Trade and transportation infrastructure has undergone massive privatisation worldwide over the past 50 years (see Arnold 2019 and Maingard and Virto 2011 on the effects of privatisations on the economy). Assets such as seaports, airports, roads, bridges, railroads, water systems, and internet cables have transitioned from government ownership and operation to the private sector via either long-term concession leases or outright ownership transfers. Over time, private equity (PE) investors – usually through dedicated infrastructure funds – have come to play an important role in this process. The privatisation of traditionally publicly owned infrastructure raises questions about what types of goods private markets can efficiently provide, a topic that economists have long debated, perhaps most famously in the context of lighthouses. Studying infrastructure privatisation in the modern era sheds light on the economics of these types of goods, the public policy questions around who should own these assets, and the role of PE in the economy.
Our research focuses on airports, examining how changes in ownership relate to changes in service quality and financial performance (Howell et al. 2022). Airports are crucial strategic and economic assets, serving as gateways for people and goods from around the globe to enter a city and its country. Airports and infrastructure, more broadly, have distinctive features relative to other assets: They are large, long-term, provide an essential service, and face little competition and high barriers to entry. Unlike other types of infrastructure, however, airport revenue can be volatile and linked to the business cycle, as it depends on passenger and freight transport.
We document airport privatisation patterns over nearly four decades. We examine the consequences of ownership type as well as variation across regulatory regimes. Airports provide a useful setting for an international analysis because they share a common business model: sell to passengers in terminals and charge airlines for using the terminals and gates. Around the world, airports adhere to common standards that enable aggregate performance analysis. We consider three ownership types that have dominated the industry over the past fifty years: public, non-PE private, and PE. Under public ownership, the government owns and manages the airport. When the airport privatises, a firm acquires the right to operate, invest in, and earn residual cash flows from the airport in either a sale or a concession. Following industry standards, we define a sale as either an outright sale or a long-term (>30 years) lease, while concessions are shorter-term leases. We segment the private firms into those owned by infrastructure funds (PE) and those that are not (non-PE private).
Relative to other work on infrastructure or privatisation, one contribution of this paper is to consider PE separately. PE represents a different economic model from independent private ownership, including higher-powered incentives to maximise profits and shorter time frames for creating value. Infrastructure funds have been growing rapidly and are now a major asset class within private capital markets. Between 2015 and 2019, these funds invested $388 billion and have more than $300 billion of capital raised and ready to invest (‘dry powder’) as of 2022, up from $69 billion in 2011.
The real effects of PE have been studied in other sectors, such as retail and manufacturing, but there is little evidence on whether PE creates value in infrastructure, which is characterised by longer holding periods and intensive government monitoring. With long-term, stable cash flows, privatised infrastructure has proven an attractive class to institutional investors. However, Andonov et al. (2021) document that, in practice, infrastructure funds have failed to outperform the market on average, and value creation has been driven by short-term capital gains from quick exits, not long-term holdings. This contrasts with evidence of strong returns in PE overall (Harris et al. 2014). It is an open question whether infrastructure funds have similar real effects as PE in other sectors.
We combine a wide array of sources to paint a reasonably holistic picture of airport ownership and operations. We begin with an expansive dataset of 2,444 unique airports in 217 countries. In the most comprehensive, hand-collected privatisation data effort to date (to our knowledge), we document that 437 have been privatised. Of these, 102 have at least once been owned by an infrastructure fund. As government plays a crucial role in determining airport outcomes, even after privatisation, we collect information on airport price regulation as well as local government quality and business climate.
In our main analysis, we use airport-year panel data, with information on traffic and passengers at airports with more than 10,000 passengers and 100 flights a year. We first examine the determinants of private ownership. Notably, PE but not non-PE buyers avoid airports with cost-based price regulation, where prices must reflect costs, and thus profits are limited. Infrastructure funds also target airports with higher trade volumes. Motivated by Lerner and Schoar (2005), who show how cross-country governance affects PE investment approaches, we consider local governance indices. Infrastructure funds target airports in countries with better judicial effectiveness and more financial freedom. A takeaway from this exercise is that these two types of private ownership have different predictors, suggesting a more systematic approach on the part of the infrastructure funds.
The results, estimated during our sample period of 1996 to 2019, paint a consistent picture of which infrastructure funds improve airport performance. First, we consider traffic. Passengers per flight is a key efficiency metric, enabling the airport to serve more customers with the same runway and gate infrastructure. Under PE ownership, both in privatisation events and in subsequent acquisitions from non-PE private firms, the number of passengers per flight increases, for example, by 20% in privatisation events. In contrast, non-PE privatisation has no effect. This appears to reflect the encouraging airlines to bring larger planes as the share of jets increases at the expense of regional and small aircraft. Overall passenger traffic increases under both ownership types, but by more than four times as much (84%) under PE ownership. The number of flights exhibits a similar pattern.
Both in privatisation and post-privatisation transactions, PE increases the number of routes by much more than non-PE. This is driven by international routes, which increased by 46% after PE privatisation. This benefits passenger welfare and the local economy, as access to more routes creates new economic opportunities (Bernstein et al. 2016). We find dramatic declines in the flight cancellation rate under PE ownership, again both in privatisation and subsequent transactions. This presumably reflects improved operations. The event studies indicate that under PE ownership, there is a decline in the share of departures that leave on time in the deal year, but by the second year after the deal, there is a large increase in the on-time departure rate relative to before the deal. However, the average effects suggest declines in the on-time departure rate for both PE and non-PE. This might reflect airport congestion, driven by the higher volume documented above, or more delayed incoming flights. The airport can improve the former, but the latter is out of the airport’s control.
There are a number of aspects of the passenger’s experience in an airport that cannot be directly observed, such as the quality of the stores, waiting areas, and overall cleanliness. To evaluate the impact of privatisations on these factors, we employ ACI Word’s annual Airport Service Quality awards, which recognise airport excellence in customer experience based on surveys of passengers. We find that post-privatisation transitions to PE ownership increase the chances of winning an award.
We consider two financial dimensions: prices and airport financials. First, consistent with the airline industry’s dim view of privatisation, fees charged to airlines increase after privatisation by non-PE firms and in non-PE to PE transactions. Relatedly, there is a strong relationship between PE acquisitions from non-PE private firms and the removal of price regulation, which could reflect PE owners are lobbying for deregulation. In a rare look at the income statements of private, PE-owned firms, we see that net operating income increases by 108% after PE privatisation. This appears to reflect higher revenues rather than significant cost-cutting, as we see increases in operating expenditure and no change in employees per passenger. We observe revenue increases driven by both aeronautical (i.e. charged to airlines) and non-aeronautical (i.e. terminal retail) sources. After transitions from PE to non-PE private ownership, we see significant declines in net income and revenue, as well as in operating expenditure.
Overall, we find strong evidence that infrastructure funds improve the efficiency of the airports they acquire. Of course, this conclusion comes with some caveats. Airports are (as we document) not randomly targeted for privatisation and PE acquisition, so despite our tests and the absence of pre-trends, it is possible that the airport would have experienced the changes we observed in the absence of the ownership change. Furthermore, we do not observe all dimensions of airport operation. Each data source does not cover all airports, and some samples have relatively small numbers of PE-owned airports, though the main results are robust to the overlapping samples. Nonetheless, we believe our sample and outcome variables represent by far the most complete picture of ownership and operations for a class of infrastructure to date. These data allow us to document for the first time how privatisation and PE ownership affect the operational and financial performance of infrastructure.
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Howell, S, Y Jang, H Kim and M S Weisbach (2022), “All Clear for Takeoff: Evidence from Airports on the Effects of Infractructure Privatization”, Working Paper.
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