Large capital injections will be needed at the beginning of the next millennium for the modernisation of passenger and cargo aircraft fleets, the expansion and rehabilitation of airport infrastructure, and more sophisticated air navigation systems. The International Civil Aviation Organisation (Icao) estimates the investment that will be needed before the year 2010 at between US$250 and $350 billion. Such large investment needs, coupled with a redefined state role - part of the reform process taking place in modern societies - have led to changes in air transport's organisation.
Latin America and the Caribbean provide a good example of recent developing country experiences in the provision of air transport infrastructure. Investment levels dropped in the 1980s, the so-called 'lost decade' which saw Latin American and Caribbean economic growth almost grind to a halt as nations were faced with the macroeconomic imbalances built up in the 1970s. Routine infrastructure maintenance on airports and air navigation equipment, to say nothing of new investment, became a rarity. When countries addressed the immediate challenges of economic stabilisation, adjustment and reform, they found that their deteriorated infrastructure stock was constraining economic growth. At present Latin American and Caribbean annual growth rates of 7 per cent in both passenger and cargo traffic, combined with an investment backlog, are driving the sector's expansion.
Traditionally, air transport sector related activities have been owned, managed, and operated by the state through various managerial models - central government, public institutions or corporatised public entities. But, by the end of 1995, 75 per cent of airlines were directly or indirectly under private ownership. Latin American airlines have been particularly successful in seeking private sector participation and most of them are currently under private ownership. A similar trend is beginning to be seen in airport infrastructure.
Although the only successful experiences of complete privatisation of airport infrastructure are currently found in the UK in the form of BAA plc and Belfast International airport, by the beginning of 1995 some form of private sector participation in the airports sector was either in implementation or under consideration in 54 countries. In air navigation services there is currently no case of a full divestiture of government assets. However, several countries, including Germany, Switzerland and New Zealand, have created corporations with an independent financial and legal status whose shares remain in the hands of the state. This is a step towards eventual privatisation.
Changing circumstances in the Latin American and Caribbean political, economic and social environment have given rise to a public-private partnership. The state's new role in this partnership involves becoming an efficient legislator, regulator and policy maker, while the management and ownership of assets is decided on the basis of operating and investment efficiency. An appropriate legal and regulatory framework attempts to translate these comparative advantages into mutual economic gain. The state acts as the arbiter, establishing 'ground rules' and ensuring that participants observe them, thereby safeguarding the interests of the customers, protecting the environment, and promoting private sector participation in the provision of public services (see table 1).
Governments facing high debt service burdens and attempting to balance revenue and expenditure while maintaining current spending levels on basic services, cannot afford large airport infrastructure investments. Latin American and Caribbean governments are therefore keen to involve the private sector in infrastructure provision in order to achieve greater efficiency, raise fiscal revenue by selling profitable concessions, and expand the quality of infrastructure through privately financed improvements. This desire for private sector participation is reflected in a willingness to innovate when developing mechanisms for private sector involvement. From the options in table 1, build-operate-transfer (BOT) schemes for developing economies and full/partial divestiture of an airport corporation (developed economies model) appear most suitable (table 2).
To be implemented adequately, divestiture of airport related assets should take place after the activities have been corporatised within financially independent joint-stock corporations. In cases where developing economies use this option, it is recommended that a world class airport operator be included as a participant in the transaction (for example, as an investor through a trade sale or as an administrator through a management contract arrangement).
Increasingly creative financial mechanisms to raise capital, and the emergence in the marketplace of new products that insure against political and contractual risks, are providing additional incentives for private sector investment in Latin American and Caribbean airport-related infrastructure. Mechanisms such as revenue bonds (based on US$ airport income), corporatisation of airport operations with a subsequent capitalisation through private investors/public markets, or the securitisation of airport-related fees and charges, are some of the avenues currently being explored.
The convergence of private and public sector interests and attitudes over the need for private sector participation in Latin American and Caribbean infrastructure has become more effective with the rapprochement between some governments and multilateral agencies like the World Bank, IMF, Miga, and IADB. Attempts by multilateral institutions to encourage private sector involvement are a relatively recent phenomenon, so there is limited experience in this area. However, this trend has been increasing in the last decade.
As a result multilateral agencies have begun to develop refined financial products, such as partial risk and partial credit guarantees, that foster public-private sector cooperation. Partial risk guarantees cover specified risks arising from the non-performance of contractual obligations or certain political risks such as expropriation, strikes and riots. Partial credit guarantees extend maturities beyond what private creditors would otherwise offer. Such guarantees generate private lender and partner institution investment flows by reducing the cost of project finance.
Multilateral institutions have recently been offering guarantees for projects in the power, electricity and telecommunications sectors. Although there is no experience with the use of guarantees in the air transport sector some prospects are currently being considered.
Technical assistance in redefining the role of the state - through institutional strengthening and the creation of a regulatory framework that addresses economic and procedural issues - and in designing and implementing a privatisation transaction, is central to the preparation of projects for private sector involvement. During the last few years multilateral agencies have extended technical assistance loans to a number of countries in Latin America and the Caribbean. Countries have received loans to develop regulatory capabilities, reform and prepare state entities for privatisation, and implement privatisation transactions. This technical assistance is meant to ensure that the reforms are effective in maximising the benefits of competition, and are ingrained in the country through institutional and legal frameworks.
Many airlines do not believe the federal government is an impartial body or able to manage some airports efficiently enough. A survey of worldwide carriers in October 1994 by Cincinnati-based Aviation Planning Associates showed that many airlines favour a shift in federal government responsibilities to an independent airport authority or a private entity. However, in the short-term, the privatisation of airport infrastructure will tend to be viewed cautiously by airlines because of the potential impact on airport-related charges, given the profit-oriented nature of private companies.
Unlike other industries, airlines will not tend to integrate vertically into airport ownership since, contrary to typical vertical integration, this will not yield an economic cost advantage. Guaranteed access to slots, through a dedicated terminal, has thus far been the only situation in which airlines have been willing to invest their own capital into improving airport infrastructure. As airport operations improve under the management of private operators, airlines will recognise the advantages and increasingly favour private sector involvement. Airlines will also probably enter into more strategic relationships with airports as airport capacity problems and financial challenges continue to grow.
The public-private partnership in airport infrastructure is expected to accelerate as Latin American and Caribbean governments continue to redefine and streamline operations while laying a foundation for future economic growth. Some recent and emerging examples of private sector participation in Latin American and Caribbean airport infrastructure can be found in:
1 Argentina. The Argentine government's goals are to transfer the responsibility of operating and investing in airport infrastructure to a competitive private sector. The privatisation strategy involves creating two concession packages for the National Airport System's 58 airports, grouping profitable and unprofitable airports together. The more lucrative Buenos Aires airports, Ezeiza and Aeroparque, will each head one list. The privatisation strategy has been defined and consultants hired to develop a regulatory framework that guarantees a level playing field for all participants. Investment banks are currently in the process of being selected to assist on the financial side of the transactions that will end the government's operational and managerial control of the system.
2 Bolivia. The government is following up the successful capitalisation of national carrier Lloyd Aereo Boliviano (LAB) with the opening up of airport infrastructure to private sector participation. Dozens of small, loss-generating airports constrain the government's flexibility in reorganising the system but nevertheless serve a vital national purpose. The Bolivian government must decide which type of cross-subsidisation would most effectively balance the interests of the profit-oriented private sector with national political interests (table 3).
The Bolivian government's reorganisation of the air transport sector involves firstly, restructuring AASANA, the state entity in charge of the sector, and secondly, creating an adequate regulatory oversight mechanism. Private sector participation will also need to be fostered. The initial strategy for the development and privatisation of the three major airports - a long-term master concession scheme with investment commitments - is a response to the urgent need for major investment in the La Paz and Cochabamba international airports, as well as ownership considerations in a sensitive sector. The government's Airport Development Fund (ADF) would manage the concession fees from a BOT used for the concession. These funds would finance the operations of the smaller non-profitable airports. The Airport Authority of Bolivia (AAB) would hold title to the assets and administer the concession scheme, as well as overseeing the operation and management of the more attractive airports by the private sector. A cross-sectoral agency, Sistema de Regulación Sectorial (SIRESE), would regulate and supervise air transport sector activities in order to promote competition and efficiency within the sector. Although the Bolivian privatisation experience is still in process, it is of much significance for airport privatisation in Latin American and Caribbean nations because it addresses cross-subsidisation in a small-scale market context.
3 Colombia. At the end of 1993 the Government of Colombia corporatised the Civil Aviation Authority (CAA), separating airport operations from air navigation activities, as an initial step towards involving the private sector in the nation's large infrastructure needs. At the same time, and as part of a process begun before the enactment of the law, the government undertook the privatisation of the second runway at Bogota\El Dorado International using a BOT scheme for the construction and maintenance of a new runway (3,800 m) and the maintenance of the existing runway (3,800 m). The El Dorado privatisation transaction highlights the flexibility of the BOT scheme and could become a model for private sector participation in cases of airside airport infrastructure such as runways, taxiways, and aprons.
On May 15, 1995, the concession was awarded to the Ogden/Dragados/ Conconcreto consortium, stipulating investments of Col$80 million (US$97 million). Colombia's Civil Aviation Administration is to refund total investment costs, financing expenses, and expected profits throughout the 20-year concession through a repayment scheme based on the relinquishing of landing fee revenues to the concessionaire. The government guarantees a minimum level of revenues (floor pricing) should the landing fee structure and/or expected traffic volumes be unable to support the required revenue stream. Guarantees of commercial risks are not a common practice in infrastructure privatisation. Nevertheless, the El Dorado experience is one of the pioneer experiences in the privatisation of large airside infrastructure.
4 Jamaica. Concern that the capacity of its air transport infrastructure would not keep pace with large tourist flows, the country's main source of income, led the Jamaican government to initiate the preliminary work for expanding its airport facilities. The government established the following two premises to govern future airport privatisation and expansion. First, upgrades would be primarily funded by the private sector and second, airport operations would be transferred to the private sector. A creative privatisation method was devised.
Sangster International airport in Montego Bay, the programme's core case, will be expanded by using a Build-Operate-Own (BOO) scheme for the construction of a new passenger terminal. The new terminal will be built by SIA Ltd, which will have the operational and investment responsibilities. AAJ will transfer, via a 49-year lease arrangement, the operation of the existing passenger terminal and the remaining landside facilities to SIA Ltd. The government will grant a management contract to SIA Ltd for the operation of the airside-related services currently provided by AAJ. Thus, the new expansion, existing terminal, and airside facilities will all be under one management. Once the capital financing structure for SIA has been put in place, funds will be raised on the domestic, regional, and international markets. At least 70 per cent of shares will be in the hands of the private sector and a maximum of 30 per cent of the shares will remain government-owned. The government plans to sell the shares in SIA Ltd on a phased basis in order to maximise potential gains on its investment.
5 Mexico. In February of this year a strategy for privatising the 58 airports operated by the Mexican government entity Aeropuertos y Servicios Auxiliares (ASA) was announced. The strategy adopted allows for the involvement of state and municipal governments, private participation in airports, and the capitalisation of companies that acquire the airports. It also prioritises investment commitments in the bidding. To ensure investor interest, the Mexican Congress has extended initial operating concession periods to a maximum of 50 years, renewable for a maximum of another 50. In general, foreign investment is limited to 49 per cent but permission for acquiring more equity may be sought from the National Foreign Investment Commission. Starting this year the 58 airports operated by ASA will be offered as concessions to the private sector. The initial transactions for the privatisation are expected to be offered by year end. Mexico City's overused airport will be rehabilitated while a new airport, Complementary Airport for Mexico City, is built to provide additional capacity. Studies are to be undertaken on economic regulation, technical regulation, environmental sensitivity, and airport safety, to enable the government to be an effective policy maker and regulator.
6 Venezuela. Although Venezuela's government has no programme regarding private sector participation in air transport infrastructure, a recent move towards decentralisation, by transferring operational responsibility over ports, toll roads, and airports to regional governments, has resulted in local attempts to seek private sector participation in airport infrastructure. A failed effort to privatise airports by the State of Zulia underscored the importance of ensuring adequate institutional, legal, and regulatory frameworks when attempting privatisation. However, local governments face difficulties because of limited experience, bargaining power, human resources, and lack of access to the technical assistance offered by multilateral institutions.
From the information available on traffic flows, revenues, and concession fees, the concession agreement between the private CVA consortium and the State of Nueva Esparta (Island of Margarita) for the Santiago Mariño airport appears to be a success. The bidding criteria included clear and specific requirements regarding investment commitments, concession fees to be paid, and the need for a specialised experienced airport operator. Increases in traffic flows and airport facility expansion, in addition to in-flows into government coffers, appear to validate this experience. The estimated investment to be undertaken by the concessionaire during the concession period is approximately US$100 million.
Panama, Ecuador, Peru, Paraguay, Uruguay, and Chile, among other Latin American and Caribbean nations, are currently actively considering private sector participation in the provision of local air transport infrastructure.
The cases described above support the view that the private sector is becoming a leading player in financing and operating airport infrastructure. Governments, particularly in the developing economies of Latin America and the Caribbean, are having to rely increasingly on private funds to enable their airport infrastructure to meet the market's growing demands. In developing economies social investment needs will place larger constraints on budget expenditures. However, for these economies, airport infrastructure development is crucial to their efforts to become members of the global economy.
Governments face the challenge of designing and implementing creative privatisation schemes. The recent and emerging experiences of Latin America and the Caribbean indicate that programmes should be tailored on a case-by-case basis. Designing programmes that reconcile the needs of the state with those of the new private participants will prove crucial in facilitating the flow of private capital and managerial expertise into airport operations before economic traffic threshold levels have materialised. The ways in which this challenge is met will determine which economies hold a competitive edge in the air transport industry.
Source: Airline Business
