Privatesector P U B L I C P O L I C Y F O R T H E The World Bank June 1996 Note No. 82 Privatizing Airports—Options and Case Studies Ellis J. Juan The air transport sector will require large capi- Can$1.5 billion to a not-for-profit corporate en- tal investments over the next fifteen years—by tity whose board of directors will include pri- one estimate, US$250 billion to US$350 billion1— vate sector representatives appointed by the to modernize aircraft fleets, improve airport in- federal government and end users. frastructure, introduce more sophisticated air navigation systems, and meet the demand of Consistent with the global trend in other infra- new markets in China, Eastern Europe, and the structure sectors, in air transport the state’s role countries of the former Soviet Union and the is shifting from owner to regulator and policy- strong growth in Southeast Asian and Latin maker, and operational, investment, and man- American markets. These large investments, to- agement responsibilities are moving to the gether with a redefined role for the state, are private sector. The government’s role as eco- transforming the air transport sector. nomic regulator is particularly important in light of the fact that some airport services are inher- Traditionally, the air transport sector—airlines, ently natural monopolies. airports, and air navigation services—has been in state hands. The private sector became in- The business of airports volved in the sector only recently, beginning with the airlines. By the end of 1995, 70 per- The airport business is becoming increasingly cent of airlines were privately owned, directly multifaceted, extending into real estate, com- or indirectly. Private sector participation in the mercial, and other ventures. These activities are airports subsector is just starting, with only two of two main types: the provision of airside, or successful cases of complete privatization of aeronautical, services (runways, taxiways, airport infrastructure: the U.K. government’s aprons, terminals)—services that by their nature privatization of the British Airport Authority are still considered monopolistic within each air- (BAA) in 1987 and of the Belfast International port—and the provision of landside services Airport (BIA) in 1994. By the beginning of 1995, (passenger and aircraft services, food and bev- however, some form of private sector partici- erage concessions, duty-free shopping, parking, pation was being implemented or was under hotels), where a wider variety of suppliers is consideration in fifty-four countries. possible. The current trend in airport econom- ics is to rely on commercial operations to contri- Private sector participation in air navigation is bute an increasing share to airport revenues,2 also at an early stage. Several countries, in- resulting in less dependence on increases in cluding Germany, New Zealand, and Switzer- airside charges. In industrial economies, airside land, recently corporatized their air navigation charges are falling in real terms, leading to higher services through the creation of corporations traffic levels and greater airport revenues. 3 with independent financial and legal status, as a step toward eventual privatization through Private sector options public offerings. And in March 1996, the gov- ernment of Canada announced its intention to Private sector participation in airports, through sell the country’s air navigation system for ownership, management, or new investment pro- Private Sector Development Department ▪ Vice Presidency for Finance and Private Sector Development Privatizing Airports—Options and Case Studies TABLE 1 OPTIONS FOR PRIVATE SECTOR PARTICIPATION IN AIRPORTS Option 1 Option 2 Option 3 Allocation of responsibilities Ownership State State Private sector Investment State Private sector Private sector Management and operation Private sector Private sector Private sector Common strategies for Service concessions Build-operate-transfer Wraparound additions private participation Contracting-out schemes Trade sales Management contracts Long-term leases Build-own-operate schemes Multiple concessions Master concessions Strategic buyouts (manage- ment-employee buyouts) Capital markets Recent cases Aéroports du Cameroon Athens International Airport British Airports Authority Pittsburgh International Lester B. Pearson Airport, Sangster International Airport, Airport, United States Canada Jamaica Kai Tak Airport, Hong Kong La Chinita Airport, Venezuela Belfast International Airport Palma de Mallorca, Spain Note: The options include alternatives for selected airside activities, selected landside activities, and all airport activities. grams, can take many forms, including outright sector participation in airports could choose a sale of shares or assets, concessions, and long- combination of the two options, beginning with term leases (table 1). Historically, the private a BOT scheme that gives way to corporatization sector has managed most of the landside con- with full or partial divestiture. cessions, but governments are now increasingly seeking to involve the private sector in the pro- The following paragraphs outline cases of air- vision of airside services as well. The goal is to port privatization in Colombia, Jamaica, Canada, improve efficiency, increase fiscal revenue by sell- and Northern Ireland.4 ing profitable concessions, and improve infra- structure through privately financed investments. Colombia—innovative financing Although there have been only a limited num- At the end of 1993, the government of Colom- ber of privatization transactions, two options bia corporatized its Civil Aviation Authority seem to be the most suitable for transferring (CAA), separating airport operations from air airport activities to the private sector: (1) build- navigation activities. At the same time, it under- operate-transfer (BOT) schemes (a project fi- took the development of a second runway at El nance mechanism generally used in developing Dorado International Airport in Bogotá, using a countries, where the priority is new investment BOT scheme for construction and maintenance to upgrade and expand facilities), and (2) of the new runway and maintenance of the ex- corporatization followed by full or partial di- isting runway. In May 1995, the government vestiture (generally used in industrial countries, awarded the BOT concession, stipulating invest- where the priority is to obtain privatization ments of US$97 million, to the consortium of revenues and improve efficiency) (table 2). Ogden, Dragados, and Conconcreto. The con- Developing countries trying to promote private cessionaire’s investment and operating costs, fi- TABLE 2 CONSIDERATIONS UNDER VARIOUS AIRPORT PRIVATIZATION OPTIONS FOR DEVELOPING ECONOMIES Option Considerations Build-operate-transfer ▪ Facilitates relatively large new investments (or variants, such as build- ▪ Maintains government ownership (transfer at a later date limits political conflict) own-operate and build- ▪ Requires relatively complex procedures and an array of technical and financial specifications own-operate-transfer) ▪ Lack of ownership rights could make raising capital funds more difficult and costly for private sector investors Full or partial divestiture ▪ Generates fiscal revenues through a public offering, ▪ Full divestiture limits state intervention capital markets, a trade ▪ Public offering requires track record of profits and audited financial statements sale, or a combination ▪ Public offering requires developed capital markets (rare in developing economies) nancing expenses, and profits will be covered Sangster International Airport (SIA) in Montego by the landing fee revenues, which the CAA Bay, the program’s core case, will be expanded will cede during the twenty-year concession. through the construction by SIA Ltd., a new Once bidders had fulfilled the technical require- company created by the government, of a new ments, bids were evaluated on the basis of the passenger terminal under a build-own-operate net present value of the minimum landing fee (BOO) scheme. Airports Authority of Jamaica revenue the bidder would require throughout (AAJ) will transfer, through a forty-nine-year the concession period (landing fees multiplied lease arrangement, the operation of the exist- by estimated traffic volume) and the weighted ing passenger terminal and the remaining land- average landing fee in U.S. dollars. The govern- side facilities to SIA Ltd. The government will ment has guaranteed a minimum level of rev- grant a management contract to SIA Ltd. for enues (floor pricing), in a rare case of a the operation of the airside services now pro- government’s accepting commercial risk. If the vided by AAJ. So the new expansion, the ex- landing fee structure or traffic volume, or both, isting terminal, and the airside facilities will all cannot support the required revenue stream, the be under one management, SIA Ltd. government would compensate the concession- aire from a trust fund equivalent to 30 percent The financial capital structure for SIA Ltd. calls of the annual landing fee revenue. The El for funds to be raised on domestic, regional, Dorado transaction demonstrates the flexibility and international markets. At least 70 percent of BOT schemes and is becoming a model for of the entity’s shares will be held by the pri- private sector participation in developing such vate sector, and up to 30 percent by the gov- airside airport infrastructure as runways, taxi- ernment. The government plans to sell shares ways, and aprons. on a phased basis in order to maximize the gains on its investment. Jamaica—wraparound mechanism Canada—joint ownership structure In an effort to expand airport facilities to ac- commodate tourist flows, the Jamaican govern- Toronto’s Lester B. Pearson Airport is a rare case ment established three premises to govern both of joint public-private ownership of facili- airport privatization and expansion: upgrades ties on shared premises and of competitive pro- would be funded primarily by the private sec- vision of airport infrastructure services. Terminals tor, airport operations would be transferred to one and two are owned and operated by Trans- the private sector, and the government would port Canada, the government transport author- not provide guarantees. ity, and terminal three, operating since 1991, is Privatizing Airports—Options and Case Studies owned by the Terminal Three Limited Partner- ern Ireland (DOE) retains ownership of the ship (TTLP). Terminal three is operated under a golden share, which allows it to exercise power management contract by Lockheed Air Terminal in instances related to matters of security and the of Canada Inc. (LATC), and it was developed public interest. In addition, under leasehold con- under a build-own-operate-transfer (BOOT) ar- trol over the 999-year lease agreement between rangement that includes a sixty-year renewable NIAL and the DOE, the DOE and the Ministry of land lease contract. The development cost for Defence are authorized to enter airport land if the terminal, which has capacity for 10 million to NIAL fails to honor its obligation to provide fa- 12 million passengers, was about Can$570 million. cilities and access to the Ministry of Defence. Transport Canada coordinates activities between Since privatization, passenger traffic through Lester B. Pearson’s privately and publicly owned the airport has increased by 17 percent, cargo terminals. It also provides air navigation services, freight by 17 percent, and turnover by 13 per- owns all runways and taxiways, and receives cent—no doubt helped by the cease-fire ac- all revenues from landing fees, passenger fees, cord in Northern Ireland. airline fuel taxes, and ticket taxes. LATC con- trols the landside activities for terminal three, The challenge which begin when aircraft switch from general to terminal three tower control. While airside The limited experience with airport privatization charges for terminals one and two are purely —especially in developing countries—makes it on a cost-recovery basis, terminal three gener- hard to draw firm lessons. There is no doubt, ates revenues through airline rents and charges however, that governments will be unable to (aircraft taxiing and parking, and terminal fees), fund all the necessary investment in airport and concessions, and parking to cover not only air navigation infrastructure, and that the pri- The Note series is an open forum intended to higher operating costs and capital costs but also vate sector will therefore play an increasing role encourage dissemina- profits.5 The market is segmented: the average in meeting the sector’s needs. The challenge for tion of and debate on per passenger airside charges at terminal three developing economies is to find creative mecha- ideas, innovations, and best practices for are twice as high as those at terminals one and nisms to foster private sector participation in expanding the private two, and the more prestigious international car- markets where traffic has not yet reached a lu- sector. The views riers tend to use terminal three, while lower- crative threshold or transaction risks are per- published are those of the authors and should cost regional or local carriers use the others. ceived to be higher than normal. not be attributed to the World Bank or any of its Northern Ireland—public security 1 affiliated organizations. International Civil Aviation Organization, “Investment Requirements Nor do any of the con- concerns for Airport and Route Facility Infrastructure to the Year 2010,” clusions represent ICAO Circular 236-AT/95 (1992). 2 official policy of the At a March 1995 airport conference in East Asia, an official of the The privatization of Belfast International Airport International Civil Aviation Organization commented that “airports World Bank or of its Executive Directors (BIA), one of the two cases of full airport dives- today could be viewed as large shopping malls with aircraft ac- or the countries they titure, illustrates the complexity of dealing with 3 cess gates instead of street exits.” represent. The Economist, in an article titled “Why Heathrow Is Hell” (August national security matters in a geopolitically sen- 26, 1995), argued that, theoretically, it is perfectly possible for in- Comments are welcome. sitive context and the government’s creativity and creasing commercial revenues to obviate the need for aeronautical Please call the FPD determination in coming up with viable solutions. 4 charges, which, in turn, could saturate an airport’s operating capacity. Note line to leave a For more details, see Ellis J. Juan, “Airport Infrastructure: The Emerg- The winning bid came from a management and ing Role of the Private Sector—Recent Experiences Based on 10 message (202-458-1111) or contact Suzanne employee buyout team (MEBO Co.), which pur- Case Studies,” CFS Discussion Paper Series 115 (World Bank, Co- Smith, editor, Room chased the Northern Ireland Airports Limited financing and Financial Advisory Services Department, Washing- G8105, The World Bank, ton, D.C., 1995). (NIAL) public corporation, entrusted with oper- 5 Because of the relative age of its terminals, Transport Canada 1818 H Street, NW, Washington, D.C. 20433, ating BIA, for about US$72 million. The airport does not include capital costs in the calculation of airside charges. or Internet address contract was awarded to MEBO Co. in July 1994, ssmith7@worldbank.org. and all the share capital in NIAL was transferred Ellis J. Juan, Senior Privatization Specialist, 9 Printed on recycled to MEBO Co. except for a golden share of £1. Private Sector Development Department (email: paper. The Department of the Environment for North- ejuan@worldbank.org)