Public Versus Private Ownership and Operation of Airports and Seaports in Canada

David Gillen and
Douglas Cooper
[The authors are indebted to Trevor Heaver, Ron Gilbertson, Lloyd McCoomb, and particularly Filip Palda for comments on earlier drafts and in providing helpful discussion.]

I have never known much good done by those who affected to trade for the public good.

- Adam Smith

Introduction

IN A RECENT ARTICLE DISCUSSING THE PRIVATIZATION of British Rail, The Economist wrote: "It is a brave man who interferes in a love affair, however tempestuous. The British public loves railways, even as it hates the way they are run. Opponents of the government's privatization bill, published this week, argue that it will cause grief." "On the Right Tracks," The Economist, January 23, 1993, p. 20.Note This statement could apply equally well to any one of Canada's hundreds of government owned corporations. The article went on to point out what many, including economists, have argued for many years, namely, that there are significant economic gains to be had from privatization and these translate into welfare gains to the community. First, and foremost, privatization will "root out inefficiency - when a railway in a small country employs 35,000 civil engineers, something is amiss." Ibid.Note Second, it introduces new management styles and skills oriented to serving the users of the rail system and becoming more consumer oriented. Third, it will lead to better investment decisions. Better in many cases can mean less investment or reductions in capacity, as governments are notorious for overbuilding.Note

The ideal view of privatization is that it enhances individual freedoms, encourages and improves efficiency, makes industry more responsive to the demands of the customer, decreases the public debt, and reduces the potential stranglehold of trade unions by forcing management to face the realities of the market place. The major objectives of privatization were, perhaps, best spelled out by Great Britain's then Financial Secretary to the Treasury, John Moore, in 1983 and augmented by a subsequent government White Paper. They are: to reduce government involvement in the decision-making of industry; to permit industry to raise funds from the capital market on commercial terms without government guarantee; to raise revenue and reduce the public sector borrowing requirement; to promote wide share ownership to create an enterprise culture; to encourage workers to share ownership in their companies; to increase competition and efficiency; and to replace ownership and financial controls with a more effective system of economic regulation designed to ensure that benefits of greater efficiency are passed on to consumers (Veljanovski, 1987).Note The argument is made that when projects meet private investors' profit return expectations, only economically sound projects will be undertaken. Furthermore, the operation of infrastructure facilities by private operators is claimed to result in lower costs than if they were run by the public sector. The cost savings are said to be real efficiency gains and not simply transfers from one sector of the economy to another. See Gomez-Ibanez, John Meyer and D. Luberoff (1991), "The Prospects for Private Infrastructure: Lessons from U.S. Roads and Solid Waste," Journal of Transport Economics and Policy, Vol. XXV, No. 5 (September) p. 259-279.Note The private sector also represents a source of financing development, expansion, and improvement of infrastructure at a time when governments are meeting increasing taxpayer resistance and are reluctant to further increase their debt. Finally, there is an argument that a public firm would have less incentive to charge socially efficient prices. This is based upon the notion that public firms will be used for "general government purposes" such as promoting regional economic development and, that allocative inefficiencies would arise from a government firm as they provide the wrong mix of outputs. In the absence of these two arguments there is no strong theoretical argument that a more efficient form of and base for pricing is more likely with private operations than with public operations.Note This means that with public ownership there is some likelihood that infrastructure will be financed out of general revenues rather than through user charges.

Opponents charge that privatization would lead to monopolies, loss of service, reduced flexibility, and unfairness among users as well as between modes. They view private ownership as "a return to the mean market mentality of the nineteenth century, to the elevation of private greed over public interest, and a short sighted policy that sells valuable state assets in order to finance tax cuts and which converts public monopolies into private ones with no adequate safeguards for the consumer or worker" (Veljanovski, 1987). These claims and counter-claims associated with the controversy regarding privatization of British Rail are at the heart of the discussion and fuel the debate over privatization in general. While this essay does not deal with railways, it does discuss privatization, with an emphasis on ports and airports, and what has been stated for railways in Britain applies equally well to Canada's crown corporations.

The privatization In this paper we take a broad definition of privatization and include defederalization in the definition. The reasoning is that taking airports or seaports out of federal hands and placing them in local hands will have similar effects to private ownership in that the local owners will be responsive to market demands. The difference between privatization and de-federalization then is one of degree rather than kind.Note phenomenon is not isolated to a few countries. The World Bank, in 1988, reported that approximately 1800 state owned enterprises were being privatized in 83 countries (World Bank 1988). In Canada, before privatization efforts began in 1984, the crown corporations received approximately $8 billion annually in government support and employed more than 250,000; thus, one worker in forty in the country was employed in a crown corporation at an average annual wage of $32,000. As of July 1987, the Canadian government owned 54 parent crown corporations with 144 subsidiaries and 183,000 employees. Assets were valued at $6 billion. These crown corporations extended across every facet of the economy and included railways, airlines, airports, the post office, ports, cultural institutions, and agricultural marketing boards. Hirshhorn (1990) reports that in 1980 approximately 34 percent of Gross Domestic Product (GDP) involved activities which were supervised or regulated by government. Table 1 lists the number of government owned or controlled enterprises.

In Canada in the mid-eighties, the trend to get government out of those activities which the private sector could handle accelerated as politicians and policy-makers sought to redefine the role of government since it was viewed as having become too large. With its intrusion into the marketplace, the government inhibited entrepreneurship and caused distortions resulting in significant efficiency costs. This movement followed similar change in the United States and Britain. The programs of privatization which began to be implemented in the late 1980s were influenced to a great extent by the privatization actions of the British government. The case for a more market-oriented approach was also affirmed by the report of a Royal Commission in 1985 (Hirshhorn 1990). Politicians and policy-makers argued that traditionally provided public goods and services could, and in many cases should, be supplied by the private sector or with a public/private nexus. The dominant thinking was that it was important to achieve the most efficient output possible from the limited resources available and that governments could address questions of equity and fairness through the tax-transfer system; using markets to redistribute income via underpricing or subsidies had significant economic efficiency costs. There may be a role for government to play on purely equity grounds in providing goods and services. If persons are poor because they have less ability to generate income, the tax-transfer system provides a solution. However, if people have less ability to translate income into utility, something other than transfers are required.Note

There are several reasons for the re-thinking of the common reliance on government as the sole provider of certain classes of goods and services including transportation infrastructure. First, there is the immediate concern of fiscal constraints and the pressures to reduce deficits, which makes private sector participation attractive. It should be noted that simply transferring responsibility to the private sector to avoid government spending provides neither a desirable nor an economically efficient solution to meeting the transportation needs of a community, however broadly defined.Note Second, there are arguments that the public sector cannot, or will not, bring fiscal responsibility in the form of efficient prices and productive efficiency. Third, it is difficult for the federal government to adopt flexible policies and standards that are adequate to meet local or regional conditions. A single policy or uniform standard for the entire country leads, in many cases, to inefficiencies and excess costs with no corresponding benefits. Finally, the failure to deregulate infrastructure after having deregulated and privatized transportation services has led to a failure to achieve some of the available efficiency gains from deregulation.

The deregulation of infrastructure through privatization or private sector management in order to realize the gains available from the discipline of market forces has a brief but successful history. New Zealand, for example, moved to a "for profit" Air Traffic Control system in 1987. The results have been dramatic. Within four years, Airways Corporation of New Zealand recovered full costs, paid taxes, generated $30 million in dividends and reduced expenses by 20 percent. See, Paul Proctor (1992), "For-Profit New Zealand ATC System Cuts Costs and Increases Efficiency," Aviation Week and Space Technology (April 27, 1992, p. 32).Note In 1986, Australia created the Federal Airports Corporation to operate the major airports in the country. BAA (British Airports Authority) was created when the British government privatized the five major regional airports. Government owned air carriers in Europe and Canada have shown significant gains in productive efficiency when privatized and placed in a competitive market setting. See, Gillen, D., T. Oum, and M. Tretheway (1986).Note

The decision to privatize has not been based simply on political stripe or a belief that the private sector is inherently more efficient than government. Boardman and Vining (1989), for example, examined a number of studies that had investigated the relative efficiency of public versus private corporations. Boardman and Vining (1989), "Ownership and Performance in Competitive Environments: A Comparison of the Performance of Private, Mixed and State Owned Enterprises," Journal of Law and Economics, Vol. XXXII (April) p. 2-33.Note The industries examined included electric utilities, refuse, water, health-related services, airlines, railroads, financial institutions, fire services, and non-rail transit. They concluded that in terms of all profitability indicators, public sector firms perform substantially worse than do private firms, and that it is the competitive environment that explains the difference in profitability between public and private firms.

On the other hand, Vickers and Yarrow (1989) report that in an investigation of the relative performance of private and public enterprises, the evidence does not clearly establish the clear-cut superiority of private ownership with respect to cost efficiency. They do make the point, however, that privately owned firms tend, on average, to have lower costs (more internal efficiency) when competition in product markets is effective.

In this essay, we examine the arguments for and against alternative ownership and managerial organizations in airports and ports. Many of the arguments are transferable to other types of infrastructure such as roads. The central question that is being asked with increased frequency is "whether running airports and seaports like non-profit organizations or public utilities is in the public's best interest?" Many are taking the position that airports and seaports would contribute more to the transportation sector and the economy in general as privately held organizations that pay taxes and fees to government, which now owns them. It is also claimed that they would be more sensitive to the needs and concerns of those most directly affected by them and would operate at lower costs. This view is one which is taking hold in a number of countries, including Canada. The traditional reliance on government to be the provider, manager, and operator of transportation infrastructure is being questioned. The stimuli for this exploration of new possibilities arise from essentially three concerns: cost or technical efficiency, financing and pricing.

In the following section, we describe the Canadian airport and port systems. The description includes a brief history, the current institutional features and their respective outputs, and financial characteristics. The next section discusses a methodology for assessment and provides a general framework for considering the public/private ownership and management question. Following, the arguments for and against privatization are considered for both airports and ports. Included in this section is a description of some of the privatization initiatives that have occurred elsewhere. A summary and conclusions are contained in the final section.

The Canadian airport and port systems

Airports

After World War I, with aviation rapidly developing in Canada, airports were the responsibility of municipalities. Federal government involvement was limited to providing emergency landing sites and advising municipalities regarding development and operation of airports.

In the 1920s, the primary role of aviation was to transport passengers and freight into remote areas and carry mail. The Airports and Airways Section of the Civil Aviation Branch of the Department of National Defense was founded in 1928. It was given the responsibility of providing auxiliary services, such as beacons for night flying and navigation, to municipal airports.

The federal government presence in airport ownership and operation began in the 1930s when unemployed workers were hired to improve existing airports and build new ones. Between 1932 and 1936, 50 airports were built across Canada at 100 mile intervals. The depth of the depression taxed the financial resources of the municipalities and they were unable to fund needed improvements to airports as aircraft became larger and more sophisticated. In 1936, Parliament approved the first major federal-municipal finance agreement whereby the Federal government agreed to pay up to one third of the cost of airport terminal construction. By 1939, almost $2 million had been spent.

With the arrival of World War II, the importance of aviation in general and the need for Canada as a training area Canada was a major participant in the British Commonwealth Air Training Plan.Note led the Department of National Defense to take over administration of all airports. In addition, 24 new landing fields were constructed and existing facilities were improved.

After the war, airports were returned to civilian control, in an improved and modernized condition. Some municipalities refused to take the airports, and where these were on a transcontinental route, the Department of Transport (now Transport Canada) continued to operate them. The Federal government introduced an operating subsidy plan in 1946 to assist the municipalities. As aviation flourished, however, and aircraft grew in number, size, and technical sophistication the resources of the municipalities were outstripped. Consequently, the federal government, over time, assumed the responsibility for the development and operation of major airports in Canada. It took over Toronto International in 1958, Vancouver International in 1962, and Calgary International in 1967. In addition, the Department of Transport built new airports at Edmonton and Halifax, both in 1960.

By mid-1985, the Department of Transport owned 153 airports. It operated 89 of these sites and had lease agreements and management contracts with others, such as municipalities, to operate the remaining 64. The airports owned and operated by the Department ranged in size from small general aviation airports to the largest air carrier airport in Canada. While there are over 1000 airports in Canada, the 89 operated by the Department of Transport accounted for almost 95 percent of all commercial traffic in Canada and 100 percent of international passenger traffic.

Transport Canada also has total responsibility for air traffic control in Canadian airspace. This has been the case since 1937 when the Department of Transport took responsibility from the Department of National Defense. Radio and air traffic control was introduced at major airports in 1940, and along main airways commencing in 1942. Radar was introduced in 1956. These systems have been progressively updated through the years, with a major radar modernization program currently under way (RAMP program). In total, Transport Canada has 124 sites with radar equipment, 859 with navigational aids, and 381 with communications systems, all of which require maintenance.

The present Federal involvement in airports goes beyond ownership and includes management and subsidies to a number of airports across the country. Table 2 sets out the Federal investment by region (Hirshhorn 1992). The top 26 airports in Canada are termed the Group I airports and handle most scheduled services. Within the Group I are the major federal airports (MFA) which include Pearson (Toronto), Vancouver, Halifax, Mirabel, Dorval, Ottawa, Winnipeg, Edmonton, and Calgary. The airports included in the various Groups are listed in table 3.

Transport Canada also operates the airports as a system with revenue transfers between money making and money losing airports in the system. Table 4 presents this systemwide data of the major federal airports. The numbers reflect the long established policy of centralization and single user fee structure regardless of local conditions. These policies were changed in the late 1980s.Note

The federal policy toward airports in Canada has moved from one in which they were used as a tool for economic development and regional assistance and to complement aviation regulatory policy to one in which the government has a commercial orientation and is responsive to cities and regions that seek to lease airports from the federal government. The current policy reforms are related to government's claimed efforts to reduce the deficit and the pressures brought about by deregulation of the domestic airline industry, as well as the liberalization of transborder and international aviation. Greater commercial orientation and responsiveness to local needs are significant motivations for the current policy. Additionally, the previous structure and management of airports, which was centralized in Ottawa, was viewed as unable to respond to the significant changes taking place at particular sites.

Seaports

With 25 percent of Canada's gross national product composed of international trade, and with considerable commerce moving on the Great Lakes and St. Lawrence Seaway, Canada's ports and seaports are a significant part of the national economy. In 1991, the ports handled a total of 350.8 million metric tonnes of cargo with Ports Canada accounting for roughly 50 percent, Harbour Commissions and Harbours and Ports accounting for 40 percent, and a variety of public and private facilities accounting for the remaining 10 percent. The six year record of Canadian cargo handling is presented in table 5. Only two of Canada's provinces and one territory do not have important ports within their boundaries. The ports vary in terms of size and types of commodities handled; some handle only a few bulk commodities while others handle a variety of goods ranging from bulk commodities to containers.

The Canadian port system today consists of approximately 365 commercially-oriented ports which can be divided into three major groups: Ports Canada, Harbour Commission Ports, and Harbours and Ports of Transport Canada. In 1982, fifteen of Canada's major ports came under the jurisdiction of the National Harbours Board (NHB), an organization established in 1936 by the National Harbours Board Act (1936) (Ruppenthal 1983). These fifteen accounted for approximately half of all waterborne commerce in Canada. Ports Canada, formerly the National Harbours Board, administers 15 ports pursuant to the 1983 Canada Ports Corporation Act. Seven of these ports are autonomous local port corporations located in Halifax, Montreal, Prince Rupert, Quebec, Saint John, St. John's, and Vancouver. The eight other ports are administered on a divisional basis by Canada Ports Corporation and are located in Belledune, Churchill, Port Colborne, Prescott, Port Saguenay, Baie-des-Ha!-Ha!, Sept-îles, and Trois-Rivières.

The Canada Ports Corporation was established in 1982 as a crown corporation to review, co-ordinate, and facilitate ports planning by semi-autonomous local port authorities. Ports Canada serves as an "intermediate" model, which contrasts with the situation in the United States where local port authorities are highly autonomous and in competition with one another. At the other extreme are countries such as, Japan where management of port operations and capacity planning are highly centralized. In this latter case, port development is viewed as being an element within a broader economic development strategy.Note The enabling legislation contemplates a degree of local autonomy. It provides for the establishment of local port corporations that are significant at the national or regional level, are financially self-sufficient, and are able to manage their own affairs.

The Harbour Commission group operates under three legislative statutes. The first, the Harbour Commissions Act of 1964, governs the administration of Oshawa, Windsor, Thunder Bay, Fraser River, North Fraser River, Port Alberni, and Nanaimo. The Commission ports of Toronto and Hamilton operate under their own statutes. Harbour Commission ports operate as semi-autonomous bodies responsible to the Minister of Transport and are established by the Governor in Council on the recommendation of the Minister. The rationale, in the past, for establishing these harbour commissions ranged from the need to establish a body to provide waterfront services to a variety of users, the need to manage strategic waterfront property, and the fact that harbours were major community employers.

Ranging in 1991 tonnage from 434,839 metric tonnes at Oshawa to 17,363,153 metric tonnes at Thunder Bay, commission ports handled a wide variety of cargo, consisting of approximately 70 percent dry bulk, 2 percent liquid bulk, and 28 percent break bulk. Two ports handle containers: Fraser River with a throughput of 15,990 twenty-foot equivalent units (TEU's) and Toronto with 40,021 TEU's. Total tonnage, primary cargo, and 1991 operating income (operating revenues less operating expenses and depreciation) for the nine Harbour Commission ports are displayed in table 6.

Click here to view Figure 1: Canadian Seaport Tonnage Handled

The Public Harbours and Port Facilities Act assigns to the Minister of Transport control of all harbours, wharves, piers, and breakwaters that are the property of Canada but not the responsibility of another minister. As a result, there are currently 340 commercially-oriented ports and 186 other sites across Canada whose public port facilities and harbours are under the jurisdiction of Transport Canada and administered through the five regional offices of the Canadian Coast Guard's Harbours and Ports Directorate. The operational role of Transport Canada in its ports is normally limited to enforcing facility use regulations, monitoring port operations, and collecting user fees. Most other services are provided by the public sector. An essential objective of the 1983 legislation creating Ports Canada was to "create a balance between the role of the ports in the national framework, and the need for responsiveness to regional and local conditions. The legislation offered a high degree of local autonomy to those ports which could achieve financial self sufficiency" (Ports Canada 1991).

All Canadian ports, whether administered by Ports Canada, Harbour Commissions, or Transport Canada, have as their stated objective to work toward a port system that: (a) contributes to the achievement of Canada's international trade objectives as well as national, regional, and local economic and social objectives; (b) is efficient; (c) provides port users with accessible and equitable transportation services; and, (d) is coordinated with other marine activities and surface and air transportation systems (Harbours and Ports 1991).

Changes in ship size and cargo handling technology have had a significant effect on Ports Canada, primarily in the form of containerization. Beginning with a single terminal in Montreal in 1968, Ports Canada container ports, which now include Vancouver, Halifax, and Saint John, presently account for approximately 95 percent of the total Canadian container traffic.

In addition to the traditional role of serving the local marketplace, the introduction of standard size containers and specialized equipment to handle them has made it economical for a port to act as a gateway of foreign trade for entire countries, even those as large as the United States and Canada. This is particularly true on the west coast where multimodal Intermodal is taken to mean the movement of unitized freight, either by steel container on highway trailer, on one bill of lading, or by more than one mode of transport in a (relatively) continuous operation.Note trips allow cargoes to be moved to locations throughout the west, east of the continental divide, and even as far away as Europe (Boschken 1982).

The advent of containerization, along with coordination between ports, railways, and motor carriers promoting intermodal transfers, has had a dramatic effect on inter-port competition in North America. Where as recently as fifteen years ago a port could expect to derive over 80 percent of its traffic from the area within a radius of 200 miles from its wharves, today a port's hinterland can extend for thousands of miles and can no longer be considered its sole domain. For all practical purposes, North America is now one transportation market. In 1990, for example, 20 percent of container traffic destined for Canada came through U.S. ports, some from as far away as Los Angeles. During this same period, five percent of container traffic heading for the U.S. arrived via Canadian ports (Canada Ports Corporation 1991). Also intensifying inter-port competition is the increasing tendency for ocean shipping lines to become involved in the inland movement of containers. Many lines own or lease double-stack rail equipment giving them incentive to concentrate their cargoes at those ports where they can link up with their associated inland operations. This has had the effect of concentrating traffic at relatively few ports or load centres (Canada Ports Corporation 1991).Note

One of the many significant effects of intermodalism has been the change in shipping fleets. Ships are now being designed and built to move only containers and their size is growing dramatically, so much so that vessels of greater than 2500 TEU's, which now constitute less than 25 percent of the containership fleet, will soon make up more than 60 percent. As they grow, each ship's significance to a port will grow as well, intensifying competition among each region's ports. Shallow ports, those with difficult access, or those that are simply smaller and less well equipped will be at a disadvantage in winning a share in the east-west trade that has built up between the three major trading blocks of Asia, North America, and Europe.

While some factors, such as domestic transportation costs, local market size, and national transportation policies, are outside of the ports' control, others, under the general headings of productivity, service, and congestion, can and must be controlled to attract business. The first of these, productivity, normally measured in number of crane lifts per hour, is linked to the stability, cost, and attitude of dock labour and the degree of port mechanization. In addition, there is some evidence that dedicated terminals, which are more common in the U.S. than in Canada, can lower shipping costs by boosting productivity and smoothing the interface among the shipping line, port, terminal, and rail line. The second, service, includes hours of operation, ease of access and departure, and documentation efficiencies. Provision of on-dock transfers of cargo between ocean carriers and long-haul rail lines is also considered to be an important service factor. The third, congestion, can be broken down into landside vehicular congestion, problems caused by inadequate storage and handling space, and port congestion while ships wait for berths and cranes (Canada Ports Corporation 1991).

Whether public or private, unique location, large local markets, and even good fortune are not enough to insure a successful port operation. Rather, the key element appears to be the appropriate organizational design, incorporating "an enterprise orientation that provides systematic incentives to perform effectively and competitively as well as a sophistication in designing organization to meet contingencies unique to the changing port industry" (Boschken 1982). Interestingly, the degree of managerial separation from the political process that the port enjoys appears to be vital to its success. As stated in the Port of Oakland 1979 Annual Report, "Managing a big harbourcannot be done effectively if every important decision is to be sifted through a political body."

Seaports and their managements form a important link in the national and international transportation network. As part of the total cost of producing and delivering goods and services, the efficiency of ports can be reflected in the amount of goods produced as well as their route to market. Any lowering of the transshipping charge due to technological innovation or lower port profit margin would increase producers' and/or consumers' surplus, encouraging increased production and consumption, as well as increasing the potential trading area for imports and exports (Boschken 1982). Lowering the charge through public subsidy would not have the same beneficial effect, though, as the opportunity cost of the subsidy would more than offset any gains from lower prices.

Uneconomic pricing is evident in Canada as most Harbours and Ports public ports do not generate sufficient revenues to cover their capital, operating, and administrative costs. Therefore, government support, largely in the form of appropriations through Parliament, is necessary. Illustrating this need are the 1990-91 fiscal year operating results for Transport Canada harbours and ports are listed in table 7.

A framework for assessing privatization

In the privatization debate, the distinction between changing the ownership and changing the competitive circumstances that face the corporate entity is all too often blurred. Privatization and liberalization are distinct concepts. Privatization represents a change in the principal's objective from one of maximizing some welfare function to one of profit maximization. Included in this case would be one in which profit enters and plays a significant role in the managers' utility function.Note As Vickers and Yarrow (1989) point out, ownership of a firm will have a significant effect on its behaviour and performance since changes in property rights modify the structure of incentives faced by decision-makers within the firm. This has the consequence of altering both monitoring and incentive arrangements. Liberalization, on the other hand, refers to a move away from command and control strategies to a decentralized and impersonal allocation mechanism through the opening up of competitive forces.

Economic efficiency may be improved by either or both privatization and liberalization. There are three components to the measure of economic efficiency: productive efficiency, static allocative efficiency, and dynamic (allocative) efficiency. Productive efficiency addresses the question of whether an organization produces its output at a given level of quality at the least cost possible. Productive efficiency will be achieved if the best available technology is utilized and the mix of inputs used is consistent with the set of relative input prices in the market. In other words, the firm which has achieved productive efficiency is operating on the lowest cost function available.

Static allocative efficiency refers to the issue of whether the right level and quality of output is produced that yields maximum overall benefits. This will be achieved when the price of the output reflects the marginal cost of production. If prices are less than costs, too much output is produced and scarce resources are squandered. Prices that exceed costs result in too little output or too low quality or both with the consequence that benefits are lost because a demand, which would have paid all of the resource costs that are excluded from the market, has not been satisfied.

Dynamic (allocative) efficiency deals with the issue of investment in capacity. A firm has achieved dynamic efficiency if it is operating with no excess capacity or with as little excess capacity as the technology allows. If there are indivisibilities in construction it may not be possible to eliminate all excess capacity. Runway and roadway investment are examples of transportation investments with some indivisibilities.Note The key to realizing both static and dynamic allocative efficiency is competition.

Advocates of privatization as well as liberalization base their arguments upon three literatures in economics and management: property rights, transactions cost, and principal-agent literature. Property rights literature focuses on the non-transferability of ownership claims in the public sector. Transactions cost literature analyzes the decision by an economic agent, such as a firm, to make or buy a product or service. Principal-agent literature is concerned with the problem of information and incentives and addresses the question, "what is the optimal incentive scheme for the principal to lay down for the agent?" (Vickers and Yarrow 1989). This refers to a situation in which a shareholder of a firm (the principal) has interests which differ from those of the managers. The shareholder hires the manger (the agent) to represent him/her and to manage the firm to achieve the best rate of return for the principal. The problem is that the principal cannot control what the agent does and thus must try to develop incentive schemes that lead the agent to act on his behalf.

Some opponents of this line of reasoning argue that government provides a more complex output and thus should not be compared to a private firm. The argument is based somewhat on the "principal-agent" problem. The principal-agent problems are deemed more difficult and costly to address in the public sector (Hirshhorn 1992). Where there are legitimate public policy objectives this argument may have some validity but it is the "legitimacy" of the objectives which must be questioned.Note The essence of this reasoning is that public sector managers are unable to appropriate or lay claim to the gains from their efforts and thus have less incentive to undertake actions which provide for greater efficiency or benefits, however measured. Furthermore, the lack of transferable property rights results in less incentive for monitoring managerial behaviour. In a system in which the future value of (strategic) decisions is capitalized into the value of the firm, the owners have both a greater incentive and ability to ensure managers are working on their behalf. A public sector bureaucrat has less incentive to minimize costs or make decisions that increase the future value of an asset. This line of reasoning comes out of the property rights literature. For a succinct and transparent discussion see H. Varian (1992). See also R. Rees (1985), "The Theory of Principal and Agent," Bulletin of Economic Research 37, p. 3-26.Note

If there are positive externalities that convey benefits by virtue of public ownership or efficiency gains from cost savings arising from scale economies attributable to public ownership or regulation, public provision or standards are economically justified. Similarly, if there are network externalities resulting from the fact that all parts of the network are complements, government intervention may provide efficiency gains.

Another legitimate basis for public intervention occurs when people make decisions where the marginal social cost of the decision exceeds the marginal private cost This is sometimes termed the problem of moral hazard.Note and private markets cannot be developed to internalize these effects. However, to simply use public ownership as a means to redistribute income does not constitute a legitimate public policy objective.

Transactions cost literature (Williamson 1975) focuses upon the "make or buy" decision by government. The three options available to the government are to have the product or service provided and marketed by the private sector, have it produced by the private sector through contracts and purchased by the public sector for allocation and distribution, or have it provided by the public sector. The decision will rest upon the ability of government to have private sector production and to extract the rents from the private sector from their more efficient production. Interestingly, this is the same behaviour as a private firm. Economic welfare is enhanced when the private sector produces the product or service if it is more efficient, even if the private sector also appropriates the rents.

The transactions cost issue is more important for the choice of instruments in a public-private nexus than it is for deciding between public or private production (Hirshhorn 1992). There may be circumstances, for example, in which government may want to use the efficiency of the private sector but maintain property rights because of market failure concerns or for public policy considerations. It may also be that the product or service is a durable and specific asset (physical or human). In this case, government may decide to produce if it concludes that any irreversabilities occurring after the initial decision to produce or invest create constraints on the terms of trade. Williamson (1975) notes that private sector firms will themselves produce or vertically integrate to reduce transaction costs in circumstances involving specialized investments, special skills, or a special location.

Privatization and increased competition are both sources of improved economic efficiency and in most cases they are complements. See Gillen, Oum, and Tretheway (1985 and 1986).Note A change in ownership results in a change in entitlement to residual profit. There is a shift in the relationship between those who make decisions and those who benefit from the flow of profits. The change in property rights results in a change in the structure of incentives for management, hence management's behaviour and firm performance. However, there may be a trade-off between internal (productive) efficiencies and allocative efficiencies from privatization. Privatization may not be desirable if it is less efficient and if public monitoring arrangements are no less efficient than what the private sector has to offer. In this case public sector ownership is better, in terms of both internal and allocative efficiency. Vickers and Yarrow (1989) demonstrate that a necessary condition for the superiority of private ownership is to have a significantly more effective monitoring system. They also make the point that the value of private ownership increases with the elasticity of demand.

Public sector ownership does not imply state monopoly nor does private ownership imply competition. Having a firm subjected to the competitive processes provides a spur to internal efficiency, eliminates x-inefficiency, and serves as a mechanism to achieve allocative efficiency. Privatization provides a discipline on managers of firms through competition in the market for corporate control while competition in the product market provides discipline to the firm. Competition, even if it is not perfect, may well yield advantages over a regulated or controlled regime. It is important to consider the costs and benefits of using the competitive market solution to what have been deemed market failure problems. In particular, contestable markets, incentive mechanisms that spur internal efficiency, and the use of networks and vertical relationships should all be considered. Just as there may be a trade-off in the decision to privatize, there may be a trade-off between allocative efficiency and scale economies in the decision to liberalize. For example, allocative efficiency may be reduced due to monopoly while productive efficiency may be lost due to duplication of firms and fixed costs in the industry. Yet there are several reasons why competitive forces might improve efficiency even in public enterprises. Internal efficiency may be enhanced as an additional firm can weaken or destroy the monopoly on industrial information. There are also more opportunities for rivals to introduce new products or undertake niche strategies when a public firm is in the market. A good example of this is allowing courier and other specialty firms into the markets traditionally reserved for a public post office.Note

The discussion of privatization, as Poole (1992) has noted, has centred on several major questions. The issues are equally applicable to ports, airports, and other public facilities in different countries. The questions include: Does privatization lead to rational capacity investment? Is there evidence that privatization results in greater efficiency and lower operating costs? Do prices rise or fall and how does the structure of prices change with privatization? Are capital costs higher using private sector capital instruments rather than public funds? How does privatization deal with externalities such as air, noise, and water pollution? Does customer service improve? Are there monopoly problems? Should national and regional objectives play a role? Is privatization sufficient or is liberalization also necessary? In the following sections we address these questions for both airports and ports.

Privatization of airports and ports

There are those who argue that public ownership is essential since national and regional objectives are not furthered by a system of autonomous airports and seaports. See for example, Eric Heikkila (1990), "Structuring a National System of Ports," Portus (Summer 1990), p. 19-23.Note The argument is founded on the notion either that government should use transport to redistribute income or that there are externalities that private sector ownership or management would not consider. This market failure, it is argued, is of sufficient consequence that public ownership is required; seaports and airports, locally owned, would pursue their own narrow interests and would fail to consider the broader public interest that goes beyond local objectives. This line of reasoning was reflected in Canadian policy toward airport ownership and operations until the mid-1980s. After passage of the new National Transportation Act (NTA) in 1988, which reaffirmed the market orientation of transport policy and contained deregulation provisions for air carriers, and with increasing evidence that efficient pricing and investment in infrastructure yielded real welfare gains to the community, government sought organizational reform of infrastructure in keeping with the reliance on market forces to guide decision-making as contained in the NTA. For airports, this reflected a continuation of a policy in reform of airport management which began in 1978 with the Haagland Study and was revived in 1985 after a hiatus by the government of the day.

The question of the appropriate choice of instruments must begin with an assessment of the role of government in "port" ownership and management. Governments should be concerned with those circumstances in which there are scale economies, market failure due to externalities, potential for monopolization, and circumstances in which there are efficiencies associated with coordination of large, long term sunk investments. This is also a legitimate argument for public ownership if there are network externalities that a private producer would ignore.

The basic argument for private provision of infrastructure is that the private sector is more efficient. The efficiency gains arise from two sources. First, private mangers have the incentive and capacity to make decisions that ensure the maximum value of an asset. Second, the private sector can produce the output at lower costs. These lower costs stem from a number of sources and include greater internal efficiency and productive efficiency. Furthermore, the efficient level of capacity and technology associated with private sector ownership/management will also lower costs.

Airports

In the 1980s, an increased emphasis on market forces as a way of organizing production and distribution was embraced by a number of governments as well as the world aviation community. Not only did a number of countries follow the lead of the United States and deregulate domestic airline services, but others proceeded to privatize their national carriers in whole or in part. A number of countries also moved in the direction of privatizing airports. Britain is the only country to date which has completed the privatization initiative through sale of their airports. In 1987 the British government converted the BAA into a private company, BAA plc.Note However, several different forms of privatization have taken place in other countries since 1991. These include long term leases of airports to private firms, contract operations of airports, creation of new terminal facilities by private sector builder/operators, development of local airport authorities (LAA), and the creation of new airports as private business ventures.

Britain has had two cases of privatization. The larger, identified earlier, involved the three large London airports (Heathrow, Gatwick, and Stanstead) and the four primary Scottish airports (Aberdeen, Edinburgh, Glasgow, and Prestwick). The second privatization involved the purchase by British Aerospace (BAe) of a 76 percent interest in Speke Airport (Liverpool) for the purpose of developing it as an industrial airport and providing relief capacity to BAA capacity.

The several other initiatives to privatize by sale occurred in France, Germany, Jamaica, Malaysia, Singapore, and South Africa. In 1991, the Danish government planned to sell Kastrys airport (Copenhagen), the Belgian government had partially privatized Brussels Airport (establishing the Brussels Airport Terminal Company - BATC), and the New Zealand government planned to sell its three international airports at Auckland, Christchurch, and Wellington. These three airports had already been corporatized by the New Zealand government.Note Long term lease arrangements have also been introduced into aviation from other industries. Several sizable airports in the United States have long term leases: Richenbacker Field (Ohio), Morristown and Teterboro (New Jersey), and Bade Field and Atlantic City International (both in Atlantic City). Contract operations are found at Burbank Airport (California), Stewart International (New York), and Westchester County/White Plains (New York). In Britain, Biggen Hill, Exeter, and Southland airports have all been operated under contract by BAA.

The options of privatizing by building/operating and building/operating/transferring This is the type of model being employed by the four private road initiatives that have begun in California.Note have been limited to terminal developments. Terminal 3 at Pearson International Airport (Toronto) was the first major project of this type. Similar operations have been established at Birmingham Airport (U.K.) and Ataturk Airport (Turkey). Few new private airports have been developed. Two examples are London City Airport located in the downtown Docklands district of London and Alliance Airport in Fort Worth, Texas, established by Ross Perot.

Local airport authorities (LAA) developing in Canada are similar in some respects to the type of airport ownership commonly found in the United States. They differ in that airports in the U.S. are in many cases owned by local governments whereas this is not allowed under the current rules governing airport transfers. They are similar to U.S. airports in that they are closer to the community that they serve and are more responsive to local needs. They also have a greater commercial orientation.Note They have evolved from the Canadian federal government initiative begun in 1987. LAA's exist in Calgary, Edmonton, Vancouver, and Montreal and are currently under consideration in Toronto, Ottawa, Halifax, Winnipeg, Moncton, Victoria, Thunder Bay, Windsor, and Quebec City. The LAA's are not "private" but are established under provincial enabling legislation that specifies which government organization may appoint board members.

The local airport authority model selected in Canada is a hybrid of public and private forms of ownership and management. The LAA's view themselves as "public utilities" with a different motivation than public owners have and an eye to the bottom line. What distinguishes "local" public ownership from federal public ownership are the following. First, the LAA assumes full financial responsibility for its operations, while federally owned airports have a broader internal source of funds (general revenues) from which to meet shortfalls. Second, the motivation for operations, investment, and policy differ significantly. With federal ownership there is a propensity to focus on large rather than incremental changes. Investments tend to be technical/engineering oriented, while LAA's focus more on customer oriented projects. Federal ownership means that any airport investment must compete with all other government investments for funds and that a political allocation model is used. LAA's focus upon operational needs and use economic capital allocation decision criteria. Federal ownership has risk averse decision-making, with the objective of minimizing political risk. The result is safe but non-progressive decisions. The LAA does not eliminate non-profit objectives in its decision-making but does, at least, have profits in its constraint function

In these Canadian cases, the rationale for the move to privatize, or one of the variants discussed earlier, had multiple purposes. In a period of growing fiscal constraints, the market was to signal, finance, and create new airport investments as well as expansion of existing capacity. It was also seen as a mechanism to achieve operating cost savings with improved efficiency and reduce capital costs through more efficient pricing while at the same time being sensitive to the needs of customers, passengers, and airlines. Opponents voiced concern that privatization was an inappropriate model because of externalities, monopoly, and "public good" issues even in spite of alleged efficiency gains from privatization.

A concern and argument of those opposed to privatization is that capital costs will be higher than those of government owned airports. The use of tax-exempt municipal bonds in the U.S. reduces interest expense and hence overall capital costs. This option is not available in Canada. However, while the tax exempt status represents a financial saving, it does not represent a true economic saving. It has simply distorted the relative returns between airport investment and other investments; the result may be too much airport capacity in a given region.

Financial analysts also make the argument that the after-tax cost of debt to a private firm may be less than the before-tax cost of debt to a public firm since the debt is tax deductible. However, there is a more fundamental issue here. Proponents of public funding and/or ownership argue that money is "cheaper" for governments because they do not have to pay a risk premium to the capital market. While this may have been true in the past, increasing borrowing by government, coupled with increasing deficits, has resulted in the downgrading of government credit ratings. This has resulted in a general increase in costs across all projects and government borrowing. The market is, in essence, telling the borrowing government that it is "more risky." The provinces of Ontario and Saskatchewan provide good examples of precisely this point. There is another point to be made as well. Governments compete with private firms for capital in the economy because it represents the scarce savings of the economy. This competition can bid up the cost of capital to all users.

The cost of debt to a public firm may well be much higher than for a private firm if the public firm receives financing or a subsidy from public revenues to pay its debt. Jorgenson (1992) has noted this point. He reports on research by Jorgenson and Yun (1990) which shows the marginal cost of a tax dollar is $1.46: for every dollar of public spending, the cost is $1.00 in tax revenue and 46¢ of loss in economic efficiency in the private sector. Ballard, Shoven, and Whalley (1985) produce a marginal cost of $1.33. Furthermore, when a government borrows to finance a project, it must service this debt. It generally does this with revenue from taxes or other levies, the allocative economic efficiency costs of which have been shown to be significant (Shoven and Whalley 1991).

Publicly funded projects suffer the malaise of "bureaucratic delay" (Forror 1990) and inertia with respect to the planning, operation, and management of construction. Transport Canada estimated, for example, that the construction of Terminal 3 at Pearson International Airport would have taken almost twice as long as it did were it handled by the federal government as it would have been in the past (Poole 1990). If privatization reduces capital requirements arising from savings in development time and more efficient building methods, the total costs may be less, even if the per unit price of capital is higher, as the private firm has every incentive to obtain the lowest costs for the project value. Therefore, the costs of government ownership can be, and generally are, higher than those of private ownership.

Investment in capacity is also more likely to be at an efficient level under a privatization scheme. In Canada, over-investment in capacity at Mirabel and Calgary airports was a direct consequence of the Federal government making investment decisions on political grounds and attempting to maintain a national standard. The fear that the private sector will fail to invest and will simply exploit (and run down) existing capacity lacks evidence. A reduction in capacity should also not be construed as prima facie evidence of private sector failure. In many cases public ownership/management can lead to excess capacity. Rational investment decision-making may lead to a reduction in capacity to a more economically efficient level.Note Investment by BAA more than doubled in the three years following privatization. The investment has been in terminals only. Runway expansion is currently blocked by legislation.Note At Heathrow, $440 Million is being spent on a rail project to link the airport with downtown London. When complete, the trip will be cut from one hour to fifteen minutes. At lease-managed airports, investment has also grown. Morristown, NJ, for example, has undertaken continuing investment in runways, terminals, and ancillary services since being leased in 1982. A similar situation has occurred at Teterboro Airport, under lease since 1970 (Ashford and Moore 1992).

An analysis of both BAA and Lockheed air terminals has provided evidence that productivity, both nominal and real, has increased markedly. A cost comparison of a federally owned and operated airport, Yarmouth NS, and a municipally owned airport, Oshawa, ON, provides marked evidence that local ownership leads to substantially lower costs. In the example of the two comparable airports, Yarmouth had a $700,000 deficit, while Oshawa was in a break-even position. Yarmouth had a staff of 20, while Oshawa had 3. See, Hamilton, G. (1991), "Cost Competitiveness of Canadian Airports," paper presented at the ATAC 57th Annual General Meeting (November).Note Edmonton International Airport, now operating under a local airport authority, achieved a 25 percent reduction in operating costs in the first full year of operations relative to when it was owned and operated by the federal government.

Hirshhorn (1992) reports that the Canadian federal government has 14 airports in which the entire operations have been contracted out to private firms. He notes that operating costs tend to be lower and that contract airports utilize resources more efficiently. Reinforcing this conclusion, Hickling's study (1990) of two federally operated airports in Quebec found that the two privately managed airports had substantially lower costs, which was attributed to the increased freedom and flexibility of private managers. Finally, an Auditor-General Report that compared the efficiencies of three federally operated airports with those of three U.S. airports, found the manpower requirements of the U.S. airports to be 40 percent less.

The questions of pricing and monopolization go hand-in-hand. Critics of privatization argue that prices will rise and airports will exploit their monopoly position. What is the evidence and what are the arguments?

In many cases airports are the sole suppliers of runway and terminal services to airlines. Some argue that this provides a sufficient condition to reject privatization since public firms would not exploit their monopoly positions, or they are not allowed to earn a profit and thus have no incentive to exploit their monopoly positions. A number of points must be made here. First, a monopoly can result from the ability of a single firm to satisfy the market because of continuously falling average costs and the lack of scope economies. There are a number of bases for the creation of monopoly for airports. These include the existence of scale and scope economies, barriers to entry from land markets, and community constraints and government control of complementary services such as air traffic control (ATC) that are not expanded.Note Morrison (1983) has shown, however, that for large airports there are essentially constant returns to scale in the absence of congestion. When congestion is present, marginal costs (both private and social) are rising. For smaller airports there is no substantial empirical evidence, but casual empiricism suggests that there may be some minor increasing returns over a range of smaller sizes of airports. At some point, however, airports are subject to increasing costs (or decreasing returns). The reasoning is that established airports are surrounded by residential and commercial development. It is not easily possible to add runway capacity although it is possible to add terminal capacity. The alternatives are building a new airport or, equivalently, competitive entry, but this entry is inhibited for two reasons. First, inefficient underpricing of existing capacity does not attract capacity investment and leads to administrative allocation rather than market based allocation. Secondly, different sectors of the community take different positions on airport location and expansion. Some groups view airports as externalities rather than as assets of the community. Therefore, they impose extraordinary costs in terms of location and procedural wrangling for building and operation.

Any attempts to move to "economically efficient" prices at U.S. airports, privatized or not, have met with the threat of lawsuits. United States airports utilize either a compensatory or residual method of financing, neither of which is likely to lead to economically efficient prices including the pricing of externalities such as noise.Note Legislation passed in 1992 in the U.S. now allows airports to levy "passenger facility charges" (PFC's) but only under defined circumstances and in conjunction with other changes, including a reduction in federal grants. BAA, prior to privatization but at a point at which it had been corporatized, established a marginal cost based pricing scheme and peak-period pricing. When the private Terminal 3 was completed at Pearson International Airport in Toronto, the prices charged for almost all services and access by taxis and buses differed dramatically from those charged by Transport Canada on the same airport. The Terminal 3 prices were much closer to "efficient" prices. See a full description in Gillen, D., Tae Oum, and M. Tretheway, A Study of Peak Period Pricing with an Application to Toronto International Airport, Report to Airport Authority Group of Transport Canada, 1989.Note Since the LAA was established at Edmonton, the authority has also been moving to more efficient prices.

There is clear evidence that efficient prices are more likely with privatization. The prices are not monopoly prices and an airport does not have unfettered control over prices for a number of reasons. An airport provides services to a broad range of customers with differences in their demand elasticities. Just as airlines practice yield management, the practice of segmenting the market by placing restrictions on fare classes and being able to vary fares with the number and type of restrictions, so too could and would airports. They have to spread their costs, traceable and non-traceable, across all user groups. Second, airport services are a derived demand by carriers and other commercial aviation interests. Their demand is contingent on the demand for their product. To the extent they operate in competitive markets, which airlines do, the ability of airports to increase prices is limited. At a practical level, airports face competition from other airports and other modes, in the short to intermediate term. In the longer run, communications is a substitute. Third, there is inter-airport competition for many of the airports in Canada: for example, Vancouver and Seattle, Edmonton and Calgary, and Toronto and Buffalo and/or Pittsburgh. The ability of an airport to increase its prices will be constrained by an airline's ability to move to another airport and simply feed from the previous centre. It is the case that inefficient, and some monopoly pricing, is more likely with public ownership. Having a common price for all users underprices some and overprices others. The higher price will, in some cases, approximate the monopoly price. Airports also tend to focus more on costs than on (monopoly) prices. This is the opposite from most industries.Note Airports essentially have three sources of revenue. Land rental for industrial use on or adjacent to the airport is relatively stable from year to year. Similarly, concession revenue, generally a percentage of sales, does not vary significantly from year to year. Airport/terminal revenue does vary with the volume of traffic. At most major airports this does not vary much. Therefore, revenue in aggregate is relatively stable over time. Hence, since airports cannot affect revenue except over the longer term, they must focus on costs as a means to increase profits.

Proponents of public ownership for airports argue that private owners will pollute more. In the case of airports, public sector airports, it is argued, cope better with noise issues than do or would private sector airports. Poole (1992) provides evidence to the contrary. He reports that BAA, Burbank Airport, and Palm Beach County Airport have been successful and innovative in dealing with noise mitigation. The (noise) externality issue, however, has little to do with ownership type. In the United States, the federal government and, in some cases, state or local governments establish noise ordinances that apply to all airfields in their jurisdictions. Transport Canada performs this function in Canada. For a full discussion of noise issues and international comparison see Gillen, D. and T. Levesque (1990), The Management of Airport Noise, Final Report to Transportation Development Centre (July), and Gillen, D. and T. Levesque (1989) Noise Management Strategies: A Survey, Technical Report 89-01 to Transportation Development Centre, Montreal, 1989.Note These regulations apply equally, regardless of whether ownership or management is public or private.

Do private airports and seaports have a greater incentive to ignore standards or undertake investments and operations that exceed standards or place extraordinary pressures on the environment? Poole (1992) provides evidence that private airports do as well as public airports in mitigating noise. In Canada, there is little evidence one way or the other, since almost all major airports are owned by Transport Canada. One can, however, look at locally owned or municipal airports such as Oshawa, Edmonton Municipal, and Toronto Island airports for some evidence that local ownership provides an incentive for airports to respond to the demands of the local population and airport environs. Some of the most innovative noise management strategies have been put in place by Edmonton Municipal Airport (Gillen and Levesque 1989 and 1990).

A network externality refers to a situation in which the addition of one more node (airport) to a network adds value to the network that exceeds the value of the node operating independently. The reason is that not only can a new airport link with all other airports but those other airports can also link with the new airport. The value of all previously existing airports is therefore higher because they can generate higher utility and/or profits, hence the externality. Network externalities are said to provide a strong argument for having some public control of airports. The reasoning is that an airport that links with other airports will, by monopoly pricing, reduce traffic to itself as well as to many other airports in the system. This externality results from the fact that the airport ignores the impact of its pricing decisions on other airports. There are a number of issues to be considered. First, it assumes that public owners or operators would price to take into account the "system effect" and this has never been shown to be the case. Second, although there is complementarity between origin and destination airports, there are also substitutes. This substitution can offset the need to take into account the positive cross-elasticity between one airport and another. Essentially, the complementarity and substitutability offset each other. It would only be the case in which there is perfect complementarity between two airports that externality pricing creates problems. Third, there is the argument (above) that no airport has an incentive to restrict output. They would engage in some form of yield management. Fourth, there is the evidence from the U.S. where airports are owned and operated by independent authorities that make decisions in their own best interests. The U.S. aviation system has not broken down from a failure on the part of airports to recognize that they are part of a system. Airports are not unlike most other markets, there are substitutes and complements. The minor interdependencies between airports do not provide a strong argument for having Federal control.

Seaports

Seaport privatization, or at least commercialization, is a worldwide phenomenon. A 1990 survey of port authorities and national ministries revealed that at least 36 governments were exploring the possibility, although, of these, only nine have been active in their pursuits (Bennett 1992). The position of many on the public versus private ownership question is not a neutral one, in the sense that many are taking the position that if there is no compelling justification for public ownership, private ownership is preferred, i.e., less government is better.

For the most part, government involvement in ports has been viewed as a response to a failure, or anticipated failure, of private markets to provide desired outcomes. Depending on the specific area involved, this failure can occur for a number of reasons, including free-riding and lack of discretion in the level of consumption in the area of public goods, failure of private enterprise to take account of externalities in the case of environmental protection, and lack of competition where economies of scale and large startup costs promote natural monopolies. Simple market failure, while cause for government intervention, should not be justification for public ownership when remedies for the failures can be found in the form of taxes, regulations, and legal sanctions (Hemming 1988).

The problems created by the three cases of market failure listed above as well as the needs to establish property rights and to coordinate planning are often given as the five minimum duties that must be carried out by some sort of overall organization in order for a port to function (Goss 1990-c). For those who favour public ownership, that organization should be a public port authority. Their arguments pertaining to each of the five duties are given below and are addressed in turn.

While property ownership for land, its use, and the right and means to transfer ownership are usually clearly established, the same cannot be said of the aquatory (that area relevant to a port that is normally covered with water). As a consequence, anyone building a jetty or pier may have no property rights in it, and particularly no exclusive rights. In some cases it may even be regarded as a hazard or obstruction making the builder subject to fines or damages. In such a situation, there is little incentive to build at all or, at best, the incentive is to build with as little financial outlay as possible in the event that it must be removed (Goss 1983, 1990-c).

A successful port obviously needs wharves and terminals that will survive use and abuse by ships as well as the elements for a long time. Thus, there must be some mechanism for securing property rights in these long lived structures. A public authority, empowered by statute or public proclamation with power and jurisdiction over the aquatory, could then construct the necessary port works with a "legal security equivalent to property rights for all practical purposes." (Goss 1983)

Without disputing any of the above, there is no reason for the process to stop there. Once legal rights have been clearly established by law or statute, they can be sold to private enterprise. Clearly, when the State of California transferred to the city of Los Angeles, in 1911, "all the right, title, and interest of the state of Californiain and to all tide lands and submerged lands, whether filled or unfilled, within the present boundaries of the city," it was exercising this power even though it was ceding the property to another public entity. By transferring property to private owners, costs and benefits of actions are concentrated on those who make the decisions. "Property rights mean self-interested monitors. They reduce the social cost of monitoring. That is precisely the problem that the nationalized industries were incapable of solving, since the residual claimant was the government and not a wealth maximizing shareholderIf the market is competitive, maximizing the residual rewards of business becomes equivalent to maximizing consumer welfare, even though this is not the intention of businessmen" (Veljanovski 1987).

With the possible exception of single user ports, establishing a seaport requires some sort of coordination for the building of "permanent" or even temporary structures in the aquatory. Due to the dynamics of the ocean environment, with its currents and tides, a pier, jetty, or breakwater in one location could easily cause siltation or erosion at some other location.

Some argue that landside development requires extensive planning as well, including cooperation with the neighbouring community in locating rail connections, roads, and public utilities, as well as in controlling positive and negative externalities of the port. In addition, they say that without planning it is possible that competition among private firms within the port could lead to oversupply of capacity (Goss 1983).

Once again the facts are indisputable, but concluding that these necessitate a public port authority is shortsighted. Where a port is sold to a single profit maximizing entity, no problems will arise as careful infrastructure planning and coordination with the adjacent town to reduce congestion will help it to control costs. If a port is sold to several private firms, coordination of infrastructure construction with regard to environmental consequences such as erosion and siltation will still be in the best interest of all involved. If there is a failure, the damaged firm will have remedy at law. Finally, the possibility of overcapacity is a short run problem only and will be corrected by market forces either through growth in traffic or the exit of capacity via reassignment or bankruptcy.

Proponents of public ownership of seaports also draw on the argument that there are certain goods that in an ordinary competitive market would tend to be undersupplied or possibly not supplied at all. In a seaport, this may include such items as radio navigation aides, lightships, marker buoys, beacons, and radar reflectors. They base their position on several arguments, including the inability of the supplier to exclude consumers (or beneficiaries) from using without paying, the lack of a relationship between the level of costs to provide the service and the levels of use, and, finally, the fact that there is no variation in the cost to the consumer with changes, however large, in the level of use. This final point says that there is zero marginal cost and since the price charged for a product or service is normally related to the marginal cost, no revenue can be collected for providing it, hence a need for some overall public authority to supply it.

This line of reasoning must be carefully assessed. If there is genuine excludability and there are no free-riders, private markets will provide the optimal number of navigation aids, lights, marker-buoys, et cetera. The reasoning is that commercial interests and negotiation between firms, port owners, and ship owners would lead to investment in and the provision of the optimal amount of these services because it is in their best interests. The port can attract ships and can capture all the gains from providing this "public good." Single ownership of a port does not preclude the provision of these services. Rather, only if there is non-excludability and if marginal cost equals zero, would they tend to be undersupplied by the private market.

While there may be a need for certain public goods in seaports, private ownership of ports should not preclude public supply of some of these goods any more than private ownership of airports in the United States precludes use by aircraft of their air traffic control systems. Also, it is in a seaport owner's best interests to provide those goods not supplied by government if it expects ship owners to continue to use its port.

The concept of economic externalities has become more important of late as one of its most obvious examples, pollution, has become more of a public concern. Among the many externalities associated with ports (or, perhaps more correctly, with port users) are safety, pollution, and congestion, both in the port and in the surrounding community.

Given that these externalities exist, there must be some mechanism in place to deal with them. If a ship sinks in the middle of the channel it becomes a hazard to other ships and must be removed whether or not the owner is willing and able to do so (or can even be identified). Likewise, fires must be put out, spills cleaned up, and rules of the road established and enforced.

As is the case with public goods, however, private ownership of ports does not require nor even imply an absence of government oversight or participation in protecting the public from pollutants or safety hazards. Private industry today must comply with myriad environmental regulations at both the national and local levels. In addition, fire and police protection are provided to all businesses, public and private, and are paid for out of local taxes. There is no reason to believe that privately owned seaports would be treated differently.

It is interesting to note that improving efficiency is used as an argument by both sides of the private versus public ownership question. The public ownership faction feels there are many ports that, in at least some segments of their operations, have little or no competition, thus allowing them to exploit their positions through the extraction of economic rents. Since these financial surpluses are the results of particular situations rather than superior efficiencies, they will lead to losses in economic welfare. To prevent these losses, the faction continues, some public entity must constantly monitor the ports' performances in some manner that goes beyond merely checking the bottom lines. Profits may merely reflect a monopoly, not efficiency. For a public landlord port authority, this can be achieved by ensuring that there is competition among the companies vying for port leases and contracts. This does not necessitate there being a large number of firms competing but merely that the cost of entry or exit be kept low enough so that the market is contestable. If this is the case, current tenants or suppliers will be forced to try to reduce costs, rather than raise prices to produce a profit, in order not to attract new entrants.

Whether a landlord or a comprehensive port authority, Goss (1990-c) argues, only a public authority can provide the necessary monitoring to protect the public against the excesses of cartels and monopolists. Those who favour privatization, on the other hand, hold that even in the worst case, i.e., where public monopoly is replaced by a private one, reduced political interference, increased accountability of managers to owners (shareholders), and pressures brought by private capital markets to seek productive and allocative efficiency will lead to increased efficiency (Hemming 1988). Where there is competition, and this is almost always the case, the market will force the private owners to operate efficiently.

The public versus private ownership debate does not end with the five areas mentioned above. There are several other arguments put forth by public authority advocates. First, there is the danger of a local monopoly or cartel forming that could decrease economic welfare by pricing above marginal or average cost but just below the shippers' cost, causing business to move elsewhere. Second, the private sector's time horizon can be relatively short compared to that of the public sector, due to pressure by shareholders for quick results, necessitating higher prices to recover costs more quickly, although it can just as easily be argued that the public sector has its own time exigencies, with politicians under pressure by their constituents. Third, the large, indivisible investment usually required for port installations and heavy equipment are atypical of private investment interests. Although this may be true when a large port is viewed as a whole, there is no reason why a site cannot be developed piecemeal, with each part being built as demand and financial conditions dictate. Finally, coordination with public investments in connecting links in the transportation chain, i.e., rail lines and highways, is more complex than if all were in the public domain.

While these may be valid points, are we simply replacing market failure with bureaucratic failure when we make a decision to place an activity in the public sector? Most arguments against public ports are, in fact, simply arguments against bureaucracies in general. In the public arena, political interference and lack of appropriate incentives can reach the point where managers simply want to be left alone and so they merely do enough to achieve that goal. On the other hand, managers can cultivate their relationships with their bureaucratic overseers in order to increase their budgets and thus inflate their own prestige, power, and pay. In either case, public production will be relatively inefficient (Hemming 1988).

Public monopoly can also create circumstances in which economic rents can be translated into costs. In any monopoly or situation in which there is actual or potential market power, there will be economic rents available. If factor markets are competitive, these rents will remain with the owner of capital, at least until they are dissipated by entry. To the extent that some factors also have some market power, they will appropriate some or all of the rents. In the end, a rent, which is simply a transfer and does not affect allocative or productive efficiency, will be translated into a permanent cost increase, which does impact economic efficiency.

This scenario is most likely with public monopolies or regulated environments. First, the public sector is heavily unionized, which creates an opportunity for the labour factor to exercise its market power. Second, with public monopolies, there are rents available both from being monopolies and from being public. The latter point arises from the fact that publicly owned or regulated enterprises have, in most cases, the opportunity to obtain funds from government revenues. Governments derive revenue from taxation, a power unique to governments. Their monopoly powers over taxation create rents. It is, therefore, not happenstance that labour forces in public ports and airports receive above average wage and benefit packages. The move to privatize would not lead to lowering wages below marginal product costs, but would only reduce or eliminate rents that have been extracted over time. It would also serve to change work rules, thereby increasing the productivity of labour and reducing costs.

While political interference and bureaucratic failure are probably the principle sources of public sector inefficiency, they are not the only sources. Without fear of economic repercussions, such as bankruptcy and take-over or the inability to borrow due to a poor credit rating, there is little incentive to operate efficiently. In addition, lack of competition can lead to insensitivity to consumer-desired quantity and quality (Hemming 1988).

The current trend to integrated logistics systems has both led to and resulted from increased specialization in shippers and terminals. The latter has been made possible due to the technological change that has taken place in vessels, ports, and terminals. Heaver (1992) makes the point that these developments have created an opportunity for greater reliance on competitive market forces for port policy and port management. In the port, the port authority would essentially play the role of the landlord and the private capital market would satisfy the demand for terminal services. Technical change, leading to greater specialization of vessels and cargo, places relatively greater weight on scale rather than scope economies. Terminal specialization means fewer "common" port inputs. These factors make terminals relatively independent, reduce barriers to entry, and raise the opportunity for greater terminal competition. Heaver (1992) makes the point that these changes mean that terminals and not ports should be the focus of any strategy.Note

There are few, if any, ports that are free from competition. Efficiencies brought about by containerization and inter-modal transfer leave few markets accessible through only one port. The competition experienced by seaports may be found among essentially five different categories:

1)Competition among port ranges or coastlines regardless of nationality: advances in inter-modal transfer systems and enhanced efficiencies in truck and rail transportation have provided access to many inland areas once felt to be the province of a single port. In this way even ports as far apart as the west and east coasts of North America are in competition.

2)Competition among ports in different countries: an excellent example here is the contest for container traffic to the industrial mid-west of the U.S. carried on by the ports of the Maritime provinces of Canada and the cities of Baltimore and New York.

3)Competition among individual ports in the same country: while there often appears to be a great deal of cooperation (or collusion) among countries', provinces', and states' ports regarding tariffs, this is often misleading as tariffs come a distant third among the generalized costs of using ports (the other two being cargo handling and the costs associated with turnaround time).

4)Competition among the various providers of facilities or services within a port: even in landlord ports, this type of competition cannot be taken for granted as advances in cargo handling technology have reduced the need for large numbers of firms. Also, service providers are capable of reaching agreements among themselves regarding prices and labour practices.

5)Finally, competition among modes of transport: in this case, ships, and thus ports, have already lost out on most passengers and high specific value or perishable goods. Since most of the trades through major Canadian ports are bulk cargoes such as coal, grain, ore, and wood chips, or neo-bulk cargoes such as wood pulp and paper that are going to overseas destinations, the ports are unlikely to be seriously affected by competition from other transportation modes (Goss 1983).

Port competition also has another dimension. Competition among ports is composed of the myriad services each has to offer. A new service can be introduced into a port through investing in new terminals. A terminal can be placed anywhere and represents an incremental investment. Thus, like airports, which have a few runways and, in some cases, many terminals, terminals can be added at a port. The changing nature of ports and terminals and the changing terminal technology, in which terminals are self-contained, are important because, in the absence of entry barriers, significant increases in competition can take place. Thus, inland terminals located some distance from a port can create competition among ports that would not have existed previously, in much the same way that hubs create competition among airports that would not exist in a point-to-point network.

Summary, conclusions, and policy directions

Much of the debate over privatization has focused on the greater efficiency of the private sector and the potential cost savings. It is also seen as attractive for financing the much needed capacity increases that the public sector cannot or will not undertake. Herein lies the real rub. The public sector has failed to price in an efficient manner what it owns and operates. The end results are not only excess demand, but also inefficient levels of investment. It is not that the public sector is unable to price efficiently, it is simply unwilling to do so because with its historical operating measures and procedures it has left the impression with the public that there is community fairness and value in underpricing, uniform pricing, and having excess capacity.

In comparing the advantages of public versus private provision of infrastructure, distribution issues as well as allocative efficiency must be considered. The losers from privatization will be organized labour and, to some extent, landowners. This results from the private sector's initiative to seek out and capture rents. It is, of course, obvious that now these two groups gain disproportionately under public ownership.

The potential gains of moving from an administrative rule decision process of allocating resources to one in which the market plays a dominant role arise from two sources. First, there are the incentives created by ownership. Second, gains are available from the introduction of competitive forces. The competitive process provides the spur to internal efficiency, eliminating x-inefficiency and serves as a mechanism to improve allocative efficiency.

The value of privatization or some form of defederalization is dependent upon competition. Without competition, the gains from privatization or corporatization will be smaller since the risks will remain in the public sector while the rents will accrue to the private sector. A key issue, therefore, in assessing the shift away from the public sector is the extent to which a competitive market exists. If it does not, the restraints on the exercise of monopoly power must rely on some form of corrective regulation. It is not clear that this offers significant improvements over public ownership.

Public safety and environmental concerns are neither a necessary nor a sufficient condition for public ownership since they can be addressed through established mechanisms, as private firms are currently including issues of investment. Some, however, are willing to argue that the role of transportation infrastructure in preserving and developing the national well-being may provide a rationale for public ownership. We disagree. The private sector has undertaken and will undertake investments that are long lived and require considerable investment; the oil and mining industries are testimony to this. The risk premium should not differ significantly between the public and private sectors, as argued earlier.

Airports and seaports have much in common. They serve a multitude of user groups. They involve investments that are large and long lived. They create externalities. They are both perceived as a means of realizing economic growth and development. Both have moved some distance from public federal ownership. The federal government began to market airports in the late 1980s. Seaports have been shifted to a significant extent to autonomous local port authorities. Although these represent significant moves, there is a considerable way to go. Efficiency gains can be achieved through greater private contracting for building and services; there is ample evidence for this in all modes. The most significant gain from greater private participation is in the flexibility with which the private sector is able to use resources. This results in substantial increases in productivity and consequent reductions in cost.

There is considerable debate as to the monopoly power of airports and ports. Changing technologies, intermodalism, and network strategies by carriers have all led to a diminution of market power. Nonetheless, where monopoly power may be troublesome, corrective regulation may be required. It should be noted, however, that regulation is not without its own problems.

Perhaps the most important outcome from moves to corporatization and privatization is that of removing investment and pricing decisions from the hands of politicians and bureaucrats, who have some grand notion that building airports, ports, roads, and railroads will somehow provide a panacea for the economic ills of a region or nation. What has generally happened is that government has not only provided the capacity but has underpriced it as well. It should be remembered that transportation is a derived demand and neither investments in capacity nor policy initiatives will alter economic activity in a substantive way. This simple notion seems to be lost to the proponents of public ownership. In their view, privatizers fail to see the "market failures," including the need for government to provide public services. The "publicizers" see government as wise, disinterested, and technically competent. The evidence is far from compelling for this view, particularly when government intervenes to try to direct markets. Government failure has done more harm than has market failure. Privatization, or at the very least corporatization, provides a superior solution.


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