Airport Privatization: Issues Related to the Sale or Lease of U.S.
Commercial Airports (Chapter Report, 11/07/96, GAO/RCED-97-3).

The possible sale or lease of commercial airports in the United States
to private companies has generated considerable interest in recent
years. Such cities as New York and Los Angeles have considered
privatizing their airports. Proponents claim that privatization would
inject much needed capital into the aviation infrastructure, while
opponents argue that local governments favor privatization as a way to
divert airport revenue intended for developing aviation infrastructure
to other municipal purposes, resulting in higher costs for airlines and
passengers. This report examines the (1) extent of private sector
participation in commercial airports in the United States and foreign
countries; (2) incentives and barriers to the sale or the lease of
airports; and (3) potential implications for major stakeholders, such as
the passengers, the airlines, and the government, should airports be
sold or leased.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  RCED-97-3
     TITLE:  Airport Privatization: Issues Related to the Sale or Lease 
             of U.S. Commercial Airports
      DATE:  11/07/96
   SUBJECT:  Privatization
             Airports
             Airline industry
             Commercial aviation
             Air transportation operations
             State governments
             Local governments
             Budget receipts
             Bonds (securities)
             Capital
IDENTIFIER:  Airport and Airway Trust Fund
             FAA Airport Improvement Program
             Heathrow Airport (United Kingdom)
             Gatwick Airport (United Kingdom)
             Baltimore-Washington International Airport (Baltimore, MD)
             Washington National Airport (DC)
             Dulles International Airport (VA)
             United Kingdom
             Chicago-O'Hare International Airport (Chicago, IL)
             Greater Pittsburgh International Airport (Pittsburgh, PA)
             Cincinnati-Northern Kentucky International Airport
             John F. Kennedy International Airport (NY)
             John Wayne Airport (CA)
             Atlantic City International Airport (NJ)
             Mexico
             
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Cover
================================================================ COVER


Report to the Subcommittee on Aviation, Committee on Transportation
and Infrastructure, House of Representatives

November 1996

AIRPORT PRIVATIZATION - ISSUES
RELATED TO THE SALE OR LEASE OF
U.S.  COMMERCIAL AIRPORTS

GAO/RCED-97-3

Airport Privatization

(341487)


Abbreviations
=============================================================== ABBREV

  AIP - Airport Improvement Program
  BAA - British Airports Authority
  BOT - build, operate, and transfer
  FAA - Federal Aviation Administration
  GAO - General Accounting Office
  PFC - passenger facility charge

Letter
=============================================================== LETTER


B-271960

November 7, 1996

The Honorable John J.  Duncan
Chairman
The Honorable William O.  Lipinski
Ranking Minority Member
Subcommittee on Aviation
Committee on Transportation
 and Infrastructure
House of Representatives

This report responds to your request that we examine issues relating
to airport privatization in the United States. 

We are sending copies of this report to other interested
congressional committees; the Secretary of Transportation; the
Administrator, Federal Aviation Administration; and the Director,
Office of Management and Budget.  Copies are made available to other
interested parties on request. 

Please contact me at (202) 512-3650 if you or your staff have any
questions concerning this report.  The major contributors to this
report are listed in appendix III. 

Gerald L.  Dillingham
Associate Director,
 Transportation Issues


EXECUTIVE SUMMARY
============================================================ Chapter 0


   PURPOSE
---------------------------------------------------------- Chapter 0:1

The possible sale or lease of commercial airports in the United
States to private companies has generated considerable attention in
recent years.  Such cities as New York and Los Angeles have
considered privatizing their airports.  Proponents claim that
privatization would inject much needed capital into the aviation
infrastructure because it would make airports more commercially
oriented and financially self-sufficient.  Opponents say that local
governments favor privatization as a way to divert airport revenue
intended for developing aviation infrastructure to other municipal
purposes, resulting in increased costs for airlines and passengers. 

The Chairman and Ranking Minority Member of the Subcommittee on
Aviation, House Committee on Transportation and Infrastructure,
requested that GAO examine (1) the current extent of private sector
participation at commercial airports in the United States and foreign
countries; (2) the current incentives and barriers to the sale or
lease of airports; and (3) the potential implications for major
stakeholders, such as the passengers, airlines, and local, state, and
federal governments, should airports be sold or leased.  This report
expands on testimony provided to the Subcommittee in February 1996.\1


--------------------
\1 Airport Privatization:  Issues Related to the Sale or Lease of
U.S.  Commercial Airports (GAO/T-RCED-96-82, Feb.  29, 1996). 


   BACKGROUND
---------------------------------------------------------- Chapter 0:2

Privatization refers to shifting governmental functions and
responsibilities, in whole or in part, to the private sector.  The
most extensive privatizations involve the sale or lease of public
assets.  Selling or leasing any of the nation's 565 public commercial
airports would require the support of local, state, and federal
governments.  Unlike the air traffic control system, whose assets are
owned entirely by the federal government, commercial airports are
owned by local governments and, in limited circumstances, states and
the federal government.  However, commercial airports also receive
federal airport development grants, have access to federal tax-exempt
financing, and are subject to federal regulatory control.  As a
result, federal laws can substantially influence whether public
owners would choose to sell or lease their airports and whether a
private entity would want to be a buyer or lessee. 

Besides federal grants, other major sources of funding for airport
development are passenger facility charges, bonds, and airport
revenue.  The Federal Aviation Administration (FAA) administers
federal grants that are made available from the Airport and Airway
Trust Fund to help support capital development projects that enhance
airports' capacity, safety, security, and noise mitigation.  FAA
allocates most grants on the basis of a legislated apportionment
formula and set-aside categories earmarked for specific types of
airports or projects.  FAA also has the discretionary authority to
allocate the remaining funds on the basis of needs identified by
airports.  In 1990, the Congress gave commercial airports another
source of development funding--passenger facility charges.  With
FAA's approval, these airports can collect up to $3 per passenger.  A
third source of airport financing is issuing bonds, typically with
long-term maturities.  Most airport bonds, especially those issued by
larger airports, are secured by airport revenue.  Finally, airports
generate revenue internally from such sources as landing fees,
parking fees, and concessions.  Revenue remaining after paying
operating costs is net income that may be used for development. 


   RESULTS IN BRIEF
---------------------------------------------------------- Chapter 0:3

Although all commercial airports in the United States are publicly
owned, the private sector plays a significant role in their
operations and financing.  None of the nation's commercial airports
has ever been sold to the private sector, and only one has ever been
leased.  Nevertheless, employees of private companies--airlines,
concessionaires, and contractors--account for 90 percent of all
employees at the nation's largest airports.  Furthermore, the largest
source of capital for airport development is long-term bond debt
secured by future airport revenue and subject to the scrutiny of
credit rating agencies.  In other countries, a majority of airports
are owned and operated by their national governments.  However, 50
countries have sought greater private sector involvement in their
airports, though many of these efforts have just begun. 

While several factors, such as providing additional private capital
for development, are motivating greater interest in privatization,
legal and economic constraints currently impede the sale or lease of
U.S.  airports.  Although FAA has permitted and even encouraged some
limited forms of privatization, such as contracting for airport
management or allowing private companies to develop and lease
terminals, it has generally discouraged the sale or lease of an
entire airport to a private entity.  FAA is concerned that in selling
or leasing an airport, the legal obligations that the airport had
made to obtain a federal grant may not be satisfied.  Chief among
these obligations are restrictions on using airport revenue.  These
restrictions are intended to ensure that revenue is not diverted from
the airport for other uses and are interpreted by FAA as not
permitting public owners of airports to retain the proceeds from
selling or leasing their airports.  Also, according to FAA, these
legal obligations cannot be extinguished by repaying past grants to
the federal government.  FAA's recently proposed policy on the use of
airport revenue states that the agency will consider privatization
proposals on a case-by-case basis and will be flexible in specifying
conditions on the use of airport revenue that will protect the public
interest and fulfill restrictions on diverting revenue without
interfering with privatization.  However, FAA has not specified these
conditions, and privatization is discouraged as long as FAA considers
sale or lease proceeds to be airport revenue subject to restrictions
on diversion. 

Predicting how various stakeholders might be affected by the sale or
lease of airports largely depends on how such privatization might
ultimately be implemented.  For example, if sale or lease proceeds
are not bound by federal restrictions on the use of airport revenue,
then the local and state governments that own airports could receive
millions of dollars from these proceeds as well as future tax
receipts from privately owned or leased airports.  However, airlines
and their passengers could incur substantial additional costs if fees
charged to airlines by privately owned or leased airports are
unregulated or if privately owned airports lose access to some
federal grants and tax-exempt bonds.  Conversely, continuing to bar
privately owned airports from obtaining some federal grants and from
issuing federal tax-exempt bonds would have a positive effect on the
federal budget if a significant number of airports were sold to the
private sector.  Recognizing the barriers to and the opportunity to
test the potential benefits of privatization, the Congress
established an airport privatization pilot program as part of the
Federal Aviation Reauthorization Act of 1996.  As of October 9, 1996,
the Secretary of Transportation can exempt up to five airports from
some legal requirements that impede their sale or lease to private
entities.  The pilot program also requires that a sale or lease
agreement meet certain conditions, such as requiring that the private
owner or lessee maintain airport safety and security at the highest
levels. 


   GAO'S ANALYSIS
---------------------------------------------------------- Chapter 0:4


      PRIVATE SECTOR PARTICIPATION
      AT U.S.  AND FOREIGN
      AIRPORTS IS EXTENSIVE
-------------------------------------------------------- Chapter 0:4.1

While no U.S.  commercial airport has been sold to a private entity,
publicly owned airports have extensive private sector involvement. 
Most services now performed at large commercial airports, such as
airline ticketing, baggage handling, cleaning, retail concessions,
and ground transportation, are provided by private firms.  For
example, GAO's survey found that 90 percent of the people working at
69 of the nation's largest airports are employed by private
companies.  The remaining 10 percent of the employees are local and
state government personnel performing administrative or public safety
duties; federal employees, such as FAA air traffic controllers; or
other public employees, primarily military personnel.  According to
airport executives, airports have been increasingly dependent on the
private sector to provide services as a way to reduce costs and
improve the quality and the range of services offered.  In recent
years, some public owners have even contracted with private firms to
manage their airports; most notably, in 1995 the Indianapolis Airport
Authority contracted with a private firm to manage its system of
airports, including the Indianapolis International Airport. 

Similarly, airports are relying more on private financing for capital
development.  Airports have sought to diversify their sources of
capital development funding, including the amount of private sector
financing.  Traditionally, airports have relied on the airlines and
federal grants to finance their operations and development.  However,
in recent years, airports, especially the larger ones, have sought to
decrease their reliance on airlines while increasing revenue from
other sources.  For example, in 1994, nonairline revenue, such as
concession receipts, accounted for more than 50 percent of the total
revenue larger airports received.  Also, private sector financing has
been used to provide more capital.  For example, from 1985 through
1994, the larger airports issued over $42 billion in both new and
refinanced bonds. 

In most other countries, the national government owns and operates
airports.  However, a growing number of countries have been exploring
ways to more extensively involve the private sector as a way to
provide capital for development and improve efficiency.  These
privatization activities range from contracting out services and
infrastructure development, in a role similar to private sector
activities at U.S.  airports, to the sale or lease of nationally
owned airports. 

We found airport privatization efforts in 50 countries, although most
of these initiatives are in their early stages and results are
limited.  However, in the United Kingdom, efforts have been in place
long enough to provide tangible results.  Specifically, privately
owned airports have generated large profits for their shareholders
because of steady growth in passenger traffic and concession revenue,
despite government caps on airline fees and the owner's investment in
infrastructure. 


      WHILE ADVOCATES CITE SEVERAL
      INCENTIVES, SIGNIFICANT
      BARRIERS CURRENTLY BLOCK THE
      SALE OR LEASE OF U.S. 
      AIRPORTS
-------------------------------------------------------- Chapter 0:4.2

Several factors are motivating the current interest in expanding the
role of the private sector at commercial airports in the United
States.  First, privatization advocates believe that private firms
would provide additional capital for development.  Second, proponents
believe that privatized airports would be more profitable because the
private sector would operate them more efficiently.  For example, the
productivity of airports in the United Kingdom increased after they
were privatized.  However, airports' monopoly power could also be a
source for increased profits.  According to analysts who rate airport
bonds, some airports face little competition and, if unrestrained,
could charge prices above the levels that would prevail in a
competitive market.  Lastly, advocates believe that privatization
would financially benefit all levels of government by reducing demand
on public funds and increasing the tax base. 

Despite the growing interest in privatization, various legal
obstacles have deterred attempts to sell or lease commercial airports
in the United States.  The primary obstacle stems from the legal
assurances airports agree to meet as a condition to obtain federal
grants.  FAA maintains that airports must continue to adhere to these
assurances as part of any transfer of control.  Particularly
problematic is the assurance regarding the use of airport revenue. 
Current law generally requires that revenue generated by public
airports must be used exclusively to pay for their capital and
operating costs and cannot be diverted for nonairport purposes. 
Because FAA currently considers airport revenue to include any sale
or lease proceeds, local and state governments are entitled to
recover only their unreimbursed capital and operating costs from
these proceeds.  Therefore, the financial benefits to local and state
governments from privatizing airports would be diminished. 

Even if a sale or lease transfer could overcome legal obstacles, the
ability of a private airport to operate profitably under current
rules and conditions is uncertain.  A privately owned airport would
not be eligible for federal airport apportionment grants or
tax-exempt debt financing and would have to impose another type of
fee to replace passenger facility charges.  Losing these funding
sources would raise financing costs significantly because they
generally constitute the majority of an average airport's capital
base.  Also, a private airport owner or lessee could encounter
constraints on its revenue, making recovering its investment costs
more difficult.  For example, FAA's rules on the rates airports may
charge airlines for using their airfields limit the return on
investment from these assets.  In some cases, a private buyer or
lessee would also have to renegotiate the airport's agreements with
its tenant airlines to enable the private entity to retain the
profits generated at the airport.  However, airlines would be
reluctant to change their agreements if it meant that their costs
would increase. 


      PRIVATIZATION'S EFFECTS ARE
      CONTINGENT ON IMPLEMENTATION
-------------------------------------------------------- Chapter 0:4.3

Predicting how the sale or lease of airports would affect local and
state governments, airlines, passengers, and federal interests
requires assumptions about how such privatization might ultimately be
implemented.  Some general observations and possible examples can be
illustrated on the basis of likely scenarios and current trends. 

Local and State Governments:  Public airport owners are unlikely to
sell or lease their airports unless they can share in the proceeds
from these transactions.  Specifically, if they are not bound by
restrictions on the use of sale or lease proceeds, then they could
expect a significant financial benefit.  Estimating the market value
of an airport is extremely difficult, however, because future profits
are highly contingent on the regulatory environment that it will
operate under.  For example, removing restrictions on the landing
fees airports charge airlines or selling multiple airports together
could increase their potential future earnings and, consequently,
their market value. 

Airlines:  The effects on airlines largely depend on how their
landing fees are regulated and if a commercial airport that was sold
to a private entity could receive federal apportionment grants and
tax exemption on bonds.  First, FAA's policy regarding rates and
charges prohibits an airport from charging airlines market-based
rates for using its airfield.  If this policy is waived, an airport
facing only limited competition could raise its fees.  Other
countries have imposed some form of price regulation on the rates
privatized airports may charge airlines.  For example, in the United
Kingdom, airports' charges to airlines for the use of airfield assets
are capped at historical rates adjusted by inflation and productivity
factors.  Second, under current law, a privately owned airport would
no longer receive federal apportionment grants or tax-exempt
financing, which could increase an airport's costs and,
correspondingly, the landing fees and terminal rentals it might
charge airlines.  Such costs, according to data from airlines, were
on average about 6 percent of an airline's total costs in 1995. 

Passengers:  The effects on airline passengers depend on whether
airlines' costs increase and the degree to which airlines adjust
their ticket prices and flights in response to any increased costs. 
Passenger traffic is very sensitive to changes in ticket prices. 
Studies have found that a 1-percent increase in ticket prices may
lead to more than a 1-percent decline in passengers.  Therefore,
airlines have been cautious about passing on increased costs through
higher ticket prices.  Also, with higher costs, airlines might cut
back or eliminate flights at some airports. 

Federal Government:  The effects on the federal government depend on
whether privately owned airports continue to be denied tax-exempt
status and access to federal apportionment grants.  While access to
tax-exempt debt significantly reduces financing costs for public
airports, it also substantially reduces the federal government's
revenue.  GAO's analysis determined that the tax exemption for
interest on public airport debt costs the federal government about
$560 million annually in forgone tax receipts.  However, the amount
of additional tax revenue resulting from airport privatization would
depend on a number of factors, including how many airports were sold
to private entities.  In addition, federal apportionment grants to
commercial airports totaled $450 million in fiscal year 1995. 
Because privately owned airports are not eligible for these grants,
if a significant number of airports were to become privately owned,
the Congress could cut airport grant appropriations and still
maintain constant funding levels for the remaining public airports or
redirect these funds for other airport development needs. 


   RECOMMENDATIONS
---------------------------------------------------------- Chapter 0:5

This report makes no recommendations. 


   AGENCY COMMENTS
---------------------------------------------------------- Chapter 0:6

GAO provided the Department of Transportation and FAA with a copy of
our draft report for review and comment.  Agency officials, including
the Acting Manager of the Airports Financial Assistance Division and
Manager of the Program Guidance Branch, generally agreed with the
facts presented and provided some minor clarifying comments and
information, which GAO has included as appropriate.  Agency officials
also stated that the report was a thorough and balanced
representation of the facts. 


INTRODUCTION
============================================================ Chapter 1

The U.S.  aviation system, which accounts for 40 percent of all
worldwide aviation activity, is the largest in the world.  In 1995,
the nation's system of airports served over 580 million passengers.\2
The federal government has financed a considerable portion of this
airport infrastructure.  However, privatization advocates have
suggested that the private sector should assume more of the cost of
financing airport development. 


--------------------
\2 Total U.S.  enplanements include passengers at airports in
American Samoa, Guam, North Mariana Isle, Puerto Rico, and the Virgin
Islands. 


   PASSENGER TRAFFIC IS HIGHLY
   CONCENTRATED AT THE NATION'S
   LARGEST AIRPORTS
---------------------------------------------------------- Chapter 1:1

While there are 18,224 airports in the United States, only 4,172 are
publicly owned.  Most airports are small, privately owned general
aviation airports.\3 However, most airline passenger traffic is at
the nation's largest publicly owned commercial airports.  Table 1.1
compares the number of publicly and privately owned U.S.  airports in
1995. 



                               Table 1.1
                
                    Ownership of U.S. Airports, 1995

Ownership                       Use                 Number of airports
------------------------------  ------------------  ------------------
Private                         Private                         12,809
Private                         Public                           1,243
Public                          Public                           4,172
======================================================================
Total                                                           18,224
----------------------------------------------------------------------
Source:  FAA. 

Of the 4,172 publicly owned airports, 565 (14 percent) are commercial
service airports.  Commercial service airports (referred to as
commercial airports in this report) are legally defined as airports
(1) with scheduled passenger service, (2) that annually enplane 2,500
or more passengers, and (3) that are publicly owned.\4

FAA has identified nine additional airports--seven of which are
privately owned--that would qualify for commercial status on the
basis of the amount of annual passenger traffic but do not qualify
because they are privately owned or do not have scheduled airline
service.\5

Airline passenger traffic is highly concentrated at the largest
commercial airports.\6 The 29 large hub airports accounted for over
67 percent of all passenger enplanements in 1995, the last year for
which figures were available.  The 42 medium hub airports accounted
for another 22 percent of annual enplanements in the same year. 
Figure 1.1 depicts the concentration of passenger traffic at the
largest commercial airports. 

   Figure 1.1:  Concentration of
   Passenger Traffic Among
   Commercial Airports, 1995

   (See figure in printed
   edition.)

Note:  The percentages do not add to 100 because of rounding. 

Source:  FAA. 

Public ownership of commercial airports varies.  Most public owners
are local governments, such as cities or counties.  However, in many
instances, local and state governments form special governmental
entities, such as single-purpose airport authorities or port
districts to manage airports as well as other transportation-related
infrastructure.  The legal and other relationships between a local or
state government and a special governmental entity vary, but most
local or state governments exert some level of control over them.  A
few states, such as Alaska, Hawaii, and Maryland, also own airports. 
For example, Maryland owns the Baltimore-Washington International
Airport.  The federal government owns two major airports--Washington
Dulles International Airport and Washington National Airport--and has
leased them to a public entity, the Metropolitan Washington Airports
Authority. 


--------------------
\3 General aviation airports serve nonscheduled aircraft operations. 

\4 49 U.S.C.  ï¿½ 47102(7). 

\5 The seven privately owned airports are Fajardo Harbor Seaplane
Base, Puerto Rico; Griffing Sandusky Airport, Ohio; Kenmore Air
Harbor Seaplane Base, Washington; Monument Valley Airport, Utah; Oak
Harbor Air Park Airport, Washington; Princeville Airport, Hawaii; and
Red Dog Airport, Alaska.  In 1995, these airports enplaned from 5,251
to 52,378 passengers. 

\6 FAA divides commercial airports into two categories--primary and
other commercial airports (nonprimary).  Primary airports include all
airports that enplane more than 10,000 passengers annually and
receive scheduled airline service.  FAA designates primary airports
as large, medium, small, or nonhub airports according to the number
of annual passenger enplanements.  Large hub airports are those that
annually enplane at least 1 percent of all U.S.  airline passengers
(at least 5,863,268 passengers in 1995), medium hub airports are
those that enplane between .25 and 1 percent (at least 1,465,817
passengers), small hub airports are those that enplane .05 to .25
percent (at least 293,163 passengers), and nonhub airports are those
that enplane less than .05 percent but more than 10,000 passengers
annually.  Other commercial airports include all airports that
enplane from 2,500 to 10,000 passengers annually. 


   THE FEDERAL ROLE IN FINANCING
   AIRPORT DEVELOPMENT
---------------------------------------------------------- Chapter 1:2

Federal grants have played a critical role in building the nation's
airport infrastructure.  In addition to receiving grants from the
federal Airport Improvement Program (AIP), commercial airports can
also impose passenger facility charges (PFC), issue bonds, and
generate net income from airport revenue.  All of these sources of
capital are affected by federal policies.  Figure 1.2 depicts the
average percentage contribution of each of these sources of capital
at 53 large and medium hub airports in 1994. 

   Figure 1.2:  Average Percentage
   of Total Capital for Large and
   Medium Hub Airports by Source,
   1994

   (See figure in printed
   edition.)

Notes:  The percentages are based on financial data from 22 large hub
and 31 medium hub airports. 

The percentages for large hubs do not add to 100 because of rounding. 

Source:  GAO's analysis of data from Van Kampen American Capital
Management, Inc. 

For smaller airports, federal grants constitute a larger portion of
their total capital because the other sources are not as accessible. 
Our prior work has shown that an inverse relationship exists between
an airport's size and its reliance on federal grants.\7


--------------------
\7 AIP Funding for the Nation's Largest Airports (GAO/RCED-96-219R,
July 31, 1996). 


      FEDERAL GRANTS HELP FINANCE
      DEVELOPMENT NEEDS
-------------------------------------------------------- Chapter 1:2.1

Since 1946, the federal government has helped finance airport
development with more than $23.5 billion in grants.  Since 1970,
airport grants have been financed by the Airport and Airway Trust
Fund, which is financed from taxes on domestic and international
airline travel, domestic cargo transported by air, and noncommercial
aviation fuel.  AIP, the current federal airport grant program, was
established by the Airport and Airway Improvement Act of 1982, as
amended, and is administered by FAA.  AIP grants help finance
projects that enhance airports' capacity, safety, security, and noise
mitigation. 

There are two categories of AIP grants--apportionment and
discretionary.  Apportionment grants are distributed by formula to
commercial airports (with more than 10,000 annual passenger
enplanements) and states.  Discretionary grants can generally be used
for any eligible airport development project.  The Congress has
earmarked or "set-aside" some AIP discretionary funding for certain
types of projects or airports.  About 3,300 (18 percent) of the
nation's airports are eligible to receive AIP grants.  All airports
receiving AIP grants must provide a "matching share", ranging from 10
to 25 percent of a project's total cost, depending on the type of
project and size of the airport. 

In fiscal year 1995, AIP grants to commercial airports totaled more
than $1.2 billion, or about 80 percent of all grant obligations.  The
remaining 20 percent was directed to general aviation airports.  A
larger airport would generally receive more in airport grants than a
smaller airport because larger airports enplane more passengers and
have greater funding needs.\8


--------------------
\8 For more information on AIP grants, see Airport Improvement
Program:  Update of Allocation of Funds and Passenger Facility
Charges, 1992-94 (GAO/RCED-95-225FS, July 17, 1995). 


      PASSENGER FACILITY CHARGES
      AUGMENT GRANTS
-------------------------------------------------------- Chapter 1:2.2

To augment grants from the AIP, in 1990 the Congress authorized
commercial airports to impose a PFC.  This authorization enables
airports to charge each passenger a $1, $2, or $3 facility charge per
trip segment up to a maximum of four segments per round trip.  After
determining which projects to fund with PFCs, an airport must apply
to FAA for approval.  Large and medium hub airports that collect PFCs
must forgo up to 50 percent of their AIP apportionment funding, most
of which is used to provide additional funding for smaller airports. 
As of February, 1996, just 4 years after the first PFC was approved,
FAA had approved PFC collections at 244 airports.  In 1995, PFC
collections totaled about $1 billion.  In 1996, the first bond that
was secured solely by PFC collections was issued. 


      TAX-EXEMPT STATUS REDUCES
      COST OF AIRPORT BOND DEBT
-------------------------------------------------------- Chapter 1:2.3

Tax-exempt status enables airports to issue bonds at a lower interest
rate than taxable bonds, and tax-exempt bonds are an important source
of funding for airports.  Bond market professionals and a recent FAA
study estimate that if airports did not have tax-exempt status, the
interest rate on their debt would be about 2 percentage points
higher.\9 Bonds are the largest single source of capital for large
and medium hub airports.  From 1985 through mid-1995, over $42
billion in new and refinanced airport bonds were issued in the United
States.  According to one credit rating agency, an estimated $25
billion in bonds is currently outstanding.  Airport bonds, which are
issued by airport sponsors, are one of two types.\10 The most common
for larger airports are revenue bonds, which are secured by airport
revenue.  Less common are general obligation bonds, which are secured
by the taxing authority and the full faith and credit of the issuing
public airport owner. 


--------------------
\9 In FAA's March 1996 report to the Congress, Innovative Approaches
for Using Federal Funds to Finance Airport Development, tax-exempt
status was found to reduce large hub airports' interest costs by 1.87
percentage points from 1985 through 1995. 

\10 The airport sponsor is responsible for meeting grant obligations
and can be a public or private entity and the airport owner or
operator. 


      AGREEMENTS WITH AIRLINES AND
      FAA RULES PLACE LIMITS ON
      AIRPORT REVENUE
-------------------------------------------------------- Chapter 1:2.4

Airport revenue is unlike other sources of airport capital for two
reasons.  First, airport revenue is used to fund both current
operating costs as well as capital investment.  Second, future
airport revenue is typically used to secure outstanding airport debt
and, therefore, may not be fully available to secure new debt issues
or directly fund capital projects. 

Most commercial airports have agreements that define their financial
relationship with tenant airlines.  These agreements, commonly termed
"airport use agreements" are often long-term, sometimes running 20
years or more, although there has been a trend towards shorter-term
agreements.\11 Typically, these agreements set airline rates and
charges using either a "residual" or "compensatory" cost approach or
a combination of both approaches.  With the residual approach, the
airlines collectively assume significant financial risk by agreeing
to pay any costs of running the airport that are not allocated to
other users or covered by nonairline revenue.  Any surplus revenue is
credited to the airlines and any deficit is charged to them in
calculating their rates and charges for the following year.  With the
compensatory approach, the airport operator assumes the major
financial risk of running the airport and sets rates and charges to
recover the costs of the facilities and services that the airlines
use. 

Under FAA's rules regarding rates and charges to airlines, landing
fees must be based on formulas which only permit an airport to
recover the historic costs of its airfield assets (generally the cost
to acquire land and develop the airfield), including debt-related
expenses.  Therefore, an airport may not revalue airfield assets in
the absence of modifications or improvements to those assets.  Also,
that portion of assets acquired with AIP or PFC funds is not
considered airport assets for the purpose of cost recovery through
airline fees. 


--------------------
\11 The term "airport use agreement" is used here to include both
legal contracts for the airlines' use of airfield facilities and
leases for the use of terminal facilities.  At many airports both are
combined in a single document.  A few commercial airports do not
negotiate airport use agreements with the airlines but have their
rates and charges set by local ordinance. 


   INFRASTRUCTURE PRIVATIZATION
   EFFORTS IN THE UNITED STATES
---------------------------------------------------------- Chapter 1:3

Infrastructure privatization initiatives extend across local, state,
and federal governments and include such diverse services as
education, housing, utilities, and transportation.  Numerous studies,
task forces, and initiatives have focused on ways to attract private
capital to help provide public goods and services.  For example, the
Congress included provisions within the Intermodal Surface
Transportation Efficiency Act of 1991 that are intended to promote
public-private partnerships to meet the nation's surface
transportation needs.\12

In 1992, the President issued Executive Order 12803 outlining the
principles executive agencies must use to determine whether to
approve a local or state government's request to privatize an asset
that had been partly paid for with federal money.  Under this order,
local and state governments (where permitted by law) would be able to
recover the unadjusted dollar amount of their portion of an asset's
total costs from sale or lease proceeds.  From any remaining
proceeds, the federal government would receive its share of grants
associated with the asset, less the depreciated value of the asset. 
In 1994, the President issued a subsequent order on infrastructure
investment, Executive Order 12893, which directs executive agencies
to minimize regulatory and legal barriers to private participation in
providing infrastructure facilities and services. 

Despite these executive orders and other federal initiatives, very
few sales or leases of federally funded infrastructure assets have
occurred.  In 1995, the first and only privatization under Executive
Order 12803 occurred, with the long-term lease of a waste water
treatment plant in Hamilton, Ohio.  According to a privatization
expert, the federal government waived its share of the lease proceeds
because it considered the plant to be fully depreciated. 

Legislation was introduced in the 104th Congress to expand the
private ownership of public infrastructure.  In 1995, bills were
introduced in both the House and Senate (H.R.  1907 and S.  1063,
"Federal Aid Facility Privatization Act of 1995") that would waive
the federal government's claim to any proceeds from privatizing any
locally owned or state-owned facility that had received federal aid. 
Although these bills were not enacted, the Congress did authorize an
airport privatization pilot program as part of the Federal Aviation
Reauthorization Act of 1996.\13


--------------------
\12 23 U.S.C.  ï¿½ 129(a). 

\13 Public Law 104-264, Oct.  9, 1996, section 149 (to be codified in
49 U.S.C.  ï¿½ 47134). 


   OBJECTIVES, SCOPE, AND
   METHODOLOGY
---------------------------------------------------------- Chapter 1:4

Because of continuing widespread interest in airport privatization,
the Chairman and Ranking Minority Member of the Subcommittee on
Aviation, House Committee on Transportation and Infrastructure,
requested that we undertake a study to examine

  -- the current extent of private sector participation at commercial
     airports in the United States and foreign countries;

  -- the current incentives and barriers to the sale or lease of
     airports; and

  -- the potential implications for major stakeholders, such as the
     passengers, airlines, and local, state, and federal governments,
     should airports be sold or leased. 

To determine the current extent of private sector participation at
U.S.  and foreign airports, we reviewed airports' financial
statements, interviewed airport and government officials, reviewed
external studies, and surveyed 69 of the nation's largest airports. 
For U.S.  airports, we measured the levels of public and private
sector participation in their operations and capital financing.  To
measure private and public sector participation in airport
operations, we surveyed 69 large and medium hub airports and
requested the number of private and public full-time-equivalent
positions there.  We received responses from all 69 airports.  To
assess the levels of private and public financing, we analyzed
several sets of data, including FAA's information on federal grants
and airport enplanements, Van Kampen American Capital Management's
information on 85 airports' financial statements, and the Securities
Data Company's information on all airport bonds issued between 1985
and 1994.  While we did not audit the accuracy of the databases, we
did some limited cross-checking of information and found that it was
accurate.  To obtain information on privatization in foreign
countries, we relied on a study by the World Bank,\14 a survey by
Public Works Financing,\15 and studies of international airport
finance.\16 We also spoke with officials of two foreign countries and
four airport management companies concerning planned or completed
privatizations and reviewed pertinent studies and documents relating
to airport operations and financing. 

To assess the incentives and barriers to privatization, we spoke to a
broad array of interested parties, including officials representing
13 airports, airport and airline interest groups, airlines, airport
management firms, investment banks, credit rating agencies, the
Department of Transportation, and FAA.  Among the 13 airports we
selected to visit are 9 that have at one time considered
privatization.  At these airports, we reviewed any feasibility
studies and legal analyses they had conducted relating to
privatization.  We surveyed representatives from 13 domestic airlines
to obtain their positions on airport privatization and their reasons
for supporting or opposing the concept.  We also met with
representatives of four of the largest airport management firms
operating in the United States and airport consultants to discuss
impediments they have encountered in structuring privatization bids. 
Similarly, we met with representatives of three major credit rating
agencies and several firms active in municipal finance to discuss
economic benefits and impediments to privatization.  Finally, we met
with lawyers active in airport law and FAA counsel to discuss legal
impediments to privatization.  We also researched all applicable
federal statutes, FAA policies, legal opinions, and court cases to
determine how various laws may affect the sale or lease of airports. 

We also assessed the possible implications and policy considerations
of selling or leasing airports on airlines; passengers; and local,
state, and federal governments.  To assess privatization's possible
effects on public airport owners, we spoke to officials representing
airports, airport management firms, airport consultants, investment
banks, and FAA.  We also reviewed studies of infrastructure
privatization in other countries and in the United States.  To gauge
the possible effects of privatization on airlines and their
passengers, we examined privatization studies, airport and airline
industry financial trends, and studies of the effects of airlines'
prices on passenger traffic.  We also spoke to representatives of 13
U.S.  airlines.  Finally, we assessed privatization's potential
effects on the federal budget through estimates of airports'
outstanding debt, tax-exempt versus taxable bond yield differentials,
and grant funding.  We also discussed the effect of grant repayment
on the federal budget with a representative of the Congressional
Budget Office. 

We provided the Department of Transportation and the FAA with a copy
of our draft report for their review and comment.  Officials,
including the Acting Manager of the Airports Financial Assistance
Division and Manager of the Program Guidance Branch, generally agreed
with the facts presented and provided some minor clarifying comments
and information, which we included as appropriate.  Officials also
stated that the report was a thorough and balanced representation of
the facts.  Our work was performed from July 1995 through October
1996 in accordance with generally accepted government auditing
standards. 


--------------------
\14 Anil Kapur, Airport Infrastructure:  The Emerging Role of the
Private Sector, World Bank Technical Paper Number 313, Dec.  1995. 

\15 1995 International Major Projects Survey:  Public-Private
Partnerships in Infrastructure Development, vol.  89, Oct.  1995. 

\16 These include John Vickers and George Yarrow, Privatization:  An
Economic Analysis, Massachusetts Institute of Technology Press,
Cambridge and London, 1988; Rigas Doganis, The Airport Business,
Routledge, London, 1992; and Norman Ashford and Clifton A.  Moore,
Airport Finance, Reinhold, New York, 1992. 


COMMERCIAL AIRPORTS, WHILE
PUBLICLY OWNED, OPERATE IN
PARTNERSHIP WITH THE PRIVATE
SECTOR
============================================================ Chapter 2

Even though all U.S.  commercial airports are publicly owned, they
operate in partnership with the private sector to deliver most
services.  Airports have also adopted commercial practices in
response to regulatory and market demands to become less dependent on
federal grants and more self-sustaining.  As a result, the private
sector provides most employees at the nation's major airports.  While
federal grants have played a significant role in financing airport
development, airport investment is also subject to some market
discipline because investment supported by airport bonds must produce
sufficient revenue to pay debt service costs.  In other countries,
private sector participation in airport operations and financing is
also becoming more prevalent, including the sale or lease of the
airports in some countries. 


   FEDERAL POLICY AND MARKET
   PRESSURES HAVE PROMPTED
   AIRPORTS TO RELY ON THE PRIVATE
   SECTOR
---------------------------------------------------------- Chapter 2:1

Several factors are causing airports to rely on the private sector
for airport operations and financing and to adopt more business-like
practices.  Airports are required by federal statute to operate as
self-sufficiently as possible.  While budget pressures on the federal
government have reduced traditional sources of capital (grants),
intense competition in the airline industry has resulted in greater
pressure on airports to contain costs.  Airport sponsors have also
begun to adopt innovative industry practices to increase airports'
retail potential. 


      FAA REQUIRES AIRPORTS TO BE
      SELF-SUSTAINING
-------------------------------------------------------- Chapter 2:1.1

One of the obligations an airport assumes as a condition for
receiving federal grants is that its fee and rental structure will
make the airport as self-sustaining as possible.\17 This obligation
generally requires that an airport charge fair market value for the
use of airport facilities, excluding the airfield.  In recent years,
FAA and the Department of Transportation's Inspector General have
emphasized the need for airports to comply with this obligation. 


--------------------
\17 49 U.S.C.  ï¿½ 47107(a)(13)(A). 


      FINANCIAL SUPPORT FROM THE
      FEDERAL GOVERNMENT HAS
      DECLINED
-------------------------------------------------------- Chapter 2:1.2

Following substantial growth in the 1980s, AIP funding has declined
in recent years.  Figure 2.1 depicts AIP funding trends, in
inflation-adjusted and nominal dollars, for fiscal years 1982 (the
first year of the AIP) to 1995. 

   Figure 2.1:  AIP Funding for
   Airport Development, Fiscal
   Years 1982 Through 1995

   (See figure in printed
   edition.)

Source:  FAA. 


      AIRLINES PRESSURE AIRPORTS
      TO CONTAIN COSTS
-------------------------------------------------------- Chapter 2:1.3

While airline profitability rebounded in 1995, the industry as a
whole has suffered substantial losses over the last decade.  Our
prior work found that the U.S.  airline industry had a profit margin
half that of the average U.S.  company.\18 While intense competition
brought on by airline deregulation in 1978 helped to lower passenger
fares, it also made airlines less profitable and, accordingly, more
cost-conscious.  Although the money airlines pay in landing fees and
terminal rentals is relatively little--on average 6 percent of their
total costs in 1995 according to data from airlines--these costs are
not fixed.  Therefore, airlines pressure airports to keep these costs
low. 


--------------------
\18 Airline Competition:  Industry Competitive and Financial Issues
(GAO/T-RCED-93-49, June 9, 1993). 


      GROWTH IN PASSENGER TRAFFIC
      PROVIDES OPPORTUNITIES FOR
      AIRPORTS TO INCREASE
      NONAIRLINE REVENUE
-------------------------------------------------------- Chapter 2:1.4

The growth in passenger traffic helps airports expand nonairline
revenue, such as retail concessions.  Passenger traffic has nearly
doubled, from 300 million enplanements in 1982 to over 580 million
enplanements in 1995; and FAA has forecasted that enplanements will
increase 3.9 percent each year through 2007, as shown in figure 2.2. 

   Figure 2.2:  Actual and
   Forecasted Passenger
   Enplanements at U.S.  Airports,
   1982 Through 2007

   (See figure in printed
   edition.)

Source:  FAA. 

Airports obtain revenue from four general sources:  landing fees and
rentals from terminal leases (both paid by airlines), concessions
(such as parking), and other income (such as advertising).  As figure
2.3 shows, nonairline revenue from concessions and other income now
account for a majority of total revenue at large and medium hub
airports. 

   Figure 2.3:  Average Annual
   Amount of Total Revenue for
   Large and Medium Hub Airports
   by Source, 1988 Through 1994

   (See figure in printed
   edition.)

Note:  The percentages are based on financial data from 22 large hub
and 31 medium hub airports. 

Source:  GAO's analysis of data from Van Kampen American Capital
Management, Inc. 

The Airmall terminal at Pittsburgh International Airport illustrates
an innovative method to increase an airport's retail potential.\19 In
Pittsburgh, a private operator manages the retail facility, which
includes over 100 retail outlets, for the public owner, Allegheny
County.  These retail outlets represent a wider diversity of products
and services than U.S.  airports generally provide.  Between 1992
(when the Airmall opened) and 1995, per passenger retail spending at
the airport increased 250 percent. 


--------------------
\19 Airmall is a registered trademark by BAA USA, Inc. 


   PRIVATE SECTOR PARTICIPATION AT
   AIRPORTS IN THE UNITED STATES
---------------------------------------------------------- Chapter 2:2

U.S.  commercial airports have collaborated with the private sector
to control costs and improve services.  While local governments, and
in a few instances states, own almost all of the nation's commercial
airports, we found that most employees providing services at airports
work for private companies, including airlines, concessionaires, and
contractors.  Some public owners have also contracted out the
management of their airports to the private sector, although such
arrangements have tended to be with smaller airports. 


      AT THE LARGEST AIRPORTS,
      MOST SERVICES ARE PROVIDED
      BY THE PRIVATE SECTOR
-------------------------------------------------------- Chapter 2:2.1

Most of the people working at the nation's largest airports are
employed by the private sector.  As shown in figure 2.4, information
we obtained from 69 of the nation's largest airports (29 large hub
and 40 medium hub airports)\20 showed that 90 percent of the people
who work at these airports are private employees and 10 percent are
public employees.\21

   Figure 2.4:  Percentage of
   Private and Public Employees at
   69 of the Nation's Largest
   Airports

   (See figure in printed
   edition.)

Source:  GAO's analysis of data from 69 large and medium hub
airports. 

Of the nearly 686,000 private employees working at the 69 responding
airports, about 437,000 (64 percent) were airline employees, such as
pilots, flight attendants, ticket counter attendants, and baggage
handlers.  The approximately 249,000 (36 percent) nonairline
employees were engaged in providing such services as cleaning, retail
concessions, and ground transportation. 

According to airport executives we spoke with, there are several
benefits to using contractors and concessionaires, including improved
services, lower costs, and increased revenue.  These officials noted
that by using private companies to provide these services, airports
can rely on the expertise and financial standing of these companies. 
Contracting can reduce the airports' costs through the competitive
bid process, and concession agreements often allow airports to share
in the revenue generated by private companies. 

Of the nearly 80,500 public employees working at the 69 responding
airports, about 32,750 (41 percent) worked for local or state
governments, about 38,000 (47 percent) worked for the federal
government, and about 9,750 (12 percent) were other public employees,
primarily military personnel.  Employees of local and state
governments were primarily administrative personnel (such as airport
directors, financial officers, operations officers, public relations
officers, and clerical support), police officers, and firefighters. 
Federal employees included public safety and security personnel such
as FAA air traffic controllers, and agents from the Customs Service,
Department of Agriculture, Drug Enforcement Agency, and Immigration
and Naturalization Service.  Other public employees at airports were
primarily military personnel from such services as the U.S.  Air
Force and Air National Guard. 


--------------------
\20 Our survey sample was based on passenger enplanement data for
1994, the latest data available at the time the survey was done. 
According to the 1994 data, there were 29 large hub and 40 medium hub
airports. 

\21 The 69 airports that responded to our survey had about 766,500
total employees.  The percentage of private employees at each of the
69 airports ranged from 64 percent to 98 percent with the exception
of one airport with 28 percent.  Also, the median percentage (half of
the responding airports were above and half were below the median) at
the 69 airports was 89 percent. 


      FEW PUBLICLY OWNED AIRPORTS
      ARE PRIVATELY MANAGED
-------------------------------------------------------- Chapter 2:2.2

Despite commercial airports' reliance on the private sector for most
services, few of these airports are privately managed.  However, in
response to increased pressure to reduce costs and the growing number
of airport management firms competing for management contracts, the
number of publicly owned airports that are privately managed has
expanded.  The Indianapolis Airport Authority's contract with a
private firm to manage its system of airports (1 commercial airport
and 5 general aviation airports) is an example of this trend.  We
found 7 commercial airports (out of 565) that were privately managed
under management contracts.  Also, in addition to the Indianapolis
Airport Authority's five publicly owned general aviation airports, we
found 10 such airports that were privately managed under a management
contract and 3 such airports that were privately managed under a
lease.  (See app.  I for information on publicly owned commercial and
general aviation airports that are privately managed.)

In 1994, the Indianapolis Airport Authority sought bids to manage its
airport system that included Indianapolis International Airport (the
nation's 47th largest airport) and five surrounding general aviation
airports.  The winning bidder won a 10-year contract.  Under the
contract, the winning bidder has made a guarantee, secured by a
letter of credit, to reduce airport costs and increase airport
revenue.  Airport profits will be split between the contractor and
the airport authority, the latter passing on its share of profits to
tenant airlines in the form of reduced rates and charges.  According
to city and airport authority officials, the contractor was selected
on the basis of its demonstrated ability to develop and increase
retailing profits at airports.  While first year financial results
are not yet available, estimates are mixed on whether the contractor
will achieve the contract's goals. 

In most cases, private managers are compensated on a fixed fee basis,
sometimes including a performance incentive payment.  The
Indianapolis contract is different in that the private manager has
promised the public authority and the airlines a guaranteed level of
cost savings.  One other municipality is now exploring the viability
of a similar agreement at its airport. 


   TO ATTRACT PRIVATE CAPITAL,
   AIRPORTS MUST DEMONSTRATE THAT
   REVENUE WILL BE SUFFICIENT TO
   COVER DEBT PAYMENTS
---------------------------------------------------------- Chapter 2:3

The use of private investment funds, such as bonds, is subject to the
scrutiny of credit rating agencies.  While federal grants have played
a significant role in developing airport infrastructure, airports'
net income and bond financing has also played a key role.  For
example, in 1994 more than half of the average large or medium hub
airports' total capital for development consisted of net income and
bond proceeds (see fig.  1.2). 

Airport revenue bonds, which are backed by an airport's current and
future revenue, provide the greatest single share of total capital at
the largest airports.  To support continued infrastructure
development, large airports have in recent years increasingly relied
on debt financing through revenue bonds.  For example, accumulated
debt levels (in nominal dollars) doubled between 1988 and 1994,
rising to an average $889 million, for each of the 22 large hub
airports we examined.  Despite taking on this additional debt, these
airports' financial performance did not deteriorate, as operating
margins remained constant and credit ratings were not impaired. 

To issue a revenue bond, an airport must convince credit rating
agencies that future airport revenue will be sufficient to cover
future interest and principal payments as well as operating costs. 
Credit rating agencies evaluate the airport's finances, operations,
and management before rating a bond issue.  The rating agencies also
evaluate how the bond proceeds will be invested.  An investment grade
rating is generally necessary in the municipal bond market before a
bond can be issued. 

In some cases, airlines and other tenants have privately financed the
construction of their terminals, hangars, and other facilities at
U.S.  airports.  For example, major terminals at Chicago O'Hare
International Airport, Cincinnati/Northern Kentucky International
Airport, and John F.  Kennedy International Airport were privately
financed.  In 1996, the public sponsor completed negotiations with a
private developer to finance, build, and operate a new $1.2 billion
building for international arrivals at John F.  Kennedy International
Airport. 


   PRIVATIZATION OF AIRPORTS IS
   BECOMING MORE PREVALENT IN
   OTHER COUNTRIES
---------------------------------------------------------- Chapter 2:4

While national governments of most foreign countries have
historically owned and operated airports, in recent years some
countries have begun to privatize all or parts of their nation's
aviation system as part of an overall economic restructuring.  These
countries have privatized many parts of their infrastructure,
including airports, railroads, shipping, and trucking.\22 Generally,
these countries' privatization policies have been driven by a desire
to raise capital, reduce the size of the public sector, and to
improve economic efficiency. 

Most of the efforts to privatize airports that we identified in 50
countries were in the preliminary stages.  For example, Mexico passed
legislation in 1995 to lease 58 major airports on a long-term basis. 
Australia is implementing privatization legislation to allow 22 major
airports to be leased on a long-term basis.  Most countries'
privatization efforts do not transfer ownership of airports to the
private sector, but involve long-term leases, management contracts,
the sale of minority shares in individual airports, or the
development of runways or terminals by the private sector.  Only the
United Kingdom has sold major airports to the private sector. 
Appendix II provides a list of countries and their efforts to
privatize airports. 

Our findings on the increasing efforts to privatize airports are
similar to those in a recent World Bank study, which determined that
airports around the world have evolved into multifaceted commercial
operations.\23 This study also noted that while most airports are
owned and operated by national governments, a trend toward more
private sector involvement has been emerging.  The study found a
great variety of ownership structures, ranging from fully public to
fully private with many variations in between.  U.S.  airports were
in the middle of this ownership spectrum--with regional (local and
state) governmental ownership but commercial operations. 


--------------------
\22 For additional information on other countries' privatization
efforts, see Budget Issues:  Privatization/Divestiture Practices in
Other Nations (GAO/AIMD-96-23, Dec.  15, 1995). 

\23 Kapur, Airport Infrastructure:  The Emerging Role of the Private
Sector. 


      PRIVATELY OWNED AIRPORTS IN
      THE UNITED KINGDOM HAVE BEEN
      PROFITABLE
-------------------------------------------------------- Chapter 2:4.1

The United Kingdom, which sold its major commercial airports in 1987,
is one of the few countries where airports have been privatized long
enough to provide measurable results.  To privatize, the United
Kingdom sold the government corporation British Airports Authority
(BAA) and the seven major airports it operated (including London's
Heathrow and Gatwick airports) in a $2.5 billion public share
offering.  Proceeds from this sale were used to reduce the national
debt.  Even after privatization, the airports have remained subject
to government regulation of airlines' access, airports' charges to
airlines, safety, security, and environmental protection.  The
government also maintains a right to veto new investments in or
divestitures of airports. 

BAA has generated profits every year since it assumed ownership of
the United Kingdom's major airports in 1987.  As a result of steadily
increasing passenger traffic and growth in retail revenue, BAA
generated $455 million in profits for its shareholders in 1995.  This
profit was attained despite government-imposed caps on charges to
airlines and $782 million invested in infrastructure improvements,
including a rail link to central London from Heathrow International
Airport.  BAA was valued at over $4.5 billion in 1995. 

However, the privatization of BAA has not been without its critics. 
Some private economists have noted that by selling BAA's seven
airports together, instead of separately, the United Kingdom did not
allow for greater competition among the airports.  These critics
charge that as a result, the government converted a public asset into
a regulated private monopoly that requires regular review and
negotiation over the airports' charges to airlines. 


DESPITE INCENTIVES, NUMEROUS
IMPEDIMENTS BLOCK THE SALE OR
LEASE OF U.S.  AIRPORTS
============================================================ Chapter 3

In recent years, the sale or lease of U.S.  airports has generated
considerable interest.  Supporters of privatization believe that many
major U.S.  commercial airports can operate on a sound economic basis
without government assistance.  Airports' funding needs, the desire
to improve their efficiency, and the potential financial benefits to
all levels of government are also generating interest in
privatization.  However, considerable legal barriers currently block
the sale or lease of U.S.  airports.  In addition, even if the legal
barriers were removed, significant economic barriers could impede
privatization. 


   REASONS TO PRIVATIZE VARY
---------------------------------------------------------- Chapter 3:1

Privatization advocates point to three major reasons why the sale or
lease of airports should be encouraged.  First, they note that
private entities would provide additional private capital to help
finance airport development.  Second, advocates maintain that private
operators would more efficiently develop and manage airports and, in
the process, reduce airlines' and passengers' costs.  Third, if
federal requirements on the use of airport revenue are changed, the
sale or lease of airports by local or state governments would
generate a quick infusion of cash for them, while reducing the need
for local, state, and federal grants and eliminating tax subsidies. 


      ABILITY TO MEET AIRPORTS'
      CAPITAL NEEDS IS UNCERTAIN
-------------------------------------------------------- Chapter 3:1.1

Although there has been considerable investment in the nation's
airports, FAA studies indicate that substantial future investment in
airport infrastructure will be needed.  As of March 1996, FAA
estimated that U.S.  domestic and international passenger
enplanements will grow 3.9 percent annually through 2007.  Also,
according to FAA's analysis, the number of severely congested
airports would increase from 7 in 1995 to 17 in 2002 if capacity is
not increased.\24 Congestion results in increased costs and delays
for airlines.  Airport officials contend that they will need about
$60 billion from 1997 through 2002, or $10 billion per year, most of
which will be needed for projects to increase airport capacity.  FAA
estimates that airports' AIP-eligible capital needs will be about
$6.5 billion per year over the next 5 years. 

Whether existing sources of capital will be adequate to meet future
development needs is uncertain.  Since 1992, AIP funding has declined
to $1.46 billion in fiscal year 1997.  PFCs contribute about $1
billion annually for airport capital development.  Whether debt
financing and internally generated revenue will be sufficient to
supply the difference in funding needs is uncertain.  Privatization
advocates believe that the private sector would provide additional
capital to meet these needs.  For example, private entities could tap
the debt equity market (such as by selling stock) that is not open to
public entities.  A 1995 FAA study indicates that the largest
airports generally have been able to obtain sufficient debt financing
to meet their capital needs.\25

A prior GAO report also showed that while the debt levels of large
hub airports doubled between 1988 and 1994, revenue was available to
pay the increased principal and interest amount.\26 However, the same
report also noted that airports cannot accumulate unlimited debt to
fund capital projects and the ability to finance large amounts of
debt may vary substantially among airports. 


--------------------
\24 FAA considers an airport to be severely congested when average
airline delays exceed 9 minutes per operation. 

\25 FAA's March 1996 report, Innovative Approaches for Using Federal
Funds to Finance Airport Development. 

\26 AIP Funding for the Nation's Largest Airports (GAO/RCED-96-219R,
July 31, 1996). 


      ADVOCATES CLAIM THAT
      PRIVATIZED AIRPORTS WOULD
      OPERATE MORE EFFICIENTLY AND
      PROFITABLY
-------------------------------------------------------- Chapter 3:1.2

Advocates claim that private firms would operate airports more
efficiently and profitably than the public sector.  Some studies
support the position that the private sector is more efficient than
the public sector.\27 Advocates also point to the contract to manage
the Indianapolis airport system, where a private firm has promised to
reduce operating costs and increase revenue by about $140 million
over 10 years, even though some aviation industry officials
considered it among the more efficient public airports in the
country.  The Reason Foundation, a privatization advocate, also
points to labor productivity growth at airports in the United Kingdom
following their privatization as evidence of private airports'
ability to operate more efficiently. 

Private airport owners or lessees can generate profits and a return
on their investment in two ways--by increasing efficiency and by
charging users higher prices.  However, whether private firms would
operate airports more efficiently than public owners (and pass on
some cost savings to users) is uncertain and would likely vary among
airports.  According to airport management firms, some airports are
not good privatization candidates because opportunities to increase
revenue or cut costs are limited.  In addition, several economists
have asserted that competition is a more important factor than the
type of ownership in encouraging greater efficiency.  According to
analysts who rate airport bonds, airports in some cities may face
little competition and could charge prices above the levels that
would prevail in a competitive market. 


--------------------
\27 These include David F.  Linowes, Professor of Political Economy
and Public Policy, University of Illinois, testimony before the House
Committee on the Budget, Mar.  1, 1995; Fuat Andic, Privatization
Theory and Policy, United Nations Industrial Development
Organization, Apr.  1, 1993; John Hilke, Cost Savings From
Privatization:  A Compilation of Study Findings, Reason Foundation,
Mar.  1993; and Jose A.  Gï¿½mez-Ibï¿½ï¿½ez and John R.  Meyer, Going
Private:  The International Experience With Transport Privatization,
Brookings Institution, Nov.  16, 1993. 


      ADVOCATES CLAIM THAT
      PRIVATIZATION WOULD BENEFIT
      LOCAL, STATE, AND FEDERAL
      BUDGETS
-------------------------------------------------------- Chapter 3:1.3

Advocates contend that airport privatization would benefit the
budgets for all levels of government for several reasons.  First, if
current restrictions on the use of airport revenue are changed,
privatization would immediately generate sale or lease proceeds that
could be used for other than airport purposes.  The amount of these
proceeds would depend on how privatization might be implemented, but
one privatization advocate calculated that the 87 largest airports
have a total market value of $29 billion.\28 In addition, local,
state, and federal governments would receive a lasting benefit from
reduced airport demands for financial assistance.  Advocates also
point out that private airports would be paying taxes. 


--------------------
\28 Robert Poole, Revitalizing State and Local Infrastructure: 
Empowering Cities and States to Tap Private Capital and Rebuild
America, Reason Foundation, May 1995. 


      FEW PUBLIC SPONSORS HAVE
      SUSTAINED EFFORTS TO SELL OR
      LEASE COMMERCIAL AIRPORTS IN
      THE UNITED STATES
-------------------------------------------------------- Chapter 3:1.4

As of October 1996, only one of the ten attempts by public owners to
sell or lease U.S.  commercial airports to a private entity has been
successfully implemented (see table 3.1).  Very few of the
privatizations under consideration were formally proposed to FAA for
approval, and some were rejected as infeasible because of legal
impediments.  In at least three cases, public owners considered
selling or leasing their airports to divert the proceeds from the
airports for other uses.  For example, in 1995, Orange County,
California, considered whether it could sell John Wayne Airport to
obtain revenue for its general fund after the county had filed for
bankruptcy in December 1994.  The county abandoned this effort, in
part, after concluding that it could not legally divert sale
proceeds. 



                                        Table 3.1
                         
                         Outcomes of Ten Efforts to Sell or Lease
                         U.S. Commercial Airports, as of October
                                           1996

                                                             Type of
Airport and      Who led                                     privatizatio
location         effort        Year          Purpose         n             Outcome
---------------  ------------  ------------  --------------  ------------  --------------
Greater Peoria   Airport       1985          Reduce costs    Sale or       Determined
Regional         manager                     and increase    lease of the  infeasible
Airport,                                     revenue         airport
Illinois                                                     terminal

Atlantic City    Mayor         1986-1992     Improve the     Sale or       Leased the
International                                facility        lease of the  terminal to a
Airport, New                                                 airport       private entity
Jersey                                                       terminal      from 1986 to
                                                                           1992 and sold
                                                                           the terminal
                                                                           to a public
                                                                           entity in 1992

Albany County    County        1989-1991     Recover and     Lease of the  Opted for a
Airport,                                     reduce          airport       private
New York                                     operating                     management
                                             costs                         contract

Los Angeles      Mayor         1992-1996     Divert revenue  Sale or       Ongoing
International                                                lease of the
Airport,                                                     airport
California

Baltimore-       State         1993          Reduce costs    Sale or       Two state
Washington       legislature                 and increase    lease of the  panels
International                                revenue         airport       recommended
Airport,                                                                   not to sell or
Maryland                                                                   lease the
                                                                           airport

Logan            State         1993          Reduce costs    Sale or       Contracted
International    legislature                                 lease of the  some
Airport,                                                     airport       activities and
Massachusetts                                                              leased a
                                                                           portion of
                                                                           terminal
                                                                           facilities

Kennedy          Mayor         1995-1996     Improve         Sale or       Ongoing
International                                facilities and  lease of the
Airport and                                  divert revenue  airport
LaGuardia
Airport, New
York

John Wayne/      County board  1992 and      Divert revenue  Sale or       Rejected by
Orange County    of            1995                          lease of the  the county as
Airport,         supervisors                                 airport       infeasible
California

Indianapolis     Mayor         1994-1995     Reduce airline  Lease of the  Opted for a
International                                fees and        airport       private
Airport,                                     improve                       management
Indiana                                      service                       contract

Stewart          Governor      1995-1996     Improve         Sale or       Ongoing
International                                service,        lease of the
Airport, New                                 increase tax    airport
York                                         revenue, and
                                             provide
                                             additional
                                             private
                                             financing for
                                             development
-----------------------------------------------------------------------------------------
Atlantic City is the only public owner that was able to lease its
airport to a private company and collect annual payments to use for
nonairport purposes although it had received federal grants.  In
1986, the city leased the main airport's terminal and a general
aviation field to a private firm for a minimum yearly payment of
$400,000, which was diverted to the city's general fund and not used
for airport purposes.  We could not determine, nor could FAA explain,
why this lease was approved, when the agency has subsequently opposed
similar proposals.  In 1992, Atlantic City sold the terminal to a
newly created public transportation authority for $11.5 million and
annual payments of $500,000, which have been placed in the city's
general fund.  This latter transaction was specifically authorized
under the Department of Transportation's 1992 Appropriations Act.\29


--------------------
\29 P.L.  102-143, ï¿½ 335, Oct.  28, 1991. 


   FEDERAL GRANT AND OTHER LEGAL
   REQUIREMENTS ARE IMPEDIMENTS TO
   PRIVATIZATION
---------------------------------------------------------- Chapter 3:2

Under federal grant agreements, FAA approval is required before a
commercial airport can be sold or leased, regardless of whether the
transfer is to a public or private entity.\30 In opposing proposals
to sell or lease airports to private entities, FAA has cited its
concern that a private owner or lessee would not be able to satisfy
the legal obligations that the public airport sponsor had made as a
condition of obtaining a federal grant.\31 Grant agreements currently
contain 35 assurances (obligations), including those on the uses of
airport revenue, environmental compliance, and public use and access. 
While many of the assurances would not likely be an obstacle to
privatization, some could, especially those concerning the use of
airport revenue and reimbursement of federal assets.  According to
FAA, these legal obligations cannot be unilaterally extinguished by
repaying past grants to the federal government.  However, according
to FAA's recently proposed policy, the agency will be open and
flexible on the conditions for the use of airport revenue if it
determines that privatization would not harm the public interest or
undermine aviation policy. 


--------------------
\30 According to FAA's Airport Improvement Program (AIP) Handbook,
Oct.  24, 1989 (Order 5100.38A), for public airport sponsors, grant
obligations shall remain in effect for the useful life, up to 20
years, for any facilities that were developed or equipment that was
acquired with federal grants and these obligations shall remain in
effect indefinitely for any real property that was acquired with
federal grants. 

\31 See 49 U.S.C.  ï¿½ï¿½ 47101-47131. 


      PROHIBITION ON REVENUE
      DIVERSION IS THE MAJOR
      OBSTACLE TO SELLING OR
      LEASING AIRPORTS
-------------------------------------------------------- Chapter 3:2.1

The Airport and Airway Improvement Act of 1982, as amended, which
established the AIP, requires sponsors to use all of an airport's
revenue for its capital and operating costs and not divert revenue
for nonairport purposes.\32 The intent of this provision was to
ensure that airports receiving federal grants also used the revenue
generated at the airport to pay for its costs.  In 1987, the
restrictions on revenue diversion were tightened to limit the use of
airport expenditures to activities that were not only "directly" but
also "substantially" related to air transportation.  In late 1993 and
early 1994, the House Committee on Appropriations and the Department
of Transportation's Inspector General issued reports concerning
airport revenue diversion and recommended greater oversight by FAA. 
In 1994, the Congress added airport financial reporting requirements
and penalties for violating requirements concerning the use of
airport revenue.  In 1996, the Congress added the penalty that an
airport is subject to a fine of three times the amount of revenue
that it illegally diverts. 

To what extent the public owner of an airport can retain sale or
lease proceeds is a crucial issue in the privatization debate.  FAA
contends that any sale or lease proceeds constitute airport revenue
and, therefore, must be used for airport purposes.  If a public owner
of an airport cannot retain privatization proceeds for nonairport
purposes, the financial incentives to privatize are diminished.  A
1991 Department of Justice opinion stated that public owners of
airports are entitled to unreimbursed capital and operating expenses
from the proceeds of an airport's sale or lease.\33 The opinion also
stated that no time limits exist on the right to receive compensation
for these expenses.  However, under the Federal Aviation
Reauthorization Act of 1996, any request to recoup capital and
operating costs must be made no later than 6 years after the expense
occurred. 


--------------------
\32 49 U.S.C.  ï¿½ 47107(b)(2) allows public airports with
preestablished revenue-sharing legislation or debt covenants to
legally take some revenue from the airport.  We found only a few
airports that qualify for this provision. 

\33 The opinion was sought by FAA in conjunction with a request by
Albany County, New York, to lease its airport to a private entity. 


      GRANT REPAYMENT AND SURPLUS
      FEDERAL PROPERTY
      REQUIREMENTS MAY POSE
      BARRIERS
-------------------------------------------------------- Chapter 3:2.2

Another legal issue concerns whether federal grants must be repaid
and donations of surplus federal property must be returned if an
airport is sold or leased to a private entity.  Since 1946, the
federal government has awarded over $23.5 billion in airport grants
and donated an unknown value of surplus federal property to assist in
the development of airports.  According to privatization proponents,
federal grant and surplus property requirements would pose
significant barriers to privatization if FAA requires that grants be
repaid and the Secretary of Transportation does not waive surplus
property restrictions. 

The question of whether federal grants must be repaid has not been
officially determined by FAA.  According to FAA officials, the
statutory restrictions on the use of airport revenue appear to take
precedence over Executive Order 12803 that requires FAA to seek grant
repayment from sale or lease proceeds.\34 Furthermore, there is no
reason for FAA to seek reimbursement of federal grants if, as the
agency has interpreted, revenue diversion restrictions only allow
sale or lease proceeds (exclusive of proceeds used to reimburse the
public owners' capital and operating costs) to be used for airport
purposes. 

For any airport property that is deeded as surplus federal property
the Secretary of Transportation must approve its sale or lease even
if it is used as originally intended.\35 Specifically, the Secretary
must determine that in selling or leasing an airport to a private
entity, the airport will continue to be used as originally intended. 
Upon making this determination, the Secretary can then allow the
airport to be transferred to a private entity. 

According to privatization advocates, grant repayment and surplus
federal property requirements impede airport privatization. 
Specifically, they are concerned that FAA would seek reimbursement of
federal grants because the agency has not had to consider whether to
apply Executive Order 12803 to an actual public to private transfer
of an airport, and FAA has no policy on whether this order would
apply.  Under bills introduced during the 104th Congress (H.R.  1907
and S.  1063), the Secretary of Transportation could not require
local and state governments to repay federal grants if a legal
agreement or regulation requires that the privatized asset continue
to serve its originally intended purpose.  However, these bills were
not enacted.  Also, according to privatization advocates, surplus
property requirements are barriers to privatization because it would
take a costly legal effort to determine if the Secretary would allow
the airport to be transferred and would also waive certain terms of
the original transfer to the public entity, especially the terms
allowing the federal government to possess the surplus property
during a national emergency or take back the property if any
requirements are not met. 


--------------------
\34 Executive Order 12803 specifies that, to the extent permitted by
law, sale or lease proceeds are to be distributed in the following
manner:  (1) Local and state governments shall first recoup in full
the unadjusted dollar amount of their portion of the asset's total
costs; (2) if sale or lease proceeds remain, the federal government
shall recoup in full the amount of federal grants associated with the
asset, less the applicable share of accumulated depreciation on the
asset; and (3) finally, local and state governments shall keep any
remaining proceeds if they are used only for investment in additional
infrastructure assets or for debt or tax reduction. 

\35 See 49 U.S.C.  ï¿½ï¿½ 47151-47153. 


      NOISE, ENVIRONMENTAL, AND
      LAND-USE REQUIREMENTS ARE
      NOT SIGNIFICANT BARRIERS
-------------------------------------------------------- Chapter 3:2.3

Conformance with noise, environmental, and land-use assurances does
not present significant barriers to the sale or lease of an airport. 
Specifically, these assurances apply equally to both privately and
publicly owned airports and meeting these assurances would generally
require the same actions.  Federal regulations established a system
for measuring aircraft noise in communities next to or near airports
and for providing information about how land should be used depending
on the noise level.  Airport operators must also meet applicable
environmental requirements such as air and water quality standards. 
In considering whether to buy or lease an airport, a private entity
can determine what the potential costs of meeting noise and
environmental requirements are and how these costs will be met.  The
land-use assurance requires airport operators to take appropriate
action, including the adoption of local zoning laws (to the extent
reasonable) to restrict the use of land next to or in the immediate
vicinity of the airport to activities and purposes compatible with
normal airport operations, including the landing and take-off of
aircraft.  Private entities do not have zoning authority.  Therefore,
to satisfy this assurance private owners would either need to control
the land within the immediate vicinity of their airports or have the
cooperation of local governments.  In some cases, local governments
that own airports also do not control land next to or in the
immediate vicinity of their airport and must have the cooperation of
other local governments to meet the land-use assurance. 

The exposure of a private owner or lessee to noise and environmental
liability arising from lawsuits presents an additional business risk. 
For example, public owners have been found liable for damages from
noise caused by airport operations.  Therefore, a private airport
owner or lessee could be liable for damages from noise.\36
Determining liability for airport noise and environmental damages is,
for the most part, a local issue. 


--------------------
\36 Under 49 U.S.C.  ï¿½ 47506, the Congress acted to limit noise suits
against airport operators who have prepared a noise exposure map
under ï¿½ 47503 by property owners who acquired property within a noise
affected area after February 18, 1980.  Essentially, after the map
puts the public on notice of a noise exposure level, there is no
legal basis for a suit unless aircraft operations at an airport have
significantly changed since the property was purchased (such as an
increase in the type of certain aircraft and frequency of their use
or changes in airport layout or flight patterns). 


      SAFETY AND SECURITY
      REQUIREMENTS ARE NOT
      SIGNIFICANT BARRIERS
-------------------------------------------------------- Chapter 3:2.4

Although airports must conform to federal safety and security
requirements, regardless of their ownership and whether they receive
federal grants, these requirements do not pose significant barriers
to privatization.  Under FAA's safety requirements, airports must be
certified by FAA to service various categories of commercial
aircraft.  Similarly, airports must meet FAA's security requirements. 

Because of sovereign immunity,\37 a public owner may have greater
protection from lawsuits claiming that the airport failed to adhere
to safety or security requirements.  A private owner would not have
this immunity and would need to obtain private insurance or
self-insure against liability unless specifically indemnified as part
of any transfer.  As a result, a private airport's costs could
increase to cover this insurance cost. 


--------------------
\37 Under sovereign immunity, a governmental entity cannot be sued
without its consent for liability arising from activities that are
governmental in nature. 


      FEDERAL PENALTIES TO ENFORCE
      GRANT OBLIGATIONS ARE MORE
      LIMITED FOR PRIVATE AIRPORT
      OWNERS
-------------------------------------------------------- Chapter 3:2.5

In the event a public agency does not abide by its grant obligations,
the Secretary of Transportation can pursue several courses of action
depending on the nature of the offense.  For example, airports that
have illegally diverted revenue can be required to make repayment. 
Also, under some circumstances, the Secretary can impose a civil
penalty for failure to take corrective action.  At the most extreme,
the Secretary could withhold any future transportation grants,
including airport apportionment grants and highway funding in
accordance with the 1994 and 1995 Department of Transportation
Appropriations Acts. 

For a private airport owner, the Secretary's ability to enforce
compliance with outstanding grant assurances is more limited.  A
commercial airport that was sold to a private entity would not be
eligible for apportionment grants or other transportation grants that
a local or state government can receive.  Therefore, the federal
government's ability to encourage compliance by withholding grants to
privately owned airports is reduced. 


      FAA'S PROPOSED POLICY ON THE
      USE OF AIRPORT REVENUE IS
      AMBIGUOUS
-------------------------------------------------------- Chapter 3:2.6

FAA's proposed policy on the use of airport revenue, including the
use of sale or lease proceeds, is ambiguous because it provides
conflicting advice to airport owners interested in privatizing.  On
February 26, 1996, FAA issued its proposed policy for public
comment.\38 Under the proposal, FAA continues to consider sale or
lease proceeds as subject to restrictions on diverting airport
revenue.  However, the proposal also states that FAA does not intend
to discourage privatization and will consider privatization proposals
on a case-by-case basis.  The proposal further states that the FAA
will remain open and flexible in specifying conditions on the use of
airport revenue that will protect the public interest and fulfill
revenue diversion restrictions without interfering with
privatization.  However, FAA has not specified these conditions.  As
a result, the policy effectively discourages privatization as long as
FAA considers sale or lease proceeds to be airport revenue subject to
diversion restrictions. 


--------------------
\38 Section 112 of the Federal Aviation Administration Authorization
Act of 1994, P.L.  103-305 (enacted Aug.  23, 1994), required the
Secretary of Transportation to establish revenue diversion policies
not later than 90 days after enactment. 


      BOND COVENANTS PRESENT
      RESTRICTIONS TO
      PRIVATIZATION
-------------------------------------------------------- Chapter 3:2.7

Covenants in bonds could restrict the transfer of a public airport to
private control in certain instances.  To protect bondholders, bonds
generally contain covenants that require the bonds to be retired if
assets are sold or transferred.  According to public finance
officials, altering these covenants would generally require a vote of
bondholders.  Recalling existing bonds and issuing new bonds would
mean incurring prevailing interest rates that could be higher. 


   ECONOMIC FACTORS PLACE
   PRACTICAL CONSTRAINTS ON
   PRIVATIZATION
---------------------------------------------------------- Chapter 3:3

In addition to the various legal constraints, a privatized airport's
ability to operate profitably under current regulations and
conditions is uncertain.  Privatized airports would lose eligibility
for some main sources of capital.  Also, a private airport could
encounter opposition from airlines and restrictions on its ability to
generate an adequate return on investment.  Finally, a privatized
airport could go bankrupt. 


      PRIVATE AIRPORTS' ACCESS TO
      SOME FUNDING SOURCES IS
      REDUCED
-------------------------------------------------------- Chapter 3:3.1

Under current regulations, private airports would lose access to some
AIP funding as well as PFCs and tax-exempt status for bonds.  First,
privately owned airports cannot receive AIP apportionment grants,
although they would continue to be eligible for AIP discretionary
grants.  Depending on how a lease is structured, a privately leased
airport could receive apportionment grants.  Specifically, the public
owner could be the airport sponsor for the purpose of receiving
grants.  In fiscal year 1995, apportionment funding for commercial
airports was one-third of the total $1.45 billion in AIP funds.\39

Second, privately owned airports could not collect PFCs, but could
impose other types of fees.  As with apportionment grants, depending
on how the lease is structured, a privately leased airport could
collect PFCs.  Between June 1992 and January 1996, 244 airports were
approved to collect an estimated total of $12.5 billion in PFCs
through the year 2024.  In 1995, airports collected almost $1 billion
in PFCs.  To replace lost PFCs, a privately owned airport could
collect other types of passenger usage fees that are not subject to
PFC limits. 

Finally, according to public finance officials, for future bond
issues at privately owned airports, the loss of tax-exempt status
would add about 2 percentage points to the average airport's debt
costs.  For example, without tax-exempt status, a $100 million bond
issue would cost at least $2 million more in additional interest
costs each year for a privately owned airport.  However, these
interest costs are tax deductible.  Concerning the status of
outstanding bonds at a privatized airport, in 1994, the Internal
Revenue Service issued Revenue Procedure 93-17 that sets forth the
conditions under which an outstanding bond's tax-exempt status can be
protected when the use of that bond's proceeds changes.  (This
protection is referred to as "safe harbor.") This revenue procedure
requires the issuer to take one of several specified remedial actions
that are available only if certain conditions are met.  To the extent
that the requirements and conditions of the revenue procedure are
met, safe harbor protection for outstanding tax-exempt bonds might be
available if an airport is sold or leased to a private entity. 


--------------------
\39 In fiscal year 1995, the Congress provided commercial airports
with $729 million in apportionment funding before statutorily
required cuts were imposed.  After these cuts were imposed,
commercial airports' actual apportionment funding was just over $450
million. 


      PRIVATE AIRPORTS COULD FACE
      AIRLINES' OPPOSITION AND
      LIMITS ON PROFITABILITY
-------------------------------------------------------- Chapter 3:3.2

A private airport owner or lessee also could face opposition from
airlines and could encounter constraints on its revenue that would
make it more difficult to earn a return on investment.  First, the
airline officials that we talked to are almost universally opposed to
privatization, especially if it means higher charges to the airlines. 
In our discussions with officials from 13 domestic carriers, a
majority opposed privatization because of concerns that it would lead
to revenue diversion and an increase in airport landing fees and
terminal rentals.  Airlines approved of the contract for the private
management of Indianapolis' airport system because they hoped it
would lead to lower costs, improved efficiency, and assurances that
no revenue would be diverted. 

Second, FAA's policy on rates and charges prohibits airports from
increasing their charges to airlines to reflect the costs of
appreciated or revalued airfield assets.  On June 21, 1996, FAA
published its new policy on rates and charges, which dictates how
airports may charge airlines for aeronautical uses of the airport.\40

Because revenue from fees for using an airfield, generally landing
fees, may not exceed actual historical costs, a private airport would
not be able to charge landing fees based on revalued airfield assets
that reflect its acquisition costs.\41 However, this new policy would
allow a private owner or lessee to earn a reasonable rate of return
on airfield investments although the policy does not define what
constitutes a reasonable return.  In addition, it permits airports to
earn a return, without constraints, on other assets. 

Third, a private owner or lessee may need to renegotiate the
airport's agreements with its tenant airlines to retain profits. 
Often these agreements, which govern how airports charge airlines for
using terminals and airfields, restrict how much and in which ways
airports can make a profit.  Private owners or lessees of airports
would be particularly keen to renegotiate residual agreements because
they would not allow the airport to retain any profits.  However, air
carriers would likely be hesitant to renegotiate their airport
agreements if they believed their costs would increase. 


--------------------
\40 FAA's policy defines aeronautical uses to include services
provided by air carriers related directly and substantially to the
movement of passengers, baggage, mail, and cargo at an airport. 

\41 Privately owned or leased airports are only subject to FAA's
rates and charges policy if they must meet grant assurances or have
received surplus federal property. 


      PRIVATIZED AIRPORTS COULD GO
      BANKRUPT
-------------------------------------------------------- Chapter 3:3.3

Privatized airports could go bankrupt.  The outcome from a bankruptcy
proceeding would depend on several factors, including whether the
insolvent party is the airport's owner, lessee, or a management
contractor, and what type of bankruptcy protection, such as
protection to reorganize its debts, is sought.  It is unclear to what
extent an airport's activities might be disrupted by bankruptcy
proceedings. 

If a private airport owner faces bankruptcy proceedings, the local
community or state may have to purchase the airport to ensure it
continues to be used as an airport.  Executive Order 12803 states
that any sale or transfer must contain a mechanism to ensure that the
airport continues to operate even if the private owner becomes
insolvent.  However, the effect of any such mechanism has never been
tested in bankruptcy proceedings.  As part of a bankruptcy
liquidation or reorganization, the airport's assets could be sold to
satisfy creditors, without regard to whether those assets would be
used for airport purposes.  Also, it is uncertain what the courts
would decide were the assets of the private airport owner, the
airlines, or the local, state, or federal government.  For example,
air traffic control facilities and equipment might be considered
assets of the airport owner for bankruptcy purposes even though they
had been funded by FAA. 

Certain Bankruptcy Code provisions may, in effect, hinder or prevent
a local or state government from cancelling a lease or management
contract to protect other creditors, even if the lease or contract
contains a default clause.  Furthermore, the local or state
government's ability to substitute a new operator may be restricted
even if the bankrupt operator's performance deteriorates.  Moreover,
certain Bankruptcy Code provisions authorize the trustee, subject to
court approval, to reject certain agreements, which could include a
lease or management contract. 


IMPLICATIONS OF THE SALE OR LEASE
OF AIRPORTS FOR VARIOUS
STAKEHOLDERS DEPEND ON SEVERAL
FACTORS
============================================================ Chapter 4

How the sale or lease of airports would affect local and state
governments, airlines, passengers, and the federal government depends
on several factors, including how privatization is implemented, how
privatized airports might be regulated, and the unique
characteristics of each airport, such as its size and future revenue
potential.  If federal restrictions on the use of airport revenue are
changed and local and state governments could retain the proceeds
from privatizing airports, then they are more likely to sell or lease
them.  If airports' costs for capital increase as a result of
privatization, the effects on airlines and passengers would depend on
whether these increases are passed on to them.  The effects of
privatization on the federal government will depend on whether the
grants and subsidies that are currently extended to public airports
are similarly offered to private airports.  The Congress recently
established a pilot program for airport privatization.  Under this
program, the public owners of up to five airports could be exempted
by the Secretary of Transportation from revenue diversion, grant
repayment, and surplus property requirements in leasing commercial
airports or selling or leasing general aviation airports. 


   THE FINANCIAL BENEFITS TO LOCAL
   AND STATE GOVERNMENTS DEPEND ON
   WHETHER REVENUE DIVERSION AND
   GRANT REPAYMENT REQUIREMENTS
   ARE CHANGED
---------------------------------------------------------- Chapter 4:1

Local and state governments could potentially benefit from
privatization in two or more ways.  First, leasing or selling an
airport to a private concern would result in a financial windfall for
the public owner if federal restrictions on the use of airport
revenue are changed.  Second, public owners would accrue a long-term
benefit by adding airports to their tax bases.  Some public owners
have actively sought to privatize their airports specifically to
benefit financially from the proceeds of selling or leasing their
airports.  For example, the Los Angeles and Orange County
privatization studies were undertaken, in part, to examine if the
proceeds from the sale or lease of an airport could be legally
diverted.  However, an official of one airport that had sought to
privatize told us that if they could legally divert that airport's
revenue without selling or leasing it, they would not be as
interested in privatizing it. 

Estimating how much local or state governments would gain by selling
or leasing airports is difficult because the amount largely depends
on whether current revenue diversion and grant repayment requirements
are changed.  Although airports have reported billions of dollars in
assets, their market value may be substantially more or less to a
prospective buyer.  An airport's market value principally depends on
the present value of its future earnings, which in turn depends on
market forces and the manner in which it is privatized, especially
what constraints are imposed and subsidies are granted by the various
levels of government. 

While local and state governments could benefit financially from
privatization, there is the risk that a private airport operator
could go bankrupt.  If a private airport owner faces bankruptcy
proceedings, the local or state government might have to purchase the
airport to ensure that it continues to be used as an airport.  Also,
bankruptcy proceedings might, in effect, hinder or prevent a public
owner from cancelling its lease with a private operator. 


   THE EFFECTS ON AIRLINES DEPEND
   ON PRICE REGULATION
---------------------------------------------------------- Chapter 4:2

The effects of the sale or lease of airports on airlines largely
depend on whether airlines' airport costs would increase.  Currently,
airports subject to FAA's policy on rates and charges are required to
charge landing fees based on historical costs, thus prohibiting them
from charging market-based rates.  No such policy applies to
airports' other sources of revenue, such as concessions and parking
fees.  Indeed, the self-sufficiency assurance to obtain a federal
grant generally requires an airport to impose market rates.  If FAA's
current policy on rates and charges is not applied to privatized
airports, then airports could raise their landing fees because
airports, especially those with large origination and destination
traffic, have a strong local demand for air services.\42

Some economists contend that pricing based on historical costs is
inefficient because assets would usually be underpriced and
eventually rationing must take place.  A few countries are
experimenting with various market pricing systems as part of their
privatization initiatives.  However, it is likely that the federal
government would regulate the landing fees privatized airports'
charge airlines because of concerns that monopoly pricing would
result in fees above the levels that would prevail in a competitive
market.  Other countries that have privatized airports generally
impose some form of price regulation on landing fees.  For example,
the United Kingdom has capped these fees at historical rates plus an
adjustment to account for inflation and increases in productivity. 
The United Kingdom has also allowed a form of market-based pricing by
permitting airports to charge airlines higher landing fees during
peak traffic times. 

Even if FAA's policy on airport rates and charges remains the same
and airport landing fees are tied to historical costs, airlines could
still face higher costs at a privatized airport.  Under current law,
a privately owned airport would no longer receive federal
apportionment grants or be eligible for tax-exempt financing, which
could increase the owner's costs to obtain capital.  Accordingly,
even if subject to FAA's current policy, a privately owned airport
could pass its higher costs--for example, greater interest
expenses--on to airlines in the form of higher landing fees and
terminal rentals.  Such costs, according to data from airlines, were
on average about 6 percent of an airline's total costs in 1995. 

Economic studies indicate that even relatively small increases in
airlines' airport-related costs could have a profound effect on their
profitability.\43 Prior to 1995, the airline industry had encountered
significant losses and several carriers had gone bankrupt. 
Substantial increases in airline costs could result in lower
profitability and reduced competition. 


--------------------
\42 Airport analysts often categorize airports by the nature of their
passenger traffic.  Airports with a strong local market (a high
percentage of origin and destination traffic) are less affected by
airline and financial pressures than airports with a high percentage
of connecting traffic, where it is easier for an airline to move its
operations elsewhere. 

\43 Report to Congress:  Child Restraint Systems, U.S.  Department of
Transportation, FAA (May 1995), summarizes 25 economic studies on the
relation of ticket prices to the demand for air travel. 


   THE EFFECTS ON PASSENGERS
   DEPEND ON WHETHER AIRLINES
   WOULD PASS ON COST INCREASES
---------------------------------------------------------- Chapter 4:3

The effects of the sale or lease of airports on airline passengers
depend on the extent to which increases in airlines' costs would be
passed on through higher ticket prices or changes in the number of
flights.  Although small increases in airlines' costs may have a
substantial effect on airlines' profitability, airlines may be
reluctant to offset this increase by raising ticket prices if they
believe that higher prices would reduce passenger traffic.  Economic
studies have shown that passenger traffic is sensitive to changes in
ticket prices and that a 1-percent increase in prices may lead to
more than a 1-percent decline in passengers.\44 Also, with higher
costs, airlines might cut back or eliminate flights at some airports. 

Airline ticket prices could increase if airport privatization reduced
airline competition.  If privatization lead to higher costs because
of a change in FAA's rates and charges policy or reduced subsidies
for airports, this increase could also serve to reduce airline
competition and increase fares.  GAO previously found that reduced
competition between airlines in serving various airports had resulted
in higher fares.\45


--------------------
\44 Report to Congress:  Child Restraint Systems. 

\45 Airline Competition:  Effects of Airline Market Concentration and
Barriers to Entry on Airfares (GAO/RCED-91-101, Apr.  26, 1991) and
Airline Competition:  Higher Fares and Reduced Competition at
Concentrated Airports (GAO/RCED-90-102, July 11, 1990). 


   THE FEDERAL GOVERNMENT WOULD
   LIKELY BENEFIT IF TAX-EXEMPT
   STATUS AND APPORTIONMENT GRANTS
   ARE NOT EXTENDED TO PRIVATELY
   OWNED AIRPORTS
---------------------------------------------------------- Chapter 4:4

The effect of the sale or lease of airports on the federal
government's budget would generally be positive, provided federal
laws and FAA's policies remain unchanged.  Currently, privately owned
airports are not eligible for federal financial assistance in the
form of tax-exempt bonds and AIP apportionment grants.  In addition,
public airports do not pay corporate income taxes.  The actual effect
on the federal budget, however, would depend on the eventual form and
extent of privatization. 

A privately owned airport's loss of tax-exempt status would result in
additional tax receipts for the federal government.  While over $42
billion in airport bonds was issued between 1985 and 1994, we could
not identify exactly how much tax-exempt debt is currently
outstanding because some of these bonds had been used to refinance
existing debt.  One credit rating agency estimated that roughly $25
billion in tax-exempt airport bonds is currently outstanding.  If all
these bonds were taxable and interest costs averaged 8 percent, then
an additional $2 billion in annual interest income would be taxed. 
At a 28-percent tax rate, the tax exemption for interest on airport
bonds would cost the federal government $560 million annually in
forgone tax receipts.\46 However, the federal government may not be
forgoing this entire amount because airports would have likely issued
less debt if it were taxable.  Also, the amount of additional tax
revenue resulting from airport privatization would depend on several
factors, including how many airports are sold, the amount of airport
bonds issued in the future, and whether existing bonds would continue
to be exempt from taxation. 

Privately owned airports would not be eligible to receive AIP
apportionment grants.  In fiscal year 1995, large hub airports
received $168 million in AIP apportionment funding, while medium hub
airports received $89 million.  According to airport management firms
and a privatization consultant, large and medium hub airports are
generally the most attractive candidates for privatization. 
Therefore, if a significant number of them were to be sold to private
entities, the Congress would have the option of reducing the total
AIP funding level by the amount of apportionment funding these
airports had received or redirecting these funds for other airport
development needs. 


--------------------
\46 An 8-percent interest cost is a conservative estimate of what
taxable debt of equivalent risk and maturity would yield.  For the
period 1985 through 1995, the median interest rate on tax-exempt
airport debt was 6.9 percent, the value-weighted median was 7.5
percent.  Adding 2 percentage points to the tax-exempt yield offers
8.9 to 9.5 percent.  As of August 1996, the average yield on a
municipal bond was 5.97 percent verses 7.19 percent for a taxable
corporate bond. 


   THE FEDERAL AVIATION
   REAUTHORIZATION ACT OF 1996
   ESTABLISHED A PILOT PROGRAM FOR
   AIRPORT PRIVATIZATION
---------------------------------------------------------- Chapter 4:5

The Congress, as part of the Federal Aviation Reauthorization Act of
1996, created an airport privatization pilot program that became
effective on October 9, 1996.  This legislation acknowledges the
current obstacles to privatization and recognizes that the pilot
program provides an opportunity to test the potential benefits of
privatization to increase funding for airports, improve airport
management, improve customer service, and lower costs of operating at
airports. 

Up to five airports can participate in the pilot program.  At least
one airport must be a general aviation airport and the other four
airports can be commercial airports, although only one of the
commercial airports can be a large hub airport.  Any general aviation
airport in the program may be sold or leased, while the commercial
airports can only be leased.  A privately leased commercial airport
could collect PFCs and receive AIP apportionment grants.  A privately
owned or leased airport would still be eligible to receive AIP
discretionary grants, but the maximum grant amount of a project's
total cost would be 40 percent rather than the normal maximum grant
amount of 75 to 90 percent.\47

Under the program, the Secretary of Transportation may exempt the
public sponsor and private owner or lessee from revenue diversion
restrictions or grant repayment or surplus property requirements. 
Specifically, an airport owner can retain sale or lease proceeds if
65 percent of the airlines serving that airport approve and would not
have to repay federal grants.  Also, the Secretary could waive any
requirements for the public owner or lessee to return surplus federal
property.  However, before granting these exemptions, the Secretary
must find that approval would not result in unfair or deceptive
practices or unfair competition.  Also, the Secretary must determine
that the sale or lease agreement would meet several conditions,
including the following: 

  -- the airport would remain available to public use;

  -- airport operations would not be interrupted if the operator went
     bankrupt;

  -- the private owner or lessee would maintain and improve the
     facilities;

  -- airline fees would not increase faster than the rate of
     inflation, unless a higher amount is approved by 65 percent of
     the airlines that service the airport;

  -- general aviation fees would not increase faster than airline
     fees;

  -- safety and security would be maintained at the highest levels;
     and

  -- noise and environmental effects would be mitigated to the same
     extent as at a publicly owned airport. 

An airport would remain eligible for the pilot program and any
associated exemptions to revenue diversion, grant repayment, or
surplus property requirements as long as its facilities continue to
be used for airport purposes.  The Secretary may, however, revoke an
exemption upon determining that the owner or lessee knowingly
violated any of the conditions set forth in the statute governing the
pilot program. 

According to FAA and aviation industry officials, it is too early to
know which airports might be interested in applying for this pilot
program or if any airports could qualify for it and gain the support
of their tenant airlines.  However, the public owners of two
airports--Allegheny County Airport, a general aviation airport in
Pennsylvania, and Stewart International Airport, a former military
air base in New York--have expressed interest in the program's
innovative arrangements.\48 The Department of Transportation and FAA
are charged with reporting to the Congress within 2 years after the
first application is approved on the pilot program's implementation
and are authorized under the program to audit a private owner's or
lessee's financial records and operations in order to monitor its
compliance with the program's requirements. 


--------------------
\47 The pilot program is silent on the issue of access to tax-exempt
debt.  Although a private owner would not be able to issue tax-
exempt debt, the situation is less clear for a privately leased
facility.  Depending on how the lease is structured it might be
possible for the public owner to issue tax-exempt debt to make
improvements at the airport. 

\48 H.R.  Report 104-848 (1996). 


PRIVATE MANAGEMENT CONTRACTS AND
LEASES FOR THE OPERATION OF
PUBLICLY OWNED AIRPORTS IN THE
UNITED STATES
=========================================================== Appendix I

Airport and                    Contractor/   Type of
location         Sponsor       lessee        agreement     Compensation    Term
---------------  ------------  ------------  ------------  --------------  --------------
Commercial airports
-----------------------------------------------------------------------------------------
Albany County    Albany        Airport       Management    Direct and      5-year
Airport, New     County        Group         contract      indirect        contract
York             Airport       Internationa                costs, plus a   extended to
                 Authority     l (AGI)                     management fee  1998
                                                           of $331,680
                                                           (inflation
                                                           adjusted)

Atlantic City    South Jersey  Johnson       Management    Expenses,       5-year
International    Transportati  Controls      contract      fixed fee,      contract to
Airport, New     on Authority  World                       plus a          expire in 2001
Jersey                         Services,                   performance
                               Inc. (JCWS)                 incentive
                                                           payment

Burbank-         Burbank-      AGI           Management    Expenses, plus  5-year
Glendale-        Glendale-                   contract      a percentage    contract to
Pasadena         Pasadena                                  of certain      expire in 1998
Airport,         Airport                                   costs
California       Commission

Indianapolis     Indianapolis  BAA           Management    Management fee  10-year
International    Airport       Indianapolis  contract      based on        contract to
Airport,         Authority     LLC                         improvement in  expire in 2005
Indiana                                                    net airline
                                                           costs plus a
                                                           quality bonus

Rochester        City of       Rochester     Management    Contractor      5-year
International    Rochester     Airport       contract      pays certain    contract to
Airport,                       Company                     operating       expire in 2000
Minnesota                                                  costs and       with a 5-year
                                                           earns a         renewal option
                                                           maximum profit
                                                           or loss of
                                                           $37,500

Stewart          New York      AGI           Management    Total           5-year
International    State                       contract      operating       contract
Airport, New     Department                                expenses,       through 1993,
York             of                                        including a     renewed
                 Transportati                              management fee  annually
                 on

Westchester      Westchester   JCWS          Management    Expenses, plus  26-year
County Airport,  County                      contract      a fixed fee     contract to
New York                                                   and a capital   expire in 2022
                                                           investment
                                                           commitment


General aviation airports
-----------------------------------------------------------------------------------------
Addison          City of       Addison       Lease         3 percent of    24-year lease
Airport, Texas   Addison       Airport of                  gross receipts  to expire in
                               Texas, Inc.                 or $75,000,     2000
                                                           whichever is
                                                           greater

Danielson        State of      Northeast     Management    Expenses plus   5-year
Airport,         Connecticut   Air Services  contract      a fixed fee     contract to
Connecticut                                                                expire in 1997

Fort Worth       City of Fort  Alliance Air  Management    Graduated fee   20-year
Alliance         Worth         Services,     contract      based on        contract to
Airport, Texas                 Inc.                        performance     expire in 2014


Brackett         Los Angeles   COMARCO       Management    All revenue     20-year
Field,           County                      contract      that exceeds    contract to
Compton                                                    contractor      expire in 2011
Airport,                                                   costs,
El Monte                                                   including a $3
Airport,                                                   million
Fox Field,                                                 payment to the
Whiteman                                                   county
Airport,
California

Morristown       City of       DM Airport    Lease         All revenue     99-year lease
Municipal        Morristown    Developers                  exceeding
Airport, New                                               costs,
Jersey                                                     including a
                                                           $100,000
                                                           annual lease
                                                           payment to the
                                                           city

Republic         New York      JCWS          Management    Expenses plus   5-year
Airport,         State                       contract      a fixed fee     contract to
New York         Department                                                expire in 1998
                 of
                 Transportati
                 on

Rickenbacker     Rickenbacker  AGI           Management    Certain         3-year
International    Port                        contract      expenses plus   contract to
Airport,         Authority                                 an inflation-   expire in 1998
Ohio                                                       adjusted
                                                           management fee

Teterboro        Port          JCWS          Lease         All revenue     30-year lease
Airport,         Authority of                              exceeding       to expire in
New Jersey       New York and                              costs,          1999
                 New Jersey                                including
                                                           lease payments
                                                           to the Port
                                                           Authority

Windham          State of      Windham       Management    Expenses, plus  10-year
Airport,         Connecticut   Aviation,     contract      a fixed fee     contract,
Connecticut                    Inc.                                        renewed
                                                                           annually
-----------------------------------------------------------------------------------------

EXAMPLES OF PRIVATE SECTOR
PARTICIPATION AT COMMERCIAL
AIRPORTS IN 50 FOREIGN COUNTRIES
========================================================== Appendix II

Country              Plans or actions for airport privatization
-------------------  -----------------------------------------------------------
Albania              Contracted with a private entity to modernize and expand
                     Tirana Airport

Algeria              Plans to contract with a private entity to complete
                     construction of and operate the new international terminal
                     at Houari Boumedienne Airport near Algiers

Argentina            Considering long-term management contracts with private
                     entities to operate 59 airports; the national legislature
                     (Senate) passed a bill allowing for these management
                     contracts

Australia            Implementing 50-year leases with private entities to
                     operate 22 major airports

Austria              Sold shares in Vienna International Airport; 47 percent of
                     total shares are privately held

Bahamas              Transferred ownership of Freeport International Airport to
                     a private entity

Bolivia              Plans a long-term agreement with a private entity to
                     operate three major airports

Brazil               Plans a contract with a private entity to rehabilitate the
                     terminal at Guararapes International Airport in Recife

Bulgaria             Plans (with the municipality of Sofia) a 30-year build,
                     operate, and transfer (BOT) contract\a with a private
                     entity to modernize Sofia International Airport

Cambodia             Plans a 20-year BOT contract with a private entity for
                     projects at Pochentong Airport in Phnom Penh; plans a 15-
                     year BOT contract with a private entity for projects at
                     Sihanoukville Airport on Naga Island

Cameroon             Plans a long-term lease with a private entity to build and
                     operate a terminal at the airport in Yaoundï¿½

Canada               Implemented a long-term lease with a private entity to
                     build and operate Terminal 3 at Pearson International
                     Airport in Toronto; a regional government implemented a 40-
                     year contract with a private entity to operate and manage
                     Hamilton-Wentworth Airport in Ontario

Chile                Implemented a contract with a private entity to operate the
                     passenger terminal and plans a 15-year BOT contract with a
                     private entity for a second terminal at Arturo Merino
                     Benitez International Airport in Santiago

China                Implementing a joint agreement with a private entity to
                     build and operate a new airport in Haikou; plans to
                     contract with private entities to develop and operate 8
                     airports, including Beijing International Airport

Colombia             Awarded a contract to a private entity to build a runway at
                     and plans a contract with a private entity to operate the
                     Eldorado International Airport in Bogotï¿½; awarded long-
                     term leases to private entities to operate two airports in
                     Cartagena and Barranquilla; plans long-term leases with
                     private entities to operate two airports in Medellï¿½n and
                     one airport in Cali

Costa Rica           Plans a BOT contract with a private entity for a new
                     airport in San Josï¿½

Denmark              Sold shares in Copenhagen International Airport

Dominican Republic   Transferred ownership of Punta Cana International Airport
                     to a private entity

Ecuador              Plans to contract with private entities to operate two
                     airports in Quito and Guayaquil and plans BOT contracts
                     with the same private entities for two new airports in
                     these cities

Egypt                Plans a BOT contract with a private entity for a new
                     airport near Cairo

Germany              Considering contracts with private entities to develop and
                     lease airports, including a major airport in Berlin

Greece               Implementing a 30-year BOT contract with a private entity
                     for a new airport near Athens

Hong Kong            Implementing a joint development agreement with a private
                     entity for the new Chek Lap Kok Airport on Lantau Island

Hungary              Implementing a joint development agreement with a private
                     entity for a new international terminal at Ferihegy Airport
                     in Budapest

India                Considering contracting with a private entity to construct
                     and operate a new airport in Bangalore

Indonesia            Plans a joint development agreement with a private entity
                     for a new airport in Medan

Italy                Plans to contract with a private entity to manage the
                     airport in Naples; national government-owned airlines are
                     divesting their shares in Rome and Milan Airports

Jamaica              Plans a long-term contract with a private entity to operate
                     Sangster International Airport in Montego Bay and Norman
                     Manley International Airport in Kingston

Japan                Plans (with Chubu regional governments) a contract with a
                     private entity to develop one runway and terminals for the
                     new Chubu International Airport; implemented (with Osaka
                     regional governments) a contract with a private entity to
                     build the new Kansai International Airport

Macau                Implemented a joint development agreement with a private
                     entity to develop and manage a new international airport

Malaysia             Implemented a BOT contract with a private entity for a new
                     terminal and a lease-develop-operate contract with a
                     private entity for nonaeronautical portions of a new
                     international airport in Sepang

Mexico               Considering leasing 58 airports to private entities;
                     national legislature passed a bill to allow these leases

Myanmar              Plans a BOT contract with a private entity for the new
                     Hanathawaddy Airport near Rangoon

New Zealand          Plans to sell three major airports to private entities

Pakistan             Plans to contract with a private entity to build and
                     operate a new terminal at Lahore International Airport

Panama               Plans a 10-year contract with a private entity to expand
                     and maintain passenger and cargo facilities at Tocumen
                     International Airport near Panama City

Peru                 Implemented a lease with a private entity to build and
                     operate a terminal and runway at Jorge Chavez International
                     Airport in Lima

Philippines          Plans a long-term agreement with a private entity to build
                     a new terminal at Ninoy Aquino International Airport in
                     Manila; plans a 25-year contract with a private entity to
                     convert the former Clark Air Base into an international
                     airport

Qatar                Plans a BOT contract with a private entity for a new
                     international airport in Doha

Russia               Plans a contract with a private entity to manage
                     nonaeronautical activities at the airport in Moscow; plans
                     a 25-year contract with a private entity to upgrade a
                     runway and modernize the terminal at Kazan International
                     Airport; plans contracts with private entities to expand
                     Khabarovsk Airport and modernize Tolmachevo Airport

Singapore            Implemented private sector participation in the development
                     of Changi International Airport

Slovakia             Plans to sell Bratislava Airport to a private entity

Switzerland          Sold shares in Zurich International Airport; 50 percent of
                     the shares are privately held; a private firm operates the
                     airport

Thailand             Plans to contract with a private entity to build a second
                     international airport in Bangkok

Trinidad and Tobago  Implementing a BOT contract with a private entity for a new
                     terminal at Piarco International Airport

Turkey               Plans a BOT contract with a private entity for a new
                     terminal at Ataturk International Airport near Istanbul;
                     plans a joint development agreement with a private entity
                     for a new international airport near Sanliurfa

United Kingdom       Sold shares in seven airports (BAA); local government sold
                     Belfast International Airport to a private company formed
                     by the airport employees; regional government plans to sell
                     shares in Birmingham International Airport and sold East
                     Midlands International Airport to a private entity

Uruguay              Plans a 20-year contract with a private entity to expand
                     the terminal, build a new runway, and make other
                     improvements at Laguna del Sauce International Airport near
                     Maldonado

Venezuela            Plans a long-term contract with a private entity to build,
                     operate, and manage a new airport between Bolï¿½var City and
                     Guayana City in eastern Venezuela

Vietnam              Plans a BOT contract with a private entity for a new
                     international passenger terminal at Tan Son Nhat
                     International Airport in Ho Chi Minh City
--------------------------------------------------------------------------------
\a Under a BOT contract, a private entity finances, builds or
modernizes, and operates a facility and obtains revenue from its
operation.  After a certain period, ownership of the facility
transfers to the government. 

Sources:  World Bank and Public Works Financing. 


MAJOR CONTRIBUTORS TO THIS REPORT
========================================================= Appendix III

RESOURCES, COMMUNITY, AND ECONOMIC
DEVELOPMENT DIVISION

John H.  Anderson, Jr.
Paul M.  Aussendorf
Jeanine M.  Brady
Michael G.  Burros
Charles R.  Chambers
Jay R.  Cherlow
Fran A.  Featherston
Joseph D.  Kile
Stanley G.  Stenerson
Michael R.  Volpe
Randall B.  Williamson


*** End of document. ***