(T'1S I)iD ctl,iill Palme Set el . N mlbllert I 1 I AIRPORT INFRASTRUCTURE: Timl E EMVRGING ROLE oF THEI PRIVATE SECTOR RA Xcit EXperin ces Based oli 10 Cc StueSi(es 1 5 2 7 1 Ellis .. Juan ma.~~~~N Coh in Inci, zi _U Fin - ancia Ad. _ o_ S _r _c_ Nowniber XI CFS DISCUSSION PAPERS 101 - Privatization in Tunisia, Jamal Saghir, 1993. 102 - Export Credits: Review and Prospects, Waman S. Tambe, Ning S. Zhu. 1993. 103 - Argentina's Privatization Program, Myrna Alexander, Carlos Corti, 1993. 104 - Eastern European Experience with Small-Scale Privatization: A Collaborative Study with the Central European University Privatization Project, 1994. 105 - Japan's Miain Bank System and the Role of the Banking System in TSEs, Satoshi Sunumura, 1994. 106 - Selling State Companies to Strategic Investors: Trade Sale Privatizations in Poland, Hungary, the Czech Republic, and the Slovak Republic, Volumes 1 and 2, Susan L. Rutledge, 1995. 107 - Japanese National Railways Privatization Study 11: Institutionalizing Major Policy Change and Examininlg Economic Implications, Koichiro Fukui, Kiyoshi Nakamura, Tsutomu Ozaki, Hiroshi Sakmaki, Fumitoshi Mizutani, 1994. 108 - Management Contracts: A Review of International Experience, Hafeez Shaikh, Maziar Minovi, 1995. 109 - Commercial Real Estate Market Development in Russia, April L. Harding, 1995. 110 - Exploiting New Market Opportunities in Telecommunications: Lessons for Developing Countries, Veronique Bishop, Ashoka Mody, Mark Schankerman, 1995. 111 - Best Methods of Railway Restructuring and Privatization, Ron Kopicki, Louis S. Thompson, 1995. 112 - Employee Stock Ownership Plans (ESOPs), Objectives, Design Options and International Experience, Jeffrey R. Gates, Jamal Saghir, 1995. 113 - Advanced Infrastructure for Time Managemenit, The Competitive Edge in East Asia, Ashoka Mody, William Reinfeld. 1995. 114 - Small Scale Privatization in Kazahkstan, Aldo Baietti, 1995. JOINT DISCUSSION PAPERS Privatization in the Republics of the Former Soviet Union: Framework and Initial Results, Soo J. Im, Robert Jalali, Jamal Saghir; PSD Group, Legal Department and PSD and Privatization Group, CFS - Joint Staff Discussion Paper, 1993. Mobilizing Private Capitalfor the Power Sector: Experience in Asia and Latin America, David Baughman, Matthew Buresch; Joint World Bank-USAID Discussion Paper, 1994. OTHER CFS PUBLICATIONS Japanese National Railways Privatization Study, World Bank Discussion Paper, Number 172, 1992. Nippon Telephone and Telegraph Privatization Study, World Bank Discussion Paper, Number 179, 1993. Beyond Syndicated Loans, World Bank Technical Paper, Number 163, 1992. CFS Link, Quarterly Newsletter. Cofinancing and Financial Advisory Services (Project Financing Group), October 1995 Copyright) 1995 The World Bank, 1818 H Street, N.W., Washington, D.C. 20433, U.S.A. All rights reserved Manufactured and printed in the United States of America First printing, November 1995 The findings, interpretations, and conclusions expressed herein are entirely those of the authors and should not be attributed in any manner to CFS, the World Bank, or to members of the Board of Executive Directors or the countries they represent. The World Bank does not guarantee the accuracy of the data included in this publication, and accepts no responsibility whatsoever for any consequence of their use. The paper and any part thereof may not be cited or quoted without the author's expressed written consent CFS DISCUSSION PAPER SERIES, N-MBER lf5 ;.V m Airport Infrastructure: The Emerging Role of the Private Sector Recent Experiences Based on 10 Case Studies Ellis J. Juan WITH CONTRIBUTIONS FROM: ALBERT AMOS ANIL KAPUR SERGIO MAGNACCA CIRA ROMERO CEZLEY SAMPSON ASSISTED BY: EMILY EVERSHED ROXALANA KASSARABA PAUL KIHN VICKI MCGILL HEATHER QUICK MARIE-ANGE SARAKA-YAO JOHN SWEPSTON For additional copies, please contact the CFS Infonnation Office, Tel: (202) 473-7054, fax (202) 477-3045 TABLE OF CONTENTS LIST OF ABBREVIATIONS ..................................................... vii ACKNOWLEDGMENTS .....................................................................................................X FOREWORD ..................................................... xi PRIVATE SECTOR PARTICIPATION IN AIRPORT INFRASTRUCTURE RECENT EXPERIENCES, BASED ON 10 CASE STUDIES ......................................................1 I. A Framework for the Analysis of Private Sector Participation in Airport Infrastructure ................ ............................................. 3 II. Policy Options for Airport Privatization ............................................................. 12 III. Industry Trends Based on Recent Experiences ........................................................ 40 IV. Lessons from Recent Privatization Transactions ..................................................... 46 CASE STUDY 1 AIRPORTS IN BOLIVIA A CASE STUDY OF AIRPORT PRIVATIZATION IN SMALL-SCALE MARKETS .................................................... 51 I. Ownership and Institutional Framework ............................................................. 54 II. Regulatory Framework ............................................................. 58 III. Restructuring Process and Privatization of the National Airport System ......... ....... 63 IV. Economic Performance ............................................................. 70 V. Key Issues Emerging from the Bolivian Experience (Privatization Program in Process) ............................................................. 75 Annex 1.1 Bolivia: ADP Model for Bolivia's Airport System ................. ..................... 80 CASE STUDY 2 AIRPORTS IN CAMEROON A CASE STUDY OF AIRPORT PRIVATIZATION IN WEST AFRICAN ECONOMIES ............................................... 83 I. Ownership and Institutional Framework ............................................................. 85 II. Regulatory Framework ............................................................. 90 III. ADC: Financial Performance ............................................................. 92 IV. Privatization Process ............................................................. 94 V. Key Issues Emerging from the Cameroon Experience ........................ ..................... 99 Annex 2.1 Feasibility Study Income from Operations ............................................................. 101 Annex 2.2 Feasibility Study Estimated Cash Flow ............................................................. 102 CASE STUDY 3 AIRPORTS IN CANADA A CASE STUDY IN CORPORATIZATION AND JOINT PUBLIC/PRIVATE OWNERSHP STRUCTURES .......................... ............... 103 I. Ownership and Institutional Framework ............................................................. 104 II. Regulatory Framework ............................................................. 106 m. Financial Performance ............................................................. 107 IV. Privatization Process ............................................................. 108 V. A6roports de Montreal: A Case Study in Corporatization ................. ..................... 111 VI. Lester B. Pearson Airport, Toronto: A Case Study in Joint Public/Private Ownership Structures ................... .......................................... 120 iii AIRPORT PRIVATIZATION EXPERIENCES CASE STUDY 4 AIRPORTS IN COLOMBIA A CASE STUDY OF INNOVATIVE INFRASTRUCTURE FINANCING IN LATIN AMERICA .......................................... 131 I. Ownership and Institutional Framework .............................................................. 134 II. Regulatory Framework ................ .............................................. 137 III. Financial Performance .............................................................. 141 IV. Privatization Process: Second Runway - El Dorado Airport, Bogota .................... 144 V. Key Issues Emerging from the Colombian Experience ..................... ..................... 154 Annex 4.1 Aircraft Parking and Landing Fee Structure ............................................................ 157 Annex 4.2 Initial Proposed Landing Fee Structure by Consortium Awarded El Dorado Project .............................................................. 160 CASE STUDY 5 AIRPORTS IN EAST ASIA A CASE STUDY OF AIRPORT DEVELOPMENT IN FAST-GROWING ECONOMIES ............................................. 161 I. Ownership and Institutional Framework .............................................................. 164 II. Regulatory Framework ............... ............................................... 169 lIl. Kai Tak Airport .............................................................. 170 IV. Chek Lap Kok: Airport Development Process ..................................................... 173 V. Privatization Process .............................................................. 180 CASE STUDy 6 AIRPORTS IN JAMAICA A CASE STUDY IN AIRPORT PRIVATIZATION THROUGH A COMBINATION OF PPI MECHANISMS (WRAPAROUND) ................ 193 I. Ownership and Institutional Framework .............................................................. 195 II. Regulatory Framework ............... ............................................... 197 III. AAJ's Financial Performance ......................... ..................................... 199 IV. Privatization Process .............................................................. 203 V. Key Issues Emerging from the Privatization Experience ........................................ 214 Annex 6.1 Airports Authority of Jamaica Organizational Structure ..................... .................... 217 Annex 6.2 Sangster International Air Terminal Ltd. Available cash flow ............... .................. 218 Annex 6.3 Norman Manley Air Terminal Ltd. Available cash flow ....................... ................... 220 CASE STUDY 7 AIRPORTS IN SPAIN A CASE STUDY IN THE EVOLUTION OF STATE OwNERsmP IN THE AIRPORT SECTOR ................................. , 223 I. Ownership and Institutional Framework .......... ............................ 224 II. Regulatory Framework ...................................... 227 HI. Financial Performance ...................................... 231 IV. Privatization Process ...................................... 234 V. Key Issues Emerging from the Spanish Experience ...................................... 242 Annex 7.1 Composition of Spanish Airport Traffic ........... ........................... 246 Annex 7.2 Organizational Structure of Aena ...................................... 250 Annex 7.3 Spanish Airport Tariffs - Airside Costs ....... ............................... 251 Annex 7.4 Financial Information ...................................... 254 CASE STuDY 8 AIRPORTS IN THE UNITED KINGDOM -BELFAST INTERNATIONAL AIRPORT A CASE STUDY OF AIRPORT PRIVATIZATION THROUGH A MANAGEMENT-EMPLOYEE BuYouT ................................. 255 I. Ownership and Institutional Framework .......... ............................ 256 II. Regulatory Framework ...................................... 260 m. Financial Performance ...................................... 263 IV. Privatization Process ...................................... 267 V. Key Issues Emerging from the Belfast Experience ......................... ............. 271 Annex 8.1 Airports (NI) Order 1994 ...................................... 273 iv TABLE OF CONTENTS CASE STUDY 9 AIRPORTS IN THE UNITED KINGDOM - BAA PLC A CASE STUDY OF 100 PERCENT PRIVATE OWNERSHIP ............................ ............................ 281 I. Ownership and Institutional Framework ............................................................... 283 II. Regulatory Framework ............................................................... 288 m. Financial Performance .............................................................. 290 IV. Privatization Process .............................................................. 291 V. Key Issues Emerging from the United Kingdom Experience .............. ................... 308 Annex 9.1 Regulatory Regime for Airside Charges .............................................................. 311 CASE STUDY 10 AIRPORTS IN VENEZUELA A CASE STUDY IN DECENTRALIZATION OF AIRPORT OPERATIONS ........................................................ 315 I. Ownership and Institutional Framework .............................................................. 316 II. Regulatory Framework .............................................................. 320 Im. Financial Performance -- IAAIM ...................................... ........................ 322 IV. Privatization Process .............................................................. 323 V. Key Issues Emerging from the Venezuelan Experience .................... ...................... 333 Annex 10.1 Venezuela: MTC operated Airports (1993) ............................................................ 335 Annex 10.2 Projected International Passengers by Airport ....................................................... 336 Annex 10.3, 10.4, 10.5 Venezuelan Airport Fees, Taxes and Charges ................... ................... 337 TECHNICAL ANNEX I THE AIRLINE SURVEY ....................................................... . 339 I. Airport Ownership .............................................................. 341 II. Airport Pricing .............................................................. 342 m. Institutional and Regulatory Framework ............................................................... 344 IV. Industry Strategic Planning .............................................................. 346 V. Conclusions .............................................................. 347 TECHNICAL ANNEX II AIRPORT ECONOMICS ........................................................ 349 Assumptions of the Model .............................................................. 350 Attachment 11.1 Landing Fees and Related Charges ...................................... ............. 360 V AIRPORT PRIVATIZATION EXPERIENCES LIST OF ABBREVIATIONS AA Airports Authority AAA Air Affaires Afrique AAB Airports Authority of Bolivia AAJ Airports Authority of Jamaica AASANA Administraci6n de Aeropuertos y Servicios Auxiliares de Navegaci6n Aerea AAT Asia Airfreight Terminal Company Limited ACI Airports Council International ACL Airport Coordination Ltd. ACP Airport Core Program ADC Aeroports du Cameroun ADF Airport Development Fund ADM Aeroports de Montreal ADP Aeroports de Paris Aena Aeropuertos Espainoles y Navegaci6n A6rea AJAC Anglo-Japanese Airport Consortium ANA Air Navigation Authority ANFA Average Net Fixed Assets ASA Air Services Agreement ASC Airport Scheduling Committee ASECNA Agence pour la Securite de la Navigation Aerienne en Afrique et a Madagascar ATA Air Transportation Authority ATC Air Traffic Control ATEA Air Transport Engineering Authority ATLA Air Transport Licensing Authority BA British Airways BAA British Airports Authority BAH Booz, Allen and Hamilton BBO Buy-Build-Operate BIA Belfast International Airport BICIC Banque Internationale pour le Commerce et l'Industrie du Cameroun BOO Build-Own-Operate BOOT Build-Own-Operate-Transfer vi Airport Privatization Experiences ABBREVIATIONS BOT Build-Operate-Transfer BTO Build-Transfer-Operate CAA Civil Aviation Authority CAAS Civil Aviation Authority of Singapore CAD Civil Aviation Department CFD Caisse Fran,aise de Developpement CONAER National Aeronautics Council COPRE-Zulia State Reform Commission of Zulia State DFP Department of Finance and Personnel DGAC Direcci6n General de Aviaci6n Civil DGSTA Direcci6n General Sectorial de Transporte Aereo DNP Ministry of Planning DOE(NI) Department of the Environment for Northern Ireland DOT Department of Transportation EEC European Economic Community EIB European Investment Bank EPF Employees Provident Fund EPU Economic Planning Unit ERDF European Regional Development Fund EU European Union FAA Federal Aviation Administration FAC French Ministry of Cooperation FIR Flight Information Region FSA Financial Support Agreement GNP Gross National Product HACTL Hong Kong Air Cargo Terminals Limited HATS Hong Kong Airport Terminal Services Limited IAAIM Maiquetia International Airport Autonomous Institute IATA International Air Transport Association ICAO International Civil Aviation Organization IDA International Development Association IDB Inter-American Development Bank IPB International Public Bidding IRA Irish Republican Army KLIA (Bhd.) Kuala Lumpur International Airport LAA Local Airport Authority LAB Lloyd Aereo Boliviano vii AIRPORT PRIVATIZATION EXPERIENCES LATC Lockheed Air Terminal of Canada, Inc. LBP Lester B. Pearson Airport LDO Lease-Develop-Operate MAB Malaysia Airports Berhad MAS Movimiento al Socialismo MDC Mercury Development Capital MEBO Management and Employee Buyout MMC Monopolies and Mergers Commission MTC Ministry of Transportation and Communications MTOW Maximum Take-Off Weight NAPCO New Airport Project Coordination Office NATS National Air Traffic Services NERC New En Route Centre NI Northern Ireland NIAL Northern Ireland Airports Limited NITHCo Northern Ireland Transport Holding Company NMIA Norman Manley International Airport NTA National Transportation Act OAN Organismo Aut6nomo de Aeropuertos OECD Organization for Economic Cooperation and Development OPIC Overseas Private Investment Corporation OUR Office of Utility Regulation PAA Provisional Airport Authority plc Public Limited Company RPI Retail Price Index SAAEZ State of Zulia Autonomous Airport Service SAM Sociedad An6nima Mixta SAR Special Administrative Region SIA Sangster International Airport SOE State-Owned Enterprise SSCA Sub-secretary of Civil Aeronautics Ti Terminal One, Lester B. Pearson Airport T2 Terminal Two, Lester B. Pearson Airport T3 Terninal Three, Lester B. Pearson Airport TAB Transporte Adreo Boliviano TAM Transporte Aereo Militar viii Airport Privatization Experiences ABBREVIATIONS TTLP Terminal Three Limited Ownership UDAPE Unidad de Analisis de Politicas Econ6micas UGD Unidad de Gesti6n Diferenciada UNDP United Nations Development Programme YPFB Yacimientos Petroifferos Fiscales Bolivianos ZAA Zulia Airport Authority ix AIRPORT PRIVATIZATION EXPERIENCES ACKNOWLEDGMENTS During the 18-month period taken by us to research, write, and edit the airport privatization cases, we received assistance and support from the different authorities involved in airport op- erations in the selected countries in the study. We were assisted by high-ranking officers, who provided clear policy orientation and strategic thinking on their privatization cases, as well as by operational personnel who contributed valuable practical insights. In particular we would like to thank the following individuals for their contributions and com- ments on the various privatization cases: Dr. Rene Blattman (Subsecretary of Aeronautics, Bo- livia) and Javier Burgos (Ministry of Capitalization, Bolivia), Ing. Justin Kono (Director of Civil Aviation, Cameroon), John Cloutier, M.E. Farquhar and Lloyd A. McCoomb (Transport Canada, Airports Division), Lic. Antonio Marulanda Rojas (Secretario Aeroportuario, Aeronautica Civil, Colombia) and Claudia Stevenson (Departamento Nacional de Planeaci6n, Colombia), Albert K.Y. Lam (Airport General Manager, Kai Tak Airport, Hong Kong) and Clinton Leeks (Director of Corporate Development, Provisional Airport Authority, Hong Kong), Pat Morgan (Project Director, Sangster International AMirport Ltd, Jamaica), Khairuddin Ibrahim (Managing Director, Malaysia Airports Berhad, Malaysia) and IR. Lee Chin Wah (Project Manager, K.L. International Airport Berhad), Lic. Fernando Sanchez-Beato Lacasa, Lic. Jose Luis Wagener and Lic. Alfonso de Alfonso (AENA, Espana), Greg Hamill (Finance Director, Belfast Interna- tional Airport, Northern Ireland), Michael Toms and Charles Williams (British Airport Author- ity, U.K.), A.T. Baker (Department of Transport, U.K.), Jhon Banfield (Monopolies and Merger Commission, U.K.), Hugh Ashton (Coopers & Lybrand, U.K.) and Lic. Stephane Gonzalez (CVA, Aeropuerto Internacional Santiago Marinlo, Venezuela). We would also like to thank the follow- ing institutions, which provided important information for the development of the privatization cases as well as valuable insights on trends in this sector: Aeroports de Paris (Architecture, Engineering and Consultancy Division), Airports Council International (ACI), International Civil Aviation Organization (ICAO), International Air Transport Association (IATA) and Instituto Autonomo Aeropuerto Internacional de Maiquetia (IAAIM). In addition, we would like to thank the readers and reviewers of various drafts of this report. We benefited greatly from their critical and insightful comments. In particular the contributions from: Harald Fuhr (PSD Specialist, Latin America Country Department II, World Bank), Susan Goldmark (PSD Specialist, Latin America Country Department III, World Bank), Jean-Noel Guillossou (Infrastructure Specialist, Central Africa and Indian Ocean Department, World Bank), Daniel Kern (Director for South America, A.T. Kearney), Moises Naim (Senior Associate, Carnegie Endowment for International Peace), Heidi Mattila (Privatization Specialist, CFSPS, World Bank), Eduardo Quintero (Fellow 1994-95, Harvard University, Center for International Affairs) and Gerver Torres (former Minister of Privatization, Venezuela, 1990-92). We are specially grateful for the support of Kevin Young, Manager of the Private Sector Devel- opment and Privatization Group of Cofinancing and Financial Advisory Services (CFS) of the World Bank, who encouraged us to undertake this study and whose valuable direction was in- strumental in bringing this paper to completion. Alrport Privatization Experiences FOREWORD During coming years, air transport infrastructure needs to be expanded and modernized to ac- commodate the growing demand for international travel and transport of goods and merchan- dise. Developing countries need to invest large amounts of resources in airport related infra- structure in order to connect into the global air transport industry. Increased demands placed on developing country public finances are inducing policy-makers to find alternatives to replace the government's role in the financing and management of airport infrastructure. Recent suc- cesses in developed economies in reducing government involvement in this sector have created a more optimistic view of private sector participation in the financing, management, and owner- ship of airport related activities. This study, Airport Infrastructure: The Emerging Role of the Private Sector, Recent Experiences Based on 10 Case Studies, is intended for developing country policy makers. Designed to func- tion as a helpful reference work, it provides practical information, context and strategies to foster private sector participation in the airport sector. The study, built on 10 case studies encom- passing diverse continents and national income levels, addresses a large number of issues in- cluding privatization mechanisms, regulatory and legal structures, project finance schemes and cross subsidization concerns among different countries. It presents the trends and lessons, de- rived from existing and on-going privatization cases, relevant to the policy-maker. Our research showed that governments were following diverse patterns and strategies when privatizing their airport operations. Funding needs for upgrades and expansions coupled with budgetary constraints was the consistent common factor identified among the cases. As the private sector increases its participation in the ownership and management of this industry, gov- ernments will need to strengthen their institutional capacities to efficiently perform their roles as policy-makers and regulators. This study was prepared as part of the CFS Discussion Paper Series on privatization in develop- ing and transition economies. Other papers in the same series have covered privatization pro- grams in Argentina, the legal and regulatory frameworks in the countries of the former Soviet Union, Japanese National Railways privatization, trade sale privatizations in Poland, Hungary, the Czech Republic, and the Slovak Republic, management contracts, Russian commercial real estate market development, new market opportunities in telecommunications, and most recently a study on Best Methods of Railways Restructuring and Privatization. The Study is a comple- mentary task to the white cover report Airport Infrastructure: The Emerging Role of Private Sector Participation jointly developed by the Latin American Technical Department (LAT), the Transportation, Water & Urban Development Department (TWU), and Cofinancing and Finan- cial Advisory Services Department (CFS) of the World Bank in June 1995. The purpose of the Discussion Paper series is to disseminate current practices and the "lessons" learned in privatization. As a Department that covers all the World Bank's borrowing countries, Cofinancing and Financial Advisory Services (CFS) endeavors to share with outside readers some of its cross-country experience in privatization. We are pleased to present this review of recent experiences in private sector participation in airport infrastructure. Ram Kumar Chopra Kevin Young Director Manager Cofinancing and Financial Advisory Services Private Sector Development (CFS) and Privatization Group (CFSPS) xi Overview PRIVATE SECTOR PARTICIPATION PRIVATE SECTOR PARTICIPATION IN AIRPORT INFRASTRUCTURE RECENT EXPERIENCES, BASED ON 10 CASE STUDIES In the early 1980s the idea that public airports could be pri- vately owned would have been considered extreme economic liberalism, or ignorance regarding the subject, or both. Today, the U.S. Government has presented Congress with a proposal for the partial privatization of NASA - the transfer to the pri- vate sector of the launch and ground processing operations for the space shuttle at Cape Canaveral.' Clearly, the privatization of airports as the last frontier in air transport infrastructure has become old news. Airports are an essential component of the infrastruc- ture needs for air transport activities. As with many other infra- structure developments, airports in the past were almost exclu- sively under government ownership and management, and capital investment funding was solely government's responsibility. As demands for government spending outpace revenues, competi- tion for funds among society's varied needs is becoming more intense, and governments are increasingly calling for a larger "NASA's Five-Year Plan," The Washington Post, March 27, 1995. A r T PRIVATIZATION EXPERIENCES private sector role in meeting these needs. Economic reforms undertaken by these governments facilitate the involvement of the private sector in the management, financing, and ownership of airport related activities. Consequently, private sector par- ticipation has become a rapidly growing worldwide trend. As of early 1994, some form of privatized airport operation existed, was being developed, or was under consideration in some 54 countries.2 As air transport continues to grow, in both passenger and cargo transport, and as air travel becomes more affordable and accessible to travelers in less developed economies, air trans- port will increase its participation as a transportation mode.3 The tourism industry is the number one employer and taxpayer in the world. According to the latest figures of the World Travel Tourism Council, the tourism industry employs 10.6 percent of the world's work force (204 million people), generates 10.2 per- cent of the world's gross national product (GNP), and accounts for 10.9 percent of total consumer spending.4 Global tourism is expected to grow 6.1 percent per year between now and the year 2005. These numbers do not take into account the eventual par- ticipation of the Chinese and Eastern European societies in the air travel market once their economies can support the nec- essary standard of living for their nationals to travel abroad.5 The growth in air transport will also bring about changes in avia- tion technology, such as aircraft with larger passenger capaci- ties as opposed to aircraft with greater speeds. Airports will need to adapt to the growing tourism demands and the changes in aircraft technology, and will have to be better linked to other means of transportation (i.e., roadways and railways) in order to adequately handle massive additional volumes. Given this trend, air transport infrastructure (airports and air navigation services) will require major investments in upgrading and expansion in the near future. The International Civil Aviation Organization (ICAO) estimates US$250 to US$350 billion as the necessary investment in air transport in- frastructure before the year 2010.6 In the United States, the Air- 2 Robert W. Poole, Jr., The Reason Foundation, February 1994. 3The World Bank estimates that for the next 15 years air travel will increase at a rate of 6 percent ("Sustainable Transport: A Sector Policy Review," March 1995). John Naisbitt, "The Global Paradox," March 1994. By the year 2005, 20 million newly wealthier Chinese travelers (up from the current 3 million) plus another 20 million Indian travelers (up from I million at present), will be added to the world's tourists. "The New Age of Travel," Time Magazine, June 12, 1995. 6 Investment requirements for airport and route facility infrastructure to the year 2010, Circular 236-AT/95. Overview PRIVATE SECTOR PARTICIPATION ports Operators Council International(AOCI) estimated US$50 billion as the amount of investment required by the mid-i 990s to support passenger needs in the year 2001. As the air transport market develops and deregulation continues, related infrastructure investment becomes increas- ingly necessary. Private sector involvement in the financing, management, and ownership of airport-related activities will become an indispensable part of governments' air transport de- velopment strategy. What do the recent attempts to foster private sector par- ticipation in airport-related infrastructure have in common? Are there similarities between the successes and failures in this field that are relevant for policymakers? This report deals with these and similar queries by presenting trends and lessons stemming from recent experiences in airport privatization drawn from the cases analyzed in the present study (The Case Studies). 1. A FRAMEWORK FOR THE ANALYSIS OF PRIVATE SECTOR PARTICIPATION IN AIRPORT INFRASTRUCTURE Private sector participation in airport infrastructure is a very re- cent phenomenon, and its effects on quality of service, invest- ments, and pricing are yet to be seen, given the relatively small scale of private sector participation in airport ownership today. Available data seem to indicate that, where the private sector has a significant participation in management and ownership, both quality of service and investment commitments have sig- nificantly improved. The effect of airport privatization on gen- eral pricing policies (i.e., direct airport-related charges and prices for goods and services consumed on the premises) is more diffi- cult to measure, but the evidence at hand from fully privatized airports/terminals suggests the following pattern: la Airside charges (i.e., landing fees, aircraft parking fees, and passenger/terminal fees) are not lower than under the previous public administration, but neither have they increased substantially AIRPORT PRIVATIZATION EXPERIENCES aI The airside charges pricing mechanism has become more complex (peak hour pricing, volume discounts, etc.) * Airside charges are subject to price-cap economic regu- lation (i.e., a formula based on general price index ad- justments minus X percentage, where X reflects the ef- ficiency gains in the airport operation) * There has been intense development of non-aeronautic commercial airport revenues (i.e., end consumer-ori- ented concessions, such as duty-free, hotels, shops, fre- quent traveler services, etc.) at relatively high (premium) prices. Not all current experiences in airport privatizations un- der development are success stories (e.g., Terminals One and Two at the Lester B. Pearson Airport in Toronto, Canada, and Aeropuerto La Chinita in Maracaibo, Venezuela, in the case stud- ies), although the evidence suggests that in most of these cases failure to accomplish the objectives is associated with poor ex- ecution of the privatization strategy and/or changes in the political environment in which the initial decision was taken. _^¢ A. Privatization Concepts and Definitions to Be Used in the Study For the purpose of this study the term "privatization of airports" will include all the different approaches through which private sector participation in airport-related activities is being promoted and developed, whether the participation is in ownership, man- agement, or investment programs. An airport authority (the en- tity that is the subject of privatization) will be divided into the following components: (1) the airside services (runways, taxi- ways, aprons, terminals, etc.), mostly defined as those services considered monopolistic by nature within the airport7; and (2) the landside services (passenger services, food and beverage concessions, duty free, car parking, hotels, etc.), where end-con- sumers can find a wider variety of suppliers.8 Police and secu- rity, customs and immigration, and fire and ambulance services I The airfield, gates, jetways, and all facilities associated with the movement of the aircraft. Airside facilities are considered to be all the facilities beyond the passenger security areas. (Moody's on Airports, 1992.) The portion of airport facilities devoted to the main terminal complex, ground trans- portation, and services; facilities associated with the movement of passengers and baggage away from aircraft areas; terminal facilities up to the passenger security areas. (Moody's on Airports, 1992.) 4 Overview PRIVATE SECTOR PARTICIPATION are generally provided by the municipal, regional, or federal government agency in charge of providing that particular ser- vice for all purposes (Ministry or Secretary of the Interior, Cus- toms and Immigration Department, etc.). Airport privatization, in the study, will refer to airports that provide services to the general public where governments in both developed and de- veloping countries have a role in the airports' policy and regu- latory issues. The study does not consider airports that, by defi- nition, are planned for private users (aeroclubs, aircraft manu- facturing airfields, etc.). Privatization of airports, in the context of the study, will not include the air navigation services (air traffic control [ATC], communications services, meteorology, etc.). Privatization of air navigation services, although an important part of air trans- port infrastructure, will be considered as a separate subject since in most of the cases the institutional framework is separate from that of the airports, and the exploitation of the activities has a stronger externalities component (i.e., national defense and se- curity).9 That portion of ATC that is related to the approach and landing of the aircraft (the control tower) will be included as part of airport functions under airside services. The airports analyzed in the case studies, and several others, divide their air traffic controlfunction, for the approach and landing of aircraft, into the forms shown in Table 1. Table 1 Aircraft Approach and Landing: Institutional Arrangements Institution in charge of Institution in charge of Distribution of airport providing the service' runway maintenance charges (i.e., landing fees)2 Examples A CiviiAiahon Civil Aviation 100 oCivil Bobvia (AASANA) Aulrhriav ATC Authornty Aviat|n Authority Colombia (DGCA) e Civl Avation Airport Aulhority 1000. A,rport Brmsh Airpons Aulhority (BAA plci AutlhriW ATC Authority 'lenezuela IMaicu6tia) Cameroon (ADC) r COll Aviation Airport Aultonty Revenue shared Toronto (Lester B. Pearson Aulthjriy ATC Detween Airport Airporn) Authority and CAA Jamaica (Montego Bay Airport) I All of the entities in charge of air navigation services in the study were under the supervision of the Civil Aviation Authority. 2 The airport charge that covers aircraft approach and landing is known as the 'landing fees." 4 Worldwide experience indicates that the first step taken by industrialized countries (the only countries in which ATC activities have been considered for private sector involvement) has been to corporatize air navigation services (New Zealand, Switzer- land, Germany, and South Africa), but with the state still owning a majority of the shares. AIRPORT PRIVATIZATION EXPERIENCES Total privatization of airports in the most rigid interpre- tation of the term (100 percent private ownership through pur- chase of shares or assets) is by no means frequent or widely employed. The only cases of this type found in our research were the British Airports Authority (BAA plc), which today has full private ownership widely distributed among 523,405 pri- vate shareholders, and Belfast International Airport, which is owned by the management and employees through a manage- ment and employee buyout (MEBO) operation (for reference, see Case Studies 8 and 9). Most other airport privatizations worldwide adopt different models, ranging from partial subscrip- tion of shares by the private sector or general public (e.g., air- ports in Vienna, and Copenhagen) to more complex schemes such as build-own-operate-transfer (BOOT), or similar arrange- ments (e.g., Terminal Three in Lester B. Pearson Airport at Tor- onto, the planned new airport for Athens, etc.). The term "service concession"10 will be considered a form of privatization of an airport-related activity when the con- cessionaire is a fully private enterprise. Service concessions have been widely and historically used (except by countries in the communist bloc prior to 1989) in the development of the land- side or commercial services, and most service concessions have been to private concessionaires. An airport service concession usually does not carry a large investment commitment and ex- pires in a relatively short period of time (less than five years). When an airport service concession carries an important amount of investment commitment and its maturity tends to be for longer periods, the option becomes a more traditional infrastructure development scheme (i.e., build-operate-own [BOO], build-op- erate-own-transfer [BOOT], build-operate-transfer [BOT], etc.). With some exceptions, most of the present concession- aires for restaurants, shops, duty-free, car parking, etc., at the terminals are privately owned enterprises or private individu- als. More recently, "master concessions" have been used to op- erate and manage a full range of landside airport services; in these cases the airport authority deals only with one "master concessionaire," which usually has some investment obligations 10 A lease of a defined space or area within the terminal, to exploit a particular conmner- cial activity for a predetermined period of time, and under given financial conditions. It does not consider ownership of the space or area under concession. The ownership of the improvements made to the space or area varies from case to case. 6 Overview PFRIVATE SECTOR PARTICIPATION in terminal upgrading included in the concession contract. An- other use of concessions as a tool to maximize private sector participation in the management of airport-related activities is the multi-concession approach, in which the airport authority gives the private sector, under concession, as many airport-re- lated services as possible (both airside and landside), becoming in effect a concessionaire's administrator with a limited number of employees to perform its functions. In Bucharest, Romania, at the Othopeni Airport Authority, most of the airport-related services have been concessioned to the private sector (i.e., ter- minal passenger services and ground handling services to a Ger- man-Romanian joint venture,"1 and the rest of the services - shops, restaurants, duty free, car parking, advertising, etc. - to Romanian private enterprises). The Othopeni Airport Author- ity remains in charge of aircraft approach and taxing (airside: runways and aprons management) and internal security, and is developing its capacities as a concessionaire's administrator.12 B. Corporatization of Airports The term "corporatization," seldom used in the context of re- structuring state enterprises or public functions, will be used in this study to mean the step by which an airport is transferred from federal government control to an independent government body through the creation of an autonomous airport authority. The non-corporatized airport, previously subject to federal gov- ernment laws, becomes subject to civil corporate law like any other private enterprise, with autonomy in its financial budget- ing and corporate governance. Although varied from country to country, the status of a corporatized airport authority is similar to that of private corporate governance, allowing for the intro- duction of certain functions of private enterprise governance (budgeting, accounting principles, productivity programs, sal- ary and staffing, etc.) and even, in some cases, for ownership other than that of the state (e.g., trade organizations, chambers of commerce, etc.). In most of the analyzed cases in the study, shares of airport authorities still under government ownership I' Lutas, a joint venture among Lufthansa, Tarom (Romanian Airlines), the Airport Authority, and private Romanian investors. 12 In most of the airports around the world (state-owned or with private participation) external security is under the supervision of the armed forces or national police. 7 AIRPORT PRIVATIZATION EXPERIENCES are most commonly held by the Ministry of Transport, the Min- istry of Defense, or local authorities (municipalities, city coun- cils, etc.). The corporatization of airport activities is a necessary step when the privatization of an existing airport under any form or model is under consideration. Creating an autonomous air- port authority with financial and operating independence allows the government to establish the necessary framework for the privatization of airport-related activities. Whether the govern- ment is privatizing through the issue of new shares to be placed in the capital markets, concessions arrangements, or long-term leases and BOTs, legal and financial considerations for private sector involvement will be easier under a corporatized entity than under federal government control. (For example, under fed- eral government ownership financial decisions such as capital increases or long-term leases are subject to the general govern- ment budget, and in some cases even to parliamentary approval.) It can be argued whether it is absolutely necessary to corpora- tize an airport prior to its privatization. However, it is signifi- cantly more efficient to privatize airport-related activities when the entity subject to privatization is well defined and its assets and liabilities are clearly separated from the federal government's budget, particularly in the case of developing countries. Box 1 provides an illustration of the corporatization and decentraliza- tion of airport services in Canada through the creation of Local Airport Authorities (LAAs). _wqv A C. Assignment of Roles: Airport Infra- structure For the purpose of allocating responsibilities between the pri- vate and public sectors to determine the range of privatization options for the air transport policymakers, the respective roles in airport infrastructure are divided as follows13: s Planning/Policymaking. Since market conditions for developing publicly used airports are limited (high cost of entry, long lead planning schedules, limited avail- ability of land, etc.), the government must retain a role in planning investments for airport infrastructure. In 3 C. Kessides, "Institutional Options for the Provision of Infrastructure," The World Bank, September 1993. 8 Overview PRIVATE SECTOR PARTICIPATION Box 1 CORPORATIZATION OF AIRPORTS: THE CANADIAN MODEL The Canadian Model is based on the transfer of the management of Transport Canada airports to incorporated business entities called Local Airport Authorities (LAAs). first announced as air transport policy in April 1987. The model was developed by an airport transfer task force (headed by Transport Canada) and implemented in July 1992 for the Vancouver, Edmonton, Calgary, and Montreal airports. The LAA is a regional variant of corporatized airport services. It provides the frame- work and corporate governance of private sector institutions but maintains govern- ment ownership of assets. The LAA concept can be defined as the 'privatization of a public sector function." The concept was developed by Transport Canada (i.e., The Federal Department of Transport) as part of the general policy to reduce federal gov- ernment participation in the provision of air transport services. The LAAs are non- profit corporations with an independent Board of Directors appointed by municipal or regional governments and/or organizations such as the Board of Trade, Chamber of Commerce. etc. As non-profit organizations, the LAAs have no shareholders, and profits are reinvested in the airport operations. The LAAs are not subject to economic regulation and operate and manage the airports under a long-term lease agreement (i.e., 60 years). The federal government mantains ownership of airport-related as- sets and land. The lease agreement provides the federal government with a base rental payment for each airport business (i.e.. airside, landside, and real estate) plus a participation in the revenue increases. The LAAs enjoy federal income tax exemp- tion and are responsible for airport expansions and capital financing without recourse to federal government funding and/or guarantees. The development and implementation of the LAA concept in Canada, as a model for the corporatization of airport services. has the following strengths and weaknesses: Strengths: Permits airports to better serve local community interests and enhances regional economic development potential. Decentralizes airport management functions, allowing government to concen- trate more on aviation sector policy and regulatory issues. Introduces some private sector behavior into the govemance of airport public functions (independent board. nondependence on govemment subsidies, etc.) as well as private sector commercial orientation of the airport operation. Allows the national airport system to operate in a more cost-efficient and com- mercial manner. The LAAs can access the capital markets for financing purposes on the basis of their future stream of cash flows, without government guarantees. Continued.... 9 AIRPORT PRIVATIZATION EXPERIENCES Box 1 (concluded) Weaknesses: (a) Concerning the structure of the LAAs: A not-for-profit organization will lack some of the necessary incentives for the opti- mization of economic performance and the increase of new investments. If an LAA were to evolve into a for-profit organization, it would require economic regulation (e.g., the case in Britain where BAA pic is a for-profit organization regulated by the Civil Aviation Authority). Since ownership is retained by the federal government, in the event of a default of an LAA, the federal government might possibly be held accountable by the public. (b) Concerning the rransfer process of the LAAs: Given the way the procedures were initially planned, there was a relatively high degree of discretion in the selection process of the Local Groups (local authorities and private sector organizations) for establishing the LAAs. The process was not open to different interested parties (at the local level) and discussions were held directly with only one Local Group, which gave the federal government limited flex- ibility in the negotiating process. For a process that does not include pre-qualification of candidates and bidding procedures. the period from April 1987 until July/August 1992 seems to reflect a prolonged and slow execution of the program. most of the case studies analyzed, this role is performed by a special planning unit under the Civil Aviation Au- thority and/or the Ministry of Transport. Xm Regulation. Given the monopolistic nature of airport- related services (airside) and the relatively high exter- nalities of its activities, regulatory functions and respon- sibilities should be separated institutionally from the provision of these services. Government should have a role in the economic regulation of airport user charges, preferably exercised by an independent state body (e.g., the Civil Aviation Authority in the British Airports case), as well as a role in the technical regulation of airport- related activities (runways certification, air safety, air navigation standards, etc.). Airport services that ought to be subject to economic regulation include: (1) air- side facilities (i.e., runway, taxiway, apron), and (2) fa- cilities that require access to the airside (terminal, ground handling, fueling, etc.). In most of the case studies ana- 10 Overview PRIVATE SECTOR PARTICIPATION lyzed, economic and technical regulation was performed by a government body with responsibility for the full range of air transport activities (e.g., a department or departments within a Civil Aviation Authority). Ownership. The holding of shares or assets in airport infrastructure could be in the hands of the state or the private sector. For purposes of the study, the following ownership options are considered: (1) full airport ser- vices (both airside and landside); (2) airside services only; and (3) landside/commercial services only. BOOT and BOT schemes that involve long-term leases of real estate and/or existing assets to the private sector on be- half of the state are considered state ownership. How- ever, this is debatable, considering that in economic terms a lease of over 30 years for practical purposes is tantamount to ownership.14 Land ownership is not ana- lyzed in the context of the study, but in most of the cases land belongs to the local or federal governments. Land ownership has not become an issue in any of the ana- lyzed cases and is usually transferred to the airport op- erator (private or public) on a semi-perpetual lease (up to 99 years or more). Management (Operations and General Maintenance). Operations and maintenance of airport activities can be performed by either the state or the private sector. When ownership is retained by the state, management con- tracts or operational concessions are widely used for the transfer of airport management responsibilities to the private sector. The same options used in the defini- tion of roles under Ownership will be used for manage- ment. Investment and Financing. Investments in airport in- frastructure for new developments, upgrades, and ma- jor maintenance needs have traditionally been a respon- sibility of the state. As private sector participation in the air transport industry increases, a greater amount of private investment is being channeled into airport-re- 14 Ownership of airport-related assets can become an issue for the private sector opera- tor when financial institutions require guarantees or pledges of assets for financing purposes. In such cases some type of collateral is usually required by the financial insti- tutions. AIRPORT PRIVATIZATION EXPERIENCES lated infrastructure. The same options used in the defi- nition of roles under Ownership will be used in this cat- egory. II. POLICY OPTIONS FOR AIRPORT PRIVATIZATION Governments confront the decision to privatize their airport sys- tem for a host of different reasons. In some cases, mismanage- ment and corruption in airport administration have played a major role in the decision. In countries with a historic heavy military presence, modernization of the political system has driven civil governments to increase the participation of the private sector. However, the single reason common to most case studies was the government's inability to fund and/or obtain adequate fi- nancing for airport development (upgrades as well as new air- ports). Although lack of public funds is common to other infra- structure needs (water and sewerage, electricity, etc.), airports, given their limited use by the public, are even less of a govern- ment priority for public investment. As discussed previously, privatization of airport activi- ties can take many different forms (outright sale of shares or assets, concessions, long-term leases, etc.), and can take place for the airport as a whole (e.g., BAA plc), for the airside-re- lated services (e.g., a new runway at El Dorado Airport in Bogota, Colombia), or, as is frequently seen, in most of the land- side or commercially related services (e.g., Terminal Three at Lester B. Pearson Airport in Toronto). As noted by the Ameri- can Association of Airport Executives in 1992, "Privatization of airports is not a single theory with a single definition."15 Trying to rigidly structure the different types or options available to policymakers could be misleading. This section attempts to or- ganize the policy options available to a government facing the need to privatize airports, and presents the techniques most com- monly used in each case. Each policy option is accompanied by a brief summary of one or two relevant experiences. 15 "An Airport Executive's Guide to Privatization," a Privatization Study by the Ameri- can Association of Airport Executives and the Airport Research and Development Foundation, April 1992. 12 Overview PRIVATE SECTOR PARTICIPATION As governments embrace economic reform and politi- cal modernization, their role in the development of infrastruc- ture evolves from that of owner and operator to that of policy- maker and regulator. Although more recent in origins, this is also the trend in air transport infrastructure as private sector par- ticipation increases in the sector. In the airline industry today, majority ownership is already private (by late 1994, 70 percent of airlines were private or had a controlling private partnership). The privatization options for the air transport policy- maker are illustrated in Table 2(See next page). These options are categorized according to the three roles that the private sec- tor plays and will continue to play in the development of airport infrastructure: (1) ownership; (2) management/operations; and (3) investment/financing. The study assumes that the roles of policy/planner and regulator in airport-related activities will continue to be undertaken by the state. Situations in which the government assumes sole re- sponsibility for all roles are the historical reference to the ways in which airport-related activities were entirely under state con- trol in the past. There are very few exarnples of this type of arrangement in today's airport world. Among the cases consid- ered in the study, there was not one case in which the state had a predominant role in all airport-related activities.'16 16 The following sections present examples drawn from the case studies in this report and other recent airport privatization experiences. Further details on most of the airport transactions discussed in this section can be found in the case studies. 13 AIRPORT PRIVATIZATION EXPERIENCES Table 2 Private Sector Methods to Increase Participation in the Airports Sector Roles Option 1' Oplion_ ' Option 3' State retains Ownership and State retains Ownership ot Ownership Operations, Investment Responsibilities Airport but transfers and Invesiment but transfers Airport Investment as well as Responsibilities are Management and Operations Operations/Management iransterred to to ihe Private Sector Responsibililes to the the Privaie Sector Private Sector Ownershp State State Private Sector Investment State Private Sector Private Sector Management, Private Sector Private Sector Private Sector Operations i _ * Service Concessions * BOT scheme (BOOT. * Wraparound Additions PPI Options * Contracting-Out BTO, etc I * BOO (comrmrrnly used) * Management Contracts * Long Term Leases tLOO. etc.l * Strategic Buyout a Multiple Concessions a Master Concession (e.g MEBO, etc.) o Capital Markets * Aeroports du Carrmeroon * Athens International Airport * British Airports Authoritv o Pittsburgh Int'i Airport a Lester B. Pearson, Toronto o Sangster International Recent o Kai Tak Airport. Hong Kong * La Chinita Airporn Airport Jamaica Expenences Maracaibo - Venezuela * Beltast International - Palma de Mallorca, Spain Airport tPrjvaIe Sector participation trend in airport infrastructuret Legend Private Sector Participation in Infrastructure (PPI) Options MCs Management Contiacts BOT = Burl3Ooieraie-Transter BOOT= Buila-Own-Operaie-Transler LDO = Lease-Develop-Operate BTO = Build-Transtfer-Operate LT Lease= Long-Term Lease Wraparound= Combination ot BOT lor new lacilitlies with long-term lease or concess,on lor eistirng fac,lifies S.B. = Srategi.- BuVoul by a group or consornum of in'meslors (srares andror assersl MEBOs= Management-Employee Buyouis Includes alternatives for selected airside activities, selected landside activities, and full airport activities. 14 Overview PRIVATE SECTOR PARTICIPATION Option 1: State Retains Ownership and Investment Responsibilities but Transfers Airport Management and Operations to Private Sector This is the most commonly used option for private sector par- ticipation in airport-related activities. Evidence suggests that policymakers around the world have concluded that airport com- mercial activities (landside) with low externalities in relation to the society are better managed by the private sector. Activities such as shops, duty-free, car parking, porters, aircraft catering, and city-airport transport have traditionally been handled by private enterprises. More recently, there have been cases in which the entire airport infrastructure (airside and landside activities) has been transferred to the private sector for management and operation. The investment commitments of the private sector, in this option, are relatively low and are largely associated with the remodeling and redesign of commercial space in the case of landside infrastructure, and with minor repairs in the case of airside infrastructure. The legal configuration or instrument through which this privatization option is implemented can take the following forms: a Service Concession Contract. This is an agreement whereby the private enterprise is awarded the right, by the airport landlord (the airport authority), to exploit a particular service (under, or not under, exclusivity terms, depending on the type of service and the size of the air- port) for a given period of time and under certain condi- tions (quality of service, leasing and or concession fees, minor repairs and maintenance commitments, etc.). In all of the airports analyzed in this study, concession con- tracts are presently in use in the exploitation of land- side/commercial opportunities. Even in the case of fully privately owned airports (such as BAA plc), conces- sion contracts are used as a mechanism for decentraliz- ing management and employing qualified specialists in each field of business, so as to maximize the economic potential of the airport's commercial side. More and more owners perceive airports as offering an opportu- nity to increase passenger-related revenue by expand- ing the types of goods and services offered and making the airport an attractive place to shop. This "customer- oriented" movement is emerging at a number of airports, especially in the industrialized countries, since it repre- 1 5 AIRPORT PRIVATIZATION EXPERIENCES sents an opportunity to sell goods and services to a cap- tive audience, with available time and an above aver- age income. Terminal Three in Toronto and BAA plc, described in the case studies, are good examples of the use of service concession contracts in modem airports.17 Contracting-Out. This is an arrangement in which the airport landlord (the airport authority) subcontracts the provision of a particular service with a private enter- prise. This type of arrangement is commonly used for maintenance services (cleaning and maintaining infra- structure, repairing and maintaining equipment, over- hauling airport vehicles, etc.). The agreements are usu- ally simpler than those for concessions and are for shorter terms (one year or less). The use of private con- tractors was frequent in all of the airports analyzed in the study. Contracting-out has the effect of privatizing a function that is being provided by the airport author- ity at a given time. This type of arrangement has been used to privatize a specific airport service through cre- ation of a commercial company owned by former air- port employees who previously performed that service. This mechanism reduces airport staffing and its related costs while simultaneously privatizing the service. (For example, the general maintenance of the airport infra- structure at Othopeni and Baneasa Airports in Buchar- est is in the process of being contracted to a private com- pany recently created by former employees of the air- port maintenance department.) Management Contracts. Under this type of agreement the management of all or part of the airport-related ac- tivities is contracted by the airport landlord (the airport authority) with a specialized airport operator for a given period of time and under specified conditions (perfor- mance criteria, economic incentives, maintenance com- mitments, etc.). Management contracts can take differ- ent forms in the case of airport-related activities, de- pending on the type of services to be managed, the type of autonomy in the day-to-day administration, and the financial incentives. In some cases the management contracts can even include some equity participation in " In a recent airport conference in East Asia, an ICAO official indicated, "Airports today could be viewed as large shopping malls with aircraft access gates instead of street exits" (March 1995). 16 Overview PRIVATE SECTOR PARTICIPATION the airport ownership. The management contractor will generally subcontract, via concession agreements with different specialists in the field, each of the airport com- mercial services (duty free, shops, car parking, etc.). This option is frequently used when the government wants to maintain ownership of the airport and has al- ready undertaken - or committed itself to - major investments, but does not want to be involved in opera- tion and management responsibilities. It's option is also utilized when the entire airport operation is privatized through the creation of a joint venture enterprise (in- volving private promoters, real estate developers, and local authorities) and airport expertise is needed to run the operation. Examples of Option 1: a. FullAirport Services Cameroon - Aeroports du Cameroun Management Contractfor Full Airport Services. A new government-owned airport was opened in Yaound6 (the federal capital) in September 1991. The airport has a capacity of 2 million passengers per year, and total construction costs were approximately US$250 million. Aeroports du Cameroun (ADC), a recently forned (October 1993) joint venture com- pany involving the Government of Cameroon, the national flag carrier (CAMAIR), and Aeroports de Paris (ADP) was created to manage and operate seven airports in Cameroon including Yaound6 International Airport. ADC contracted the management services for all of its airport-related services with ADP for a period of five years. ADP has moved a team of 10 expatriates to Cameroon to run the operations at the privatized airports. As the management contractor, ADP does not have investment com- mitments in major upgrades and expansions in the airports, and ADC is committed only to reinvest a portion of the profits. Given the relatively low traffic volumes in Cameroon, it is unlikely that major upgrades or expansions in the system will be covered by the joint venture company. The management contract has certain basic performance parameters, and incentives are based on the expected profits from the airport operation. A manage- ment contract was used in this case as the main privatization option, given government reluctance to give up ownership in the operating company (ADC) and the government's previous 17 AIRPORT PRIVATIZATION EXPERIENCES large investment in Yaounde International Airport. In addition to illustrating the use of management contracts, this case por- trays the difficulties faced by governments with regard to cross- subsidies between airports when the operation is transferred to the private sector (only the airports of Douala and Yaounde gen- erate positive cash flows before capital costs), and also points to some of the problems that can arise when the privatization pro- cess is not properly designed and the selection process is not adequately promoted. For further information see Case Study 2, "Airports in Cameroon." Examples of Option 1: b. Landside/Commercial Services This is the most common type of private sector participation in airport-related activities and usually takes the form of a rental concession for a given period of time. It is also the predominant mode of private sector participation in U.S. airports. Typically, U.S. airports operate on the basis of having one or two master concessionaires with the rights to operate all landside activities. The institutional economic design of the airport system in the United States does not encourage private sector ownership (i.e., the airport system is designed on the basis of direct/residual cost recovery, owing to the historical high influence of the airline industry in the sector). (See Box 2 for further details.) Pittsburgh Airport Authority (PAA) and British Airports Authority plc (BAA plc, operator) Landlord Service Concession for Retail Activities. Pittsburgh International Airport opened a new terminal with a projected capacity of 32 million passengers per year in October 1992. The airport is owned and operated by the local govern- ment (the Director of Aviation, Allegheny County, Pennsylva- nia). In 1991 the PAA granted BAA the management and devel- opment of all retail, food, and beverages services of the new 75- gate midfield passenger terminal through a 15-year master de- veloper/lessee contract. BAA does not directly operate the con- cessions but sublets the space to individual operators as if it were the landlord of a shopping mall. BAA's experience in de- veloping commercial revenues in Heathrow and Gatwick, re- sulted in positive results for PAA. Average spending per pas- senger climbed from US$2.40 to US$7.30 in the 1991-94 pe- riod.18 BAA created a local company (BAA Pittsburgh, Inc.) to 18 Overview PRIVATE SECTOR PARTICIPATION manage concessions at the Terminal Mall (35 shops, 9,200 square meters of space). Infrastructure investment in the Terminal Mall was funded by the local government with assistance from the Box 2 AIRPORTS IN THE UNITED STATES The United States is the world's largest domestic air passenger and cargo market and is serviced by approximately 1.400 carriers with a combined fleet of over 6,100 aircraft. There are 5,589 public use airports in the United States. of which 680 have scheduled services by airlines. commuters, andior air taxi operators. In the United States 101 airports have annual traffic flows oa over 1 million passengers. In terms of commercial movements, U.S. airports make up 45 of the worlds top 100 airports. Moreover. U.S. airports handle approximately 48 percent of worldwide passenger and air cargo transport. Almost all U.S. airports are owned and operated by local (state, county. and munici- pal) governments. Regional and local government ownership has encouraged the use of airports as important growth poles tor local economic development. As exten- sions of local governments, U.S. airports are considered public utilities and are ad- ministered on a not-tor-protit basis. Government linkages allow U.S. airports to obtain funding for infrastructure improvement projects through the issuance of gen- eral obligation bonds (which are backed by locai tax receipts) and/or airport revenue bonds. During the 1980s, federal spending on airports was minimal in relaTion to spending on other large infrastructure projects. The low level of federal funding for airports is a reflection of the role of local govemments in airport management and the fact that most large U.S. airports are sell-sustaining entities. The Federal Aviation Administration (FAA I manages the allocation of tederal grants which are used for the renovation and expansion of existing airport facilities (US$t.9 billion in 1994). The FAA does not directly regulate the economic activities ot airports. and this has al- lowed airports to pursue close economic and strategic partnerships with privately owned airlines. At all large and medium-size airpons in the United States, signatory carriers have negotiated favorable pricing structures tnrough airport use agreements. Many of these agreements also include Majority-in-Interest (Mlli clauses that give airlines veto power over airport financial and development decisions. Furthermore, airlines have vertically integrated operations through the development of new terminals on leased airpon property. These dedicated terminals are either build-operate-transfer (BOT) or wraparound additions that return ownership to the airport authority after a specified time period (e.g.. USAir and Pittsburgh. Delta and Atlanta. American Air- lines and Terminal D in Miami). As a result ot this close relationship with airlines. U.S. airports are directly affected by changes in the airline industry. Continued .... IB British Airports Authority, Asian Airports Conference, March 1995. 19 AIRPORT PRIVATIZATION EXPERIENCES Box 2 (concluded) The FAA's position on privatization is that airports are natural monopolies with low air- side costs which would be abused by private ownership. U.S. carriers also oppose privatization on monopoly pricing grounds and are adamant against the loss of indirect subsidies.' Pnvatization would alter the close relationship that airlines have with air- ports and lead to the renegotiation of airport use agreements. FAA's position on priva- tization also stems from its military origins and the post-War view of airports as "strate- i gic national assets.' Appmzr.ae t42owe'ent.:.I US. a5 use> Cr 6a1Gir or( C:!l .n I.;rs azj-W. ,raIrr'..3 ,1ie, .>)-xld mrb l,Uc,* a. ervm MA thI f l u a I L flinSCrCA .COSISI flu r8n.M'rg tO8 p&Cdre 01 U S ai'D(rIS use r:Sdu2I C'jS I' . Ihe 9'.5'TdI uC]u; cow,rNerr .,1 rrw ,uC Ir;rC4I.U COil- ca -,h a dnrgaJ a.r$.'as5 mae 'esialu Tha.) elernha ls I f s-,re urderprr.9 n i ad,e cnan6es thme UrneoSirne; Cr*.oye:: r.a B'irr i Omice *F.rn.dg US nspor1s Fe,ancSrj L1S gLaerts en Me 80 I federal government (FAA). BAA also plans to offer its services to airports in Denver and New York City (La Guardia). The Pitts- burgh case also reflects a recent globalization trend in airport management. BAA plc, Aeroports de Paris, Aeropuertos Espanioles (Aena), and Vienna Airport are some of the airport corporations that are actively seeking a growing worldwide par- ticipation in airport activities. Hong Kong - Kai Tak Airport S Multiple Private Concessionaires. Kai Tak is a wholly government-owned airport in which, apart from air traffic con- trol and apron management, the airport activities are operated by the private sector through service concessions (passenger services, ground handling services, car parking, etc.) and BOOT schemes (cargo handling, maintenance facilities, airport hotel, etc.). Kai Tak is extremely profitable (HK$1.0 billion in net profits in the 1993-94 fiscal period, or approximately US$131 million) and provides an interesting example of public/private sector partnership in the exploitation of airport-related services. Kai Tak Airport employs approximately 25,000 workers, only 370 of whom are government workers employed by the Civil Aviation Authority (CAA); the remainder are employed by pri- vate airport concessionaires.19 Because of space constraints, 20 Overview PRIVATE SECTOR PARTICIPATION the airport has only eight gates (fingers) through which it handles 25 million passengers through the use of shuttle links between the aircraft parking areas and the terminal. The operation is run very efficiently; in terms of passengers per gate, Kai Tak has one of the highest ratios in the world. Sixty-five percent of Kai Tak's revenues come from non-aeronautical sources (landside activities), which are relatively high by international standards. This partially explains the stability of the airside charges (land- ing fees, aircraft parking, and passenger fees), which have not increased in the past four years, and the low level of CAA per- sonnel at the airport (only 1.5 percent of the total work force). In terms of worldwide privatization experiences with airport in- frastructure, the Hong Kong case could be labeled "a privately run corporation wholly owned by the government." (For further information, see Case Study 5, "Airports in East Asia.") Option 2: State Retains Ownership of Airport but Transfers Investment as well as Operations/Manage- ment Responsibilities to Private Sector As in most transport infrastructure privatizations, a recent world- wide trend in airport infrastructure is some type of arrangement in which the owner/landlord (the government) grants a long- term concession to the private sector for the exploitation of a given service (airside, landside, or both), provided the follow- ing conditions are met by the private party: (1) responsibility for funding the required investments in the development or up- grading of the facility; (2) operation and management of the facility; and (3) transfer of the property to the owner/landlord at the end of the concession period (infrastructure built under the arrangement). This is commonly known in financial terms as the build-operate-transfer (BOT) scheme and is widely used for infrastructure development. The following are some of the most common types of long-term leasing arrangements with pre-de- termined investment commnitments used for airport-related in- frastructure. ' Even the internal security services are provided by private security services and funded by a group of private airlines that operating out of Kai Tak Airport. 21 AIRPORT PRIVATIZATION EXPERIENCES * Build-Operate-Transfer (BOT). Under this scheme, a long-term concession (normally between 20 and 40 years) is given to a private firm for the exploitation of a particular ser- vice/facility (a passenger terminal, a cargo terminal, a runway, a complete airport, etc.). The private firm has the responsibility to finance, build, and operate the facility for a given period, after which time the property of the facility is transferred to the gov- ernment at a symbolic price. The private firm does not take title of the property at any point during the concession. The private firm manages the cash flows from the operation of the facility, accounting for operational costs, capital costs, concession fees, and profits. The scheme allows governments to benefit from private capital market funding at no cost and without project risk (i.e., construction is the responsibility of the private sector) and commercial risk (i.e., the scheme also transfers operational responsibility for the facility to the private sector). Build-own- operate-transfer (BOOT) is a similar scheme in which the pri- vate firm takes property title to the facility in the construction period and transfers it back to the government at the end of the long-term concession (e.g., this is used in cases in which loan guarantees or collateral are required). Build-own-operate (BOO) is also a similar scheme, but in this case the property is not trans- ferred back to the government at the end of the concession pe- riod. Build-transfer-operate (BTO) is similar to the above scheme but the government takes property title immediately after con- struction of the facility. ; Buy-Build-Operate (BBO). Underdeveloped or de- teriorated facilities are bought from the government by a pri- vate firm for a given price and with the right to exploit the ser- vice for a given number of years (i.e., a concession). The facili- ties are upgraded and/or expanded and the property title is owned by the private sector. X Lease-Develop-Operate (LDO). A long-term con- cession on an existing facility is given to a private firm. The private firm upgrades and expands the facility and operates it for the given period, managing its cash flows and paying the government a lease canon. The government holds the property rights throughout the concession period. a Wraparound Addition. An existing government- owned facility is expanded by a private enterprise, which holds title to the addition only.20 The private enterprise operates the 20 "An Airport Executive's Guide to Privatization," American Association of Airport Executives and the Airport Research and Development Foundation, April 1992. 22 Overview PRIVATE SECTOR PARTICIPATION entire facility through a concession contract/operational agree- ment of the government-owned section (see Figure 1). Figure 1 ltng -rerm lease or similar Wraparound Addition, Typical Structure pcite Concessionaireb fl Builds expans,on of airport lacilite I ooOperates & maineainsin The option is als used in situatins,i,wic assignin lan ini- Expansgon eo Airpor e Fcif t M onteg siona Jmaica,is BOT arrangeduents simir Invesmen. This option is becoming increasingly prevalent in cases in which an existing passenger terminal needs to be expanded through private sector participation, given that it may not be in the best interests of airport operations if two entities operate the airport -vone operating the old terminal and the other the expansion. The option is also used in situations in which assigning an ini- tial value to the old tesminal in the privatization transaction would seriously compromise the success of the operation (in view of the prevailing economies of scale). The airport expansion in Montego Bay, Jamaica, is being carried out through the use of a similar scheme. In most of the BOT schemes used for airport infrastruc- ture development, the private sector participates through joint venture affangements in which there, is usually a partnership among a real estate developer, a financial institution, and an airport operator. In these cases, once the construction of the fa- cility is completed, the BOT scheme is followed by a manage- ment contract affangement between the joint venture company and the airport operator. An example is the new passenger ter- minal at Toronto International Airport, where Terminal Three Limited Partnership (TTLP) (the private consortium to which Transport Canada awarded the construction, development, and operation of Terminal Three) contracted in 1991 with Lockheed 23 AIRPORT PRIVATIZATION EXPERIENCES Air Terminal of Canada (LATC)21 for the entire operation of the terminal once construction was finished through a management contract arrangement. Contracting out the management of a fa- cility to an airport operator (whether or not the airport operator is included in the private joint venture company awarded the concession contract) has become an important part of success- ful privatization of airport infrastructure through the use of BOT schemes. In practice, BOT schemes in transport infrastructure for developing economies are becoming a substitute for ownership in cases in which externalities are perceived as politically sensi- tive, or where governments are in the initial phases of their eco- nomic reforms. To revert operations back to government in a long-term concession carries high transaction costs to society (rebuilding of the government's institutional capacities, dilution of public management efforts, etc.). Therefore, the likelihood of the concession's renewal is relatively high (in cases in which the concessionaire defaults on its obligations, a reallocation to another private concessionaire is likely). Under this scenario, ownership becomes an issue only from the financing perspec- tive, when fixed assets guarantees or collateral are required for bank loans. In these cases, lenders will tend to request some type of government guarantee on the conditions of the conces- sion contract. Examples of Option 2: a. Full Airport Services Athens, Greece - Spata, the New International Airport BOOT for a Greenfield Airport Project. Since the late 1970s the Government of Greece has been considering the construction of a new airport in Athens. Over the years, govern- ment policymakers had nursed the idea of using private sector financing and management for this project, and by June 1991 the private sector was approached regarding the design, financ- ing, construction, and operation of a new airport under a BOOT scheme. The scheme included the following considerations: (1) there would be a 40-year concession on both airside and land- side services; (2) the old airport would be closed once the new 21 A subsidiary of Lockheed Corporation. 24 Overview PRIVATE SECTOR PARTICIPATION facilities were fully operational; (3) the government would re- tain a 40 percent equity participation in the airport operating company (the joint venture to be awarded the BOOT contract); (4) the government would provide part of the funding through an airport development fund (a passenger departure fee was imposed in November 1992 to create the fund), and would pro- vide guarantees for EC and European Investment Bank (EIB) long-term financing; and (5) there would be economic regula- tion on airside charges (a price cap with an adjusted inflation formula) and a guarantee of open competition (more than two suppliers) in the provision of ground handling concession ser- vices. The initial project costs were estimated at US$2.3 bil- lion to be disbursed in a period of 36 months.22 Seven compa- nies expressed their interest, four of these participated in the bidding process from which the German corporation Hochtief AG23 was selected by the government in August 1993. In Sep- tember 1993 the Greek Parliament was dissolved and a new government elected. This government nullified the initial award and initiated a series of investigations regarding complaints by rival builders and mishandling of the bidding process. On July 28, 1995, after several delays and an EC overruling of the com- plaints, the Greek Cabinet approved the contract with Hochtief AG. Owing to the delays and to the change in government, some of the original conditions have changed, for example: (1) the length of the concession has been shortened to 30 years (instead of 40); (2) private ownership has been limited to 45 percent (the original participation was 60 percent); and (3) the total estimated cost has increased to US$ 2.6 billion (instead of US$ 2.3 bil- lion). Toronto, Canada - Terminal Three at Lester B. Pearson Airport BOOTfor a New Passenger Terminal. The Lester B. Pearson Airport at Toronto (LBP) is one of the facilities owned by Transport Canada. LBP handles a third of Canada's air pas- senger traffic and 40 percent of the country's air cargo. It is the busiest airport in Canada and is among the top 30 in the world in terms of passenger and cargo traffic. A new terminal, Termi- 22 Coopers & Lybrand, "The BOOT Approach for Airport Development," October 18, 1993. t3 A large German builder, leader of the German consortium interested in developing and operating the new Athens Intemational Airport. 25 AIRPORT PRIVATIZATION EXPERIENCES nal Three (T3, the Trillium), was opened in 1989, under private sector responsibility concerning of both infrastructure invest- ment and operations management. At the time, this arrangement was one of the most interesting cases of airport privatization. The scheme was to build, own, operate, and transfer (BOOT) a new passenger terminal facility at LBP under a long-term lease contract of 60 years for the use of the land. The project was a greenfield concept to provide LBP with a new passenger termi- nal that would include the following characteristics: (1) 16 gates; (2) an access road; (3) capacity to handle between 5 and 6 mil- lion passengers a year with the potential to expand to up to 12 million passengers a year; and (4) an estimated project cost of Can$250 million. The concession was granted to exploit the air- side and landside services in the T3 area.24 The concession contract for T3 was awarded in 1987 to Terminal Three Limited Partnership (TTLP), a consortium of Canadian real estate developers (Huang and Danczkay) and an airport operator (Lockheed Corporation). In 1992 Huang and Danczkay sold their share in TTLP to Claridge Properties Lim- ited (a real estate developer related to the Bronfman investors group, Seagrams). T3 is managed by Lockheed Air Terminal of Canada, Inc. (LATC) under a management contract from TTLP. Total development costs for the project amounted to Can$570 million, and the total time elapsed between the selection of the proposal and the delivery of T3 was three years. The original T3 project of 16 gates and 6 million passengers per year, was ex- panded to 29 gates (24 and 5 satellite) and a capacity of between 10 and 12 million passengers per year. Terminal One (TI) and Terminal Two (T2) are owned and operated by Transport Canada,25 which has promoted "real" competition for airport services within the same airport premises. Given the lack of economic regulation of airport-related charges in Canada, the terminal fees charged to airlines by T3 are three 24 Aircraft approach and landing, as defined in the study, is shared between Transport Canada (the airport authority) and T3. 25 An effort to privatize Tl and T2 at LBP was launched in 1992. The privatization process used was similar to that for T3. Negotiations were taking place with the "win- ning" consortium (the same participants involved in T3) late in 1994 before the general elections. After the elections, the new Canadian Govemment (Liberal Party) decided to invalidate the transaction while reconsidering its overall policy with respect to the avia- tion sector (i.e., restructuring and privatization of airports). 26 Transport Canada argues that if replacement costs (terminal facilities) were to be included in the pricing formula for charges at Ti and T2, the price differential would probably be a ratio of about 1.5 to 1 as opposed to 3.5 to 1. 26 Overviow PRIVATE SECTOR PARTICIPATION times higher than those charged by TI and T2.26 Airlines are free to choose the terminal from which they will operate and the price mechanism associated with it. The differences in the ter- minal services (T3 is a new facility as opposed to the older fa- cilities at Ti and T2) and in fees and charges have led to market segmentation at LBPAirport. International and prestige airlines (Lufthansa, British Airways, KLM, etc.) are using T3 services, Air Canada and domestic carriers are using T2, and low fare carriers (U.S. regional carriers, etc.) and charters are using Ti. Operation by the private sector has increased efficiency in the provision of airport services in T3. A Transport Canada official made the following statement during research for this case: "It takes TI and T2 forty-one administrative steps to replace a rug in the passenger service area, while T3 can do it with a phone call from the maintenance manager to the supplier." (For fur- ther information, see Case Study 3, "Airports in Canada.") Examples of Option 2: b. Landside/Commercial Services Maracaibo, Venezuela - La Chinita Airport LDO for Existing Landside Facilities. On December 21, 1991, three commercial airports located in the State of Zulia (an oil-producing region located in northwest Venezuela) were transferred from the federal to the local government under a complex legal scheme. The Civil Aviation Authority retained ATC activities (including aircraft approach and landing) as well as the rest of the air navigation services (telecommunications, meteorology, etc.). On June 6, 1992, the three transferred air- ports (Maracaibo, Oro Negro, and Santa Barbara) were corpo- ratized through the creation of the Zulia Airport Authority (ZAA) (an autonomous entity under the jurisdiction of the governor's office). In October 1992 a general call for bids for the privatiza- tion of the three airports under an LDO scheme was announced. The concession agreement included the following key compo- nents: (1) a 20-year concession for the exploitation of the land- side services and selected airside services (i.e., aircraft parking and some passenger charges); (2) an investment program (to be defined by the bidder); (3) a fee of 5 percent of gross revenues to be paid to the ZAA; (4) a charge of 15 percent of gross rev- enue to be placed in a local government's trust fund for invest- ment purposes; and (5) the stipulation that economic regulation would be applicable to passenger terminal fees through the ZAA. 27 AIRPORT PRIVATIZATION EXPERIENCES Bidding took place in early 1993, and the LDO contract was awarded on May 14, 1993, to a consortium of three compa- nies (Consorcio Aeropuertos del Zulia, made up of a U.S.-based consulting firm, a local civil engineering firm, and an interna- tional airport equipment supplier). Unfortunately, the perfor- mance of the private company, Consorcio Aeropuertos del Zu- lia, as an airport operator was not successful, and the company defaulted on a series of obligations in the concession contract (e.g., investment commitments, financial reporting, mainte- nance). Changes in the political context within the local gov- ernment (a new governor was elected in January 1994) exacer- bated matters, and the concession contract was voided by the new administration on February 21, 1994. Given the present state of the domestic airline market in Venezuela (in 1994 pas- senger traffic decreased by 16 percent compared with the previ- ous year) and the political tendencies within the local govern- ment, the privatization process is not likely to be restarted. This privatization effort was conducted by a local government (after the decentralization) with little experience in either airport op- eration or privatization techniques. Although the intentions were positive, the execution of the process lacked consistency and transparency. Lack of adequate institutional capacities in place is one of the risks associated with the decentralization of airport functions in developing countries. (For further details, see Case Study 10, "Airports in Venezuela.") Spain - Palma de Mallorca Airport . BOOTfor New Services Terminal. This project con- sisted of the construction of a new services terminal to include a hotel complex, an expanded car parking area, and commercial offices. Palma de Mallorca is the second largest airport in Spain. It is an important tourist destination for Europe (13 million pas- sengers in 1993). It is probably the airport with the largest peak traffic difference by world standards (January with an average of 300,000 passengers versus August with an average of 2.0 million passengers). In order to expand Palma de Mallorca's tourist offering to the international business sector the new ter- minal has been designed to provide the airport with a first class hotel and convention facilities. The total estimated project cost is 10,000 million pesetas (approximately US$80.0 million),27 to be disbursed during a three-year construction period. The project design and plans have been prepared by Aeropuertos Espanioles 27 Based on an average exchange rate of 125 pesetas to US$1 (September 1, 1994). 28 Overview PRIVATE SECTOR PARTICIPATION y Navegaci6n A6rea (Aena), an autonomous public entity with responsibility for the operation of the airport system and the provision of air navigation services. A BOOT scheme will be used for the development of the service terminal through a 40-year land concession to a se- lected developer (a joint venture between a private promoter and Aena). At the end of the concession period, the existing as- sets (i.e., service terminal) will be transferred to Aena at a sym- bolic value. The prices at which the services (hotel, parking, and office rental) will be provided in the new terminal are con- sidered private prices, and therefore not subject to economic regulation. The international public bidding process for the se- lection of a private promoter to develop and operate the service terminal was launched in early 1993. The promoter was selected in September 1993 and has established a joint venture associa- tion with Aena under the predetermined bidding conditions. The joint venture company will develop, own, and operate the new service terminal. Aena's participation in the joint venture could reach a maximum of 31 percent. Project finance for 75 percent of the total project cost is presently being negotiated, and Aena's officials expect construction to start in the third quarter of 1995. (For further details, see Case Study 7, "Airports in Spain.") Examples of Option 2: c. Airside Services Bogota, Colombia - El Dorado Airport BOTfor the Construction of a New Runway. In July 1994 the Civil Aviation Authority (Aeronautica Civil de Co- lombia) launched an international public bidding process for the construction and maintenance of a second runway (3,800 mt) for El Dorado Airport under a BOT scheme. This is one of the first cases world's in which a runway and its related infrastruc- ture are built, financed, and maintained by a private sector con- sortium.28 The scheme, an innovative mechanism for private sector financing in infrastructure projects, includes the follow- ing components: (1) a 20-year concession for the operation and 28 Most of the airside services (aircraft approach and landing) in this case will be pro- vided by a government institution (the Civil Aviation Authority), which is typical given the nature of the provision of air navigation services. The private sector will build the runway and provide the maintenance for both the new runway and existing runway during the concession period. 29 AIRPORT PRIVATIZATION EXPERIENCES maintenance of the new runway as well as for the existing one (3,800 mt); (2) technical specifications for the construction of the runway, which will determine the development costs (esti- mated at US$98.8 million); (3) the provision of ATC services, including aircraft approach and landing, by the Civil Aviation Authority; (4) the transfer of landing fees to the concessionaire (a private sector joint venture company) as its source of rev- enues in the BOT project; and (5) the economic regulation of landing fees by the Civil Aviation Authority - but for the pur- poses of this project the Government of Colombia is providing a guarantee to the concessionaire of a minimum level of land- ing fee revenues (i.e., the minimum level necessary for project implementation). The most important selection criterion in the bidding process is based on the net present value of the 20-year landing fee revenue structure proposed in the offer (including a formula adjusting for inflation and changes in the exchange rate). The proposal with the lowest value will be awarded the contract. Bidding was planned for November 25, 1994, but, given the wide interest of the private sector in this project, the final bid- ding date was extended to January 25, 1995 (19 private sector companies sent in their expressions of interest and 6 consortia presented final proposals). On May 15, 1995 the project was awarded to a consortium led by the spanish developer Dragados y Construcciones and incorporated as a Columbian Joint Ven- ture Company - CODAD S.A. However, the methods used in structuring transaction raise questions regarding the impact of the pricing strategy used for determining the levels of landing fees, and the use of gov- ernment guarantees to enhance the project's commercial risks. (For further details, see Case Study 4, "Airports in Colombia.") Option 3: Ownership, Operations, and Investment Responsibilities Are in the Hands of the Private Sector This option is the least frequently employed mechanism for pri- vate sector participation in airport infrastructure because it en- tails private ownership of the property. However, results from this study suggest that this option will be increasingly used in privatization cases. As previously mentioned, the only cases from the analyzed sample in which 100 percent of both airside and 30 Overview PRIVATE SECTOR PARTICIPATION landside services of a given airport are under private sector own- ership are some large airports in Britain (British Airports Au- thority, Liverpool Airport, and Belfast International Airport). Privatization alternatives used in this option range from the is- suing of shares to be placed in the capital markets to the out- right sale of assets, to a management buyout, as in the case of Belfast International Airport. In most cases the land used for airport operations is not included in the company or assets to be sold, and a perpetual concession (99 years or more) is granted to the new airport owners. Although full private ownership of an entire airport is still uncommon, more and more governments are allowing for 100 percent private ownership in parts of the landside infrastructure (passenger terminal, cargo terminal) as well as in the related infrastructure (hotel, business center, car parking, city transport, etc.). As governments redefine their roles in public services infrastructure, strengthening their capacities as policy planners and regulators, there will be more cases of full private participation. In some cases, for example the Copen- hagen International Airport and the Vienna International Air- port, governments have already taken steps toward the partial privatization of the airport corporations through the use of capi- tal markets. The United States and some countries in Western Europe will probably move more cautiously toward complete private sector ownership of airports, given the influence of their respective airline industries in the air transport sector. (Some countries in Western Europe have not yet privatized their na- tional flag carriers - a first step in the deregulation of the air transport sector). Examples of Option 3: a. FullAirport Service London, England - British Airports Authority Full Divestiture through the use of Capital Markets (Trade Sale). In 1986 the British Airports Authority, then under state ownership and comprising seven airports,29 was dissolved by the Airports Act and airport assets and liabilities were trans- ferred to seven subsidiary airport companies. The rights and li- abilities of all seven companies were transferred to a newly cre- ated holding company, BAA plc, for privatization purposes. On 29 Heathrow, Gatwick, Stansted, Southampton, Glasgow, Edinburgh, and Aberdeen. 31 AIRPORT PRIVATIZATION EXPERIENCES July 16, 1987, 500,000 shares were offered to the general public under the following conditions: (1) the book value was 25 pence per share; (2) the sale value was 245 pence per share; (3) 100 pence was payable on application and the rest by May 1988; and (4) no allocation of shares in excess of 10 percent was to be made to any one person or group. By July 28, 1987, BAA plc was listed on the London Stock Exchange. Of the 500,000 shares 260,000 were offered to the general public and 240,000 were placed with institutional investors. Provisions were also made for shares to be placed privately in Canada, and since July 1988 shares have been quoted on the Toronto Stock Exchange. Cur- rently, BAA has approximately 511 million shares outstanding with approximately 523,405 shareholders (see Table 3). Table 3 BA's shareholder profile, as of May 22, 1995 Number of Percent of Category Shareholders Total Shareholders Individuals 493,622 94.31 16.99 1 Corporate Investors 29,783 5 69 83.01 rTo 523,405 100.00. 100.00. Size of Holding 1-50C 467,357 89.29 10.08 501-1,000 26,888 5.14 1.96 1,001-5,000 25,240 4 82 4.70 5,001-10,000 1,807 0 35 1.25 10,001-30.000 787 015 1.33 30,001 and above 1,326 0.25 80.69 Total 523,405 100.00 Io.00 4 Source: BAA pic Annual Report, 1995. Most of the shares are held by private individuals; however, no individual, with the exception of those granted special written permission from the Secretary of State, is allowed to hold an interest of more than 15 percent of the total shares. The Secre- tary of State holds a golden share which allows for intervention if an action is believed to contravene provisions in the Articles. BAA plc's business goal, as stated in BAA's 1994 An- nual Report, is simple: "To be the world's most successful air- port company, and the key is making money through satisfying customers." The case study analysis suggests that BAA plc is 32 Overview PRIVATE SECTOR PARTICIPATION living up to its pledge. The privatization of BAA has led to a good investment opportunity for the private investor. The aver- age rate of return for the 1988-94 period was 17.25 percent, and net assets per share have almost tripled, to £5 per share, in the same period. There has been a steady stream of dividends since the privatization (at an average of 13 pence per share), and the price/earnings ratio of the stock is today one of the highest on the London Stock Exchange (21.4). From the point of view of the general public, the upgrading and expansion of airport fa- cilities in BAA's airport system enables the system to handle 82.0 million passengers a year (domestic and international), compared with 53.0 in 1987, which has made Heathrow the busiest international airport in the world, with 48.4 million pas- sengers handled in the last fiscal year. Indeed, airlines and pas- sengers view Heathrow as the world's hub. In March 1994 the accumulated investment for the post-privatization period amounted to £1,467 million, 40 percent in excess of total profits generated in the same period. The data in Table 4 present an interesting financial comparison between British Airways (the world's top international airline in terms of both revenues and profits) and BAA plc, as of August 1994. Market Price/Earnings Table 4 Share Price Capitalization Ratio Financial Comparson of (f) (£ millions, British Airways and BAA August 1994) plC Brtish Airways 4.19 4.001 13.1 BAA pic 5.41 5,140 21.4 Sources: BAA Corporate Planning Division; Financial Times, August 15,1994. Although airlines and airports are different types of businesses, the general view is that airlines are a more lucrative business. However, as of August 15,1994, the price/earnings ratio of BAA was 60 percent higher than that of the world's top financial per- former in the airline sector, and its capital market value was 28 percent higher. Airside charges (i.e., landing, aircraft parking, and pas- senger fees) are subject to economic regulation by the Civil Aviation Authority. In accordance with the Airport Act of 1986, the Monopolies and Mergers Commission developed the initial five-year price formula for the regulation of airport charges on the basis of unit cost increase recovery. To stimulate cost effi- ciency and productivity the formula provided for the calcula- 33 AIRPORT PRIVATIZATION EXPERIENCES tion of maximum charges on the basis of the retail price index (RPI) minus X percentage points. The formula does not directly consider the gains derived from the economies of scale of air- port traffic increases. This element, together with the relatively low component of cost efficiency (X= 1 percent) in the first five- year formula (1987-92), has created the perception that profits have been relatively high since BAXs privatization. It is diffi- cult to define just how much of the traffic growth in the BAA airports is driven by non-airport-related factors (population growth, etc.) and how much is due to airport-related factors (ca- pacity, efficiency, location, etc.), but without the investments and the general improvement in operations, traffic levels could not have reached the present 82 million passenger benchmark and thus profits could not have increased to the present £240 million. However, if BAA's profits continue to increase in the coming years (and it is likely that they will, given the air traffic projections for both passenger and cargo traffic), public con- cern might intensify and cause economic regulation to become more stringent and complex. Since economic regulation of airside charges will likely to limit tariff increases, BAA plc has been increasing its com- mercial revenue base (duty free, shops, restaurants, car parking, etc.) in order to minimize the impact of future economic regula- tion and to maximize the company's profit potential. BAA plc has also expanded its business into non-operational airport ac- tivities (real estate, hotels, insurance, etc.). More recently BAA plc has expanded its operations to overseas markets, and its Con- sulting Division is presently working on projects in Chile, Ec- uador, Mexico, Jamaica, Australia, and India. BAA plc is con- sidering participating not only as a consultant but also as a joint venture partner. The percentage of total BAA plc revenues origi- nating from commercial airport revenues plus non-operational airport activities was 70 percent in the 1993-94 period - by far the largest such percentage in the airport industry today (the average percentage of commercial revenues in the selected sample cases is about 40 percent). Heathrow Airport has devel- oped strong retail marketing capabilities through an aggressive expansion of the commercial area. Terminal Four can, indeed, be considered a "shopping mall" with aircraft access gates in- stead of doors. Forty percent of the caviar consumed in Western Europe is purchased at Heathrow; the airport is also the home of 34 Overview PRIVATE SECTOR PARTICIPATION the World's largest Burger King.30 The forthcoming removal of duty-free privileges for EU passengers poses a potential threat to BAA plc's commercial strategy, and the company's manage- ment is seeking alternatives to replace anticipated revenue re- ductions. Heathrow Airport reached its saturation point in 1994 when close to 50 million passengers went through its four ter- minals. BAA plc has begun its campaign to build Terminal Five, increasing capacity to 80 million passengers at a cost of US$1.35 billion. BAA plc has become increasingly concerned about los- ing its position as the world's leading international airport to other European competitors (i.e., Paris' Charles de Gaulle, Amsterdam's Schipol, and Frankfurt and Brussels Airports are all undergoing major expansions). Terminal Five is encounter- ing some resistance in the form of environmental objections, as well as from a public inquiry, ordered by the government in May 1994. (For further details, see Case Study 8, "Airports in the United Kingdom: BAA.") Montego Bay, Jamaica - Sangster International Airport Expansion of the Existing Airport through a Combi- nation of PPI Mechanisms (a Wraparound Addition). The Gov- ernment of Jamaica is using a creative approach through which the entire operation of a public airport is being transferred to the private sector through an array of different mechanisms. Own- ership is to be partially transferred. However, if the program is successfully implemented, it would be, for practical purposes, equivalent to complete divestiture, given the role of the private sector in the scheme. The government, through the Airports Au- thority of Jamaica (AAJ), a public corporation in charge of the operation of the airport system, has for the last four years been working on the expansion of the Montego Bay Airport (Sang- ster International Airport) in order to meet projected traffic re- quirements for the year 2000 and beyond. The funding for the expansion is to come from private sources, and the government has announced its decision to privatize the existing airport op- erations as well as the proposed project expansion. The project consists of two phases: (1) the construction of a new passenger terminal (2.5 million passenger capacity); and (2) the upgrading and rehabilitation of the old passenger terminal, and its integra- 3 Robert W. Poole, Privatization: The Record to Date, The Reason Foundation, 1992. 35 AIRPORT PRIVATIZATION EXPERIENCES tion into the new terminal. The total estimated investment for the two phases is US$104 million. A wholly owned subsidiary of AAJ has been created to hold the government's equity par- ticipation in the proposed private airport operating enterprise. The government plans to hold a minority position (up to 30 per- cent of the equity) in the new private airport operations. A BOO privatization scheme is being used for the ex- pansion project. A new company, Sangster International Air Terminal Limited (SIA Ltd.), incorporated in 1993 as a wholly owned subsidiary of AAJ Holdings Ltd., is to build, own, and operate (BOO) the new terminal facilities at Sangster Interna- tional Airport. Once the capital financing structure for the BOO scheme is in place, SIA Ltd. will have the following equity dis- tribution: (1) at least 70 percent will be in the hands of the pri- vate sector; (2) up to 30 percent will be owned by the govern- ment (through AAJ Ltd.). The articles of association of SIA Ltd. provide for a special share (the golden share concept) to be held by the government, conferring special rights requiring its con- sent on strategic issues (foreign ownership, dissolution of the company, etc.). AAJ will transfer, via a 49-year lease arrangement, the operation of the existing passenger terminal facility and the re- mainder of the landside facilities (car parking, duty free, ground handling, shops and restaurants, etc.) to SIA Ltd. Through the use of this mechanism, SIA Ltd. will effectively have owner- ship and control over the integrated terminal facility. The re- maining airside-related services provided under the present ar- rangements by AAJ (i.e., runways, taxiways, and aprons) will be transferred to SIA Ltd. via a management contract. AAJ will retain ownership of these facilities and will share the airside charges with SIA Ltd. With this arrangement in place, together with the BOO scheme and the long-term lease, the newly cre- ated company, SIA Ltd., will have full operational responsibil- ity for the provision of all airport-related services at Sangster International Airport. SIA Ltd. will start operations during 1996 with the con- struction of the new passenger terminal and the operation of the existing facility. Initially, the operations will be assumed by the AAJ staff to be transferred to SIA Ltd. AAJ is currently holding discussions with international airport operators that have ex- pressed an interest in managing the operations of Sangster In- ternational Airport. (For further details, see Case Study 6, "Air- ports in Jamaica.") 36 Overview PRIVATE SECTOR PARTICIPATION Best Practices Options Although experience with successful airport privatization is rela- tively limited because the trend is recent, the following two op- tions appear as most suitable in fulfilling government objec- tives in the privatization of airport-related activities. 1. Build-Operate-Transfer (BOTschemes) When relatively large investments are required (i.e., a green- field airport project or a large expansion), the BOT schemes (including the different variants, BOOs, BOOTs, BBOs, etc), if appropriately structured, can provide the necessary conditions for the transaction to be successful. In this case a government's main objective is to raise the funding for completion of the project while transferring operational responsibilities to the private sec- tor. Operations will be granted through a Concession Agreement (i.e., a master concession), and responsibility for the funding will be undertaken by the concessionaire according to specific investment commitments outlined in the Agreement. The use of this option maintains government owner- ship of the facilities and thereby limits political conflict. How- ever, lack of ownership of the facilities under construction could become a financial obstacle for the private sector attempts to raise capital funds for the project. Financial institutions could assign a higher than normal contractual and political risk, thus increasing the project's capital costs.31 This is of particular rel- evance in the case of developing countries whose governments lack experience in such transactions. The BOT option for airport infrastructure development is best used when: (1) the facility or activity under consider- ation is independent of the rest of the operations (i.e., a cargo terminal, a new passenger terminal, a fueling facility); (2) the entire airport operation is placed under the BOT scheme; or (3) a greenfield airport project is used. In order to operate airports efficiently it is important to integrate management of the facili- ties (both existing and new facilities) under a single authority. Where a BOT is being considered for expansion of existing air- 31 Contractual risk is the debt service default resulting from the non-performance of contractual obligations undertaken by the governments or their agencies. Political risk is the debt service default resulting from political force majeure. 37 AIRPORT PRIVATIZATION EXPERIENCES port facilities, the use of a Wraparound Addition (i.e., a long- term lease of the old facility to the BOT concessionaire) or a similar mechanism would help integrate the management of the complete operation under the authority of the private conces- sionaire building and operating the expansion. BOT transactions require relatively complex procedures and an array of technical and financial specifications if they are to be successfully implemented. If the government is to pro- mote the use of this type of mechanism for airport privatization, it will need strong institutional capabilities in place, as well as expert advice, before embarking on the project. Figure 2 illus- trates a typical BOT scheme. Figure 2 A Representative BOT Scheme Project Finance Financial Institultons Capital Markers Equity (promoters) { Privatization Process < BOT Concession ' t Revenue Sharingar Cnlaser Plc n Agreement in Concession Fees trategy 8lnnvelnmenis) onairtons o r the Concessyon Debt Services Trar,sactin Design o Invesment Commitments B Dividends + Reinvestments <_ Bidcl2ng Procedures F D 1 I Govemment W GovernnentaAgency ) facilFinancial Institutions pressing need, and private ownershi Provate Concessionair n / ePolicy & Regulation \. < < ~~~~~~~Central Gove:rnm:en8t Source: Morgan Stanley Asia Ltd./ World Bank, CFSPS (May 1995). 2. Full Divestiture (Sale of Shares orAssets) When investment in a new airport facility or expansion is not a pressing need, and private ownership of airport assets is not an important issue in the political debate, full divestiture of the air- port assets is the preferred privatization option. In this case, the 38 Overview PRIVATE SECTOR PARTICIPATION government's main objective is to generate additional revenues for budgetary purposes (i.e., sale of assets or shares) while trans- ferring operational responsibilities to the private sector. Depend- ing on the design of the privatization transaction, divestiture could take place through a trade sale to a strategic investor (a consortium or single enterprise with full majority ownership), or through public offerings via capital markets, or through a combination of both. For an effective stock flotation (a public offering via capital markets), a track record of a minimum threshold level of profits is required, supported by audited financial statements. For cases in developing economies that lack consistent finan- cial reporting and possess relatively small economies of scale, this option might not be suitable in the early stages of the pro- cess. However, a combination of a first phase BOT/BOO fol- lowed subsequently by a public offering of shares from the op- erating company, might result in maximized transaction ben- efits. Under both options, the government needs to strengthen institu- tional and regulatory capacities in order to guarantee a level playing field for all participants and to ensure the degree of con- sistency and transparency necessary for private sector involve- ment in the provision of public services. Governments promot- ing the privatization of airport infrastructure should include the following elements in their policy and regulatory agenda: Expand the scope of airport regulations to include a broader spectrum of economic, competitive, and envi- ronmental aspects beyond the traditional focus on safety and security 0 Establish independent regulatory agencies (i.e., finan- cial autonomy and corporate structure) XM Strengthen enforcement capabilities, in particular those derived from concession contracts, and formalize link- ages within government agencies involved in air trans- port activities X Discourage vertical integration, particularly when it leads to limits on competition • Develop pricing techniques for airport services that are based on economic principles. 39 AIRPORT PRIVATIZATION EXPERIENCES 111. INDUSTRY TRENDS BASED ON RECENT EXPERIENCES N Governments will need to adapt quickly to the role ofpolicymaker and regulator Private sector participation in the air transport sector will continue to accelerate. As of early 1995, the private sector had a majority participation in the airline in- dustry (70 percent of the airlines are private or have a control- ling private sector partnership). This trend has only recently begun in airport-related infrastructure, but as budgetary con- straints became more demanding, governments will shift the re- sponsibility of operations and development to the private sec- tor. Governments will need to adapt as rapidly as possible to a new role as efficient policymakers and regulators by strength- ening their institutional capacities and developing sound and modem regulatory frameworks that facilitate an orderly devel- opment of air transport markets and participants. Lack of public investment increases safety risks and contributes to the deterio- ration of airport services, thus requiring that governments re- think their traditional role as owners and operators. X Private ownership of public infrastructure will in- creasingly become a non-issue in the public debate. Ownership will become less of an issue as the financial mechanisms for infrastructure development evolve and as sound economic regu- lation is in place and government institutions carry out their re- sponsibilities in an effective manner. The concerns about exter- nalities that arise with the private ownership of public infra- structure will be addressed through the legitimate execution of the government's new role. The experiences with private own- ership in British public utilities and the recent cases of foreign ownership in most of the Latin American telecommunications utilities have demonstrated that there is no need for governments to retain ownership as a sovereign principle. i Consumer spending at airportfacilities will increase markedly and become the predominant revenue source.32 Air- port-related consumer spending will tend to increase in the com- ing years as a result of (1) higher airport charges to finance up- grades and expansions of the airport infrastructure, and (2) in- creased profit-oriented private participation. As theprivate sec- 32 Under this definition consumer spending includes the following items: (1) direct airport charges (either paid directly as a departure tax or indirectly through air fares), and (2) expenditures at the airport premises (i.e., duty free, shops, restaurants, hotels, entertainment, etc.). 40 Overview PRIVATE SECTOR PARTICIPATION tor increases its participation the capital costs of investments made in upgrades and expansions will be reflected in airport- related charges (in most of the analyzed cases airports under government administration did not include capital costs in their cost structure). Consumer expenditures at airport premises will also increase as a result of the expanding commercial orienta- tion of the corporatized/privatized airports. In the long run, as traffic increases, commercial revenues (non-aeronautic revenues) will gradually overtake airport-related charges (aeronautic rev- enues) and these commercial revenues will provide the predomi- nant revenue contribution (see Figure 3). Figure 3 Airport life Cycle Curve Developing Countries TrafflC | * Increased capacity of the Growth \ airport system Large porMon of revnues \from airstde chargr&s Relatively high m (simple economic High Traffic Growth regulation) Developed Counries \ Maxrmum revenue base witA Traffic Growth imed passenger growth Matures * Large rton of revenues (complex economic from commecial s _rv regulation) Relatively low Low High Share of Commercial Revenues (out of total revenues) Source: Morgan Stanley Asia Ltd., World Bank (CFSPS), May 1995. Airport-related charges will then level off and, in some cases, decrease in real terms. This is already taking place in BAA plc, and although, given the airport size, the experience is not en- tirely transferable, some indications of future trends can be in- ferred. The commercialization of airports via entertainment expansion is reaching new heights: in 1995 Amsterdam's Schipol Airport will be opening the world's first airport gambling ca- sino - an addition to its existing line of entertainments at the airport site (a computerized golf course, a gym, a sauna, tanning booths, etc.). 41 AIRPORT PRIVATIZATION EXPERIENCES Price competition will not be a driving force in the industry; therefore, well-designed regulation of airport-related charges as well as the necessary institutional capabilities will be needed to facilitate the transfer of airport activities to the private sector Given their character as relative natural monopo- lies, the airports industry will not be driven by price competi- tion. There may be situations in which airlines that want to es- tablish a "hub" operation could be looking at airport pricing as an important variable. Such situations would apply only in the few cases in which there are different well-run airports within a relatively short distance that could compete for those airlines' traffic (airports in the Persian Gulf countries, airports in West- ern Europe for sixth freedom traffic, some airports in the Carib- bean for traffic beyond destination, etc.). However, generally, price competition in the industry will not be a predominant force. Therefore, economic regulation of airport-related charges will have to be carefully designed and institutional capacities will have to be put in place as part of the successful transfer of air- port activities to the private sector. Perhaps the most relevant experience with applied economic regulation of airport charges is the British case, from which lessons can be learned to deal with misconceptions on the development of pricing methodol- ogy. However, within the airport, competition should be encour- aged among the different types of service concessions (landside activities), particularly in ground handling services. Given their impact on an airport's operational performance, ground handling services should not be concessioned on an exclusive basis, to avoid unfair pricing practices and excessive control of the op- erations.33 Healthy competition in the provision of landside ser- vices will improve an airport's performance and consumer sat- isfaction. However, not all landside services can be economi- cally feasible for more than one concessionaire, and economies of scale should be considered when this decision is made. Box 3 depicts a case for future competition among airports. 33 Iberia, the Spanish government-owned airline, until recently possessed exclusivity in the exploitation of ground handling services at airports in Spain. On November 1994, during labor negotiations between Iberia and the Spanish Government, the ground handling services were part of the airline's slow-down operation affecting airport per- formance during that period. 42 Overview PRIVATE SECTOR PARTICIPATION Box 3 A CASE FOR FUTURE COMPETITION AMONG AIRPORTS By 1998, live sizable modern airports will lie within a 75-mile arc radiating from Hong Kong to within mainland China through the Pearl River Delta. Kai Tak (later Chek Lap Kok), Guangzhou, Zhuhai, Shenzen, and Macao Airports will offer a combined capac- ity of approximately 70 million passengers/year and 1.5 million tons/year. Hong Kong's airport will account for the leading share of traffic (50 percent of passenger traffic and 85 percent of cargo). These five airports will compete for traffic in and out of mainland China once their respective expansions or new constructions become operational. However, if the pace of growth in this part of the world is sustained (i.e., between 15 and 20 percent annual growth) and airport construction experiences common delays. the competition among airports will be reduced by the spillover effect of the facilities that are near saturation. Even if the five airports are completed by 1998, competition among them will be based more on adequate capacity and the ability to handle pas- sengers and cargo than on level of landing fees unless there is an extreme difference regarding airports pricing policies. CHINA :-.1 . earl River Delta Kong Airport efficiency in handling passengers and cargo, and the timely expansion of airport capacity, will drive com- petitiveness in the industry and its impact on economic growth. Airports are driven by the expected demand generated at desti- nation points including the traffic flows of passengers going through a hub connection. In this respect, the airports' ability to foresee the need for timely capacity increase, and their efficiency in handling traffic through facilities, will become the predomi- nant driving force in the industry. Airports are becoming a key component in government's growth strategy targeting the de- velopment of the tourism and trade sectors. East Asian airports provide a remarkable example of the contribution of infrastruc- 43 AIRPORT PRIVATIZATION EXPERIENCES ture projects to economic growth (see Box 4). East Asian air- ports illustrate two key elements which are particular features of airport development and privatization strategies in fast-grow- ing economies: (1) the government perception of the private sector as ill-suited for airport development management because of a bias toward short-term financial rewards rather than long- term economic growth; and (2) the selection of a privatization Box 4 CHEK LAP KOK AIRPORT, HONG KONG The Govemment ot Hong Kong has embarked on one of the most ambitious transport infrastructure development programs in the world today. the Airport Core Program (ACP). The total cost of this mega-infrastructure project is estimated at HK$158 billion (ap- proximately US$21 billion), and its main component pivots around a new airport devel- opment (i.e., Chek Lap Kok) intended to replace the exisling Kai Tak Airport. The ACP consists of 10 interdependent projects with completion dates interlinked around the airport opening in late 1997. The implementation of the 10 projects is being coordinated by the New Airport Project Coordination Office (NAPCO), which has been set up under the Hong Kong Govem- ment with an integrated team of government and consultant staff to act as project man- agement advisers. In 1989 the Government of Hong Kong created the Provisional Airport Authority (PAA) as a statutory corporation. wholly owned by the government, to build and develop the new airport at Chek Lap Kok. Legislation was prepared and sub- mitted to consultations with the Chinese authorities (i.e., the Sino-British Memorandum of Understanding) for the creation of the Hong Kong Airport Authority, a government authority with the responsibility for operating and administering the airport-related ser- vices at Chek Lap Kok. The Airport Authority ordinance was enacted by the Governor of Hong Kong on July 27, 1995. Once the new airport authority is created, the personnel and operations of the PAA will be transferred to the new institution. When construction reaches its peak by the middle of 1996, more than 20.000 workers will be in the airport island. The airport is expected to be open in April 1998. The ACP will be Hong Kong's most important infrastructure development if Hong Kong in helping maintain its competitive edge as a major "commercial hub" of the East Asian region. The project will replace the existing airport, which has reached tull operational capacity (only one runway) and is severely limiting the increase in both passenger and cargo traffic.' The project will integrate intermodal transport facilities (airport, highway, railway, and port) in the Kowloon/New Territories area and will later connect to main transport links with southem China (i.e., the Guangzhou region). Tne ACP is being jointly financed by the Govemment of Hong Kong and the private sector. The govern- ment is contributing HK$113.3 billion (approximately US$14.8 billion) in equity invest- ments and public works, and the remainder (HK$44.9 billion, or about US$4.3 billion) is being contributed by the private sector in the form of equity investments. commercial lending. and project finance (i.e., BOOT for the Western Harbor Crossing Project). Tne CivilAviation Departmeni eslirrales Iat between 30 and 40dai tight peitions h,a.e been rerected during 1994. 44 Overview PRIVATE SECTOR PARTICIPATION mechanism at project completion rather than at project start-up, which results in more rewarding financial proceeds and favors a long-term strategic view in building airport capacity. Airlines will tend not to integrate vertically into air- port ownership. As part of the present report, a survey of airline views on airport facilities was conducted in October 1994. Given the importance of airlines as primary airport customers and their influence on government policymakers, it was considered nec- essary to include their views regarding airport privatization.34 The impact on airlines of the recent airport privatization trend has not been fully explored. Evidence from the survey suggests that there is growing concern among airlines regarding the im- pact that airport privatization could have on airport charges, given the profit-oriented nature of a private business. Survey results, together with experiences from the sample cases, appear to in- dicate that airlines are not eager to expand their roles in airport ownership and management (i.e., airside services and terminals) as part of their future growth strategies. It would appear that keeping up with the pace of technological changes in aircraft- related equipment will consume the lion's share of airline cash resources in the near future. Only in cases where carriers can have access to their own gates and terminal facilities (dedicated terminals) is participation in management and investment of air- port infrastructure considered. This is the case, particularly with the United States, given the unique relationship between air- lines and government-owned airports (e.g., Delta Airlines in- vested US$375 million in late 1994 in the construction of a new dedicated terminal facility at Cincinnati/Northern Kentucky Airport to be used as a hub to compete with Chicago).35 For further details on the airline survey, see Technical Annex 1. Efficient airport corporations will become global operators. Air transport is one of the engines of industry global- ization, and airport operations are an important component of that engine. Global operators of airport-related activities are beginning to appear as air transport evolves into the next cen- tury. Even now, airport operators in Europe and to a lesser ex- tent the United States are starting to transfer airport technology and services to developing economies (examples are BAA plc, Aroports de Paris, Aena, and Lockheed Airport Division). In I The survey consisted of a written questionnaire mailed to 60 carriers providing worldwide services. Responses were received from 20 airlines. 35 Delta itself issued more than US$500 million in special-facility revenue bonds for this and related projects. 45 AIRPORT PRIVATIZATION EXPERIENCES the coming years, airport and related services (duty free, cargo handling, ground services, etc.) operators will become more glo- balized, with partnerships in different countries and with more uniform products or services to offer the end-consumer. For example, a subsidiary of Munich Airport Cargo developed and operates a new cargo terminal (60,000 tons capacity) at Shen- zhen Airport Corporation in Southern China, and Aldeasa, a Spanish duty-free operator, operates concessions at Lima's In- ternational Airport in Peru, Santo Domingo Airport in the Do- minican Republic, and Tangier Airport in Morocco. IV. LESSONS FROM RECENT PRI\VATIZATION _TRANSACTIONS ___ _ X Corporatization of airports is a useful first step to improve airport performance but is not a substitute for a well- designed privatization. In most of the analyzed cases, the gov- ernment decision to privatize airport activities was heavily in- fluenced by lack of funding for modernizing facilities and by weak public management capacities for operating airports and their activities. Airports, like other activities in the air transport sector, are dynamic industries in which expedient decisionmak- ing and implementation are well rewarded through efficiency and market gains. The public sector is ill-prepared to deal with the dynamics of this type of service industry, even more so when airports are operated through central government agencies rather than through autonomous government corporations. Corporati- zation of airports is a positive step in the evolution of government's role in the provision of public services, but is only a first step. The more the role of government can be confmed to regulations and policymaking activities, the more the gains in industry dynamics will benefit airport operations as a whole. i Cross-subsidies among airports will need to be ad- dressed and explicit mechanisms established before the trans- action. As previously mentioned, not all airports are financially attractive. There is a threshold of traffic volume that varies ac- cording to traffic type, airport size, and investment costs that must be considered when a financial transaction for airport priva- tization is designed. (For further information, see Box 5.) 46 Overview PRIVATE SECTOR PARTICIPATION Box 5 AIRPORT ECONOMICS - TRAFFIC THRESHOLD LEVEL Airports are a cash-generating business. After a threshold traffic level sufficient to fully pay capital costs is reached airports can be a lucrative business. Airports resemble a business complex with different sources of revenues (aircraft-related charges, pas- senger taxes. services charges. consumer expenditures. rentals. concessions, etc.) and three main types of expenses: (1) labor costs, (2) operational costs (maintenance. repairs, services, etc.). and (3) capital costs (financial costs and depreciation). If air- port operations are well structured and investments are properly planned and ex- ecuted, airports beyond a minimum traffic level will make money. However, not all airports are economically viable. Secondary airports catering primarily to domestic trattic have more difficulties reaching their threshold traffic level than do international airports. and there are some cases, particularly in developing countries. where there is a need to maintain domestic airports that will not reach their threshold level for many years. This is one of the key components to be considered in the design of the privatization scheme for a national airport system, where the international airports in the system generally cross-subsidize the other airports. In an attempt to illustrate the * economics of an airport and to provide a profile of the threshold traffic level needed to generate positive cash flows, a financial simulation model was developed in the con- text of this report. For international airports the traffic threshold level needed to start generating positive cash-flows appears to be between 1 and 2 million WLU per year, For further details on the data and results of Ihe financial model. see Technical Annex 2: Airport Economics. WLU = Woiking Load Unil laquivalenl Io one passenger or 100 kg ot cargol. The following options could be utilized in the privatization of airport systems that include financially unattractive airports: Include (package) profitable and unprofitable airports in the privatization transaction. Government is left only with the roles of regulator and policy maker thereby reducing Government bureaucracy to a minimum. How- ever, the privatization transaction is less attractive from the financial point of view and reduces the amount of investment commitments and potential participants in the bid. _1 Include (package) only the profitable airports in the privatization transaction. Cross-subsidize the rest of the airport system with concession fees from the privatiza- tion transaction. Project cash flows, investment com- mitments, and potential participants in the bid are maxi- mized by this approach. However, Government is left as the operator and manager of the unprofitable airports. Government administers concession fees (bureaucracy). 47 AIRPORT PRIVATIZATION EXPERIENCES Separate into two privatization transactions: (1) pack- age profitable airports and (2) auction management and operations of unprofitable airports to bidder requesting lowest subsidy. For transaction (1) cash flows, invest- ment, and bidders are maximized while for transaction (2) operation and management responsibilities are trans- ferred to the private sector. However, Government is left with the role of administering subsidy payments to private operators. * The decentralization ofairports should be sequenced in line with the development of local institutional capabilities. The decentralization of airport administration is a necessary step in the evolution of the government role in the provision of pub- lic services as well as in the process of political reform. How- ever, when the privatization transaction of a national airport sys- tem is being designed, careful consideration should be given to the existing institutional capacities at the local/regional govern- ment level, so that the privatization process can be successfully completed. Frequently, governments are tempted (for political reasons) to accelerate the decentralization of infrastructure-re- lated services, but if local/regional institutional capacities are not adequate to handle a privatization process, the consequences can be unfortunate. In such cases it is better to implement the privatization process before decentralization and, after that, to initiate the transfer of government responsibilities to the regional/ local authorities. A well-designed privatization will generate private funding for airport expansion. After an economic threshold is reached (traffic volume), airport construction or expansion ef- forts should be able to access private funds (equity and debt), provided the privatization model (the transaction) is well de- signed and structured. Key factors deterniining access to pri- vate sector funding include: (1) the conditions of the concession (length of time, fees, penalties, etc.); (2) the quality of the air- port operator; (3) the definition of management responsibilities (degree of autonomy); (4) a clear and reasonable economic regu- lation scheme; and (5) an equitable distribution of risks (con- struction risks, commercial risks, contractual risks, and politi- cal risks) between government and the airport operator. The privatization of an airport facility is essentially the sale of a fu- ture cash flow; actions to safeguard the future cash flow and enhance its risk perception will help optimize the private fund- ing options of the project. Box 6 provides a summary of the components of an airport privatization program. 48 Overview PRIVATE SECTOR PARTICIPATION Box 6 AIRPORT PRIVATIZATION PROGRAM - KEY COMPONENTS There was ro evidence during the course of our research that governments were folloving a similar pahtern when privatizing their airport operations. or that a comrron approach to strategic decisions was shared among them Funding needs for upgrades and expansions coupled with budgetary constraints vias the only consisterit pattern among govemments privatizing or having privatized their airport operations On the basis of our findings regarding the recent airport privatization experiences (completed and in progressl the following summary is provided of the key components of an airport privatizaton program and the type of expertise required for successful implerrientation. Key Components Type of Expertise 1 Master Plan. An analysis of trie national airport system includirng. (11 Specialized Consuli,ng financial modeling of the elements in the system fi e.. air navigation ser- Firm in the field of air- vices, profitable airports. unproftable airports civil aviation authoritv. etc I port planning (2) traffic forecasts: and i31 investment needs. I 2. Restructuring Study. Separation of air navigation activities from airport Specialized Consulting activities (if necessary). Definition of airport activities to be privatized (i e., Firm in the field of sec- airside, landside, or complete operation). Packaging of airports to be priva- ior strategic analysis tized (i.e.. profitable airpons. unprofitable airports. greentield prolectis etc.) and planning Definition of the cross-subsidies mechanism. Future cash-tlow of the sys- tem under the proposed privatization arrangement 3. Analysis of the Institutional and Regulatory Framework. Diagnosis of Specialized Consulting the institutional capabilities of government agencies (i.e . civil aviation au- Firms in the field of hority, regulatory agencies. etc.] Adaptation oG existing regulations Io pri- regulatory anra instlu- vate sector participation in Ihe provision of airport services. Detinitic.n cf tional ecoromics pricing techniques and formulas for sound economic regulation. 4. Design and Implementation of the Privatization Transaction Pnvati- Financial Adviser. In- zation option to be used (i e.. BOT, sale of assets, multiple seRvice conces- vestment Bank wvith sions, management contracts. etc) Financial design ot the transaction li.e . experienice in irfra- airport revenues, prcing tormula. concession fees. level of invesimenis, structure transactions debt capacitl. etc.l. Bidcling process (i e.. sales memorandum, bidding con- ditions, marketing process. etc.) Completion of the sale (i.e transfer of assets, signing of the concession contracIt etc.) | Transparent processes have a higher payback. As with other infrastructure sectors, the use of transparent and com- petitive mechanisms (public bidding process, adequate dissemi- nation of information, etc.) to accomplish the privatization of airport-related facilities will tend to increase the economic value of the transaction as well as goodwill for the project. Cases in which, because of previous circumstances, governments have been restricted to negotiating the privatization of airport-related facilities with one partner have not provided the maximum ben- efits to the society as a whole and often have not contained ap- 49 AIRPORT PRIVATIZATION EXPERIENCES propriate incentive mechanisms for future investments; thus they have also run the risk of being reversed because of perceptions of unfair practices. The private sector will become a leading player in financing and operating airport infrastructure during the coming years. Governments, particularly in developing economies, will have to rely increasingly on private sourcing of funds to bring their airport infrastructure up to the market's growing demands as deregulation and globalization affect the air transport sector. Gov- ernments in developing economies will have larger constraints placed on their budget expenditures as social investment needs become more acute. However, for these economies, airport in- frastructure development will be crucial to their efforts to be- come members of the global economy. These governments face the challenge of designing and inplementing creative privatiza- tion schemes and innovative financial mechanisms for their in- frastructure needs. This will prove crucial in facilitating the flow of private capital and private management to airport operations while economic traffic threshold levels have not yet material- ized. The ways in which this challenge is met will determine which economies will hold a competitive edge in the air trans- port industry. 50 Case Study 1 BOLIVIA AIRPORTS IN BOLIVIA A CASE STUDY OF AIRPORT PRIVATIZATION IN SMALL-SCALE MARKETS1 Bolivia, a landlocked country with a large territory equivalent to that of France and an irregular topography, relies heavily on air transportation for internal and external communication links. It is reversing a history of inward-oriented policies with regard to the air transport sector. Given its strategic location with re- gard to larger air transport markets (i.e., Argentina, Brazil, and Chile), Bolivia has the option of becoming a regional hub pro- vided that an appropriate institutional, legal, and regulatory framework can be established. Prior policies, which contrib- uted to isolating the sector from the rest of the world, assumed a bolivian inability to compete. The new course taken by the Sanchez de Lozada government attacks the root causes of inef- ficiency by reforming the institutional and regulatory frameworks while encouraging capital inflows. In 1993, as part of its economic reform program, the Government of Bolivia initiated an ambitious program of pri- vate sector participation in the nation's infrastructure needs. The Capitalization Program, an integral part of the reform process, involves awarding shares corresponding to equity increases in state-owned enterprises (SOEs) in exchange for contributions 'Research for this case was conducted between October 1994 and June 1995. 51 AIRPORT PRIVATIZATION EXPERIENCES (i.e., cash, equipment, management services, or a combination).2 The strategic investor obtains full management prerogatives and equity ownership normally equal to the actual value of the com- pany to be capitalized (up to a maximum of 50 percent). Half of the value of the newly capitalized company becomes the strate- gic investor's equity share. In accordance with the Capitaliza- tion Law, the shares representing the other half of the company will be distributed on an equal basis to all adult Bolivian citi- zens. These shares will not be given directly, but will be placed in deferred distribution accounts managed by private pension funds, to be withdrawn at retirement. It is envisioned that the shares will stimulate a new privately run pension system and foster domestic capital market growth. Airports have traditionally played a key role in the de- velopment of the regional economy, and in some inaccessible areas they continue to be the only viable transport mode. Con- straining the government's flexibility in reorganizing the sys- tem are dozens of small, loss-generating airports that neverthe- less serve a vital national purpose. These airports have to be subsidized and are not sufficiently attractive to lure private in- vestment. Three large airports, two of which (La Paz and Santa Cruz) are profitable, raise questions as to what type of cross- subsidization would most effectively balance the interests of the profit-oriented private sector with national political interests. The Government of Bolivia has opted for a build-oper- ate-transfer (BOT) scheme for the development and privatiza- tion of the three major airports because of the urgent need for major investment in the La Paz and Cochabamba international airports, as well as ownership considerations in a sensitive sec- tor. The government is considering the creation of an Airport Development Fund (ADF) to manage the concession fees from the BOT that will finance operations of non-profitable airports. Although the Bolivian privatization experience is still in pro- cess it is of notable significance for airport privatization in de- veloping countries because it addresses the cross-subsidization issue within a small-scale market context. The airport consult- ing division of A6roports de Paris (ADP), hired by the govern- ment to undertake an analysis of the national airport system, found that the existing capacity had not been managed well by Administraci6n de Aeropuertos y Servicios Auxiliares de Navegaci6n Aerea (AASANA). Furthermore, facilities had de- 2 The eventual capitalization of YPFB (hydrocarbons), ENTEL (telecommunications), ENDE (electricity), ENFE (railways), LAB (airline), and EMV (smelter) is contemplated. 52 Case Study 1 BOLIVIA teriorated and security and safety compromised prior to the priva- tization decision. In addition, ADP's projections of future air traffic flows (see Figure 1.1) support forecasts and expectations for future constraints on the air transport sector's infrastructure. In view of the need for managerial improvements in the sector (analyzed later in this study) and future requirements for rela- tively large investments, the government decided to reform the air transport sector, an undertaking it initiated through the capi- talization of the national flag carrier and principal passenger service, Lloyd Aereo Boliviano (LAB),3 and aims to follow up with a restructuring involving breaking up AASANA's monopoly on all facets of airport sector policy establishment and imple- mentation. 80 - Figure 1.1 -0 --______ _- .-- ___-- -- . Bolivia: ProjectedAir Traffic Flows, 1993-2020 g 60 ,, __ _ _ __ i ____ ~.o o I E 2.0 *30 0.0-;1111 WIL _EI I 1993 2000 2005 2010 2015 2020 Actual Projected Year 13 Domestic Passengers * International Passengers Source: ADP, "Pian Maestro del TransporteAereo de Bolivia: Informe Final," May 1995. Which should take place in late 1995. 53 AIRPORT PRIVATIZATION EXPERIENCES ECNI [ - -d 2 A !8 ' . . 9 XC ~~~~. . -*- BRA2IL - 1.1 a ~~~~I / 4 -_ P KBOLIyA _ '-I< Air Ntavigation Authorityis3t , r : ,l - 90% (AASANA ll) autonomy) Air Traffic Control Funding of Secondary Airports Concession fees Funding of operationsl x°/o F - 'investments Airside charges 100 r - Private Airport AASANA (V3 years) Landing fees Operators Operat Passenger fees 100%> La Paz (LPZ) Secon eray tr Passenger fees ~ ~ Cochabamba (CBB) (transfer to Local Atoiis Santa Cruz (SCZ) Commercial revenues BOT mechanism 25-30 years Master Concession Legend I Economic regulation _~ =Regulatas U (on L. Fees & P. Fees) _ = Govemment Institutions Freedom on commercial concessions w_ Fnanil sty Total= US$170 million (25 years) = Pt vate Sector Total= US$50 million (first S years) Note: Under the model, AASANA's debt (US$86 million) is assumed by the Government of Bolivia. Source: Ministry of Capitalization, Air Transport Group, July 1995. Ministry of Economic Development, Resolution No. 67, May 2, 1995. 69 AIRPORT PRIVATIZATION EXPERIENCES IV. ECONOMIC PERFORMANCE A. AASANA Between September and October 1994, ADP performed an ex- tensive analysis of AASANA's financial situation. Attempting to gauge AASANA's financial situation proves difficult because the accounting results lack the requisite certification by an au- diting firm. Furthermore, AASANA does not possess a cost ac- counting system. However, certain observations did emerge from ADP's analysis. AASANA's revenues covered operational costs but did not produce the necessary annual surplus to pay for planned capital costs or investments. AASANA's rev- enues could not finance annual investment needs, esti- mated at US$240 million for the 1994-2000 period, or debt service for an outstanding debt of US$76.2 mil- lion. AASANA claimed that if it had to include debt servicing in tariffs, a landing would cost approximately US$5,600 for a Boeing 727-100. The inability to self- finance operations is normal for an airport system lack- ing in economies of scale; nevertheless, investment needs are urgent since a large part of the equipment, runways, etc., has become obsolete, resulting in safety concerns. Table 1.3 illustrates AASANA's economic performance excluding government transfers. Air navigation charges (landing and overflight fees) provide a surplus that compensates for the airport divi- sion losses.'2 0 Some self-financing could occur and the current situa- tion could be improved by cutting down on the loss of passenger airport charges revenues. AASANA's lack of transparency makes it difficult to hazard a guess as to the reason behind the revenue shortfall. According to passenger flow figures, passenger airport charges should result in a revenue of 26.3 million bolivianos, but the 12 For purposes of this analysis, ADP allocated 100 percent of landing fees as part of the air navigation revenues. 70 Case Study I BOLIVIA Table 1.3 Bolivia: AASANA's Finances - Inability to Cover Investment (bolivianos OOOs)' AASANA Air Aeronautical Regions Total Navigation Airports La Paz Cochabamba Santa Cruz Trinidad Aeronautical Inflows 55.175 32.935 22.780 14,379 6.911 17.033 1.492 Landing Fees 12,803 12 803 0 4,058 1.02 76 6,757 705 ight.'lWeevend Exlra Charges 1 612 1.612 0 596 98 913 5 Airciaf Parc,ng 127 0 0 70 48 2 PasserngerFee; 22653 0 22,653 1.271 128 1.431 1 In houSe Navigation Aid 18,520 18.520 0 8|,84 5.606d 7.8,, 9 Ground Handling 2,532 0 2.532 1,218 0 1,314 0 Commercial Revenues 9.402 1,514 7,888 3767 576 4759 257 Vehicle Paiking 1.025 0 1 025 317 39 625 4- Cornrr,ffir,1i.I:rl:,vs 5.378 0 5.378 91 12 446 2,965 155 Various 7.c444 1514 1485 1638 91 1169 e5 Total Inflows 67,649 34.449 33.200 19,364 7,487 23,106 1,776 Osf I Personnel 41.330 23.223 18.107 12.106 5.895 14.371 3.351 Services & Maintenance 11,834 1442 13,164 3,052 1,115 2,322 1,042 Materials & Supplies 8.214 2.417 5,792 2.815 1,086 2,758 778 State Taxes & Fees 5 1 4| 0 0 0 5 Total Outflows 61,378 27.416 33,962 18,382 8,297 19,925 5,267 Cash flow Operations 6,271 7,033 (-762) 982 (-811) 3,181 (-3492) ' US$1 = 4.70 bolivianos (May 1995). Source: ADP, ""Plan Maestro del Transporte Aereo de Bolivia: Informe Final," May 1995. actual figure is 15 percent lower (see Table 1.4, follow- ing page). However, even in the case of full collection of revenues there would still be insufficient funding. AASANA's financial performance is closely linked to that of the airports it administers. ADP found that the most viable way to compare amongst Bolivia's airports was to compare personnel costs in relation to total in- flows. Personnel costs account for 64 percent of air- port system outflows. An analysis of the airports dem- onstrates that personnel expenses are covered only by the larger airports. The rest of the airport system does 71 AIRPORT PRIVATIZATION EXPERIENCES Table 1.4 Bolivia: Theoretical | La Paz 9890 8.384 1,506 versus Actual Revenues from Passenger Fees Cochabamba 3.654 5.606 [1.952] (bolivianos OOOs) Santa Cruz 12,051 7.884 4.167 Trinidad 661 779 [118] Total 26,255 22,65 3.602 'Theoretical revenues are the revenues that should have been perceived in accordance with the number of passengers that used the airports and were legally obligated to pay the pas- senger fee. Source: ADP, "Plan Maestro del Transporte Aereo de Bolivia: Informe Final," May 1995. not reach the threshold traffic levels to cover personnel costs. Cross-subsidization would be necessary in Bolivia's case until traffic levels reach an economic threshold"3 (see Table 1.5). Personnel Airport Use Table 1.5 Airport Costs Inflows Difference Cross-subsidization Al Needs in the Bolivian | La Paz 3.553 9,877 6.324 Airport System Santa Cruz 6,264 11,931 5,668 (bolivianos OOOs) Tarja 265 729 464 Trinidad 186 499 313 Sucre 246 544 299 Cochabamba 2.216 2.326 110 28 loss producers 2,800 349 [2,451] Total 15,629 - 26 - . 10126 Source: ADP, "Plan Maestro del Transport Aereo de Bolivia: Informe Final," May 1995. B. ADP's Financial Model ADP constructed a financial model for the Bolivian airports case (see Figure 1.5). For the three largest airports the model calcu- lates the outflows and inflows for each airport under the master concession scheme and therefore the amount of autofinancing (inflows minus outflows) before interest and taxes. The model takes into account foreseeable investment for each of the three airports and calculates the internal rate of return for them as a whole. 13 For some airports located in relatively low density areas, cross-subsidies may always be required. 72 Case Study 1 BOLIVIA Figure 1.5 Bolivia: ADP's Financial Model ( Passenger Related < Operatonal Costs ADP Model Cas Ca:h OW ash Flov (MB) (ANA) | ADFI | Rest of Source: Airport Privatization Study, Case Studies, CFSPS, October 1995. ADP's simulation tested various economic scenarios for the key variables and found that the internal rate of return is particularly sensitive to (1) changes in the level of concession fees paid to the ADF, (2) the percentage of landing fees shared with ANA, and (3) the level of domestic passenger fees. The model demonstrated that even under various different assump- tions the project for the three largest airports had a positive in- ternal rate of return while the medium and smaller airports had a negative internal rate of return. On the basis of market as- sumptions and the desired level of investment, the model indi- cates the estimated levels of cross-subsidization in the Bolivian airport system. (See Annex 1.1, Financial Model.) The three large airports (La Paz, Santa Cruz, Cocha- bamba) could interest investors because of their potential prof- itability. These airports, under all the variable values consid- ered, demonstrate a positive internal rate of return. For this rea- 73 AIRPORT PRIVATIZATION EXPERIENCES son, these airports could be concessioned off and the revenues could be used to subsidize the operating costs of the other un- profitable airports in the Bolivian Airport System. C. Cross-subsidies The Bolivian Government was faced with a situation in which three large airports accounted for 80 percent of total domestic flows and two of them (Santa Cruz and La Paz) accounted for 97 percent of total international air transport system flows. Ob- viously, it is these airports that are attractive in the eyes of pro- spective investors. However, there is a tangible national interest in developing an air transport system that ensures adequate fi- nancing for the smaller airports as well. Once it was understood that cross-subsidization was necessary (at least for the initial project period), the question became the kind of cross-subsidy mechanism that should be selected (see Table 1.6). Table 1.6 Bolivia: Cross- subsidization Options in Airport Privatization A. Include pack.~get profitable and Govemrnent left only *ith the roles of Privatization transacfion is less attractive unprcftlable a,rpons ,n the regulator and polcymaker. Govemmenl from the financial point of view. Reduces prvailzai,on ir 3n--acrion bureaucracy reduced to minimurri level. the amount of investTenlt commitments. Reducws the number of potenial part- icipants in the bid. B Inrlude ipa:lAoeel onily the prof Maximizes project cash ftoyls Increases Govemment left wh operator andl manager itable airporls in the pnvat'zaron the amount of investment commitments. role for unprofitable airporls. Govemrnent ransacrionr, cromssubsidize rest Increases the number ol potential part- has to administer concession fees fbur- of airport stsiem rinrough aor'- ,cipants in the bid. eaucracyl. cOss,,n fees from rla privat- Zarcin transaction. C Separalte int- t*o diflerenr pr,y- For iransacl,on (1 . same as optin B. Governrent is shit left with the role of arllalon rransacrions. (li package For trarsaction 12) transter operation administerrnq subsidy payments to profitable arpcons and 1271 auction and management responsibities to private operalors managr-meni arid operations of privaie seclor. unpro.litable airpons lo bidder requue5lrng li:jweir eubswVi Source: Airport Privatization Study, Case Studies, CFSPS, October 1995. The government chose to package the profitable air- ports together, privatize them in exchange for concession fees, and cross-subsidize the small and medium-size airports through concession fees. This option was selected in order to maximize the attractiveness of the project by providing the largest cash 74 Case Study 1 BOLIVIA flow, and thereby obtaining the highest number of bids. The con- cession fees will be collected by the AAB and transferred to the ADF; from there they will be channeled to fund the operations and investments of the smaller airports. It is envisioned that in the future authority over the smaller airports will be given to the local governments. The regional entities would select the op- erator requesting the smallest subsidy to manage the airports. At that point, the ADF proceeds would be used to fund these subsidies. V. KEY ISSUES EMERGING FROM THE BOLIVIAN EXPERIENCE (PRIVATIZATION PROGRAM IN PROCESS) Shift toward Outward Orientation. The case of Bo- livia is that of a nation that over the course of decades found itself increasingly isolated from the global community. The poli- cies undertaken since the 1985 bout with hyperinflation are an attempt to restore Bolivia to the world arena. The reorganiza- tion of the air transport sector, which involves the capitalization of LAB and the reorganization of the entire airports system, is a part of this new policy. Bolivia's historical insular develop- ment strategy and protection of the air transport sector from for- eign competitive pressures led, at least partly, to an inefficient airline, high prices for services, unsafe airports, and debts. Study- ing the results and methodology employed in the Bolivian reor- ganization will contribute to facilitating future reorganizations of nations with air transport sectors that find themselves in similar situations. AASANA's Black Box. The in-depth investigation of the Bolivian air transport sector, undertaken to ready the sector for an eventual restructuring and privatization of certain func- tions, confirmed the poor functioning of AASANA. It became clear that AASANA's lack of corporate governance, stemming from its total independence of means and policymaking and its control of numerous functions usually divided among different bureaucratic governmental and private entities, had led it to ac- cumulate large debts while, at the same time, creating a situa- tion rife with security and safety concerns. The lack of transpar- ency combined with the inefficiency of AASANA's affairs pre- vented it from achieving positive financial results by producing 75 AIRPORT PRIVATIZATION EXPERIENCES widespread inefficiencies. For developing nations seeking to restructure or modernize their air transport sector, the regula- tory, policymaking, airport, and air navigation services func- tions should be separated, and an appropriate regulatory frame- work instituted. Government entities such as DGAC must be given financial autonomy. i Institutional Strengthening. The Bolivia case illus- trates the negative consequences stemming from a weak institu- tional structure. Bolivia's weak air transport sector institutional framework led to a deterioration in safety and security (made evident by analyses of airport infrastructure, accidents, training levels, etc.). Unfortunately in today's interrelated world, with its many international regimes, domestic issues can have grave international repercussions. Bolivia's failure to ensure compli- ance with ICAO-mandated regulations led to problems with the U.S. FAA, which sees its role as ensuring compliance with these standards. This failure, in tum, threatened to derail prospects for privatizing LAB and the national airport system, thus high- lighting not only the interrelated nature of air transport sector policies within nations but also the interrelated aspect of the components that constitute a country's air transport sector. X Cross-subsidies. One of the characteristics of national airport systems is that only the very large airports tend to obtain the volume of traffic necessary to derive economies of scale and therefore make a profit. Most airports within a country tend to be small and therefore unprofitable. In the case of relatively large (in area) developing countries, maintaining these small but in- efficient airports in operation is of great national interest be- cause these airports are often the only links between underde- veloped and developed national areas. In the case of Bolivia, geographical factors make it impossible to link many areas of the nation through railways or highways and therefore the bur- den of preserving the integrity of the nation-state falls on the air transport sector. Once cross-subsidies are accepted as explicit, the question becomes: what kind of cross subsidy mechanism? When considering whether to package profitable airports together or to combine them with smaller airports with little profitability potential, a government must consider the following: 'A Whether to attach more importance to maximiz- ing the amount of cash flow and bids and mak- ing the package more attractive by limiting it to the large, profitable airports 76 Case Study 1 BOLIVIA j Whether to assign priority to limiting govern- ment involvement in administering cross- sub- sidies by privatizing small and large airports together. The decision about how to package the airports has a large im- pact on the system's cross-subsidy mechanism. 5 Suitability of BOTArrangements, Design, and Con- tractual Guarantees. Given that a trade sale or a stock flotation did not appear suitable for the Bolivian case under the present circumstances, the use of a BOT was chosen as a more viable and sustainable privatization option. Concerns about ceding ownership in a public service that has high externalities and that is often considered a part of the nation's security apparatus make it politically difficult to attempt a privatization under more con- ventional forms at the present time. A BOT effectively avoids direct confrontation on the ownership issue. Countries contem- plating the use of a BOT to concession off the operation of air- ports should consider a number of factors which have been of obvious concern to the Bolivian authorities and ensure that the BOT's terms of reference: Specify the amount of investment as well as the required technical specifications to be under- taken by the concessionaire. 'A Elicit the maximum possible response, without sacrificing issues of importance to the national interest, from name-brand airport operators with a serious, reputable track record and with the financial backing necessary for a project of such magnitude. j Specify the economic regulatory environment. This should provide a balance between private and public interest. Contain clearly defined rules with respect to contractual and political risks, specifying the obligations and compensatory procedures to be followed in the event that either party fails to observe the terms of the contract.'4 14 Contractual risk is the debt service default resulting from the non-performance of contractual obligations undertaken by the governments or their agencies. Political risk is the debt service default resulting from politicalforce nmajeure. 77 AIRPORT PRIVATIZATION EXPERIENCES J Include a reference to the ways in which con- tractual and political risks will be assessed and covered. This would enhance private sector per- ceptions regarding the project and therefore would lower the costs associated with risks. The clearer, more explicit, and specific the terms of reference are, the greater will be the benefit accruing to the parties con- cerned. M Air Transport Deregulation. The results of opening up the domestic air transport sector to other competitors (i.e., Aerosur)'5 seem to demonstrate that (1) competition brings about positive results in terms of an improved overall service, and (2) the Bolivian domestic market may not derive the necessary economies of scale to make it sufficiently viable for competi- tion between domestic interests to take place. The latter point is illustrated by the financial difficulties that have beset Aerosur, as a result of fierce competition for market share of the domes- tic air transport market. A solution, endorsed by the ADP study, to problems originating in the limited size of the internal air transport sector market would be to adopt a more widespread "open skies" policy and become part of a larger regional market.'6 The expanded market implicit in a successful insertion of Bolivia into the larger Latin American market (Bolivia s neighbors include Argentina and Brazil) would create economies of scale essential for a sec- tor with large investment needs and long-term financing recoup- ment periods. Furthermore, Bolivia's central position within South America encourages its prospects of becoming a regional hub that could benefit, through increased competition, from flights passing through Bolivia. However, while Bolivia's larger cities would benefit from this arrangement, airline service of- ferings to the more remote and less densely populated regions remain limited. Airports in these areas will remain unprofitable; the best option might be to auction off the operation of these airports to the bidder requesting the lowest compensation. There- " Supreme Decree 21060, 1992. 16 Bolivia is already a member of the Andean Pact's "Open Skies" Agreement. 78 Case Study t BOLIVIA fore, future hopes for a more efficient, and expeditious delivery of air transport services within the domestic market might de- pend on: -J Enacting a regulatory framework that ensures competitive practices on the part of the local carriers X Attempting to increase the market's size j Recognizing that certain expenditures or sub- sidies are inescapable until Bolivia's market experiences long-term economic growth. An important step in such a move is the anticipated capitaliza- tion of LAB, which will free the government from what have been, up to now, contradictory goals: (1) to protect LAB's mar- ket; and (2) to improve airline service offerings in Bolivia. 79 AIRPORT PRIVATIZATION EXPERIENCES ANNEX 1.1 BOLIVIA: ADP MODEL FOR BOLIVIA'S AIRPORT SYSTEM (Liberal Context) TraffiC Debt Service 3_ Annual ADP Traffic Forecast Interest Rale Pnleis frornal,oneps P- \ / lAircraft Parrina and Finger Fee ernabonal, Pass US£.020 \ / | USS96 00,internanonal Movement D\Drriccri.-Pass \S /020 USi69 O0Domeshc Movement mrr,a,.n3 Ui1ONion| \ nvestmenl Fmnancna DomslcUSi00f1on f rom Capilal 30°; 15 Olor ,rzi Opraior ar> > X A,rr,>rl l r,arges \ ~~~~~~~~Concess,on Fee IPe3uce_Ou,per'farfea FirstYear. 80. 'uritritg ; ;- -1- I 1 Year: O.25l RESULTS 80 Case Study 1 BOLIVIA HN NE X ES ANNEX 1.1 BOLIVIA: ADP MODEL FOR BOLIVIA'S AIRPORT SYSTEM (concluded) (Liberal Context) Internal Rate of Retum: 23.88% RESULTS. 1995-2007 Auto Financing Total 0 9.44 1126 131)7 1932 21 59 2269 2335 25.09 2802 2944 30.52 31 66 LaPaz 0 3 72 448 5.34 765 8 49 8 94 943 9.94 1169 1226 1277 132i8 SamnaCruz 0 4.15 505 5h8 9 16 1042 1095 1151 1210 1313 13d82 W42 1491 Cc,chabamua 0 1 56 1 7 1 90 250 ;68 2d8 2'92 205 321 3.36 3.51 36' Concesshin Fee 1) 146 171 2 27.9 18 342 368 296 447 4.13 5. 4d7 Cross-SubSPJy cl Irivesimenl C0 473 299 622 1:30 96 1 14 1.14 1.50 521 145 157 1.66 ot Other Airportis CrossjSubs&dy .rt Gperai,ons 0 0 44 0) 36 u 28 0 22 (t1. 1 0.15 0.11 0 u 0 02 0 0 0 of Other Airpors RESULTS, 2008-2020 AuloFirancingTolal 931 3699 3335 3980 4157 432 4614 47 97 014 52119 54h6 5666 59.10 La3P3z 164 1519 15.81 1646 17 15 1765 1881 1962 2048 Ž116 22.11 23.11 2393 SanraCruZ 15f63 17.6'5 1845 191:16 1995 Ž03 8 22.30 2309 24 1 25 0 26C0 ?7.54 253d. Cocrabamtba 384 115 4C9 4 2d 142 J68 503 526 549 5 73 575 601'.2 6.30 Concession Fee 586 6 61 7Q5 751 8 00 e 52 924 9id4 10 48 1115 11P7 12.64 1346 Cross-Subsdyot lnves5ment 191 2e61 218 2?4 255 2 78 317 326 3.53 383 415 460 4d8i of Other Airpo 1s, Cross Subsdv or Operations 0 0 0 0 0 2 1) 0 0 il oa Other Airports Source: ADP Master Plan, May 1995. 81 AIRPORT PRIVATIZATION EXPERIENCES 82 Case Study 2 CAME ROOD0N AIRPORTS IN CAMEROON A CASE STUDY OF AIRPORT PRIVATIZATION IN WEST AFRICAN ECONOMIES' Since the mid-1980s, Cameroon's airports have been character- ized by growing air-related services inefficiencies. The prob- lem has been exacerbated by (1) a 40 percent and 64 percent decline in passenger traffic and freight volume, respectively, between 1986 and 1992, in the major international airport at Douala; (2) relative improvements in road transportation between Douala and Yaounde; and (3) the Government of Cameroon's inability, under severe financial distress, to invest in moderniz- ing equipment. The difficulties faced in attempting to modern- ize the air transport sector infrastructure are exemplified by the Yaounde international airport and the domestic airport at Maroua. The government realized that it did not have the necessary funds to operate and maintain the Yaounde Airport or to finance the necessary equipment for the rehabilitated (through Italian financ- ing) Maroua Airport. With these difficulties in mind, the government in 1991 embarked on a privatization program to improve the efficiency and competitiveness of its 14 airport facilities. In August 1994 the government entered into a concession agreement with Aeroports de Paris (ADP) whereby 7 of the government's 14 airports will be privately managed by the new joint venture Aeroports du Cameroun (ADC). ADC was incorporated in De- cember 1993 as an autonomous company with paid-in capital of 'Research for this case was conducted in July-October 1994. 83 AIRPORT PRIVATIZATION EXPERIENCES CFAF 177 million.2 The largest portions of shares were allo- cated to ADP (34 percent); the Government of Cameroon (29 percent); and Agence pour la S6curit6 de la Navigation Aerienne en Afrique et a Madagascar (ASECNA) (20 percent). The re- maining shares were distributed among Cameroonian air carri- ers as follows: Cameroon Airlines (CAMAIR)3 (8 percent), UNITAIR (3 percent), Air Affaires Afrique (AAA) (3 percent), and the domestic Banque Internationale pour le Commerce et l'Industrie du Cameroun (BICIC) (3 percent). ADC's founding mandates were to improve the management and efficiency of airport operations and investments and to generate capital, through autofinancing, for future airport facility maintenance and investment. The government's objectives in transferring airport management control to ADC were the following: The efficient development of air transport services in order to promote Cameroon's tourism sector and to fos- ter economic growth R Private sector financing for upgrades and expansions of airport-related infrastructure to alleviate the demands on Cameroon's public finances. This case illustrates the privatization constraints faced by governments in countries with weak economic performance and a highly subsidized airport system. In this type of situation, the cross-subsidization option (see Table 2.1) selected by the government will drive the privatization strategy to be used in the design of the transaction. ADC's privatization process por- trays a strong government commitment to the completion of the joint venture transaction -- as was demonstrated by the government's downsizing of the airports' labor force prior to the transaction. However, the transaction design was subject to important restrictions (i.e., a ceiling placed on private sector share participation prevented majority ownership in ADC's eq- uity), and lack of clear definitions (i.e., investment commitments, corporate governance of the operating company) caused diffi- culties in project implementation. An example of such an issue is the deadlock blocking ADC's business development that origi- nated from a disagreement between the Government of Cam- eroon and private sector shareholders regarding the structure and competence of the Board of Directors. 2 CFAF (Central African franc) 291.79 = US$1 (December 1993). National flagship. 84 wase stUay Z CAMEROON Table 2.1 Cameroon: Cross- subsidization Options in Airport Privatization a ;- -i '6 .: .6l ' .61 . .6. A. Include (package) Drortable ar,d Government left only with the roles ot Privatization transaction is less attraclive non-profitable airports in the regulator and polikymaaWer Govemrnment from the financial point of view. Reduces prwsatzation tiansaction bureaucracy reduced to minimum level. the amount of investment commitments Reduces the number ot potential pan icipanrs In the cd B tnclude (package) only the prot- Maxirrlizes protect cash flrws. Increases Governmenr left wth operator and manage dable airports in tne privalizatron the amount of investment cormmitments role for unprofitable airports Govemrnment transaction. Cross-subsidie rest Increases the number of potential par t- has rc administer conr.ession fees (bur- of airport systlem trough con- cipants in the bid eaucracy). cessiron tees from the pnval- ization transac tion C. Separate into two diffrent piiv- For transaction (1t- same as option B Govemrnment is still len wir, Ihth role ol alizairon transactions (II package For transaction 12) lransfer operation adrnirnsterrng subsidy paymens io profitable airports and (21 auction and management responsibilities to private operators rnanagement and operations of private sector. unprot,table airports to bidder requesting lowest subsidy. Source: Airport Privatization Study, Case Studies, CFSPS, October 1995. 1. OWNERSHIP AND INSTITUTIONAL FRAMEWORK The Ministry of Transport is the principal authority in charge of Cameroonian airport facilities. Before privatization, airport control and management had primarily been the responsibility of two entities, the Civil Aviation Authority (CAA) and ASECNA. Since 1961 ASECNA had been contracted by the Ministry of Transportation, as stipulated in Articles 2 and 10 of the Dakar Convention, to provide air navigation services over Cameroonian territory. ASECNA, created in 1959, is the Afri- can multinational agency in charge of providing air navigational services, including overflight, route control, meteorology, and communications. ASECNA was placed under the tutorship of a committee of regional ministers in charge of civil aviation, as a public entity with complete financial autonomy. The Dakar Con- vention, signed in 1974 by all 16 member states,4 legislates 4 Bdnin, Burkina Faso, Carneroon, Central African Republic, Chad, Congo, Cote d'Ivoire, Equatorial Guinea, France, Gabon, Madagascar, Mali, Mauritania, Niger, Senegal, and Togo. 85 AIRPORT PRIVATIZATION EXPERIENCES ASECNA's mandates and services. As of January 1994, the total work force employed by ASECNA in Cameroon to pro- vide services specified by the Dakar Convention is 1,231, in- cluding 29 engineers and 101 technicians. As a division of the Ministry of Transportation, the CAA promotes, regulates, and controls all Cameroonian civil avia- tion activities. The CAA's work force consists of a general di- rector assisted by a deputy director, 4 division chiefs with 4 deputy chiefs, 13 engineers, and 15 technicians. Figure 2.1 shows the organization chart for the CAA. Figure 2.1 Cameroon: CAA Organization Chart m_ Facilities& Air Navigation International Licenstng and Aautic & Air Transport Relations Personnel Serity Services | Services Services i ~~~~~Services Air Bilateral Airpor Facilites Air WVIvigiOn Agreements Licensing Airport Inspection Transporr | rilernational i Navigation IArpon Inspection Search 8 |' Relations Personnel Radio Rescue Rerltion Peronel Airport Security * ~~~~~Ovedltighl Source: CAA, L'Aviation Civile au Cameroun, April 1994. The CAA is organized into four main divisions: 1. Air Navigation and Air Transport Services includes regulation of air navigation services, air transport ser- vices, and airport services 2. International Relations Services oversees bilateral agree- ments and international representation (see Figure 2.2) 3. Licensing and Personnel Services provides licensing, permits, and training 4. Aeronautic Security Services inspects and authorizes airports and provides airport security and planning. 86 Case Study 2 CAMEROON Figure 2.2 _ 3 1 1. 1 r_ _ m- m Cameroon: Air Transport Bilateral Germany Israel Agreements Belgium ___ Holland Burundi Great Britain Ethiopia Switzerland Kenya Former Soviet Union Rwanda o | Benin TNamibia Ghadnaoir Tanzania Ghana Zimbabwe Liberia O Mali Sierra Leone Senegal Central African Rep. Togo Chad Nigeria Congo --- Equatorial Guinea I_VAr Gabon Sao Tome & Principe , Algeria J | Zaire Source: CAA, L'Aviation Civile au Cameroun, April 1994. Fourteen airports fall under the supervision of both the CAA and ASECNA. Three of them are international: 1. The airport of Douala, the economic center of Carneroon, located in the country's eastern part 2. The airport of Yaound6,5 on the outskirts of the capital city The new airport is 15 kilometers south of the capital and has a runway of 3,400 meters. It was designed to receive 1.5 million passengers per year with future expan- sion capabilities of up to I million passengers. At full capacity the airport will accommodate 7 large carriers simultaneously. However, since opening in 1991, Yaounde has operated well under capacity. The financing of the airport (over US$200 million) was structured as follows: 85 percent in the form of soft export credits backed by a German consortium, and 15 percent was front end financing from the Government of Cameroon. 87 AIRPORT PRIVATIZATION EXPERIENCES 3. The airport of Garoua in the northern region: Garoua airport is of particular importance because of poor north- ern road infrastructure. Since the late 1980s, because of the deepening eco- nomic crisis in Cameroon, these larger airports have experienced declining passenger traffic and freight volume. The decline in oil production and the sharp worsening in the international mar- ket price for the country's commodity exports eroded the government's export revenues and precipitated an economic cri- sis that significantly affected transport performance - in par- ticular airport service efficiency. Air transport performance, in terms of both passenger and freight traffic, deteriorated sharply, particularly at Douala Airport (Tables 2.2), beginning in the mid- 1980s. The relative improvement in road transportation between Douala and Yaounde accelerated the decline of the domestic air traffic market. Table 2.2 _ 00 Cameroon: Annual Traffic Flows at Douala .- 24402. 299,820 20,9O7 Airport 1978 20,280 490,788 24,763 1981 34,353 707,765 21,014 20,280 . 733,150 23,327 1986 20,280 58A,550 18,213 1989 20,280 436,293 14,292 1990 20,280 406,088 13,088 1991 13,564 440,228 10,356 W ;' 523 301.134 - .6.56, 1993 10,851 365,264 10,000 Source: CAA, L'Aviation Civile au Cameroun, April 1994. In the early 1980s rapid growth in gross national prod- uct and forecasts for continued economic growth, together with substantial increases in traffic flows, prompted the Cameroonian authorities to study the creation of a new and larger Yaounde International Airport. Financed mainly by German concessional credits and constructed by a German consortium, the airport opened in 1991. Unfortunately, by the time the airport was fully operational Cameroon had entered a period of economic crisis. Air traffic flows to and from, and within, Cameroon diminished greatly and Yaounde International Airport found itself with in- sufficient revenues to finance operations. Because of the eco- nomic downturn Cameroonian officials decided they could not afford the airport's yearly financing requirements. 88 Case Study 2 CAM EROON Given the economic situation at the time of the decision (second semester of 1993), traffic projections for the ADC project were based on a conservative no-growth scenario. Table 2.3 depicts traffic figures used in ADC's Feasibility Study. __i~Jp~.rJuIuii[.u,1:pII~IinscJII.mm'u,III.n.pg.].I Table 2.3 Traffic Flows for Seven =Intern_atio_nalw 7 . r 1 I Major Cameroon International i:Airports Douala 351,134 305,033 305,033 10,996 9,570 I Yaounde 138,856 138,856 138,856 666 1,037 1 Garoua 44,657 44.657 44.657 1,313 893 Domestic Bamenda 1,075 1,075 16,224 Bertoua 143 143 16.224 - - I MaroualSaIak 30,997 33,094 32,763 240 168 1 N Gaound4rd 17,844 17.844 17.666 64 76 Source: ADP - Consulting Division, estimates from ADC's Feasibility Study, July 1993. Faced with the above-mentioned inefficiencies and de- clining airport service performance, compounded by growing pressures on public finances that prevented the state from pur- suing much-needed airport modernization investment, the gov- ernment decided in 1989 to consider airport privatization. The government's willingness to transfer airport services manage- ment to private hands, combined with technical assistance from the French development agency Caisse Fran,aise de Developpement (CFD) (through the financing of a FF760,000 feasibility study), led to the creation, on December 13, 1993, of ADC, with the ownership distribution described at the begin- ning of this case study.6 ADC, a financially and legally autonomous company, manages five principal airport facilities and services at Douala, Garoua, Yaound&Nsimalien, N'Gaoundere, and Maroua, and ensures minimum service for two secondary airports, Bamenda and Bertoua. ADC has full authority for managing all airport services in all seven airports and for maintaining, upgrading, and replacing equipment and airport installations through a planned investment program of CFAF12 billion. ADC also acts as the executor agency for project development. Prior to start- up, the government must approve projects, with the Board of ADC having the right to refuse any project that jeopardizes the company's financial stability. In most airports, under the priva- 6 The privatization process is described in further detail in section IV. 89 AIRPORT PRIVATIZATION EXPERIENCES tization scheme, ground handling services exclusivity has been transferred back from CAMAIR to ADC, the airport operator, as is the general practice.7 As of December 1994, ADC has sub- contracted air navigation services to ASECNA and ground han- dling services to CAMAIR for the five major airports. ,._w & II. REGULATORY FRAMEWORK Since independence, a proper economic regulatory framework has not been developed in Cameroon. Given the considerable state intervention in transport-related services, economic regu- lation has not been a top priority in the government's agenda. The CAA presents airport and air navigation charges to the Min- istry of Transport and the Prime Minister for approval. Eco- nomic regulation has been based mainly on reserve power prac- tices. Along with managerial and operational control, the gov- ernment transferred to ADC full authority for setting ground handling and other non-aeronautical charges (parking fees, rent- als, leases, concession fees, etc.). ADC is also responsible for establishing air and landside charges after agreement with ma- jor airport customers and in line with full production cost re- covery. The government retains the final word regarding ap- proval. Aeronautical fees proposals, presented to the Ministry of Transport, should be based on fee levels in the French franc zone countries and members of ASECNA. The CAA retains control over airport policy. However, ADC advises the CAA on policy decisions. Air traffic control and telecommunications remain under the CAA's control through its relation with ASECNA. Proposed changes are subject to government approval. The Government of Cameroon, through ASECNA ac- tivities, retains control of the following services at the airports listed below: * Douala and Garoua Airports: ASECNA collects 2 per- cent of landing fees at Douala and Garoua. In addition, ASECNA controls air traffic control and meteorologi- CAMAIR has historically been the exclusive ground handling agent for Cameroon airports, without financial compensation to the CAA. 90 Case Study 2 CAME ROON cal services, including air traffic in route, approach and landing, the aerodrome weather station, radioelectric equipment to assist air navigation, telecommunications equipment, air navigation visual aids, independent elec- trical energy production, and fire safety.8 • N'Gaoun6MrJAirport: ASECNA operates and maintains meteorological services • All Airports: ASECNA is responsible for provision of aviation fuel, control of military installations, and ac- quisition of airport safety equipment. Table 2.4 shows landing and passenger fees as of March 1994. Table 2.4 Cameroon: Landing and Passenger Fees, March 1994 (CFAF)' International Traffic lla .l , l .11X 5,744 1,281 2,553 3,606 3.750 3,900 Domestic Traffic _ 482 274 1,033 2,068 2.150 2,236 International/ Domestic 66,545 66,545 66,545 Destination _ 500 4,000 6,000 CFAF576 46 = uS$1, as ,.l March 31, 1994 Source: CAA, Decree No. 94/074, March 1994. It should be noted that at the time of the Dakar Convention agreement in 1974 the airport at Yaounde was not considered an international airport. Since construction of the new international airport in Yaounde, ASECNA has tried to incorporate Yaounde into the list of international airports from which 2 percent of landing fees are collected. 91 AIRPORT PRIVATIZATION EXPERIENCES .111 ADC: FINANCIAL PERFORMANCE Owing to data limitations, the financial performance of Cameroon's airports has been evaluated on the basis of esti- mates provided by ADP's Feasibility Study. The financial state- ments of the seven privatized airports for the first year of ADC's operation, based on July 1993 actual income statements, fore- cast an operating profit approximating 39 percent of total rev- enues. The CFAF304 million difference between operating prof- its for the three international airports and those for the seven privatized airports reveals the financial burden of cross-subsidi- zation. Under ADC management, labor costs are estimated at 20 percent of total revenues while commercial revenues account for 26 percent of total revenues as comnpared with 74 percent for airside activities. Until now, CAMAIR has provided ground handling ser- vices. Historically, the airline has enjoyed the exclusive exploi- tation of this concession without financially compensating the CAA. To finalize the privatization arrangement, ADP and the government entered into an agreement whereby ground handling revenues, collected by CAMAIR, would be shared with ADC. ADC would subcontract ground handling services to CAMAIR, charging 20 percent of total revenues for the concession. By collecting 20 percent of all ground handling charges, the new company would be able to raise revenues (roughly CFAF400 million per year of operating income) and thereby maintain and upgrade equipment and meet its financial obligations. Ground handling charges alone are expected to total a significant por- tion (14 percent) of ADC revenues. In addition, ADC is ex- pected to embark on an investment program amounting to CFAF9 billion over a 15-year period to renovate and expand facilities for the five major airports. The investment program is split into two parts, with a CFAF 4.1 billion high priority renovation pro- gram financed primarily by CFD and the remainder financed from the fourth year of operation by ADC from internal resources. In the forecasted investment program, half of the financ- ing originates from the CFD as financing linked to the conces- sion agreement contract. Given ADC's heavy reliance on its principal customer, CAMAIR, for revenues, particularly from airside and ground handling services subcontracted to CAMAIR, the financial viability of ADC and the subsequent success of the management contract will depend primarily on CAMAIR's op- erations and profitability. 92 Case Study 2 CAM EROON On the basis of proposed investment programs (upgrades and maintenance) and the conditions of the CFD financing fa- cility, the projected income statements and cash flows shown in Tables 2.5 and 2.6 were prepared for the ADC project. Secondary Seven Table 2.5 Five Major Airports Airports Airports l l ll l ! ls s , zi l 1-71w_ =_ ~~Statements for ADC, l First Year of Operation Revenues 2,901,359 61,570 50302 51,128 3,064.359 (an illustration of cross- Expenses 1.731,774 207,404 203.946 55,700 *2,198.824 subsidies in the airport Oper. Profit 1.169,585 (1.834) (4,572) 865,535 system) -- -- |(000 CFAF)l Technical A. 80,000 ( Depreciation 50,000 Debt Interest 45,000 CFAF 291.70 = US$1, as of July 31,1993. Source: ADP-Consulting Division, estimates from ADC's Feasibility Study, July 1993. See Annexes 2.1 and 2.2 for further details on ADC's available financial information. Table 2.6 Cameroon: ADC Forecasts of Cash Flow Statements (000 CFAF) Net Results 690,535 575.788 457,296 448,812 440,335 Depreciation 50,000 137,000 230,000 230,000 230,000 LT Debt: 900,000 1.500,000 1,500,000 100,000 100,000 Total Inflows 1,640,535 2.212,788 2,187,296 778,812 770,335 Investments 900.000 1.500.000 1,500,000 100,000 100.000 LTDebtto)2 0 0 0 0 0 W Capital 209,058 209,079 208,799 208.521 208,242 m FM, ' ,g*.*,I ' As of July 31, 1993, CFAF 291.70 = US$1. 2The CFD loan is a 15-year obligation at 5 percent interest with a 5-year grace period. The loan amounts to CFAF 4.1 billion, with CFAF 3.45 billion available for investment purposes and the remainder disbursed as technical assistance. I The total cash position reflects the amount of funds available to ADC for necessary mainte- nance and upgrades of the five major airports (in addition to the investments financed by CFD, Note 2). Source: ADP-Consulting Division, estimates from ADC's Feasibility Study, July 1993. 93 AIRPORT PRIVATIZATION EXPERIENCES IV. PRIVATIZATION PROCESS Cameroon's privatization process began in the early 1990s. It was initiated by the Ministry of Transport, which requested a feasibility study concerning privatization of airports. Privatization was considered an avenue for improving the com- petitiveness of airports through increased efficiency, and for re- ducing the impact, through lowered fiscal demands, on the government's budget constraints in the near future. In 1991, ADP, at the government's request, conducted a study financed by a FF760,000 technical assistance loan from FAC (the French Min- istry of Cooperation) and ASECNA (headquarters office in Dakar). Five scenarios, differing on number of airports and po- tential profitability (Table 2.7), were initially considered under the privatization feasibility study. Table 2.7 Cameroon: Airport Privatization Scenarios (CFAF)' No. of Airports under 14 9 5 9 7 Ptivatization Financial Results (2.5) billion (1.8) billion break-even (100) million (50) million Investment Program n.a. 12 billion n.a. n.a. 9 billion Governmenm 1.5 billion 400 million 400 million 500 million 400 million Transfers (Subsidy) Personnel 1o Be 736 262 175 n.a. 492 i Transferred (No. of employees) As of July 31,1993, CFAF 291.70 = US$1. Source: ADP-Consulting Division, estimates from ADC's Feasibility Study, July 1993. The initial recommendation called for privatizing 5 of the country's 14 airports. These 5 airports could become finan- cially viable and relatively efficient. Early in the process, ADP was considered the prospective private airport operator, and no competitive bidding for selecting a private airport operator was undertaken. Additional technical assistance was required to ana- lyze other options, namely, the privatization of 7 or 9 airports with minimum service. Technical assistance was again provided by ADP and financed by FF760,000 from CFD (the French de- velopment agency). The privatization of the 5 principal airports, 94 Case Study 2 CAMEROON Douala, Yaounde, Garoua, Maroua, and N'Gaoundere, again seemed the most efficient scenario since these airports were breaking even (or better) and did not require any subsidy. Ex- tensive discussions in 1992 among the government, ASECNA, donors, and ADP led to the conclusion that privatization of nine airports under a concession agreement contract with a newly created management company was feasible. The key condition for the privatization plan was that, to balance financial accounts, the private operator taking over the management of these 9 air- ports would charge CAMAIR (the ground handling agent) 20 percent of all ground handling charges. Under this scheme, privatizing 9 airports (5 major air- ports and 4 secondary airports) would lead to a deficit of CFAF1,800 million that would be offset by an annual govern- ment subsidy. However, the continuing economic deterioration in Cameroon in 1993 - reflected in an air traffic decrease at seven major airports, from 584,706 in 1992 to 540,702 in 1993; the financial difficulties of CAMAIR, ADC's main customer; and Cameroon's default on its debt to CFD led ADP to reverse its decision to manage the nine airports. Given the economic out- look and air traffic trends, the government decided to privatize seven airports in three phases. Phase I: the privatization of five airports under a con- cession agreement and a BOT scheme Phase II: the progressive transfer of two secondary air- ports, Bamenda and Bertoua Phase III: the closing of the other airports. The structure of the privatization process implemented is given below. A. Phase 1: Privatization of Five Principal Airports 1. Creation of a New Operating Company (Air- port Operator) A new private operating company, ADC, was incorporated for the purpose of managing a 15-year master concession agree- ment for operating seven airport facilities. The new company's shares were distributed among: ADP (the major shareholder) 95 AIRPORT PRIVATIZATION EXPERIENCES (34 percent); the government (29 percent); ASECNA (20 per- cent); CAMAIR, (8 percent); and small private airlines and a major bank (9 percent). The company, incorporated under a preferential investment regime for newly created companies, ben- efits from numerous fiscal exemptions. Under the master con- cession agreement, ADC has full authority for operations and investments concerning the seven airports. The agreement in- cluded a 20 percent charge on ground handling services pro- vided by CAMAIR (as the ground handling concessionaire). 2. Selection of the Strategic Partner, ADP Even though the World Bank financed a consultant to review the draft concession agreement and to provide advice, and in- sisted that a competitive bidding process be used, the selection of the partner did not result from an open and competitive bid- ding process but from a series of individual technical consulta- tions held by the government. In that context, alternatives to the privatization scenario have never been explored with other airport specialists and consultants. As the initial consultant in charge of technical assistance for the feasibility study, ADP had the following responsibilities for formulating and starting-up the company: Negotiating with partners (identified by the government) Preparing legal and regulatory clauses for transferring and managing airports fi Implementing the concession agreement Implementing and administering the charter and bylaws Negotiating subcontracting agreements for meteorologi- cal and air traffic control services (air traffic to be sub- contracted to ASECNA per government request) X Developing and implementing standard financial guide- lines and procedures (budgets, income forecasts, ac- counting systems, etc.). Following this study, ADP, the government, and CA- MAIR promoted the creation of ADC, incorporated in Decem- ber 1993. Prior to creating ADC, the government, through the CAA, had signed a technical assistance contract (a type of man- agement contract) with ADP for operating Cameroon's airports. This contract was transferred to ADC, through a master conces- 96 Coae Study 2 CAMEROON sion agreement signed in August 1994. ADP became the operat- ing company's largest single shareholder as well as its manage- ment contractor. However, since the Ministry of Transport rep- resents the shareholdings of the government in ASECNA, and CAMAIR (equivalent to 57 percent), the state retains control of key board level decisions. 3. Master Concession Agreement Through this type of concession agreement the government trans- ferred five airports, along with control of airside and landside facilities, to ADC. The company's viability is the government's main concern. The GOC has thrown its full support behind the company. Apart from sub-contracting appropriate services, the newly formed company is completely separated from all na- tional bodies. Regulatory oversight remains the government's responsibility. However, ADC retains advisory status concern- ing policy formulation directly affecting airport operations. ADC receives all airside and landside charges. Airside charges are set by ADC in agreement with major airport customers and in line with regional pricing. If the government should refuse ADC's request for a new pricing scheme, it would have to com- pensate ADC unless new services jeopardized air traffic provi- sion and operation. At the Douala and Garoua airports, airside charges are shared with ASECNA according to the Dakar Con- vention of 1974. Charges are on the basis of full-cost recovery. The company remains free to set landside charges. Under the master concession agreement, no performance criteria have been developed. The concession agreement's main articles confer special rights on the government, such as approval rights for all major investments considered by ADC that might bring about a change in the provision of air operations, particularly naviga- tion services, security, and telecommunications. 4. Investment Commitments Article 6 of the Concession Agreement provides a general de- scription of the investment program for the seven airports under contract. The original investment plan was developed in Octo- ber 1992 and amounted to CFAF5,848 billion.9 This amount 9 As of October 31, 1992, CFAF 251.54 = US$ 1. 97 AIRPORT PRIVATIZATION EXPERIENCES was revised in Article 6 (February 1994) to CFAF3,450 billion.'0 The description provided in the agreement is vague and lacks the required specifications of an investment plan (i.e., detailed descriptions of the investment projects and their components as well as the cash flow requirements of each). This section of the agreement also establishes guidelines for the financing of the investment plan (Articles 25 and 26). Here, again, the descrip- tion is vague and is limited to indicating that financing could come from: (1) internal sources (ADC's cash flows), (2) loans and credits from financial institutions to ADC, and (3) the trans- ferring to ADC of grant funds available to the government from the donor ccmmunity. 5. Labor Restructuring Strategy Following the privatization feasibility study, a technical assess- ment made by ADP indicated that approximately 492 employ- ees were necessary to support ADC operations. Their distribu- tion was structured as follows: 230 employees for airport opera- tions and 262 for management and administration. Labor re- structuring was carried out by means of a competency test de- signed to select the best employees from the existing work force (approximately 1,230 at the time of the test, in September 1994). In all, 739 employees were laid off. Severance was paid through a CFD loan of CFAF 350 million. B. Phase II: Operation of Two Secondary Airports Given the relatively low traffic levels at these two airports at the present time, ADC will manage these airports with reduced per- sonnel and will keep traffic to a minimum. Personnel will be reduced to 10 employees per airport. ADC will operate the air- port services and will not subcontract to ASECNA. Under the minimum service scenario, operations in these two airports will lead to a CFAF50 million deficit, to be financed through cross- subsidies from the five profitable airports. The deficit could be bridged by servicing the airports with regular flights. Exploita- tion of these routes could be given to a small airline company such as AAA or UNITAIR. ID As of February 28, 1994, CFAF 590.10 = US$ 1. 98 Case Study 2 CAME ROON C. Phase III: Closing of Other Airports This phase is still under consideration by the Ministry of Trans- port and the CAA. V. KEY ISSUES EMERGING FROM THE CAMEROON EXPERIENCE The privatization experience of the Cameroon airports, and the particular scheme used, provide valuable insights for the future privatization of airports in countries with poor economic per- formance. Five main issues are of particular interest in Cameroon's airport privatization. Government Intervention. Due to the fact that it faces severe economic constraints, the Government of Cameroon has, throughout the last four years, expressed a strong commit- ment to the completion of the ADC joint venture transaction. Unfortunately, the government's ownership majority in the newly created airport operating company (ADC) and the lack of a clear definition of roles for each participating partner provide obstacles to the development of a successful privatization. Once the priva- tization decision was taken by the government, its ownership participation in ADC should have been modest (or should have ceased) in order to minimize interference with the day-to-day decisions of a private corporation. Governments in this type of infrastructure operation should concentrate on their roles as ef- ficient policymakers and regulators, leaving the role of owners, operators, and financiers to the private sector. Selection of the Strategic Partner. Lack of competi- tive bidding in the selection of the technical partner in the pri- vate operating company (airport operator) limits the government's choice and its negotiating power in the privatization process. By selecting the strategic partner through individual technical consultations (as opposed to an open pub- lic bidding process), the government limited its privatization options and the conditions of the master concession. Cross-subsidy Mechanisms. Cross-subsidy mecha- nisms should be established prior to transferring airport opera- tions to a private operator. The need to economically sustain 99 AIRPORT PRIVATIZATION ExPERIENCES the less profitable components of the airport system, particu- larly when the system as a whole is not financially attractive, remains the most critical issue concerning airport privatization in underdeveloped economies. In the Cameroonian case the au- thorities did their best to establish a cross-subsidies system through packaging of the airports to be privatized. Given Cameroon's current economic situation, only seven airports were included in the ADC package, with the others awaiting a future decision. The government can no longer finance operations by reallocating resources from profitable airports. Owing to the government's self-imposed restrictions concerning the airport privatization process, alternative mechanisms (e.g., auctioning unattractive airports to the bidder requesting the lowest subsidy) were not considered. The CAA is currently working on a new budget proposal that tries to find ways of dealing with the system's unprofitable airports (a group of seven airports). Investment Commitments. The concession agreement's lack of clarity regarding investment commitments and performance criteria for the private management company could prove critical when investment decisions are made and responsibilities assumed. This issue is even more compelling if one considers that from the government's point of view one objective of privatization is to bring in capital for financing much- needed investment in airport facilities. Ground Handling Service Concession. Exclusivity of the ground handling services concession to the national flag carrier could become a major setback in an airport privatization transaction. In the past, CAMAIR enjoyed exclusive rights for the provision of ground handling services, without paying any kind of financial compensation to the CAA (the airport operator before ADC). Transparency and accountability in airport opera- tions tend to be overlooked when governments own both the airport and the flag carrier. In airport privatization a conflict of interest arises from the government's simultaneous commitments to the privatization effort and the flag carrier. To avoid conflict, airport and airline responsibilities, even in the case of full gov- ernment ownership, should be clearly defined and the relation- ship between them established on a commercial basis (i.e., a formal concession agreement with financial compensation). Exclusive ground handling services arrangements should be avoided because of their negative effects on airport operation competitiveness. 100 Case Study 2 CAMEROON Ar J,,XE S ANNEX 2.1 AtROPORTS DU CAMEROUN S.A. FEASIBILITY STUDY Income from Operations' (CFAF 000) Douala (SecodarvAirport) Garoua Bamenda - Yaounde N Gaoundere Maroua Bertoua L Revenue Larndin'tees 813,015 41,542 27.964 32.604 915125 Ground lighting 105,419 13.754 11.432 130 605 A;rcrah parking 8.083 80 8 8,176 Passengerlees 745 063 3.676 7 86 16.224 772,8E4 Cargo fees 51352 Q) 0 0 51.352 Total airside charges 59.052 47.300 48 828 1,878 122 Ground handling charges' 400,000 0 0 0 400.000 Dom3nials 41,.168 2,320 3.002 2.300 420 790 Commercial concessions 105.109 54 . - 105,163 Fuel concesslons 70.000 - - 0,000 Other 190.140 144 - - 190.284 Total landsde charges 778,417 2.518 3.002 2,300 7d6.237 TOtal ReVnues 1,718,417 61rS70 50,302 51,128 34354,359 ,. Operating Expenses Opertaons- Labor 587.543 27.866 14.996 47,.100 677 505 Operations . Gther 657,511 42.476 36,730 8,600 745,317 AESCNA peisonnel IATCi 355.180 130 2410 0 65,660 AESCNA personnel IMETl 75 740 0 20 780 0 96.520 OLher 55,800 6.822 1,2d0 0 63.822 Total OperatIng Expenses 1.731.774 207,946 203,948 55.700 2.196,624 1lH.Operatng Profit 1,189,685 -145,834 *153,E44 -4$. 85,535 IV. Net Results Technical assistance 80.000 Deprecation 50,000 Financial charges 12) 45.000 Figures are from July 1993. They have not been updated to include the January 1994 devaluation from 50 to 100 CFAF per FF. As of July 31, 1993, CFAF 291.70 = US$1. Source: ADP-Consulting Division, estimates from ADC's Feasibility Study, July 1993. 101 AIRPORT PRIVATIZATION EXPERIENCES ANNEXES ANNEX 2.2 AEROPORTS DU CAMEROUN S.A. FEASIBILITY STUDY Estimated Cash Flow' (CFAF 000, 15 years) Net results 690.535 575.788 457.296 448,812 440.335 Deprociavion 50.000 137.000 230.000 230,000 230.000 Lonc!-erm aebt ICFD) 900.000 1.500,000 1.500,000 100,000 100.000 Total inflows 1.640.535 2.212.788 2.187.296 778,812 770,335 Investrnenis 900.000 1.500.000 1.500.000 100,000 100.000 Debl repayment 1 1 0 0 0 0 0 Working capilal needs 209.058 209.079 208.799 208 521 208,242 Net caSh posiior 531.477 503.709 478.497 470.291 462.093 Net cash poik (a) 3-1.477 1031.1K ' 1 (CEAF 000, 15 years) -Nel results 612.452 714,952 DeprecaIK'n 230,000 230,JOO Long-lerm debt (CFDI 0 d ITotal inftlowS 842452 944,952 Invesimentis 0 0 Debt repavyment (11 410,000 410,000 Working c-ap,lal needs 207.412 207,412 NJet cash posilion 225,040 327,540 Net (a) _ _ 3.30 . 1 Figures are from July 1993. They have not been updated to include the January 1994 devaluation from 50 to 100 CFAF per FF. As of July 31, 1993, CFAF 291.70 = US$1. Source: ADP-Consulting Division, estimates from ADC's Feasibility Study, July 1993. 102 Case Study 3 CANADA AIRPORTS IN CANADA A CASE STUDY IN CORPORATIZATION AND JOINT PUBLIC/PRIVATE OWNERSHIP STRUCTURES1 Within the last 10 years macroeconomic constraints, combined with the overall weak economic performance of Canadian air- ports, have prompted the limited divestiture of government air- port holdings. This process has been uneven, as is reflected in the two distinct ownership structures- (1) corporatization; and (2) joint public/private ownership- within the Canadian airport system. The majority of the 135 airports in Canada are owned or operated by Transport Canada, the national transportation min- istry. In 1992, Calgary, Edmonton, Montreal Dorval, Montreal Mirabel, and Vancouver Airports were corporatized and man- agement functions were devolved to four regionally based Lo- cal Airport Authorities (LAAs). In 1994, the newly elected gov- ernment announced a National Airports Policy which included the intent to corporatize another 19 Transport Canada airports to be completed by the year 2000. Corporatization, in the Cana- dian context, is the transfer of airports by way of long term lease (60 + 20 years) from federal government operation to private sector corporations without shareholders and whose Board of Directors cannot include elected officials or government em- ployees. A unique feature of these LAA corporations is the ap- pointment process for their Board of Directors. Board members are appointed by the LAAs Boards from persons nominated by Research for this case was conducted in May 1994. 103 AIRPORT PRIVATIZATION EXPERIENCES local municipal governments, provincial and federal govern- ments as well as organizations such as Chambers of Commerce. The directors' fiduciary responsibility is to the LAA corpora- tion, not to the nominating entity. Private sector participation in Canadian airports also exists within a modified Build-Own- Operate-Transfer (BOOT) scheme that was utilized for the de- velopment of Terminal Three (T3) in Toronto. The divestiture of airports has resulted from pressure to change from centralized to local decision making, to make airports more flexible and responsive to local situations, to fa- cilitate a more commercial orientation to these airports and to transfer the financial responsibility for new investments from the taxpayer to the users. The corporatization of the first group of airports took almost four years to bring about because of a national election, several changes of transportation ministers and deputy ministers combined with the fact that the approach was without precedent in Canada. Moreover, limited consensus existed among federal government ministries as to the degree of financial and operational involvement after corporatization. A key step was the reconciliation of conflicting government objectives: deficit reduction versus transportation policy. There was some controversy during the 1993 national elections when the on-going government proceeded to sign agreements which leased two terminals at Canada's major airport to a private sec- tor corporation for a 60 year lease. The incoming government canceled those agreements and is proceeding with corporatiz- ing the airport instead. The process has been further compli- cated by the involvement of municipal and provincial govern- ments interested in developing airports as economic growth poles. 1. OWNERSHIP AND INSTITUTIONAL FRAMEWORK In addition to its airport ownership and management functions, Transport Canada (the national transportation ministry) supplies air navigation, air traffic control, safety, security, aircraft certi- fication, pilot licensing, and aviation regulation activities. Table 3.1 summarizes the administration of airport services under the different airport ownership structures in Canada. The two Mon- treal airports (Dorval and Mirabel) illustrate the corporatized experience, and Lester B. Pearson Airport in Toronto illustrates 104 Case Study 3 CANADA Table 3.1 Canada: Ownership/ Management of Airport Services Air Traffic Control Transport Canada Transport Canada Transport Canada Police Canadian Mounted Police Canadian Mounted Police Canadian Mounted Police Security Transport Canada Transport Canada Transport Canada Fire/Ambulance Transport Canada ADM' Transport Canada Maintenance Transport Canada ADM Lockheed Air Specific Facilities Transpon Canada ADM Lockheed Air Traffic Handlmg Aircratt Airlines Airlines Airlines Baggage/Freight Transport Canada ADM Lockheed Air I Passenger Transport Canada ADM Lockheed Air Customs Immigration Canada Immigration Canada Immigration Canada Immigration Immigration Canada Immigration Canada Immigration Canada Concessions Shopping/Duty Free Private Private Lockheed Air; Private Catering/Restaurants Private Private Lockheed Air; Private Car Parking Private Private LocKheed Air: Private Car Rental Private Private Lockheed Air; Private Other iBanking, Transport Canada; Private Private Lockheed Air Hotel. etc.) The LAA in Montreal is Aeroports de Montreai (ADM), which administers Dorval and Mirabel Airports. Sources: ADM; Transport Canada; Lockheed Air. the joint public/private ownership of facilities. In contrast to a purely private operation, such as British Airports Authority (BAA) in the United Kingdom, the private operators at Lester B. Pearson Airport (i.e., Terminal Three[T3]) do not collect land- ing fees and related airport taxes. 105 AIRPORT PRIVATIZATION EXPERIENCES __E;_,,: A. The Current Airport Ownership Structure Except for T3 at Pearson Airport in Toronto, Transport Canada retains ownership of the assets of the 135 primary airports in Canada. Transport Canada directly administers 76 airports and heavily subsidizes an additional 54. The five corporatized air- ports are managed by an independent Board of Directors. Be- ginning with Toronto, an additional 19 airports are scheduled to be corporatized within the next few years. T3 (the Trillium Ter- minal) is a BOOT project owned by Claridge Properties Lim- ited (a real estate developer) and Lockheed Air Terminal of Canada, Inc. (LATC), and managed by LATC. The other two terminals were leased to a Toronto consortium but this arrange- ment was rescinded after the change in governing parties in 1993. B. Sources of Airport Revenues The bulk of revenue within the Canadian airport system is gen- erated by the nine largest airports (Calgary, Edmonton Interna- tional, Halifax, Montreal Dorval, Montreal Mirabel, Ottawa, Toronto, Vancouver, and Winnipeg) which comprise 84 percent of total passenger traffic within Canada. On the average, air- side charges constitute roughly 50 percent of total revenues at these airports. Revenue generation at the remaining smaller air- ports is derived almost exclusively from airside activities. Land- ing fees and passenger fees account, respectively, for 30 percent and 19 percent of total revenues. Revenue from landing fees is slightly below the European average of 40 percent and higher than the U.S. average of 23 percent. Revenues from commer- cial activities comprise roughly 36 percent of total revenues, which is more or less equivalent to the U.S. average. Revenues from land rents remain relatively underdeveloped comprising about 10% of airport revenues. 11. REGULATORY FRAMEWORK Transport Canada's many transportation activities include the administration and regulation of the Canadian Coast Guard, and of ports, railways, surface roads, aviation, air traffic control, and 106 Case Study 3 CANADA airports. Civil emergency coordination is also under the aegis of Transport Canada. Cross-subsidies exist between functions since airport and aviation divisions comprise 97.7 percent of Transport Canada's revenues and 41.8 percent of its total bud- get. The remaining budget shortfall is covered by fiscal appro- priations. Like most aviation authorities, Transport Canada pro- vides safety supervision and aircraft certification functions. Transport Canada regulates the economic activities of govern- ment-operated airports and airside charges are determined on a cost-recovery basis. No independent economic regulatory agency exists for the five corporatized airport authorities, which have full freedom to establish landing fees and passenger fees (airport use). However, corporatized airports are mandated to be non-profit entities with all profits to be reinvested into air- port functions and facilities. This non-profit orientation effec- tively limits potential abuses in airport pricing schedules. Ill. FINANCIAL PERFORMANCE Canadian airports managed by Transport Canada operate on cost- recovery principles that are based on International Civil Avia- tion Organization (ICAO) guidelines. With the exception of the airports in Toronto and Vancouver, most Canadian airports have traditionally been money-losing enterprises. Canadian airports have markedly high operating costs, which represent 54 percent of total costs. In contrast, operating costs at U.S. and European airports comprise 34 percent of total costs. Transport Canada has historically borne the costs of these deficits. In 1991, the last year system-wide information was made available, Trans- port Canada incurred total losses of Can$95.3 million from the operation of the nine largest airports. The corporatization ini- tiative was undertaken in part to improve operational efficiency and reduce government financial involvement in airports. Table 3.2 summarizes the financial performance of the nine largest airports prior to corporatization. 2 Can$1.1457/US$1 in 1991. 107 AIRPORT PRIVATIZATION EXPERIENCES Table 3.2 Financial Performance of the Nine Largest Canadian Airports, 19911 (Can$ millions) Calgary Edmonton Halifax Dorval& Ottawa Toronto W Mirabel Revenues 38.5 15.8 14.4 103.8 23.0 129.0 73.8 14.6 Costs 53.5 30.9 28.8 142.4 39.6 98.5 71.5 42.7 ProfiVLoss (15.0) (15.1) (14.3) (38.5) (16.6) 30.2 2.3 (28.2) ' The figures include air navigation costs because figures were presented in a cumulafive manner. Sources: ICAO; Transport Canada. IV. PRIVATIZATION PROCESS A. Background Within the Canadian airport system, nine airports have annual traffic levels exceeding 1 million passengers. During 1993, Lester B. Pearson Airport in Toronto and Vancouver Interna- tional were ranked by Airports Council International (ACI) as the twenty-seventh and fifty-eighth largest airports in the world with passenger traffic of 20.0 and 10.1 million passengers, re- spectively. These two airports account for nearly 40 percent of total passenger traffic in Canada. Air traffic growth within the last 10 years has been largely spurred by airline industry de- regulation and restructuring. From 1983 to 1993 total passen- ger traffic at the nine largest airports grew 2.4 percent annually. However, even this moderate level of growth has been suffi- cient to strain the existing infrastructure. Transport Canada projects that, in the next 12 years, passenger traffic at these nine airports will increase by 2.1 percent annually. These forecasts, however, do not incorporate the expected increases in passen- ger traffic from the recently ratified Open Skies Agreement with the United States.3 Private sector capital will be needed if the 3 For example, Mroports de Montreal predicts that passenger traffic will increase by 5.8 percent at Dorval and Mirabel each year as a result of the Open Skies Agreement. 108 Case Study 3 CANADA projected growth in passenger traffic is to be accommodated with additional capacity. Table 3.3 lists historical and projected passenger traffic data at the nine largest airports. Table 3.3 Historical and Projected Passenger Traffic at the Nine Largest Canadian Airports (millions of passengers) 1985 3.9 2.0 1.8 5.5 17 2.3 158 7.0 22 i 494 1990 4.6 20 2.5 64 25 2.7 204 95 2.3 1 59 1993 45 17 23 5.6 2.3 25 19.5 97 20 50.1 1982- 1.2. *1 40% 4 200 0 40. 6 4°o 28% 3 5'o 4 1°o 0. 1% j 2 6'. 1993 1990- 3.1%a 2.0V 3.0%0 3 1%. 24%o 3 7eo 3 8% 3.5% .1% 3.1%. 2000' 1 Projected. Source: Transport Canada. B. Liberalization/Deregulation of the Airline Industry Canada was one of the first countries to privatize the national carrier and also deregulate the domestic air transport market. Liberalization of the airline industry commenced with the part privatization of Air Canada, the largest national carrier, in 1986. In addition, the National Transportation Act (NTA), which went into effect in 1988, allowed carriers to establish fares without regulatory discretion on most routes. Entry requirements also became less onerous with the elimination of "public convenience and necessity" criteria in favor of financial "fitness" criteria. The ratification of the Open Skies Agreement with the United States had the added effect of improving market access and flight schedules for transborder competitors. In terms of entry, ser- vice, and price, Canada has one of the more open air transport markets within the OECD. Air Canada continues to maintain a close and influen- tial relationship with Transport Canada. Airside charges remain artificially low at most government-operated airports, which serves to benefit Air Canada and other airport users. Airport 109 AIRPORT PRIVATIZATION EXPERIENCES corporatization was undertaken in part to give airport authori- ties wider latitude over politically sensitive increases in airside charges. Air Canada's influence also extends to the establish- ment of flight schedules and the distribution of airport space. For example, Air Canada was heavily involved in the decision to refurbish T2 at Pearson. _w"wAnA C. Emerging Environmental Concerns Environmental concerns relating to noise mitigation, waste dis- posal, and water treatment will have an increasing effect on air- port operations. Transport Canada has responded to these con- cerns by requiring mandatory annual environmental audits of Canadian airports. In addition, Transport Canada must provide the necessary funding for Transport Canada operated airports to meet national environmental regulations. For example, the Van- couver LAA was compensated for the destruction of a wildlife habitat during the construction of an additional runway and ter- minal at Vancouver International Airport because this decision had been made while the airport was still operated by Transport Canada. Funding for noise mitigation has also been provided, and airports situated near residential areas such as Dorval are subject to night restrictions. D. Upgrading of Air Traffic Control Services Air traffic control (ATC) navigational services are administered by Transport Canada. ATC functions are financed through a passenger ticket tax (usually 10 percent) that varies depending on the length of the flight. Existing infrastructure is in extremely good condition as Canada is currently installing one of the world's most advanced ATC systems, which is expected to last until the next century. As part of its overall airport divestiture program, Transport Canada is currently reviewing the feasibil- ity of spinning off ATC functions to a private sector corpora- tion. In addition to improving efficiency, corporatization would provide access to private debt markets. 110 Case Study 3 CANADA E. Limited Sources of Financing The Canadian Auditor General estimates that Can$329.0 mil- lion in capital expenditures will be needed over the next 15 years to renovate existing airport infrastructure and accommodate ex- pected growth in passenger and air cargo traffic. Within the context of extremely high fiscal deficits and other macroeco- nomic pressures, government funding sources are becoming in- creasingly scarce. Indeed, airport capital expenditures decreased from Can$244.6 million in 1989 to Can$112.2 million in 1993. Moreover, the poor economic performance of most government- operated airports has made it difficult to generate sufficient funds for airport infrastructure projects. In recent years Transport Canada has begun to consider the private sector for increased funds and to improve airport self-sufficiency. Corporatization and privatization initiatives were undertaken in large part to achieve this financial objective. F. Two New Ownership Structures in Canadian Airports The Canadian efforts to divest government airport holdings have had uneven results. Presently, divestiture is reflected in two distinct ownership structures within the Canadian airport sys- tem: (1) corporatization of airports ; and (2) joint public/private ownership. Each of these structures is discussed below in case study form (Sections V and VI). V. AROPORTS DE MONTREAL: A CASE STUDY IN CORPORATIZATION Seven years and several false starts after the government ex- pressed the need for an airport restructuring program, Transport Canada corporatized five airports in four cities - Calgary, Ed- monton International, Montreal Dorval, Montreal Mirabel, and Vancouver. Most of the delays resulted from the highly politi- cized context in which the initiative was undertaken and from the fact that the initiative was without precedent. Decision-mak- ing was also slowed by the turnover of transportation ministers and the involvement of several federal departments in the trans- AIRPORT PRIVATIZATION EXPERIENCES fer process. In addition, the final scheme required Cabinet and parliamentary approval as well as the implicit consent of mu- nicipal and provincial governments. The corporatization initia- tive and the introduction of private sector management were driven by the need to reduce government financial involvement, to provide additional sources of funding, to improve the poor economic performance of airports, and to transfer decision mak- ing to the local level. The five airports that have been corpora- tized account for roughly 40 percent of total passenger traffic in Canada. A. Ownership and Institutional Framework A6roports de Montreal (ADM) is a primary example of the Ca- nadian airport corporatization experience. Prior to corporatiza- tion, Dorval and Mirabel were consistent loss-makers even though they serviced a vital origin and destination market and experienced sufficient traffic levels to be profitable. Both fa- cilities have also suffered from a lack of investment funds. In particular Dorval, the third largest airport in Canada, has long experienced strains on capacity that are heightened by its close proximity to residential areas. The original infrastructure was built in 1941 and needs renovation. In 1992 Dorval handled 95.5 percent of domestic and 49.0 percent of international pas- senger traffic through Montreal.4 Built in 1975 to alleviate ca- pacity at Dorval, Mirabel is the eighth largest airport in Canada and has some additional capacity for future growth. Passenger traffic at Mirabel is almost exclusively international. Until 1992, Dorval and Mirabel Airports were admin- istered by Transport Canada, and operational and development decisions were centralized in Ottawa. The two Montreal air- ports were corporatized and management functions were trans- ferred to ADM in April 1992. ADM was formed by members of the local Chamber of Commerce and Board of Trade and the nominating process for the Board was accepted by the Mont- real municipal government, and Transport Canada. Daily and long-term operations are managed by a 15-member indepen- dent Board of Directors without interference from Transport Canada. However, local land-use issues are subject to the ap- proval of the local municipal and provincial governments. The 4 Dorval's three runways have a capacity of 77 aircraft movements per hour. With two runways, the maximum capacity at Mirabel is 70 aircraft movements per hour. 112 Case Study 3 CANADA terms of the transfer agreement do not preclude the possibility that ADM can purchase Dorval and Mirabel after five years of operation. B. Revenue Sources and Regulatory Framework Formal evidence is unclear as to whether the transfer of man- agement functions depoliticized the airside charges issue. Spe- cific information regarding revenue generation by type of activ- ity was unavailable and was not listed in the most recent annual report. Nonetheless, landside activities have been expanded and overall revenue generation has remained steady. Transport Canada has emulated the compensatory approach used at U.S. airports, in which rents are assessed in proportion to the amount of airport space utilized. Corporatized airports are also free to impose passenger fees without government approval. For ex- ample, the Vancouver LAA has assessed a passenger fee in or- der to expand existing facilities. C. Financial Performance Corporatized airports operate under a not-for-profit orientation which requires that excess revenues be reinvested into airport operations, or be used to fund new infrastructure, or be returned to Transport Canada.5 Formal evidence at this point concerning the still recent transfers of Dorval and Mirabel Airports from Transport Canada to ADM remains unclear. Due to the fact that ADM and Transport Canada have chosen to utilize different accounting practices in depicting their financial situation it would be difficult to compare pre and post-corporatization experiences. Transport Canada accounting practices involve recording and reporting expenditures, both operating and capital on a "cash" basis while ADM uses the generally accepted "accrual" basis whereby profits are reported on an operating basis and depreci- ating capital expenditures expensed over years rather than in the year of disbursement. The practical result of these account- ing methods is that ADM's management of the Montreal air- ports on the surface appears more profitable but in reality proves difficult to gauge. In reality, over the short term results of the I Profit maximnization would necessitate the introduction of economnic regulation of ac- tivities as in the U.K. and Austrian experiences. 113 AIRPORT PRIVATIZATION EXPERIENCES corporatized airports would not be expected to differ sharply from pre-corporatized results but one would anticipate that in the next five years the positive characteristics of corporatiza- tion may lead to better results. At present we can only compare ADM's work force, at 510 employees, which is almost exactly the same as the actual Transport Canada employees that were transferred to ADM, 520 employees. In addition, post-corpora- tized airports should in the medium term see improved perfor- mance attributable in part to the elimination of navigation, ATC and security activities from airport balance sheets. The TC-LAA Ground Lease imposes an obligation to spend a minimum capital amount on airport infrastructure each year on ADM. Therefore, ADM must generate a profit each year roughly equal to its capital spending requirement. In the event that ADM did not spend the minimum capital amount as re- quired by the TC-LAA Ground Lease, ADM would have to re- mit such funds to TC as additional lease payments. Therefore, ADM is currently implementing a 5-year $150 million invest- ment program at both airports to satisfy the terms of the Ground Lease and to minimize the possibility of such funds being re- mitted to the federal government as additional rent. Lease pay- ments under the TC-LAA Ground Lease agreement totaled Can$1.9 million in 1992 and Can$1.4 million in 1993. How- ever, ADM accepted the option to defer rent obligations to Trans- port Canada until 1997. The amount of deferred rent owed was Can$9.3 million in 1993. Table 3.4 contrasts certain facets of Dorval and Mirabel's economic performance for 1993. .se.I 6..: n:I - -a.:s Table 3.4 Canada: Costs/ Gross Revenues $57.1 $44.8 $101.9 Revenues of ADM Expenses m429 p.3 S7S. 1 Airports, 1993 IReported Profit $14.1 $12.5 26.7 (Can$ million)' Passengers 5 8 2.4 8.2 Onfg.oing capital prolecis Not Available Not Available $33.7 US$ 1 is equivalent to Can$1.2901 (1993). Source: ADM. D. Corporatization Process 1. Growth in Air Traffic Activity Origin and destination traffic comprises the greater part of the air transport market in Montreal. Consequently, air transport traffic levels are linked to economic growth cycles. Passenger 114 Case Study 3 CANADA traffic at Dorval and Mirabel grew at a steady pace during the 1980s, which was followed by a sharp reduction in the early 1990s owing to the economic downturn in Canada. In recent years, passenger traffic and aircraft movements have rebounded but have not yet reached the levels registered during the previ- ous decade. Mirabel Airport, which relies primarily on interna- tional traffic, was less affected by the economic recession. Mirabel is also the primary entry point for air cargo transport to Montreal, which has grown steadily in the last few years. Trans- port Canada forecasts that passenger traffic is expected to grow 3.3 percent annually, and by the year 2005 total passenger traf- fic through Montreal is projected to reach 12.3 million (8.0 mil- lion passengers at Dorval and 4.3 million passengers at Mirabel). Traffic data for the period 1985-93 are summarized in Table 3.5. Table 3.5 Canada: Historical Air Transport Data for Montreal Dorval and Mirabel, 1985-93 Dorval Mirabel Total Dorval Mirabel Total Dorval Mirabel Total 1985 5 5 1 7 7 2 152.1 40.8 192.9 N/A N/A N/A 1a86 5 7 1.9 7.6 160.0 43.2 203.2 NiA NiA N/A 1987 6.0 2.0 8.0 175.4 42.3 217.5 hl,A N/A NMiA 1988 6 5 2.2 8.7 203.1 46.0 249.1 N'A NiA N.A 1989 6 5 2.4 8.9 231.3 49.5 280.8 N/A N/A N/A 1990 6 4 2.5 8 9 197.5 47.8 245.3 N/A N/A N/A 1991 5 6 2 3 7.9 197.4 47.5 244.9 32.3 91.0 123.3 1992 5 6 2.4 8.0 197.5 46.4 243.9 31.5 102.4 133.9 1993 5.8 2.4 8.2 N/A NMA N!A 32.7 109.9 142.6 Sources: ADM; Transport Canada. 2. Limited Sources of Financing Corporatization was intended to eliminate dependency on gov- ernment funds and to permit access to private capital, with the restrictions that assets cannot be used as collateral. This prohi- bition relates to the fact that airports are leased assets still owned by the federal government. ADM issued revenue bonds before the devolution of airport management functions. In this way, 115 AIRPORT PRIVATIZATION EXPERIENCES ADM was able to access starting capital to ease the transition period. Under the specific terms of the ground lease, Transport Canada is not obligated to guarantee debt obligations of the LAAs. Total long-term debt was roughly Can$13 million for 1992 and Can$12 million for 1993. The extensive financial burden of maintaining and ex- panding two airport facilities led ADM to study the feasibility of consolidating airports. A study undertaken by Aeroports de Paris (ADP) and Transport Canada concluded that closing Mirabel would not be practical because of the existing night restrictions at Dorval. The age of Dorval necessitates several infrastructure improvements. ADM estimates that as much as Can$830 million will be needed for renovations and expansions in both airports. Under the transfer agreement, committed ex- penditures total approximately Can$150 million (Can$30 mil- lion/year), some of which was subsidized by Transport Canada in 1992. In 1993, ADM allocated approximately Can$33 mil- lion for investment in airport infrastructure; this was financed in part by debt financing and reserved revenues. ADM must maintain this level of capital spending or it will be required to pay additional rent to Transport Canada. 3. Techniques Used in Corporatization The most important element of the corporatization process is the ground lease agreement which has a 60-year term. Lease payments forecasts are fixed for the first 16 years and are based on the fair market value of airport property, 20-year traffic pro- jections, and 20-year revenue. Thereafter, lease payments can be restructured only by mutual agreement of both parties. To improve financial viability, Transport Canada gave ADM the option to defer lease payments for the first five years after trans- fer. ADM and the Edmonton LAA exercised this option and the deferred amount will be paid with interest in years 11 to 15. As part of the ground lease agreement, ADM was required to retain all permanent employees for two years after the transfer. To ensure that airport services were not disrupted by staff reduc- tions, ADM was required by Transport Canada to offer compa- rable benefits to those provided by Transport Canada. Roughly 98 percent of the employees accepted the transfer toADM.6 Final 6 Overall, 881 out of 1,025 Transport Canada employees (86 percent) transferred to the four LAAs. Another 110 employees refused the transfer and were reassigned to other jobs within the federal government. 116 Case Study 3 CANADA approval of the employee benefits package was given by Trans- port Canada in conjunction with the Treasury Board of Canada. In contrast to the U.S. experience, ADM did not owe the Minis- try of Finance employee benefit liabilities stemming from cor- poratization. (Figure 3.1 outlines the corporatization process.) Figure 3.1 Formation of ADM from interested local Canada: Corporatiza- business groups | tion Process, ADM Montreal CityiQuebec Provincial Government approval: * Designation of single local representative Determined by Transport Canada: * Base report (revenue and traffic proiections) * Fair market value of Dorval and Mirabel Negotiated between ADM and Transport Canada: * Bill of sale * ADM operational/organizational plan * Ground lease * Employment agreement * Inspection services agreement * Aviation services and facilities agreement . Agreement to transfer Ministry of Finance/Treasury Board approval: * ADM employee plan * ADM tax-exermpt status * Agreement to transfer Transfer of management functions: * Signing of agreement to transfer * 3-6 month transition perod * Transfer of management functions Sources: Transport Canada; World Bank Staff. 117 AIRPORT PRIVATIZATION EXPERIENCES The guiding principle behind corporatization was that the government would not be in a worse position as a result of the transfer. However, this approach, combined with the not- for-profit orientation of corporatized airports, has the effect of being an inherent disincentive to incremented revenue genera- tion until certain revenue thresholds are achieved. Revenue gen- eration up to a pre-determined ceiling (based on the 20-year foreca ,sults in higher lease payments to Transport Canada. Revenue ceilings also exist at some U.S. airports but are negoti- ated with the airlines, not the government. Operational effi- ciency is encouraged because airlines guarantee break-even rev- enues. The Canadian arrangement also includes a revenue floor to ensure airports are managed in a commercial manner. Cor- poratized airports in which revenues are below forecasted amounts are eligible to receive a negative lease payment or a subsidy which is limited by the existence of revenue floors. The formula for determining the ground lease payment is as follows: ADM Revenues - (Base Operating Costs + Base Capital Costs) = Lease Payment Actual revenues below revenue projections = decreased lease payments. Actual revenues above revenue projections = increased lease payments (until certain thresholds reached).7 Under the transfer agreement, the four LAAs have com- mitted an equivalent of US$238 million for airport improve- ment projects over the next 15 years. In particular, ADM has committed an equivalent of US$110 million over five years for renovation and expansion projects at the two airports. To meet these investment levels, ADM must set aside a minimum amount of operational revenues to a capital development fund or return excess revenues to Transport Canada in the form of additional rent. This provision, which mimics economic regulations used in the United Kingdom, was designed as a built-in incentive for airport development. However, this mechanism requires Trans- port Canada to fund committed capital expenditures that exceed the actual revenue streams of the corporatized airports. In 1992 the four LAAs increased capital expenditures by Can$30.9 mil- lion but incurred a revenue shortfall of Can$ 13.3 million. Most of this deficit of Can$11.5 million was incurred by ADM. Also Sources: Transport Canada; ADM; World Bank Staff. 118 Case Study 3 CANADA in 1992, ADM allocated Can$10.2 million or 86 percent of ex- cess revenues to various small-scale infrastructure projects at Dorval and Mirabel. ADM increased total capital expenditures to Can$34 million in 1993. To avoid future shortfalls, ADM must increase revenues, obtain additional private capital, or con- tinue to receive subsidies from Transport Canada. E. Key Issues Emerging from the Corporatization Experience The stated objectives behind the airport corporatization initia- tive were: (1) to ensure that the government was "no worse off from the transfer than if it had continued operating the airports;" (2) to reduce financial involvement in airports; (3) to improve airport sustainability; (4) to de-politicize the airside charges is- sue; (5) to increase sources of funds; and (6) to increase local involvement and economic growth. To date, Transport Canada has had a relatively satisfactory record in achieving these objec- tives. Original estimates predicted that after 15 years the gov- ernment would incur a surplus from the transfer. This amount included a Can$2.0 million shortfall in 1994 and surpluses each year thereafter. Revised estimates predict shortfalls of Can$44.4 million, Can$49.5 million, and Can$52.5 million for 1994,1995, and 1996, respectively.8 The main differences in these estimates are increases in capital expenditures and overhead costs. A pro- jected Can$20.0 million reduction in overhead costs has not yet materialized. Financial involvement in airport operations and devel- opment has decreased only marginally. As part of the transfer agreement, Transport Canada absorbed previous airport liabili- ties. Costs relating to the provision of navigation, ATC, secu- rity, and safety services were removed from the balance sheets of the corporatized airports. Furthermore, airports with revenues that are below projections are eligible to receive "negative lease payments" from Transport Canada. Payments are received even when no operating loss is incurred. Two years after the transfer, revenues of the LAAs were below base case projections, and two LAAs - ADM and Edmonton - received negative lease payments. The Canadian Auditor General cited Transport Canada's traffic projections as "overly optimistic." I According to recent (1995) information from Transport Canada results in 1994 were substantially better than expected. 119 AIRPORT PRIVATIZATION EXPERIENCES Still, corporatized airports have become more self-sus- taining and revenue generation has increased. The Vancouver LAA has been the most proactive with the introduction of a pas- senger fee which is used to finance airport expansion. This in- crease is separate from the politically sensitive issue of landing fees, which remains largely unresolved. Additional sources of funds have come from the capital markets, which were unavail- able under government administration. Finally, the corporati- zation initiative has had some success in fostering local eco- nomic growth. The LAAs permit the construction of commer- cial and industrial parks on airport property (an arrangement that is discouraged at some U.S. airports). ADM estimates that in 1992 airport-related activities at Dorval and Mirabel gener- ated Can$2.4 billion and created 48,000 jobs. The Canadian airport corporatization experience was characterized by a relatively high degree of discretion and po- liticized process. Transport Canada negotiated with only one local group and there were no efforts to advertise that an oppor- tunity existed for corporate investment so no additional groups could have expressed their interest in participating in the LAAs. Political pressures turned the corporatization process into a com- promise among federal ministries, provincial and municipal gov- ernments, and business groups and took over four years to com- plete. Potential economic benefits and efficiency concerns were secondary to the negotiation process. In comparison, airport corporatization in the United States took only one year and has been less politicized. VI. LESTER B. PEARSON AIRPORT, TORONTO: A CASE STUDY IN JOINT PUBLIC/PRIVATE OWNERSHIP STRUCTURES A. Ownership and Institutional Framework Lester B. Pearson Airport in Toronto is the largest airport in Canada and accommodated approximately 20 million passen- gers in 1994. It was the only case in the analyzed sample in which independent public and private ownership of airport fa- cilities shared the same premises. Terminals One and Two (Tl and T2) are owned and operated by Transport Canada, and the 120 Case Study 3 CANADA newly built Terminal Three (T3) is owned and operated by the private sector. Given the lack of economic regulation in Canada, there is a "real" price competition among the different terminals (i.e., terminal fees charged to airlines by T3 are three times higher than those charged by TI and T2). Because of their differing ownership structures and user preferences, the three passenger terminals at Pearson are in vary- ing states of physical condition. Built in 1962, TI is somewhat deteriorated and in need of renovation. Before the opening of T3, TI handled 10 million passengers each year, which was more than double its intended capacity. Moreover, several foreign- based carriers were crowded into the premises. At present the main users of Ti are low cost U.S. airlines, and a third of total airport's traffic has been diverted to the new T3. The physical infrastructure of T2 is in much better condition than that of Ti as a result of renovation undertaken through ajoint venture with its primary user, Air Canada. However, T2, which was devel- oped in the 1970s, is nearing its maximum capacity. In the five years prior to the development of T3, passenger traffic at Pear- son Airport for Ti and T2 grew at a compounded average an- nual growth rate of 8.3 percent (Ti was operating at more than double its intended capacity and both terminals were in severe need of renovation). Thus, the initiative to develop a third ter- minal stemmed from the need to relieve existing capacity. Lim- ited public funds necessitated private sector involvement in the development of the third terminal. The new terminal has a maxi- mum capacity of 12 million passengers per year. Increased fund- ing for the two government-operated terminals has been ham- pered by delays in the bureaucratic process, shifting political objectives, and a tight fiscal environment. The proposed priva- tization (i.e., long term leasing to private sector operator) of Ti and T2 was canceled owing to the change in governing parties and to conflict of interest concerns. T3 at Pearson Airport was developed as a build-own- operate-transfer (BOOT) project. Equity ownership of T3 is shared by two private entities: Claridge Properties Limited owns 73 percent and LATC owns the remaining 27 percent. Land ownership has been retained by Transport Canada. Through a 60-year lease agreement with Transport Canada (a 20-year lease with two 20-year renewal options), LATC is responsible for the administration and maintenance of T3 facilities, property, and adjacent roadways and receives a 6 percent management fee for its services. Operations are coordinated by Transport Canada. 121 AIRPORT PRIVATIZATION EXPERIENCES Transport Canada is responsible for providing all air navigation and ATC functions and owns all airport runways and taxiways. Revenues from landing charges, passenger fees, the airline fuel tax, and the ticket tax accrue to Transport Canada. T3 operations are primarily confined to landside activities and begin at apron approach when the aircraft switches from gen- eral to T3 tower control. B. Revenue Sources and Regulatory Framework The revenue profile of Pearson is comparable with that of other airports operated by Transport Canada. Historically, Pearson has been negatively affected by airside charges that were kept artificially low because of political constraints. Truncated air- side revenue streams made it difficult for Transport Canada to finance new and expanded airport infrastructure. The traditional response had been to raise airside charges shortly after each gen- eral election. However, pricing according to electoral cycles is no substitute for solid economic criteria. One objective of the airport corporatization initiative was to depoliticize the airside charge issue by devolving the price setting function to the LAAs. In accordance with international principles, airside charges at TI and T2 are purely on a cost-recovery basis. Because of the relative age of the terminals, capital costs are not included in the calculation of airside charges. Moreover, airside charges are much lower at Canadian airports than at the more profitable U.S. airports. Table 3.6 compares the landing fees for a Boeing 747- 200 at Toronto and at Boston, two airports that are comparable in size. Table 3.6: Comparative Airside Landing 757.34 953 16 Charges for Toronto and Terminal 140.90 596.00 Boston for a B747-2001 Peak Period 51.00 0.00 (US$) Parking (0-4 hours) 67.56 137.00 Loading Bridge 1014 0.00 Total 1,066.94 1,686.16 Landing fees and terminal charges are based on international and/or transborder pricing schedules. Sources: ICAO; Transport Canada. 122 Case Study 3 CANADA Revenue generation at T3 comes from three sources: (1) airline rents and charges (50 percent); (2) concessions (30 percent); and (3) parking (20 percent). Revenues are split ac- cording to the existing ownership breakdown (73/23). The ter- minal uses a hybrid approach to determine airlines charges which was modeled after the system in use at several U.S. airports. Rents are derived according to the amount of space utilized, with operating and capital costs factored in the rental payments. Operating costs are guaranteed by terminal and aircraft parking charges and can be raised to achieve break-even revenues. To recover security costs, the airlines are assessed a percent per seat charge on each arriving flight. Airlines and concession- aires are also assessed a 5 percent charge that finances mainte- nance costs. These funds must be utilized or returned to the users. Transport Canada agreed to commit up to the equivalent of $60 million in loans (up to a maximum of $8 million in any one year) if revenues drop by 50 percent during the course of a year. Transport Canada reports that the coordination of ac- tivities between the privately owned and publicly owned termi- nals has been harmonious. Although airside charges at the ter- minals have been structured on a non-competitive basis, a large disparity exists between the two ownership structures. On aver- age, airside charges at T3 are Can$7.19 per passenger, whereas at T1 and T2 revenue per passenger is Can$2.59. The higher charge at T3 reflects the greater capital costs associated with the development of a new terminal. Airside charges at the govern- ment-operated terminals are on a pure cost-recovery basis and do not include capital costs. Market segmentation between the ownership arrangements is another factor. International airlines operate out of T3, whereas domestic and low cost U.S. airlines serve TI and T2, respectively. C. Financial Performance In spite of relatively low airside charges, Pearson Airport has remained profitable because of its large passenger flows, which generate higher revenues from landing fees and concessions. In addition, Pearson's operating costs are roughly 3 percent lower than the composite of the largest nine airports in Canada. Table 3.7 outlines the overall financial performance of Ti and T2 at Pearson during the period 1988-92. 123 AIRPORT PRIVATIZATION EXPERIENCES Table 3.7 Canada: Financial Performance of Ti and T2, Toronto, 1988-92 (Can$ millions, except as noted) Passengers (millions) 20.7 20.9 21.2 13.4 13.5 Revenues! 148.0 158 4 165.1 129.0 123.1 Revenues/Passenger (Can$) 7 2 7.6 7.8 9.6 9.1 Costs2 69.4 82.6 98 7 98.5 84.6 Costs/Passenger (Can$) 3.3 3.9 4.7 7.4 6.3 Profit/Loss' 78.5 75.9 66.4 30.5 38.4 Cash Holdings 102.0 89 5 88.1 30.6 47.7 Capital Expenditures 46.7 48.9 30.2 18.3 10.3 Average Retum on 36.0 30.0 29.0 13.0 17.0 Investment (%o) Lower revenues 1991-1992 are attributed to U.S./Canada exchange rate differences. US$1=Can$1.1.2307(1988); Can$1.1840(1989); Can$1.1668(1990); Can$1.1457(1991); Can$1 .2087(1992). Lower costs are due to efficiency concems andto the U.SJCanada exchange rate differences. 'The opening of T3 in February 1991 impacted on 1991-1992 profits. Source: Transport Canada. T3 has much lower staff costs than the government-op- erated terminals. T3 maintains a third fewer employees than either Ti or T2, and T3's employees are not unionized. More- over, T3 is less burdened by regulatory and administrative pro- cedures, and procurement is more streamlined. To illustrate the efficiency of operations at T3, one official quoted a statement to the effect that to change a carpet in the passenger service area at TI or T2, 41 administrative steps are required, whereas at T3 all that is needed is one phone call from the maintenance manager to the supplier. Although T3 has been profitable, total profits have been less than originally forecast. The decrease in passen- ger traffic as a result of the Gulf War and the 1991-92 recession had a negative impact on commercial revenue. In addition, two concessionaires contested the financial terms of the retailing agreement, which led to the renegotiation of one contract and the nullification of the other. Detailed information on the finan- cial performance of T3 is precluded by the lack of disclosure by LATC. 124 Case Study 3 CANADA D. Privatization Process 1. Growth in Air Traffic Activity Pearson Airport serves the Toronto metropolitan area - the business and financial capital of Canada. In addition to having a strong origin and destination market, Toronto serves as the primary entry point for foreign carriers and provides hub ser- vices for Air Canada into domestic markets. Because of these market factors, growth at Pearson Airport is closely linked to changes in national and world macroeconomic conditions. Pas- senger traffic increases in the middle to late 1980s were fol- lowed by a reduction in traffic during the Gulf War and the 199 1- 92 recession. Overall, average annual growth rates in passen- ger and cargo traffic during the period 1985-93 were 3.3 percent and 7.2 percent, respectively. As is seen in Table 3.8, maxi- mum capacity constraints were reached around 1988 and the development of an additional terminal became necessary. Trans- port Canada estimates that air passenger traffic will grow by 2.1 percent annually. Total traffic estimates range from 30 million to 35 million passengers by the year 2005. Table 3.8 lists pas- senger, cargo, and aircraft movements at Pearson during the period 1985-93. Table 3.8 Canada: Passenger, Cargo, and Aircraft Movements at Pearson, 1985-93 S. * - _ SI ww T1-2 T3 Total T1-2 T3 Total T1.2 T3 Total 1985 15.8 0.0 15.8 282.6 0.0 282.6 I N/A N/A N/A 1986 171 0.0 17.1 301 2 0.0 301.2 216.7 0.0 216.7 1987 184 00 18.4 313.8 0.0 313.8 241.5 0.0 241.5 1988 20 3 0.0 20.3 347.6 0.0 347.6 273.5 0.0 273.5 1989 20.7 0.0 20.7! 348.3 0.0 348.3 312.2 0.0 312.2 1990 20.4 0.0 20.4 353.8 0.0 353.8 327.6 0.0 327.6 1991 13.4 5.1 18 5 . 214.9 107.4 322.3 209.7 104.8 314.5 1992 13.5 6.5 19.1 218.3 109 2 327.5 216.7 108.3 325.0 '1993 13.7 7.0 20.7 N/A NA N/A N/A N/A N/A Source: Transport Canada. 125 AIRPORT PRIVATIZATION EXPERIENCES 2. Limited Sources of Financing Federal ownership of Pearson precludes its access to capital market funds. Funding for TI and T2 is obtained exclusively from fiscal appropriations and covers operational costs, naviga- tion, ATC, and security services. Increases for infrastructure improvements have been difficult to obtain within the current macroeconomic context in Canada. In particular, Pearson Air- port requires three new runways which would increase airside capacity by 30 percent and would accommodate projected in- creases in aircraft movements. This project, which had been under study for four years, was postponed in 1993 because of political concerns and financing constraints. In addition, Ti is in serious need of renovation. Lack of financial resources was the primary reason why T3 was developed by the private sector and the privatization of TI and T2 was undertaken. 3. Techniques Used in Privatization T3, a 29-gate terminal, was developed to relieve capacity con- straints at Pearson Airport. The original developers, Huang and Danczkay (which sold their shares to Claridge Properties in 1992) and LATC had complete autonomy in choosing the design, size, and financing of the new terminal. T3 was constructed in three years at a cost of Can$570 million, an overrun of more than Can$320 million over original estimates. The expansion of the original design from 16 to 24 gates and the development of a 5- gate satellite terminal was the primary cause of the cost over- run. Unlike airport terminals in the United States, developed by airlines to vertically integrate operations and achieve greater economies of scale, this project was intended to be a separate and commercially viable operation. In contrast to the selection process at the corporatized airports, the bidding for the devel- opment of T3 was open and transparent. Nine business groups responded to Transport Canada's original request for proposals, which was eventually short-listed to four consortia. The main criterion for differentiating the four bids was the ability to un- dertake all phases of the development - design, financing, and operations. The maximum rate of return is unregulated by Trans- port Canada. Because of the concern that T1 and T2 would be un- derutilized, Transport Canada has rigidly controlled the entry of airlines at the new terminal. Prior to construction, the develop- 126 Case Study 3 CANADA ers obtained commitments from seven foreign-based airlines to operate at T3. Airline leases have 20-year terms and a review by Transport Canada is required. A demand existed for addi- tional airline transfers to T3, but this was not permitted by Trans- port Canada. Carriers that currently operate out of T3 were un- happy with this decision, as an increase in new entrants would lower rental costs. Transport Canada is not obligated to transfer a new carrier to T3 in the event of drastic service reduction or bankruptcy of the operating airlines. (Box 3.1 gives project high- lights for T3.) TERMINAL THREE (THE TRILLIUM) - PROJECT Box 3.1 HIGHLIGHTS Description of the Project. The privatization concept used in this transaction was a "build - own - operate - transfer' (B1iOTi arrangerment with a long-term lease contract of 60 years icr the use of land irenewable). One of the features of this parlicular transaction w%as that the BOOT included full capita' cost recovery over the life of the lease (including the investor's rate ot return) on the total costs ot the project (ter- iminal access roads. etc.). The project was a greenfield con- cept iniendea originally to provide Lester B. Pearson Airport with a new passenger terminal with the following characteris- TiCs: l 1t 16 gates; t2) access road: (3) capacity to handle be- tween 5 and 6 million passengers a year with potential for expansion to up to 12 million passenger a year: (4) estimated project cost of CanS250 million. Project Implementation. The BOOT contract for T3 was awar-ded in 1987 to Terminal Three Limited Partnership (TTLP), a consortium integrated by two Canadian developers (Huang and Danczkayl and one airport operator (Lockheed Corpora- tioni. Later in 1992 Huang and Danczkay sold its share in TTLP to Claridge Propenies Limited (a real estate developer related Io the Bronfman investors' group. Seagrams). Termi- nal 3 (T3i is managed by Lockheed Air Terminal of Canada Inc iLATCO under a management contract trom TTLP. The final total development costs for the project amounted to Can $ 570 million. and the total time elapsed from the selection of the proposal until the delivery of the T3 was three years. From the original profect of 16 gates and 6 million passengers per year. T3 ended up with 29 gates t24 + 5 satellite) and a ca- pacity of between 10 and 12 million passengers per year. The total area of the terminal is 130.060 square meters. Structure of Fees and Charges (TTLP). Although financial intormation was not available, given the ownership structure of the private operators i.e.. closely held companies). the fol- lowing is a description of the key components of the fees and charges at T3: Continued 127 AIRPORT PRIVATIZATION EXPERIENCES Box 3.1 n Management Fees. LATC's management fee is 'cost plus" based. The current conditions are set at 6 percent of total ex- penses. Terminal Fees. Landing fees and air navigation services are charged to airlines by Transport Canada. Charges to airlines tor the use ot T3 start at the apron approach when the carder switches from the general tower control to T3 tower control. T TTLP charges the airlines terminal fees based on a predeter- mined formula that estimates the total expenses of a given year (i.e.. operational and maintenance expenses plus capital costs). This amount is divided by the estimated number of i offered seats for that year (enplanements and deplanements by type of aircraft) to calculate the terminal fees per offered seat. Secunty Cflarges. TTLP charges the airline a security fee. on a per passenger basis, tor the use of T3. Concessionaires Charges. TTLP charges each one of the commercial concessions with a percentage of gross revenue for the lease of the space (duty-tree. shops, restaurants, etc.). In addition, it charges an initial payment for the right of exploi- tation (key money). Investment Fund Charges. T3 users (airlines and conces- sionaires) are charged 5 percent of gross revenues for pur- poses of upgrades, general maintenance, and new invest- ments tor the terminal. If the amounts in the investment fund are not used within a given period of time, the fund is trans- ferred back to the users. Other Direct Cosl Allocations. Other operational costs are allocated to users (airlines and concessionaires) on the basis of real expenses. These costs are allocated on the basis of space used, according the following distribution: (1) 70 per- cent to airlines and (2) 30 percent to commercial concession- aires including parking (the parking concession is directly ex- ploited by TTLP). Construction Charges. Full recovery of capital investment (in- cluding financial costs and investor's rate of return) are in- cluded in the pricing lormulas of the different charges In 1993 the Conservative Administration attempted to privatize TI and T2 through a lease-develop-operate (LDO) scheme. The selected consortium, PAXPORT, agreed to invest in the renovation and expansion of TI and T2. The use of fast- track bidding procedures coupled with a politization of the priva- tization process resulted in the project becoming controversial. During the 1993 general election, the Liberal Party campaigned 128 Case Study 3 CANADA against the leasing of T I and T2. With the subsequent change in governing parties, the project was canceled. To date, PAXPORT is seeking financial damages as a result of this cancellation. E. Key Issues Emerging from the Pearson Airport Experience E Private Sector Involvement. The privatization expe- rience of the new T3 at Lester B. Pearson Airport has been suc- cessful. Pearson airport has three terminals, one of which is com- pletely under private sector management while the other two are under the direct supervision of Transport Canada. The rela- tionship between the two different types of administration has been excellent according to officials from both the Pearson Air- port authority (Transport Canada) and LATC. The difference in prices has segmented the provision of terminal services, provid- ing a market mechanism for carriers' preferences. Capital allo- cation to the development project was available, given the ex- isting financial conditions in the original arrangement (i.e., 60- year land lease, no economic regulation on charges, user's charges driven by full capital cost recovery requisites). By se- lecting the option of private sector involvement in the develop- ment and operation of T3, Transport Canada provided the com- munity of Toronto with a new terminal facility at no cost to the taxpayer. Transaction Design. The relative success of the T3 transaction was due to the transparent process and the depoliticized environment. Bid submissions were requested openly, and Transport Canada was able to choose the best out of four proposals. Conflict of interest concerns such as those that affected the privatization of Ti and T2 did not materialize. More- over, the absence of a politicized environment meant that only the main principals involved had a voice in the transaction. The development of T3 was not held hostage to political concerns and did not necessitate the involvement of various federal de- partments andlor levels of government. Thus, the government was able to concentrate on financial provisions and future op- erations of the terminal. Moreover, this arrangement precludes future government financial involvement in T3 unless a bank- ruptcy occurs. Unlike the corporatization experience discussed earlier, in the T3 transaction capital expenditures are the sole responsibility of the developer; in addition, no government funds were involved in the development of the new terminal. The ex- 129 AIRPORT PRIVATIZATION ExPERIENCES perience with Ti and T2 at Pearson Airport in Toronto illus- trates the importance of maintaining transparent and open bid- ding procedures in the privatization initiative. M Political Influence. Another significant issue is that the depoliticization of airport operations and development ini- tiatives is absolutely necessary to improve economic efficiency and establish financial autonomy. Political pressure to maintain low airside charges impairs the ability of airport authorities to finance renovations and expansions. At small and medium-size airports, low airside charges in relation to operational costs may impede airport sustainability. Privatization and deregulation of the airline industry is one approach that would depoliticize the airside charge issue and concomitantly reduce the political link- ages among aviation enterprises. However, changes in airport ownership structure in conjunction with the establishment of an independent regulatory entity would give airport authorities wider latitude in setting pricing schedules. Management Contract (fees and incentives). T3 is using as a management contractor a private sector operator (Lockheed Air Terminal of Canada Inc.). Given the basis on which the management contract fees are calculated (i.e., cost plus), an argument could be made against real incentives to become cost efficient . This issue will have to be given consideration by Transport Canada on the basis of the "real competition" that could occur in TI and T2 under the present ownership structure (to provide an incentive for lower operational costs). Management fees should not only be linked to total cost figures, but should also include performance results (gross operational profit, revenue increase per passenger, etc.). 130 Case Study 4 COLOMBIA AIRPORTS IN COLOMBIA A CASE STUDY OF INNOVATIVE INFRASTRUCTURE FINANCING IN LATIN AMERICA1 The cielos abiertos (open skies) agreement signed in 1990 by Andean Pact members Colombia, Bolivia, Ecuador, Peru, and Venezuela liberalized air space and, coupled with the economic liberalization taking place in other Latin American nations, stimu- lated air traffic. Sustaining air traffic growth, developing Colombia's position as a regional hub, and satisfying interna- tional operative and security standards will require substantial investment in airport and air navigation infrastructure. The Civil Aviation Authority (CAA) (Aerocivil de Colombia) and the Min- istry of Planning (Departamento Nacional de Planeaci6n) fore- cast investment needs of US$329 million for air navigation and airport-related infrastructure in the near future. In view of the increasing difficulties faced by the Government of Colombia in meeting these investment needs, the CAA embarked in 1993 on a series of far-reaching reforms designed to involve the private sector in the development and provision of air services infra- structure. In early 1993, the CAA commissioned an international consulting firm, Booz, Allen and Hamilton (BAH), to under- take a thorough study, financed by the United Nations Develop- 'Research for this case study was conducted in February 1995. 131 AIRPORT PRIVATIZATION EXPERIENCES ment Programme (UNDP), for the rationalization of the airport system in Colombia (BAH Study). The study, called "Descentralizaci6n de la Infraestructura Aeroportuaria" (Decen- tralization of the Airport Infrastructure), included a restructur- ing and privatization strategy for the airport sector, a corporati- zation strategy for the CAA, and a new pricing policy for air- port-related charges (economic regulation). In December 31, 1993 new Transport Law No. 105 was enacted by Congress. Under the new legislation, the government corporatized the CAA, separating airport operations from air navigation activi- ties. At the same time, and as part of a process begun before the enactment of the law, the government undertook the privatiza- tion of the second runway at El Dorado International Airport, Bogota, using a build-operate-transfer (BOT) scheme for the construction and maintenance of a new runway (3,800 m) as well as the maintenance of the existing runway (3,800 rn).2 The El Dorado privatization transaction incorporates innovative financing mechanisms in cases of non-conventional airport infrastructure (for private sector participation) such as runways, taxiways, and aprons. If it is successfully implemented (construction is expected to begin at the end of 1995), this type of transaction could become a model for airport infrastructure financing in developing economies. The case also illustrates the importance of using technical experts to design and implement the privatization transaction, as well as a meticulous and pre- cise implementation of bidding procedures for the concession contract. However, the ways in which the transaction was struc- tured raise some issues regarding the impact of the pricing strat- egy used for determining the levels of landing fees and the use of government guarantees to cover the project's commercial risks. This experience is further analyzed in Section IV of this case study. The privatization process of the Cali International Air- port, after an initial failed attempt owing to security concerns in April 1995, is being reformulated by the CAA in consultation with six interested parties. The transaction is expected to be com- pleted by late 1995. Bidding documents are also being drawn up for the privatizations of the Baranquilla and Cartagena Air- 2 Largely in response to issues of capacity constraint and the desire for a quick resolu- tion of concerns, the government embarked on the partial privatization of the airport facility (runway). 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(D 0 0 0) !D (U ;:v cr, m (U 3 - CP 0 Ic CD CD rn m CL 0 CD 0 CD CD CL 2, - > iD X :3 CD W - 9 cp CD CD CL C). 0 0 x AIRPORT PRIVATIZATION EXPERIENCES . OWNERSHIP AND INSTITUTIONAL FRAMEWORK ___ e__ A. The CAA through 1993 Colombia's CAA, a government agency under the supervision of the Ministry of Transport, was responsible for overseeing and managing all aspects of air transport policy and airport-related services. With 3,349 employees, the CAA performed three main functions: (1) provision of air navigation services; (2) adminis- tration of technical and economic regulation; and (3) airports operation. At the federal level, the CAA was structured into a gen- eral division subdivided into three sections: X An administrative division employed 927 staff who together with the Ministry of Transport oversaw air transport policy. This division established and controlled economic regulation - specifically the determination of airside charges. • An air navigation and technical division, which em- ployed 985 staff, provided air navigation services and, in particular, controlled aircraft movements and provided en route and search and rescue assistance to flights. • An airports division, with 1,437 employees, focused on managing airport-related services and on planning air- port investment and maintenance programs in the 74 Colombian airports. Figure 4.1 shows the CAA organization structure. At the regional level, the CAA provided air traffic con- trol services through six air navigation sub-divisions respon- sible for controlling aircraft movements within Colombian air- space. B. The CAA after 1993 Given the pressing needs for airport infrastructure development and the tight budgetary constraints, the Government of Colom- bia decided in 1993 to restructure the air transport sector to fa- vor both regional decentralization and increased private sector 134 Case Study 4 COLOMBIA Figure 4.1 Colombia: CAA Organization Structure (to December 1993) CAA I Administrative Division) AirNavigation Services Airports Manageinen) I Air Tranport Policy) Air Traffic Control Airport Operation Economic Regulation Safety Regulation )Airport Safty ' Technical Regulatio n ) ' Search & Rescue ) Cci Source: CAA, "La Nueva Aerocivil, Estructura y Normas Generales," Janu- ary 1994. participation. Under the December 30, 1993, transport law (Law No. 105) the government overhauled the airport institutional framework. Decree No. 2724, of December 31, 1993, corporatized the CAA: "The CAA is a specialized entity of tech- nical character under the Ministry of Transport with legal char- acter, administrative autonomy, and financial independence."3 Under corporatization, the CAA is subject to civil corporate law like any other private enterprise, with autonomy in its financial budgeting and corporate governance. The CAA's assets and li- abilities became clearly separated from the federal government's budget. Undertaking a BOT or a long-term lease concession is easier under a corporatized entity. Corporatization imbued the CAA with the necessary flexibility needed for restructuring the sector. The new CAA, under the jurisdiction of the Ministry of Transport, will focus its activities on: Regulating air transport services. The Administrative Division will focus primarily on economic and techni- cal regulation of the sector. 3 CAA,"La Aerocivil: Estructura y Normas Generales," January 1994. 135 A r)RT PRIVATIZATION EXPERIENCES Providing air traffic control (ATC) services under the aegis of the Air Navigation Services Division. This reorientation of activities required a correspond- ing restructuring of personnel. The Administrative Division staff went from 927 to 329 employees, and the Air Navigation Ser- vices Division staff increased from 985 to 1,073. Under the new arrangements, the CAA can transfer re- sponsibility for infrastructure development and airport manage- ment to private sector operators. Figure 4.2 shows the post-1993 organization structure of the CAA. Figure 4.2 Colombia: The New CAA Organization Structure Policy & Regulation Air Navlption Svvicem I Air Transport Policy Air Traffic Control Econornic Regulation )( Safety Regulatlon ) ,Technical Regulation ' Search & Rescue Source: CAA, "La Nueva Aerocivil, Estructura y Normas Generales," Janu- ary 1994. The aim of the institutional reforms enacted in the air transport sector is to establish a mechanism for decentralizing the administration of transport-related infrastructure while cre- ating a framework that facilitates and promotes private sector participation. The rationalization of Colombia's national airport system is being implemented by the CAA through its operating unit (Secretarfa Aeroportuaria). As private investors enter the sector, the CAA's role in setting air transport policy and regulat- ing the sector will gain in importance (see Box 4.2). 136 Case Study 4 COLOMBIA OFICOLOMBIA'S Box 4.2 CONTEXT OF COLOMBIA'S RESTRUCTURING AND PRIVATIZATION OF THE AIR TRANSPORT SECTOR In 1994 the Colombian air transport system mobilized 8.0 mil- lion domestic passengers, 2.1 million international passengers, 161,000 tons of domestic cargo. and 403.000 tons of intema- tional cargo. During the period 1990-94 the number of pas- senger and freight operations grew by an 8 percent annual rate. 1 Most of the increase was concentrated among the larger airports. Forecasts call for continued increases in volumes being handled by the Colombian air transport sector. Investment spending must occur in the light of these projections, for Colombia's airport infrastructure to cope with the increased demands placed on it in future years. Summary of Passenger Flow Projections (in millions) Airport Year Category 1994 1999 2004 2009 2014 A Large I 6.1 8 9 10.8 13.0 15.7 B Medium' 1.7 2 3 2.8 3.4 4.1 C Sma!l 0.3 0 4 0.4 0.5 0.6 'Reordenamiento Irisinuconal y Plan de Expansion del Sisiema Aeroportuario,. Deparimerit ot National Planning. August 1994. Source Booz. Allen and Hamilton, 'Descenlralizaci6n de la lnfraeslructura Aeroportuaria." Seplember 1994 Il. REGULATORY FRAMEWORK A. Economic Regulation through 1993 Since its inception the CAA has been responsible for setting and regulating aeronautical charges, which represent 83 percent of revenues. Aeronautical charges in Colombia include air navi- gation fees, landing fees, aircraft parking fees, and passenger fees. Prior to December 1993, since air navigation services and airport management had been the CAA's sole responsibility, a unitary pricing scheme had been developed whereby air navi- gation, landing, and aircraft parking fees were not separate fees 137 AIRPORT PRIVATIZATION EXPERIENCES but were grouped under a single aeronautical charge. Passenger fees, although considered an aeronautical charge, were priced separately while concession and rental fees were set on the ba- sis of market prices (see Figure 4.3). Figure 4.3 Aircraft Colombia: Unitary Parking Fees Aeronautical Revenues, 17% Including Passenger Fees, 1993 Overflight FeesAipr 8% Passenger Fees 48% Air Navigation Services Fees 17% Landing Fees 10% Source: CM, "Estados Financierosdel FondoAeronautico Nacional a 31 de Diciembre de 1993." B. Economic Regulation after 1993 The BAH Study found that, in the context of the liberalized air- space and the pressing need for infrastructure development, changes in the pricing structure of airport services appeared nec- essary. The BAH Study also emphasized that the present value of future CAA revenues over the next 10 years, using the same pricing structure, revealed an accumulated deficit of US$233 million. If there were no changes, the deficit would continue to drain scarce resources from government coffers (including capital costs). The first step taken was to corporatize the CAA so as to facilitate private investor and regional and local entity par- ticipation in the sector. After corporatization, the single aero- nautical charge was separated into an air navigation fee, a land- ing fee, and an aircraft parking fee for El Dorado, because the El Dorado Second Runway privatization scheme was already under consideration; for the remaining airports the single charge was separated into an air navigation fee and a landing fee (with parking fee included). The air navigation, landing, and parking 138 Case Study 4 COLOMBIA fees usually vary depending on flight origin, airport size, and aircraft weight. By separating air navigation charges from land- ing fees, the government paved the way for the privatization and decentralization of airport services, since ATC and air navi- gation activities could remain the purview of the CAA while airport services could now be privatized. ATC and air naviga- tion-related services are accepted as the federal government's domain because of their association with defense and safety and because of the need to have one national entity provide these services. The new economic regulation set a passenger fee of US$20 per passenger. Basically, by separating the large aero- nautical charge into three smaller charges the CAA increased its flexibility and gave itself options that it had previously lacked, since privatization would have proved more difficult under a unique aeronautical charge. Figure 4.4 presents the aeronauti- cal charge structure before and after 1993. _______ Figure 4.4 Colombia: Structure of Aeronautical Charges, before and after 1993 Pre-1993: Single Aeronautical Charge AT,'->Cr,rer ar Arl , l,:n3 A,,) n-ni Facr iiit A,rcra?t ApproaCh Runwiay Ta3.*ay Apron Gates Rermote lAircralt Parking, Parking … _ _ _ Pgt-1993: Multiple Aeronautical Crares _ _ A,r ja.,qiai,.jn Fe;,LUS2')> 51 Lanling FePs ILI5C203 5> A,rcrafi Parking US¶S40 J 'fnourl' I Legend 11 _ _~~ _;'1111 Al- 'i!l Crl.jre 1 Aircraft parking charges are effective after the first two hours. Note: Data in brackets are calculated for a B-727 (international flight). Source: CAA, Special Administrative Unit, Decree 2724/93. 139 AIRPORT PRIVATIZATION EXPERIENCES _ill-l'l-w n C. Pricing Strategy under Consideration for Privatization Purposes The pricing of airside-related charges for each airport to be priva- tized under the master concession scheme will be determined on a case-by-case basis, as defined by the govermment on the basis of the results of the BAH Study. The advantage of this arrangement is that it allows the CAA to have flexibility to design the financial structure required by each airport to be privatized (i.e., the financial viability of the transaction). However, this pricing strategy could result in two disadvantages: (1) it could drive up the level of airside charges in the system, which could affect the competitiveness of Colombian airports; and (2) the CAA could find itself regu- lating a very complex set of airside charges if the differences among airports are significant and/or frequent. Airside charges are to be based on an inflation-adjusted formula, including a minimum salary index for airside charges on domestic flights, and a U.S. inflation index for airside charges on international flights. Table 4.1 shows aeronautical charges as of January 1995. Table 4.1 Average Weighted Aeronautical Charges' Colombia: Aeronautical Air Navigation2 Landing Fee3 Aircraft Parking4 Charges, January 1995 El Dorado 109,435.12 98,494.13 10.934 97 (in Col$) Large Airports 109,514.99 109.514.99 Medium Airports 107,109.53 107,109.53 4 'Average weighted airport fees. 2Air navigation fees. For domestic flights, four types of air navigation charges corresponding to fourtypes of Colombian airports apply. For intemational flights, two types of air navigation charges pertain: one for El Dorado and another for other airports. I Landing fees are priced according to a formula based on airport traffic type, aircraft weight, and volume, broadly in line with the formula used for air navigation services. I For El Dorado, aircraft parking fees are distinguished from landing fees, while for other airports aircraft parking fees are included in the landing fees. Notes: US$1 = Col$831.60 (January 1995). See Annex 1 for calculations of average landing fees. Source: CM, Special Administrative Unit, Decree 00724/95. The final step in the overhaul of the Colombian pricing structure, according to the BAH Study, is to increase Colom- bian charges and bring them more in line with world rates. This will increase the potential profitability of the airports system for the government, and enhance the attractiveness of Colombia's airports for investors. To minimize the potential negative effect of these rate increases on competitiveness, BAH advised gradu- ally bridging the gap between the average international fees and Colombian fees. 140 Case Study 4 COLOMBIA IlIl. FINANCIAL PERFORMANCER The CAA's financial statements over the past three years reflect an increase in operational profits resulting from an increase in air traffic, as well as continued recourse to government subsi- dies and extemal financing (see Figure 4.5). Operating profits as a percentage of revenues rose from 18 percent to 29 percent in 1994. Govemment Figure 4.5 Government - Colombia: CM Subsidies Revenue Sources, 1994 26%- Airport-Related Services 49% Air Navigation Services 26% Source: Booz, Allen and Hamilton, 'Descentralizaci6n de la Infraestructura Aeroportuaria," September 1994. Whereas airport revenues covered airport operating charges, government subsidies and external financing (non-op- erational resources) upgraded air navigation equipment and air- port facilities. Clearly, if the government agrees that it is no longer able to subsidize investment then it will have to have more pri- vate sector involvement. The system's increasing investment needs, stemming from the larger demands placed on it, increase the need for private investor participation in the nation's infra- structure financing. However, it is important to note that total revenues have increased substantially while expenditures have remained constant (see Table 4.2, following page); as a result, an increasing surplus before investment has eased the system's cash needs. Thus, although the operating surplus is not suffi- cient to cover the sizable investment needs that have accrued over the years, it does demonstrate to prospective investors that the sector is a dynamic one with growth opportunities. 141 AIRPORT PRIVATIZATION EXPERIENCES Table 4.2 Colombia: CM Financial Performance, 1991 -94 (US$ millions) roi -venuesR s U48.3 5S53 73.3 77.0 Air Navigation Services 22.6 25.2 19.6 22.3 Airports 16.8 21.5 24 9 20.7 Operational Expenditures 39.4 46.8 44.6 43.0 Debt Service 16.0 18 1 16.0 12.0 .ToIhEJqJdndt 5 -4 64.9 60.6 55.0 Opwrational Resuft - [-7.1 'f-3.31 127 21.9 -I mstrnersls 40.6 50.0 58.8 59.6 Financing Needs 47.7 59.3 46.1 37.3 FLunded by. GmrnementTransets 23.2 27.3 2&6 28.3 No-openraton Sources 24.4 32.0 17.5 9.4 I Esfimates for 1994. Source: Department of National Planning, Conpes-2727, August 1994. (From BAH analysis, original source in US$.) The CAA's ratio of airside to landside charges for 1993, the last year for which data were available, was 83:17 percent.4 The predominance of airside charges as a source of revenue fol- lows a general pattern in developing countries. However, the contribution of airside charges to revenues in Colombia is much higher than in other developing countries. Such a level of con- tribution indicates a window of opportunity for increased land- side revenues to finance upgrading and modernizing of equip- ment and facilities. The CAA's future financial performance depends on its ability to raise revenues to cover large airport system invest- ment needs. In the context of the continuing liberalization of air transport in Latin American countries (increased traffic flows), I Airside charges encompass all services associated with the movement of aircraft (air navigation fees, landing fees, parking fees, and passenger fees), while landside charges include all services associated with the movement of passengers (ground handling, air- port use fees). 142 Case Study 4 COLOMBIA and in order to meet international operative standards and de- crease safety concerns, the CAA needs to invest US$83 million to upgrade air navigation services, mainly in ATC (see Table 4.3) and flight assistance, in the next few years. . U _ . Table 4.3 Radar 42.7 5 years Colombia: ATC VORDME'ILS 21.7 10 years Investment Plan Communication Equipment 15.5 2 years ( Meteorological Equipment 2.8 3 years Total 82.7 Source: BAH. (From CAA and Department of National Planning, August 1994, original source in US$.) The CAA forecasts investment plans totaling US$236 million over the next three years for airport infrastructure up- grades (see Table 4.4). Investments will allow airports to meet traffic increases from 8.1 million to 20.4 million passengers in the year 2014, as well as maintenance costs averaging US$7 million per year. Table 4.4 Runways 78.2 27 8 106.0 Colombia: Airport Aprons 11.8 6.2 56.2 Infrastructure Invest- Terminals 23.5 32.8 18.0 ment Plan, 1995-97 Enclosures 11.8 12.0 23.8 (US$ millions) Security Equipment 1 0 7.4 8.5 Fire Fighting Equipment 4.0 19.7 23.7 Total 130.3 106.0 236.3 ' Data for El Dorado correspond to figures used before the BOT arrangement (second runway). Source: BAH. (From CAAand Department of National Planning, August 1994, original source in US$.) Under the restructuring program, investment needs for the entire airport system are covered by revenues from profit- able airports (cross-subsidies). Introducing private operators into infrastructure financing and management will facilitate explicit resource transfer from one group of airports to the rest of the system. This arrangement will enable the government to con- centrate its activities on regulating operators and channeling con- cession fees to unprofitable airports that cannot achieve the economies of scale necessary to finance large investment costs. Document 2747/94 from the Department of National Planning approved the creation of an Airport Development Fund (Fondo de Compensaci6n Aeroportuaria) to channel funds from con- 143 AIRPORT PRIVATIZATION EXPERIENCES cession fees revenues (privatization of Category A airports) to unprofitable airports. The government thus can more easily to cope with the conflicting demands of larger airports with con- siderable political clout and smaller airports with little lobbying power, and transfer funds from the operations of larger airports to the smaller airports. IV. PRIVATIZATION PROCESS: SECOND RUNWAY - EL DORADO AIRPORT, BOGOTA Although the construction of El Dorado's second runway was slated for 19885 it was not begun because of the Cabinet's re- fusal to approve the construction under prevailing contractual arrangements. The use of the existing runway had reached satu- ration levels by 1992, increasing safety hazards and flight de- lays for airlines. Given the capacity constraint, the government, in 1993, launched an expedient process for building the second runway. (This constraint was limiting the development of Bogotd as a potential "hub" for Andean Pact members.) Fiscal limita- tions prompted the government to pursue the project through private sector financing and construction. The project can be con- sidered a blueprint exemplifying the government's approach to the privatization of airport infrastructure. A. Project Description The project includes (1) building a new runway parallel to the existing one; (2) procuring lighting and instrument landing equip- ment; (3) maintaining the existing runway; and (4) constructing the related infrastructure (taxiways, aprons, relocation of the Bogota River's western bank, etc.). The technical specifications for the bidding process estimate the total cost to be US$98.8 million (see Box 4.3). The project finance mechanism consists of a BOT scheme involving a 20-year concession for the con- struction and maintenance of a new runway (3,800 m) as well as maintenance of the existing runway (3,800 m). At the end of the concession period all of the assets needed to provide the service revert to the CAA. ATC services, including approach and land- 5 Master Plan for El Dorado Airport, 1985. 144 Case Study 4 COLOMBEIA Box 4.3 EL DORADO AIRPORT, BOGOTA: CONSTRUCTION OF THE SECOND RUNWAY (ESTIMATED INVESTMENT COSTS)' I.Civil Works * Relocatir,n ot the wesiern bank of Bogota River * ConsTructon of the second runwaV i3.8000 m) * Apron tor mil,rary air base Catami * Intermal a:cess road * Waler pump statin ard seiage sistem assoiated wt, the runway Sub-i $75,893.00 90.00 II. Electrical supplies and visual landing systems $Ks 933.00 4 71 Ill. Communication and meterology equipment 989 00 t 0G IV. Project audit 2 424 OU 2 90 Total 8323900 ge US$1 = ColIS42.50 iFebrvari 1995s Source CAA. Proyecto de Construcci6n ae la Segunda P,sta ael Aeropuert o E! Dorado de la Ciudad de Santa Fe de Bogota i Resumen ' Ejecutivo) - February 1995. ing, are to be operated by the CAA (services retained by the CAA following the restructuring and privatization process), while maintenance of runways is to be provided by the conces- sionaire and is estimated to be US$2.8 million annually begin- ning in 1998, the first year of maintenance. The estimated in- vestment of US$98.8 million is to be financed entirely by the winning bid (the concessionaire). At least 20 percent of the total project cost is to be funded by the concessionaire via equity participation (in the company that operates the concession). 145 00 .0 CL (D c 'A w La a) (a CA co co m - - - 0 a) M 0 E C Z > E w (D Cn CD :3 CD X -6 a) C X CD 0 0 co 4) CL - -0 0) 0 0 -a - > IJL C" W -0 cm oj c 0 (D L) a) C X r c x ctsc 4- E W - .- 4-: o 6- in E a: z .0 C M 0 0 0 -6 c 0 m C-0 -r- m c a cis E CL C 0 m 0 0 (D W a) o U) (D CL 0 U 0 - E 0 L2 Q) E 0- E a) x w 0 0 D..b 2- x a- .- a - - - 0. CL CO CL 0 (D a) M tn E 0 U) -a 4) 0) Q) C E to'Co 70 U) LU - r- - C: a) W x ci U cn C w .= .6 a) w CY) - - 0 E 0 0 .;--M Lo m 0 Co C a) o (D cy) ai a) 'a C) LL. cn -0 C -- C t: En a) 'D a rts a) o w .1 0 tn m r- u 'a fn in CL 0 C a) .- (D w E CL CL (D (D (b W c) L) tn La C u CD CL V) u -0 If, a) 0 w C) - - 0 CD X - -W ui C- ri Lc) 0 E E 0 0 oc -C)0 CL w 0 h C 0 C: -E 0 C 0 CL tn 0 o 0 o CL) L) (L) cn v) 0 C,) L) (L) (L) W C 0 L) r- r- 0) C (D 'a)0 (1).0 (1) 0 o - 0 CU E E c (D CU W a) CL -a CL LL .2 0 C CL cn z- zr,0 :E 2 f E E -o cc')) 0 0 U) CJ w E E -0 C: m cm a) (D 4. D :p n tn 0 0 CL) t! r CL u L) co , a CL 0 ""b Cr,o u U En V) En 2 u C3 0 (D LU LO 0 0 'D (D 0 'O u L) u o cn CL 69 U!) CL C u C -'5 ') E E U) u 73 E u w ui in 5 CL a) tn u w d, :3 C2 .0 > m m 0 0 0 0 CD 0 U) CL 0 cn -i C3. - CL -3 CL D 0 zi CL Ld L) 7 i F LA 0 LU m a: E cn L) o Ti 7 Cl, Zo - -Z U) lu. mr CC x Case Study 4 COLOMBIA Landing fee revenues are calculated as the landing fees multi- plied by the expected trafficflows.6 The concessionaire will pro- pose the landing fees structure for the 20-year period (including a formula adjusted for inflation and changes in the exchange rate). Disbursements of landing fee revenues (refunds) from the CAA to the concessionaire will commence when the second run- way becomes operational. The construction phase is estimated to take 33 months postdating the contract award. After construc- tion is completed, the maintenance phase will last until the end of the concession.7 Annex 4.2 illustrates the methodology for the submission of proposals for the landing fees structure. The Government of Colombia, through the CAA, is guaranteeing a minimum level of revenues to the concession- aire (floor pricing) in case the landing fees structure and/or the expected traffic volumes cannot support the required revenue stream. The government, through the CAA, will compensate any difference in a given year between "real landing fees revenues" and the required mriinimum level. For this purpose the CAA is establishing, as part of the bidding conditions, a Trust Fund equivalent to 30 percent of the annual landing fee revenues. Landing fees are set by the CAA according to its policies and regulatory framework. The concessionaire will propose the mini- mum level of landing fee revenues necessary for project imple- mentation (see Figure 4.6).8 The net present value of the re- A I- > Figure 4.6 Colombia: Minimum Landing Fees Level of Landing Fees Revenues Revenues (Conceptual Scheme) Minimum Level _ _ (required by bidder) Time = CAA's compensation to the private concessionaire irom the Trust Fund (commercial risk guarantee) = actual revenues accruing from landing fees Source: Airport Privatization Study, Case Studies, CFSPS October 1995 (based on El Dorado Second Runway Bidding Documents). 6 Depending on the "proposed pricing structure," the cession of landing fee revenues can be partial or total. The maximum tariff increase allowed over the base pricing struc- ture (i.e., Decree 04077, July 1, 1994) is 63 percent. 7 The 20-year concession includes the construction and maintenance phases of the project. I The minimum level of landing fees cannot exceed 100 percent of the expected traffic forecast. Traffic forecasts were included as part of the bidding conditions. 147 AIRPORT PRIVATIZATION EXPERIENCES quired minimum revenues stream during the maintenance phase will be considered the main criterion for the selection process (15 percent annual rate discounted back to the first day of con- struction). C. Bidding Process Bidding documents were prepared during the first half of 1994 and offered for public access in July 1994.9 Government offi- cials, financial advisers, and interested private parties met to discuss the proposed terms. The elimination of a condition stipu- lating a ceiling limitation on the concessionaire's potential rev- enues stream increased the project's expected return on invest- ment and investor confidence.10 Presidential elections held in 1994 during the bidding process resulted in a Cabinet change. In September 1994 the newly appointed Minister of Finance increased the income tax level from 30 percent to 37 percent. Potential concessionaires then requested that a clause be added to the bidding documents ensuring compensation for tax changes during the period of the concession. The CAA duly incorpo- rated such a clause (see Box 4.5). Box 4.5 COMPENSATION FOR TAX POLICY CHANGES (POLICY RISK GUARANTEE) It a change in the income tax level leads to higher than estimated costs, the CAA will use the following two options to compensate the difference to the concessionaire: 1. An annual payment beginning a year atter the decision to issue an indemnity and continuing throughout the life ot the contract according to the following formula: C,.- =(MIPCOI + (D *[ ,.- .r Legend: Cit*n Annual quota equal to difference in costs associ- ated with change of tax. To be compensated in continued.., the year ot operation t+n 'Documents could be obtained at the CAA for the equivalent amount of US$5,000. 10 If traffic flows and/or landing fees were much higher than expected during the 20- year period, then the concessionaire would have to reimburse the CAA for excess revenue 148 COLOMBIA _ Box 4.5 IPCot+n Average value of consumer price index in the year (concluded) t+ n IPCt Average value of consumer prce index in the year t, the year in which the differential in tax payment level is incurred Di Differential in tax payment on rent and complemen- taries and/or industry and commerce in the year in which the quota corresponding to the differential is paid r 1.10 n Number of years remaining in the maintenance pe- riod (concession) 2. One lump sum payment of the differential (including inter- est) within one year (Concurrently, if a change in the tax policy benefits the concessionaire, the CM will have to compen- sate it through the use of the procedure described above.) Source~ Bidding Conditions El Dorado Second Runway, Unidad Administrativa Especial Aeronauwica Civil, July 1994. Bids were presented on January 25, 1995. Six different consortia (most of them including an airport operator, an engi- neering firm, and a financial institution), representing 18 differ- ent firms, presented bids and funding proposals. Participants included firms from Canada, the United States, Mexico, Spain, the Netherlands, France, and Colombia. The technical qualifi- cations of each consortium and the financial viability of its pro- posed capital finance structure (i.e., funding of the project) were the basis for qualification to continue to the economic evalua- tion phase. Participants at this initial phase (technical evalua- tion) were qualified on the basis of yes/no criteria. Two partici- pants failed to pass the technical evaluation while another was disqualified for having conditioned the offer in certain areas and having violated the conditions and terms of the bidding docu- ments. Once bidders were qualified, the selection criteria were based on the economic proposals presented by each participant (see Table 4.5, following page). 149 AIRPORT PRIVATIZATION EXPERIENCES Table 4.5 Colombia: Economic Evaluation: Qualified Participants, Selection Criteria (US$) Weiqhted Averaqe Net Present Value Concessionaire Landing Fees Points (minimum level) Points Total Ogdem'DragadosJ 185 12 75 00 90,652.566 33 25.00 100 00 000 Conconcreto 2. Pavirnientos Colombia/ 24326 57.08 98.064 782.01 23.11 80 19 -19.81 Others 3 GaycoGolcorp/Others 266.92 52.01 120.028.,704.79 1888 7090 -29.10 Current Weighted Average Landing Fees (El Dorado) 99 26' 1 Figure used for bidding evaluation purposes by the Govemment of Colombia. Source: CAA, "Economic and Technical Evaluation of Proposals Concerning Construction and Maintenance of Second Runway of El Dorado Airport,' March 1995 (orginal source in US$). The economic evaluation phase (economic proposals) was based on the following formula: * Initial weighted average landing fee in US$ (a function of the type of aircraft and its domestic or international origin)= 75 points * Net present value (discounted at 15 percent @ rate) of the minimum required level of landing fees revenues throughout the concession period, in US$ (i.e., landing fees time estimated traffic volume)= 25 points. On May 15, 1995, the Government of Colombia awarded the El Dorado concession to the Ogden/Dragados/Conconcreto consortium" which was incorporated as a Colombian joint ven- ture company - CODAD S.A. The winning contract stipulates total investments of Col$80,786,000,000 (US$97,157,000 at US$1 = Col$83 1). The contract between CODAD S.A. and the Government of Colombia, which was signed in July 1995, speci- fied that the consortium had eight months from the date of sig- nature to obtain financing. When financing for the project is obtained, construction will begin. As of August 1995, a tenta- tive financing plan was awaiting approval from the Colombian authorities regarding the environmental feasibility of the con- struction of the second runway (approval was pending on the westward relocation of the Bogota River). "' Dragados is a leading Spanish builder in several infrastructure sectors, Ogden is a U.S.-based airport operator, and Conconcreto is a Colombian civil engineering firm. 150 Case Study 4 COLOMBIA D. Project Finance The government's economic evaluators found the CODAD plan for financing the construction of the second runway aggressive yet realistic. The plan would finance 80 percent of the project cost through the placement of US$107 million in Eurobonds. The financial scheme is supported by the Union of Swiss Banks, which will function as the financial adviser and will place project debt on international capital markets. The Eurobonds will be listed in the Luxembourg and PORTAL Exchanges with a U.S. Securities and Exchange Commission register, under norms and procedures 144A. The financial scheme anticipates an interest rate on the order of 3.5 percent over the U.S. Treasury rate for a period of 10 years and a maturity of 15 years (including a grace period during construction). The project's rate of return is influenced by several fac- tors including construction costs, construction period, and capi- tal costs. The figure in the required investment offered by the CAA during bidding (US$98.8 million) is an indicative figure based on the project's technical specifications and cost estimates. As long as the technical specifications are followed, the conces- sionaire could attain a more efficient cost structure in the con- struction phase. Given that the landing fee revenues will not be disbursed by the CAA until the second runway is operational, any gain in time with respect to the 33-month target would im- prove the projected cash flows. E. Project Risks One of the more interesting facets of the Government of Colombia's privatization strategy concerning El Dorado is the government's willingness to partially guarantee commercial risks (i.e., minimum level of landing fee revenues guaranteed by the Trust Fund mechanism). At the same time, the government does not satisfy basic investor concerns regarding issues such as capi- tal repatriation and currency convertibility - transfer risk. Con- struction risk, in terms of both project cost and construction time, is borne 100 percent by the concessionaire, as is the case with most BOT arrangements. Political risks such as those arising from expropriation, strikes, and riots are not specifically men- tioned, although Section No. 25.1-5 of the bidding conditions refers toforce majeure when defining the compensation mecha- nism for the minimum level of landing fee revenues. 151 AIRPORT PRIVATIZATION EXPERIENCES Box 4.6 ( PRIVATIZATION OF THE CALI AIRPORT (ALFONSO BONILLA ARAG6N INTERNATIONAL AIRPORT) Because of continuing demands from the regional govemment in Cali, the Government of Colombia began the privatization process for Category A airports using Cali as the pilot case for the implementation of the strategy developed in the BAH study (i.e., master concession through a public bidding process). Bidding documents were issued in September 1994 and the initial bidding date was set for January 10, 1995. As in the case of the second runway in El Dorado Airport, Bogota. dis- cussions were held with potential concessionaires.1 Although a number of parties expressed interest in the bidding, the Cali Airport was declared deserted in March 1995. Lack of clarity within the bidding conditions on safety and security issues led prospective investors to request additional information. The government. represented by the CAA, has been meeting dur- ing recent months with the six previously interested parties to discuss specific security roles and conditions that would be ascribed to the government and the future concessionaire. New bidding conditions are being prepared and the new bid- ding date is set for late 1995. Following is a brief summary of the main components of the bidding conditions for the airport in Cali: Master Concession Scheme. There will be 15-year conces- sions (renewable on the government's decision). The conces- sion will include management, maintenance, and operations of both airside and landside activities and will include only a minimum level of investment commitments to general mainte- nance and upgrade, equivalent to 30 percent of the conces- sion fees. Pricing Scheme. Airside charges are regulated by the CAA. As in the case of the second runway at El Dorado Airport, the concessionaire will propose the complete range of airside charges as part of its economic proposal. These charges will include an inflation-adjusted formula based on: (1) minimum salary index in the case of airside charges on domestic flights. and (2) the U.S. inflation index in the case of airside charges for international flights. Landside charges - provided related services are supplied under market conditions - could be set Independently by the concessionaire. Bidding and Selection Criteria. After technical consider- ations are evaluated and potential concessionaires qualified, the selection criteria will be based on the highest value of con- cession fees to be paid to the CAA. The calculation will be based on the net present value of the yearly fee to be paid by the concessionaire (discounted at 15 percent @ annual rate). The proposed value of the annual concession fees will have to be higher than a minimum value (floor price) of US$5.5 Continued ...million. 152 Case Study 4 COLOMBIA - _ >_Box4.6 Use of the Proposed Concession Fee. The proposed tee to Boxc4.6 be paid by the concessionaire will be distributed according to ( the follow,ing scheme: (1) 30 percent will be relained by the concessionaire to be used for inveslment purposes (mainte- nance and upgrading of airport-related services); (2) 59 per- cent wvill be paid quarterly to the CAA. as part of the funding for the rest of the airport system (Airport Development Fund): (3) 11 percent will be paid every five years in one lump sum (investments in ATC and safety). Government Guarantees (Commercial and Policy Risks). The C:AA will compensate, through credits from the quarterly concession fee, any difference between the pricing scheme for airside charges proposed by the concessionaire and the pricing scheme authorized by the Ministry of Transport. The CAA will not compensate any difference in the real traffic fig- ures versus the estimated figures in the Airport Restructuring and Privatization Plan. In contrast to the case of the second runway at El Dorado Airport. the commercial risk will not be guaranteed by the CAA in this transaction. The policy risks of changes or adjustments in airside charges will be compen- sated by the CAA. Existing Concession and/or Leasing Contracts. The dif- ferent contracts for the exploitation of airport-related services in effect at Cali's airport today will be transferred to the con- cessionaire. The concessionaire has the rights and responsi- bilities derived from such contracts until their date of expira- tion. ,P'tenralconcessionaires v%ere 1i) Surna S.A.-A4roporis ae Paris. El Invenlir S A. 31 Paimaseca S.A; (41 Aena S A. (51 C.rporacion Financerad . ir Vle? and ,61 Corporacon Financiera de ls Andes V. K'E'\ ISSUES EMERGING FROM THE COLOMBIAN ExPERIEENGE S Creativity and Innovation in Privatization. The Gov- ernment of Colombia's privatization of El Dorado's second run- way is a creative and innovative approach to private sector in- volvement in providing infrastructure needs. El Dorado is an unusual example of the use of a BOT to finance particular air- side infrastructure in a public airport. The case points up the flexibility of BOT mechanisms for infrastructure development: privatization is not necessarily an "all or nothing" arrangement but rather is a lengthy and complex process that can be shaped 153 AIRPORT PRIVATIZATION EXPERIENCES to fit a particular context. Even the guarantee on commercial revenues, counterproductive or not, is innovative and illustrates a creative approach that provides a challenge to explore ways of improving the methods to increase private sector involvement in the development and operation of public infrastructure. 0 Corporatization prior to Privatization. The Colom- bian experience confirms that an autonomous government cor- poration is better prepared to make necessary changes to the operation of airports and to take active steps to privatize. Fol- lowing corporatization, the CAA created a more flexible fee structure that helped the government to enact a BOT scheme for construction of the second runway at El Dorado. However, only a well-designed privatization strategy with clearly delineated responsibilities and risks can ensure the maximum feasibility of successful transfer to the private sector. Therefore, a corpora- tized government agency could be seen almost as a necessary (but not quite sufficient) condition for privatization. The model for the privatization of Colombian airports does not include the corporatization of individual airports be- fore transfer (airport assets and liabilities are centralized under CAA administration). Given that there is no change in owner- ship (i.e., the master concession), corporatization of airports that are to be privatized or transferred to local authorities would in- crease transparency and accountability for the transaction and would simplify administrative procedures for the new manage- ment. However, corporatizing and transferring airports to local authorities will not achieve the desired objectives unless proper institutional capacities have been built in at the local level. 0 Design of the Transaction. The project finance ar- rangement would have been more attractive if the privatization of El Dorado had been packaged with the construction and main- tenance of the second runway. A master concession arrange- ment for the entire airport, associated with a BOT for the con- struction of the second runway, would have enhanced project cash flows and significantly reduced commercial risk."2 The preliminary design for the restructuring of the na- tional airport system approaches the privatization of the airports on an individual basis (the group of six), and does not include 12 In this case we are referring to the commercial risk associated with the concession of El Dorado Airport to a private operator having no responsibility in the initial setting of airside charges (i.e., landing fees are established in the BOT transaction). 154 Case Study 4 COLOMBIA the possibility of privatizing the airports in groups (i.e., a con- cession for two or three airports to be bid as a package). Pack- aging in groups would enhance the financial attractiveness of the operation (i.e., the commercial risks would be lower), in- crease potential investment in airport upgrades and maintenance, and simplify the CAA's oversight function (i.e., there would be fewer operators to regulate). Pricing Policy on Airside Charges. The privatiza- tion scheme for the six Category A airports includes a mecha- nism with built-in incentives for relatively high airside charges. The concessionaire's financial offer is bid on the basis of the highest concession fees to be paid to the CAA, which in turn is based on a proposed airside charges scheme. Landing fees are driven by the government's investment requirements, as reflected in the operators' minimum required level of revenues, not by competitive market forces. The government receives the high- est concession fees if the concessionaire imposes the highest landing fees. High landing fees threaten traffic flow volumes. Therefore, the concessionaire's interest in profit and the government's interests need to be balanced. If airports are to be privatized on an individual basis, the CAA could ultimately find large disparities among the airside charges of different airports.'3 Commercial Risk. The government's absorption of commercial risks casts doubt on the future of landing fees in Colombia, particularly since the El Dorado model will be used as a blueprint for future privatizations. At the same time, the government falls short when addressing policy/regulatory and political risks. However, the case is completely different for the privatization of Cali International Airport, where the govern- ment (through the CAA) is providing a guarantee exclusively for the level of landing fees (contractual risk)14 but not for traf- fic volumes (commercial risk). However, it could be argued whether guaranteeing the total landingfees revenues (the mini- mum level for project implementation) was an indispensable component of the El Dorado transaction, given the relatively high level of investments involved in the construction of the second runway. 13 Complications could arise if disparities in airside charges were to be transferred to the public via air transport costs (e.g., airlines in the United States are adding a US$40 surcharge on flights into the new Denver Airport, creating a price differential between destinations with similar flying time). 14 Related to the regulation of airside charges. 155 AIRPORT PRIVATIZATION EXPERIENCES The use of partial risk guarantees promoted by multilat- eral institutions should be explored as a mechanism for ensur- ing payment for non-performance of government contractual obligations (the maintenance of an agreed-upon regulatory frame- work, project delays or interruptions caused by government ac- tions, etc.) or for non-performance owing to political events. The use of such an instrument, by alleviating the perception of investor risks, could provide governments with the confidence to implement a transaction without having to guarantee the project's commercial risk. 156 Case Study 4 COLOMBIA ANNEXES ANNEX 4.1 COLOMBIA: EL DORADO AIRPORT, BOGOTA PROJECT FINANCE FOR THE SECOND RUNWAY Landing Fees Structure (January 31, 1995) Category Weight (2) Tariff Weighted Component I _ tmax. kg' (Pesos CoC mbis.nos) LUS S P,; R C kv-ooItar' so 0-5.000 12.03 % 3.600.00 4.33 433.08 0.5208 5.001-10.000 10.12%. 7,200.00 8.66 728.64 0.8762 10,001-20.000 14.0300 14A400.00 17.32 2,020 32 2.4294 20,001-30.000 1.94%o 23.900.00 28.74 463.66 0.5576 30.001-50 000 12.81% 38.400.00 46.18 4,919.04 5.9152 50 001-80.000 26.25%o 62.400.00 75.04 16,380.00 19.6970 80,001-110,000 3.33'% 91.200.00 109.67 3,036.96 3.6519 110.001-150.000 0.95'o 124,800.00 150.07 1,185.60 1.4257 150,001-200,000 0.06%o 168.100 00 202.14 100.86 0.1213 > 200 000 (1) 0 02%o 309 425.64 372 08 61.89 0.0744 IWnterntioral Flights . .. 0-10.000 0.19 G 19,200.00 23.09 36 48 0.0439 10 001-20.000 0.14%. 42,700.00 51.35 59.78 0.0719 20 001-30.000 0 15°% 71.100.00 85.50 106.65 0.1282 30,001-50.000 0 31c. 113,900.00 136.96 353.09 0.4246 50,001-80,000 2 44%a 184.900.00 222.34 4,511.56 5.4252 80.001-110,000 6.39%G 270,400.00 325.16 17,278.56 20.7775 110,001-150.000 4.64%c 370.000 00 444 93 17,168.00 20.6445 150.001-200.000 2 07%o 498.100 00 598 97 10.310.67 12.3986 > 200.000 (1' 2.11%c 916 554.30 1,102.16 19.339.30 23.2555 Notes: (1) B-747 =322,050 kg. (2) Weights are based on real traffic move- ments by aircraft in 1993 (annex 5, bidding conditions). (3) US$1 =Col$831.60 (December 31, 1994). Source: CAA, Resoluci6n No. 00724 (January 31, 1995). 157 AIRPORT PRIVATIZATION EXPERIENCES ANNEX 4.1 (continued) COLOMBIA: LARGE AIRPORTS (BARRANOUILLA, BUCARAMANGA, CALI, CARTAGENA, CUCUTA, MEDELLIN, SAN ANDRES AND SANTA MARIA) Aircraft Parking and Landing Fee Structure (January 31,1995) Category Weight (2) Tariff Weighted Component ~~R41s..~ ~ , . .^^ r . - 0-2,500 6.02%o 3,100.00 3.73 186.62 0.2244 2.501-5.000 6 02%-3 4,200.00 5 05 252.84 0.3040 5,001-10,000 10.12%: 7 500 00 9.02 759.00 0.9127 10.001-20,000 14.03°o 17,100.00 20 56 2,399.13 2.8850 20.001-30,000 1.94%.1 26,600.00 31.99 516.04 0.6205 30,001-50,000 12.81%" 43.700.00 52.55 5,597.97 6.7316 50,001-75,000 21.88%6 73.600.00 88.50 16,103.68 19.3647 75.001-100,000 6.57°o 92.80000 111 59 6,096.96 73316 100,001-150,000 2.27°c 141.900.00 170.63 3,221.13 3.8734 150,001-200,000 0.060a 185,700.00 223.30 111.42 0.1340 > 200,000 (1) 0 02°; 343,820.58 413.44 68.76 0.0827 .1 Mrd ar F ml .ura . ' , , 0-10 000 0.19%o 21.400 00 25.73 40.66 0.0489 10,001-20,000 0.14%G 48,100.00 57.84 67 34 0 0810 20,001-30.000 0 15%o 69.500 00 83.57 10425 0 1254 30,001-50.000 0.31°o 117 70000 141 53 36487 0.4388 50,001-80.000 2.440%G 198,000.00 238.10 4,831 20 5.8095 80,001-110.000 6.39%o 267,600.00 321.79 17,099 64 20.5623 110.001-150.000 4 64°o 412,100.00 495.55 19.12144 22 9936 150.001-200.000 2 07% 535.200 00 643 58 11,078 64 13 3221 > 200.000 (1I 2.11°o 1,018.644.15 1,224.92 21,49339 25.8458 Notes: (1) B-747 =322,050 kg. (2) For comparative purposes weights are based on real traffic movements by aircraft at El Dorado in 1993 (annex 5, bidding conditions).(3) US$1 =Col$831.60 (December 31, 1994). Source: CM, Resoluci6n No. 00724 (January 31, 1995). 158 Case Study 4 COLOMBIA ANNEX 4.1 (concluded) COLOMBIA: MEDIUM AIRPORTS Aircraft Parking and Landing Fee Structure (January 31, 1995) Category Weight (2) Tariff Weighted Component (max kg) (Pesos Coombcsnos' LUS S) Poess Cc, criuLr:s), Domestic Fight 0-2,500 6.02° 3,100.00 3 73 186.62 0.2244 2.501-5 000 6.02', 4,200 00 5 05 252.84 0.3040 5,001-10.000 10 12%a 5,300.00 6 37 536.36 0 6450 10,001-20,000 14.03%, 16,000.00 19.24 2,244.80 2.6994 20.001-30,000 1 94%o 25,600.00 30.78 496.64 0.5972 30,001-50.000 12.81Oa 42,700.00 51.35 5,469 87 6.5775 50.001-,5 000 21 883., 68,300.00 82.13 14,944.04 17.9702 75 001-100,000 6.57%, 87,500.00 105.22 5,748.75 6.9129 100.001-150.000 2 27% 133,400.00 16041 3,028.18 3.6414 Intemetional Flights ' ' 0-10 000 0 19%0 21.40000 25 73 40.66 0.0489 10,001-20.000 0 14%, 48.100.00 57.84 67 34 0.0810 20001-30000 0.15i% 69.500.00 83.57 10425 0.1254 30,001-50000 031%o 117.700.00 141.53 36487 0.4388 50 001-80.000 2.44co 198,000.00 238.10 4,831.20 5.8095 80,001-110.000 6.39%c 267.600.00 321 79 17,099.64 20.5623 110,001-150.000 4.64% 412,10000 495.55 19,121.44 22.9936 150 001-200 000 2 07° 535 200.00 643 58 11,078.64 13.3221 >200.000d1 2 110 1 018.644.15 1,22492 21,493.39 25.8458 Notes: (1) B-747 =322,050 kg. (2) For comparative purposes weights are based on real traffic movements by aircraft at El Dorado in 1993 (annex 5, bidding conditions).(3) US$1=Col$831.60 (December 31, 1994). Source: CAA, Resoluci6n No. 00724 (January 31,1995). 159 AiRPORT PRIVATIZATION EXPERIENCES ANNEX 4.2 COLOMBIA: INI1TIAI. PROPOSED LANDINGIC FEE STRUCTURE BY CONSORTIUm AWARDED EL DORADO PROJECT (Colombian pesos unless otherwise denoted) Domestic International Variation from Variation from Category (1) Fee per Category' Actual Fee Weight (2) Category (1) Fee per Category' Actual Fee 'A in 4.54 90.16%0 12.03`% 1 I 27.05 85.02% 0.19% 2n 13.62 90.16%a 10 12%c 2i 81.16 85.009o 0.14% 3n 27.16 90 11%a 14 03 3i 135.27 85.00% 0.15% 4n 45.32 90.13% 1.94%o 4i 216.45 85.00% 0.31 % 5n 72.49 90.15', 12.81 o 5' 351.72 85.00% 2.44% 6n 117.31 90 14%a 26.2503 6i 51406 85.009% 6.39% 7n 172.14 90 14%, 333%o 7i 703.46 85.00%a 4.640' 8n 235.55 90.26%, 0.95%b 81 946.96 85.00% 2.07% 9n 317 11 90.14'o 006%o 91 1,668.71 85.00%0 2.11 % 1On 630.09 90.140.% 0.023 Total IlSSI 55.15 90.15% B1.55% TotallJS$= .. 19S7i O% * 11) Calegones ln 0-5.000 li 0-1000 2n 5.001-10.000 2i 10001-20000 3n 10.001-20,000 3i 20001-30000 4n 20,001-30,000 4i 30001-50000 5n 30.001-50.0OO 5i 50001-80000 6n 50.001-80,000 6i 80001-110000 7n 80.001-110,000 7i 110001-150000 8n 110.001Q150.000 8' 150001-200000 9n 150.001-200.000 91 >200000 1On >200,000 12; Weighis are based on real iraltic mrcvemenirs by aircraft at El Dorado irn 1993 I US$1 =Col$831.60 (December 31, 1994). Source: CM, Financial-Legal Evaluation of Proposals for Construction and Maintenance of Second Runway at El Dorado (March 1995). 160 Case Study 5 EEAST ASIA AIRPORTS IN EAST ASIA A CASE STUDY OF AIRPORT DEVELOPMENT IN FAST-GROWING ECONOMIES' East Asian airports provide a remarkable illustration of the con- tribution of infrastructure projects to economic growth. East Asian airport development reflects both the unprecedented growth of East Asia as a key economic center and the active support of governments in laying the ground for private entre- preneurial success in infrastructure development projects. The three cases that follow illustrate two key features of airport de- velopment and privatization strategies in fast-growing econo- mies: (1) the government perceived the private sector as being ill-suited to manage airport development because of a bias to- ward short-term financial rewards rather than long-term eco- nomic growth; and (2) the government felt that the selection of a privatization mechanism at project completion rather than at start-up would favor more rewarding financial proceeds as well as a long-term strategic view in building airport capacity. The following three cases, Hong Kong, Kuala Lumpur in Malaysia, and Singapore, illustrate the East Asian experience. Research for this case study was conducted in January 1995. 161 AIRPORT PRIVATIZATION EXPERIENCES 45 HONG KONG: KAI TAK AND CHEK LAP KOK AIRPORTS Air traffic development in Hong Kong reflects both the extraor- dinary growth of Hong Kong as a key economic center2 in the Pacific Rim area and the active involvement of the Hong Kong Government in keeping the country in the forefront of South Asian economies. The Hong Kong Government views air trans- port development as essential to the support and promotion of trade and financial and tourism activities and has thus encour- aged the development and modernization of Hong Kong's in- ternational airport - Kai Tak Airport - into one of the busiest airports in the world, with revenues reaching HK$2.2 billion in 1993.3 Space constraints at Kai Tak (particularly its limited size of 332 hectares) have put pressure on the airport's operators to manage it more effectively. Such constraints currently hinder traffic growth, however, and impede the government's policy of strengthening Hong Kong's economic position in southern Asia vis-a-vis southern China. At full capacity Kai Tak Airport is unable to cope with projected increases in passenger numbers and cargo tonnage. Therefore, the Hong Kong Government embarked in 1989 on the replacement of Kai Tak Airport with Chek Lap Kok Airport. The development of Chek Lap Kok is one of the main components of a mega-infrastructure project, the Airport Core Program (ACP), consisting of 10 interdepen- dent projects worth some US$21 billion.4 Through this project the government intends to maintain Hong Kong's economic lead in the Pacific Rim. The Hong Kong airports provide a good illustration of the contribution that infrastructure projects can make to eco- nomic growth. These airports also illustrate the key features of airport development in East Asia as mentioned above, as well as the unique partnership between the government and the private sector, whereby government ownership is combined with pri- vate sector management of the entire operation. However, the forthcoming change in the political status of Hong Kong in 1997 (see Box 5.1) poses risks associated with the airport develop- 2 The annual growth of GDP in Hong Kong averaged 6.2 percent in real terms in the past 10 years. The per capita GDP for 1991 was US$14,000. 3From March 1992 to March 1993, US$1 was equal to an average of HK$7.7355. US$1 was equivalent to HK$7.738 on January 1. 1995. 162 Case Study 5 E_AST ASIA Box 5.1 POLITICAL STATUS OF HONG KONG In light of Hong Kong's transfer of sovereignty to China in 1997, China's commitment to the close partnership between the Hong Kong Government and the private sector is a pending issue. The strategic alliance between the Hong Kong Government and the private sector dates back to the beginning of British colonization. The Hong Kong territories were gained by the British Empire during the Opium Wars in the nineteenth cen- tury. Shonly afterward Hong Kong became the West's gate- way to China. First. Hong Kong became established as a trans-shipment center for trade with China. Much later, when the Korean War and UN embargo cut off most of its trade with China, Hong Kong set itself up as a manufacturing center. In 1990 Hong Kong ranked as the world's fourth largest financial center after New York. London, and Tokyo. The World Bank's official figure lor Hong Kong's per capita GDP was US$11,490 in 1990 compared with US$370 for China. For a long time, Hong Kong appeared as a symbol of Western capi- talism, pointing up the Chinese Government's difficulties in creating a robust economy. Hong Kong has virtually no re- strictions or limitations on legitimate business. The territory has a freely convertible currency and imposes light taxation - 15 percent for individuals. Hong Kong's success to date has been based on the active support of its government. which has acted as a catalyst by displaying foresight in laying the foundations for entrepreneurial success in infrastructure de- velopment. In September 1984 the British and Chinese Governments signed a Joint Declaration in which the British agreed to hand the entire colony back to China on July 1. 1997, on the condi- tion that there would be -one country, two systems" for an- other 50 years and that the new -Special Administrative Re- gion" (SARI of Hong Kong would be administered by Beijing. Because of the forthcoming change. the British Government, and the Government of China, created the Sino-British Joint Liaison Group to oversee the transition period. Theoretically, the Sino-British Joint Declaration will allow Hong Kong to re- tain Jts present social, economic. and legal systems for at least 50 years after 1997. However. Hong Kong's Chinese popula- tion (96 percent), although they regard 1997 with pride. are also concerned about the new regime The most important question concerns what is likely to happen after 1997. Hong Kong needs China's space and la- bor, and China needs Hong Kong's capital, expertise, and stra- tegic physical location. Hong Kong's importance as the most efficient service center in the world cannot be emphasized strongly enough. and therefore, in the short term at least. China needs a prosperous Hong Kong. Hong Kong ought to ensure that it becomes a prime gateway to China and an integral part continued .... 163 AIRPORT PRIVATIZATION EXPERIENCES Box 5.1 of China's future economic development. In 1991 China gave (concluded) its support to the ACP through a Sin-British Memorandum of Understanding and is being consulted on all aspects of the Chek Lap Kok development through the Airport Com- mittee of the Joint Liaison Group. However, China's reluc- tance to approve the financing packages for Hong Kong's new airport has already caused some delays in the project development. ment, its financing scheme and the future business strategy, par- ticularly with regard to the close partnership between the Hong Kong Government and the private sector. 1. OWNERSHIP AND INSTITUTIONAL FRAMEWORK A. The Civil Aviation Department The Civil Aviation Department (CAD) is under the supervision of the Secretary of Economic Services, a government authority responsible for overseeing most public utilities activities in Hong Kong. The CAD has a staff of 370 and performs four main functions: (1) the provision of air navigation services (air traf- fic control, telecommunications, search and rescue); (2) the regu- lation of the civil aviation sector (excluding licensing, which is the responsibility of the Air Transport Licensing Authority [ATLA]); (3) the administration of air services agreements; and (4) the management of operations and facilities for Kai Tak Air- port. Figure 5.1 depicts CAD's organization chart. CAD's func- tions are distributed among the following seven divisions. m The Air Services Division. Administers Air Services Agreements (ASAs) after their negotiation by the Air Services Negotiation Unit of the Economic Services Branch. The Air Services Division delivers operating permits to designated airlines so that they can operate scheduled services. Until recently, air traffic rights to, from, and through Hong Kong were covered by ASAs between the United Kingdom and its bilateral partners. 164 Case Study 5 EAST ASIA Direclor Figure 5.1 of _ Hong Kong: CAD - Civil Aviation 3 Organization Chart Air Services Air Traffic Airport Safet Division i Manageent Maineme nTa J Air Sences Air Taffic Ser_ices Agreements ServicesComnea | Ah Fire Akmninsra¶jon Air Nvg3ton Coesncen I Cotge Legis-iaon Servce & ProperV Airwartrnese TwnncalAdmin. Technical Finance Administratio j Planning | Division Division IP annin & _ Forecasting ! relec,rnmuni- Fffam4La1 i Personnl j r1-ont ,Manai,rnent Maragmewnt Elecaricss In view of Hong Kong's changed status in 1997, the U.K. Government is now establishing separate Hong Kong ASAs. The Air Traffic Management Division. Manages and con- trols aircraft movements within Hong Kong's airspace. In particular, Air Traffic Services must maintain safe air traffic flows at the busy Kai Tak Airport. Services are provided on a 24-hour basis to all civil and military aircraft. Because of the hilly landscape around Kai Tak Airport, approach and departure flight paths have been restricted to the southeast or western parts of the air- port. Thus, aircraft movements are scheduled at a fre- quency of 28 per hour. To alleviate traffic congestion in Hong Kong, the Air Traffic Management Division has taken measures to provide extra control positions and training, and to improve equipment. As a result, runway capacity has been increased to meet demand. The Air Traffic Management Division has been ex- tremely active and efficient in increasing air traffic con- trol (ATC) capacity by installing additional radar facili- 165 AIRPORT PRIVATIZATION EXPERIENCES ties at strategic sites. A search-and-rescue coordination center at Kai Tak Airport is linked to an international search-and-rescue assistance satellite system that can rapidly position an aircraft in distress. Finally, to re- main competitive and efficient, the CAD has its own school for recruiting and training ATC officers. * The Airport Management Division. Has the day-to-day responsibility for managing Kai Tak Airport, from the operation of the terminal building and the aircraft park- ing apron to all of the commercial activities. Kai Tak Airport is thus managed directly by the CAD as an op- erating division. The Airport Management Division employs 270 people, with the objective of providing the best possible service to airport customers, airlines, passengers, and cargo shippers. A very high demand is made on the Division to handle Kai Tak's high volume of passengers, cargo, and aircraft through the single run- way5 and within the very small area of 332 hectares. Since virtually every part of the airport is used to ca- pacity, additional pressure has been felt by the Airport Management Division and its four Sections: Operations; Passenger Services; Commercial Concessions and Prop- erty; and Technical Administration. J The Operations Section. Supervises airfield and apron activities and all aspects of aircraft op- erations. The Section plans the allocation of over 200 arriving aircraft per day through a computerized bay allocation system. The Sec- tion is also primarily responsible for airfield safety and aircraft servicing equipment, and also has a bird control unit. The Passenger Services Section. Coordinates passenger flows at the airport through a com- puterized system called Common Use Termi- nal equipment, whereby any airline can access any desk for passenger check-in. All baggage handling and passenger transfer services are provided by a private concessionaire, Hong Kong Airport Terminal Services Limited (HATS), under a franchise to the Hong Kong Government. 5In 1993, Kai Tak airport handled: 24.5 million passengers; 1,139,000 tons of cargo; and 135,000 aircraft movements. 166 Case Study 5 EAST ASIA "i The Commercial Concessions and Property Section. Responsible for ensuring that high stan- dards of service are provided by airport con- cessionaires. These concessionaires range from restaurants, bars, and shops to an international bank and a telecommunications post office. The Technical Administration Section. Deals with airport safety regulation and has been re- sponsible for introducing 100 percent hold-bag- gage X-ray screening, making Kai Tak the first airport in the world to adopt such a system. The Section also supervises airport development. While Chek Lap Kok is under construction, Kai Tak's Technical Administration Section is han- dling the building of new facilities necessary to meet traffic demands. A HK$2.2 billion (ap- proximately US$288 million) terminal refur- bishment program was completed in 1992 to- gether with the reconstruction of the Transport Terminus. Additional passenger space and check-in facilities will be provided shortly. Two new road ramps and a curbside drop-off area have been opened to improve access. HATS has built a new interline baggage handling fa- cility. The Safety Regulation Division. Includes flight safety regulation, the airport fire contingent, and airworthiness. The Technical Planning Division. Oversees planning and forecasting, telecommunications, and electronics engi- neering. The Finance Division. Monitors financial performance and produces various financial and accounting state- ments. The Administration Division. Divided into two sections: personnel management and office organization. In practice, the CAD controls the provision of air navi- gation services, technical regulation, and the administration of ASAs, and subcontracts most of the airport-related activities to private concessionaires. 167 AIRPORT PRIVATIZATION EXPERIENCES The CAD's work is complemented by specific boards and committees that have advisory status to the Government of Hong Kong. The Aviation Advisory Board advises the govern- ment on broad policy matters such as air transport services and transport operations. The Airport Operations Committee, com- posed of senior members from airline management and the CAD, as well as a representative of the Royal Air Force, provides as- sistance and counseling to the director of the CAD on opera- tional issues. Lastly, there is the Airport Facilities Committee, which is chaired by the airport general manager, senior staff from the airlines, from HATS, and from the Hong Kong Tourist Association, and by other members involved in passenger-re- lated and cargo-related activities. B. The Provisional Airport Authority Along with the decision to build a new airport, the government approved the creation of a commercially independent corpora- tion, the Hong Kong Airport Authority, to operate and manage airport-related services at Chek Lap Kok. Consultations with the Chinese authorities are currently under way regarding legis- lation for setting up the new Airport Authority. The Airport Corporation Bill (the Airport Authority Ordinance), under revi- sion by the Government of China, was enacted by the Govern- ment of Hong Kong on July 27, 1995. It will incorporate the new Hong Kong Airport Authority as a commercially autono- mous government authority(corporation). Airport development assets will be owned by the Airport Authority and airport land will be leased on a long-term contract. As an interim step toward a commercially independent Airport Authority, in 1989 the government set up the Provisional Airport Authority (PAA), under the chairmanship of the Finan- cial Secretary, to supervise the planning, construction, and de- velopment of the new airport. The PAA, which in practice func- tions as a developer, is wholly owned by the government and is funded primarily by advances from the government's Capital Investment Fund. These advances are scheduled to be converted into government equity following the enactment of the Airport Corporation Bill. (Further details on the PAA are provided in Section IV, below.) 168 Case Study 5 EAST ASIA 11. REGULATORY FRAMEWORK __ Due to air navigation and airport management services having been the responsibility of a government department (the CAD), economic regulation procedures and methods have not been properly developed. The pricing of airside charges is based on inflation, vol- ume, and time coefficients, which has resulted in higher charges for peak hours. However, owing to traffic congestion at Kai Tak Airport, airside charges have been applied uniformly re- gardless of peak hours. The formula is based on historical costs with a break-even approach that enables the government to re- cover the operating cost of the runways. This pricing policy for airside charges is a significant departure from the approach in developing countries and reflects the government's decision to form strategic alliances with the private sector in airport opera- tions. Revenues from private sector commercial concessions provide most of Kai Tak Airport's profits. Most private concessions are regulated through a rate of return formula - the return on average net fixed assets (ANFA). The target ANFA in this profit-controlled scheme ranges from 12 to 15 percent. This scheme is applied to most privately run utilities in Hong Kong. With the forthcoming opening of Chek Lap Kok Air- port and the setting up of a new Airport Authority, economic regulation procedures will have to be developed. Airside charges will probably have to be increased to account for the massive investments in airport infrastructure. Future economic regula- tion will be formulated in line with International Civil Aviation Organization (ICAO) guidelines. In practice, issues pertaining to economic pricing are still pending, as ICAO guidelines relate more to qualitative aspects, such as the Chicago Convention and non-discriminatory economic treatment, than to quantitative regulation. In this regard, future economic regulation will prob- ably give the PAA the freedom to establish and increase airside charges. 169 AIRPORT PRIVATIZATION EXPERIENCES 111. KAi TAK AIRPORT Kai Tak Airport is owned and operated by the Hong Kong Gov- ernment as an operating division of the CAD. Kai Tak is one of the busiest airports in the world, averaging, in 1993, 24.5 mil- lion passengers and 1,140,000 tons of air cargo (see Table 5.1). Table 5.1 a Hong Kong: Annual Mvt. Type Landings Take-offs Arrivas Departures Transit Unloaded Loaded Traffic Flows at Kai Tak - Airport, 1992-93 Passenger 56624 565533 11.128434 113.Ia7S8 63121 287.782.451 20.0489.s Cargo 4.18 4.361 15.447 767 205 138.55 046 283.484.486 Non-Taffirc 1227 932 | 282 1211 3.071 27M.152 127J36 Trct ilrs, suts "ien 6m t, n.. 4[rMs.ne Source: CAD, 1993 Report. Fifty-five international airlines provide 2,300 scheduled passen- ger and cargo flights each week out of Kai Tak, with 92 world- wide destinations. In addition, 2,550 non-scheduled passenger and cargo charter flights operate from Kai Tak weekly. In 1993, passenger traffic and air cargo volume at Kai Tak showed, re- spectively, an 11 percent and a 19 percent growth over the pre- vious year. Kai Tak Airport now ranks fourth in the world in terms of international passenger movements and third in terms of international cargo throughput per annum. The airport is managed and operated by the Airport Management Division of the CAD. Although Kai Tak is a fully government-owned air- port, apart from ATC and apron management, its activities (pas- senger services, ground handling services, car parking, etc.) are operated by the private sector through long-term concessions and build-own-operate-transfer (BOOT) schemes (cargo han- dling, airport hotel, etc.). The airport is extremely profitable and represents an interesting case of public/private sector partner- ship in the exploitation of airport-related services. Kai Tak Air- port employs approximately 23,000 workers, only 370 of whom are employed by the CAD; the rest are employed by private concessionaires in the airport.6 Because of space constraints, the airport has only eight gates (fingers) through which it handles 25 million passengers through the use of shuttle-links between the aircraft parking areas and the terminal. The operation is run very efficiently, and in terms of passengers per gate Kai Tak 6 Even the internal security services are paid for by a group of private airlines operating out of Kai Tak Airport and provided by private security services. 170 Case Study 5 EAST ASIA could have one of the highest ratios in the world. Sixty-five per- cent of Kai Tak's revenues come from non-aeronautical sources (landside activities), which are relatively high by international standards. This partially explains the stability of the airside charges (landing fees, aircraft parking, and passenger fees), which have not increased in the last four years, and the low level of CAD personnel at the airport (only 1.5 percent of the total work force). In terms of the privatization experiences of airport infrastructure around the world, the Hong Kong case could be labeled "a privately run corporation wholly owned by the government." Audited statements as of March 31, 1993 reflect the healthy financial situation of Kai Tak Airport, which has experi- enced, between 1992 and 1993, a growth of 13.5 percent (12.4 percent in real terms) in total revenues from HK$1,977 million to HK$2,244 million (see Table 5.2). Much of that growth has been accounted for by increases in aircraft landing and parking fees, and in trading concessions. Revenue growth was distrib- uted as follows: trading concessions grew by 7.5 percent; air- craft landing and parking fees, by 19 percent; airport rentals, by 24 percent; and baggage handling, by 15 percent. The growth in airside charges, namely, aircraft landing and parking fees, was attributable to traffic growth rather than unit fee increases. _3 _ = 0 .0 Table 5.2 Airside Operations 587 26 Hong Kong: Revenue Distribution for Kai Tak Landing and Parking Fees 587 26 Airport as of March 31, Landside Operations 1 65'7 74 1993 Trading Concessions 1.222 54 AirDort Rentals 188 8 Baggage Handling 100 4 Other 147 7 Total Revenues Z244 . 100. 'US$1 is equivalent to HK$7.7355 (average 1992/93 period). Source: CAD, 1993 Report. 171 AIRPORT PRIVATIZATION EXPERIENCES Kai Tak Airport's net operating profits approximated 47 percent and 44 percent of total revenues in 1992 and 1993, respectively (see Table 5.3). This is relatively high compared with industry standards in Europe and the United States. One of the main explanations for this performance is the difference in the labor cost component between Kai Tak and european and american counterparts. Table 5.3 Hong Kong: Kai Tak TotalRevenues 1,997 2,244 Airport Income State- ments (HK$ millions)' Expenditures Staff 259 266 Depreciation 245 348 Maintenance 199 144 General Expenses 264 286 Total Expenditures 887 1,044 Operating Surplus (before tax) 1.110 1,200 Net Operating Surplus 927 990 'US$1 is equivalent to HK$7.7355 (average 1992/93 period). Source: CAD, 1993 Report. Kai Tak's financial performance reflects the government's decision to rely on private sector retail conces- sions for an increasing source of revenue as well as to upgrade airport facilities to meet the growing air transport demand and to favor traffic development. Once Chek Lap Kok Airport becomes operational, the Kai Tak Airport will be closed and converted into a real estate development managed by the government. 172 z.s. c.uoy S EAST ASIA IV. CHEK LAP KOK: AIRPORT DEVELOPMENT PROCESS .. A. The Airport Core Program The development of Chek Lap Kok Airport is part of the Airport Core Program (ACP), the mega-infrastructure development pro- gram initiated by the government in 1991 and supported by the Chinese authorities through the Sino-British Memorandum of Understanding. To meet the rapid growth in passenger and cargo traffic in the Asia-Pacific region, the Hong Kong Government decided in 1989 to embark on the ACP, which is one of the most ambitious transport development programs in the world today. The ACP includes the creation of a new airport at Chek Lap Kok and of 10 interdependent infrastructure projects. The project will integrate intermodal transport facilities (airport, highway, railway, and port) in the Kowloon/New Territories area and will later connect to main transport links with southern China (i.e., the Guangzhou region).' The implementation of theACP is being coordinated by project management advisers at the New Air- port Project Coordination Office (NAPCO). The total cost of the ACP was estimated at HK$112.2 billion in March 1991 prices or HK$158.2 billion (approximately US$20.7 billion) as of No- vember 1994 (taking into account inflation during the design and construction stages). The ACP is being jointly financed by the Government of Hong Kong and the private sector. The gov- ernment is contributing HK$113.3 billion (approximately US$14.8 billion) in equity investments and public works, and the rest (HK$44.9 billion, or about US$5.8 billion) is being con- tributed by the private sector in the form of equity investments, commercial lending, and project finance (i.e., BOOT for the Western Harbour Crossing Project). The ACP will be Hong Kong's most important infra- structure development in its bid to maintain its competitive edge as a major East Asian commercial hub. Table 5.4 depicts the breakdown of costs for the ACP. I These developments include 34 kilometers of new expressways, an express rail link connecting the airport with Hong Kong's major centers, a highway network, one of the world's largest suspension bridges, a cross-harbor tunnel, land reclamation, and new town building. 173 AIRPORT PRIVATIZATION EXPERIENCES Table 5.4 Hong Kong: Airport Core Program, 10 Different Projects (HK$ billions)" in, ffiffffig"10 Im Description Estimated Cost (HKS billions) 1. New Airport 75 gates, 35 million pass/year 70.7 Transport Links (1st phase 1998) 2. Landau Fixed Crossing 1,377 mt suspension bridge 7.2 3. Airport Railway 34 km local and express service 34.0 4. Western Harbour Crossing 1.36 km cross harbor tunnel 6.5 5. North Landau Expressway 12 km dual 3-lane highway 8.0 6. Route 3 8 km dual 4-lane highway 5 7 7. West Kowloon Expressway 4.2 km dual 3-lane highway (Inc. above) New Land and Town 8. West Kowloon Reclamation 330 ha of new urban land 7.6 9. CentraUWanchai Reclamabon 20 ha of new urban land 3.5 10. Tung Chung new city with population of 200.000 at airport site 15.0 t 1 . -ft2 ' - ^ , ' . . . 15&2 US$1 is equivalent to HK$7.65 (as of November 31, 1994). Source: PM, 1994 Report. B. Airport Development Chek Lap Kok Airport will cover an area of 1,248 hectares8 and will have two runways, 3,800 meters long, and a midfield pas- senger terminal complex. Chek Lap Kok is an island consisting of 302 hectares, off the northern coast of Landau Island. The airport will be created by leveling Chek Lap Kok and a nearby smaller island, Lam Chau, and by reclaiming 938 hectares of land from the sea. The first runway is scheduled to be com- pleted by June 30, 1997, the scheduled date for the transfer of Hong Kong's sovereignty. The airport is expected to open in April 1998, which allows up to nine months for trial operations and the move from Kai Tak. The capacity at that date will be 35 million passengers and 3.0 million tons of cargo a year, with 65 8 This area is equivalent to more than four times the size of Kai Tak Airport. 174 Case Study 5 EAST ASIA aircraft positions. The total capital cost of the airport project up to the completion of the first phase (1998) is estimated at HK$70.7 billion (approximately US$9.06 billion) as of Novem- ber 1994, including HK$49.8 billion (approximately US$6.4 bil- lion) for PAA costs, HK$15.4 billion (approximately US$2 bil- lion) for private sector franchises, and HK$5.5 billion (approxi- mately US$710 million) for government facilities.9 The second runway will be opened according to air traf- fic demand. The passenger terminal complex will have one ter- minal initially and another at a later date. According to the ini- tial opening development plan (being revised at date of publica- tion due to changing traffic forecasts) at the end of its Phase I development in the year 2010, the airport will have an annual capacity of 45 million passengers and 2.5 million tons of cargo. For the second phase, facilities are planned that will increase the airport's capacity to 87 million passengers and 9 million tons of cargo by the year 2040. C. The PAA To further stimulate competitiveness in services and efficiency in management, the government has shifted the airport's overall management from a government department to a public corpo- ration. The planning, construction, and ownership of the re- placement airport will be placed under a new, commercially in- dependent, airport authority. In the interim, as has been men- tioned, the government has set up the PAA, under the chairman- ship of the Financial Secretary, as a statutory authority respon- sible for building and developing the new airport. The PAA was created in 1989 as the corporate entity responsible for plan- ning, designing, and constructing the new airport. It is the PAA's responsibility to ensure that airport development (site forma- tion, key facilities construction, etc.) is carried out in accordance with the Memorandum of Understanding. The PAA's policy is to provide quality services at the airport through competition and private sector participation. Following the enactment of the Airport Corporation Bill, the PAA will be transformed into a full-fledged corporation under its own legislation and will be able to operate the airport independently, to borrow funds, and to initiate investments in facilities to be developed by the pri- vate sector. The personnel and the assets and liabilities of the 9ATC-related equipment and infrastructure. 175 AIRPORT PRIVATIZATION EXPERIENCES PAA will be transferred to the new Airport Authority. The Air- port Authority is expected to focus chiefly on air traffic-related services and apron management, delegating airport-related ser- vices to the private sector. The CAD will mainly provide in- route navigation services. The PAA is supervised by a Board with members appointed by the Governor. Executive directors at the PAA are responsible for construction, finance, corporate development, commercial and operations planning, and admin- istrative matters. The PAA employs 1400 persons. The PAA acts principally as project manager, and has four main areas of responsibility: X Supervision of building operations, including supervi- sion of site formation and construction, and design of the terminal building. Most of the work has been done through contracting the local private sector, with con- tracts being awarded through a fair and open tendering process. Provision of competitively priced services to all airport users through private sector franchises, to bring in ex- pertise and promote competitive services. The PAA has been mainly involved in commercial and operational planning, including the selection of private operators, the specification of business plans, the drafting of fran- chise terms, and also negotiations for franchise awards for building and operating airside support businesses such as cargo handling, aircraft maintenance, air cater- ing, and the aviation fuel system. Operational planning has also been oriented toward customer facilities in the terminal building and landside developments. 0 Financial management, including the monitoring of costs and expenditures through financial and manage- ment information systems and control procedures, and the structuring of financing for the airport's develop- ment. The PAA is responsible for arranging financing, and in that capacity works with the government and the Sino-British Joint Liaison Group's Airport Committee on the overall financing plan. The PAA has continued to prepare for the borrowing program that its successor, the Airport Corporation, would have to undertake to raise capital. 176 Case Study 5 EAST ASIA et Coordination with the Joint Liaison Group's Airport Committee, including work on the completion of the financing and capital structure agreement for the new airport with the Chinese authorities, on the enactment of the Airport Corporation Bill, and on the land grant for the airport island. The structure and the operational style of the PAA will result in major changes in the provision of civil aviation ser- vices in Hong Kong, of which the following are the two main features. f The focus of the PAA's operations will be on designing airport development plans, support systems, and qual- ity, safety, and performance standards for consultants and contractors, and on coordinating with government officials to arrange airport financing structure. *e The total reliance on private sector operators for the implementation of airport development and management translates into a type of greenfield privatization of the new airport with governments owning 100% of the air- port corporation and land property. The government's management responsibility will thus be redefined around ATC and meteorological systems. Future airport man- agement will be planned around five management cen- ters: security, airfield safety and operations, passenger terminal customer services, landside services, and main- tenance services. D. Project Finance Financial arrangements for the new airport were signed on No- vember 4, 1994 by the British and the Chinese in the Joint Liai- son Group's Airport Committee to provide HK$36.6 billion of government equity and a maximum of HK$11.6 billion of pri- vate sector debt (see Table 5.5, following page). The private sector will provide HK$15.4 billion in the form of BOOT ar- rangements for cargo handling, ground handling, catering fa- cilities, and the airport hotel. The CAD will provide an addi- tional HK$5.5 billion in air navigation equipment and related infrastructure. 177 AIRPORT PRIVATIZATION EXPERIENCES Table 5.5 m 0 - HKS Hong Kong: Airport (billions)1 Development (ACP) - Equity Funds 36.6 Financing Structure Debt Funds 11.6 Total Airport Corporation (in process) 48.2 Private Sector 15.4 CAD (air navigation equipment) 5.5 Olhers (to be determined by PAA) 1.0 Total Funding 70.7 US$1 is equivalent to HK$7.8. Source: PM Finance Department, October 1995. The Government's initial proposal to the Airport Com- mittee had a higher debt: equity structure (almost the inverse of the present 1:3 ratio). The PAA's officials felt confident that, given the project financial figures,'0 the new airport project could easily raise the funds from local capital markets. The Govern- ment of China opposed this proposal on the basis that, as future owner of the new airport development (1997), it was not in- clined to accept such a level of debt for a new infrastructure project. It was also reluctant to accept the full coverage of the construction risk, although it finally accepted this in November 1994. The PAA's financial strategy is to raise short-terrn capi- tal through a syndicated loan that will later be converted into a revenue bond issue." The PAA officials believe that the bonds will be placed in the Hong Kong capital market at a rate similar to Government of Hong Kong sovereign debt. Recently (1994), a similar 20-year revenue bond issue from the Mass Transit Rail- way Corporation was placed in the local market with a -AA rating and an 8 percent yield. Construction risk is being under- taken by the government through a Financial Support Agree- ment (FSA) between the PAA and the government. In this agree- ment the government is guaranteeing the total funding for the construction phase of the project (the public sector portion). As usual, the commercial risk will be borne by the project sponsors '° Once the first phase is in full operation expected revenues are estimated at HK$8.0 billion per year with returns similar to those at Kai Tak Airport. 1" Bonds payable from a specific source of revenue and which do not pledge the full faith and credit of the issuer. 178 Caseo Study 5 EAST ASIA and lenders, but with the following caveat: economic regulation on airside charges will be limited to agreements that comply with international conventions (ICAO).'2 Apart from the risks associated with Hong Kong's change in political status after 1997 (to a Special Administrative Region under the Chinese Central People's Government),'3 policy risks in the new airport devel- opment tend to be low, given the arrangements for economic regulation which provide the PAA (and the new Airport Corpo- ration) with a relatively high degree of discretion to establish airside charges. Until now, the PAA has been funded by government advances approved by the Legislative Council's Finance Com- mittee. On July 1, 1994 the Finance Committee approved funds totaling HK$15.18 billion to cover the construction of the pas- senger terminal and concourse. Further approved funding in January 1995 brought advances from the government's Capital Investment Fund to HK$36.6 billion (i.e., the proposed equity level).'4 E. Private Sector Partnerships The PAA's objective is to draw on private sector experience and expertise to provide competitive and quality services to all air- port users. Therefore, the PAA awards contracts and commer- cial franchises to private sector firms through an open and non- discriminatory tender process. Companies from all over the world have won major contracts. Japan has received the largest amount (25 percent), followed by Hong Kong (23 percent), the United Kingdom (16 percent), China (7 percent), Netherlands (6 percent), France (6 percent), Belgium (3 percent), New Zealand (3 percent), Australia (2 percent), Spain (2 percent), and others (6 percent). In December 1994 the PAA short-listed four international consortia to tender bills for the contract to build the passenger terminal superstructure at Chek Lap Kok 12 The ICAO (Chicago Convention) guidelines and principles on airside charges are very limited and refer mainly to equality of treatment between nations and not to level of pricing. 3 Already largely discounted under the transition period (1984-97). 14 On June 30, 1995, the British and Chinese sides of the Airport Conmiittee reaffirmed support for the construction of the new airport and related projects in reaching an ac- cord over the Financial Support Agreements (FSAs). These contain assurances of government support that will enable the PAA to raise, in a cost-effective manner, the necessary borrowing in accordance with the Agreed Minute (PAA RPE0221, July 1995). 179 AIRPORT PRIVATIZATION EXPERIENCES and three international consortia to tender bids for the terminal building services contract. On January 26, 1995, the PAA awarded the passenger terminal contract (the largest contract in the airport project, at HK$10.1 billion, equivalent to US$1.3 billion) to BCJ Joint Venture.'5 The PAAdecided to award cargo handling franchises to HACTL (capacity on opening 2.6 mil- lion tons) and Asian Air Freight Terminals Limited (Hong Kong, Singapore, and Chinese ownership) with capacity of 0.4 million tons. V. PRIVATE SECTOR DEVELOPMENT A. Kai TakAirport Private Sector Development at Kai Tak Airport is characterized by a close partnership between the CAD and private operators. Out of the 23,000 employees at Kai Tak Airport, only 370 are employed by the CAD. This particular process has translated into a very clear division of responsibilities. The CAD is primarily responsible for the provision of air navigation services and apron management. Private concessionaires are primarily responsible for bringing competitiveness and efficiency to the opera- tional management of the airport. In this context, pas- senger and cargo service operations have been trans- ferred to private operators. The two major franchises in Kai Tak Airport were awarded to Hong Kong Airport Terminal Services Limited (HATS) for passenger and ground handling services and to Hong Kong Air Cargo Terminals Limited (HACTL) for air cargo handling. These concessions were awarded to promote competi- tively priced and high quality services (charges are regu- lated through a rate of retem formula known as ANFA). 'J HATS was set up in 1961 as a 50/50 joint ven- ture between Jardine, Matheson & Company Limited and Swire Pacific Limited. It was de- 15BCJ Joint Venture comprises: China State Construction Engineering Corporation, of the People's Republic of China; Kumagai Gumi (HK) Ltd., of Hong Kong; Maeda Cor- poration, of Japan; and Amec International Construction Ltd., of the United Kingdom. 180 Case Study 5 EAST ASIA cided at that time that the small area available at the airport would not support the operations of several ground handling agents. Thus, one agent, HATS, was chosen to provide services to all airlines under a six-year renewable fran- chise agreement. HATS pays royalties to the government and a profit control scheme limits its shareholders returns. HATS employs 1,300 staff, primarily responsible for delivering lug- gage to and from the aircraft; delivering cargo to and from the aircraft to the HACTL ware- house; delivering air mail; loading and unload- ing aircraft; and providing boarding steps to air- craft. Other HATS responsibilities are ramp transportation, a porterage service, and mail delivery services. HACTL was incorporated in 1971 under a pri- vate franchise to handle air cargo services in and out of Hong Kong. The government granted HACTL an exclusive concession to provide consolidated air cargo terminal services to all airlines. HACTL is subject to economic regu- lation, which is overseen by the CAD through the application of a rate of return formula (re- turn on ANFA). The ANFA rate for HACTL fees and charges has been between 12.5 and 15.0 percent. The decision to grant an exclusive con- cession was reinforced by space constraints at Kai Tak and by inefficiency in air cargo opera- tions resulting from the fact that airlines were operating their own obsolete warehouses. The ownership of HACTL is distributed among five shareholders, as follows: Jardine, Matheson & Company Limited (30 percent); Swire Aviation Limited (30 percent); The Wharf Limited (15 percent); HK & Whampoa Dock Company Limited (15 percent); and China National Avia- tion Corporation (10 percent). HACTL's share- holders have recently agreed on the acquisition of 10 percent of the company by Cathay Pa- cific Airways. Since 1976, HACTL has been providing cargo handling, storage, buildup, breakdown, and data and documentation pro- cessing services on a 24-hour basis to more than 181 AIRPORT PRIVATIZATION EXPERIENCES 70 airlines. HACTL operates two terminals with an annual throughput capacity of 1,500,000 tons. During the period 1992/93, HACTL handled close to 1,000,000 tons."6 To maximize land use, HACTL has exploited vertical space to the extent possible. HACTL's two terminals represent the largest investments in air cargo facilities in the world, amounting to US$256 million. HACTL has been extremely success- ful in maintaining a high standard of services despite an average compound growth rate of 11 percent per year. The mishandling rate is as low as 1 mishandled consignment out of 20,000. Estimates put the value of tonnage handled by HACTL at 20 percent of Hong Kong's external trade. The average dwell times are 19 hours for exports and 40 hours for imports thanks to the company's efficiency and the free port sta- tus of Hong Kong. _ d------ B. Future Private Sector Involvement Process at Chek Lap Kok Partial placement of the new Airport Authority (the Corpora- tion) equity will take place at the completion of works. It will be supported by subscription of shares to the public via domes- tic and international capital markets (a percentage of the total equity is to be determined at a later stage). The government decided to partially allow private sector participation in the air- port corporation at project completion rather than at its start-up because of the following constraints: i It was considered necessary to develop the airport quickly to meet the rising traffic demand and to com- plete the airport before the transfer of Hong Kong's sov- ereignty to China. * The management of the airport's development was un- dertaken by the government in order to favor a long- term strategic viewpoint in building airport capacity ahead of actual demand. 16HACML ranks among the top the caigo terns in the world today. 182 Case Study 5 EAST ASIA B The experience and in-depth expertise of the govern- ment in such infrastructure project development made it the most suitable candidate for managing the devel- opment process quickly and effectively, with financial cost control. * Private sector management of airport development was perceived as being tailored to short-term financial re- wards rather than to long-term economic development. Upon the opening of the airport, the private sector will operate five key franchises: aircraft catering, cargo handling, aircraft maintenance, aviation fuel supply, and ground handling services. Business plans for these franchises have been received and evaluation and negotiations are being carried out.'7 KUALA LUMPUR-MALAYSIA: SEPANG AIRPORT Malaysia has recently corporatized its national airport system through the creation of a state-owned corporation, Malaysia Airports Berhad (MAB). Malaysia, with a total of 36 airports in the system,"t is different from the cases of the city-states of Hong Kong and Singapore. In late 1991 the enactment in Parliament of the Civil Aviation Bill separated the existing Civil Aviation Department (CAD) into two entities: (1) the MAB, with respon- sibility for operation of the national airport system, and (2) the CAD, with responsibility for policy and regulatory functions in air transport. MAB officials have remarked that within the sec- ond year of operation the economic performance of the national airport system had changed from that of a subsidized entity to a profit-making concern. 17 Good progress has been made in finalizing the negotiations for these franchises. In a separate Agreed Minute on June 30, 1995, the two sides on the Airport Committee agreed to the terms of the two Franchise Agreements to be entered into by the Airport Authority with HACTL and Asia Airfreight Terminal Company Limited (AAT) for the provision of air cargo services at Chek Lap Kok, confmnring that they will continue to be valid after 1997. The Airport Authority expects to award the franchises as soon as the Airport Authority Ordinance comes into effect (PAA RPE 0221, July 1995). Is Five international airports, 14 domestic airports, and 17 short takeoff and landing (STOL) airports. 183 AIRPORT PRIVATIZATION EXPERIENCES A. Subang Airport The existing international airport at Kuala Lumpur, Subang Air- port, has gone through three different expansions and renova- tions and is now close to capacity limits, handling an average of 12 million passengers per year and 300,000 tons per year in 1994. In 1991 the Government of Malaysia announced plans to build a new international airport in Sepang, 50 kilometers south of Kuala Lumpur. The new airport facility is a mega-project for transport infrastructure in Malaysia and includes railway and highway links to the capital (the first phase of the airport-re- lated infrastructure alone is estimated at RM10 billion, or ap- proximately US$4 billion). The airport project was announced in 1991 in the context of Malaysia's 30-year economic plan (Vi- sion 20/20). The plan's main objective is for Malaysia to achieve developed nation status by the year 2020. e._ _ B. Sepang, Kuala Lumpur International Airport The new airport development at Sepang, to be opened in 1998, will have in its first phase the capacity to handle 25 million pas- sengers per year and 1 million tons of cargo per year. Subse- quently, Phase II (2008) and Phase m (2012) will increase the capacity to 35.0 and 45.0 million passengers per year, respec- tively. In early 1993 the government created a new company, K.L. Intemational Airport (KLIA Bhd.), as a state-owned cor- poration with full financial autonomy under the supervision of the Ministry of Finance. KLIA Bhd. has responsibility for build- ing and developing the airport facilities according to a master plan developed by the Anglo-Japanese Airport Consortium (AJAC).19 The concept is to provide the airport development with a high degree of flexibility and autonomy in the construc- tion phase of the facility. Once built, KLIA Bhd. will be incor- porated into MAB as a subsidiary for the operation and man- agement of airport-related services. The design concept used is that of "the airport in the forest," which will provide all passen- ger terminals with built-in surrounding tropical forests, making the facility unique (an 18-hole golf course and an attraction park are planned within the airport compound). 19 British Airports Authority (BAA plc) is the "Anglo" component in the consortium. 184 Case Study 6 EAST ASIA The following are some of the most relevant issues con- cerning to the new airport project's finances and private sector participation in infrastructure. 1. Private Sector Participation Of the total projected investment of RM10.0 billion, the private sector is expected to contribute RM2.0 billion (approximately US$0.8 billion). MAB will directly provide the air traffic con- trol, apron management, internal security, and fire and rescue services. The other airport-related services (landside and pas- senger services) will be provided by the private sector through long-term concessions and BOOT schemes. According to the privatization consultant (Arthur Andersen) working with KLIA's authorities, the following activities will be privatized in the new 'airport development (with total investment funded by the pri- vate sector): In Ground handling services I Passenger services (excluding the construction of the passenger terminal) * Car parking and car rental in Aircraft catering * Cargo terminal (apron, terminal, office building, and warehousing) * Aircraft maintenance facilities * Aircraft fueling system *1 Airport hotel A Golf course/theme park. 185 AIRPORT PRIVATIZATION EXPERIENCES 2. Capital Finance Structure The remaining RM8.0 billion to be invested by the GOM is struc- tured as shown in Table 5.6. Sources of Funding RM Malaysia: KLIA Bhd. (billions)' Financing Structure Equity injection (Government of Malaysia) 1.00 Debt: Overseas Economic Cooperation Fund, 1.60 Japan Government (to finance terminal construction) Government Bonds (20 years. Z775%) 1st tranche Employees Provident Fund 1.20 Pensions Funds 0.20 Bank Simpanan 0.15 Social Securty 0.05 2nd tranche (end ot 1995) 1.50 Rest of the Funds Govemrnment bonds from local capital markets. 2.30 terms and conditions to be announced 1 US$1 is equivalent to RM2.56 (January 1, 1995). Source: KLIA Bhd. Planning Department, January 1995. Officials from both the Ministry of Finance and KLIA Bhd. seem confident that most of the financing could come from the local capital markets by means of government bond issues. This is to be expected since the most important bond subscriber, the Employees Provident Fund (EPF), is a government-related institution. The EPF is in charge of managing the funds from the mandatory contributions of employees and employers to pension and social benefits. The EPF has been a major player in the financing of recently privatized infrastructure projects (Norti- South Express Highway, Light Rail Transit, YTL Power Gen- eration Bhd., etc.), and the government is asking it to assume a total of RM4.0 billion in the financing arrangements for the new airport development. The EPF has a mandatory portfolio strat- egy for the administrators, in which 70 percent of the Fund's assets must be invested in government securities. For all practi- cal purposes most of the project financing needs are being funded by government sources. 186 Case Study 5 EAST ASIA 3. Project Development and Privatization Strategy Malaysia's Privatization Program, headed by the Economic Plan- ning Unit (EPU) of the Prime Minister's Department, has been widely known as one of the most successful programs world- wide. Several infrastructure projects, with more complicated pricing and revenues issues than those in airport infrastructure, have been carried out successfully in recent years (road infra- structure, ports, power plants, etc.). In the case of the Sepang Airport development, the railway and highway transport links (not included in the RM10.0 billion figure) have also been tar- geted for full privatization under BOOT schemes. Despite all this, private sector participation in the new airport development is relatively low (20 percent) and airport ownership will remain in the hands of the state, at least in the initial years of the project. During meetings held with officials from EPU, the Ministry of Finance, MAB, and KLIA Bhd., this issue was brought up but did not receive a definite response from the Government. As with Hong Kong, the government prefers to complete the project and then start a privatization process through the placement of shares in local and international capital markets (similar to the BAA case). The following factors must be taken into account in assessing the government's project development and privatiza- tion strategy. i The Government of Malaysia feels that if the new air- port were to be privatized as a greenfield project, the private sector would probably scale down the size and magnitude of the facility in order to enhance the short- term financial performance. a The new airport development at Sepang is not market driven but supply driven. It is part of the government's strategy to enhance the competitiveness of Malaysia, particularly in relation to Singapore (government offi- cials claimed that they had lost a significant portion of the cargo business to Singapore's Changi Airport). The government appears reluctant to share the responsibil- ity for this type of project investment with the private sector beyond the limits that it has already established. It prefers to assume 100 percent of the risk of over- spending in the short term before compromising the potential of long-term gains in the future. In a certain 187 AIRPORT PRIVATIZATION EXPERIENCES sense it could be implied that the government believes it can out-perform the market's future expectations with respect to investments in airport infrastructure. a The government is now in a relatively cash-affluent position and can draw most of the project funding from its internal resources. The situation would change some- what if KLIA Bhd. had to go to international capital markets to seek project finance. 40, SINGAPORE: CHANGI AIRPORT Today Singapore (with a local population of 3 million) has, in its Changi Airport, the Rolls Royce of the airport industry. This airport is probably the "showcase" of successful transport infra- structure investment as a driving force in economic develop- ment. The airport's first phase (a greenfield project) began op- erations in 1981, with runway, terminal capacity, and related installations clearly exceeding market demand for years ahead. Changi Airport handles 24 million passengers per year and 1 million tons per year of cargo (this represents approximately 10 percent of the worldwide air transport cargo).20 Terminal 2, a model of airport design in the industry, was opened in 1990 to expand passenger capacity at Changi. Terminal 3 is already in the design phase and is expected to be completed by the year 2000, in order to keep up with airport management's philoso- phy that "airport capacity should always exceed demand." Changi Airport has become, in less than 15 years, the most im- portant commercial hub in Southeast Asia and one of the world's leading airports for international traffic. It has clearly set the standards in terms of operational efficiency and customer ser- vice for airports around the world. In 1984 the Government of Singapore decided to cor- poratize all the air transport-related activities (i.e., airport op- erations, air traffic control, technical regulation, and the admin- istration of bilateral agreements), creating a new statutory board with full financial autonomy through the enactment of the Civil Aviation Act. The corporation was named the Civil Aviation Au- I LATA statistics, 1993. 188 Case Study 5 EAST ASIA thority of Singapore (CAAS), and Changi Airport operates as a fully owned asset of the corporation. CAAS is a state-owned corporation under the tutorship of the Public Works Department. It is one the few cases in which both the function of air transport regulations and the administration of bilateral agreements are assigned to a state corporation and not to the federal govern- ment. The combining of air transport policy functions (regula- tions and bilaterals) with operational and management functions (airport and ATC) has had an impact on the business develop- ment of the airport. CAAS has aggressively promoted the Changi Airport and Singapore's flag carrier (Singapore Airlines) through the use of a liberal aviation policy (an open skies policy). CAAS believes that having control of both air transport policy and op- erational functions has been the key to its success in establish- ing Singapore as a major international gateway. As in the case of Hong Kong, most airport-related ac- tivities are operated by the private sector. CAAS is responsible for the provision of air traffic control, apron management, and internal security. ChangiAirport employs approximately 27,000 workers, of which 1,500 are directly employed by CAAS. In 1987 the Government of Singapore short-listed CAAS as one of the candidates for privatization. Privatization studies were con- tracted out to two international consulting firms, Price Water- house and Arthur D. Little, in 1988 and 1991, respectively. Recommendations from the studies suggested that it would be both desirable and financially attractive to privatize the owner- ship of the Changi Airport. In 1992 CAAS concluded indepen- dently that it was not in the best interests of Singapore to priva- tize the airport ownership and made a recommendation to the government to exclude the Changi Airport from the privatiza- tion list. CAAS claims that its recommendation was totally sup- ported by the government and that presently the government is not considering the privatization of the Changi Airport owner- ship. CAAS' main concern regarding privatization was that the necessary breakdown of functions within the corporation (the airport would have been privatized as an independent unit with- out the policy functions) would have weakened the airport's ability to control its own growth. CAAS officials expressed skep- ticism regarding the Western model, wherein policy roles are separated from operational and management roles, particularly concerning Singapore (in which they would need to compete aggressively with neighboring nations to maintain their edge as the region's leading commercial hub). 189 AIRPORT PRIVATIZATION EXPERIENCES KEY ISSUES EMERGING FROM THE EAST ASIAN EXPERIENCE * Airport Infrastructure Development. The govern- ment efforts in this area appear to be driven by country strate- gies to enhance competitiveness in the service sector. Airports are not built to meet national demand needs: they are built as extensions of services and exports activities. Cargo facilities for storage and handling play a more important role in the plan- ning and development of airport infrastructure than they do in the standard case of Western economies. Average investment in airport facilities is much higher than in other developing coun- tries. Government supervision of the design and planning pro- cess, to ensure long-term economic development, is a key fea- ture of east asian government's airport development strategy. The private sector is perceived as being tailored to short-term financial rewards rather than to long-term economic develop- ment goals in the management of large infrastructure projects (i.e., an international airport). However, private corporate gov- ernance in the management of project design and construction is the option preferred by both the Hong Kong and Malaysian Governments. Both airport development efforts were led by in- dependent and decentralized government-owned corporations newly created for that purpose. Both the PAA and KLIA Bhd. are cases of corporatization of the airport design and develop- ment services, allowing for the necessary level of financial au- tonomy and corporate governance. X Privatization Strategies. Full privatization of airport ownership is not considered by the governments in these cases to be an initial option for private sector participation in airport infrastructure. The key reason for the deferral of ownership priva- tization seems to be twofold: (1) the existence of relatively cash- affluent governments with a balanced fiscal situation; and (2) the fact that airport plans and designs are not profit-driven but development-driven, thus governments are inclined to retain con- trol until the facilities are in full operation. An option com- monly used is the privatization of the provision of most of the landside and airside airport services, apart from air traffic con- trol and apron management, through long-term concessions and/ or BOT schemes. Both the Hong Kong and the Malaysian Gov- 190 Case Study 5 EAST AsIA emments expressed their intentions to allow partial private sec- tor participation in the ownership at a later date through share subscription. e Vertical Integration with National Flag Carriers. In the three analyzed cases, there existed a close "partnership" be- tween the airport authorities and each flag carrier (i.e., Cathay Pacific, Malaysia Airlines, and Singapore Airlines). In most of the cases, flag carriers had some kind of exclusivity rights on the provision of passenger services, ground handling services, or cargo handling services.2" Although this is common in most countries (e.g., in U.S. airports and Western European airports), it raises some questions concerning fair competition and market power, particularly in air transport facilities catering to the in- ternational business community. g Project Finance Needs. East Asia's air transport mar- ket has been growing in the last three years at an annual rate of between 10 and 15 percent. This is roughly 2.5 times higher than the growth experienced by the rest of the world. Consider- able airport upgrades and expansions are taking place in this area, particularly if one considers the market in China. For many years the Chinese air transport market was dormant, but in the past few years it has experienced impressive growth (there are about 35 domestic air carriers in China today with an annual rate of growth of 20 percent)22 which translates into a massive need for airport and air navigation infrastructure investments in the forthcoming years. Government and the Private Sector ' Unique Part- nership. The development of airport infrastructure in the cases of Hong Kong, Kuala Lumpur, and Singapore illustrates a clear division of responsibilities between the public and private sec- tors in the provision of air transport services. Government as- sumes the roles of policymaker, regulator, owner, and devel- oper (including the major portion of the capital financing), trans- ferring the operational responsibilities and management to the private sector. 21 In the case of Kai Tak Airport, the parent company of Cathay Pacific (Swire Corpora- tion) owns the exclusive rights to both ground handling and cargo handling. In the case of MAB, Malaysia Airlines owns the exclusive rights to cargo handling and storage. In the case of Chek Lap Kok the ground handling concession will be open to more ample competition. 22 Overseas Economic Cooperation Fund, Asian Airports Conference, Hong Kong, May 1995. 191 AIRPORT PRIVATIZATION EXPERIENCES 192 Case Study S JAMAICA AIRPORTS IN JAMAICA' A CASE STUDY IN AIRPORT PRIVATIZATION THROUGH A COMBINATION OF PPI MECHANISMS (WRAPAROUND)2 The Sangster International Airport (SIA) in Montego Bay is the principal gateway for the Jamaican tourism industry. Passenger traffic at this airport experienced an 8 percent compound growth rate during the period 1980-92, and future traffic is forecast at 5.0 million passengers by the year 2005. The Government of Jamaica realized that by 1990 the present airport system, with a capacity of 2.5 million passengers/year, would have difficulties handling the increased traffic. It was then feared that the lack of capacity would have a negative impact on the country's tourism market. In response, the government initiated the preliminary work for the expansion of the airport facilities. The Government of Jamaica established two basic pre- mises that would govern future airport privatization and expan- sion programs: (1) airport expansion should be funded prima- rily by the private sector; and (2) airport operations would be transferred to the private sector. On the basis of these premises, and with private sector involvement, a creative privatization method was devised. The privatization program was centered 1 Research for this case was conducted in September 1994 and January 1995. 2 PPI is Private Sector Participation in Infrastructure. Wraparound is when an exist- ing government-owned facility is expanded by a private enterprise, which only holds title to the addition; the private enterprise operates the entire facility through a conces- sion or lease contract of the government-owned section. 193 AIRPORT PRIVATIZATION EXPERIENCES on: (1) the use of a deferred privatization mechanism that would maximize privatization revenues by selling up to 70 percent of the shares in the terminal company (SIA Ltd.) that owns the existing terminal buildings, and is responsible for the expansion of landside activities, through a Privatization Trust after project completion; and (2) the design of a capital finance structure that will raise funds on the domestic, regional, and international mar- kets. The government agreed to limit its equity to no more than 30 percent of the overall ownership and to sell a first tranche of SIA Ltd., totaling 10-15 percent of total shareholding, to the private sector with the outstanding shares being placed in a Priva- tization Trust, with an irrevocable commitment to sell these shares at a later date to the private sector. Equity would be sold on the local market or to selected overseas airport investors. While the government was to be entitled to dividends at all times to the extent of its share ownership, its voting rights in the shares in the Trust were to be restricted to 30 percent, which would effectively give control of the expansion and the operation of the terminal to the private sector. The government also con- cluded that up front privatization would deny the state the op- portunity to benefit from the potentially high capital gains an- ticipated once the expansion was completed. Since the government of Jamaica is not directly provid- ing guarantees to the SIA development plan, the Overseas Pri- vate Investment Corporation, U.S. (OPIC) is guaranteeing the transfer and political risks associated with the Project's Senior Debt. The expansion plans were approved in 1993 and con- struction is slated to begin in 1996. Due to the relatively com- plex process of decisionmaking at Jamaica's Cabinet level and the legal and regulatory changes required to allow private par- ticipation in the sector, the project's completion has taken longer than expected. As of July 1995, the project has been on hold pending a recommendation from the Attorney General's Office that a vesting legislation is needed to give the government the necessary power to transfer the assets and functions of AAJ to SIA Ltd.3 The government is also considering the rehabilitation and expansion of Norman Manley International Airport (NMIA) at Kingston using the same project concept as in the SIA case (this project is currently being developed by the Airports Au- ' Flotation of the convertible bonds tranche in the domestic market has been postponed pending a decision on the Attorney General's Office recommendation. 194 Case Study 6 JAMAICA thority of Jamaica [AAJ]). The government has also accepted the principle of the privatization of four domestic aerodromes: Boscobel, Tinson Pen, Negril, and Ken Jones. 1. OWNERSHIP AND INSTITUTIONAL FRAMEWORK The AAJ is an independent corporate body established in 1974, in accordance with the Airport Authority Act, under the super- vision of the Ministry of Water and Transport. Its functions are to administer, control, and manage prescribed airports and to provide and maintain such services and facilities, other than navigational services, that are necessary for their efficient op- erations. The AAJ owns and operates the two international air- ports at Kingston (NMIA) and Montego Bay (SIA). It is also responsible for, but does not own the assets of, four domestic aerodromes: Tinson Pen, Negril, Boscobel, and Ken Jones. The AAJ is governed by a Board of Directors in which the Chair- man and all the members are appointed by the Minister. In prac- tice the Board functions independently, with a mandate to oper- ate as a viable business entity. The AAJ's current strategic plan has the following objectives: (1) the divestiture of airport termi- nal operations (landside); (2) the development of new economic regulation framework; (3) the strengthening of its planning and policy development capacities; and (4) the upgrade and mod- ernization of airport related infrastructure (see Annex 6.1 for the organizational structure of the AAJ). The Civil Aviation Department (CAD) (see Figure 6.1, following page) is a division of the Ministry of Public Utilities and Transport in charge of two functions: (1) the provision of air navigation services (air traffic control, communications, me- teorology, and search and rescue)4 and (2) the regulation of the civil aviation sector (e.g., air safety, licensing, airport opera- tions), excluding economic regulation activities. The regula- tory legislation for Jamaica's aviation sector is contained in the following three documents: the Airports Law of 1959, the Co- lonial Air Navigation Order of 1961, and the Civil Aviation Act 4 Air Traffic Control (ATC) functions as a department of the govermment. A decision was made in 1995 to merge ATC with AAJ. This decision was reversed in 1995 and ATC is to become a part of a proposed Civil Aviation Authority. 195 AIRPORT PRIVATIZATION EXPERIENCES Figure 6.1 Jamaica: CAD Ministry of Water and Organizational Structure Transport Director of Civil Aviation rector DeputyDirector L hDvigaonSen/ices J 29 e!ion(airopertlon)l Source: Jamaica Transport Sector Study - Task 8, Teape-Johnston Associ- ates, November 1993. of 1966. There are other departments/bodies within the Minis- try of Water and Transport that also carry out aviation-related functions in Jamaica: I Air Transport Policy Committee: Its main responsibili- ties are to oversee air transport agreements (i.e., bilat- eral and Caricom) and their associated issues. X Air Transport Licensing Board: Its responsibilities are to consider and approve requests for air transport licenses and permits as well as pricing issues related to passen- ger and cargo air transportation (this does not involve airport and air navigation charges). The CAD is not an independent body and does not have financial autonomy. It combines the function of the provision of a public service with the regulatory functions for air transporta- tion. Both of these factors have contributed to the CAD's failure to develop a business/commercial culture and to thereby attain the desired level of economic efficiency in its operations. Given its dependency on central government budgeting, the CAD lacks adequate capital budget allocations and also lacks funding for infrastructure replacement and expansion. The CAD is not up to date in its equipment, technology, and manpower: equipment is 196 Case Study 6 JAMAICA in need of modernization and upgrading, and the organization needs considerable improvement if it is to fulfill its role in the aviation sector.5 Table 6.1 presents CAD annual aircraft operations sta- tistics on movements and overflights for a five-year period. Table 6.1 Movements Jamaica: Civil Aviation Department, Annual Norman Manley N.A. N.A. 12,470 N.A. 12,961 Aircraft Operations (Kingston) Statistics, 1989-93 Sangster (Number of Movements! i (Montego Bay) 33,642 36,653 36,701 37,991 44,595 Overflights) Overflights Kingston Right Informabon Region (FIR) 34,977 37,494 36,031 54,543 53,981 Source: Civil Aviation Department, September 1994. 11. REGULATORY FRAMEWORK Given that the operations of both airports and air navigation services have traditionally been under government ownership, economic regulation procedures and methods have not been properly developed. Airport charges are presented by the AAJ to the Minister of Water and Transport for approval, and the same procedure is followed in the case of the CAD for air navi- gation charges. Under a technical assistance facility from the IDB, the Government of Jamaica is developing an economic regulatory agency for all utilities. The economic regulation of airport related charges is expected to fall within the jurisdiction of the new Office of Utilities and Regulation (OUR). Experts from the U.K. government are scheduled to assist the Govern- ment of Jamaica in the design and development of the new regu- latory framework.6 ' From a US$50 million project (funded by IDB/Japanese Exim Bank) for the rehabili- tation of Norman Manley airside facilities, US$15 million are earmarked to upgrade the CAD communication system. 6 The study is being financed as part of a US$50.0 million loan from the IDB/Japanese Eximn Bank for phase one of the airport rehabilitation and expansion at Norman Man- ley International. A British finn (Portland Group Ltd.) was retained by the Jamaican Government and conducted the preliminary institutionaUregulatory framework study. 197 AIRPORT PRIVATIZATION EXPERIENCES Table 6.2 shows AAJ airside and landside charges for 1993/94. Table 6.2 Jamaica: AAJ Airport (a) Airside Charges (US$) Charges, 1993/941 Landing Fee (per 1.000 Ib) 1.1592 1.6229 Terminal Fee (per arriving passenger) 4.00 5.60 (charged directly to the airlines) Secunty Fee (per arriving passenger) 0.70 1.05 (charged direcly to the airlines) (b) Landside Charges (J$/m2) Space Rental Offices 215.28 2.691.00 I Ticket Counter 215.28 2,691.00 Baggage (make-up) 53.82 538.20 Storage 53.82 968.80 Maintenance nil 968.80 'Original source in US$. Source: Airports Authority of Jamaica, September 1994. Air navigation charges were also increased recently (May 2, 1994) (see Table 6.3) and airlines have been complain- ing about the magnitude and the timing of the price adjustments (last increase was in 1989). In 1995, in part to remove the air traffic controllers from the Civil Service bargaining unit, the government decided to establish the CAA as a statutory body with financial and regula- tory autonomy.7 The CAA was to be responsible for the techni- cal regulation of both the privatized operations and the public facilities. Consideration was given to the corporatization of the air traffic controllers' services, but this was ruled out as an op- tion at this stage. ' Air traffic controllers, though comparatively few in numbers, were able to bargain for higher levels of wage increases than the other public sector groups, and these increases often established a precedent for later negotiations. 198 Case Study 6 JAMAICA Table 6.3 En R Ui Ch argeq 0 . Jamaica: CAD Air Navigation Charges, (a) Prvate Flights 1994 - aircraft weighing 5.700 kg or less 12.00 - aircraft weighing more than 5,700 kg 24 00 (b) Commercial Flights - 5.700 kg or less 28.00 - more than 5.700 kg 48.00 Th,mlnal Charges (Motego .Bu yan-dXts1on)i (a) Pnvate Flights - aircraft weighing 5,700 kg or less 12.00 aircraft weighing more than 5.700 kg 20.00 (b) Commercial Flights - 5,700 kg or less 30.00 - more than 5,700 kg 40.00 Source: CAD, September 1994. Ill. AkAJ's FINANCIAL PERFORMANCE The AAJ's March 31, 1993 audited financial statements reflect, as a percentage of total revenues, operating profits of 40 percent and 30 percent, respectively, for 1992 and 1993, and net profits of 22 percent and 13 percent, respectively, for the same period. The return on equity for the year ending March 31, 1993 was 21 percent. Table 6.4 (following page) highlights some of the main financial indicators of the AAJ during the fiscal period 1992/93. Security costs at Jamaican international airports are rela- tively high compared with world standards (21.5 percent of total airport operating costs in fiscal year 1993). This is due to the fact that in recent years both the FAA and the U.S. customs services have increased the security requirements for Jamaica in response to the growth in illegal drug and arms traffic. Safety and security practices have increased in Jamaican international airports in terms of procedures as well as technology. The ratio of airside to landside revenues is 70:30 percent, which is similar to that in most airports in developing countries. Once both air- ports in Jamaica are upgraded and modernized, a window of opportunity for increasing the landside revenues (concessions, rentals, etc.) will exist. SIA, with a relatively higher interna- 199 AIRPORT PRIVATIZATION EXPERIENCES Table 6.4 Jamaica: Financial Airport Revenues 252,699.60 366,006.90 Indicators of AAJ, for the Entire System, 1992/93 Airport Operating Costs 149,023.90 254,470.90 (J$ thousands) OpeahigProft Aerodromes (net cost) 3,882.50 1,190.30 ! Head Office Expenses 15,625.00 46,146.20 Financial Costs 6,724.00 13,030.30 Provision - Doubtful Debts 28,083.50 12,518.80 Other Income-net 6,724.10 7,867.40 (financial and foreign gains) IM Promi ?~ TotalAssets 418,754.40 667,344.60 Shareholders' Equity 196,483.10 243,000.90 Source: AAJ's audited financial statements, KPMG, July 27, 1994. Note: The equity base of AAJ is not properly reflected. Government ad- vances through the Public Budget and repayment of AAJ Capital Debt are not adequately stated in AAJ books. tional traffic volume than NMIA, reflects an operating profit of 44 percent, which is high when compared with developing coun- try standards, although there may be some cost allocation pro- cedures that will need to be revised (security costs are higher at NMIA than at SIA, etc.). Table 6.5 shows the economic perfor- mance of each international airport during the fiscal period 1992/ 93. Landing and terminal fees at Jamaica's international air- ports are relatively low by world standards, but when they are compared with those of the relevant airports in the Latin Ameri- can and Caribbean region, the situation changes somewhat. It is a common policy in countries that are developing a tourism market to offer competitive airport rates in order to attract air- lines to their facilities. This was certainly the case in Jamaica. But given the need for airport upgrading and expansion (pre- cisely because of tourism development), airport charges could be expected to increase in the future. However, considering that recent increases in airport charges (Table 6.2) are not in- cluded in the aforementioned comparison, there appears to be 200 Case Study 6 JAMAICA Table 6.5 Jamaica: Financial Indicators of AAJ, for Each Airport, 1992/93 (J$ thousands) 1992 1993 Norman Manley Sangster Total Norman Manley Sangster Total Airport Revenues Landing fees 35,400.50 47,486.80 82,887.30 46,398.50 69,838.50 116,237.00 Terminal fees 31,705.50 52,799.70 84.505.20 45,003.10 76,369.40 121,372.50 Security fees 5,733.80 9,542.50 15,276.30 8,484.00 13,526.40 22,010.40 Total Airside 72,839.80 109,829.00 182,668.80 _999,885.60 159,734.30 259,619.90 Concessions 31,473.90 27,346.00 58,819.90 49,625.30 43,944.80 93,570.10 iSpace rentals 2,775.20 1,672.80 4,448.00 2,919.90 1,610.10 4,530.00 Utilines 2,931.60 2,038.30 4.969.90 2,934.70 1,847.40 4,782.10 Car parking 1,100.90 388.50 1,489.40 1,548.50 570.50 2,119.00 Miscellaneous 218.70 82.30 301.00 1,303.20 82.30 1,385.50 TotalLandside 38,500.30 31,527.90 70,028.20 58,331.60 48,055.10 106,386.70 Towa 11311v S h l >, _ Airport Expenses Administration 23,999.40 22.220.80 46,220.20 44,411.70 50,869.60 95,281.30 Security 22.372.90 16.415.30 38.788.20 30,491.80 24,093.70 54,585.50 Services 19,035.80 14,127.90 33,163.70 19,002.50 12,579.80 31,582.30 I Electricity n.a. n.a. n.a. 12.192.70 7.083.70 19,276.40 Airfield n.a. n a. n.a. 8.611.90 5,563.90 14,175.80 Landscaping n.a. n.a. n.a. 4,656.00 2,174.40 6,830.40 Others 11,457.50 7,952.20 19,410.00 12,193.50 7,731.80 19,925.30 Depreciation 5.043.60 6,398.10 11,441.70n 5,714.50 7,099.40 12,813.90 Total aiAoBM - 67A143 A4.% mi%uwmI_ Oper. Profit 29,430.60 74,242.60 103.673.20 20,942.60 90,593.10 111,535.70 I For average exchange rates, see Table 6.4. Source: AAJ's audited financial statements, KPMG, July 27, 1994. little room for further fees increases (from the point of view of the airport investors) if Jamaica is to keep a competitive edge. There is not measurable evidence of the impact of relatively high airport charges on tourism traffic flows in the Caribbean market, but we tend to believe that, all factors considered, land- ing and terminal fees will not play a major role in popular tour- 201 AIRPORT PRIVATIZATION EXPERIENCES ist destinations.' This will be an important factor in considering the financing of the upgrading and expansion of Jamaica's in- ternational airports, particularly since the government is expect- ing the private sector to finance the projects. Airport Departure Tax in 1995 was set at a level of US$ 11 per passenger. The Government is contemplating the introduction of a passenger facility fee of US$ 5 in early 1996 as part of the revenue stream of airport terminal operating companies (privatization of land- side operations). Airlines have expressed reservations about the adoption of a PFC charge. Table 6.6 is a comparison of actual landing and terminal fees for Latin American and Caribbean airports, calculated on the basis of standard aircraft equipment with average configurations. Table 6.6 Comparative Analysis of Landing and Terminal Fees in Latin America and the Caribbean, 1992 (US$) DC-9 B-707 B-747 DC-9 B-707 B-747 Bahamas (Nassau) 85 282 586 200 400 900 Barbados 119 489 850 697 1.393 3,134 Brazil 235 778 1,686 550 1,100 2,475 Colombia 220 770 1,900 850 1,700 3.825 Cuba 158 522 1,131 250 500 1.125 Ecuador 260 690 1.460 1,250 2,500 5,625 US (Miami) 120 299 682 363 503 1,385 Pueto Rico 116 386 838 127 253 570 Guyana 163 543 1,179 67 133 299 SlfWtff ~~~11, WI. ,) 4..*. vl. Cayman Islands 222 705 1,512 482 964 2.169 Turks and Caicos 196 591 500 1,000 St. Lucia 105 351 709 370 741 1.667 Tnnidad-Tobago 134 443 961 288 575 1.294 Venezuela 135 447 969 366 732 1.637 kg 44.500 148,300 322.050 Seats 75 150 375 Load factor 66.670o 66.67% 60.00% Source: ICAO, 1992 airport and air navigation charges tables. 'We beLieve that in the case of Jamaica more important factors such as tourist safety and security and the real exchange rate will play a more significant role in the future traffic flows of fomgn tourism. Case Study 6 JAMAICA IV. PRIVATIZATION PROCESS A. Government Policy Guidelines on Airport Development During 1993 the Ministry of Water and Transport prepared a nationwide transport sector review under a technical assistance program from the World Bank. The aviation sector studies were carried out by consulting companies from the United States and Jamaica (Wilbur Smith and Associates of the United States, and Teape-Johnston and Associates of Jamaica). The following are the principal Government of Jamaica policy guidelines as de- scribed in the Transport Sector Study: a Reduction of public sector involvement in the opera- tion of airports and airlines *i Promotion of aviation infrastructure development through the use of private capital (debt and equity); cre- ation of an adequate economic environment to encour- age private sector investments in the sector In Provision of quality services with the appropriate stan- dards of safety and security IN Strengthening of the role of the public sector as a regu- lator and policy planner of airport-related activities. The Government has taken the first steps in the imple- mentation of its aviation policies. As of October 1, 1994, the Government of Jamaica privatized its national flag carrier, Air Jamaica, by divesting 75 % of its controlling interest to a local private group of investors led by the Sandals Group (one of Jamaica's largest tourism business consortia). Privatization plans for the domestic carrier (Transjamaica) are being carried out by the government's privatization agency (National Investment Bank of Jamaica). The privatization plan for Sangster Interna- tional Airport has been announced, and the new operating com- pany (which is to be privatized later) has been incorporated. Similar privatization plans are being prepared by the AAJ for Norman Manley International Airport. As has been mentioned, the government is considering the corporatization of air naviga- tion services (Civil Aviation Department) and the incorporation of the economic regulatory function into the proposed Office of Utilities and Regulation. 203 AIRPORT PRIVATIZATION EXPERIENCES ________ B. The Montego Bay Airport Case: The Privatization Process Through the AAJ, the government has been working during the last four years on the expansion and privatization of the Mont- ego Bay Airport in order to meet the traffic requirements pro- jected for the year 2000 and beyond. A feasibility study under- taken by the U.S. consulting firm Birk Hillman and Zippery analyzed two options: (1) building a new airport (the greenfield project), and (2) building a new passenger terminal on the exist- ing facility (the integrated approach). The initial recommenda- tion of the study was to proceed with the "greenfield project" option given the future limitations of the existing site. Further discussions within the government led to the conclusion that the integrated approach was a better solution from the point of view of cost effectiveness. A minor upgrade and rehabilitation of the existing terminal was made in early 1993, under a concessional terms credit facility from the EEC (US$10 million). Table 6.7 provides traffic statistics for the Montego Bay Airport from 1991 to early 1994. Table 6.7 Jamaica: Traffic Total TransR Tons Movements' Statistics, Montego Bay : Airport, 1991-94 1991 1 1,665,813 242,653 6,022 33,383 1992 1,862,411 297,908 11.062 34,629 1993 . 1.973,358 300,962 18,008 40,891 199421 1,067,782 128,544 5,013 21,983 Fifty percent of the movements correspond to domestic commuter flights (i.e., Sangster, Tinson Pen, Negrl, Boscobel, and Ken Jones). 2 First semester. Source: AAJ, Airport Traffic Report, 1991-94. Given the new policy guidelines on the aviation sector, the government will privatize the existing airport terminal op- erations as well as the proposed project expansion. The funding requirements for the project expansion should come from pri- vate sources, and the government has expressed its reluctance to provide guarantees for the financing arrangements. The project consists of two phases: (1) the construction of a new passenger terminal (peak hour traffic designs for 2,450 emplanements and 2,700 deplanements),9 and (2) the upgrading and rehabilitation 9Estimate mnual traffic equivaent to 2.5 milfion passengess. 204 Case Study 6 JAMAICA of the old passenger terminal and its integration into the new construction. The total estimated investment for the two phrases is US$104.0 million. 1. Creation of AAJ Holdings Ltd. This company was established as a wholly owned subsidiary of the AAJ, created for the purpose of holding the government's equity participation in the proposed private airport operating en- terprises (at Montego Bay and Kingston Airports). The govern- ment policy calls for a minority position (up to 30 percent of the equity) in each of the private airport operations. 2. BOO Privatization Scheme: Creation of Sang- ster InternationalAir Terminal Limited (SIA Ltd.) SIA Ltd. was incorporated in 1993 as a wholly owned subsid- iary of AAJ Holdings Ltd. SIA Ltd. was created to serve as the vehicle to build, own, and operate (the BOO scheme) the new terminal facilities at Sangster International Airport. Once the capital financing structure for the BOO scheme has been put in place, SIA Ltd. will have the following equity distribution: (1) at least 70 percent will be in the hands of the private sector; and (2) up to 30 percent will be owned by the government (through AAJ Holdings Ltd.). The articles of association of SIA Ltd. pro- vide for a special share (the golden share concept) to be held by the government, conferring special rights to require the holder's consent on the following issues: * Changes in the limitation on each foreign investor's ownership (currently limited to 25 percent equity par- ticipation) * Disposal of the whole or the material part of the assets * Dissolution of the company * Decisions which impinge on the sovereign rights of the state. 205 AIRPORT PRIVATIZATION EXPERIENCES 3. Long-Term Lease AAJ will transfer, via a 49-year lease arrangement, the opera- tion of the existing passenger terminal facility and the landside facilities (car parking, duty free, ground handling, shops and restaurants, etc.) to SIALtd.10 The financial and operational terms of the lease arrangement are still being developed by the Gov- ernment . Through the use of this mechanism, SIA Ltd. will effectively have ownership and control over the integrated ter- minal facility. 4. Management Contract The Government is also contemplating the granting of the man- agement contract to SIA Ltd. for the operation of airside-related services provided under the present arrangements by AAJ (i.e., fire security, runways, taxiways, and aprons). AAJ will retain ownership of these facilities and will share the airside charges with SIA Ltd. Criteria for performance and for sharing charges are currently being developed by AAJ. With this arrangement in place, together with the BOO scheme and the long-term lease/ license, SIA Ltd. is expected to have full operational responsi- bility for the provision of all the airport-related services at Sang- ster International Airport (i.e., the wraparound mechanism). 5. Privatization Process The government has decided to sell the shares of SIA Ltd. on a phased basis in order to maximize potential gains on its invest- ments. Given Jamaica's capital market limitation and the government's financial objectives, shares will be sold by stages to the local investors. In the first stage a limited amount of shares, 10-15 percent of SIA's equity will be sold to the public via pri- vate placement and the rest will be subscribed in the following mode: K A block of shares (up to 30 percent of overall equity) will be subscribed by AAJ Holdings Ltd. on behalf of the Government of Jamaica. 10 A 49-year lease of the land of the terminal facilities and related infrastructure, and an exclusive 49-year license to operate the integrated terminal complex will be given to SIA Ltd. 206 Case Study 6 JAMAICA in The remainder (100 percent minus the initial private placement and the government's holdings) will be trans- ferred to a Privatization Trust. * During construction and after, as further equity is re- quired, additional tranches will be sold from the Priva- tization Trust based on market conditions. The phased sale of equity will provide for greater governmental capi- tal gains upon completion of the complex. Government will continue to retain 30 percent shareholding. The Privatization Trust will be held in a Jamaican financial institution (bidding for the selection of the Trustee has already taken place and the Bank of Nova Scotia, with operations in Jamaica, is expected to be appointed as the trustee). This insti- tution will exercise the voting rights of such shares while they are in the Trust. Shares may be transferred (that is, sold) from the Trust only to private persons. A "Deed of Mandatory Priva- tization" has been included in the Trust documents and will grant the Trustee the necessary assurance to execute the sale of the shares to the private sector. In addition, the Trustee's powers will be entrenched in the articles of SIA Ltd. via a second spe- cial share which will allow a veto on any proposed modification that could slow or reverse the privatization mandate. The timing and financial mode in which sales of shares from the Trust will take place will be at the government's discretion and will de- pend on market conditions. 6. Airport Operators SIA Ltd. will start operations in mid- 1996 on both the construc- tion of the new passenger terminal and the operation of the ex- isting facility. AAJ is currently holding discussions with for- eign airport operators that have expressed an interest in invest- ing in the Sangster International Airport operations. The alter- native being explored by AAJ with foreign airport operators (one of whom is to be a major investor) is for SIA Ltd. to retain for a given period the management advisory services of an interna- tional airport operator to assist it with efficiency improvement, establishment of operational standards and performance crite- ria, training of personnel, etc. This international airport opera- tor could become the lead investor to take up to 25 percent of equity in the final analysis. Government has limited any one foreign investor to a maximum of 25% of SIA Ltd.'s equity. 207 AIRPORT PRIVATIZATION EXPERIENCES ________ C. The Montego Bay Airport Case: Capital Financing Structure In 1992 the Government of Jamaica appointed Citibank as the financial adviser for the capital finance scheme for the Sangster International Airport expansion (estimated at US$104.0 million). The following government premises were given to Citibank in relation to the constraints of the financing strategy to be devel- oped: (1) given that the government has decided to divest itself from airport operations, project financing should be primarily funded by the private sector; and (2) given the economic attrac- tiveness of the project, the government would not be providing government guarantees or assurances of any kind of project fi- nancing. Citibank's proposal for the project financing is based on a three tranche structure, with financing to be raised both in the foreign and local capital markets. 1. Tranche (a) Financing from Extemal Markets (up to US$49.0 million) Senior Debt, 12-year loan with a 2-year construction period, funded in U.S. dollars. OPIC has in principle agreed to provide an insurance coverage for the tranche amount." Risks insured under the Overseas Private Investment Corporation (OPIC) ar- rangements include the transfer (convertibility) risk, the expro- priation risk, and the political violence risk. The estimated cost of the insurance based on OPIC published rates is between 135 and 195 basis points. Citibank is presently rating this tranche with an overseas rating agency in order to facilitate access to foreign investor markets (i.e., New York, Puerto Rico, and Lon- don). Citibank feels confident that with the OPIC insurance fa- cility the rating for the transaction could be at least a triple B, and that they will have no problem raising part of the funding in the foreign capital markets. Additionally for this tranche, con- versations with Exim Bank have been held for a long-term project financing facility, and some supplier's credit could also be avail- able under the OPIC insurance umbrella. Citibank estimates the interest rates for this tranche to be 6 months LIBOR plus 400 l' Informal conversations held with Citibank and OPIC during September 1994 indicate that the insurance coverage was given to the project without a government counter- guarantee of any kind. 208 Case Study 6 JAMAICA basis points, depending on market conditions at the time of is- suing. This facility will have a first priority lien on the net cash flows from the project. 2. Tranche (b, c, d) Financing from Local Markets Tranche (b) (up to US$ 20.0 million)-Subordinated Debt Subordinated Debt, 13 year loan with a 2-year construction pe- riod, funded in hard currency or a local currency note indexed to U.S. dollars. The investors in this tranche will have a subor- dinated claim on the net cash flows from the project (a viola- tion of the Senior Debt Coverage ratio will trigger a blockage of payments to the Subordinated Debt). Citibank estimates the interest rates for this tranche to be near LIBOR plus 500 basis points, depending on market conditions at the time of issuing. Citibank believes that most of this tranche will be privately placed in the local markets among investors related to the tourism in- dustry (hotel owners and operators, financial institutions with tourism related assets, real estate developers). The size of this part of the tranche could be up to US$ 20.0 million. Tranche (c) (up to US $ 15.0 million)-Convertible Bonds Convertible Debt, 13- year private placement of debt convert- ible to equity after the fifth year, funded in local currency. This facility will be used to finance the local component of the project. Interest on this facility would be cumulative over the first five years of the project (investors will not receive cash interest pay- ments until the project's cash flow is sufficient to meet the cov- erage of the other facilities). Following the fifth year, investors will have the right to exchange their bonds (including the capi- talized unpaid interest) for a given number of shares in SIA Ltd. or have the option to cash out. Because this instrument is pro- viding both debt and an equity return, Citibank believes that it could be placed at below domestic market rates (e.g., 25 per- cent). The size of this tranche could be up to US$ 15.0 million. Tranche (d) (up to US$10 million) - Initial Equity An initial block of equity of 10% to 15% of the overall equity is to be offered at the time of placing the convertible bonds. A Lead Manager/Underwriter has been selected for the sale of the equity and the convertible bonds based on tender process. There 209 AIRPORT PRIVATIZATION EXPERIENCES will be a separate equity issue extended to existing employees of Sangster since Employee Share Option Participation forms part of the Government's privatization policy. 3. Tranche (e) Government's Equity Participation (up to US$20.0 million) This portion of the financing structure will be funded through the increase in domestic departure taxes (collected by AAJ but transferred to the central government) and the creation of a new Passenger Facility Charge (PFC) fee at the Sangster Interna- tional Airport, the airport development fee. Passenger departure taxes have been increased from J$200 to J$500 since May of 1994 (approximately US$ 14.0 equivalent at the present rate of exchange), of which the equivalent of US$5 per passenger is being paid to SIA Ltd. over the period of three years ending March 1997, at which time Government's cash equity of US$20 million will have been reached The new airport development fee has not yet been put into effect.12 Negotiations with the air- lines are currently taking place and AAJ's officials estimate that the new charge will be put into effect in early 1996. At present traffic levels on Jamaican international airports, the government's equity portion on SIA Ltd. should be funded in less than two years. 4. Capital Finance Cost Depending on the initial amount of equity to be raised in the aforementioned financing structure, the capital cost of the Sang- ster International Airport expansion could be simulated on fu- ture market conditions, and the bond rating assigned to the trans- action (tranche a). Using Citibank interest rates assumptions and estimating the initial equity injection to be 35 percent of the total financing needs (25 percent Government of Jamaica + 10 percent private placements), average capital costs for the project could be approximately 8.75 percent on an annual basis. 12 The Vancouver Airport Authority is also partially financing its international airport expansion through the use of a Can$10 airport improvement passenger fee (January 1994). 210 Case Study 6 JAMAICA D. The Montego Bay Airport Case: Project Feasibility Study Table 6.8 contains a summary of the market projections used in the feasibility study for the Montego Bay Airport expansion (the integrated approach). Table 6.8 Jamaica: Montego Bay Airport Feasibility Study- Market Projections Enplanements Scheduled Intern. 633.112 693.096 982,500 1,395,100 1,891,300 2,444,500 Charter Intern. 178,142 258,822 260,900 360,500 477,900 606,400 Domestic 30.685 39.065 41.900 54.200 67.900 81.900 1. *W,' 84I as 'im OR Nprnoo Movements Intemational 15,092 20,424 23,200 31,200 38,400 45,200 Domestic 15,299 20.467 17.600 19,400 21,200 22,200 *,&.g'f-t;. '., 4.2006.> 0| 3 Sources: (Historical) AAJ; (Projections) Aviation Planning Associates, Inc. During the first semester of 1994 the number of total enplanements (departing passengers) was 524,698, projecting a total of 1,060,000 enplanements for the year. These figures are 9 percent below the estimated projections for 1994 (i.e., 1,160,000). Assuming that the levels of traffic will tend to re- cover (as some initial indications appear to suggest) the same projected figures will be used for the feasibility study. The feasibility study used for purposes of illustrating this case was carried out in 1992 by Birk Hillman & Zippery in association with Aviation Planning Associates. At that time, the feasibility study was developed for the existing institutional ar- rangements for airport operation (in other words, for AAJ). No consideration was given to the proposed privatization process and the creation of a new operating company (SIA Ltd.) for the provision of airport-related services at Sangster International Airport. Therefore, the 1992 feasibility study has been adjusted to reflect the proposed institutional arrangements in the privati- zation process (leasing arrangements for the existing terminal facilities and the management contract for the airside facilities). 211 AIRPORT PRIVATIZATION EXPERIENCES Estimated costs have been assigned to the proposed lease ar- rangement (discussed above), and the landing fees, 100 percent of which were allocated to the project's cash flow, have been reduced to 50 percent. (See Annex 6.2, pages 218 and 219, for details on the estimated cash flows of the project [1995-2010] and the assumptions used in the feasibility study.) The internal rate of return (after adjustments) for an in- vestment of US$104.0 million is approximately 16.30 percent, which, when compared with the average cost of capital for the project (8.75 percent), provides an interesting financial return for the equity investors. The internal rate of return is heavily influenced by proposed increases in the passenger facility fees in the years 1999 and 2004. When this factor is discounted (i.e., considering as constant the existing departure tax of US$12), the internal rate of return is only 12.50 percent. The cash flow figures have a high component of fees and charges that are/will be subject to economic regulation and hence the need for a regulatory system which addresses inves- tor confidence. The following fees and charges have a relatively high influence on the determination of the project's cash flows: (1) departure tax, (2) passenger fees, and (3) landing fees - particularly the portion of departure taxes allocated to SIA Ltd., which represents between 35 and 40 percent of the project rev- enues and is usually considered in most of the countries as a full government-related income.'3 The allocation of this portion of the revenue to a private airport operator (SIA Ltd.) will have to be supported by a long-term legal agreement among the gov- ernment, AAJ, and SIA Ltd. The issue of the subsidies required to maintain the operation of the domestic aerodromes in Jamaica has not yet been addressed by AAJ as regards the government's decision to privatize the two international airports. 13 The departure tax is being made available to this projects to build government equity contribution. Once this is established all departure takes will be transferred to government's consolidated treasury funds. 212 Case Study 6 JAMAICA E. The Kingston Airport Case: Project Concept14 Norman Manley International Airport is to be developed in three phases over the next five years. Phase one will involve govern- ment expenditure of approximately US$7.0 Million in 1995/96 to expand the customs hall by 16,000 sq. ft., installation of two additional baggage claim devices, upgrading of the arrival and departure areas and re-configuration of the transportation ar- rangements to improve traffic flow. Construction is expected to start in November 1995. The second phase consists of improvements mainly to the airside and will involve an expenditure of US$50 million to be financed as follows: US$28 million by the IDB, US$ 15 mil- lion by the Japanese Exim bank and the remainder by the Air- ports Authority of Jamaica. Major life-cycle rehabilitation of the runway and taxiway will be carried out. The refueling hy- drant system will be upgraded and the communication and air navigation systems will be modernized. The new Civil Aviation Authority, and the AAJ will effect these improvements on be- half of the Government. The financing negotiations are fairly well advanced and should be concluded by the end of the year, with construction scheduled to commence at the beginning of the second quarter of 1996. As part of phase two, Norman Manley landside facili- ties are to be prepared for privatization. This will involve di- vesting assets and functions of the terminal facilities to Norman Manley International Air Terminal Limited, preparing a feasi- bility study and development plan to significantly upgrade the landside to accommodate the forecasted traffic growth from 616,799 in 1995 to 863,411 million in 2005. It is estimated that the expansion will cost over US$50 million. AAJ is in the pro- cess of applying for United States Trade and Development Agency support funds to carry out the development plan and this is estimated to cost US$500,000. Government will be seek- ing joint venture partners, most likely via tender, to implement the privatization and expansion programme. Table 6.9 shows Norman Manley International Airport traffic projections. 14 Taken from "Capitalizing on New Project Development and Financing Opportunities in Jamaica," Conference at the Waldorf Astoria. 213 AIRPORT PRIVATIZATION EXPERIENCES Phase three will cover the implementation of the ex- pansion of Norman Manley Terminal and final arrangements for private investors to own and operate the new expanded fa- cility. Table 6.9 Jamaica: Norman ArRvals 662,000 650,000 720,000 850,000 1,000,000 Manley Intemational Airport, Actual and Departures 552,415 616,799 729,761 863,411 1,201,538 Projected Passenger Transit 114,000 114,000 184,000 243.000 327,000 Traffic, 1990-2010 Passengers per 99 100 105 110 115 Operation Source: Airports Authority of Jamaica V. KEY ISSUES EMERGING FROM THE PRIVATIZATION ___ __ _ EXPERIENCE Given the present status of the project, it is at this point prema- ture to draw conclusions from the Montego Bay case experi- ence. During the course of 1995 and 1996, when the capital fi- nance funding will be raised and the project construction be- gins, we will be in a better position to analyze the case. Despite this fact, there are relevant issues concerning the privatization process and the capital finance scheme used in this case that need to be highlighted for future developments. These are dis- cussed in this section. Privatization Process. The design and use of a "Priva- tization Trust" with a deed of mandatory privatization to sell the shares of SIA Ltd. at a later date appears to be a creative mecha- nism for a deferred privatization action. This works well when the underlying reason for the deferred mechanism is the diffi- culty in selling the shares and/or assets, given the enterprise situation or the existing investment climate. In the Montego Bay Airport case, the reasons for the deferred mechanism are related to the government's profit maximization objectives. Al- though this could be a legitimate reason from the government's point of view, it could lead to the wrong decisions in the devel- opment of the project and therefore jeopardize the future profits of the enterprise. Projects of this nature require an experienced 214 Cae* Study S JAMAICA operator to carry out the role of strategic investor (or lead project sponsor). Given the relatively strong interests for private airport operations in emerging markets today, it appears that the gov- ernment should have no major difficulties in tendering an eq- uity participation with management control to experienced air- port operators (British Airports Authority, A6roports de Paris, Lockheed Air Terminal, Aena, etc.). This strategy could enhance the present privatization and financing mechanism in several ways: It would provide additional assurance to insti- tutional investors (a well-known airport opera- tor is a guarantee for the materialization of fu- ture cash flows), and thus would make it easier to raise project financing in the local and inter- national capital markets. It would increase the initial portion of equity based capital, thus lowering the average capital cost for the project. It would also reduce the amount of financing to be raised in the capital markets. :,Ji It would provide the project with the necessary technical and management skills in both the con- struction and the operational phase of the new terminal. Regardless of the current operational capabilities of AAJ's personnel, such a project could benefit from the experience of seasoned managers in the design, construction, and op- eration of airport facilities. Capital Finance. The funding structure designed for the airport expansion is creative and relatively cost efficient for projects in developing countries. The use of a major U.S. gov- ernment-supported insurance agency in a major tranche of the financing (tranche a), and the request for a bond credit rating for the transaction with a specialized British firm, are creative ways of accessing U.S. capital markets and lowering the poten- tially high interest rate costs. Given present conditions in Jamaica's financial markets, it seems unlikely that the tranche b long-term funding could be raised locally. However, some of the funding in this tranche could come from selective equity local investment (i.e., tourism-related investors), which would reduce the need for debt financing in the local or regional mar- kets. If the placement of the tranche a financing is successful, it would definitively help the "comfort" level of local/regional 215 AIRPORT PRIVATIZATION EXPERIENCES investors in tranche b. Subordinated long-term debt for a project in Jamaica without guarantees or insurance might not be a "pa- per" in high demand. 3 Economies of Scale and Thresholdfor Financial Re- turns. Jamaica provides a good example of economies of scale at airports and of their "attractiveness" for private sector par- ticipation. Sangster International Airport, as the principal gate- way for the tourism industry, has the necessary traffic volume and the expected cash flows to attract private sector investment in terms of both debt and equity. Norman Manley International Airport, with a lower volume of tourism traffic, does not have as interesting financial returns as Sangster, and therefore may be less attractive to private sector investors. However, Norman Manley is the airport of the nation's capital and is also its main airport, and in the near future both its airside (which is already being upgraded) and its terminal facilities will require expan- sion and modernization. The government will have to be more creative as regards the privatization mode to be applied to Nor- man Manley Airport, if it wishes to attract private sector capital to the project. Allocating a larger share of landing fees and pas- senger facility fees, or ear-marked airport development fees could help improve the financial performance of the airport's expan- sion project. The implicit traffic threshold for attractive finan- cial returns in the Jamaican airport's case appears to be close to 2.5 million passengers per year (departing passengers + arriv- ing passengers). However, the option that would maximize po- tential investment would be to package the two airports and priva- tize them as one operating unit. This would increase the poten- tial returns from airport operations to both the private sector and government, and would be likely to attract a larger number of interested investors. The issues of granting exclusivity to a single operator could be addressed through competent economic regulation. For the relative size of its market, the Government of Jamaica will probably gain more from dealing with a single airport operator than with two independent operators, particu- larly since both Montego Bay and Kingston interlink closely in terms of their traffic type. 216 Case Study 6 JAMAICA ANNEX 6.1 AIRPORTS AUTHORITY OF JAMAICA ORGANIZATIONAL STRUCTURE Board oI Directois Internal Piesideiil I Inspector of I Auditor J I Satety & Security Vice-president i Vice-president Vice-president Commercial Finance Personnel Vce President rVice President Eastem Region (Kingston) Western Region (Montego Bay) Manager Manager Manager i Manager IEngineering & Main. I ipr evcs Engineering & Main. Airpoit Service | IEninerig &Man. [Airport Services J|Egnei M n. jArptSrvcesJ Manager Airport Manager Safety & Security Admin & Personnel Safety & Security Duty ( Aerodrome Duty I Aerodrome Officer Manager Officer Manager Communications ! Communications OffHicer Officer Source: AAJ, Personnel Department. 217 AIRPORT PRIVATIZATION EXPERIENCES ANNEXES ANNEX 6.2 SANGSTER INTERNATIONAL AIR TERMINAL LTD. AVAILABLE CASH FLOW (DEBT SERVICE, TAXES, AND PROFITS) Adjusted Projections (thousands of constant US$) i~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~g I Tota Ernplanemenis 1 285 1.376 1.474 15.78 7. 61 1 8!0 2.137 3.133 ldeparrnin passengers.I Airside Revenues: Lanf7ing Fees 4.134 4,395 4,673 4,968 5.283 5.617 7.341 9.144 Passenger Fees 5.595 5,995 6.423 6862 7.373 7.500 10.661 13.729 I Secunry Fe, 1 554 1.665 1.'84 1,912 2.048 2 195 2.962 3.814 Landside Revenues: Space rentals 671 671 671 671 671 738 812 893 Ioncessi-ni 1093 1170 1 253 1,341 14317 153e 2.072 2,6633 Fuel 1,108 1468 1 539 1.600 1.671 1 746 2.056 2.325 Car Parking 6Z 66 71 76 81 102 131 ! Departure Tax 83 04 9.325 9.991 lu 705 14.747 15.8M0 26.061 39.662 Teial Re.enues 23.27I 2J.'755 26,398 28,,135 33311 35.621 52,067 72.361 Expenses:; Airpon Overhead 3161 3 290 3.425 3.566 3,713 3.868 4,704 5,663 Airponr SL,rvices 2.212 2 300 2.332 2.488 2,587 2.691 3.2,74 3,983 Ma,nlenance 2.185 2.273 2,363 2.458 2,554 2.650 3,235 3,935 I Fire & Se.7uri7y 2. 391 2.443 2.497 2 552 2,608 2 666 2.972 3,314 I Tot3 Erpenses t 9 919 10.306 10.677 110064 11462 11.875 14,185 16895 meserve br 464 495 520 563 664 712 1.041 1,447 Replacemenl Aaildabfecashilo,% I2,038 r3.954 15.201 16.508 21.185 23r034 36841 54.019 Adjustments: Land,ng Fees 2067 2197.5 2336.5 2484 2641.5 2808.5 3670.5 4572 Lease 1old ierminal; 840 840 840 840 B40 840 84e0 40 Atailabel Casn 1,1j& 9 901 10,976 12,024 13.184 i 7.703 19.335 32,330 48,607 (aher adluslfmenltl Source: Adjusted figures from the 1992 Birk Hillman Zippery Feasibility Study. 218 Case Study 6 JAMAICA ANNEX 6.2 (CONCLUDED) SANGSTER INTERNATIONAL AIR TERMINAL LTD. AVAILABLE CASH FLOW (DEBT SERVICE, TAXES, AND PROFITS) Assumptions 1. Growth Rate of passenger traffic 6.5%/yearly average 2. Passenger Fee 4.50 US$ 3. Security Fee 1 25 US$ 4. Fuel Concession Fee 0 03 US$/gallon 5. Departure Tax: 1995-97 1997-99 1999-2005 2005-10 (US$) (USS) (US$) (US$) Gross 12.00 12.00 14 00 18.00 Govemment 7.00 12.00 14.00 18.00 Airport Operator, 5.00 a 0 0 6 Lease Payment for Existing Terminal Facilities Payment to AAJ based on book value of airport-related assets at December 31.1993 (J$ 464.232) 60°o of the value was assigned to the Montego Bay Airport Leasing fee was calculated at 1 00o 7. Landing Fees Fee sharing with AAJ tnrough the Management Contract was estimated to be 50°b of the total amount for this concept Until 1997. After 1997 the Airport Operator is allowed to assess a passenger fee of up to US$5.00 to replace loss of departure tax revenue. Source: Adjusted figures from the 1992 Birk Hillman Zippery Feasibility Study. 219 AIRPORT PRIVATIZATION EXPERIENCES ANNEXES ANNEX 6.3 NORMAN MANLEY AIR TERMINAL LTD. AVAILABLE CASH FLOW (DEBT SERVICE, TAXES, AND PROFITS) Adjusted Projections (thousands of constant US$) Total Enplanements 56?7 60 643 68S 939 1.287 (dcepartng passengersi Airside Revenues: Landing Fees 1.798 1.901 2.011 2.126 2.829 3.755 Passenger Fees 2.471 2.626 2.806 2 990 4.108 5.638 Securr, Fee 686 732 779 831 1,141 1.566 Landside Revenues: Space renials 258 257 255 279 313 367 Concessions 482 513 547 582 798 1.094 FueI 589 612 6 36 661 792 955 Car Parking 27 29 31 33 39 54 DepariureTax 3.844 4097 5.613 5980 10.042 16.287 TbtalRa [Jnues 10,156 7 C. 7o9 ?z2f9 13.482 20.062 29.714 Expmses: Airpon Overhead 1,318 1.365 1,413 1.464 1.812 2.325 Airpori Servces 920 952 985 1.018 1,262 1.636 Mainlenarce 909 941 972 1.003 1,246 1.616 Fire&Security 961 977 993 1,009 1,145 1.361 Total Expenses 4.108 4. 235 4,363 4.494 5.466 6,938 Reserve for 520 563 664 712 1,041 1,447 Replacement Ava dable cash-flow 5.52Z 5,9