Airport PPPs: Benefits, drivers, and success factors January 22, 2015
Contents
1. WBG Overview
2. Airport PPPs
3. Lessons Learned & Getting PPPs Right
4. WBG Experience in Airports PPPs
2
IBRD International Bank for
Reconstruction and Development
IDA International Development
Association
MIGA Multilateral Investment and Guarantee Agency
Est. 1945 Est. 1960
IFC International Finance
Corporation
Est. 1956 Est. 1988
Role:
Clients:
Products:
Shared Mission: To Promote Economic Development and Reduce Poverty
To promote institutional, legal and regulatory reform
To promote institutional, legal and regulatory reform
To promote private sector development
To reduce political investment risk
Governments of member countries with per capita income between $1,025 and $6,055.
Governments of poorest countries with per capita income of less than $1,025
Private companies and governments in member countries
Foreign investors in member countries
Technical assistance Loans Policy Advice
Technical assistance Interest Free Loans Policy Advice
Equity/Quasi-Equity Long-term Loans Risk Management Advisory Services
Political Risk Insurance
4
WBG partner of choice in PPPs
350
Global market knowledge and experience as both advisor and investor
projects since 1989
Objectivity & transparency in transactions
Neutral partner balancing objectives of government, consumers and investors
Only multilateral organization offering direct advisory services to governments globally
Social and environmental focus
Risk sharing and long-term commitment
Pioneering transactions in frontier markets & sectors
5
Full spectrum of support from upstream policy, advisory, public financing,
private financing (debt and equity), guarantees, PRI, and mobilization
PPP Variants in Airports
7
Technical Assistance
Service Contract
Management Contract
Lease Contract
Concession Contract
3-5 yrs 5-15 yrs
1-3 yrs
25-30 yrs
Priv
ate
Sect
or In
volv
emen
t
Contract Duration
Siemens-LGW
Baggage Handling contract
ADP-Egyptian Regional Airports
/ Fraport-Cairo &
KAIA/KKIA airports
TAV-Izmir Airport
Concession Lease
TAV-Madinah Airport
/ GMR-Delhi
Airport
Vinci – ANA (Portuguese
Airports)
MAHB – Astana Airport
Full Divestiture
Airport PPPs benefit Governments
Construction Significant reduction in
project development risk with transfer of
construction risk to the private sector
Financing Access to private sector
financing, freeing government budgets for
social sectors
Efficiencies Introducing operational efficiencies with best in
class international practices
Public Sector Benefits
Revenues Potential for new revenue
streams for governments/airport
authorities
O&M Transfer of risks related to
Operations and Maintenance with clear KPIs and performance
incentives
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Asset Transfer Airport and related
developments return to public sector ownership at the end of the concession
Airports are also attractive Assets for Private Sector
Strong growth Forecasted growth leading to potential for significant cash flow and improved
margins
Efficiencies Significant ability to
introduce operational efficiencies and improve
financial performance
Opportunities Opportunities to develop real estate, commercial and auxiliary activities
outside of the regulated perimeter
Attractive Assets for Private Sector
Exchange rate risk Low foreign exchange risks
as airports generate substantial revenues in
hard currency
Commercial Revenues
High potential for improving airport amenities
thereby increasing non- regulated revenues
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Private Investment in Airports
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• Private investment in airports is on the rise again
post the 2007-2010 period where sector activity waned due to lack of financing, traffic concerns, and gaps in valuation expectations.
• Fundraising for infrastructure deals has remained positive, and as of early 2014, there are 136 unlisted funds targeting $86bn in capital commitments.
• Investors are likely to look to emerging markets where expected returns are higher than in developed markets.
Source: Private Participation in Infrastructure Database (World Bank)
Source: Preqin, 2013 Infrastructure Raising and Deals 10
Evolving Business Model on Airports
Past Today Mere infrastructure provider
Exclusive public ownership
Securing needs of flag carrier
Supported by public funding
Fully fledged businesses/ Diversified activities
Competition for customers
Customers with different needs
Mobilization of private funding
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Key Sector Players
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• Traditional players - Infrastructure funds; - Construction firms (on
greenfield or brownfield expansion).
• New players
- Direct investments by pension funds with increasing focus on emerging markets;
- Sovereign wealth funds; - Private equity; - Operator / financial institution
consortiums; and, - Private equity (smaller airports
c. <5m pax).
Global financial crisis has led to an adjustment in mix of airport investors.
Key Air Traffic Drivers
13
09 27
Competition
Rise of LCCs or foreign
carriers can increase
affordability and route
options which drives
traffic
Hub Status
Small countries
with high air connectivity
due to airport hub
status boosts traffic
potential (eg: Sing.,
UAE)
Economic Health
Higher
personal income and growth of economy (ie: GDP)
Demographic Changes
Growing
population can raise
propensity to fly
Market Maturity
Increasing maturity
eventually leads to
saturation
Crises
Financial crisis or war / terrorism
dampens air traffic
Geography
Need for air transport higher in
island nations or
isolated regions with
big distances between
cities
Population Mix
Countries with high immigrant population see large visiting
friends and relative
(VFR) traffic (e.g: UAE)
What are the revenue streams?
Aeronautical Non-Aeronautical
Landing Fees
Terminal Area Air Navigation Fee
Aircraft Parking & Hangar Charges
Airport Noise Charge
Passenger Service Charge
Security Charge
Ground Handling Charges
En Route Air Navigation Fee
Night flight fees
Concession fees for Aviation Fuel & Oil
Concession fees for Commercial Activities
Revenues from Car Parking & Car Rentals
Rental of Airport Land, Space in Buildings &
Assorted Equipment
Fees charged for Airport Tours, Admissions
etc.
Other non-airport Revenues
Note: new charges can be envisaged in the case of projects with major expansion works to match revenue flow levels with private sector return requirements (subject to regulatory framework of country where airport is being developed)
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Common Structuring Issues (1/3)
Issue Description
Contract Type Concession (BTO, BOT etc), Management contract, TSA; choice will depend on requirements leveled on private partner, government preference, accounting / regulatory issues etc.
Project Scope Full scope (all of airside and landside including commercial developments), only airside activities, limited to one terminal etc.
Investment obligations
Expansion / rehabilitation requirements placed on investor at the beginning of contract + future expansion requirements with appropriate trigger mechanisms
Contract Term Driven by concession type (ie: 15-25 years for concession, 3-5 years management contract, etc), and financial return requirements
Basis for bidding Weighting and defining components of technical and financial bid (ie: input vs. output based design, upfront fees vs. ongoing concession revenue sharing, pass/fail vs. scoring bids)
Regulatory regime
Regulated tariffs set by concession contract or through existing country wide regulatory framework
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Common Structuring Issues (2/3)
Issue Description
Role of Grantor Define what role Grantor will play on project (eg: general facilitator, providing vacant enjoyment of land / site, security, ATC, etc.).
Exclusivity Specify any protection from existing airports or new airport developments with no compete clauses (eg: no new international airport within 200km radius)
Traffic risk Protection against traffic risk (ie: investor assumes 100% or protected below a certain traffic level)
Sponsor stability requirements
Define any minimal equity participations by individual investors at bid and lock in periods over contract term
Inflation Define tariff indexation level and frequency of adjustments
FX protection Potential requirement when local currency volatile and majority of financing is international (and / or bidders are international). Can be implemented through adjustments to aeronautical tariffs
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Common Structuring Issues (3/3)
Issue Description
Performance Obligations
Define investor obligations throughout contract to adhere to service levels or standards (eg: IATA level C, minimum technical requirements) and penalties if breach occurs, through liquidated damages, performance bonds, and default clauses
Existing airport staff
Level of employment protection offered, requirements placed on investor to accept them over defined term and conditions
Governing law, arbitration
In most jurisdictions, international investors will have preference / requirement for non-local law and international arbitration
Termination Triggers and compensation levels for debt and equity on both grantor and investor sides needs to be defined
Conditions precedent
All conditions that need to be fulfilled by grantor and investor prior to financial close need to be clearly defined in the contract and monitored
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Impact of PPP on Responsibilities
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PRE-PPP PPP APPROACH
CAA / Govt
Airport Co*
Private Sector
CAA / Govt
Airport Co*
Private Sector
Revenues
-overflight / ATC -airport revenues** Payment to Govt / Airport Co + - + / + -
Capex / Staff / / Regulation Supervision Slot Coordination This allocation is one example amongst many and may vary from project to project depending on structure (eg: security staff provided by State or private operator, capex subsidies required, etc.)
* May be contained within CAA in certain countries ** Payment of operating costs also falls on private sector under concession model
PPP = Preparation Preparation Preparation
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• MUST prepare for the main stages of a PPP - Due Diligence; - Structuring; - Tendering; - Award / Closing; and - Implementation / Monitoring
• Each of the stages requires careful methodical preparation - short cuts are costly.
• Core to achieving a successful result is ensuring advisory team is highly experienced and
has all the required skill-sets (ie: financial, legal, technical, etc.) – even highly experienced global infrastructure investors do not rely solely on their in-house expertise to complete transactions.
• The following section illustrates issues that can arise and the important role advisors play in supporting clients to address these complexities.
Airport PPPs: some issues…
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National security
Land acquisition
Environmental issues
Resettlement
Passengers vs. Cargo
Land value capture
Terminal design
Traffic Airside capex
Tourism Level of service
Domestic Competition
Exclusivity International Competition
Safety & Security
Customs
Immigration
Ground Handling
Retail concessions Fuel
Devaluation
Laws & Regulation
Concession fee
Subsidy
Zoning
Lenders Investors
Electricity
Water and Water Treatment
Sanitation
Ground transportation Road access
Lack of preparation leads to failure…
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• Extensive analyses are ESSENTIAL (technical, commercial, financial, strategic) to test proposed structure with market and meet Govt’s objectives;
• Jump starting tender phase without preparation and structure is highly risky = almost guaranteed to fail.
• Structuring allows Govt’s to design a project based on their objectives, capabilities, risk appetite and market interest;
• Structuring reduces uncertainty for bidders and gets them to make proposals based on Govt’s needs, and at the highest value;
• Structuring reduces the temptation of accepting spontaneous offers, which may not provide best value for money for the Govt.
Preparation / Due Diligence: you can’t build a house from the roof up
Structuring: inadequate project structure raises risk profile for all
…as does weak framework, bankability…
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Uncertainty or new framework raises project risk profile and lowers bid value.
Lack of government support / indecision leads to delays and conflict.
• Mismatch between risk / obligations and levels of return anticipated dilutes investor interest;
• Unrealistic demands set by public sector leads to failure in bids (eg: developing greenfield airport with no / weak traffic record).
Bankability: Fair & Appropriate Risk Allocation is Key
Commitment: Buy-In Critical At All Stages
Framework: Avoid Surprises
…and inadequate profiling of candidates along with absence of competition
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• Competitive tension results in much better offers for public sector;
• Transparency from competitive tender improves credibility of process and public support.
• Pre qualification allows to retain the most appropriate profiles of candidates;
• Wrong candidate – inappropriate selection criteria is highly risky.
Partner Profile: Avoid Unqualified Candidates
Competition: Maximises Public Sector Gains
For Govt’s to maximize gains, the right PPP model is essential: control and benefits
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Leads Govt’s to often shy away from concessions or O&M contracts preferring to keep a firm hold over all aspects of airport operations • In most concessions / BOT, despite private operations of airport, public sector maintains
full control via the concession contract and related obligations; • Grantor (public airport company or CAA) are the pillar and should become reinforced –
focus on regulation and supervision.
Loss of Control – Misconception by Public Sector
Appropriate Size & Structure Needed to Maximise Benefits
• Management contracts separated from capex obligations or publicly funded projects have reduced cost or time effectiveness - Public sector takes more risks and misses out on many of the gains; - Use of public instead of private finance: issue for IDA/Developing countries.
• Carving out activities dilutes value and efficiency of projects: carving out commercial
activities drastically reduces returns for private sector (hence less involvement in capex) and fees for Govt’s;
• International operator brings more than just funding; expertise is key!
Post award failure risks greater without monitoring, continued cooperation…
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• Unreasonable expectations / intrusion of authorities
• Lack of capacity / coordination of stakeholders (ex. Police, Customs, Grantor)
• Grantor does not have the capacity to handle the complexities of a PPP contract
• Lack of enforcement of contractual provisions and penalties if applicable
Lack of Monitoring / Institutional Capacity: risky for public sector
Lack of Cooperation / Coordination Among Players: Complicates Further
…or with poorly designed contracts containing inadequate provisions
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• Lack of, or inadequate provisions on applicable laws, cure periods, step-in rights, etc.
• Lack of clarity on exit strategy
• Lack of clarity on obligations and contribution, guaranties
• Poorly conceived (or lack of) performance obligations and related penalties
• Lack of clarity on unforeseen events, force majeure, modification of plans or structure
Incomplete Contractual Provisions: Creates Sense of Unfairness
Inadequate dispute resolution mechanisms: Can Drag Disputes Longer
Airport Credentials
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Loan
Cambodia Airports ( Siem Reap and Phnom
Penh)
$27 ,500,000
IFC as Lender
Concession
Nnamdi Azikiwe International Airport,
Abuja, Nigeria
IFC mandated as Transaction Adviser
Concession
Prince Mohammad bin Abdulaziz Int’l Airport
in Madinah , Saudi Arabia
IFC mandated as Transaction Adviser
Loan
Tbilisi Airport in Georgia
$27,000,000
IFC as Lender
Equity Lima JCIAirport in Peru
$20,000,000
IFC as Investor
Loan Queen Alia Airport in
Jordan
$120,000,000 Loan
$160,000,000 Syndicated Loan
IFC Lender & Arranger
Loan Pulkovo Airport in
Russia
€ 70,000,000 Loan
€ 100,000,000 Syndicated Loan
IFC Lender & Arranger
Loan Montego Bay in Jamaica
$45,000,000 Loan
$45,000,000 Syndicated Loan
IFC Lender & Arranger
Loan TAV - Tunisia
€ 132,500,000 Loan
€ 257,500, 000 Syndicated Loan
IFC Lender & Arranger
Concession
Male International Airport in Maldives
IFC mandated as Transaction Adviser
Concession
Hajj Terminal at King Abdulaziz Int’l Airport
in Jeddah, Saudi Arabia
IF C mandated as Transaction Adviser
Concession
Queen Alia International Airport in Jordan
IFC mandated as Transaction Adviser