Public-Private Partnerships in the

Airport Sector
Structured Guidelines for PPP Implementation

André Franco Pena

Seminar AIRDEV – Business Models for

Airport Development
Lisbon, 20 October 2011

1
 Public-Private Partnerships in the Airport Sector
Structured Guidelines for PPP Implementation

OUTLINE

Introduction

Public-Private Partnerships in Transportation

Airport Ownership and Governance Models

Airport Finance

Guidelines for the Application of PPP in Airports

Final Conclusions

2
 Public-Private Partnerships in the Airport Sector
Structured Guidelines for PPP Implementation

INTRODUCTION
Infrastructure Needs Lower Productivity
Infrastructure
Gap
Lack of Public Resources Reduced Market
Competitiveness

Private Initiatives Public Sector (the Principal): PSO requirements and regulation.
to overcome
shortage Private Sector (the Agent): Dynamic and market-oriented businesses.

The Airport Sector

Why is it important? Vehicles of economic well being and social development.

Issues in airport delivery? Capital intensive, frequent cost overruns and delays, and public contestation.

PPP as a possible solution to deliver airport infrastructures.

3
 Public-Private Partnerships in the Airport Sector
Structured Guidelines for PPP Implementation

PUBLIC-PRIVATE PARTNERSHIPS IN TRANSPORTATION (I)

Public-Private Partnerships – The Concept
Cooperative ventures between the public and private sectors, built on the
expertise of each partner, which best meets clearly defined public needs through
the appropriate allocation of resources, risks and rewards.
[Canadian Council for Public-Private Partnerships, 2004]

Why and why not PPP in Transport Infrastructures Delivery?

Value for •Maximization of business potential;
Complex •Money and time consuming task;
money •Optimization of cost structures. Contract Design •Responsible for several cases of
& Management serious PPP failures.
•Improvement of constructive &
Efficiency
operational performance.
•Financially opaque structures;
Private •Reduction of burden on public budget; Ring-fencing
Finance structures •Does not allow monitoring nor
•Allows alternative sources of capital.
benchmarking.
Risk •Potential to optimize the design of risk
Management allocation plans.
Capital •Significant resources to define
Intensive projects’ TOR and for procurement;
•State-of-the-art technology;
Innovation Character •High transaction costs.
•Cutting edge improvements.

4
 Public-Private Partnerships in the Airport Sector
Structured Guidelines for PPP Implementation

PUBLIC-PRIVATE PARTNERSHIPS IN TRANSPORTATION (II)

Major Types of Public-Private Partnerships

Differences? Contractual Length, private sector’s role and ownership structure.
How to choose? Depends on governmental aims – increase efficiency or reduce expenditures?

Management Leasing Concession Private Finance (Partial)

Options: Divestiture
Contracts Contracts Contracts Initiative

Examples of PPP Implementation in Transportation

Airport
Road Infrastructures Rail Infrastructures Port Infrastructures
Infrastructures

. Car culture socially

. Landlord port
installed; . Less attractive
authorities w/
. Abundance in road investment;
privately developed Addressed further.
delivery; . High CapEx and
& operated
. Prohibitive Public OpEx.
terminals.
Deficit.

5
 Public-Private Partnerships in the Airport Sector
Structured Guidelines for PPP Implementation

AIRPORT OWNERSHIP AND GOVERNANCE MODELS (I)

Public Ownership and Governance in the Airport Sector
Introduction

Governmental
Market-oriented
Protection of the Air
management approaches
Transportation Sector
Marketization of
Strategic Public Airports Improved
National Asset competitiveness

Promotion of Inefficient Service

Greater autonomy from
Economic and Excessive
political power
Development Public Deficits

Public Interest PPP and Addressed in a further

Privatizations section

6
 Public-Private Partnerships in the Airport Sector
Structured Guidelines for PPP Implementation

AIRPORT OWNERSHIP AND GOVERNANCE MODELS (II)

Public Ownership and Governance in the Airport Sector
Models

Independent Not
Governmental Local Gov. / Governmental Public
For Profit
Department Quasi-Gov. Entity Agency Corporation
Company
Ministry of Decentralization Separation Public-owned Decentralization of
Transport / Defense of Power between Airport / Power to Not-For-
Airline Operation Airport Operation Profit local
Airport, Air Traffic / Regulation & Regulation are authorities
Control & Navig., Smaller Operating Independent
National Airline and Units Dependence on Reinvestment of
Regulator public budget Corporate status profits

7
 Public-Private Partnerships in the Airport Sector
Structured Guidelines for PPP Implementation

AIRPORT OWNERSHIP AND GOVERNANCE MODELS (III)

Public-Private Ownership and Governance in the Airport Sector

Models

Public-Private Airports . Private Sector responsible for full service delivery – CapEx and Opex;
under Concessions . Privately held during the contract and then transferred to the State.

Public Airports w/ Private . Ultimate liability over the airport is public;

Operation of Terminals . Privately developed and managed terminals.

Public Airports under . Airport players “hunting” management contracts globally;

Management Contracts . Diminish the risk exposure to their markets and expand know-how.

Public-Privately Owned . Bring private expertise, reduce public expenditures, raise capital for
and Governed Airports CapEx programs or develop strategic alliances.

8
 Public-Private Partnerships in the Airport Sector
Structured Guidelines for PPP Implementation

AIRPORT OWNERSHIP AND GOVERNANCE MODELS (IV)

Private Ownership and Governance in the Airport Sector
Introduction

. Increase efficiency;
Economic Motivations . Induce competitive pressure in the market;
for Privatization . Decrease the level of governmental expenses;
. Enhance economic growth and social welfare.

Economic Regulation: Strong prevention of market abuses, but flexible enough to attract
private capital. Attention shall be addressed to the creation of private monopolies.

Beyond Public Budget:

Privatization is far too important to be viewed as a quick fix to the Government's

current budgetary difficulties. Long term vision is needed… [Bisignani, 2003]

Gains in efficiency, social welfare and in fostering national economy are imperative.

9
 Public-Private Partnerships in the Airport Sector
Structured Guidelines for PPP Implementation

AIRPORT OWNERSHIP AND GOVERNANCE MODELS (V)

Private Ownership and Governance in the Airport Sector
Privatization: For or Against?

Financial Diversification of Managerial Market-Oriented

Flexibility core business Expertise Thinking
PROS

New sources of More experiences Break-through Avoid “white-

capital to costumers management elephants”
No public budget Increase airports’ Decisions made on
Innovation
constraints attractiveness financial basis

Stock Market Diversification of Obsessive Profit-

Market Abuses
Fluctuation core business Orientation
CONS

Monopolistic Subject to market Loss of capital Deterioration of

Agreements volatility flexibility costumers’ opinion
Reduction of Social Secrecy regarding Subject to
Loss of demand
Welfare financial “health” economic cycles

10
 Public-Private Partnerships in the Airport Sector
Structured Guidelines for PPP Implementation

AIRPORT FINANCE (I)

Introduction

2007/08 Financial New financial paradigm Airport Finance

Crisis + Sovereign- w/ more constrained as a prominent
Debt Crisis capital availability issue

Sources of Capital
Retained Earnings: Related to airports’ direct and indirect revenue streams.

Special Purpose Taxes (SPT): Directly assigned to the operator (not a grant), SPT are used on CapEx.

Governmental Grants: Non-returnable funding, provided by national or international institutions.

Debt: Low-Cost Loans, Commercial Loans, Bridge Financing and Bond Financing.

Quasi Debt-Equity: Securities w/ characteristics of both equity and debt (e.g. Preferred shares).

11
 Public-Private Partnerships in the Airport Sector
Structured Guidelines for PPP Implementation

AIRPORT FINANCE (II)

Sources of Capital
Equity

. Capital traded in exchange of ownership rights of an asset/corporation;

. Placed in the lowest seniority level - higher risk / potential higher returns.

Private Equity Venture Capital

General Investors Investment Banks Stock Market
Firms Firms
Construction Primary vehicles to Provide capital for Possibility of
companies and Development of perform start-ups with high attractive returns,
their subsidiaries securitization plans infrastructure perceived growth however it may be
for concessions investments potential perverse

Capital Structure
. Combination of capital sources defining a project’s financing plan;
. Depends on: Capital Cycle & CF Generation, Taxes, Financial Risk & Flexibility and Cost of Capital.

12
 Public-Private Partnerships in the Airport Sector
Structured Guidelines for PPP Implementation

GUIDELINES FOR THE APPLICATION OF PPP IN AIRPORTS (I)

Bringing Public-Private Partnerships into Policy Agenda

. Political strength is imperative requirement;
. Identify moments of opportunity - Policy Windows - to bring the issue into discussion;
. To create those moments, issues in the debate must address Public Interest.

Structuring a National PPP Programme

Define proper Ensure

Specify Assess
legal, regulat. Engage Commitment &
Requirements Technical
& political Stakeholders Designate PPP
& Expectations Issues
frameworks Champions

Stakeholders
Identify the Understand Legal: Labour. Ensure an
are valuable
system’s flaws, level of in- Regulatory: informed
inputs for
causes and house expertise Prevention of debate. Appoint
design and
choose what to and needs for market abuses. champions at
critical to
tackle. Foresee knowledge Political: different
ensure political
likely outcomes. imports. Stability. societal levels.
commitment.

13
 Public-Private Partnerships in the Airport Sector
Structured Guidelines for PPP Implementation

GUIDELINES FOR THE APPLICATION OF PPP IN AIRPORTS (III)

Identification and Prioritization of Projects
. Identify investments deemed to be relevant in the national context;
. Perform a Suitability Test, to assess implementation barriers and eliminate condemned projects;
. Prioritization of projects is imperative to assign special focus to the most relevant ones.

Due Diligence and Feasibility Studies

Cost-Benefit Analysis Allows thoroughly understanding project’s socio-economic impacts.

PPP Family Preliminary assessment.

PPP Model
Choice of

Indicator Criteria: CapEx, Ownership, Financing and Private Sector’s Role.

PPP Model Final decision. Risk analysis, comparing the proposed risk allocation
Validation Tool with pre-defined risk structures.

PPP Financial Scenario analysis, with varied capital structures & outcomes.
Assess VfM
Delivery

Feasibility Ind. Acknowledge likelihood to attract investors & need for subsidies.

PPP VFM Probability distribution of VFM.

Indicator Tool Final comparison with PSC, assessing which model delivers higher VFM.

14
 Public-Private Partnerships in the Airport Sector
Structured Guidelines for PPP Implementation

GUIDELINES FOR THE APPLICATION OF PPP IN AIRPORTS (IV)

Due Diligence and Feasibility Studies
Decision Support System for PPP Implementation

PPP Family
Preliminary model analysis.
(CaPex, Ownership, Financing Risk Analysis
Indicator
Source, Private Sector Role)
PPP Model i Project Specific
PPP Model
(iterative evaluation
Validation Tool PPP
of different models)
Most
adequate
PPP
Revise 1st level of decision

model? Assess Project’s financial

feasibility. (When delivered with
the selected delivery model)
Yes

PPP Financial Viability Indicator

VFM
delivery?
PPP yield Revise. Inadequate goals and scope.
Project better PPP VFM
value? Indicator
Proceed with the
PPP Suitability Assess VFM, against PSC. recommended
Indicator Compute PSC. (Typically carried by an
model. Start PPP
independent party)
procurement.
No

Assess other
procurement
Inadequate. Withdraw PPP
strategies procurement.

15
 Public-Private Partnerships in the Airport Sector
Structured Guidelines for PPP Implementation

GUIDELINES FOR THE APPLICATION OF PPP IN AIRPORTS (VI)

Due Diligence and Feasibility Studies
Decision Support System for PPP Implementation
. Structure political decision-making, without neglecting imperative points of analysis;
. Investors are benefitted by the awareness raised to a significant batch of subjects.

Procurement and Contract Award

Technical &
Proposals’
EOI IFB RFP Financial
Appraisal
Close

. Rigorous appraisal procedures: Technical Skills and Financial Evaluation;

. VFM Measurement of every proposal, with comparison with PPP VFM Indicator.

Implementation, Contract Management and Benchmarking

. Contract Management: Crucial for success. From pre-operative stage until asset transfer;
. Benchmarking: Imperative to compare and evaluate productivity & efficiency.

16
 Public-Private Partnerships in the Airport Sector
Structured Guidelines for PPP Implementation

FINAL CONCLUSIONS

#1: Past experiences created a preconception #5: Guidelines for PPP Implementation provide:
about PPP. . Stepping stones for better delivered services;
. Bilateral and holistic consciousness
#2: PPP are partnerships - Public interest to be regarding PPP in airports;
protected and private potential to be promoted. . Promote the transformation of the policy
process;
#3: Need of structured, transparent and . Investors’ ‘eye-opener’ concerning
consistent political decisions. imperative matters of analysis.

#4: Market liberalization creates major business #6: ‘Clean’ PPP attract more private capital and
opportunities for both sectors. increase public support.

The airport infrastructure gap is JV between the public & private

huge and a counterattack is sectors may be the strongest
imperative weapon to overcome this gap

17
Public-Private Partnerships in the
Airport Sector
Structured Guidelines for PPP Implementation

André Franco Pena

DECivil – IST – UTL
Email: [email protected]
LinkedIn: http://pt.linkedin.com/in/francopena

18