ACSA

PUBLIC PRIVATE PARTNERSHIPS IN AIRPORT DEVELOPMENTS

The aviation industry is currently facing various challenges such as rapidly increasing oil prices, the strong emergence of low cost operators, increasing traffic growth, old and inadequate airport infrastructure, security threats and environmental concerns. Governments are forced to think beyond limited public sector budgets, in the midst of many competing needs, if they are to meet airport infrastructure development challenges. In the developing world, a high proportion of the existing airport infrastructure bears no resemblance to the latest traffic trends. Many airports are in dire need of rehabilitation and or modernisation in order to meet the minimum service levels and ICAO requirements in terms of facilitation, safety and security as well as to accommodate future traffic. The size of rehabilitation funding required in African airports was estimated in 2001 to be in the order of US$350 billion and that of new airports is prohibitively higher, let alone the fact many airports on the African continent have sub optimal traffic and therefore capital investment requirements would be marginally viable at best. Furthermore, many countries in Africa and other parts of the developing world would not be able to fund airport modernisation projects given that there are competing needs, which have higher priorities.

Governments have no choice but to partner with the private sector to realise or unlock these projects. It is important to note that airports are no longer viewed as simple transport facilities but rather as economic assets. They are catalysts for economic development given a strong correlation existing between economic growth and airport traffic. Airports are a great business with excellent economic fundamentals and strong but increasing cash flows. An airport is an economic community in its own right based on the number of people directly or indirectly employed. It is therefore clear that a dysfunctional airport is a hindrance rather than a gateway to a country’s economic development.

A public private partnership (PPP) is a relationship between Government and the private sector that is forged over a defined period for the socioeconomic benefit of people and end users. In the infrastructure sector and specifically airports, Governments normally expect capital investments into airport facilities together with intellectual know-how as part of an integrated infrastructure development programme. On the other hand, private sector seeks projects that would yield market rate of return commensurate with the level of risk inherent. Typical forms of public private partnerships in the airport industry are initial public offering (IPO), trade sale, lease or concession and management contract. Management contracts normally run for a short period of time, five years on average and do not require any up front investments on the part of the private sector operator. Concessions on the other hand normally run for at least 20 years on average in order to allow for payback of investment when one considers time value of money. Familiar concession variants include Build Operate and Transfer (BOT), Build Own Operate and Transfer (BOOT) whether they involve green or brown fields. The public private partnership landscape is littered with several failures and a few noteworthy successes. The fundamental reasons behind these spectacular failures could be attributed to the following:

1. Lack of framework for private sector involvement on the part of Government. This is what I refer to as a strategic options study, undertaken to determine the feasibility of the project. Questions never asked such as what IATA service level is desired, an estimate of maximum sustainable capital investment required based on selected IATA service levels and ICAO requirements, traffic forecasts and the impact of liberalisation (Yamoussoukro declaration), the economic potential of the project based on traffic and international financial performance benchmarks, and finally what is the acceptable concession period. The impact of selling crown jewels versus the entire airport network on the viability of remaining airports. There is no doubt that Government requires financial advice on the financial modalities of this pre-feasibility study.



2. Unrealistic goals and demands by Government on concession and airport operator fees. The international norm for concession fees is 5 to 10 per cent of turnover and that for the airport operator fees is either 2.5 per cent of turnover or 1-2 per cent of Earnings Before Interest Tax Depreciation and Amortisation (EBITDA) subject to the achievement of agreed financial and operational targets.



3. Lack of regional economic integration of airport development goals. Every country on the African continent wants to be a gateway to Africa irrespective of its dominant position in relation to the region, something that often results in destructive competition.



4. Lack of a clear regulatory framework, particularly dealing with the tariff regime. Government does not provide a clear mechanism for tariff adjustments, something that presents undue risks to the private sector operator.

The framework for successful public private partnership lies in lessons that could be drawn from failed attempts and also successes such as ACSA. There are many lessons that could be learnt from the aforementioned points. These lessons consist of the following:

1. Government needs to create an enabling environment, capable of attracting foreign direct investment for all types of public private partnerships i.e. concessions, management contracts and trade sale if the latter option is open.



2. Government must allow international sourcing of capital. A regulatory framework needs to be very clear about the tariff regime i.e. how will airport tariffs be regulated in future and what would the mechanism for tariff revision be.



3. Government needs to open its skies in order to increase traffic by implementing the Yamoussoukro declaration where applicable. An infant industry argument in relation to its national flag carriers, will limit traffic growth and subsequently the ‘‘trickle-down’’ economic effect. This initiative would lower entry and exit barriers for airline operators, especially low cost operators, and finally benefit airports through increased traffic.



4. Government needs to take on board various stakeholders such as labour, airline community and civil society in order to remove misplaced concerns. Local communities need to realise that they are not giving up control, but entering into a partnership with people with more expertise.



5. When it comes to foreign direct investments, cash is king. It is therefore important that Government must allow easy repatriation of profits and have adequate foreign reserves in order for this to happen, especially in emerging markets where there is currency volatility.

In summary, a carefully managed public private partnership benefits various stakeholders. The shareholder value of airlines is positively affected because it creates room to increase their attractiveness to passengers through the increased ability to influence new developments. Passengers benefit through the optimisation and expansion of retail and other non-aviation service opportunities.

It is absolutely critical that any Government interested in pursuing public private partnerships must secure an airport operator with impeccable track record in the developing world given the uniqueness of challenges. These challenges comprise of limited operational budgets, less developed capital markets, skills shortages, and sub optimal traffic levels. Global airport operators from the developed world usually have not had to deal with these challenges and they could easily be overwhelmed or distracted. A country that chooses not to follow the PPP route in a quest to save airport operator fees must bear in mind that no two airports in the world are the same.

Contact Details
	T: + 27 (0)11 723 1400
	F: + 27 (0)11 453 9353/4
	W: www.acsa.co.za