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Decision Framework for Private Participation in Airport Development: The Case of Incheon International Airport in South Korea

TitleDecision Framework for Private Participation in Airport Development: The Case of Incheon International Airport in South Korea
Publication TypeConference Paper
Year of Publication2016
AuthorsIn, SYoung, Casemiro, L, Kim, J
Conference NameThe Engineering Project Organization Conference, Cle Elum, WA, USA
KeywordsAirport development, Privatization, public infrastructure ownership, public policy, Public-private partnership

The private sector has increasingly participated in operation and management of public airports. However, policymaking on airport development remains challenging because the properties of public airports as public goods often involve complex principal-agent problems. The government, as a principal, defines requirements to improve the airport’s infrastructure and service levels, and the private sector, as an agent, is responsible to meet the requirements. Yet the objectives of the principal and agent are different and often conflict with each other; the private sector aims to maximize the economic profit while the public sector’s primary goal is to maximize the social welfare. A public airport development policy should, therefore, align the interests of these two parties. This study proposes a policymaking framework to determine and execute the optimal policy for airport development. As the outcome of the new policy may be highly contextdependent, the present discussion focuses on a concrete case – the central airport of Korea, Incheon International Airport (IIA). We identify six private participation structures. Each structure shifts ownership, risks and responsibilities of the airport business to different degrees and in varying modes. We find that public private partnership (PPP) is the least intrusive form to incorporate with private sectors, but precise risk and liability structure must be elaborated. With partial privatization, private sectors tend to commit more long-term while the public airport owner continues to be the airport sponsor. Nonetheless, policymakers should reduce future conflict between private-sector and public-sector owners by setting a clear, specified and long-term agenda. Ex-post regulation on some aspects of airport business should also be planned ahead in order for the government to maintain a limited control in providing public services. To legitimatize the proposed policy, making it politically acceptable isimportant. In the case of IIA, the general public is primarily concerned about potential radical changes of public airport operation and the loss of domestic control over the public infrastructure to foreign investors. These concerns should be preemptively addressed during public decision-making process. Lastly, policymakers should evaluate the economic and social value that the new policy is expected to provide over the lifecycle of the asset. The expected outcome should be evaluated from the perspectives of both the public and private sectors.