Meri Šuman Tolić, M. Sc
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| Meri Šuman Tolić, M.Sc.
University of Dubrovnik Department of Economics Lapadska obala 7 20 000 Dubrovnik Phone: +385 20 445 901 E-mail: mstolic@unidu.hr
University of Dubrovnik Department of Economics Lapadska obala 7 20 000 Dubrovnik Phone: +385 20 445 901 E-mail: katija.vojvodic@unidu.hr
University of Dubrovnik Department of Economics Lapadska obala 7 20 000 Dubrovnik Phone: +385 20 445 901 E-mail: marija.martinovic@unidu.hr
Traditionally, the development of transport infrastructure has been the exclusive responsibility of the government. Capital funds for infrastructure development were obtained from taxation, borrowing or issuing of public bonds. Due to the fiscal crises in many countries, both developed and developing ones, private sector involvement is becoming crucial in order to lessen the burden on public sector finances and to meet the ever-increasing demand for capital investment in the airport industry. Airport industry is a capital intensive industry entailing large investments which have long term turn-over, but may also emerge as obstacles to enter in the industry. Analyses of the international trends on the role of state and private sector in the provision of airport infrastructure bring out the conclusion that trends towards increasing the private sector involvement have been occurring since 1980s in all parts of the world. The role of the private sector as a partner in the development of public infrastructure appeared to offer the means by which governments could encourage the implementation of needed capital projects. The projects attractive to private sector are those which have commercial character capable of generating revenues. Consequently, investors expect an adequate return on investment. The private sector involvement in the airport business brings not only the financial resources needed but also the know-how and managerial skills, including more propulsive activities resulting in entering new markets by attracting new air carriers. The main goal of this paper is to analyse case studies of several European airports involved in financing and operating through various forms of private sectors participation in the airport business. The theoretical arguments supporting and opposing airport privatization are outlined. The extent to which airports need and can benefit from private sector collaboration is explored. Nowadays there has been an ongoing debate about the role of private sector in the airport industry and enhancing the infrastructure investment through private sector participation as a solution for recession. The main question, which has been dealt with in this paper, is whether there should be private sector participation in airport infrastructure sector. If the answer is yes; what kind of private sector participation should be chosen? The paper is structured as follows. First, different forms of private sector participation in the airport industry are presented. Then, the risks and the benefits of public private collaboration are discussed. A case study approach in Section 4 seeks to illustrate three different examples of private sector involvement in the airport business. Finally, some conclusions, based on the previous case studies are outlined. 2. FORMS OF PRIVATE SECTOR PARTICIPATION IN THE AIRPORT INDUSTRY In practice, there are many forms of private sector involvement in transport infrastructure development. Traditionally, it was financed and supported by the government. The lack of financial resources, fiscal crisis and constant need for infrastructure investment resulted in private sector involvement in the field. Public private partnerships can vary in the degree of both, private ownership and risk allocated between the partners, the amount of expertise required on the part of each partner to negotiate contracts and the potential implications for partners involved. For airports, public private collaboration covers a range of outcomes, from contracting out services and management, developing new facilities with public financing under different PPP schemes to selling single and multiple airports to private sector investors, developers and operators, and operation of terminals, entire airports and airport systems for long-term concession periods. Figure 1. Public private collaboration 
Source: (Palmer, 2009, 5) As seen in Figure 1, contracting out and privatisation are at the opposite ends of the spectrum of private versus public involvement, with PPPs somewhere in-between (Palmer, 2009, 5). Contracting out involves a private-sector party providing commercially a service previously provided by the public sector itself, there is little transfer of control or risk to the private sector, and no substantive private sector involvement in decision making. PPP, an arrangement would typically be characterised by some devolution of control and authority to the private sector, as well as private sector participation in decision making. In addition, the private-sector partner would likely be a provider of capital assets, as well as a provider of services. Public private partnerships can be defined as long-term contractual arrangements between public and private sector entities for the purpose of providing public infrastructure, community facilities and related services. There are many forms of private participation in transport. Perhaps the most familiar form of participation in transport infrastructure is Build, Operate, Transfer (BOT), where the private sector has the primary responsibility for financing, developing, and operating the facility for a fixed period of time, which should be sufficient to both repay debt and provide the required return on investment. At the end of the concession, assets are transferred to the government under the terms agreed in the contract. There are alternative versions of these contracts such as: Build, Own, and Operate (BOO), Build-Own-Operate-Transfer (BOOT), Build-Lease-Transfer (BLT), Build-Transfer-Operate (BTO), etc. Due to the banking crisis and lack of available financial sources the new model, known as “hybrid” PPP model, has emerged in the business practice. Hybrid PPPs involve the mixing of EU, public and private finance into PPP projects. Under this structure, EU funding typically comes in the form of capital grants – effectively providing a capex subsidy, which serves to improve the bank ability of such projects as well as affordability for governments (http://www.pwc.com). The addition of EU funding proved highly effective in improving the financial feasibility of these projects. With regard to this, the specific timing criteria, the N+2 rule, has to be met. Financial resources granted from EU funds should be spent by the end of the second year following the year in which they are allocated. Foremost, it is important to stress that PPP structures come in many forms and are still an evolving concept which must be adapted to the individual needs and characteristics of each sector, project and project partner. Indeed the terminology debate surrounding the definition of PPP categories itself mirrors the evolution of PPP approaches and the evolving regulatory environment defining PPP in many countries. Successful PPPs require an effective legislative and control framework and for each partner to recognize the objectives and needs of the other. Guaranteeing benefit from PPP requires recognition of the relative strengths and weaknesses of each type of structure and the aims and objectives of each party. The role of the public sector is of particular importance as it may transform itself from a service provider to an overseer of service contracts. Privatization of airports and airport facilities is a recent concept, which commenced in the 1980’s. Graham (2007, 19) emphasizes that the selection of the most appropriate type of privatization involves a complex decision-making process which will ultimately depend on the government’s objectives in seeking privatization. 3.RISKS AND BENEFITS OF PUBLIC PRIVATE COLLABORATION The underlying argument for establishing partnerships is that both the public and the private sector show advantages in specific aspects of service or project delivery. Such partnerships are characterized by the sharing of investment, risk, responsibility and reward between the partners. Such partnerships involve the financing, design, construction, operation and maintenance of public infrastructure and services. Private sector could be regarded as a valuable means of financial resources for successful development of airport infrastructure projects. Public private cooperation affiliates the skills and resources of both private and public sectors in the development of public infrastructure. The decision on whether to include private partner depends on the perceived benefits resulting from the participation of the private sector, such as management skills and increased efficiency. Without the involvement of the private sector, public entities will not be able to meet the growing infrastructure demands. Table 1. Potential risks of PPP agreements
Source: Authors’ systematization Economic efficiency can be gained by allowing the free market and laissez faire individualism through private involvement, to determine the best way to deliver services and may increase an organization’s ability to diversify. Proponents of PPPs also argue that the bidding process forces a more accurate and rigorous assessment of what actually needs to be provided. Partnership also means that the two sectors are able to share risks that are posed by the project, optimally allocating each risk to the partner that is best able to manage the risk (Table 1). Privatization will reduce the need for public sector investment and reduce government control. It may bring greater competition and wider share ownership.
In this section the impact of private sector in the airport industry is explored. The three cases offer insight into the various implications that dealing with the private sector might have for airports. The first case deals with the benefits of public private collaboration in airport’s developing projects. The second case emphasizes the importance of mutual EU and EIB (European Investment Bank) hybrid PPP funding while the third case focuses on airport privatization. 4.1. Case 1: International Airport Hamburg AG Hamburg Airport is an airport with the constant growth and development partially thanks to the PPP agreement. The total turnover in 2009 was € 224 millions. As regards to the passenger traffic, Hamburg Airport is the fifth largest of Germany’s sixteen commercial airports. In the year of 2009 12.2 millions of passengers passed through this airport (http://www.airport.de). Traditionally, the Federal and Local Government involved, held shares in the airport companies. Involvement of private partners took place at four German airports: Düsseldorf, Hamburg, Hanover and Frankfurt/Main. The partial privatisation of the Hamburg airport is the most advanced and successful example of the above four cases. According to a forecast made by the German Federal Ministry of Transport in 2001, air transport volumes are planned to more than double by 2015 as against 1997. The rise of flight movements is increasingly causing capacity bottlenecks at international airports. Therefore, upgrading and expansion of airports has become a priority in transport policy. The Federal Government presented an airport concept in 2000 in which it expressed support for the further development of airports by means of extending their capacities in all functions in line with demand. That included the construction of a new terminal with large commercially usable real estate as well as connection to the suburban rail network. Together with further construction measures, e.g. extension of parking areas, the entire investment between 2001 and 2007 reached a total of € 350 millions. Hamburg aimed at maintaining a majority stake in the airport operating company. From Government’s point of view, the introduction of private sector partners would increase the profitability and would therefore result in greater revenues flowing to all partners in the long term. Senate of Hamburg approved the contract in July 2000. The partners in a consortium (Hamburg Airport Partners) were “Hochtief AirPort GmbH” and “Aer Rianta International GmbH”, a subsidiary of the Irish airport operating company (Table 2). The consortium initially acquired 36% of the company shares in FHG at € 296 millions and obtained an option for the purchase of a further 13%. At present the shareholders of Hamburg Airport are the City of Hamburg (51% holding) and Hochtief Concessions (49% holding). In addition, the EIB granted a loan to the City State of Hamburg through a local bank of € 220 millions of which € 110 millions have been disbursed. Table 2. PPP at Hamburg airport
Source: European Commission, 2004, 104. The objectives of the international airport joint venture were construction and extension harnessing private sector efficiency. A right of veto in cases of conflict has been granted to each of the partners within the partnership agreement, e.g. with reference to fundamental issues of operation management. In addition, the so-called price-cap regulation has been agreed between the City as approving authority and Hamburg Airport after its partial privatisation. This means that a contract regulates the fixing and adjustment of charges for take-off, landing, parking of aircraft, as well as the use of passenger bridges. The aim of the contract is to agree on a fixed maximum charge and to create flexibility for the airport operator in pricing without relinquishing sovereign control. Besides these contractual agreements, the public`s interest has been considered in the planning procedure. As a result the expansion measures had been subject to little political dispute. Apart from a noise-protected hangar for trial runs of big aircrafts, a total of around € 25.5 millions have been invested in three main noise protecting programmes for the 11.000 surrounding households. The graduation of compensation according to noise emissions, a noise quota system, and a restriction on night flights for low-noise equipment between 23.00 and 06.00 hours exempting night airmail, complement the range of protection measures. 4.2. Case 2: Athens International Airport The hybrid PPPs are proposed in order to exploit EU funds combined with different PPPs models. The hybrid PPP concept is a relative newness, although there are several best practices of successful implementation in the airport industry. Worldwide, Hochtief and Athens Airport is the example of a successful hybrid PPP concept in the airport market. The case of Athens International Airport is the largest-ever transportation infrastructure project in Greece and world’s first partially privatised green-field development of an entire new commercial airport (Psaraki and Abacoumkin, 2002, 90). Due to the problems of overcrowding, the need for the new Athens International Airport emerged in the early 1970s. The first tender for construction and operation released in 1991 was unsuccessful, given the change of Greek government. In that time, the consortium led by Hochtief AG was selected as the preferred bidder. Two years later, bidders were requested to resubmit their bids and once again Hochtief AG appeared as the preferred bidder. Initially, the Greek State wanted to develop the Airport under a PPP scheme in order to share the risks. However, limited financial resources and overall economic environment resulted in the involvement of the EU and EIB. The role of EC was crucial since it provided funding directly through the EU Cohesion Fund. In that way, it was possible to close the financing gap between the Greek Government funds and private sector funds. As regards risk allocation, most risks, both operation and construction, were allocated to the concessionaire. Table 3. Hybrid PPP at Athens Airport
Source: Authors’ systematization Generally, developments of entirely new airports under BOT schemes are rare. This is partly because new airports are themselves a rarity, and possibly partly due to the massive capital investment required. The case study presented reveals the importance of a hybrid structure to the success of the entire project. EU involvement provided value for money to the national government and most risks were allocated to the concessionaire. 4. 3. Case 3: Airport privatization - BAA The history of airport privatization is too short to be conclusive about the success of this business approach. There are many examples of airport privatization projects that can yet be labelled as successful but this short history suggests caution. This phenomenon has been a major trend globally since 1987, when Margaret Thatcher privatized, via a 100 percent public stock offering, seven major British airports (Heathrow, Gatwick, Stansted, Prestwick, Glasgow, Edinburgh, and Aberdeen), that had previously belonged to the former British Airports Authority. This privatization is an example where the principal airports were firstly commercialized under a parastatal agency, the British Airports Authority, which was then privatized as BAA plc. in 1987 by means of a public share issue. The initial capitalisation of BAA plc was £1,225 million (£ 2,45 per share). UK Government sold its seven airports as a single package rather then breaking up the airports and selling them separately. Many opponents pointed out the problem of potential creation of monopoly over the UK airports. In the past two decades BAA has been the world’s leading private company in total airport operations management and has realised investment projects and programmes in the development of retail sales and rail service management. In 1990 BAA acquired Southampton Airport and two years later sold Glasgow Prestwick Airport. During 1990s BAA started business expansion outside the UK. BAA has expanded into international operations, including retail management contracts at Boston Logan International Airport (IA), Baltimore-Washington IA, retail and catering contract for Pittsburg Airport (USA), contracts to manage Indianapolis Airport and Harrisburg Airport (USA). In December 2005, BAA made a winning bid of £1.2 billion for a 75% stake in Budapest Ferihegy International Airport, in Hungary. Following the business strategy after the take-over of BAA by Grupo Ferrovial in 2006, the stake in Ferihegy was sold in June 2007. BAA owns and operates Heathrow Express, an express train service from London Heathrow Airport to London Paddington station in Central London. Heathrow Express jointly with First Great Western operates Heathrow Connect, a train operating company which follows the same route as the Heathrow Express service but serves intermediate stations en route, thus connecting several locations in west London with each other, the airport, and Central London. Heathrow Connect has a complex operating structure. The rolling stock and on-board staff are supplied by BAA through the Heathrow Express company and Airport Junction track is owned by BAA and leased to First Great Western (www.heathrowexpress.com). Since June 2006 BAA is owned by ADI (Airport Development and Investment) Limited, an international consortium, which includes Caisse de dépôt et placement du Québec and GIC Special Investments, that is led by Grupo Ferrovial, a Spanish firm specialising in infrastructure. As a result, the company was delisted from the London Stock Exchange (where it had previously been part of the FTSE100 index) on 15 August 2006, and the company name was subsequently changed from BAA plc to BAA Limited (www.baa.com). In August 2008 the Competition Commission (CC) found that there were competition problems at each of BAA’s seven UK airports with adverse consequences for passengers and airlines. A principal cause was their common ownership by BAA. There were also competition problems arising from the planning system, aspects of Government policy and the system of regulation (www.competition-commission.org.uk). BAA was suggested to sell three of its airports. The commission aimed to break up BAA's monopoly control of airports in the South East and Scotland. On 3 December 2009 BAA sold Gatwick Airport for £1.6 billion to Global Infrastructure Partners. BAA will also have to sell either Edinburgh or Glasgow. Currently, BAA Ltd. is the owner and operator of six British airports (Heathrow, Stansted, Aberdeen, Edinburgh, Glasgow and Southampton). In 2010 BAA sold its stake (65%) in GESAC SpA for € 150 millions to F2i SGR, an Italian infrastructure fund. Naples International Airport, the first airport in Italy that had undergone privatisation, was managed by GE.S.A.C.SpA (Gestione Servizi Aeroporti Campani), the airport management company fully owned by BAA. In March 2003 GE.S.A.C. assumed total management of Naples International Airport with a 40 year license valid until 2043. Decision to sell its interest in Naples airport is a part of a strategic refocusing of the BAA away from non-core and international assets to its UK airports. Since 2006 the company sold its shares in Budapest Airport, its Australian airport interests, two tranches of the Airport Property Partnership (APP), World Duty Free and four US retail management (Ruddick, 2010). The perception in the airport industry is that privatization is worthwhile and successful business concept, but the conclusions about the success vary significantly depending from whose point of view the evaluation comes. The BAA case in the UK would generally be seen by the government to represent a successful privatization, as it removed a burden from the public sector to operate and maintain the principal airports. However, some two decades later, government is faced with a need to plan for a major capacity increase in the South-East of the UK, which is unlikely to be funded by the BAA, or possibly by any other private sector entity. The travelling public, experiencing congestion resulting from insufficient investment in capacity (especially at London Heathrow and Gatwick Airports), would likely hold the opposite view of the success of the BAA privatization (Craig, 2009, 5). BAA makes money from charging landing fees to airlines and increasingly from retail operations within those airports. BAA monopoly resulted in higher costs and price increases that could not be sustained in a competitive environment. This has resulted in investment that is not tailored to the requirements of airport users and lower levels and quality of service for both airlines and passengers. Long check-in and security queues, crumbling infrastructure and cramped conditions have made BAA's airports a national - and international - embarrassment. Heathrow, the world's busiest international airport, was ranked 90th out of 101 airports for overall passenger experience in 2007 by the Airports Council International. Gatwick was 75th and Stansted 74th. (Provisional Report, Competition Commission, 2008). In its report the Commission blamed BAA for the lack of runway and terminal capacity. The Competition Commission’s 2008 report stated that BAA's monopoly had resulted in poor passenger service and a lack of ambition in developing vital pieces of infrastructure. The commission's key complaints were that the monopoly had made BAA complacent about responding to airline needs because there were few viable alternatives to its facilities. According to the Commission, the common ownership of airports in London resulted in the distorting of competition between the airlines. From the investors’ point of view the BAA privatization can be labelled differently, depending on the time of the share purchase. Measured in terms of the performance of the BAA stock, the investor who bought it at the time of the original share issue would have realized a fourfold increase in their holding in the twelve years since public share floatation. In 1990 qualifying shareholders who applied for bonus shares at the time of the Offer for Sale received one free share for every ten shares bought from the Government. At the time, the value of these shares for capital gains tax purpose was £4.55 per share. In 994 shareholders received one new share for each share hold at 22 July 1994. (www.baa.com). These investors would see the privatization as successful, due to the capital gain and regular dividend realized from their holding. Shorter-term investors have not fared so well. As for the future, recent abolition of European duty-free privileges will affect share performance, as could the large capital requirements.
In order to follow modern technologies and to meet the ever-increasing needs of its customers the provision of adequate and reliable physical infrastructure is important in the airport business. Traditionally, the development of transport infrastructure has been the exclusive responsibility of the government. Due to the fiscal crisis and recession followed by the spread of the banking crisis and limited credit opportunities, alternative modes of financing are required. In terms of the lack of capital, increasing competition and high risk, private sector participation in the airport business is becoming essential. In that context numerous forms of public private collaboration have been identified. Therefore, in this paper the most common forms of cooperation have been discussed. The case studies presented have illustrated that airports can benefit from various forms of private sector participation, although some issues must be taken with caution. Public private partnerships resulted to be a satisfactory solution for Hamburg airport. The shareholders of Hamburg Airport are the City of Hamburg as a public partner and Hochtief Concessions as a private partner. The involvement of the private partners upgraded business performance of the airport. The investments have enabled extension of the capacities. Thanks to the PPP agreement, Hamburg is the fifth largest airport in Germany because it could meet the ever growing transport volumes. The involvement of the EIB credit loans on the financing of this project facilitated access to the needed financial resources for both partners. The importance of EIB`s presence in financing airport infrastructure has been evident in the case of Athens airport. Due to the complex macroeconomic environment, infrastructure and technology underdevelopment, EU Cohesion funds were required. The collaboration described, known as hybrid PPP model, has resulted in the allocation of risk to the private sector. On the other hand it allowed maintaining control in public hands. When BAA was privatized in 1987, the London airports were kept in one group to ensure the provision of adequate airport capacity and to meet the growing demand. Over 20 years later an example of BAA showed that full airport privatization has created a private monopoly which has resulted in overcharging, delivering of poor standards of service and inadequate investment. There is a serious shortage of runway capacity. BAA’s common ownership of six UK airports prevents competition between them and has resulted in investment that is not tailored to the requirements of airport users and lowers the levels of quality of service for both airlines and passengers. Competition between airports would result in benefits which include lower charges, development of new routes and a far greater responsiveness to customers. Experience at the case study airports raises questions about the competition issues, the level of government control, the choice of appropriate partner and environmental impact. With that in mind, the primary focus should be placed upon the best interests of the airport users and long term consequences of these agreements. These remain relevant issues for further research. REFERENCES BAA Airports Market Investigation, Provisional findings report, Competition Commission, 20 August 2008 Craig, V. (2009): Risk & Due Diligence in Airport Privatization, http://icao2.icao.int/icao/en/ro/nacc/aps/09_pp_craig_e.pdf, (accessed 10 November 2010) European Commission (2004): Resource Book on PPP Case Studies, Bruxelles Gilroy, L.C. et al. (2009): Annual Privatization Report, Reason Foundation. http://reason.org/files/annual_privatization_report_2009.pdf, (accessed 20 October 2010) Graham, A. (2007): Managing Airports – An international perspective, Oxford, Butterworth Heinemann Martinovic, M. et.al. (2010): Public Private Partnership in the Airport Industry – Enhancing the Ability to Raise Capital, 2nd International Conference “Vallis Aurea” Focus on: Regional Development, Proceedings, 807-813. Palmer, G. (2009): Public-Private Partnership, http://www.dpwg-lgd.org/cms/upload/pdf/PublicPrivatePartnership__Lit__Review.doc, (accessed 18 March 2010) Psaraki, V., Abacoumkin, C., (2002): Access mode choice for relocated airports: the new Athens International Airport, Journal of Air Transport Management, Vol. 8, No. 2, pp. 89-98. Ruddick, G., BAA sells Naples airport for £ 130 millions, available at http://www.airportwatch.org.uk/news/detail.php?art_id=4385 (accessed 20 October 2010) The Economist, The man who bought trouble, (July 5 2007) http://www.economist.com/node/9440733?story_id=9440733 (accessed 20 October 2010) Walker, C., Smith, A. J.(1995): Privatized infrastructure – the BOT approach, London, Thomas Telford Publications http://www.airport.de/en/c_figures_traffic_figures.html (accessed 10 October 2010) http://www.baa.com (accessed 10 November 2010) http://www.competition-commission.org.uk (accessed 10 August 2010) http://www.ferrovial.com (accessed 12 November 2010) http://www.heathrowexpress.com (accessed 11 November 2010) http://www.pwc.com/en_GX/gx/engineering-construction/assets/building-new europe-infrastructure.pdf (accessed 28 March 2010) http://reason.org/files/annual_privatization_report_2009.pdf (accessed 20 October 2010) |