Jtl v05n01p11

Key words: privatization, airports, infrastructure.

Palavras-Chave: privatização, aeroportos, infraestrutura.

Recommended Citation

Resumo

Este trabalho aponta que, durante os últimos dez anos o tráfego de passageiros nos aeroportos brasileiros dobrou, superando

em 2007 o montante de 110 milhões. O desenvolvimento de infra-estrutura aeroportuária, por outro lado, não tem ocorrido em

uma taxa adequada para suportar a crescente demanda por transporte aéreo. Estima-se que 15 dos principais aeroportos

brasileiros operam acima de sua capacidade nominal de infra-estrutura. Devido a restrições orçamentárias, o governo brasileiro

tem planejado a privatização como um meio adequado para atrair investimento privado para expandir e melhorar a

infraestrutura. O objetivo deste trabalho é identificar e analisar as alternativas legais para a privatização da infraestrutura

aeroportuária no Brasil. Para cumprir este objetivo, em primeiro lugar, ele define o perfil do sistema aeroportuário brasileiro

com base nas informações sobre o volume e o tipo de tráfego e também o tipo de gestão. Em seguida, os modelos de privatização

adotado em outros países com características semelhantes ao Brasil são analisados e alternativas adequadas são identificadas

com a privatização do aeroporto do Brasil de acordo com o seu atual quadro jurídico.

Prazeres, D. L., Esteves, L. L. and Pecci Filho, R. P. (2011) Diagnosis of the Brazilian airport system and the alternatives for its

privatization. Journal of Transport Literature, vol. 5, n. 1, pp. 229-244.

Dorieldo Luiz dos Prazeres, Leonardo Lúcio Esteves, Rogério Pecci Filho

Abstract

This paper points out that during the last ten years the passengers traffic at Brazilian airports doubled, surpassing in 2007 the

amount of 110 million. The airport infrastructure development, on the other hand, has not occurred in an adequate rate to

support the growing demand for air transportation. It is estimated that 15 of the main Brazilian airports are operated above their

nominal infrastructure capacity. Due to budget restrictions, the Brazilian government has been already planning the

privatization as an appropriate means to attract private investment to expand and improve the infrastructure. The purpose of

this paper is to identify and to analyze the legal alternatives for the privatization of airport infrastructure in Brazil. To fulfill this

purpose, at first, it defines the profile of the Brazilian airport system based on information about the volume and kind of traffic

and also the kind of management. Then, models of privatization adopted in other countries with characteristics similar to Brazil

are analyzed and adequate alternatives are identified to the Brazilian airport privatization according to its present legal

framework.

This paper is downloadable at www.transport-literature.org/open-access.

■ JTL|RELIT is a fully electronic, peer-reviewed, open access, international journal focused on emerging transport markets and

published by BPTS - Brazilian Transport Planning Society. Website www.transport-literature.org. ISSN 2238-1031.

* Email: [email protected].

Reviews & Essays

Journal of Transport Literature

Submitted 22 Dec 2010; received in revised form 29 Dec 2010; accepted 31 Jan 2011

Vol. 5, n. 1, pp. 229-244, Jan. 2011

Diagnosis of the Brazilian airport system

and the alternatives for its privatization[Diagnóstico do sistema aeroportuário brasileiro e as alternativas para a sua privatização]

Agência Nacional de Aviação Civil (ANAC), Brazil

B T P SB T P SB T P SB T P S

Brazilian Transportation Planning Society

www.transport-literature.org

JTL|RELITJTL|RELITJTL|RELITJTL|RELIT

ISSN 2238-1031

1. INTRODUCTION

The main system of airports in Brazil comprises a centralized network and is predominantly

under state ownership. Since 1999, the Government of Brazil has been announcing the

intention to privatize the airports in charge of Infraero, Brazilian Airport Infrastructure

Company, responsible for the administration of the major Brazilian airports. Infraero was

created to manage, operate and exploit commercially and industrially all airports under its

jurisdiction and is currently in charge of 66 airports. As in many other countries the interest

for privatization is a result of the government’s fiscal stress and lack of resources to

counterbalance the strong growth of the industry and the need for airport infrastructure.

In Brazil, the operation and exploitation of airports open to public traffic are activities with

status of public services, monopolized by the state. Therefore, private enterprises cannot

purchase the airports outright. It has to be delegated according to the procedures determined

by Brazilian laws. The airport infrastructure is regulated by ANAC (The Brazilian National

Civil Aviation Agency), an independent agency, linked to the Ministry of Defense, which is

also responsible to set the guidelines for the airport infrastructure concession model.

The present legal framework for privatization of Brazilian airports comprises 3 (three) models

for this purpose; contract management, concessions and perpetual franchise. There is not

Brazilian law about listing national airport administrator Infraero on the stock market. Also, in

Brazil, airports privatization taken the form of corporatization or partial or full divestitures is

not still regulated in law. For this reason, this paper is only going to analyse the 3 (three) legal

possibilities already regulated in Law.

2. DIAGNOSIS OF THE BRAZILIAN AIRPORT SYSTEM

As of the end of 2008 Brazilian airport system comprises 2.724 aerodromes on record with

the National Civil Aviation Agency (ANAC). From this total, 1.976 are private aerodromes,

i.e. privately owned fields, paved or not, reserved for private use only; 675 are public

aerodromes, open to public use; 21 military and civilian use; 26 military use only; and 26

restricted public use.

The management of a smaller group of airports that can be deemed of national importance are

distributed as follows:

Revista de Literatura dos Transportes, vol. 5, n. 1 (2011)

230

Table 1: Management distribution of public aerodromes

Manager Quantity of public aerodromes

INFRAERO 66 States 192

Minucipalities 167

COMAER/FUNAI 303

Aero Clubs 9

Companies (Jari Celulose and Usiminas) 2

Brazilian Army 3 Source: ANAC (National Civil Aviation Agency – Brazil)

This study focuses on the airports; the private aerodromes are not analyzed here, because,

according to Brazilian laws they cannot offer public services and are forbidden to be

commercially explored and are destined for private use only. These private aerodromes exist

only for the convenience of a few private aircraft owners and operators and play no

substantial part in public air transportation. Due to the fact that 97% of all passengers traffic

in Brazil takes place at the airports managed by INFRAERO, the analysis will be concentrated

on some selected airports responsible for the major part of passenger traffic in the country and

consequently interesting for the private sector.

Airports benefit from marked economy scales. According to Doganis (1992), unit costs fall

sharply as traffic throughput increases up to 1,0 or 1,5 million passengers a year. Studies on

competition between airports conducted by Cranfield University (2002) indicates that

typically an airport should be fully recovering costs (excluding depreciation) at or around the

1 million annual throughput of workload units. Because of this, the study will be focused on

the airports with passenger traffic equal or above one million.

Increasingly, airports are being viewed as enterprises, rather than as public services which are

expected, at best, to break even. Around the world, governments in both developed and

developing countries are turning to the private sector for airport management and

development.

Despite of the acknowledged and strategic importance of the airports for the development of a

country, region or city, and their strategic role for the integration into global traffic, the

investments in airport infrastructure in Brazil have not been enough to support the increasing


231

demand for air transportation. In 1994, 39,4 million passengers were transported through

Infraero airports; in 2008 the amount increased to 112,19 million, a growth of 184,75%, what

corresponds to a compound annual growth rate (CAGR) of 7,76%, as showed in the graph

below:

Graph 1 – Passenger traffic (boarding and unboarding), at the airports managed by Infraero – 1994-2008

(in million)

Source: Infraero (www.infraero.gov.br)

But this increasing demand has not occurred equally distributed or on similar timelines for all

the airports managed by Infraero. In 2008, only 19 out of the 66 airports managed by that

government company concentrated 89,33% of the total passengers traffic registered in the 66

airports. The four major airports of the federal network, in terms of passengers traffic,

accounts for approximately 50% of all passengers traffic in the year 2008. The red numbers

below in the right hand column indicate those airports whose capacity is already fully utilized

or close to full utilization and figures above 100 indicate an over-utilization of the nominal

capacity.

39.445.2

5055.5

63.8 6368.4

74.5 7571.2

82.7

96.1102.2

110.6 112.2

0

20

40

60

80

100

120

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Pa

x.

(mil

lio

n)


232

Table 2 - Passengers traffic (boarding and unboarding), nominal capacity of the major airports managed

by Infraero - and utilization of airport infrastruc ture - year 2008

Source: INFRAERO (www.infraero.gov.br)

While the demand has grown exponentially, the same cannot be said about the available

infrastructure. 11 out of the 19 major airports under Infraero management are over-utilized,

they are operated above their nominal capacity. These airports are: Guarulhos, Congonhas,

Brasília, Confins, Curitiba, Fortaleza, Florianópolis, Vitória, Natal, Goiânia and Cuiabá. 3

airports are close to reaching their saturation point: Salvador, Recife and Manaus, and 3 out of

the other 5 are not too far from this.

This situation shows clearly that investments by the government for the provision of airport

infrastructure did not occur at an adequate rate to avoid capacity constraint issues at the

airports analyzed.

The following Table 3 shows the strong and firm growth of passengers traffic observed in the

19 analyzed airports since 1994:

Passengers Traffic

(% of the total)

SBGR - Guarulhos Intl Airport 20.393.165 18,17 16.500.000 123,59

SBSP - Congonhas Airport 13.679.336 12,19 12.000.000 113,99

SBBR - Brasilia Intl Airport 10.443.393 9,30 7.400.000 141,12

SBGL - Rio de Janeiro Intl Airport 10.372.034 9,24 15.000.000 69,14

SBSV -Salvador Intl Airport 5.992.826 5,34 6.000.000 99,88

SBPA - Porto Alegre Intl Airport 4.890.617 4,35 6.100.000 80,14

SBCF - Confins Intl Airport 4.804.243 4,28 4.000.000 121,10

SBRF - Recife Intl Airport 4.679.457 4,17 5.000.000 93,58

SBCT - Curitiba Intl Airport 4.281.251 3,81 3.500.000 122,32

SBRJ - Santos Dumont Airport 3.628.766 3,23 8.500.000 42,69

SBFZ - Fortaleza Intl Airport 3.466.469 3,08 3.000.000 115,54

SBBE - Belem Intl Airport 2.153.508 1,91 2.700.000 79,75

SBFL - Florianopolis Intl Airport 2.080.342 1,85 980.000 212,27

SBVT - Vitoria Airport 1.988.447 1,77 560.000 355,07

SBEG - Manaus Intl Airport 1.801.012 1,60 1.815.000 99,22

SBNT - Natal Intl Airport 1.643.297 1,46 1.500.000 109,55

SBGO - Goiania Airport 1.553.845 1,38 600.000 258,97

SBCY - Cuiaba Intl Airport 1.396.164 1,24 580.000 240,71

SBKP - Campinas Intl Airport 1.083.878 0,96 2.000.000 54,19

Airport Passengers Traffic Nominal Capacity System utilization (%)


233

Table 3 – Increasing of the passengers traffic (boarding and unboarding) in the main airports managed by

Infraero – 1994 – 2008

Source: Infraero (www.infraero.gov.br)

Several reasons have been pointed out as causes for the inadequate infrastructure provision,

and these reasons not always are related to insufficient financial resources. As Infraero detains

97% of market share, this stands for almost all the regular commercial aviation traffic in the

country. It has exceptional market power and can be considered a monopolist, acting

practically as a monopolistic firm, what – of course - eliminates the possibility of competition

and its benefits for the efficiency of the Brazilian airport system.

Presently, Infraero takes long time to conclude their buildings at the airports. The time,

including the issuance of the bidding documents, the legal proceedings, elaboration of the

basic projects for the runway, taxiway and yard consumes more than 15 months. As for the

building of passenger terminals Infraero takes at least 18 months.

Comparative study by Infraero also shows that productivity, measured by WLUs / employees

as for passengers boarding and unboarding / employees, shows very weak performance from

Guarulhos airport and from Infraero as a whole in a fairly representative sample of

international airports and groups with similar sizes. (Fiuza, 2008). Palhares and Espírito Santo

Júnior (2001) apud Fiúza (2008) indicate that the Brazilian airports have excess of staff.

Now, the current Brazilian airport system shows noticeable restrictions to be able to offer the

necessary airport infrastructure to support the growth of air traffic demand. The continuing

Passengers Traffic Growth (%) Passengers Traffic CAGR (%)

1994-2008 1994-2008

SBKP - Campinas Intl Airport 106.501 1.083.878 917,72 18,02

SBCF - Confins Intl Airport 900.266 4.804.243 433,65 12,71

SBVT - Vitoria Airport 436.481 1.988.447 355,56 11,44

SBSP - Congonhas Airport 3.425.475 13.679.336 299,34 10,40

SBCT - Curitiba Intl Airport 1.078.306 4.281.251 297,03 10,35

SBCY - Cuiaba Intl Airport 361.241 1.396.164 286,49 10,14

SBFL - Florianopolis Intl Airport 554.207 2.080.342 275,37 9,91

SBGO - Goiania Airport 425.040 1.553.845 265,58 9,70

SBBR - Brasilia Intl Airport 2.953.590 10.443.393 253,58 9,44

SBSV -Salvador Intl Airport 1.841.478 5.992.826 225,44 8,79

SBPA - Porto Alegre Intl Airport 1.508.868 4.890.617 224,12 8,76

SBFZ - Fortaleza Intl Airport 1.083.089 3.466.469 220,05 8,66

SBNT - Natal Intl Airport 529.771 1.643.297 210,19 8,42

SBRF - Recife Intl Airport 1.597.006 4.679.457 193,01 7,98

SBBE - Belem Intl Airport 886.129 2.153.508 143,02 6,55

SBGR - Guarulhos Intl Airport 8.928.464 20.393.165 128,41 6,08

SBGL - Rio de Janeiro Intl Airport 4.941.830 10.372.034 109,88 5,44

SBRJ - Santos Dumont Airport 1.871.043 3.628.766 93,94 4,85

SBEG - Manaus Intl Airport 967.871 1.801.012 86,08 4,54

Airport Passengers Traffic - 1994 Passengers Traffic - 2008


234

increase of air transportation demand can lead to a point of “strangulation” in terms of

infrastructure capacity usage.

The passenger traffic is concentrated at the airports located in the most economic developed

places. The majority of Brazilian airports are not economically profitable as their traffic is

very little. With the intended privatization the government expects to increase efficiency and

investments in the sector and turn it more competitive as well as optimize capacity usage in

terms of existing capacity investments used efficiently, investments being made where

demand calls for it and over-investments in idle capacity being minimized.

3. LEGAL POSSIBILITIES FOR BRAZILIAN AIRPORT PRIVAT IZATION

“Airport” is legally defined under the Brazilian Aeronautics Code (Law 7.565/86), as public

aerodromes equipped with installations and facilities to support aircraft operations and the

boarding and deplaning of passengers and cargoes. The airport ownership can be public or

private open to the public.

In Brazil the discussion on airport privatization involves the privatization of existing airports

and the incentives for the private sector to develop airports on its own. Since 2005, with the

creation of the Brazilian National Civil Aviation Agency (ANAC), this matter has been more

intensively discussed.

The alternatives for making use of privatization on the context of existing airports, and new

airports considered in this study are previewed in the present Brazilian Constitution and in the

ordinary law.

The Brazilian Constitution in its article 21, XII, c; the Law nº. 6.009, December, 26th 1973,

article 1º; the Law nº. 7.565, December, 19th 1986, article 36, IV; and the Law nº. 11.182,

September 27th, 2005, article 8, XXIV, envision concessions and perpetual franchises1 for

construction and operation of airports by the private sector. Also, the Law nº. 8.666, June 21st

1993 envisions the contract management (outsourcing) as another form of the participation of

the private sector on airport operation.

1 Perpetual Franchise is referred to in Brazilian laws and the Brazilian Constitution with the term

Autorização (Authorization).


235

Concerning the airport infrastructure, the present legislation does not recognize the sale of

airports as an alternative for privatization of Brazilian airports, thus this form of privatization

will not be considered in this study.

Any concession or perpetual franchise to the private sector for operation of airports will be

granted pursuant to the Law nº. 7.565, of 1986, article 36, IV.

This means that no further law needs to be enacted, since there are already sufficient legal

provisions to back these concessions. It will suffice that ordinary rules are issued by the

competent entities such as National Civil Aviation Agency - ANAC. Then, according to

POOLE (1994) and without considering transferring ownership of airports to the private

sector other forms of privatization of existing airports are: contract management and long

term lease, As these alternatives are envisioned in the Brazilian laws, they will be considered

here. The long term lease in Brazil would be equivalent to a concession in which the contract

establishes payment to the government based on airport’s gross revenue. Therefore, contract

management and specially concession and perpetual franchise will be discussed in more

details:

Contract Management – can be used for airports of all sizes and economic conditions,

though it is most applicable where an airport has been losing money (POOLE 1994). It is one

form of partnership model that involves a contract-for-service on an activity currently

provided by the public sector; this activity typically is not revenue-generating in and of itself.

It is an agreement by which a company will provide its organizational and management

expertise in the form of services. According to POOLE (1994) the contract management is

usually to reduce costs and increase revenues, thereby reducing the extent of the airports

deficit. A nearby break-even airport can potentially become profitable under contract

management. In Brazil, this kind of privatization can be used for Municipalities and States

that legally cannot tender airport concession to Private Sector, as only the Union can do this.

Concession – In Latin America, the most common way of privatizing airports has been

through concession contracts. Concessions allow a country to retain ownership of airport

assets while private promoters carry out the investments required. Additionally, the lack of

developed capital markets present a major hurdle for other ways of privatization. In a

concession, occurs the transference of the principal responsibility for the airport operations


236

and development to the private party to whom the concession has been granted. The airport

users pay fees and charges directly to the private party which must cover its operating and

capital costs, (debt and equity) out of those revenues.

According to POOLE (1994) concerning the building and operation of new airports,

worldwide, concessions are usually done as Build Operate Transfer (BOT) projects. Under

this model, the private sector receives a franchise to build a greenfield or expand an existing

airport and operate it for a period until the facility reverts to the public sector.

This kind of transaction, if it involves some financial participation in terms of subsidization

by the government results in a type of public-private partnership (PPP), which is normally

used for not profitable airports, which are usually essential from a public welfare viewpoint.

Perpetual franchise – this way, the private sector exploiting of a privileged right officially

granted by the government develops an airport entirely on its own, subject only to the

planning permissions required and the airspace approval by the national aviation authority. In

effect, the airport company has what amounts to a perpetual franchise. The title, financing,

constitution, and operation of an airport become the primary responsibility of a private firm.

The national aviation authority has oversight, control on safety and quality of construction as

well as day-to-day services. Examples of airports developed this way in the world: London

City Airport – EGLC, Grand Bahama International Airport – MYGF, Punta Cana

International Airport – MPDC and Ciudad Real International Airport – LERL.

The airports built on a perpetual franchise basis show some characteristics; they are generally

directly related to commercial or industrial activities of a certain company. In many cases they

are located close to major airports, in areas where the provision of the essential public service

is already covered. Therefore, they offer a specialized service to a specific segment, not

always promoting significant competition to the local main airport(s). It is the case of airports

that make up the regional network usually providing services connecting remote or isolated

places to the main national or international transportation networks, or airports planned to be

in or near the central business district to especially accommodate the array of aircrafts

carrying passengers, mail or freight in local hops to and from adjacent suburbs or to and from

large outlying airports to connect with long-rang flights.


237

There is no legal restriction on building and/or operation of airports in the Brazilian territory

by foreign companies or by Brazilian companies under foreign control as long as in

accordance to the civil aviation Brazilian laws.

4. MODEL TO PRIVATIZATION OF BRAZILIAN AIRPORTS

Figure 1 – Brazilian airport privatization model

* To airports providing a service not considered as an essential public service

Profitable airports – ordinary concession will evidently be more appropriate for privatizing

profitable airports. The more profitable they are, the higher concession fee the government

can obtain for the operation and development of financially weaker airports. In this case the

income earned from concessions of the major and profitable Brazilian airports should not go

to the general exchequer, but be dedicated to finance the development of smaller airports

across the country, which may occur by means of Public-Private Partnership.

Far from break-even airports (loss making airports) - The majority of Brazilian airports

are not profitable. One of the ways of having airports operated by the private sector is to grant

a concession to the same bidder for operation of one or more not profitable airports together


238

with one or more profitable airports, in this way forming a group, so that the profits out of

profitable airports would offset the losses of not profitable airports. Some of these would be

profitable if exploited by a private operator. Private operators are able to manage with more

flexibility to deal with airlines, and other airport stakeholders. The ideal scenario, however, is

that not profitable airports are operated under “sponsored” concessions. Sponsored concession

is one of the two modes of Public-Private Partnership (PPP) dealt with in Law nº. 11.079,

December 30th 2004 (PPP Federal Law). Under a sponsored concession, the public partner

(granting authority) pays the private partner (concessionaire) a pecuniary compensation, in

addition to the fees charged to the service users that the private partner obtains. Contract

management is also an alternative for not profitable airports, specially for smaller airports,

where the government can get some benefits from a private administration without the high

transaction costs of a PPP. It must be considered that in Brazil PPP are limited to contracts

over R$ 20 million (~US$ 10 million). Also, on a federal level, PPP is only eligible for

services defined as priorities by a special committee.

New airports (to be constructed)

The Brazilian laws preview that new airport capacity may be developed privately in two

ways: concession or perpetual franchise. According to POOLE (1994), around the world the

more conventional way is via the granting of a concession, at the end of which the airport (or

terminal) reverts back to government ownership. As to perpetual franchise, this approach is

essentially privately-build-privately-operated and investor-owned public utilities. Airports can

also fall into this category.

5. BRAZILIAN AIRPORTS CONCESSION: INDIVIDUAL OR GRO UPING?

The concession of Brazilian Airports needs to be supported by a reference model that

considers the main factors related to transaction costs by the Civil Aviation Authority to

enforce the contracts, and to the gain of welfare for users.

The ideal regulation is that which promotes the equilibrium of the interests of the users,

government and services providers, as shown at the equilateral triangle ahead:


239

Figure 2 – Brazilian regulatory system

The regulation process aims to pursue the highest possible satisfaction of public interest.

Concerning the reduction of regulatory costs, due to the administrative costs of a government

agency or costs imposed to the concessionaires, one of the main challenges of the regulation

activity is the reduction of transaction costs directly related to it. Transaction costs are defined

by Coase (1937) and more recently by Williamson (1985). They consist of those costs the

Government has to establish, write and enforce the contracts, as well as of the costs the

private party has for bidding and observing contractual obligations in relation to the

regulation, such as satisfying information requirements. One of the main factors that can

originate transaction costs, accordingly to Williamson (1985), is opportunistic behavior or so

called opportunism.

Opportunism can be defined as the difficultly to oversee and enforce the contracts by the

Government. It considers that the economic agents act predominantly on behalf of their self-

interest and – from a public point of view – thus in an opportunistic way. Opportunism means

the part of the contract that can be ethically omitted in fulfilling the (original intention of)

contracts, Williamson (1985 : 47). The more complex the contracts need to be to rule the

relations, the higher are the transaction costs.

The transaction costs are inherent to the regulation activity performed by the Government in

the process of tendering and monitoring concessions of the Brazilian Airports. The most

commonly contemplated transaction costs in this case are; the cost of auctioning for public

Regulatory System

Users

Government ServicesProviders

Agency

Equilibrium in behalf ofthe Public Interest


240

sector, the cost to develop and enforce the contracts, the cost of measurement of the quality of

service provided by the concessionaire and the obtaining of information to evaluate the

concessionaire´s performance as well as the corresponding cost of the concessionaire. There is

also to be considered the concessionaire’s cost because this will be reflected in the prices that

parties will pay for a concession (in case of cost during the concession) or their willingness to

participate in a tender (in the case of tendering costs).

Concerning the gain of welfare for users, the regulation activity must endeavor to lessen the

abuse of monopoly power and promote regional competition. The promotion of competition is

important so that tariffs and the public price to users are reduced. Also, the regulation activity

must observe the interests of government particularly related to the time for the

implementation of concessions and the price for the bids offered at the tendering. The more

interesting/profitable the business to the bidders the higher the bids offered for the concession

at the auctions. Elapsed time to implementation of more efficient structures and suboptimal

prices of the bidder are also part of overall transaction cost.

As for the main individual and grouping concessions issues, in the following Table, variables

such as welfare costs and the costs to public sector of each kind of concession are compared:

One-by-one Group profitableGroup profitable+not-

profitable

Later package of noz-

profitable

-/+ + -/+ +/-Highest per airport, however overall

smallest Lowest per airport, overall medium-lowMedium per airport, However overall

higestmedium per airport, overall high

++(+) ++ - --Quickest way for limited no., but slow for

all airports

Quickest way to get all profitable airports

privatized

highly complex, lengthy preparation and

bid process Done later, but slightly less complex

++ + -- +/-

highest competition , best price

Higher complexity, less competition �

price slightly less (with slight plus for

addressing regional comp.)

Extremly complex, lowest price (with slight

plus for addressing regional comp.)PPP pricing

++ ++ - +

No cross-subsidy No cross-subsidyCross subsidy (however addressing public

funding) No cross subsidization, pure PPP

++ - -- +keep regional Competition (prohibit

bidders to own nearby concession)

little competition from larger near-by

airports little competition from all near-by airports

Non-profitbale airports could create

competition for large ones

Potential of abuse of

regional monopoly

Transaction costs

Time to implementation (significant share of airports)

Adequate price for

concession

Cross-sub-sidization

Figure 3 - Individual x grouping concessions – pros (+) and cons (-)

Source: von Berg, Felix. Brazilian Airport Privatization: key Considerations from an Operator´s View. Airport

Concession Seminar – São Paulo, November, 14th, 2008. Pg. 21 and 23.


241

The individual (one-by-one) concessions of airports shows highest transactions costs for each

airport separately, but it is the lowest considering the overall amount spent on several airports.

The concession for each airport requires an auction for each, which increases the transaction

costs. On the other hand, as long as one agency carries out the process with the one-by-one

approach, it can gain experience and this reduces the overall costs over time for the

accomplishment of the concessions bids.

The grouping concession of not profitable with profitable airports shows low to medium

transaction costs per airport but, otherwise, it is the highest of all as we consider the whole

group of airports. The process is extremely complex, needs long preparation for the bidding

process because of the amount of information required for bidders. Also, definition on how to

contractually address the desired cross-subsidization between the airports requires more

efforts and resources.

Considering the time for implementation, individual concessions are more advantageous than

grouping, due to the higher complexity of the grouping. The contractual arrangements for

profitable and not profitable airports in one concession are very difficult, while level of

difficult of contractually dealing with a group of only profitable airport is less complex and

show similar contractual arrangements as one-by-one concessions.

As to the price bidders pay for concessions in auctions, it is interesting to take into account

that a lot of resources required from the concessionaire to manage the business contributes to

lessening the value of the bids. This can happen because grouping concession reduces

competition, since the number of companies able and willing to manage various airports is

small. On the other hand, grouping airports in one region into one concession decreases

uncertainty of income streams for concessionaire because the concessionaire needs not to fear

regional competition. This implies a higher price for the concession (good from public

welfare perspective) but less competition (bad from welfare perspective). Concessions “one-

by-one” allow a lot of participants to take part in the tender, because the quantity of

companies able to manage one airport is higher, and thus, consequently the competition for

the concession will be higher, what results in a higher price for the concessions. Thus this

measure per se is more favorable for the government.


242

In relation to the cross-subsidization the contractual framework from profitable to not

profitable airports is bound to have intrinsic additional inefficiencies. According to

Williamson (1985), such contracts are incomplete; it is not possible to preview all of the

future contingencies during its execution.

The recent literature about airports regulation, particularly Study on Competition between

Airports and the Application of State Aid Rules, published by Cranfield University (2002),

confirms that, apart from remote airports, generally airports can compete and do compete. The

one-by-one concession is more able to promote competition among airports, because each

airport is managed as a separate business. (Regionally) grouping concessions is in general less

beneficial for promoting competition because the concessionaire has a stronger monopoly

power over a group of airports he manages. Putting strong incentives for competition into this

kind of approach is more difficult. Individual airport concessions lead in general to more

competition and thus may result in lower tariffs and prices to users.

Based on the strength and weaknesses the two basic types of concessions: one-by-one and by

grouping, the interests of the users, of the government and the service providers is best served

in the following order: one-by-one concession, grouping concession (profitable airports),

grouping concessions (profitable and not profitable airports). The grouping of not profitable

airports (in a second stage) is still preferable to grouping concessions of profitable and not

profitable airports.

It is important that the model for concessions takes into account all the impacts on the

interests of users, government and service providers.

CONCLUSION

This paper pointed out that the growth of passengers traffic in Brazil has been exponential.

The Brazilian Government investments in airport infrastructure has not been enough to

support the increasing demand for air transportation, which is the reason why privatization in

order to increase the Brazilian airport infrastructure capacity has been contemplated. Public

airports in Brazil are legally considered public services, so they cannot be purchased by

private companies. The private sector can operate and exploit public airports by means of

concessions and contract management. Companies interested in building and exploiting their


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own airports for their predominant use, can request authorization (Perpetual Franchise) from

the Civil Aviation Authority. Brazilian airport concessions can be performed in a model of

one-by-one (individual) or in groups. The models one-by-one and grouping of profitable

airports are interesting for users, government and concessionaire interests. Grouping of

profitable and not profitable airports seems less advantageous, according to the analysis

presented (figure 3). Grouping of not profitable airports only (in a second stage), may be

interesting and worth its consideration.

The concession model of the Brazilian airports has to pursue the highest satisfaction of the

interests of government, users and service providers.

REFERENCES

COASE, Ronald. The Nature of the firm. Economica, London, v. 4, 1937 p. 386-405.

CRANFIELD University. Study on Competition between Airports and the Application of State

Aid Rules. (2002)

DOGANIS, R. The airport business. London: Routledge, 1992.

FIUZA, E. P. S. Governança, custos e subsídios cruzados no sistema Infraero. Rio de Janeiro:

Ipea, 2008 (Texto para Discussão, n. 1365).

POOLE, Jr , Robert W. Guidelines for Airport Privatization Los Angeles, CA: Reason

Foundation. Oct. 1994.

von BERG, Felix. Brazilian Airport Privatization: key Considerations from an Operator´s

View. Airport Concession Seminar – São Paulo, November, 14th, 2008. Pg. 21 - 23.

WILLIAMSON, O. E. The Economic Institutions of Capitalism. (1985).


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