37551 noTE no. 15 ­ SEpT. 2006GRIDLINES Sharing knowledge, experiences, and innovations in public-private partnerships in infrastructure The growing and evolving business of private participation in airports New trends, new actors emerging Doug Andrew and Silviu Dochia P rivate sector management and financ- For the private sector, sound airport infrastruc- ing of airports has continued to expand ture businesses offer financial returns, given the in developing countries. Long-term risks, that make private investment and manage- concessions for airports are the predominant ment possible. Historically, growth in the demand model today, with governments often taking a for air travel, and thus airport infrastructure, has minority shareholding in the venture. Careful outpaced economic growth, and this pattern is attention to policy design, regulatory issues, likely to continue. Deregulation has led to growth and management of concessions will continue in the airlines industry that has benefited even to be important in ensuring that private partici- small, often regional airports. Moreover, users pation delivers efficient and effective airport of airport services expect to pay for valuable, infrastructure services. cost-effective services, and that usually reduces political pressures on airport tariffs and finances. The private sector has played a growing role in As in other infrastructure businesses with substan- airport infrastructure over the past two decades. tial fixed assets, however, private participation The United Kingdom launched the trend with schemes require robust, policy-driven regulatory the privatization of BAA in 1987. Australia, or contractual frameworks to succeed. Austria (Vienna), Denmark (Copenhagen), Germany (Frankfurt, Hamburg), Italy (Naples, Recent activity has marked the end of a slowdown Rome), and New Zealand followed. France's that started in 2001. In 2005, 10 private airport Aeroports de Paris will soon join the group of contracts reached financial closure. Investment partially privatized airports. commitments totaled more than US$7.5 billion, the highest ever in developing countries (figure Developing countries have also been active. In 1). The number of transactions was also up. 1990­2005, 38 low- and middle-income coun- Large transactions occurred in Hungary, India, tries entered into more than 100 airport contracts and Turkey, intended to cope with the growth in ranging from short-term management contracts to air services resulting from economic growth and long-term build-operate-transfer (BOT) arrange- airline deregulation. Recent activity also reflects ments, concessions and divestitures.1 These the recovery of air transport business from the transactions attracted investment commitments effects of the terrorist attacks on September 11, of more than US$18 billion, 14 percent of all 2001. commitments to transport projects with private participation in developing countries.2 Private participation in airports has gener- ated significant funds for governments. Of the Governments often bring the private sector into airport infrastructure activities to deal with the Doug Andrew and Silviu Dochia are consultants with concerns about maintenance, cost-effectiveness, the World Bank's Infrastructure Economics and Finance and adequate capacity expansion that emerged Department.ThisnoteisaproductofthePrivateParticipation under government provision. This move also PUBLIC-PRIVATE INFRASTRUCTURE ADVISORY FACILITY in Infrastructure (PPI) Project Database, a joint initiative of reduces fiscal pressures and risks and can improve PPIAF and the World Bank's Infrastructure Economics and the government balance sheet. Finance Department. Helping to eliminate poverty and achieve sustainable development through public-private partnerships in infrastructure PUBLIC-PRIVATE INFRASTRUCTURE ADVISORY FACILITY figure 1 investment commitments in 2005 the highest ever Investment commitments to airport projects with private participation in developing countries, 1995­2005 (US$ billions) a. Under renegotiation. Source: World Bank and PPIAF, PPI Project Database. US$18 billion in investment commitments in 23 percent in 2002­05. Thanks to the Ataturk The slowdown 1990­2005, half reflected the price paid for and Budapest concessions, the region accounted the value of the existing business (or a share of for 60 percent of investment flows in 2002­05. in private it) through purchases of government equity or Divestitures and BOT contracts, predominant activity in through concession and lease fees.3 The other in the 1990s, were overtaken by concessions in half represented commitments for modernizing 2002­05. airports and expanding airport infrastructure. East Asia and Pacific has moved into third place appears to A widening distribution of activity with 18 percent of transactions in 2002­05. have ended Latin America and East Asia were the leading Private participation has occurred primarily regions in 1990­2001, accounting for 61 percent through "greenfield" contracts to build new of projects and 75 percent of investment flows. facilities and divestitures of minority stakes in But recent activity, measured by number of trans- state-owned enterprises. actions, has been more evenly distributed across South Asia has recently seen unprecedented regions. activity. In 2005 two greenfield airport BOTs Latin America has remained the most active were implemented in India (Bangalore and region, though its share of transactions declined Hyderabad), and a management contract in from 39 percent in 1990­2001 to 27 percent Bangladesh. In early 2006 private activity contin- in 2002­05. Airport concessions accounted for ued to expand with major concessions awarded almost 75 percent of the airport transactions in for Delhi and Mumbai airports. the region. In the Middle East and North Africa greenfield Eastern Europe and Central Asia has become the transactions initially dominated, but in the past second most active region, increasing its share of few years management contracts have taken the transactions from 17 percent in 1990­2001 to lead. In Sub-Saharan Africa most private activity occurred in the 1990s, mainly through concessions. The growing and evolving business of private participation in airports Since 2002 only one transaction (a concession for Changing sponsors a terminal in Nigeria) has taken place. Most airport contracts have been awarded to consortia of local companies and foreign construc- Concessions predominant tion and airport companies. The top five sponsors, Concessions, where the government retains ranked by number of projects, accounted for less ownership of assets, have remained the most than 20 percent of transactions in 1990­2005. common form of private participation in airport These top sponsors were Spain's ACS Group infrastructure in developing countries. They and Aeropuertos Españoles y Navegación Aérea, accounted for more than 40 percent of airport France's Aeroports de Paris, Germany's Fraport, contracts and 60 percent of investment commit- and Argentina's Corporación America. ments in 1990­2005. Developed in Latin America and Sub-Saharan Africa in the 1990s, the conces- Recently, new sponsors have emerged. Hochtief sion model is increasingly used in Eastern Europe AirPort has played a key role in concessions of and Central Asia and in South Asia. The trans- Albania's Tirana airport. The state-owned Malay- actions in Hungary and Turkey in 2005 and in sia Airport Holdings has taken equity positions India in 2006 all used this model. in the Delhi and Hyderabad airport contracts. New project Grupo Ferrovial and Macquarie Airports have Some of the recently awarded concessions involve been active in airports in developed and, to a sponsors and a greater role for the government. Under the lesser degree, developing countries. new financial Budapest airport concession the government took a 25 percent stake in the concession holder. The Also noteworthy is the emergence of special- structures are Indian transactions followed a similar approach. ized infrastructure consortia, led by firms like emerging A minority stake of this size is usually viewed as Macquarie, that take over airport businesses giving veto rights over strategic decisions affect- through transactions usually financed with large ing the business and changes to the corporate debt relative to the value of the airport's assets. constitution. But any benefit to the government What these highly geared financial structures from these rights needs to be weighed against the will mean for the performance and develop- resulting risks and obligations of ownership and ment of airport infrastructure remains unclear. any adverse implications for the government's But if adverse shocks occur, such structures may policy and regulatory roles. increase the challenges facing not only the airport businesses but also governments, regulators, or Greenfield projects have been the second most both. This underlines the importance of a clear, common type, accounting for 28 percent of coherent, and robust policy framework for intro- contracts and more than 20 percent of invest- ducing private participation. ment commitments in 1990­2005. This type of contract has been used primarily for the construc- Troubled contracts tion of new terminals in East Asia and Eastern The airport sector has seen less contract cancel- Europe and Central Asia. lation and distress (international arbitration or Management and lease contracts have become formal request for cancellation) than other infra- more common, increasing from 7 percent of trans- structure sectors. Of the 104 airport contracts actions in 1990­2001 to more than 20 percent granted in 1990­2005, only 4--representing 4 in 2002­05. Countries as diverse as Bangladesh, percent of investment commitments--had been China, Djibouti, and the Arab Republic of Egypt canceled or were in distress by 2005. These have awarded management contracts for airports included 2 greenfield terminal projects (in Buda- since 2002. pest and Manila) and a concession (Margarita airport in República Bolivariana de Venezuela). Divestitures have become less frequent, declining from 17 percent of transactions in 1990­2001 to Some other airport contracts have been affected less than 10 percent in 2002­05. Among dives- by major renegotiations, though only anecdotal titures, the sale of airport assets (as in the BAA information exists. Two high-profile examples privatization) has played a minor role. Most are the Lima airport concession in Peru and the airport divestitures in developing countries have 33-airport concession in Argentina, both rene- instead been structured as the sale of minority, gotiated almost immediately. In both cases the noncontrolling stakes, aimed at raising capital winning bids were perceived as fiscally attractive rather than transferring control. but raised questions about fundamental financial soundness. In Peru, for an airport with US$54 million in Because concessions can be complex, governments annual sales in 2000, the winning bidder offered should be clear about their policy objectives and an annual payment to the government of 47 structure the contracts accordingly. They then percent of annual gross revenues and a commit- need to manage their ownership rights and obli- ment to invest more than US$1 billion, including gations over the life of the contract so that the to construct a second runway by the ninth year of incentives of the private participants are effec- the 30-year concession. In 2003, after two years of tively aligned with government objectives. renegotiations, the concessionaire and the govern- ment agreed to adjust the payments and delay the Governments can also achieve their objectives investment obligations (Guasch 2004). through airport divesture, a simpler option. But to do so, they need to design and implement a In Argentina the concessionaire offered to invest regulatory regime that assures efficient investors a US$2 billion and pay annual concession fees of return on--and the return of--their investment. US$171 million during the 30-year concession granted in 1998. But once the peso crisis hit in Notes 2000, these terms were under continual dispute. 1. Data are from the Private Participation in Infrastructure (PPI) Project Database, which includes only low- and middle-income By mid-2006 the concessionaire and the govern- countries as classified by the World Bank. Country classifications ment finally agreed to lower concession fees and and project information are updated annually. All U.S. dollar amounts are in nominal terms as posted on the PPI Web site (ppi. investment commitments. Both this case and worldbank.org). The database tracks investment commitments, the Peruvian one show that it is in the interest not disbursements. It covers airport projects with potential natural monopoly characteristics (facilities required for takeoff and landing, of governments to carefully assess the underlying traffic control towers, and passenger and cargo terminals). financial and economic viability of proposed bids. 2. The total investment figure includes US$1.6 billion for the Argentine airport network concession granted in 1998. This contract, under renegotiation since 2002, was finally renegotiated in 2006. Conclusion But no revised investment figures were publicly available at the time of printing. Private participation in managing and developing 3. The data do not include ongoing concession or lease fees calculated airport infrastructure in developing countries has as a percentage of airport revenues under concession contracts in expanded since 1990, with the growth acceler- Bolivia, Costa Rica, Honduras, and Peru. ating in the past few years. In bringing in the References private sector, governments have tended to prefer Guasch, J. Luis. 2004. Granting and Renegotiating Infrastructure concessions over divestures, with continued Concessions: Doing It Right. World Bank Institute Development Study. Washington, D.C.: World Bank. ownership and contractual interests. Ositran. 2004. Desempeño Económico de la Concesión del Aeropuerto Internacional Jorge Chavez en 2004. Lima. GRIDLINES Gridlines share emerging knowledge on PPP and give an overview of a wide selection of projects from various regions of the world. Past notes can be found at www.ppiaf.org/gridlines. Gridlines are a publication of PPIAF (Public-Private PUBLIC-PRIVATE INFRASTRUCTURE ADVISORY FACILITY Infrastructure Advisory Facility), a multidonor technical assistance facility. Through technical assistance and knowledge dissemination PPIAF supports the efforts of policymakers, nongovernmental organizations, research institutions, and others in designing and implementing strategies to tap the full c/o The World Bank, 1818 H St., N.W., Washington, DC 20433, USA potential of private involvement in infrastructure. The PhoNe (+1) 202 458 5588 fAX(+1) 202 522 7466 views are those of the author(s) and do not necessarily geNerAL eMAiL ppiaf@ppiaf.org web www.ppiaf.org reflect the views or the policy of PPIAF, PUBLIC-PRIVATE INFRASTRUCTURE ADVISORY FACILITY the World Bank, or any other affiliated organization.