Considering a Governance System for Airport Development and Operations

AKAI Nobuo
Fellow, RIETI

To meet the increasing diversity of needs arising as society matures, Japan needs to build a means for local authorities to implement efficiently, on their own initiative and under their own responsibility, administrative and financial management within their jurisdictions. To achieve this, it is necessary to ensure proper division of roles and duties between central and local governments, governance by the citizens, and accountability by the administration. Particularly, economies must be revitalized through more efficient use of infrastructure. Therefore discussions are underway on the use of airports; infrastructure with a potentially huge impact on local economies. "Asian Gateway Initiative," a report presented on May 16, 2007 by the government's Council for the Asian Gateway Initiative, calls for the better utilization of local airports - along with promotion of the so-called Asian Open Skies policy - as a means to facilitate the development of local economies. A governance system needs to be established that will ensure efficient use of airports as an infrastructure facility.

"Governance" refers to a system in which one entity governs or controls another entity. In a democratic society, this translates into a situation in which an entity with authority, a "principal" which typically holds authority by means of providing funds, controls the acts of another entity without authority, an "agent," so as to achieve certain goals. A system for implementing such control is referred to as a governance system; a system that facilitates the efficient achievement of goals is a proper governance system. (The term corporate governance is often used in the area of corporate management.)

What it takes to establish an airport governance system

Unlike assets held by private-sector corporations, airports are an infrastructure asset that generates public goods (externalities). The governance of such assets is for taxpayers (the general public) as a provider of funds (taxes and fees) to exercise control over their management entities. This system is called a public (or government) governance system. The system is considered proper when it provides a means of inducing individuals in charge - by providing appropriate incentives - to manage and use infrastructure assets so as to achieve their intended goals.

To establish a proper governance system within an administrative organization, it is necessary to control incentives for individual actors (agents) and ensure that they achieve suitable goals. For these, two elements are essential:

1) Clarity - exclusion, as much as possible, of uncertainty
2) Transparency - elimination, as much as possible, of information asymmetry to facilitate the clear understanding of needs

Clarity must be realized by excluding institutional ambiguities, and transparency must be ensured by eliminating information asymmetry through proper disclosure and implementing a monitoring system for administrative and financial operations to create self-responsibility and build a system that can prevent moral hazard. In doing so, it is critical that this system be developed by citizens consciously and intentionally. That is, the public's awareness of governance must be raised and maintained. Furthermore, strong political leadership to break the existing organizational culture and change people's ways of thinking is vital to build and sustain such a system.

Airport governance promotes efficient management and use of airports through a proper, incentive-oriented system for airport managers; a system that must be designed and implemented by the taxpayers (the funding body), on their own behalf and under their own responsibility.

The following arguments have been made on the current airport management system from the viewpoint of governance:

  1. In terms of administrative responsibility, Japanese airports are broadly classified into two groups: those administered by the central government and those by local governments. But the distinction between the two groups is rather ambiguous because administrative responsibility has often been delegated based on each airport's development over time. It has been argued that airports should be placed under central governmental control in view of the need to establish a network of airports. Although such reasoning is not persuasive, airports located in major local cities - which are presumably the most important infrastructure asset for promoting grassroots international exchange to revitalize local areas - remain under the administrative control of the central government.
  2. Airport facilities - planeside facilities, terminal buildings, parking lots, etc. - are typically run and managed by multiple companies creating a difficult or low-incentive situation for a local government to plan future policies that capitalize on its airport.
  3. In terms of financial operations, major airports have their revenue and expenditures pooled in a single account managed by the central government; the Airport Improvement Special Account. This means the management of each airport lacks the element of self-responsibility. Airports administered by local governments do not sufficiently disclose their financial data (almost no disclosure in a way visible to the general public). These airports do not sufficiently explain their operations to the public, and thus lack of accountability.

Some studies have sought to examine the revenue and expenditures of the central government's Airport Improvement Special Accounts or of the financial operations of specific local airports. However, virtually no studies have focused, from a governance viewpoint, on differences in local governments' approaches to management of local airports and then analyzed the factors behind the differences. Thus, I am attempting this analysis as a RIETI project. Specifically, based on the current situation, I am undertaking the following research activities:

  1. As a means to evaluate central government-administered airport governance systems, assess, and measure the efficiency of the Airport Improvement Special Account by focusing on financial accounting
  2. As an example of local government-administered airport governance systems, focus on the Nagoya Airport, the ownership of which was transferred from the central government to the Aichi Prefectural Government, and measure the effect of the prefectural government's efforts to reform airport operations
  3. As a means to evaluate governance systems in locally administered airports, measure the effect of efforts to attract charter flights in a bid to promote the usage of local airports
  4. As a means to evaluate governance systems in locally administered airports, measure the effect of airport governance structure on the operational efficiency (in terms of the balance between revenue and expenditures) of terminal building management companies financed and run by the local governments

The following findings were derived:

  • Financial statements for the Airport Improvement Special Account, an integrated account for all national airports, are the only available financial statements at the moment and no financial statements show the actual state of each airport's management (including airports administered by local governments). Furthermore, the existing financial statements do not provide a complete picture of airport operations; "basic facilities" such as runways and aprons, and "auxiliary facilities" (banks, roads, public parking lots, bridges, drainage facilities) are covered, but terminal buildings and non-public parking lots are not. Financial statements must be prepared in a way that accounts for the full scope of airport operations. Only then will airport managers begin to develop a sense of cost consciousness. Preparing such statements for each airport is the first step toward implementing airport governance and eventually revitalizing local economies through the effective use of airports.
  • At the Nagoya Airport, positive effects of ownership transfer from central to prefectural government are beginning to emerge in terms of building a governance system for promoting self-responsibility, as seen in the airport's adopted status as a hub for commuter flights and small aircraft, the adoption of the Designated Administrator System - which allows local governments to outsource part of their duties to private-sector operators - to reduce costs, efforts to increase non-flight-related revenue (e.g., contracting with UNY Co., a major commercial facility operator, as a tenant for the former international terminal building), and initiatives to invigorate local industries (e.g., the announcement of the intention to form an aviation industry cluster and invite the establishment of a aerospace technology research center in the region).
  • Results of analysis of the relationship between airport usage (measured in terms of the percentage increase in the number of charter flights) and airport governance system show that an institutional delegation of both ownership and operational authority to respective local governments (though subject to appropriate regulations by the central government) would induce greater efforts to make effective usage of local airports, and thus, should be promoted as a flexible institutional system for revitalizing local economies.
  • Results of analysis of the relationship between operational efficiency (measured in terms of the terminal building company's revenue and expenditure balance) and the airport governance system signal the importance of the use of private finance and multifaceted monitoring. Need was also seen for the establishment of a governance system that facilitates effective airport usage by clarifying management responsibility and integrating terminal building operations as part of airport operations.

Self-responsibility is imperative for regional airports

Japan's era of airport development is considered to be over, ushering in a new era requiring a shift from airport management led by the central government to locally oriented airport governance. An appropriate airport governance system needs to be introduced to improve the efficiency of airport operations. Some point to the need to control traffic allocation between airports from the viewpoint of efficient network operations. At the same time, however, the absence of incentives for efficient airport usage under the current system which lacks the element of self-responsibility is a big problem. Given the increasing importance within Japanese society to address the diverse needs of local community, the problematic absence of incentives is growing in significance relative to the need for integrated control by the central government. (Indeed, there exist "Category 3" airports, which refers to airports established and operated by local authorities under the Airport Development Law.) The need to control air traffic allocation from a network operations standpoint should be fulfilled not through direct ownership of airports by the central government, but by indirect and moderate regulations. Self-responsibility must be established within each regional airport. This can be achieved by ensuring institutional clarity, eliminating information asymmetry through greater information disclosure, and introducing an effective monitoring system - so as to design and establish an institutional system that incentivizes greater efficiency in regional airport operations.

October 9, 2007

This argument is based on a discussion paper to be presented as an outcome of a RIETI research project titled "Empirical and Internationally Comparative Institutional Analysis of the Forms of Administrative and Financial Systems for Utilizing Infrastructure Assets to Invigorate Local Economies in an Era of Decentralization and International Competition: A study of the administrative and financial systems and governance systems in operation at regional airports." For further detail, see the forthcoming discussion paper. On behalf of our research team, I would like to extend my gratitude to officials of the Civil Aviation Bureau of the Ministry of Land, Infrastructure and Transport, who provided us with valuable knowledge and data in conducting this project. The research findings introduced represent the views of the research team.

October 9, 2007