sample essay of MGX5440 (4)

this is the last assignment of MGX 5440, also, it is last assignment of my Monash study life.

Abstract

North Korea is a less developed country as well as a mysterious socialist country. In this report, it will figure out how to develop its economic. First, the background of North Korea is introduced. From the introduction, it finds that North Korea is a unique country, and it should find a special way to develop its economic. Second, some problems contained in North Korea are identified. Two types of problems are found, first one is political problem, such as bad relationship with other countries. Second one is economic issue, such as its infrastructures are needed to be modernised. Between these two problems, political problems are needed to be fixed first, as the economic cannot be developed without a stable social environment. So, in the third part, two plans are recommended- first five years plan and long term plan. In the first five years plan, it will focus on fix its political problems through Six Party Talks. And the main idea of long term plan is using China and Vietnam's method- "economic reform and opening up" to change North Korean economic situation. The priority of long term plan is infrastructure construction, as without infrastructure, other economic activities are hard to work smoothly. And at the end of this report, some special tips are given, North Korea government can learn a lot from China's high speed economic development, but it also should watch out some bad impacts of high speed economic development.    

 

 

 

Introduction

Democratic People's Republic of Korea is a country in East Asia, occupying the northern half of the Korean Peninsula. The peninsula was governed by the Korean Empire until it was annexed by Japan following the Russo-Japanese War of 1905. It was divided into Soviet and American occupied zones in 1945, following the end of World War II. North Korea refused to participate in a United Nations–supervised election held in the south in 1948, which led to the creation of separate Korean governments for the two occupation zones.

 

North Korea has long maintained close relations with the People's Republic of China and Russia. The fall of communism in Eastern Europe in 1989, and the disintegration of the Soviet Union in 1991, resulted in a devastating drop in aid to North Korea from Russia and North Korea's economy declined sharply, although China continues to provide substantial assistance (Travel Document Systems, 2010).

 

GDP is estimated to have fallen by about 25% in 1990s. The economy has since stabilized and shown some modest growth in recent years, which may be reflective of increased inter-Korean economic cooperation. Output and living standards, however, remain far below 1990 levels. North Korean industry is operating at only a small fraction of capacity due to lack of fuel, spare parts, and other inputs. Agriculture and fisheries were 22% of GDP as of 2008, although agricultural output has not recovered to early 1990 levels. The infrastructure is generally poor and outdated, and the energy sector has collapsed (ABC, 2010).

North Korea has a centralized government under the rigid control of the communist Korean Workers' Party (KWP), to which all government officials belong. A few minor political parties are allowed to exist in name only (Government, 2010).

 

In the rest of this report, it will first identify the current problems contained in the North Korea. Then based on the features and problems of North Korea's economic and government system, it will make two plans for North Korean government to solve these problems as well as help its future development. At the end of the report, a conclusion will be given.

 

Current Problems

There are two types of problems are needed to be considered in North Korea future development- political problems and economic problems.

 

Political issues

North Korea was placed under the Soviet Union's rule for a considerable period of time, thus it is structured as a Communist state with special references taken from the Russian constitution. Even though the political system of North Korea has undergone several changes over the last few years in order to boost up the economic growth of the country, the nature of the political system, a major aspect of the North Korean political system lies in the fact that it is widely seen as a totalitarian dictatorship built upon the rationale of centralization. Due to the political and historical reasons, the bilateral relations with its neighbouring western-friendly countries are often tense. It remains a lot contentious issues among those countries on political and economic aspects. 

 

America

North Korea has been among the most vexing and persistent problems in U.S. foreign policy in the post-Cold War period. The United States has never had formal diplomatic relations with North Korea. Relations between the two countries worsened in the early 1990s when North Korea expanded its nuclear program and the US considered bombing the suspected weapons development facilities. The two sides eventually negotiated their way back from the brink of the war. The resulting Agreed Framework required that North Korea freeze its nuclear program in exchange for shipments of heavy fuel oil from the US and two light-water nuclear reactors to be built by an international consortium funded largely by Japan and South Korea. As part of this agreement, the two countries pledged to move toward full normalisation of relations. However, the Agreed Framework averted war but did not create a lasting peace. The US government has continued to criticize North Korean sales of advanced missile technology to countries such as Pakistan and Iran. In August 1998, North Korean launched a satellite that pass over Japan and demonstrated its possession of three-stage rocket technology without notification. At the same time, US and South Korean get the information that an underground facility in North Korea might house a nuclear weapon program, the US encouraged Japan to expand its military role in the region to threat North Korea. All of these limited the steps toward normalisation of relations. Although US rhetorically supports a more open and internationally integrated North Korea, all the embargo further servers Pyongyang from the capitalist world and reinforces the isolationist faction within the North Korean political elite (Porter, 2010).

 

Japan

Attempts to establish normal relations in the early 1990s and again in 2000 ended in failure, due to seemingly unresolvable obstacles. In September 2002, a one-day summit was held in Pyongyang between Japanese Prime Minister Junichiro Koizumi and North Korean leader Kim Jong il, the first ever between the leaders of the two countries. Koizumi and Kim momentarily appeared to break longstanding stalemates on several issues and agreed to restart bilateral normalization talks, but the talks subsequently stalled, due to North Korea's apparent admission to U.S. officials in October 2002 that it had a secret nuclear weapons program based on the process of uranium enrichment. Japan's role is potentially critical in the current crisis over North Korea's nuclear weapons programs for a number of reasons. Most importantly, Japan has promised North Korea a large-scale economic aid package to compensate for the Japanese occupation of the Korean Peninsula from 1910-1945, much as it gave South Korea economic assistance when Tokyo and Seoul normalized relations in 1965. Since North Korea launched a long-range missile over Japan in 1998, relations with North Korea have been a highly politicized issue inside Japan, creating strong domestic support for taking a hard line against Pyongyang. Prime Minister Koizumi, however, has equivocated on taking more coercive measures against North Korea, such as economic sanctions, absent an escalation of the situation by Pyongyang. Japan fears such measures could provoke a military response by North Korea or trigger a surge in refugees (Japan-North Korea Relations, 2010).

 

South Korea

After nearly two decades, inter-Korean relations had not improved measurably. In fact, it may be argued that political leaders in Seoul and Pyongyang have skilfully used the perceived mutual threat to maintain and justify their political legitimacy. Recently, the sinking of the South Korean Navy warship Cheonan on 26^th March and the subsequent determination two months later by a multinational investigation team that a North Korean torpedo attack had caused the destruction has sharply escalated tension on the Korean peninsula (Kurt Achin, 2010).

 

Economic issues

The political issues are not the only problems that North Korea faced at the moment. Although North Korea's infrastructure is extensive, it is crumbling and in need of expansion and modernization. The country's road system, estimated at 20,000 to 31,200 kilometers, is limited and unpaved. Private cars are scarce and the number of trucks is limited. The 5,000-kilometer railway network, originally built by the Japanese, provides 70 percent of passenger transport and carries about 90 percent of the annual freight traffic.

 

Most of the country's ports and airports need modernization. Of North Korea's 12 ports, only a few can handle large ships, while only 22 of its 49 airports have paved runways. Pyongyang's Sunan airport operates 20 weekly flights, servicing only 6 destinations.

 

North Korea suffers from a shortage of oil and gas. The oil shortage came after the country was deprived of its access to low-priced Soviet oil and saw a significant decrease in oil shipments from China. The country produces electricity from fossil fuel (34.4 percent) and hydroelectric power generators (65.6 percent). Over the next several years, North Korea will approve funds to construct over 100 new power generating plants. The state-owned oil and gas facilities are being privatized and provide excellent opportunities for investment. In 1999 it was estimated that the country produced 28.6 billion kilowatt-hours of electricity.

The telecommunication system is undeveloped. In 1995 there were 1.1 million telephone lines in use. Based on 1998 statistics, North Korea has 12 radio stations and 38 television stations. There are 3.36 million radios and 1.2 million television sets in use. The country has one Internet service provider and no cellular telephone system (Vyapaarasia, 2010).

Future Plans

First five years plan (2011-2015)

Obviously, there are several problems with North Korea. As mentioned above, the most important problem is that the society is not very stable. More explicitly, the relationship with Japan and USA is bad, and import and export activities cannot work well. If the society is not stable, it will be very difficult for this country to develop their economic. So in the first five years, North Korea should work hard on fixing its relationship with other countries, especially with Japan, USA, and South Korea.

 

 

 

Six-Party Talks

Seven years ago, an meeting called the Six-Party Talks used to give North Korea a very good platform to communicate with other countries. Unfortunately, the Talks was discontinuation since 2007. The last Talks was held on September 2007. And after its discontinuation, several events happened in North Korea. On 5^th April, 2009, North Korea proceeded with its announced satellite launch, despite international pressure not to do so. The pressure was due to international belief that the "satellite" was in fact a test of North Korea's Taepodong-2 ICBM. The launch was a failure, and it landed in the Pacific Ocean. Despite the failure, U.S. President Barack Obama responded that "violations must be punished," ordered North Korea to be "punished." South Korea urged heavier sanctions against North Korea. On 13^th April, 2009, the United Nations Security Council agreed unanimously to a Presidential Statement that condemned North Korea for the launch and stated the Council's intention to expand sanctions on North Korea. On 14^th April, 2009, North Korea, responding angrily to the UN Security Council's resolution, said that it "will never again take part in such [six party] talks and will not be bound by any agreement reached at the talks." North Korea expelled nuclear inspectors from the country and also informed the International Atomic Energy Agency that they would resume their nuclear weapons program (Mark, 2009). On 25^th May, 2009, North Korea detonated a nuclear device underground. The test was condemned by the United Nations, NATO, the other five members of the Six-party talks, and many other countries worldwide (Louis, 2009).

 

These facts indicate that the discontinuation of the six party talks made the situation worse in North Korea. We suggest North Korea goes back to the Six-Party Talks. The Six-Party was set up to solve the problems between Korea and other countries, North Korea should seize the opportunity to solve the problems. We suggest North Korea uses 3-5 years to make some agreements with these counties through the Six-Party Talks. By singing these agreements, at least North Korea can achieve peace at some level. And the peace in North Korea is the precondition of the development of North Korea. So at the first five years plan, North Korea should put Six-Party Talks in the first priority. Only under peaceful environment, the economic construction can be conducted smoothly.

 

To sum up, the first five years plan is aim to let North Korea achieve some level of peace through six party talks. After that, the economic development can be done without so many troubles.

 

Long term plan

Overall

There are only few countries are socialism countries, for instance, North Korea, China and Vietnam. During recently years, China and Vietnam are developing very well. Basically, these two countries used the same method to develop the economic- the reform and opening-up policy. In the following few paragraphs, it will introduce the cases in Vietnam and China.

 

Vietnam started Economic Reform in 1986. Over the past 20 years, Vietnam has made a shift from a centrally planned economy to a Socialist-oriented market economy. Over that period, the economy has experienced rapid growth. Nowadays, Vietnam is in the period of integrating into world's economy, as a part of globalization and is in transition from a planned economy to a market-oriented mixed economy. Although, almost all Vietnamese enterprises are SMEs with some nationwide trademarks such as VNPT, Vinamilk, Trung Nguyên, Kinh Do and others, Vietnam has been rising as a leading agricultural exporter and an attractive foreign investment destination in East and Southeast Asia.

 

In 2009, the nominal GDP of Vietnam reached $92.439 billion, with nominal GDP per capita of $1,060. According to a forecast in December 2005 by Goldman-Sachs, Vietnamese economy will become the 17th largest economy in the world with nominal GDP of $ 436 billion and nominal GDP per capita of 4,357 USD by 2025 (IMF, 2010). According to the forecast by the PricewaterhouseCoopers (2008), Vietnam may be fastest growing of emerging economies by 2025 with a potential growth rate of almost 10% per annum in real dollar terms that could push it up to around 70% of the size of the UK economy by 2050.

 

China has had a spectacular economic development and has come to play an increasingly important role in the world economy, especially since China became a member of the WTO. For a long time, the Chinese economy was a centrally-planned economy in which all companies were owned by the state. In 1978 China started an economic reform. In the beginning, in the late 1970s and early 1980s, trade was opened to the outside world and the Contract Responsibilities System was implemented in agriculture. By the end of the 1980s China had almost solved its food shortage problems. Around 1990 six special economic zones were established, including the Shanghai Pudong zone, which was a pioneer attracting foreign capital.

 

The reforms of the late 1980s and early 1990s focused on the creation of a pricing system, which was achieved using a dual track pricing system (China.org, 2009), and on decreasing the role of the state in resource allocations. Increasingly competitive sectors, such as distribution, were opened to private enterprise and foreign capital. In 2004 the GDP per capita was US$1,267. In 2009, this number reached US$ 6,567.  Industrialization, open organization and internationalization was the tendency that helped move towards a market economy. In 2009 GDP increased to US$8.765 trillion, which makes China the third biggest economic body in the world, just followed US and European Union (IMF, 2010). Opening to the outside remains essential to China's development.

 

China continues to attract large investment inflows. By the end of 2004 China had become the biggest FDI developing country. In 2003 foreign fund and enterprises produced about 45% of China's exports. By comparison, China's imports and exports account for 5.3% and 5.8% of the world's, respectively. Foreign exchange, on the other hand, total about US$ 609.9 billion in 2004. This appeared in the IMF report of 2004. More than 20% of the world increase in trade was contributed by China. China emerged as the third biggest trade body, after the US and the European Union.

 

From these two cases, it is clearly that "economic reform and opening-up policy" seems very suitable policy for socialism country for economic development. So, in the long term plan, North Korea can follow the China method, first set up one or two special economic zones. We suggest the first special economic zone should set up at Sinuiju. Sinuiju is a city near China, so it can build up some factories in this city, and then trade with China more easily. Another reason for setting up a special economic zone in this city is because of Pohai (Korea Bay). North Korea can trade with other countries through Sinuiju Port. So in the overall level, we suggest North Korean government follow China and Vietnam's way to improve its economic situation.

 

Priority in the long term plan

Generally, when a country decides to improve its economic situation, the infrastructure should be improved first.  For example, when several factories are needed in special economic zone, it needs power to support these factories, also needs roadway to deliver their products. And as mentioned above, there are so many problems contained in the infrastructure system of North Korea. So we suggest North Korea should consider how to improve its infrastructure first. And we also notice that the North Korea government may face financial problem, so BOT can be used to finance its infrastructure construction. Also China has some experiences on BOT. For example:

 

China's Shajiao B Power Plant Project

Located in the Hong Kong border area of China's Guangdong province, the US$550 million, 700 megawatt Shajiao B project was developing Asia's first large independent power producer (IPP) program. In 1984 the local government of the fast-growing area, realizing it urgently needed better power generation capacity, accepted a proposal by Hong Kong construction firm Hopewell Holdings to develop a plant on a BOT basis. Risks were high because the BOT structure was very new to Asia and China had no policy on foreign investment into infrastructural development, which was controlled by the country's state-owned enterprises. The project proceeded on the basis of Hopewell founder and chief executive Gordon Wu's good relations with government officials and state enterprises in both Beijing and Guangdong. In addition, the government shouldered a significant portion of the risk, while offering disproportional rewards to Hopewell. A government owned investment unit became a significant equity partner, and another state-owned entity guaranteed power purchase payments and foreign exchange risks. Meanwhile Hopewell, which was the major contractor to the project as well, arranged that it (as equity partner) would be paid a large cash bonus and preferential share of tariff receipts (compared to other investors) for beating the construction deadline. This amounted to more than US$50 million.  These payments ensured that, for Hopewell, Shajiao B would make an estimated 25-30 per cent return on equity, thus reducing its capital exposure very quickly. In essence, China's acceptance of a very high level of profitability and very early payback for the sponsors, in return for the latter's commitment to provide new power capacity rapidly, made the project work (Handleya, 1997).

 

Accordingly, North Korea government could sign contracts with foreign countries' companies to construct infrastructure. Especially, the government can hire Chinese companies to do that. Because China and North Korea have good relationship compared with other countries, when China companies running business in North Korea, the resistance from government maybe low.

 

Special tips

As mentioned above, North Korean Government should learn a lot from Chinese Government. So, North Korean Government should also notice the shortcomings of Chinese high speed economic development. There are several points should be avoided.

 

1) The economic growth model, from an extensive economy to an intensive one; from large investment and high consumption of resources to a high technology model, high added value and low consumption of resources.

 

The foreign companies direct invest in China contributes some GDP of China. For example, SONY operates some factories in China, and these factories manufacture a lot of products every year, and make some profit which count in China GDP. But who is the really beneficiary for operating the factories in China? The answer is SONY. SONY opens factories in China does help China to solve the employment problem in some level. But the eventual beneficiary is SONY. SONY can reduce cost through producing the products in China. And it gets the net profit of its products, just leave the Tax and GDP number for China. And China cannot get the technologic because SONY still holds that. From the pure economic point of view, SONY can get more benefits than China.

 

So, North Korea needs pay more attention to develop the high-tech products by itself, and get more real economic benefits.

 

2) Gap between the rich and the poor.

There is a common comment in China now- the rich people get richer, and the poor people get poorer. The rich people can use their capital to reinvestment, and earn more profit. But the poor people cannot do that. The huge gap between rich and the poor people maybe the main shortcomings of capitalism economic. But some capitalism countries use some leverage to solve this problem. For example, Australian Government uses tax to balance the gap between rich and poor. When people earn more money, they must pay more tax. The highest tax rate for individual people is 45%, if plus medicare levy it can reach 46.5%. That's quiet high tax level. A joke talk about the huge gap between rich and poor- China spent 30 years creates the gap between rich and poor larger than that capitalism spent more than 100 years. That's quite an irony. But it can reflect the true situation in China. So North Korea should also need to find some methods to balance the income of difference groups of people.

There are also some other problems should be considered, such as pollution problem during the high speed development.

 

Conclusion

In this report, it first introduces some background of North Korea, and it shows that the economic situation in North Korea needs to be improved. Then it finds the main problems contained in North Korea. There are two main problems, one is political problem such as bilateral relationship with US, and the other is economic problem, such as infrastructure needs modernized. After that, according to the problems contained in North Korea, we make two guidelines for North Korea Government. First one, we call it "first five years plan". We suggest North Korea Government uses 3 to 5 years to fix its relationship with other countries through the Six Party Talks. After fixed the political problems, the economic problems can be fixed faster. The second plan, we call it "long term plan". The main idea of long term plan is North Korea can use China and Vietnam's method to fix its economic problems, we can call it "reform and opening up". The priority of long term plan is constructing infrastructure. As North Korea government may face financial shortage, it is recommended to use BOT to construct infrastructure. Also, some special tips are given such as notice the gap between rich and poor people during the economic development.

 

  

References

ABC, 2010, Korea, North, http://www.theodora.com/wfb/korea_north_economy.html

Achin, K. (2010) North Korea Breaks Relations with South Korea, Global Security, http://www.globalsecurity.org/wmd/library/news/dprk/2010/dprk-100525-voa01.htm

China.org.cn (2009) 1981: Dual-track Price System, http://www.china.org.cn/features/60years/2009-09/16/content_18534471.htm

CNN (2010) North Korea's leader, presumptive heir, attend huge parade, http://edition.cnn.hu/2010/WORLD/asiapcf/10/09/north.korea.arirang/index.html

Government (2010) Government, http://countrystudies.us/north-korea/55.htm

Handleya. P, (1997) 'Critical View Of The Build-Operate-Transfer Privatization Process in Asia', Asian Journal of Public Administration Vol 19, No 2 (December 1997) 203-243

IMF (2010) Vietnam, http://www.imf.org/external/pubs/ft/weo/2010/01/weodata/weorept.aspx?sy=2007&ey=2010&scsm=1&ssd=1&sort=country&ds=.&br=1&c=582&s=NGDPD%2CNGDPDPC%2CPPPGDP%2CPPPPC%2CLP&grp=0&a=&pr.x=71&pr.y=7

IMF (2010) China http://www.imf.org/external/pubs/ft/weo/2009/01/weodata/

Japan-North Korea Relations (2010) Ministry of Foreign Affairs of Japan, http://www.mofa.go.jp/region/asia-paci/n_korea/index.html

Louis, C. (2009) U.N. Security Council condemns North Korea nuclear test. Reuters. http://www.reuters.com/article/worldNews/idUSTRE54O4FS20090525

Mark, L. (2009). North Korea Says It Will Halt Talks and Restart Its Nuclear Program. The New York Times. http://www.nytimes.com/2009/04/15/world/asia/15korea.html?ref=global-home.

North Korea Economy Watch (2010) http://www.nkeconwatch.com

PWC (2008) China to overtake US by 2025, but Vietnam may be fastest growing of emerging economies http://www.pwc.com/gx/en/press-room/2008/china-asia-economic-markets-growth-emerging-markets.jhtml

Porter,. K. (2010) The US-South Korean Relationship, US Foreign Policy,  http://usforeignpolicy.about.com/od/countryprofile1/p/usskoreaprofile.htm

Scobell, A. (2006) Kim Jong Il and North Korea: The Leader and the System, www.strategicstudiesinstitute.army.mil/pdffiles/pub644.pdf

Travel Document Systems (2010) North Korea Economy, http://www.traveldocs.com/kp/economy.htm

Vyapaarasia (2010) http://www.vyapaarasia.com/n.korea/roads.asp

sample essay of MGX5440 (3)

this is the second assignment of MGX 5440

Abstract

Historically, airports around the world were owned and operated by governments. Since the mid-1980s, however, significant changes have occurred in the way airports are owned, managed, and operated. In the report, it first states the five types of airport privatisation. Then it states the cases from UK, Canada and Colombia to demonstrate these types of privatisation in details. After that, two previous studies conducted by different researchers are shown. They find that the benefits of privatisation are not as clear as some documents stated. Finally, the conclusion is the governments should think thoroughly before they decide to involve the private sector in the provision of public infrastructure and related services.

Introduction

Currently, for some reasons, the governments would like involving the private sector in the provision of public infrastructure and related services. According to Northern Territory Treasury (2010), the greatest attraction in privatisation is the impetus it gives to the pursuit of dynamic efficiencies. Dynamic efficiency involves the degree to which the minimum level of inputs is being used to produce a given level of a particular output. This requires the assets or business in question being put in the hands of owners with enough of a stake to benefit from improved performance and with the power to achieve results. Privatisation also has the attraction that it can basically eliminate the administrative and monitoring burdens on the government of having to oversight the risks and returns of the businesses in question. The government can then concentrate on activities more suited or appropriate to government ownership. A final benefit of privatisation is the budgetary gains possible from any privatisation, and the associated additional financial flexibility that results. Such gains depend upon whether investors are prepared to pay a premium for the control of the government business. In this report, it will describe privatisation in a specific industry-airport. First, it will show the types of airport privatisation. Then it will describe the airport privatisation in UK, Canada and Colombia in details. After that, some previous studies' results will be analysed. At the end of this report, a conclusion will be given.

Types of airport privatisation

 According to Dr Anne Graham (2010), there are five types of privatization.

1.      Share flotation or IPOs

Shares sold on stock exchange and all risks passed to shareholders. Airport needs to perform well to be sold in this way. Management maintains controls as small/ passive investors.

Examples: BAA, Vienna, Rome, Auckland, Fraport

2.      Trade Sales

All or some of airport sold to single investors or consortium. It usually brings expertise as well as finance.

Examples: Australia, UK regional airports, Brussels, Dusseldorf

3.      Concession

Private company/ consortium has concession to operate all or some assets for fixed period (usually 20-30 years). At end of concession in theory airport is handed back to government. Annual fee is usually paid to government and there may be a guaranteed level of investment or service quality. It is favoured by many governments as they keep ownership of the airport.

Examples: Columbia, Bolivia, Argentina, Mexico, Luton, Peru, Delhi, Mumbai

4.      Project Finance/BOT

It is used when a new airport or new facilities are needed. Operator finances, builds and operates new facility then in theory hand back to government. There may be a special type of concession agreement with the operator paying an annual fee to the government.

Examples: Athens, Istanbul, Hyderabad, Bangalore, Antalya, Amman, Cyprus.

5.      Management Contract

It has more limited privatisation as government maintains ownership, makes strategic decisions, sets aeronautical charges etc. Operator runs airport (or part of airport) on a day-to-day basis usually for 5-10 years. Government pays a contract fee (or operator pays government some revenues). It is often used in areas of high risk or where other privatisation models are not possible.

Examples: total contract- Indianapolis. Retail contract- Boston, Pittsburgh, Baltimore

UK

BAA (British Airport Authority) was privatised under the Airports Act 1986 and is the largest UK airports manager, operating seven airports in England and Scotland. In addition to the London airports of Hethrow, Gatwick, and Stansted, BAA owns airports at Glasgow, Edinburgh, Aberdeen and Southampton. Although there are 41 airports in the UK handling passengers and/ or cargo and levying airport charges, the market is highly regionalised. In particular, BAA's London airports have almost a localised monopoly in the economically important south-east of City and Southend. Luton has developed its business in recent years but still remains largely concerned with chartered flights for holiday makers. Most airlines and passengers, and especially those in the lucrative business market, prefer to use Heathrow. In total, BAA accounts for 72 per cent of UK air passenger traffic and 82 per cent of cargo shipped by air (Parker, 1996).

At the time of privatisation, all of BAA's issued share capital was sold by the government, except for a retained special ("golden") preference share, which still exists. The state corporation was privatised without restructuring on the grounds that a unified company would have the financial resources to fund future investment needs. In addition, there appears to have been recognition that the hiving-off of either or both of Gatwich or Stansted to another company would not necessarily produce effective completion for Heathrow. The main impact of privatisation was not, therefore, in the product market, but in the capital market. BAA became subject to pressure from commercial investors and, in particular, was no longer completely sheltered from the threat of takeover by another company that indentified possible efficiency gains. At the same time, the continued existence of the government's golden share in BAA may have reduced the takeover threat (the special share held by government can block takeover bids. The government chose not to invoke its powers in the case of the Ford purchase of Jaguar, but did so in the case of a more recent bid in the electricity industry. The government's attitude to a takeover bid for BAA remains unclear) (Parker, 1996).  

Before privatisation BAA was regulated directly by government in conjunction with the CAA (Civil Aviation Authority) in a manner that was implicitly cost-plus. The cost of airport operation was forecast, and to this was added a target minimum rate of return. This approach to price setting was typical of the economic regulation of UK state enterprises. However, under the regulatory system for designated airports introduced at the time of the Airports Act, charges are controlled through a form of RPI-X price cap. The price cap is of a revenue yield per passenger form applied to runway charges, aircraft parking charges, and the passenger charge, all of which are levied on airlines. The price cap therefore covers around 35 per cent of BAA's total revenues. Commercial activities inkling duty free sales and airport facilities are not governed by the cap; but when setting X account is taken of all revenues under what is called "the single-till principle." This principle derives from international agreements that establish the rule of a reasonable rate of return on airport investment, irrespective of the precise source of the revenues. By linking X explicitly to the rate of return, a cursory appraisal might suggest that the price cap is a form of profit regulation with associated efficiency disincentives. In the case of the UK airports, however, Xis set ex ante, therefore efficiency incentives remain for the airport management to exceed the expected profit. There have been two price reviews since privatisation, in 1991 and 1996 (Parker, 1996).

BAA has been encouraged by the price control on aeronautical charges to seek out revenues elsewhere. Although BAA remains primarily an airport operator in the UK, it does have business overseas and in recent years has expanded its real estate, retail and other commercial ventures (Skapinker, 1996). For example, it is responsible for retail management at Greater Pittsburgh International Airport in the USA, and has undertaken consultancy work in countries such as Malaysia, Macau, and Hong Kong. In 1988 BAA acquired Lynton Property and Reversionary plc to diversify into property development. This proved to be mistimed, given the property slump. In more recent years the company has adopted a strategy of concentrating on its core airport operations, including its retail skills; for example in 1993 it sold the electrical distribution system at its south-east airports to London Electricity. The company now earns over 40 per cent of its revenue from retail activities, mainly at its airports (Parker, 1996).

Canada

Toronto's Lester B. Pearson Airport is a rare case both of joint public-private ownership of facilities on shared premises and of competitive provision of airport infrastructure services. Terminals one and two are owned and operated by Transport Canada, the government transport authority, and terminal three, operating since 1991, is owned by the Terminal Three Limited Partnership (TTLP). Terminal three is operated under a management contract by Lockheed Air Terminal of Canada Inc. (LATC), and it was developed under a build-own-operate-transfer (BOOT) arrangement that includes a sixty-year renewable land lease contract. The development cost for the terminal, which has capacity for 10 million to 12 million passengers, was about Can$570 million. Transport Canada coordinates activities between Lester B. Pearson's privately and publicly owned terminals. It also provides air navigation services, owns all runways and taxiways, and receives all revenues from landing fees, passenger fees, airline fuel taxes, and ticket taxes. LATC controls the landside activities for terminal three, which begin when aircraft switch from general to terminal three tower control. While airside charges for terminals one and two are purely on a cost-recovery basis, terminal three generates revenues through airline rents and charges (aircraft taxiing and parking, and terminal fees), concessions, and parking to cover not only higher operating costs and capital costs but also profits. The market is segmented: the average per passenger airside charges at terminal three are twice as high as those at terminals one and two, and the more prestigious international carriers tend to use terminal three, while lower cost regional or local carriers use the others (Juan, 1996).

Colombia

At the end of 1993, the government of Colombia corporatized its Civil Aviation Authority (CAA), separating airport operations from air navigation activities. At the same time, it undertook the development of a second runway at El Dorado International Airport in Bogotá, using a BOT scheme for construction and maintenance of the new runway and maintenance of the existing runway. In May 1995, the government awarded the BOT concession, stipulating investments of US$97 million, to the consortium of Ogden, Dragados, and Conconcreto. The concessionaire's investment and operating costs, financing expenses, and profits will be covered by the landing fee revenues, which the CAA will cede during the twenty-year concession. Once bidders had fulfilled the technical requirements, bids were evaluated on the basis of the net present value of the minimum landing fee revenue the bidder would require throughout the concession period (landing fees multiplied by estimated traffic volume) and the weighted average landing fee in U.S. dollars. The government has guaranteed a minimum level of revenues (floor pricing), in a rare case of a government's accepting commercial risk. If the landing fee structure or traffic volume, or both, cannot support the required revenue stream, the government would compensate the concessionaire from a trust fund equivalent to 30 percent of the annual landing fee revenue. The El Dorado transaction demonstrates the flexibility of BOT schemes and is becoming a model for private sector participation in developing such airside airport infrastructure as runways, taxiways, and aprons (Juan, 1996).

Privatisation or not

Numbers of studies were conducted by different researchers based on various data. Parker's (1996) study has been concerned with technical efficiency at BAA's airports, and found out no evidence was found that performance improved because of privatisation. And a similar study conducted by Oum, Adler and Yu (2006) shows that 100% public (single government owned) airports are more efficient than the PPP (Public Private Partnership) airports, where a government retains majority ownership and control. Furthermore, airports with majority private ownership (including 100% private ownership) do not achieve significantly higher efficiency than the 100% government-owned airports, such as those in the U.S. their date were collected in 116 airports in several countries. From these two studies, it indicates that privatisation is not as good as it described.

Conclusion

As mentioned above, there are five types of privatisation relation to airport industry- share flotation, trade sale, concession, project finance and management contract. Different airports in different countries used different methods. Then three cases from UK, Canada and Colombia are provided to demonstrate these types of privatisation in details. Although in some documents they state there are some benefits of privatisation, through some previous studies, the benefits of privatisation are not very clear. So, when the governments decide involving the private sector in the provision of public infrastructure and related services, they should consider it thoroughly as the benefits of privatisation are hard to achieve.

 References

Graham, A. (2010) Fundamentals for Airport Privatization and Concession Policies, University of Westminster, London

Juan, E. (1996) Privatising Airports- Options and Case Studies, Public Policy For The Private Sector, The World Bank, Note No. 82

Northern Territory Treasury (2010) Privatisation and Outsourcing, Retrieved 25^th September 2010, from www.nt.gov.au/ntt/financial/9899bps/bp3/ch_8.pdf,

Oum, T. Adler, N. and Yu, C. (2006) Privatization, Corporatization, Ownership Forms and their Effects on the Performance of the World's Major Airports Retrieved 25^th September 2010, from http://linkinghub.elsevier.com/retrieve/pii/S0969699705001006

Parker, D. (1996) The Performance of BAA Before and After Privatisation, Journal of Transport Economics, Volume 33, Part 2, pp133-46

Skapinek, M. (1996) BAA Hopes to Elude Labour Windfall Tax, Financial Times, 12^th November, page 22