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Airport Public-Private Partnerships: How Applicable Are International

Models to the United States?

By Brian F. Chase

ARTBAJuly 23, 2010

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Summary of Presentation:

1. Airport PPPs that are being used globally

2. Airport PPPs that are being used in the United States

3. Observations on what is (and is not) working in the United States

4. Predictions

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Two basic forms of airport PPPs being utilized globally:

1. Contractual PPPs

Most common; especially in developing countries

2. Institutional PPPs

Used in countries with well developed institutional and regulatory capabilities

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Why are airport PPPs being used?

Budgetary pressures on governments worldwide forcing them to explore alternatives to traditional public sector provision of assets and services

Keen interest among institutional investors (e.g., public pension funds) in alternative investment opportunities that can deliver relatively predictable, income‐oriented and inflation-protected returns – such as airports

Desire to reduce political interference with airport management decisions

International experience shows that new forms of private sector participation can boost revenues and improve services at airports

Need for massive infrastructure investment across the world – including at airports

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Contractual PPPs:

Principal-agent relationship established between the public and private sectors based solely on a written agreement. The public partner delegates one or more airport-related tasks to its private partners; these tasks may include developing, financing, reconstructing or managing all or some part of an airport facility

Examples: Management contract/operating lease/concession

Completed: Gatwick (2009); St. Petersburg (2009); Pristina (2010)

Pending: Mali; Brazil; Peru

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Institutional PPPs:

Private investor/operator and government authority are joint venture partners in a corporatized airport entity (typically followed by an IPO)

IPPPs are largely unknown in the United States because of state constitutional prohibitions on public investment in business corporations (resulted from ill-advised public investments in canal and railroad companies during the19th century)

There are some interesting exceptions to this general ban that are beginning to be explored and used (e.g., HAS Development Corp.)

Completed: Paris, Athens; Hamburg; YVRAS/Citi Infrastructure

Pending: Prague, Seoul’s Incheon Airport, Poland

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Observations on airport PPPs being utilized globally

Majority of world’s airports remain government owned and operated, despite the many privatizations that have occurred during past two decades

Nevertheless, local, regional and national governments are increasingly concluding that airports might better be operated, either entirely or partially, by the private sector

Glasgow Prestwick Airport

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Types of airport PPPs being used in the United States:

Types of airport PPPs being used in the United States:

Mostly contractual PPPs

Largely outside of FAA Airport Privatization Pilot Program (but recent renewed interest in that program too)

More awareness of institutional PPPs, but so far only one established to date involving a U.S. airport (HAS Development Corp.)

Question:Since the relevant regulatory framework exists in the United States for

contractual PPPs involving airports, why isn’t it being used more frequently?

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FAA Airport Privatization Pilot Program

Virtually ignored until 2008; due to mix of public airport authority antipathy and high regulatory hurdles (limited pilot; 65% airline approval requirement)

To date, only one project completed in 14 years (Stewart in 1999), so perceived as high risk and expensive endeavor for PPP delivery

Since Midway, however, there has been greater interest in the program

Four of 5 slots now filled; one position remains available for a non-large hub or GA airport

At least 10 other U.S. airports have expressed interest in privatization by lease

Result: Contractual and even institutional PPPs are occurring at U.S. airports, but mostly outside of the FAA’s cumbersome program (which may soon become even more difficult to use – and thus less relevant)

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Examples of U.S. Airport PPPs: Orlando-Sanford Airport (TBI Airport Management)

In 2008, AIB One LLC, a GE Commercial Aviation Services (GECAS) company, opened the privately-developed South Terminal at Austin-Bergstrom Airport in Texas; it was then closed down a year later (due to economic downturn and swine flu in Mexico) and returned to the city’s Aviation Department

In 2009, the first private greenfield commercial airport, Branson, opened. Operates entirely outside of FAA’s remit, apart from safety and security requirements

Other examples:

HAS Development Corporation (with OMERS and ADC)

JFK Terminal 4

Fort Worth Alliance Airport

Management contracts at commercial airports (Albany, Burbank, Indianapolis) and GA airports (Teterboro and L.A. County)

Panama City

Stewart (prior to 2007)

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Five predictions on use of airport PPPs (from most confident to most speculative)

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Prediction #1: Airport investment activity involving public pension funds will continue to grow (both in United States and globally).

In 2008, first institutional PPP created involving U.S. airport, HAS Development Corp., and public pension fund, OMERS

Was potential investor in Midway

Learned from example of SFO Enterprises

In 2009, the Ontario Teachers' Pension Plan (OTPP) completed a transaction to increase its stake in Bristol International Airport to 49% and to sell its minority stake in Copenhagen Airport

In 2010, CalPERS acquired a 12.7% stake in London Gatwick via direct investment (other investors include ADIA and S. Korean National Pension Service)

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Prediction #1 (continued): Airport investment activity involving public pension funds will continue to grow (both in United States and globally).

Right now, private equity firm CVC Capital Partners (which includes public pension fund investors) is leading an investor group to buy infrastructure operator Abertis

Abertis has interests in 30 airports in 9 countries, which handle more than 80 million passengers

It also (through its subsidiary, TBI) has total or partial management contracts, from governments or local authorities, at 5 U.S. airports: Hartsfield-Jackson Atlanta International Bob Hope Middle Georgia Regional Macon Downtown (GA airport) Raleigh-Durham International

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Prediction #2: If completed, Puerto Rico’s LMM will become the new poster child for the FAA’s Airport Privatization Pilot Program (rather than Midway).

Emphasis on improving airport services at lowest government cost rather than on asset monetization

Recommend review of Puerto Rico PPP Authority’s related feasibility study, available at: www.P3.gov.pr

LMM International Airport

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Prediction #3: PPPs will be used to provide airline service at certain general aviation airports.

At least some one-airport metro areas need more airport capacity

Also, such metro areas typically suffer from high traffic congestion across broad urban area

Example: Atlanta (Briscoe Field)

In FAA’s Airport Privatization Pilot Program

RFQ responses from private investors/operators due on Aug. 16

Goal is 10-gate terminal with dozens of fights/day

Seattle (Paine Field) and San Diego (McClellan-Palomar) also in process of pursuing contractual PPPs

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Prediction #4: More private investors will become interested in greenfield private airport investment opportunities such as Branson.

$155 million invested by a Connecticut businessman to build the only privately-financed commercial airport in the United States

No FAA grant agreement

Several airlines already are using it (Sun Country, AirTran, Frontier and Branson AirExpress)

Another example of a potential PPP project: Greenfield multimodal freight/industrial airport near Dallas Branson Airport

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Prediction #5: U.S. airports will begin to explore using runway congestion pricing.

Air Transport Assoc. challenged DOT program, but it was recently upheld by a DC appellate court

Airports authorized to charge by time of day as well as by aircraft weight

Goal is to reduce chronic airport delays and boost weight-based landing fee revenues (which can be lower due to increased use of regional jets)

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