Critically discuss whether you agree with the following statement: “The privatization of ownership and management is the best approach in enhancing the competitiveness of transportation infrastructures, nowadays and in the foreseeable future.” You should critically discuss the above statement based on real world examples (e.g., port, airport, highway, etc.). You should explain and justify why you (do not) agree with the statement. In the case that you do not agree with the statement, you should also provide an alternative approach.
Privatization of Ownership and Management of Transportation Infrastructures
If well executed, privatization can yield many economic benefits, among them being the improvement of fiscal balance and realization of economic growth. Although it is mostly viewed from a fiscal perspective, it brings about appreciable social and economic improvements. Consideration of the economic benefits have led many economists to infer that the privatization of ownership and management is the best approach in enhancing the competitiveness of transportation infrastructures, nowadays and in the foreseeable future. True as it were, the rationale for such privatization is rooted in recognition of the fact that many government processes, regulations, and activities make the business environment less conducive to business/commercial operations. The private sector is believed to be of relatively high potential as far as facilitating smooth commercial operations is concerned. This paper explores why privatization of ownership and management is believed to be the best approach for enhancing competitiveness of transportation infrastructures.
The reasons for the case of privatization are many and varied. For instance, in terms of consumer input, the private sector is keen to avail high quality goods and services, often aligned with consumer needs which it seeks to satisfy and still make appreciable profits (Youssef et al., 2016). This way, most activities in this sector are largely geared towards the external environment where consumers are important stakeholders, as opposed to the public sector that more often than not focuses on internal gains (for instance to workers) and the improvement of internal processes. Overall, as various firms in the private sector seek to attract and retain customers (hence gain or maintain a greater market share), competition is enhanced as each tries to provide superior goods and services at affordable prices.
Perhaps a good point of departure for appreciating the extent to which privatization of ownership and management of transportation infrastructures enhances competitiveness is recognizing the flaws that arise when utilities are publicly owned and/or managed. In most instances, mismanagement and poor performance characterize such utilities where institutional, financial, environmental, and technical issues result in poor and unreliable services, unsatisfied customers, financial insolvency, and poor environmental performance just to mention but a few (Kessides, 2004). The presence of these issues begs the question: Is the government to blame and is going private the best way? More importantly, how are these related to industry competitiveness? Against the backdrop of the aforementioned problems, private entities emerge as possessing an appreciable competitive advantage amid constant market changes in a technology-driven business climate (Youssef et al., 2016). It is for this reason that policy makers and other key actors have recognized the need to rebalance the various roles played by public and private sectors, and the debate has been whether or not privatizing ownership and management really enhances competitiveness of private sector utilities. As already implied, the answer is in the affirmative. In the context of transportation infrastructures, enhancing competitiveness is privatization’s key attraction as this approach considers price realignment vis a vis underlying costs. The result is a business environment under the control of tariffs that are cost-reflective, a fact that intensifies competition among investors as each wants to the best returns on their capital. Imperatively, the desire for investors to get the best out of the market leads to greater efficiency as may be evidenced through enhanced competitiveness.
Transportation infrastructures have evolved in face of globalization and technological advancement, so that now they are not the naturally monolithic monopolies that they used to be. On the contrary, they encompass a wide range of distinct activities that have completely different characteristics. Due to this evolution, there is a strong case for their unbundling, both vertically and horizontally, to create competitive segments that are privately owned and managed, thus set aside from the monopoly elements of the public sector (Kessides 2004). Privatization makes the implied unbundling easier and viable. For instance, in the railway industry, fixed facilities such as tracks and railroads ought to be set aside from maintenance and operations (of trains). While the aim of this view is not to dismiss or dispute government involvement, privatization and the horizontal and vertical unbundling allows investors (private entities) to pursue competition in the most feasible ways while allowing regulation to be confined to activities considered core as in part and parcel of natural monopoly (Jackoson, 2007). Thus, privatization in this manner allows for the creation of contestable or (more precisely) competitive segments where many market mechanisms are kept minimal but competitive entry is encouraged and exploited (Kessides, 2004).
In the context of the horizontal and vertical unbundling mentioned above, an associated primary virtue that makes privatization of ownership and management of transportation infrastructures is the promotion of competition and price efficiency (Zheng & Ward, 2011). This is likely to be the case when the density and size of the market allows a large number of operators to take part in service provision, thus actively promoting potential competition. Through unbundling, regulation seizes to be a necessity (or at least the need for it is reduced) as many monopoly segments are isolated, thus ridding the business environment of related damaging consequences to, in their place, create competition. However, while privatization reduces the need for regulatory oversight, it creates a business climate where regulatory efficacy and business performance become more interlocked, so that the latter is more sensitive to the former (Harris, 2003). It is for this reason that need arises to harmonize contextual oversight with the resulting competition. If that is not done, the interface between competitive segments and other bottleneck components can result in severe distortion and as such make the business climate even rockier (Gwillian, 2001). Care needs to be taken when privatizing ownership and management of transportation infrastructures more so in regions or countries with weak institutional policies. Nevertheless, such challenges should not form the basis of reasons disputing the fact that privatization is the best approach for enhancing the competitiveness of transportation infrastructures, now and in the future.
According to Gomez-Ibanez and Meyer (2006), critics of privatization have pointed out issues such as job reductions, price increases, and very high profits (resulting from improved operational performance). Arguably, such adjustments and consequences have been necessitated by the need for privatization to remain objective and successful in achieving contextual public objective goals. With public ownership and management facing inadequate revenue, available choices available include increased taxation or higher prices. Whereas increased prices are likely to be felt by the majority of service users (that is the upper and middle classes), more taxes on the other hand mostly affect the poor, who are usually the majority particularly in developing and/or underdeveloped countries. Therefore, a less regressive and arguably more sensible response of privatization is to ensure price realignment that is in line with underlying costs (Starkie, 2013). With this kind of realignment, price increases are some of the inevitable adjustments that, nevertheless, ought to be viewed in positive light especially for the role they play in attracting investors. With market mechanisms working perfectly, more investors imply more competition, hence the case for privatization in enhancing competitiveness.
In recognition of the benefits delivered by privatization, a wide body of literature has investigated and/or discussed privatization of airports in various countries around the world (Lin, 2013; Yan & Winston, 2014). The arguments that have been presented in favor of privatization, and which ultimately in one way or another are related to market efficiency and competiveness are many and varied. For instance, privatization provides greater access to available commercial markets and, by reducing government control or the need for regulation as it were, increases the ability of firms to diversify (Bilotkach et al., 2012). In this case, the aspect of competition can be comprehended in two ways. First, through reduced government control, more and more investors are likely to be attracted and in fact this is one of the greatest appeals of privatization. Secondly, privatization implies reduced government interference hence improved efficiency through the provision of greater incentives to employees and management alike since they are likely to give their best in their various capacities through a feeling of shared ownership. With the resulting efficiency there is likely to be better performance by firms, ultimately leading to enhanced competitiveness as each firm tries to outshine others offering the same good and/or services.
In the example of airport privatization, a major motivation has been provided by empirical evidence and theoretical analyzes that have shown that private ownership yields greater efficiency than public ownership (and control) (Duranton & Turner, 2012). The quest for efficiency and pursuance of other economic objectives have been identified to be the main factors informing privatization decisions in this regard. Others like social and ideological orientation can, of course, not be ruled out. Where it has taken place, airport privatization has either involved privatization of entire companies while creating institutional and legal capacities/conditions for regulation or dividing (or splitting up) state-owned enterprises to form different companies functioning independently in the same market and competing against each other. The first case involves privatizing without restructuring while the latter involves privatizing after restructuring (Gillen, 2011). Whichever privatization model is chosen, what has been noted in airport privatizations in places like Poland, Brazil and India is that with privatization of ownership and management, a platform is created that facilitates exploitation of demand interdependencies. In this regard, both indirect and direct network effects (in light of the many client/stakeholder groups involved in air transportation infrastructures) emerge and as such are generated more intensively (Oum et al., 2008). Competitiveness is enhanced because against the backdrop of the implied network effects and demand interdependencies, there is greater customer satisfaction, and actually the number of customers served goes up as more and more are attracted (due to improved network utilities). As Bilotkach and colleagues (2012) agree, it goes without saying that in this scenario more airliners are attracted to the market, hence expanded destinations as well as increased flights frequencies. Importantly, to remain in the market (as opposed to being edged out) each airliner has to strive to be more efficient and gain a competitive edge over its competitors. Since privatization implies reduced government interference, airliners enjoy greater liberty in their operations and offerings, the result being a highly competitive market where each firm is constantly trying to outshine its competitors (Berg et al. 2012). More imperatively, privatizing airports enhances or boosts their dynamic capabilities. Therefore, it makes sense to argue that privatization of ownership and management is the best approach for enhancing competitiveness of transportation infrastructures now and in the future.
The current argument finds support in a presentation by Mleczikowski and Tloczynski (2018), authors who investigate the privatization of Polish airports and related transport firms. They agree that privatization will make it possible to restructure various process across different air transport enterprises, thus ultimately increasing competitiveness in an already competitive business climate. It is in the context of this conversation that the authors recommend the selling or transferring of state airport enterprises in Poland to regional authorities. They give an example of the need to sell Warsaw Chopin Airport to a private business entity whose specialization is airport management. In the same vein, they add that in relation “to airports in Crakow, Gdańsk, Katowice, Wrocław and Poznań, the concept of privatization should concern increasing the effectiveness of organization management and the introduction of new instruments contributing to the quality of the services offered” (Mleczikowski & Tloczynski, 2018, p. 7). This would, of course, enhance industry competitiveness in the long run.
In a word, it is true that the privatization of ownership and management is the best approach in enhancing the competitiveness of transportation infrastructures, nowadays and in the foreseeable future. The reasons for this position have been discussed in this paper and the chief ones include the creation of contestable or competitive segments through unbundling (horizontal or vertical), price efficiency through realignment vis a vis underlying costs, less regulation/government interference hence more liberty in operations, creation of network effects and demand interdependencies, and enterprise process restructuring. It is time privatization of ownership and management of transportation infrastructures received serious consideration.
Berg S., Jiang, L., & Lin, C. (2012). Regulation and corporate corruption: New evidence from the Telecom sector. Journal of Comparative Economics, 40, 22-43.
Bilotkach, V., Clougherty, J.A., Mueller, J., Zhang, A. (2012). Regulation, privatization, and airport charges: Panel data evidence from European Airports. Journal of Regulatory Economics, 42(1), 73-94.
Duranton, G., Turner, M.A. (2012). Urban growth and transportation. The Review of Economic Studies, 79(4), 1407-1440.
Gillen, D. (2011). The evolution of airport ownership and governance. Journal of Air Transport Management, 17(1), 3-13.
Gomez-Ibanez, J.A., Meyer, J.R. (2006). Going private: The international experience with transport privatization. Washington, D.C: Brookings Institution Press.
Gwilliam, K. (2001). Regulation of private participation in the transport sector. World Bank, Washington, D.C.