A Decision-Makers Guide to Public Private Partnerships in Airports

Andy Ricover, Jeffrey Delmon

• Publisher: Routledge
• Year: 2019
• eBook ISBN: 9781000759853
• Edition: 1
• Topic: Architecture
• Subtopic: Infrastructure

Airport development is critical to economic growth and poverty reduction. This book will help decision-makers assess whether Public Private Partnerships (PPP) might be a viable option to meet their airport development requirements. It walks the reader through the airport PPP process, from early preparation to bringing the project to market and managing the project during implementation. The book will help eradicate misconceptions about the role of the private sector in airport infrastructure.

A Decision-Makers Guide to Public Private Partnerships in Airports provides an essential guide for those in a position to make decisions linked to airport development, to their advisers, their staff and also to students wishing to understand airport PPP.

1Introduction

The better is the enemy of the good. [« Le mieux est l’ennemi du bien. »]

Voltaire (1694–1778), French writer, deist and philosopher, The Prude [La Bégueule] (1772)

Despite their critical contribution to economic growth, development, job creation, trade and mobility, airports in many countries do not meet international safety and security standards, or having exceeded their capacity are unable to meet demand. As a result, safety and security standards decline, together with service levels, which constrains economic development and employment. In order to comply with international standards and meet the demand for air transportation, national and regional government administrations face pressure to improve operations, invest in facilities, increase airport capacity and upgrade services. Often, massive investment is required for airport upgrades, which has led many countries to consider private sector investment and operation.

The public sector provides financing for the vast majority of infrastructure services. However, scarce public resources and limited fiscal space (the credit capacity/right to borrow money) means that infrastructure faces stiff competition from alternative uses of public funds. Airports face an even greater battle for attention from policy makers as they are often, incorrectly, viewed as a service only for the rich.

Public private partnerships (PPP) represent an approach to procuring infrastructure services that is radically different to traditional public procurement. It moves beyond the client–supplier relationship where government hires private companies to supply assets or a service. PPP is a partnership between public and private to achieve a solution, to deliver an infrastructure service over the long term. It combines the strength of the public sector’s mandate to deliver services and its role as regulator and coordinator of public functions with the private sector’s focus on profitability and commercial efficiency. PPP is ultimately flexible, limited only by the creativity of those involved and their access to funding. Chapter 6 discusses PPP in the context of airports and the models most commonly used.

This chapter introduces the topics critical to decision makers when contemplating airport PPP, looking first at common myths associated with airport PPP and then reviewing key issues and risks.

1.1 Mythbusters¹

Myths surrounding airport PPPs often distract policy makers from the opportunities that these transactions can offer. But an open mind, commercial awareness, and the use of experienced advisers can cut through the clamour.

“PPP is free money”

This is often part of the sales pitch of a consultant looking for work, or a company hoping for a quick contract. But an airport PPP is not a free lunch. There may be a belief in government that the private sector will deliver the infrastructure with no engagement or involvement by the government. This is clearly not true. Airports require commitment and often serious public funding from government. Challenges will arise, and government needs to be engaged in the project to help resolve those issues.

“Don’t bother with bidding, just select a good operator and go; it is much faster and cheaper”

A company or foreign government shows up in government offices with promises of instant gratification, a simple, easy solution to all of their problems. This generally results in years of discussions, negotiations, signed memorandums of understanding, ribbon cutting, but no progress, only delays, costs and frustration, for everyone involved; or else the investment is delivered, but at a much higher cost and with less attractive terms. And you can understand the private sector, it wants a deal and is frustrated by the slow pace of government efforts, yet golden opportunities lie, seemingly, just out of reach. Why not try to push, even if procurement rules in most countries require a more thorough approach to procurement?

The easy way does not work, if it means trying to short-cut good preparation and robust competition. Government needs to take time to work out what it wants, when it wants it, what if anything it is willing to pay or guarantee, and how different project risks are going to be managed/allocated. Once the government knows its project and its role, a competitive process should be used to select the private partner. Not because it is impossible to choose a good company directly, or to find bench-marks to compare pricing and terms; but rather because competition helps to get the best deal, helps to demonstrate that the project is awarded properly and cleanly and to give opportunities to the best investors. Yes, it takes time; yes, it requires funding and effort and good staff, but the results are worth the investment, and the “faster” non-competitive approach usually takes longer.

Ain’t no such thing as a free lunch. If it seems too good to be true, it probably is.

“The private sector is always more efficient than the public sector”

While the private sector has the potential to deliver efficiently, with the right incentives embedded in the PPP agreement and a competitive process that motivates best technology and methodologies, it may not. In some cases the relationship between public and private breaks down, resulting in loss of trust, under-investment and disputes. The failure is often linked to the design of the PPP, a failure of one or both sides to do thorough due diligence, or an effort to misuse the PPP for purposes other than the best interests of the airport. Often, the break-down is linked to a change in Government, where the new Government raises questions about deals done by previous Governments. Examples include Terminal 3 in Manila with Fraport, Terminal 2 in Budapest with ADC & ADMC, Margarita Porlamar in Venezuela with Zurich Flughafen, Male in the Maldives with GMR/Malaysia, and Bucharest Henri Coandă with EDF Services.

“PPP is all about getting more financing”

PPP is not about maximising private capital; it is about finding the most efficient and effective combination of public and private. It is a partnership. There needs to be enough private commitment to keep them engaged, but more is not necessarily better. Rather, there should be the right amount of private funding, in the right balance of debt, equity and other financial instruments; the right amount of public financing, in order to achieve a robust and successful project, something sustainable, that will survive change, challenges and chaos.

“PPP financing is cheaper”

Generally speaking, a sovereign government will be able to obtain financing at a lower cost than the sponsors or the project company.² However, public financing is often less efficient due to public sector incentive mechanisms being focused more on political priorities than on cost and time efficiency, and lack of institutional capacity to control costs, time for completion, changes and other risks that result in higher construction and operation costs. Private sector financing may therefore prove – in certain circumstances – less expensive, less time-consuming and more flexible to arrange or more practical than public sector financing. The private sector can provide new sources of finance (in particular where fiscal space or other constraints limit availability of government financing), include clear efficiency incentives on the project, invigorate local financial markets and manage project risks in a more efficient manner. But not always. The examples of poor performance by private operators exist. The PPP agreement needs to create the right incentives, and the government needs to stay involved, to ensure that the project goes well. This is not an easy solution, and the government needs to ensure that PPP provides better value for the country than would other solutions.

“Airport PPP is only for rich countries”

It is true that the developed world uses PPP extensively. In 1966, the ownership and control of Heathrow, Gatwick, Stansted and Prestwick airports were transferred to the British Airports Authority, based on the Airport Authority Act 1965. This corporatisation was a first step toward privatisation of UK airports. Corporatisation can help improve sector governance, by creating a clear separation between airport authorities and government regulators. This improved accountability and corporate governance through a board structure allows better identification of areas for improvement and financial viability of an airport. Corporatisation can also help in responsiveness to customer needs, by creating a closer link between the customer and the entity operating the airport. In 1987, the airport assets were transferred to a public liability company, BAA plc, and shares were offered for sale on the London Stock Exchange. New Zealand’s largest airports were corporatised in the late 1980s with the government gradually selling down its shareholding.³

In the US airport industry, early privatisation was developed under the FAA statutorily authorised Airport Privatization Pilot Program. In the US, airport PPPs generally target projects requiring significant capital investment, for example the terminal projects at JFK and LaGuardia, the Great Hall project in Denver and the Paine field development in Seattle.

Fully private airport development in the US is relatively limited. Branson airport, in Missouri, is privately owned and developed, as a commercial passenger airport. It had difficulty mobilising finance and has defaulted several times on its debt obligations.⁴

Australia’s airport privatisation programme established long leases for Brisbane, Melbourne and Perth airports in 1997. Sydney followed in 2002.

However, airport PPPs are also common throughout the developing world. Probably the first airport to be entirely developed and operated by the private sector, under the form of a full privatisation, is Punta Cana International Airport, in the Dominican Republic. In fact, the greatest concentration of airport concession contracts is in Latin America, with over 100 airports having been improved, expanded and operated by private investors. The concession model has also been implemented in other regions like South Asia and Eastern Europe.

In 2008, Saudi Arabia awarded management contracts to Changi airport group and Fraport. In 2009, a 25-year concession was awarded for Medina under a consortium led by TAV. Jordan launched the concession for Queen Alia airport in 2007. Egypt issued concessions for two regional airports and Cairo International airport is operated under a management contract with Fraport. Tunisia has two airport concessions operated by TAV.

Chapter 6 provides a discussion of airport PPP around the globe.

“PPP is only for big airports”

In many countries, governments have managed to successfully attract private sector participation in airport infrastructure and services. Under a PPP arrangement, the private sector can invest in and operate an airport, improving its safety, security, and the service levels provided to airlines and passengers. Several airports have secured substantial private investment, sometimes without government contribution. In 2010 for example, Pulkovo Airport in St Petersburg, Russia secured more than €1.2 billion of private investment. But demand for private investment is not only for big airports. There is increasing demand from regional airports, not only in large countries such as Brazil, Russia or China, but also in smaller countries like Madagascar, Chile and Perú. Concepción in Chile shows how domestic and low-traffic airports can still attract private sector participation to develop a modern airport. Perú successfully transferred several small regional airports to the private sector under a co-financing scheme with the government.

“In time of need, sell the family jewels”

When fiscal space is tight, government budgets are stretched, and the economy has seen better days, there is a temptation to “sell” high value state assets in an effort to “release” value. An airport is a prime target, with good revenues, access to foreign exchange, and a golden future. It is tempting for decision makers to want to sell off an airport. This may not be the wrong decision, but this is the wrong reason to make that decision. Careful analysis is needed. In particular, would the government be better serviced by a share in revenues instead of an outright sale (not to mention control and incentive issues)?

Buy low and sell high: the same logic applies to privatisation. The analysis needs to be done in a dispassionate, careful manner, considering whether to sell now when improvements are needed, or share in the profits later.

“The myth of the hospital pass”

In the great game of rugby, a “hospital pass” involves chucking the ball to a teammate seconds before experiencing a near-fatal tackle by the opposing team. (The tackle is likely to result in a hospital visit.) Some see airport PPPs as the “hospital pass” of the transport sector – a way to offload the difficult and expensive challenges of an airport to the private sector. While PPPs are a good way to get more help resolving such issues, it is worth remembering that the government never steps out of the airport, it merely brings in a partner (hence the name “public-private partnership”). Or, PPP might stand for “preparation, preparation, preparation”, requiring careful thought and analysis before commencing the bid process. The government needs to know exactly what it wants, where the risks lie, and how those risks will be allocated before starting a dialogue with private investors.

“The airport authority should enter into a whole series of arrangements, including the PPP, to maintain control and maximise its benefits”

In parallel w...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Contents
• Preface
• Acknowledgements
• Glossary
• 1 Introduction
• 2 World trends in air transport
• 3 The business of airports
• 4 Airport planning
• 5 Air transport regulation
• 6 Airport PPPs around the world
• 7 Financing airport PPP
• 8 Airport PPP preparation
• 9 Procuring airport PPP
• 10 PPP agreements
• 11 Implementation, monitoring and evaluation
• Bibliography
• Index