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Privatisation: Indonesia and the Philippines seek private sector investment in new airports

27-Aug-2010
  • Indonesian government invites private sector to ‘just go ahead and join’ 14 airport projects;
  • New airport in Bali may or may not be included;
  • State to pump in USD448 million this year – belt and braces approach;
  • TAV has a BOT project already;
  • New airport to be built in Jakarta?;
  • The Philippines want more airports to spur tourism growth;
  • BOT schemes preferred for six airport terminals;
  • Operations at NAIA T3 to be privatised;
  • Caticlan Airport part-privatised; deal is due on Diosdado Macapagal upgrade;
  • Open Skies coming to the Philippines and the wider region?;
  • Islamic financing growing in popularity: part –funding the Kuala Lumpur new LCAT.

Both the Indonesian and Philippine governments have ‘invited’ the private sector to help construct new airports and terminals. In the case of Indonesia it had not previously demonstrated a favourable disposition towards the private sector in the airports business, at least outside of Jakarta, and had downgraded the likelihood of privatising the existing ones, which are in the main operated by two state departments. The Philippines has been moving a little more towards privatisation with recent decisions taken on Manila Airport’s blighted Terminal 3, the first privatisation in the country of a terminal at Caticlan, and the pending upgrade of Diosdado Macapagal Airport, a contract likely to be won by a world famous brewing company.

The Indonesian Minister of Transportation, Freddy Numberi, has offered the private sector the opportunity to develop 14 new airports from 2011 onwards. President Susilo Bambang Yudhoyono recently stated the government will construct the 14 new airports and renovate 118 airports. A fund of USD22.1 million has been earmarked from the 2011 state budget for the developments. The construction is part of an ambitious national infrastructure programme which will include an increase in capital expenditure of 28% next year as the government aims to build more bridges, roads, ports and airports to boost growth in Southeast Asia’s biggest economy. The President has promised to double spending on infrastructure to USD140 billion during his second and final five-year term to deliver average growth of 6.6%. Indonesia is usually identified as one of the ‘N11’ countries that are in the next ‘league’ immediately below the BRIC countries in economic growth potential.

The new airports will mostly be built in the eastern parts of Indonesia, including West Nusa Tenggara and Bali. In Bali another airport is planned to reduce overcrowding at Ngurah Rai airport, which is over capacity.

"Just go ahead and join" - Transport Minister

The Transport Minister was quoted as stating “If the private sector wants to join, just go ahead.” This rather vague statement, coupled with the insistence that the government will do the construction work, hints that limited duration concession agreements may be on his agenda. However, other reports have him encouraging the private sector actively to take part in the construction, which would lean towards BOT/PPP deals.

The ministry's spokesperson Bambang S. Ervan listed the 14 new airstrips as: Seram (Kuffar), Bone, Enggano, Muara Bungo, Muara Teweh, Morowali, Saumlaki Baru, Sinak Baru, Tojo Una-Una, Tual Baru, Wagete Baru, Waisai Raja Ampat, Nam Niwel and Sumarorong. All are located in Papua, Central Kalimantan, Central Sulawesi, Maluku, Bengkulu - and Bali is not mentioned in this list, creating some need for clarity. Apart from Bali, none of these locations immediately ring a bell with foreign investors. Moreover, the airports will mostly cater for small aircraft to boost domestic air traffic across the archipelago. Consequently, international interest may be limited.

If it is not, then it soon will be when potential investors learn that seven out of twelve airports controlled by PT Angkasa Pura II (PAPI II) suffered a combined total of USD12.2 million in losses in 2009. But at least this was mainly due to an increased spending on construction of the airport terminals and runway extensions.

Minangkabau International Airport incurred the highest amount with USD4 million in losses. The company raised USD160 million from five other airports despite such losses, but with Soekarno-Hatta International Airport contributing USD150 million in revenue. It is evident where the potential profit lies.

Private sector has small but appreciable presence already

The state still retains responsibility for airports and the state-owned airport operators intend to invest up to USD448 million in capital expenditure this year to improve services and infrastructure facilities, as part of the government’s programme to further improve the quality of service of the country’s airports. Expansion projects are to be financed through internal cash and bank loans.

In fact, the private sector already has a small but appreciable presence in Indonesia, beginning with Jakarta’s main airport, Soekarno-Hatta, 20 km west of the capital, Jakarta, and which is operated under a 30-year lease by a consortium involving AdP and GTM (49%) in a joint venture with Angkasa Pura II (49%). It was the first major airport privatisation of any variety in Asia, attracting BAA and Schiphol Group as bidders. A major attraction was the opportunity to develop and improve on what were very low non-aviation revenues, even by the Southeast Asian standards of the time.

Moving into 22nd position in the list of the world’s 30 busiest airports in 2009 with 37,145,000 passengers (+15.2%, the largest degree of growth in the top 30 after Beijing) Soekarno-Hatta will soon be inadequate and the Indonesian Government will consider building a new airport in Jakarta. The Directorate General of Air Transportation is cooperating with the Japan International Cooperation Agency (JICA) to determine an appropriate location for the construction of the alternative airport. The JICA study is expected to be complete by the end of 2010. Halim Perdana Kusumah and Pondok Cabe airports are considered not to be viable alternatives due to limited access. It is not yet known what degree of influence the private sector will have in this project.

More recently (Jun-2010) a BOT project was agreed with Turkey’s TAV and Sigma Sembada Group for the construction of a new airport at Singaraja, Bali, with an investment of USD500 million. Sigma and TAV will establish a joint venture company to build the project. It appears that Sigma has already been seeking cooperation with PT Angkasa Pura to construct or expand a number of airports in the country and an MoU for co-operation in airport projects was signed, involving those groups and the Indonesian government, during a visit by Turkish firms to Indonesia during that month.

Indonesia keeps options open, as strong growth potential persists

Indonesia is still regarded as a key area of growth for no frills airlines owing to its difficult topography (3,000 islands). Growth in the sector was remarkable through the first part of the past decade, although some market exit has now occurred. Main contenders actively competing are: Lion Air, Indonesia AirAsia, Mandala Airlines, Batavia Air, Merpati, Sriwijaya Air and Garuda subsidiary, Citilink.

The government seems to be adopting a ‘belt and braces’ approach by continuing to invest in airport infrastructure itself, cutting deals with globally recognised airport developers like TAV and passively inviting other parts of the private sector to help grow the smaller airports as well. As for privatising PAPI I and PAPI II, each failed to make the cut on to the government’s privatisation list in 2007 and there are no indicators yet in the country that privatisation has found its way back on to the agenda. Many foreign investors would be keen to enter this market should the opportunity arise - if only because of the volume of domestic travel and the relatively untapped non-aeronautical revenue generation opportunities.

Horizontal and vertical integration Philippines style

The Philippines Government has also stated it will call on the private sector, in this case to assist in the construction of up to six airport terminals, as it aims to raise the country's finances through increased tourism. The government aims to double the number of annual tourist arrivals to six million by 2016. The Tourism Secretary, Alberto Lim, stated that the central island of Bohol and the five other planned terminals would funnel traffic from the gateways of Manila and Cebu into the main tourist zones.

The main factor here is that the government needs to create jobs to ease widespread poverty while faced with a huge budget deficit for at least the next two years that is expected to reach PHP293 billion. Therefore tourism could become a key economic driver.

The government is expected to employ stereotypical BOT schemes in which a private firm or group builds infrastructure, operates it for profit for a period and then transfers ownership to government. Six primary hubs have been identified, including Bohol, which needs a bigger airport to handle surging visitor traffic. The government perceives that it has responsibility for building what it describes as ‘the horizontal’ (runway and access roads) with the private sector taking responsibility for the ‘vertical’ (passenger terminals).

“Private sector investment will provide the growth” – Trade Secretary

Trade Secretary Gregory Domingo stated the six-year development programme of President Benigno Aquino III's administration was “anchored on its ability to mobilise private sector investment. Given scarce government resources, it is private sector investment that will provide the growth and jobs needed in our economy. We need to improve our competitiveness. We need to make the investment climate more predictable."

In the first week of Aug-2010 the Secretary of the Philippines Department of Transportation and Communications stated it will privatise the operations and maintenance of Ninoy Aquino International Airport’s (NAIA) Terminal 3 once the arbitration case, pending before the International Chamber of Commerce in Singapore, against Philippine International Air Terminals Co (Piatco) is closed. In Dec-2005, the Supreme Court issued a ruling ordering the Government to pay Piatco ‘just compensation’ if it wanted to take over the terminal. The International Chamber of Commerce in Singapore has since ruled in favour of the Philippines Government so that it will not be obligated to pay PHP1.1 billion to the complainants. President Benigno Aquino stated the Government is expecting to commence full operations of the terminal on 03-Dec-2010.

Meanwhile, the Diosdado Macapagal International Airport (DMIA), to the north of Manila, which could take over as the country’s principal gateway, continues to be the subject of a bid by the country’s San Miguel Corporation, a conglomerate with interests in brewing, oil refining, power, mining and telecommunications, for its upgrade on a 30-year concession. San Miguel Corporation continues talks with Philco Aero Group to join the consortium, which is one of several competing for the contract, including Malaysian concerns. A Kuwaiti company, Al Mal, has already been ejected from the list of bidders by Presidential decree. San Miguel signed an agreement with Korea Airports Corporation to handle jointly the airport project by acquiring a 5% stake in Philco Aero Group. In May-2010 it was described as “the only viable proposal to develop and operate the airport and Clark Freeport.”

San Miguel Corporation also has the advantage of having already acquired a majority 51% stake (within a consortium with George Yang, Rafael Puno, Lino Barte, and RPRP Ventures Management and Development Corp) in the Caticlan International Airport Development Corporation (CIADC). Caticlan Airport was formerly known as Godofredo P Ramos Airport. The development will upgrade the airport and allow jet operations to begin. Caticlan is near to the tourist island of Boracay. CIADC has the right to construct and operate the airport through a concession approved by the government in Jun-2009. CIADC intends to spend USD55.8 million for the upgrade of the airport. The Caticlan project is the first ever privatisation of an airport terminal in the Philippines.

San Miguel has a 130-year old brewing business for which it has a globally recognised brand, but has been increasingly diversifying. It is also reported to be attracted to potential investment into high-speed rail.

Pressure for Open Skies policy

President Aquino is being pressured into launching an Open Skies policy, to allow foreign airlines unlimited access to DMIA, by the Philippines Fair Open Skies Movement. Government members of another organisation, the Freedom to Fly Coalition (FFC) include Tourism Secretary, Alberto Lim.

Potential investors in the country’s airports will be attracted by President Aquino’s decision to consider opening the country’s skies to foreign carriers as one of government’s options should the flag carrier, Philippine Airlines, and its workers fail to resolve their current differences. Any Open Skies policy needs to be considered in the context of available infrastructure like Manila’s congested single runway, overburdened terminals and the country’s negative image as a tourist destination, which the government is trying to fix. As part of the phased ASEAN liberalisation process, member airlines of the organisation in principle this year gained open skies access to each others' capital cities, thus giving liberal access only to Manila at this stage. Full deregulation is targeted for 2015.

In the background ASEAN is working to assess two separate frameworks for economic integration in East Asia, which are expected to assist ASEAN’s wider aim of an ASEAN Economic Community by 2015.

Philippines has greater clarity in its strategy, and Islamic financing gains importance

Taking the weight of all the evidence, the Philippines might be a better bet for an aspiring investor into Southeast Asian airports. There is a sense that there is greater clarity in the government’s thinking than there is in Indonesia. Another factor any such investor would need to take account of is the growing propensity for Islamic financing of major projects in Islamic countries. Islamic finance is no longer merely the preserve of financial institutions in Muslim countries and many western banks now offer and actively promote Islamic products.

Having said that, Malaysia has positioned itself as the Mecca of Islamic financing, establishing it as an important source of funding in a region where it has long been overshadowed by established financial hubs such as Hong Kong and Singapore. The country is home to the Islamic Financial Services Board (IFSB), a global organisation of Islamic bankers in charge of banking regulation and supervision that also works closely with the Bank for International Settlements. The replacement low cost terminal at Kuala Lumpur international Airport is to be partly financed by a proposed offering of MYR3.1 billion (USD987 million) in Islamic bonds which is deemed approved by the Securities Commission.

Breaking News 31 August 2010

Government to invite foreign investors to manage Soekarno Airport. US firms interested

The Indonesian Government plans to invite a number of foreign investors to manage service facilities at Jakarta’s Soekarno-Hatta Airport. State Enterprises Minister Mustafa Abubakar stated: "International airport operators including those of the United States have expressed interest to become investors." Mr Abubakar also added that the government had yet to respond to the offer because it still had to improve the internal management of the state airport operator.

Breaking News 02-Sep 2010

AirAsia to manage Indonesian airports?

Indonesia’s Ministry of State-owned Enterprises stated AirAsia has expressed interest in managing an Indonesian airport, with potential airports including Halim Perdanakusumah Airport. The LCC has also reportedly called for better management of Terminal 3 at Jakarta Airport, as there is no balance between domestic and international terminals. The Ministry stated a number of airport administrators, including the Schiphol Group, are looking into several of the country’s airports.


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