A Case Against Regulating Foreign Investment in Airports
Takatoshi ITO (Professor, University of Tokyo)
Regulations on foreign investment in airport facilities, currently advocated by the Ministry of Land, Infrastructure, Transport and Tourism, seem to be against recent trends toward a more open capital market in Japan, and have negative effects on the image of Japan in the world. Such regulations would not address national security issues, where large shareholders, rather than foreign investors, should be regulated. Monopoly-related economic problems could not be handled that way either. We should carefully examine how to introduce regulations associated with possible privatization of Narita Airport.
Need to Welcome Entry of Foreign Firms
One of the pillars for revitalization of Japan's economy is to have a more open capital market for encouraging foreign direct investment in Japan, which is still very low by the international standard. For example, Tokyo could become Asia's major financial center with higher income opportunities if foreign financial institutions locate their Asian headquarters in Japan. Similarly, Niseko ski resort in Hokkaido, which has been revitalized by investment from Australia, is a model for economic development and job creation in local regions in Japan. Potential growth capacity will be raised by competitive pressure due to foreign investment in low productivity sectors.
Prime Minister Yasuo Fukuda in his recent policy speech clearly stated that by enhancing transparency in the systems that govern foreign investment, we plan to double the amount of foreign investment into Japan by liberalizing the aviation industry, increasing the efficiency of trade procedures, and further enhancing the competitiveness of the financial and capital markets in this country.
In order to attract foreign firms' investment into Japan, we need to show our welcoming attitude toward their entry into the Japanese market in a more persuasive way. That does not necessarily mean complete deregulation, as some arrangements or regulations may be required to deal with such market failures in case of monopoly, externalities, public goods, and information asymmetry, and also with national security issues.
However, regulations, whenever necessary, should be handled carefully by taking account of the following points, in order not to offend foreign investors: (1) non-discriminatory treatment of foreign and Japanese firms, (2) reasonable predictability of regulatory changes, and (3) international harmonization of systems and arrangements.
Currently it is reported that the Ministry of Land, Infrastructure, Transport and Tourism is planning to regulate the foreign share ownership ratio to be less than one third, in terms of voting rights, regarding Narita International Airport Corporation, whose stocks are to be listed in FY 2009, and already publicly listed Japan Airport Terminal Co. Ltd. at Haneda Airport. Against this move, some Cabinet members have expressed objections, and negative opinions seem dominant at the Council on Economic and Fiscal Policy in the Japanese government.
Separate National Security from Monopoly Issues
In discussing the issue of airport privatization, we must separate concerns about "national security" from those about "monopoly problems." Regulations on foreign investment would not be able to address concerns about foreign control over Japan's airports, because those companies that are hostile to the Japanese government could possibly be those with Japanese nationality. Rather, it is more desirable to regulate a maximum limit of share holdings by a single firm. This kind of large shareholder regulation is actually imposed in stock exchanges and banking, and ensures the principle of non-discriminatory treatment of foreign and domestic investors.
Then, how to respond to the argument that "Japan should regulate foreign investment in airports, because such regulations are adopted by some foreign governments, where their airports are under national control"?
Actually, there are three types of airport ownership in foreign countries. (1) Complete privatization (very few cases, e.g., in London, Copenhagen and Brussels), (2) privatization with regulations on foreign capital (as in Austria, Mexico and Australia), and (3) central or local government control or dominant government ownership of privatized airports (in many countries including the U.S., France, Germany, the Netherlands, Switzerland and Singapore).
In this context, the current proposal by the Ministry of Land, Infrastructure, Transport and Tourism on Narita Airport is to change from type (3) to type (2). These two types look similar in terms of government involvement, but are very different from each other, as type (2) means discriminatory treatment of foreign capital, while type (3) means non-discriminatory treatment. If substantial government involvement is indispensable for some good reasons, then Japan should remain in type (3), rather than changing to type (2), and that would be no problem from the viewpoint of international harmonization.
How about monopoly-related economic problems? Needless to say, airports are a kind of basic infrastructure that tends to be monopolistic, most likely leading to underinvestment in facilities and possibly too high service fees and/or too low service quality, at least in the short run. Therefore, it is reasonable to apply public policies including taxes and subsidies for new facility investment and regulations on service fees. Actually, these policies are to be applied to both Haneda and Narita Airports, and regulations on foreign investment could not be justified on the grounds that airport infrastructure tends to be monopolistic.
Avoid Violation of Reasonable Predictability
Another point to be taken into consideration here is to recognize differences between Narita and Haneda. In the case of Narita, where the government is still holding all the shares of Narita International Airport Corporation, which controls and manages all the airport facilities including the runways and the terminal buildings. Therefore, we do not have to make a hasty decision on regulations now, as there is more than a year from now, at the earliest, before stocks are listed.
In the case of Haneda, on the other hand, Japan Airport Terminal Co. Ltd. is a private company, which owns and manages the terminal buildings, whereas the government owns and controls the runways and air traffic-related facilities. Recently, the Macquarie group from Australia has acquired a little less than 20 percent of the share of Japan Airport Terminal Co. Ltd. and the overall foreign ownership ratio of the terminal company's total stocks has exceeded 25 percent. Introduction of a new regulation to limit foreign ownership of airport facilities to one third (33.3 percent) at this point would violate the principle of reasonable predictability of regulation changes, inviting criticisms in general as "unfair ex-post rule changes," and raising concerns among foreign investors that they are blocked by Japan's "foreign capital allergy."
We should rather examine various options in privatizing Narita Airport, including application of the Haneda-type arrangement to Narita Airport, where the runways and the terminal buildings could be separated, or large shareholder regulations might be better than foreign investment regulations, etc. There is no need to privatize it with new regulations on the foreign ownership ratio below one third of total shares of the airport company. Japan's national interests should be considered carefully, and never be compromised by any particular organization such as the Ministry of Land, Infrastructure, Transport and Tourism, which has been sending many of their retiring officials with golden parachutes to Narita International Airport Corporation in the past.
In conclusion, regulations on foreign investment are neither necessary nor sufficient to deal with national security and monopoly-related issues. Introduction of such regulations would only damage the image of Japan as an open capital market by giving such bad impressions as "unfair ex-post regulation changes" and "new regulations on foreign investment" in Japan.
(The original Japanese article appeared in the February 18, 2008 issue of Nihon Keizai Shimbun)