Capital Project Delivery and Airport Privatization

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1 PRESENTATION Capital Project Delivery and Airport Privatization Airport Project Delivery Systems Summit ACI-NA - ACC - AGCA San Jose, California Justin Powell

2 Overview The Airport demand context: unprecedented challenges Privatization background Effect on capital programs and planning Case Study LeighFisher has offices in Chicago, Cincinnati, Dallas, London, Ottawa, the San Francisco area, and the Washington, D.C. area. For over 60 years, we have assisted our clients in achieving their vision and goals. We have extensive practical experience in all disciplines necessary for the planning and management of airports, including airfield and airspace analyses, airport management and operation, commercial and concession planning, forecasting and economics, facilities planning and design, federal funding and policy development, financial analysis and planning, financial feasibility and reporting, ground transportation planning, air quality analysis, noise and other environmental analyses, privatization, parking planning and analysis, rental car facility development and business planning, security planning and implementation, and simulation and operational analyses. San Francisco Area Office: 555 Airport Boulevard, Suite 300 Burlingame, California Telephone: (650) Fax: (650) Washington D.C. Area Office: Plaza America Drive, Suite 310 Reston, Virginia Telephone: (703) Fax: (703) Airport Project Delivery Systems Summit

3 Conditions in the Near-Term Unprecedented Challenges 1. Slow national and regional economic growth it s about more than economic conditions in your community, but also in the communities that are served from your airport 2. Continued high unemployment and a tight credit market will continue to make it difficult for passenger growth to take hold in a meaningful way, especially in the context of higher airline fares 3. Higher airline fares (12 material industry attempts to increase fares since mid-december, 9 of which have stuck) the airlines have been very clear about their goal of focusing on financial sustainability 4. Airline network restructuring related to consolidation and airline alliances it is likely that airlines will use airports very differently in the future, particularly in the context of their alliances 5. Continued oil price volatility the question isn t about if we will get back to June 2008 oil prices, but what happens to airline capacity when oil is consistently above current levels 3 Airport Project Delivery Systems Summit

4 AIP Funding Levels Are Likely to Decrease (If Not Today, Someday) Legislators are focused on decreasing discretionary spending Uncommitted Balance of AATF (in billions) Average CPE Impact of AIP Grants $8 $7 $6 $5 $6.00 $5.00 $4.00 $5.20 $4 $3.00 $3 $2 $1 $ $2.00 $1.00 $0.00 $1.10 $0.40 $0.20 Nonhub Small Medium Large Source: Airport and Airway Trust Fund: Declining Balance Raises Concerns over Ability to Meet Future Demands, Government Accountability Office, February 3, AATF=Airport and Airway Trust Fund. Source: LeighFisher estimates. Assumes FFY 2009 average AIP grants for each hub size would be bond financed using standard assumptions, with allocable debt service recovered in full from the airlines. CPE=Cost per enplaned passenger. Lower ticket prices and decreased passenger numbers have led to decreased ticket tax receipts, providing fewer revenues for the FAA s capital programs and operations account. A solution to this structural problem will likely involve revenue (i.e., new taxes and user fees) and cost (i.e., reduced AIP grants) components. 4 Airport Project Delivery Systems Summit

5 Privatization Can Take Many Forms Privatization is not an all-or-nothing solution Most U.S. airports have a high degree of private-sector involvement LEAST PRIVATIZATION Partial Privatization Contract Services Management contract Developer/project financing Full Privatization Long-term lease or concession agreement (including Privatization Pilot Program) Private airport development MOST PRIVATIZATION 5 Airport Project Delivery Systems Summit

6 Privatization Capital Programs Follow the Money Privatization offers Government an opportunity to pass off major capital costs, with upfront risk, to private bidders Particularly for greenfield airports where the major transition has been delayed Accelerate capex as in Brazil to prepare for sports events Private sector procurement Develop a revenue and tax stream to the Government The competitive nature of the bid process can maximize: The bid price the price of admission The promised capex improvements Many privatization RFPs have both a technical and financial offer The current Natal, Brazil proposal (due July 12) has a minimum bid price (US$32m) and an open-ended technical/business plan proposal (estimated capex of $402m) for terminal and landside facilities Create an asset that will revert to Government management or be available for re-concessioning Santiago, Chile Terminal is up for re-bid in 2014 (15-year concession) 6 Airport Project Delivery Systems Summit

7 Privatization Capital Programs Public Interest Factors are Critical Maximize valuation while protecting the public interest What level of regulation protects the public, travelers and airlines? How can this regulation be transparent and flexible to support the Concessionaire? Maintain and enhance operational and development standards (including safety and security) Improve overall standards of service Increase operational efficiency Foster introduction of new ideas/alternative approaches The capital program timing is dictated by a range of factors: Technical specifications of the concession agreement Political impact of a major new airport, terminal building, airfield modernization - getting the new facilities built ASAP If a lease, the concession duration years is a typical concession lease range 7 Airport Project Delivery Systems Summit

8 Privatization Capital Programs Capex Management CapEx Sequencing and Prioritization Private operators strive to sweat the assets Delay as long as possible making the CapEx investment But in the context of customer service Financial viability of CapEx does it provide a reasonable return on investment? RFP technical specifications Government will present minimum technical specifications over-detailed specifications may not be appropriate and also increase implementation risk PALs and Triggers Should be agreement on timetable for completion of detailed technical design. Need for flexibility by Government to deal with genuine construction time and cost issues Bid teams regularly include an experienced constructor/developer. The project value is a reason for firms such as GMR (India), Hochtief (Germany), Odebrecht (Brazil) to be involved Constructor/developer may or may not take equity share 8 Airport Project Delivery Systems Summit

9 Private Airport Regulation Government Transitions from Owner to Regulator Multiple regulators pricing, safety/security, concession terms and construction After 1987, as airports started getting privatized globally, accounting became clearer and it was apparent that large airports were very profitable Airlines have therefore put pressure on airports to share some of these profits by lowering charges Regulation method for airline charges is relevant: Single-till (or Residual in the US) lumps all finances together for purpose of regulating airport profits through aeronautical charges. Non-aeronautical revenues subsidize airline charges Dual-till ( Compensatory in the US) keeps non-aeronautical revenues separate from the airport profitability calculation so the private operator keeps any upside and as such may be incentivized to have a more extensive nonaeronautical capex program 9 Airport Project Delivery Systems Summit

10 Private Airport Regulation Concession Oversight Balance Investment with Service Levels Capacity is a function of level of service (LoS) A facility can operate at varying degrees of congestion and delay depending on level of service intended Trading off investment needs and service levels Providing the right facilities at the right time Different operators and airports have different LoS standards Within airports there is significant service differentiation (e.g. network vs. LCC for instance Singapore Airlines vs. Tiger Airways or Malaysian vs. Air Asia) IATA - Levels of Service (LoS) Definitions Level of Service (LoS) Flows State Delays Comfort A - Excellent Free None Excellent B - High Stable Very few High C - Good Stable Acceptable Good D - Adequate Unstable Passable Adequate E - Inadequate Unstable Unacceptable Inadequate F - Unacceptable System breakdown Unacceptable 10 Airport Project Delivery Systems Summit

11 Privatization Capital Programs Typical Concession Lease Contracts Build-Operate-Transfer (BOT), and Build-Transfer-Operate (BTO) vary the transition timing of the contractor into operator or owner BOT arrangements in a concession agreement usually cover construction, quality control, time schedules, milestones, and similar issues Difference between BOT/BTO is the time at which the operator transfers the newly constructed assets to the Government. BTOs are employed when relevant legislation does not allow for the private ownership of airport facilities Build-Own-Operate-Transfer (BOOT) permits ownership and depreciation of underlying site Lease extensions are often approved in exchange for additional capex Management/ negotiation of capital program with Government is highly sensitive Construction program outlines completion dates for the various construction phases (milestones) as part of the approved project, which is usually incorporated into the concession agreement 11 Airport Project Delivery Systems Summit

12 Latin America PPP Examples Airport Model Duration (years) Current concessionaire Bolivia (La Paz, Cochabamba and Santa Cruz) BOT concession 25 (2023) ACDL (Abertis and Aena International), operated by TBI Argentina (33 airports) BOT concession 30 (2028) + 10 Corporacion America, operated by AA2000 Mexico Southeast Group (9 airports) 15% minority sale plus 50-year BOT concession followed by flotation of remaining 85% 50 (2048) ASUR, operated by Copenhagen Airports Mexico North Central Group (12 airports) Minority sale plus BOT concession 50 (2048) OMA, operated by Aeroports de Paris Mexico Pacific Group (13 airports) Minority sale plus BOT concession 50 (2048) GAP, operated by Aena International Santiago Terminal, Chile BOT concession 15 (2014) SCL, operated by YVRAS Dominican Republic (6 airports) BOT concession 25 (2027) Aerodom, (Advent, operated by YVRAS) Honduras (Tegucigalpa, San Pedro Sula, La Ceiba and Roatan) Concession 20 (2020) Interairports S.A., operated by Unique/IDC San Jose, Costa Rica Management contract 20 (2019) ADC/AG Concessoes/Houston Airport System Lima, Peru BOT Concession 30 (2031) Lima Airport Partners SRL, operated by Fraport Cabo Frio, Brazil Concession - Local concessionaire Peru South Group (9 airports) Concession - Corporacion America Montevideo, Uruguay Concession 20 (2023) Puerta del Sur, operated by AA2000 Peru North Group (12 airports including Pisco) Concession 25 (2031) Aeropuertos del Peru, operated by Swissport Punta del Este, Uruguay Management Concession 20 (2019) Corporacion America, operated by AA2000 Quito, Ecuador Concession 35 (2040) Corporacion Quiport (Aecon/ AG Concessoes, operated by HAS) Guayaquil, Ecuador Concession 20 (2023) TAGSA 12 Airport Project Delivery Systems Summit

13 Case Study Mumbai International Airport Limited GVK/ACSA/Bidvest Consortium 38.7% of gross revenue share to go to Government of India/Ministry of Civil Aviation Airport to cater to 35-40mppa by 2015 and will cap out Key elements: Improvements to existing airfield infrastructure to maximize capacity Modifications to terminals to expand and add capacity in a phased manner Expanded air cargo facilities Additional infrastructure for maintenance and support Improved landside access CapEx Plan in excess of USD $1 billion Ultimate plan would have over 80 gates and cater to over 35mppa MIAL submitted a master plan to Airports Authority of India and started the capital program 13 Airport Project Delivery Systems Summit

Airport Privatization

Airport Privatization Seventeenth ACI World Annual General Assembly Conference Bijan Vasigh, Ph.D. Professor College of Business Embry-Riddle Aeronautical University Daytona Brach, Fl 32114 bijan@avionconsult.com