Date created: 28 November 1996

Last modified: 18 November 1997

Maintained by: John Quiggin
John Quiggin

Airport sale will see fares climb

The Australian

Sep 28 , 1994

Now that the compromise decision to sell long leases on Australian airports has been made, what can we expect? Much remains unclear, including the extent to which foreign airport operating companies will ultimately be permitted to create networks and the way in which unprofitable airports will (or will not) be subsidised in the future. What is clear is that, in the long run, we can expect higher airfares and higher taxes.

The reason we can expect higher airfares is simple. The estimated price for an outright sale of the FAC, either as a going concern or in a couple of pieces was $2 billion. The current sale conditions are much less attractive. The restrictions on multiple airport ownership must imply a substantial loss in operating efficiency. The history of similar restrictions in the media suggests the likelihood that years of costly manoeuvring will ultimately result in the emergence of one or two networks, probably foreign-owned. Nevertheless, the government's gesture in the direction of competition will almost certainly reduce the willingness of buyers to pay for the airports. Similarly, although the difference between a 50-year lease, a 99-year lease and an outright sale is trivial in terms of the present value of cash flows, potential buyers will rightly see a lease as offering less protection against unilateral renegotiation than a freehold title, and will reduce their bids accordingly.

Despite this, the government still intends to raise $2 billion from the sale of the leases. Given the good efficiency record of the FAC, the only way the leases can be made more profitable is if the government permits the lessees to charge higher price. The inter-airport competition promised by the government will not affect this in the slightest. The huge distances between Australian cities, the absence of any multiple-airport cities, and the absence of a significant 'hub-and-spoke' structure means that there is almost no potential for competition (competition between the nonstop Melbourne-Brisbane route and the alternative of Melbourne-Sydney-Brisbane is the most significant possibility and it is of little importance in the total Australian market). Hence the potential to extract monopoly profits is limited only by the potential for political resistance by groups like the tourist industry.

The reasons for expecting higher taxes are a little more complex. In the very short run, indeed, privatisation is seen as an alternative to tax increases. This simply reflects the fact that the (economically meaningless) budget deficit figure still plays a critical role in Australian politics and the proceeds of asset sales are counted as revenue for this purpose. Although the supine attitude of the Labor Party Left on the dismantling of the FAC has done them little credit, they should certainly be applauded for insisting on the production of separate capital and current accounts for government in future. When this is done, part, though not all, of the illusory gains from privatisation will be eliminated from the public accounts. The remaining critical reform is the preparation of accounts on a whole-of-government basis, so that GBE profits (and not the arbitrarily determined payment of dividends to the Budget sector) are treated as income to the public sector.

Once these reforms are implemented it will become quite clear that privatisation serves, in general, to reduce the net worth of the public sector. If the proceeds of sales are used to pay off debt, the resulting savings in public debt interest can be compared to the flow of profits foregone by the sale. In a recent paper for the Australia Institute, I undertook this comparison for a number of actual and proposed privatisations, including British Telecom, the Commonwealth Bank and the large-scale privatisation proposed in the Fightback package. I found that, in every case, the savings in public debt interest fell short of the flow of profits foregone, sometimes by as much as 50 per cent. Thus, in the long run, privatisation entails a loss to the public sector which must be made up either by higher taxes or by reduced services.

The situation is even worse when the proceeds of privatisation are dissipated. The British government did this with massive and unsustainable tax cuts, leading directly to the present situation where the deficit is around 8 per cent of GDP. In the case of the airports, it appears that part of the proceeds of privatisation are to be treated as Mr. Brereton's private kitty, to be allocated to projects that would not pass a benefit-cost test and certainly have little prospects of yielding significant net fiscal returns. The remainder will be allocated to current spending projects in areas including health, education and labour market programs. Although this expenditure is desirable (indeed we need much more of it than we are likely to get), at this stage in the economic cycle it should be funded by higher taxation. The use of privatisation proceeds is equivalent to borrowing and implies the need for higher taxes in the future.

Enthusiasm for an apparently painless method of raising revenue is not surprising. What is surprising is that, even when the illusory nature of this benefit has been pointed out by economists of all persuasions, and even with the awful example of Britain before us, the mania for privatisation has continued unabated.

John Quiggin is Professor of Economics at James Cook University and author of Great Expectations: Microeconomic reform and Australia, published by Allen & Unwin.

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