to focuson changes in various measures of economic or factor efficiency. To our knowledge,this is the first study to specifically focus on the financial performance of theseentities using audited published financial accounting reports.

Financial performance is measured by the entity’s ability to generate profit after tax,the accumulated change in retained profits (since privatization), and the entity’s ability togenerate positive operating cash flows. These metrics were selected as they are standardtechniques employed in the private sector when evaluating the performance of firms,and so are aligned with a major claimed benefit of privatization, that is, improvedfinancial performance.

Privatization Policies and the Australian Context

Differences in ownership between public and private organizations appear to impactlittle on the performance of organizations. The size, task and technology of govern-ment agencies may influence their performance more than anything related to theirstatus as a governmental entity (Rainey 2009). Rainey uses the example of agovernment-owned hospital that obviously resembles a private hospital more thanit does a government-owned utility. His broad conclusion is supported by many otherresearchers (eg, Lane 1993); yet the notion persists that somehow the mere change inownership, from public to private, will in itself enhance organizational performance.

The view that competition is an essential ingredient for improved performanceunderpinned privatization policies pursued by the Australian Labor governments ofthe 1980s and 90s. In bringing to an end Australia’s long preference for publicenterprise in areas such as banking, airlines, public utilities and telecommunications,Labor adopted a pragmatic policy in determining which enterprises would beprivatized: enterprises in monopoly markets such as the airports, or those whichhad significant community service obligations such as Australia Post and Telecom,continued to be government-owned, while public enterprises in competitive marketssuch as the Commonwealth Bank and Qantas were divested. Ownership, whetherpublic or private, was not the primary goal of divestment policies; rather it was theneed to ensure competitive environments as well as protecting the public interestinvolved (Aulich and O’Flynn 2007).

By contrast, the election of the Liberal-National Coalition government in 1996brought with it a different strategy, which is best seen as systemic (Aulich andO’Flynn 2007). Prime Minister Howard (1981, 1995) had earlier argued thatindividuals rather than government were inherently better at making decisions abouttheir future, and he was “profoundly suspicious” of what governments could achievebecause governments control, while the private sector provides enterprise.

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Consistent with these views, the Howard government accelerated the pace andscope of privatization, especially through divestment of public enterprises. The coreprinciple of the Howard government’s approach was captured in a speech by theMinister responsible for the public sector. In this speech, he argued that the govern-ment took a “Yellow Pages” approach to public enterprise—if such services existed inthe Yellow Pages telephone directory there was no reason why they should beprovided by government (Kemp 1997). The Howard government accrued $A61billion from divestment of public enterprises between 1996 and 2008 (di Marco etal. 2009) when the Australian Government undertook the largest disposal of assets inits history. These divestments included the sale of most of the nation’s main airportsin the period from 1996 to 2003.

Airport divestment was initiated in 1997 with the sale of Melbourne, Brisbane andPerth Airports, followed by the sale of Adelaide, Canberra and Gold Coast Airports,the remaining smaller airports in 1998, Sydney Airport in 2002, and the SydneyBasin Airports of Bankstown, Camden and Hoxton Park in 2003. The divestmentswere undertaken by direct trade sale with various private consortiums bidding for theright to receive a long-term lease over each airport.

The decision to divest Australia’s airports was influenced by a complex set offactors, both pragmatic and systemic. The national government argued that the saleswould increase economic efficiency in the provision of aviation services, includinginvestment and pricing reforms and the removal of cross-subsidies; that it wouldimprove managerial efficiency and flexibility at Australia’s airports to reduce costsand increase global competitiveness of the Australian aviation industry and its users;it would enable government to avoid the large capital investments required by airportsand make resources available for other public programs in the belief that the privatefinancial market was capable of, and had the appetite for, funding major transport andinfrastructure investments; and that it would reduce disincentives to the deploymentof new technology and working practices in airport management and operation (TFFAustralia 2007).

Some in government espoused the view that the private sector would operate theairports more efficiently, in spite of the monopoly arrangements that would be createdin each state. Prime Minister Howard (2002) argued that “we think it better for privateorganizations to run airports with governments regulating safety and air traffic control. . . I mean there are good . . . economic reasons for those airports to be operated byprivate industry”. In short, the view was taken by the then government that changes inownership would, of itself, deliver improved performance.

Since privatization, these assertions about ownership and financial performancehave not been tested in Australia. Broadly, research relating to the impact of privat-ization on airports has tended to focus on various measures of economic or factorefficiency, rather than on financial performance. For example, Perelman andSerebrisky (2010) showed that privatized airports in Latin America have notoutperformed publicly operated ones, and changes in productivity were largely dueto adapting well known technologies and production processes. Vogel (2006) con-cluded that public airports may be better able to capitalize on their governmentbacking, giving them greater ability to assume higher leverage in the financing ofproductive assets. By contrast, Oum et al. (2008) found that the average efficiency ofan airport is higher when owned by the private sector and that airports with mixed

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ownership were less efficient than those operated solely by the public or privatesectors. The Tourism Task Force Report, an industry-sponsored report,concluded that, “taken collectively, this study finds that the CommonwealthGovernment’s privatization objectives have been achieved” (TFF 2007: 4).

In one of few robust analyses of Australian airports prior to divestment, Abbottand Wu (2002) concluded that in the 1990s airports recorded strong growth intechnological change and total factor productivity, but did not fare all that well interms of growth in technical and scale efficiency. At the international level it appearedthat Australia’s largest airports fared reasonably well in comparison to their overseas,counterparts although they still possessed the potential to realise further gains. In hisstudy, Assaf (2011) concluded that most Australian airports have experienced signif-icant total factor productivity increases since privatization while few haverecorded productivity and efficiency declines over the same period. The analysissuggests that this productivity increase has been the result of changes in pure andscale efficiencies. However, the Assaf study only relied on three output indicators(the number of passengers, total cargo and number of aircraft movements) andthree input indicators (total number of staff employed, total airport area andoperational costs). Nor did this research account for the effective monopolyenvironment which is likely to have impacted on some of the indicators, in theabsence of effective competition in each major city.

Ownership Structures and Financial Performance

Financial Performance of the FAC Airports

In 1986 the national government formed a government business enterprise (GBE), theFederal Airports Corporation (FAC), to run all civil aviation airports on a commercialbasis. In 1998, Australia’s Productivity Commission (PC) found there was significantimprovement in the financial performance of all airports controlled by the FAC forthe period 1991–92 to 1996–97. For example, profits before income tax doubled inthis period from AUD$90 million2 and while there was a decline to just under $80 min 1993–94, there was a steady increase thereafter to $190 m in 1996–97. During theperiod, the airports made ongoing positive contributions to the government’s revenuebase through income tax and dividend payments (PC 1998).

The major limitation of the Productivity Commission report, for the purposesof this current study, is that it only presents aggregated data for all airports itoperated. However, the figures are strongly affected by the performance of thethree largest airports, Sydney, Melbourne and Brisbane, as they represented 81 %of the FAC’s profits for the year ended 1997 (PC 1998: 337). In addition, theProductivity Commission report is valuable as it specifically analyzes the finan-cial performance of Australian GBEs and so addresses the issue of whetherenterprises are more successful, simply because they are owned and managedby the private sector.

2 All dollar values are expressed in Australian dollars (AUD)

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The next sections examine the financial performance of the three largest airportssince privatization. The focus is on the GPFR for each airport from the first year ofprivatization until 2010.

Sydney Airport

In June 2002 the Southern Cross Airports Consortium won the bidding process forthe sale of Sydney’s Kingsford Smith Airport (hereafter Sydney Airport). Theconsortium paid approximately $5.6billion for a 50-year lease with an option torenew for another 49 years (APH 2006). The price paid by the consortium representeda multiple of 14.3 times EBITDA (ie, earnings before debt, interest costs, tax,depreciation and amortisation).

At the time of sale, the major shareholder in the consortium was MacquarieAirports (MAp), with 63 % of the equity. While the remaining members of theconsortium were infrastructure specialists such as Ferrovial Aeropuertos, andHOCHTIEF AirPort, as well as the Ontario Teachers’ Pension Plan Board, in thispaper we refer to MAp as the owner and manager of Sydney Airport.

The aggregate aeronautical revenues reported by Sydney Airport in its GPFRsince privatization (except for the period 2005 to 2007 for which figures arenot available) shows that there was a steady year-on-year growth in thisrevenue stream over the period surveyed, and over the entire period aeronau-tical revenues growing by 119 % while passenger numbers grew more modest-ly, at 49 %, and aircraft movements by 21 %.

The GPFR of Sydney Airport indicates that this entity has only been able to reportan operating profit in one year since it was privatized; this was in 2007 when its profitwas $40million. This is in contrast to Melbourne and Brisbane airports which havereported operating profits every year from 2003 and 2004 respectively—with theMelbourne profits at $20-170million and Brisbane at $20-90million.

In every year other than 2007, Sydney airport has reported an operating lossbetween $170million in 2004 and $120million in 2010, leading to accumulated lossesof approximately $2.2billion from privatization until 2010. The reported accumulatedlosses would have been greater, except that the introduction of InternationalAccounting Standards in Australia affected the balances in various accounts, resultingin a reduction of the accumulated losses in 2005 of approximately $440million. It isperhaps surprising that in the same period as incurring such large losses, the airportchose to pay $798million in dividends to its owners.

The major components of operating cash flows and the net cash from operationsindicate that Sydney Airport has been able to generate positive and increasing netoperating cash flows since 2006. Since being privatized, cash received from cus-tomers has more than doubled, representing a combination of increases in charges perpassenger, aircraft movements, rents for retail outlets and car-parking. It is clear thatSydney Airport’s revenues (excluding government mandated security) increasedsignificantly in the period since privatization (ACCC 2011: 47).

There has been a significant change in the relative proportion of Sydney Airport’sliabilities compared to their asset. In 2001 and 2002, the airport reported positive netassets, that is, it had more assets than liabilities. However, since 2003 there has been asubstantial increase in liabilities, which have risen from approximately $1.4billion to

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$8.1billion. The majority of this increase has been due to external borrowings.The net impact of this increase in debt is that the company’s net assets havefallen from approximately $1.9billion in 2002 to negative $960million in 2010,a fall of approximately $2.9billion.

The company continues to incur considerable borrowing costs and this outflow isexpected to continue for some time. The 2003 annual report indicates that the buyersof Sydney Airport hold their interests through stapled securities, each beingcomposed of a $50 ordinary share, entitled to dividends, and a redeemable preferenceshare that earns interest at 13.5 % per annum.

The GPFR reveal that since the first year of privatization Sydney Airport has notpaid income tax. In 2003, it paid $33million in tax, but given that the company madea loss of $256million in that year, it appears the tax paid in that year related tooperations the year before, when it was government-owned.

This analysis challenges the notion that simply privatizing a monopoly willinevitably lead to an improvement in financial performance. The financial reportsindicate that since being privatized, Sydney Airport has not been able to generatemeaningful profits, despite doubling the amount of cash collected from customers.The well-designed equity instruments used by the new owners of Sydney Airportprovide an interest revenue stream of 13.5 %, plus dividends. In addition, MAp ispaid managerial fees, based on the value of the assets under management, rather thanthe net assets under management. This might partially explain the explosion in thedebt levels reported by Sydney Airport.

Melbourne Airport

As with the Sydney case, Melbourne’s lease was opened for bids by public tender.The successful bidder was Australia Pacific Airports a privately-owned company thatpaid $1.3billion for a 50-year lease in 1997 with an option of a further 49 years. Atthe time of acquisition, the major investors in this entity were the British AirportsAuthority, AMP, Morgan Grenfall Australia, and Hastings Funds Management. Thecurrent ownership structure also includes Australia’s government-owned Future Fund(16.8 %) (Melbourne Airport 2009). Analysis of this company’s GPFR is complicatedby the fact that the reports include figures for Launceston Airport. However, theinclusion of these figures is not expected to significantly affect any inferences, asLaunceston is a minor airport representing approximately 3 % of the aggregatefigures for revenues and expenses (TTF 2007: 11).

Aeronautical performance data reported by Melbourne Airport in its GPFR showthat there has been steady year-on-year growth in this revenue stream over the periodsurveyed and that over the entire period, aeronautical revenues grew by 239 % whilepassenger numbers grew more modestly, at 62 % with aircraft movements increasingby 28 %. Analysis of GPFRs indicate that Melbourne commenced paying income taxnine years after being privatized.

The 1997–98 GPFR for Melbourne Airport reveals the company inherited accu-mulated losses of approximately $8.5million and it took 7 years to reverse this andproduce accumulated profits. By the end of 2010, this balance had increased to$530million, and the entity had paid $647million in dividends. A small part of thedifference in performance between Melbourne and Sydney can be explained by an

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accounting choice. Under the international accounting regime adopted by Australia in2005, increases in the fair value of investment properties can be recorded in theincome statement. Melbourne implemented this rule in 2007 and from the period2007 to 2010 this has increased Melbourne’s retained earnings by $77million.Sydney Airport did not adopt this accounting choice.

Melbourne Airport has generated positive net cash from operations in every yearsince privatization. Borrowing costs are much lower than Sydney Airport, due to thelower debt burden and the lower costs of debt, approximately 8 % for Melbourneagainst 13.5 % for a large part of Sydney’s debt.

The assets of Melbourne Airport have consistently exceeded its liabilities and thisis trending in a favourable direction. Some of the increase in assets is due torevaluations of investment properties, but this is minor. For example, in 2006, therevaluation increment on investment properties was $91million and the companyreported total assets of $1,609million. This revaluation represents approximately5.5 % of total assets.

The performance of Melbourne Airport stands in stark contrast to that of SydneyAirport with Melbourne displaying much better control over its debt levels and thecost of financing that debt.

Brisbane Airport

Brisbane Airport Corporation (BAC) paid $1.4billion in 1997 to acquire BrisbaneAirport on the same 50+49 year lease arrangements that applied to both Sydney andMelbourne Airports. The ownership structure of BAC on the date of acquisition wasquite different from that of Melbourne and Sydney Airports, as various national, stateand local government entities held substantial interests in Brisbane Airport. In 1998the national government owned 27 % of the firm’s shares through two commercialinvesting entities, the state government of Queensland owned 37 % and the City ofBrisbane held a substantial investment via convertible notes. The remaining investorswere Schipol Airport (Amsterdam) and various funds managed by private sectorentities such as Prudential, ANZ and Norwich Union (UK). However, by 2006,neither the national government nor the City of Brisbane were major investors whilethe state government continues its involvement through the Queensland InvestmentCorporation with a 25 % shareholding at 30 June 2011 (Brisbane Airport 2012).

Similar to Sydney and Melbourne Airports, Brisbane pays low tax, although therewas a substantial increase in 2010 over the previous years. Again, similar toMelbourne Airport, the privatization of Brisbane Airport led to a prolonged (10-year)interruption of income tax receipts for the national government.

The first GPFR produced after privatization shows that the retained profit figure was$0; that is, Brisbane Airport did not inherit a gain or a loss. Since then, the company hashad mixed results. In 2000, BAC reported its worst post-privatization loss of approxi-mately $113million, largely due to one-off write offs of deferred borrowing costs. Afterthat, performance tended to improve, although it remained patchy until 2004.

Similar to Melbourne Airport, Brisbane Airport has recognised changes in thefair value of its investment properties in the income statement since 2005. Thishas had an aggregate impact (up to and including 2010) of $248million on thefirm’s before-tax profits.

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Brisbane Airport has been able to generate positive operating cash flows;however, there has been an increase in the borrowing costs paid. The largestsingle component of its debt relates to redeemable preference shares, which carryan interest rate of 15 %. These instruments represent $498million out of$2,238million in interest bearing liabilities, (approximately 22 %). Their otherfunding mechanisms are not as expensive. Similar to Melbourne, Brisbane hasbeen able to maintain and increase the size of its positive net assets, partly due to$284million in revaluations of investment properties.

Due to the change in corporate structure of BAC, it is not possible to use changesin retained profits over the sample period to compare the performance of the threeairports. However, we can gain some sense of their relative performances byaggregating the operating profit figure after tax for the periods 2002–2010. Thisshows that Sydney Airport’s aggregate operating performance equals negative$1,186million, while the corresponding figures for Melbourne and Brisbane are bothpositive at $819million and $391million, respectively. The relatively weak financialperformance of Sydney Airport is surprising, given that it has approximately twice asmany passengers and aircraft movements as Brisbane Airport. Similarly, Melbourneprocesses approximately two thirds of the passengers and aircraft movements asSydney (BITRE n.d.).

The Productivity Commission (1998) showed that total tax receipts for all airportsunder the control of the FAC in 1997 were approximately $82million. If we make asimplifying assumption that 80 % of this figure relates to the three airports consideredin this study, this would imply that Sydney, Melbourne and Brisbane Airportscontributed approximately $64million in taxes in 1997. An analysis of the GPFR ofthese airports indicates that this figure was not reached until 2009, when the com-bined income taxes paid by these airports totalled $71million.

This analysis does not lend itself to the conclusion that the private sectorwas able to generate better financial performance than the FAC. These airportshave gone from being profitable under the FAC regime to weakly profitable atbest and gross wealth destroyers at worst. Further, this particular privatizationexercise has seen an erosion of the income tax and dividend streams ofgovernment revenue.

Conclusions

This analysis of the effectiveness of financial performance of airports under privateownership raises considerable scepticism regarding blanket claims that the privatesector is much more effective than the public sector at liberating wealth frominfrastructure assets. The former Prime Minister, John Howard, promoted the viewthat “it is better for private organisations to run airports with governments regulatingsafety and air traffic control” and that “there are good economic reasons for thoseairports to be operated by private industry” and that “the experience all around theworld has been that privatised airports get run better” (Howard 2002). The findingssuggest it is difficult to justify a view that governments should prefer private sectororganisations to deliver public services and that the option of a GBE might also beconsidered as a potential ownership structure.

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In the case of Sydney Airport, far from liberating wealth, MAp seems tohave a genius for “burning” cash and creating substantial losses where noneexisted before. Their ability to do this is remarkable, given the improvement inthe environment since they took over with poor financial results occurringagainst a background of increasing traffic volume indicators which should makeit easier for the airport to generate profits. At the same time, the nationalgovernment also removed some of the regulatory controls on airport ownershipand operations through the passing of the Airports Amendment Bill 2002, whichthe then Minister for Regional Services, Territories and Local Governmentargued would remove unnecessary restrictions on the operation of generalaviation airports and increase the scope for investment in airport operatorcompanies (Tuckey 2002).

MAp’s ability to create highly innovative transactions and corporate structuresshould be recognised as prodigious. However, whether this model is sustainable overthe long haul is not yet established. Christopher Dinn from the consumer advocateChoice argues that “Sydney Airport would be out of business if it was a restaurant butit remains in business because it is a monopoly” (Dorman 2010).

The question still stands, if organizations under private ownership are not intrin-sically more efficient than those under public ownership, why has there been such afocus in many jurisdictions on ownership change through privatization? Thisresonates in the case of privatized airports, especially when there is a need forgovernment regulation to prevent misuse of market power.

The private sector should not be presumed to act in the public interest;clearly their primary accountability is to their shareholders. This means thatgovernments are primarily responsible to ensure that the public interest isconsidered when determining any given asset divestment (or in the case ofother forms of privatization). The need to factor in “publicness” (Aulich 2011)has not always been accepted by recent conservative governments in Australiaand there have been cases where public assets have been divested and thepublic has either not been sufficiently well compensated from the sale orsufficiently protected after the sale where weak regulatory arrangements havebeen adopted. It appears that this problem has emerged more often in relationto the divestment of public monopolies, such as the Australian Wheat Board(see, eg, Botterill 2012). This contrasts markedly with the post-privatizationprotections offered in other industries that were privatized in Australia,particularly those operating in contestable environments such as banking,insurance or airlines where the government liberalized entry arrangements toenable international providers to compete with the former government-ownedenterprises.

The mode of privatization needs to be carefully considered in future arrangementsto divest major transport facilities. The blending of high finance and transportoperations that Macquarie specialises in is especially complex and perhaps, undersome circumstances, may be especially risky from both a shareholder and citizen’sperspective. The model of public-private ownership mix that operates at Melbourneand Brisbane appears to be less risky and may contribute to their better performance.Nevertheless, it is likely that performance differences relate more to the managementmodel than to ownership arrangements.

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Chris Aulich is a Professor of Public Administration at the ANZSOG Institute for Governance at theUniversity of Canberra, Australia. His research interest is on issues at the public-private sector interface,especially privatization and outsourcing.

Mark Hughes teaches financial accounting at the University of Canberra. His research interest is in theinterplay between the accounting standard setting process, managerial behaviour, and accounting games.

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