Privatizing Australian Airports: Ownership, Divestment and Financial PerformancePublic Organiz Rev

About

Authors
Chris Aulich, Mark Hughes
Year
2013
DOI
10.1007/s11115-013-0226-y
Subject
Law / Business, Management and Accounting (miscellaneous)

Text

Privatizing Australian Airports: Ownership, Divestment and 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 Australian airports following their privatization. The airports represent cases of divestment of government business enterprises into privately-owned businesses each with differing ownership arrangements. The performances of the privatized airports are considered using financial data obtained from general purpose financial reports of the entities.

There are significant implications for future divestment policies, including the value of divestment as a policy response in uncompetitive environments, the use of particular infrastructure investment models, and the nature of the linkage between ownership structure and financial performance.

Keywords Privatization I Divestment I Airports I Financial performance I GBEs I

Australia

Introduction

Traditionally, major city airports in Australia were owned and operated by the Federal

Government.1 In 1986 the national government decided to corporatize these city airports and run them as commercial entities through the Federal Airports

Commission (FAC), while retaining public ownership. In 1996, it was announced that the airports would be privatized by way of divestment. This article addresses the

Public Organiz Rev (2013) 13:175–184

DOI 10.1007/s11115-013-0226-y 1Other airports have also been owned and operated by departments of central governments and at other times they have been variously developed, owned and operated by local governments and by private interests (Wettenhall 1996).

C. Aulich (*)

ANZSOG Institute for Governance, University of Canberra, Belconnen, A.C.T. 2617, Australia e-mail: chris.aulich@canberra.edu.au

M. Hughes

Faculty of Business, Government and Law, University of Canberra, Belconnen, A.C.T. 2617, Australia e-mail: mark.hughes@canberra.edu.au question of whether financial performance of publicly-owned entities has improved with privatization, as predicted by the then Prime Minister. The analysis has used the

General Purpose Financial Reports (GPFR) of Australia’s three largest airports since divestment. These reports are prepared under Australian and International

Accounting Standards and, therefore, provide an independent metric by which the financial performance of entities can be compared through longitudinal and cross-sectional analysis.

Previous analyses of the effectiveness of privatizing airports have tended to focus on 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 these entities 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 to generate positive operating cash flows. These metrics were selected as they are standard techniques employed in the private sector when evaluating the performance of firms, and so are aligned with a major claimed benefit of privatization, that is, improved financial performance.

Privatization Policies and the Australian Context

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

The view that competition is an essential ingredient for improved performance underpinned privatization policies pursued by the Australian Labor governments of the 1980s and 90s. In bringing to an end Australia’s long preference for public enterprise in areas such as banking, airlines, public utilities and telecommunications,

Labor adopted a pragmatic policy in determining which enterprises would be privatized: enterprises in monopoly markets such as the airports, or those which had significant community service obligations such as Australia Post and Telecom, continued to be government-owned, while public enterprises in competitive markets such as the Commonwealth Bank and Qantas were divested. Ownership, whether public or private, was not the primary goal of divestment policies; rather it was the need to ensure competitive environments as well as protecting the public interest involved (Aulich and O’Flynn 2007).

By contrast, the election of the Liberal-National Coalition government in 1996 brought with it a different strategy, which is best seen as systemic (Aulich and

O’Flynn 2007). Prime Minister Howard (1981, 1995) had earlier argued that individuals rather than government were inherently better at making decisions about their future, and he was “profoundly suspicious” of what governments could achieve because governments control, while the private sector provides enterprise. 176 C. Aulich, M. Hughes

Consistent with these views, the Howard government accelerated the pace and scope of privatization, especially through divestment of public enterprises. The core principle of the Howard government’s approach was captured in a speech by the

Minister responsible for the public sector. In this speech, he argued that the government took a “Yellow Pages” approach to public enterprise—if such services existed in the Yellow Pages telephone directory there was no reason why they should be provided by government (Kemp 1997). The Howard government accrued $A61 billion from divestment of public enterprises between 1996 and 2008 (di Marco et al. 2009) when the Australian Government undertook the largest disposal of assets in its history. These divestments included the sale of most of the nation’s main airports in the period from 1996 to 2003.