Airport Finance and Privatisation: CAPA's Review of the Year 2013 and 2014 outlook - Part 2
In this second part of our global airport privatisation wrap for 2013, along with CAPA's 2014 outlook, we review activity in Africa, the Middle East, Russia/West Asia, India, China and the rest of Asia. Part One of this report reviewed the situation in Europe, North America and Latin America.
The information presented here is drawn from CAPA's unique Global Airport Investors Database, which is just one component of the new CAPA Airports Data Suite.
2013 was a year when the number of deals at best remained stable, but the number of participants in investment continued to grow, despite some ‘retirements’.
Africa however remains hindered by a set of circumstances which do not encourage external investment. They include:
- Inadequate infrastructure, described recently by the Secretary General of the African Airlines Association as “deficient, dilapidated and not coping with the growing airline industry”, who added that there is a need to develop and expand airports, runways and air navigation service facilities, and for airports to open 24 hours a day.
- Passenger charges that are above the global average, partly caused by fuel taxes that are 50% to 100% higher than the global average.
- The African aviation industry is lagging behind the rest of the world, accounting for just 3% of global passenger traffic (RPKs) and is in need of a common block negotiating position such as that afforded by the European Union. Some industry leaders believe that states provide foreign carriers with favourable treatment in terms of more traffic rights.
- The failure, still, of many states to ratify the Yamoussoukro Decision, which was supposed to deregulate the continent.
- Travel restrictions that hamper travel for Africans between African countries.
- Lack of passenger volume at many African airports and inadequate experience of non-aeronautical revenue generation.
As a consequence, there is still little evidence of privatisation activity and hardly any investors who have identified Africa as ‘the place to be’ in 2014.
Nevertheless, some states, including Ghana, are attempting a series of PPP transactions to improve major airports such as Kotoka Airport in Accra (the only international one), and Tamale Airport (where a USD100 million deal was just signed) as well as the construction of airports at Princess Town and Ankaful, again with the assistance of private funding. There is also talk of Chinese interest in constructing a new Accra Airport at Dangme West District.
If and when the private sector becomes more involved it might expect to take minority stakes similar to those found in the PPPs to date in India, which has become a sort of role model, and which is about 10% per investor/operator with the state authority remaining the largest investor, though not with 51% or more of the equity. It is hard to envisage any outright lease or sale transactions yet; these are construction driven investment projects where the private sector participants may well be satisfied with their fee for the project plus a small royalty on income.
But Ghana is certainly more active and forward thinking in this respect than most African countries right now, many of which covet private investment but do little to prove their value to investors. The state of the economy there also looks to be positive. The success or otherwise of start-up LCCs like FastJet will undoubtedly have a bearing on how non-African firms perceive aviation activities in Africa. It is quite possible that organisations with funds available but no prospective targets in Europe might be attracted to give Africa a go.
There is some scope for further privatisation of airports in South Africa outside of the ACSA (state operator) system. The existing ones include Lanseria, between Johannesburg and Pretoria, and the Kruger National Park airport.
In November 2013 executives in the KwaZulu-Natal province invited the private sector to consider opportunities at airports in the province, the provincial government having itself invested ZAR140 million (USD13.8 million) in airport upgrades, including projects at five airports, none of them under the auspices of ACSA. The rationale is that many of the airports have large tracts of land around them that can be developed.
Meanwhile, ACSA, which is part of a consortium that manages and develops Brazil's Sao Paulo Guarulhos Airport as well as being a 10% shareholder in Mumbai Airport, has been in discussions with several countries in Africa as part of plans to expand its investments in the region. The company plans to submit a strategy for the acquisition of stakes in African airports with the aim of increasing revenue and improving African airport infrastructure generally. The plan will be similar in nature to the company's involvement in Mumbai and Sao Paulo.
Nigeria has been renovating its airports, with all 22 to be remodelled by 2015, but still finds it difficult to attract private investors, despite the existence of a Privatisation Commission. The latest to be proposed (again) is Akwa Ibom Airport, but the difficulties the government faces in attracting investors is summed up by government statements such as that the airport must agree to a new service scheme due to the excessive staff numbers employed by the previous administration before the airport had completed construction and that “all illegal strikes at the airport would finish following privatisation.” Hardly words to encourage even a bold investor.
In the north of the continent an extremely large construction project is planned to create an airport city at Cairo Airport in Egypt, costed at up to USD14.5 billion. The Ministry of Finance is seeking additional foreign investment for the project.
[Report continues below]
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Middle East/Gulf airports
In a region where only a handful of airports have any degree of private capital attached to them it is perhaps not surprising to find another year when there has been a paucity of deal activity.
Indeed most of the attention has been focused on the soft opening to passenger airlines of the new airport in Dubai (Maktoum/Dubai World Central) and the “will it/won’t it” debate over the transfer of Emirates services; the delayed opening of the Hamad Airport in Qatar; and the construction of the midfield terminal in Abu Dhabi. Collectively, these are of course, together with the airlines that dominate them (and increasingly the world), the three big airport infrastructure giants of the region .
Surprisingly, perhaps, there has been more investment activity in Saudi Arabia, where the 25-year BOT concession to operate Medina’s Prince Mohammad Bin Abdulaziz International Airport was won by the TAV (Turkey)-led Tibah Airports consortium back in Jun-2012, prompting the suggestion that more privatisations might follow, though that hasn’t really happened yet. Indeed Saudi Arabia is still arranging bond financing for construction projects such as those at Jeddah’s King Abdulaziz International Airport and Riyadh’s King Khaled International Airport, specifically arranging multi-billion dollar sukuks, which once again goes to emphasise how this Islamic funding instrument is gaining in popularity in the airport sector as well as for aircraft financing.
At the beginning of 2013 Airport International Group (AIG) was said to be considering options to exit the 25-year BOT concession it has at Jordan’s Amman International Airport and that it was seeking banks for a possible sale, preferring to cash in its investment rather than stay the course, having finished most of the construction work they were expected to undertake.
Russian and West Asian airports
Istanbul secures its EUR26 billion third airport
Much of the action has been in Turkey, where one of the world’s largest airports is to be built at Istanbul, and in Russia. Somewhat against the odds a consortium of Turkish construction firms made the winning EUR26.14 billion bid (including VAT) to construct and operate a third airport in Istanbul, which Turkey expects will become one of the world's largest by passenger numbers, built in an area of 80 billion square meters, with six runways and 1.5 billion square metres of terminal and auxiliary plants.
The consortium of Cengiz, Kolin, Limak (already an investor in Istanbul Sabiha Gökçen airport, on the Asian shore of the Bosphorus), Mapa and Kalyon bid EUR22.15 billion for the build-operate-transfer project, which includes a 25-year lease, outbidding rivals including Turkey’s own TAV Holding (operator at Istanbul Atatürk airport and 38% owned by Aeroports de Paris) and Fraport in a joint venture with IC Holding (operator at Antalya Airport). The airport will eventually have capacity to handle 150 million passengers per annum. It should commence services towards the end of 2018 and is intended to be financed both domestically and internationally.
As usual there are objections. The Republican People’s Party immediately announced it would take the tender to the Council of State, seeking a cancellation on the grounds of “irreparable damage to the environment.”
A report alleges there are 70 lakes, smaller lakes and ponds that could affect the project's viability under Turkey's laws for wetlands protection while almost 660,000 trees will have to be cut down. But the government, which is keen to progress Turkey’s claim to be a new world centre of aviation, will press on. The new airport is likely to be completed while the British are still arguing over where one new runway should be added, if at all.
Meanwhile, TAV will continue to operate Atatürk Airport until the end of its term in 2021. Atatürk Airport makes 50% of TAV’s EBITDA. TAV believes the new airport may suffer from delays as recent political turmoil emboldens environmentalists who want to protest over the fact that so many trees have to be destroyed. TAV will also start to re-focus its efforts towards other countries including Greece (see part one), also both in North and South America as well as Southeast Asia. It is already a contender to build and operate a new terminal New York’s LaGuardia airport, as mentioned in part one.
Turkey now intends to privatise another four airports by transferring the operational rights of Dalaman, Bodrum-Milas, Samsun and Nevşehir-Cappadocia airports in compliance under ‘lease-transfer’ agreements and as part of government efforts to raise funds through private sector involvement.
Lack of clarity in Moscow airport plans
Russia’s President Vladimir Putin and Prime Minister Dmitry Medvedev take a close and personal interest in the country’s aviation affairs, more so than do most other leaders. But that does not mean the policies are any clearer or more decisive. For example, there are plans to consolidate two of the three main Moscow airports – Sheremetyevo and Vnukovo – and also to privatise them jointly, which is perhaps not the best way of encouraging competition. (The other Moscow airport, Domodedovo, is already in private hands). Certainly Russia’s major airlines – with the exception of Aeroflot – chose to speak out against the merger plan at the beginning of the year on those grounds.
Then there is the statement by the Ministry of Economic Development in Jan-2013 which forecast that the number of civil airports could increase to around 500 by 2030, with the implementation of investment projects in the sector. It was only a few years ago that the government was talking about reducing the number of airports to a hard core of commercially viable ones. Only recently Mr Medvedev called for the development of alternative air transport hubs across the country to the overburdened Moscow hub, describing the situation when three-quarters of passengers pass through Moscow as “absolutely abnormal,” and adding, “It is obvious that we should develop flight routes that would bypass our capital’s transport hub".
He may have in mind the fact that Abu Dhabi plans to invest USD5 billion in Russian infrastructure in a venture to be established with Russian Direct Investment Fund, aimed at funding toll roads, ports and airports Mr Medvedev expects investments in projects to commence in 2014, noting that it will take five to seven years for the funds to be invested.
Moreover, there are several proposals for a new airport to serve Moscow, on any one of several sites, as Domodedovo, Sheremetyevo and Vnukovo airports are expected to reach capacity with 120 million annual passengers in 2025 and (conservatively) 180 million by 2030. The existing airport infrastructure can handle 119 million passengers per year and will reach its limit by 2021. Other concerns include the infrastructure around the hubs, for example train service to airports can carry only 86 million passengers per annum and will reach their limit as early as 2017. Domodedovo will be hit the hardest and will start to experience congestion problems from 2015. The Russian Cabinet calculates that over RUB320 billion (USD9.6 billion) would be needed to improve infrastructure in and around the Moscow Air Hub.
Those sites include the Ramenskoye Airfield in the Moscow region town of Zhukovsky, which is proposed to be used mainly by LCCs and handle 10 million passengers per annum. An alternative is the former military Ermolino Airport, in the Kaluga district southwest of Moscow, about 67km from Moscow's inner ring road. Kaluga’s Governor advocated the airport as a potential site for LCCs and cargo airlines with up to seven million passengers per annum, and confirmed the willingness of his Kaluga District to finance the project partially.
Sheremetyevo and Vnukovo airports are included formally in the government’s privatisation programme and the privatisation process is expected to be completed by 2016. The government intends to sell up to a 50% stake in Vnukovo Airport (it owns 74.74% while the remaining 25% is owned by private shareholders) after consolidating the airports’ assets into a single legal entity. At Sheremetyevo it owns 83.4%, with Aeroflot owning 9% and the state-owned banks VEB and VTB each owning around 4% respectively, and hopes to raise up to RUB35 billion (USD1.1 billion) from the sale of that 83.4%.
But the simulated merger has already been postponed in order for the value of the airports to be determined better and the Ministry of Finance has indicated it does not preclude the postponement of the privatisation of companies scheduled for the 2014-2015 period with the Aeroflot and airport privatisation plans impacted accordingly. The government has even added it has a ‘Plan B’, an alternative to the unification of the Moscow airports, without detailing it.
Moscow Sheremetyevo Airport annual passenger numbers
In the interim the companies that have emerged as favourites in whatever privatisation process eventually takes place include TPS Avia, which could become co-owner of Sheremetyevo Airport prior to its privatisation by participating in the consolidation of the airport's assets prior to the sale of the government's stake in the airport, which should be conducted by the end of 2016. TPS Avia Holding has previously been a main contender to purchase the government's controlling share.
Also linked with Sheremetyevo are NPV Engineering, Amount Group and Alfa Group, one of Russia's largest privately owned investment groups and which has history in the sector, having attempted to secure Domodedovo Airport during the period when the managers of that facility were out of favour with the government. Another is Renaissance Capital, another investment fund, which has reportedly been selected as an agent in the privatisation of the government's take in the Vnukovo Airport.
Separately, Vnukovo Airport’s majority stakeholder, Vnukovo-Invest, was reported in mid-2013 to be considering a bid for a controlling stake of Ermolino Airport, located almost 100km southwest of Moscow, and to be willing to invest RUB3 billion (USD93.43 million) in order to enable the airport to operate commercial services. A rail link would need to be built in order for the company to make such an investment, which indicates that Vnukovo-Invest regarded it as (yet another) fourth Moscow airport, and again mainly for LCCs.
Elsewhere in Russia in 2013 the following plans were initiated:
- A privatisation plan for Bolshoye Savino Airport (Perm) – postponed until Nov-2013;
- Kostroma Airport, currently 100% owned by Kostroma Regional Government, could be sold in 2014 to attract private investment in its modernisation;
- Kazan Airport’s 100% shareholder, the Tatarstan Government, plans to sell at least 49% of the airport. Five foreign investors have reportedly expressed interest. An investor is needed to increase further the airport’s capacity and construct another terminal by 2018;
- The Sverdlovsk Region put Serov Airport up for auction, again;
- The Federal Property Management Agency plans to a sell 25.5% stake in Anapa Airport. The initial price of the stake is RUB99.2 million (EUR2.3 million);
- Makhachkala Airport is to be sold to a private investor by the end of 2013.
In The Ukraine, Kiev’s Boryspil Airport will not be privatised, but five of the other six largest airports (Donetsk, Kharkov, Lviv, Odessa, and Simferopol) may be, with up to UAH13.5 billion (USD1.66 billion) to be invested in the next decade to ready them for a change in ownership.
Indonesia and the Philippines seek out private sector assistance
The Asia-Pacific region has enormous potential activity, and in countries where privatisation fever is only just beginning to take hold.
Both Indonesia and the Philippines have belatedly acknowledged that development of a large and widespread airport system necessitates the involvement of the private sector.
The Indonesian government released a revised draft negative investment list (which debars or restricts foreign investors) in Nov-2013, which reached the conclusion that it requires the support of foreign investors to create a competitive environment and improve services offered by the nation's transport infrastructure – particularly airports – through public-private partnerships. Indonesia's air transport sector is monopolised by the two state companies PT Angkasa Pura I and PT Angkasa Pura II.
As air traffic demand continues to increase, the government needs new investment for the airport services sector. Right now, the rate of investment in the transport sector generally is very low. The country's main airport, Jakarta’s Soekarno-Hatta is expected to handle an enormous 64.5 million passengers this year, nearly three times its design capacity of 22 million, according to Angkasa Pura II while Indonesia has become the world’s fifth largest domestic air transport market.
According to a summary of the proposals, foreign investors will be allowed to operate airports and airport services fully through a public-private partnership. No details were given, though, about how the programme would work. Another proposal is to increase the ceiling for foreign tourism investment to 70% from 49%.
At the beginning of Dec-2013 the government went some way towards clarifying its thoughts when it said it plans to seek public-private partnership agreements for the development of 10 airports with the tender process likely commencing in 2014. The Deputy Minister of Transportation said: "We want the private sector, including foreign investors, to participate in the development of these 10 airports because we want to further improve their level of services in anticipation of increased future demand. We admit that if we only rely on state funds to develop these airports, we are not going to catch up with demand, as the budget is rigid, limiting us when we want to increase capacity and services."
Foreign private operators have been quick to respond to the invitation to invest in the country's airports and according to the government they “are waiting for their opportunity." But that has been the mantra for a couple of years now. Only last year the government declared it invites prospective private sector participants “with open arms.”
The reality of the situation is that for many western operators/investors Indonesia is still firmly outside their comfort zone and investment is far more likely to come from the likes of India’s GMR or GVK and South Korea’s Incheon International Airport. And also from home-grown firms like the Rajawali Corporation which has declared its interest in investment and operation of airports in the country if they were opened to the private sector.
The first test will be a BOT contract for Nusawiru Airport that will be offered to the private sector in 2014.
It looks as if Vietnam will be following Indonesia’s example, the Director General of the CAA having proposed opening up the country’s airports to international investment. Under the proposal, airports categorised as having significant international traffic or an important role in national security, including Hanoi Noi Bai, Da Nang, Ho Chi Minh City Tan Son Nhat, Long Thanh and Nha Trang Cam Ranh, would continue to be primarily funded and managed by the government, while other airports would be opened to foreign investment and management.
The DG seeks “international investors with modern technology, experienced administrative management, and strong financial muscles." That is all well and good but those investors are surely more likely to be attracted to such a package if at least one of the big airports is included in it.
In The Philippines there is at least a cohesive project for both domestic and foreign investors to latch on to, namely the USD400 million PPP deal to expand and operate Mactan-Cebu International Airport. All seven prequalified groups submitted final bids at the end of Nov-2013. The consortiums include established players such Incheon Airport, Malaysia Airports, Zurich Airport and GMR Infrastructure as well as a raft of newcomers.
The Department of Transportation and Communications (DoTC) is considering three options for the development of the country's major airports serving Manila. They are: shutting down and selling Ninoy Aquino International Airport (NAIA) and expanding Clark International Airport as a replacement; developing both airports until 2025 while constructing a new international airport; and developing the existing airports and delaying a decision on a potential new airport.
In the meantime, the Public-Private Partnership (PPP) Centre, DoTC and private consultants are working on a business case to bundle contracts for the operation of Balaclod, Davao Franciso Bangoy, and Iloilo Mandurriao airports as a single project. Following completion of the business case, the parties will meet with potential investors and finalise the structure of the proposed project.
If the plan goes ahead, bidding for the bundled contract may commence in 1H2014.
Malaysia Airports Holdings Berhad, which has interests in India and Turkey but may be distracted by the huge investment in KLIA2, the new terminal at Kuala Lumpur, in May-2013 stated it could seek a larger minority stake at Istanbul’s Sabiha Gökçen Airport, where it now holds 20% of the equity.
It is also bidding for the Mactan Cebu terminal construction and operation project in a consortium. Prior to that MAHB was a very late potential bidder for London Stansted Airport, in fact probably too late in the day; by the time it moved, Stansted was already in the MAG bag.
Kuala Lumpur International Airport capacity, seats per week: 09-Dec-2013 to 15-Dec-2013
Privatisation ‘fever’ takes hold in Japan...
In Japan a sort of privatisation fever has set in, following the moves to privatise the Osaka airports. As of 31-Oct-2013 the New Kansai International Airport Co (NKIAC) acquired a 67.7% stake in Osaka International Airport Terminal Co Ltd, which operates the terminal building at Osaka Itami Airport and hopes to complete the concession in FY2014. The price was around USD280 million. It will be the first concession of its kind in Japan, with bids expected from major trading houses, leading real estate companies, megabanks and other businesses.
Other Japanese airports where a privatisation process has started or been discussed (out of over 90 that are slated) include Sendai Airport (to commence Mar-2016 with the Ministry of Land, Infrastructure, Transport and Tourism (MLITT) inviting opinions and proposals on the scheme by 20-Dec-2013, with a policy implementation to be finalised in Apr-2014); Aomori Airport, which has lost half its traffic over the last decade (FY2014); Takamatsu Airport (a management outsourcing exercise) and Fukuoka Airport (the fourth largest state owned airport) where management rights may be sold out to finance a new runway.
But the privatisation of Oita Airport was postponed, after the government deemed it “too risky to start immediately” on the privatisation programme, with the airport facing a JPY429 million (USD4.34 million) loss and with issues concerning the runway.
It is reported that over 20 business firms and groups have already made inquiries to MLITT on the privatisation process, encouraged no doubt by the Japanese Prime Minister’s statement that he plans to triple to JPY12 trillion (USD123 billion) the use of public-private partnerships to fund airports, waterworks, highways and other projects in the next 10 years.
Japanese investors are active outside of the motherland, for example in Myanmar where the government is inviting private investors to upgrade 30 of the nation’s 69 airports to improve its underdeveloped air transport capacity and infrastructure, on the basis that, “we want to stop using the government budget in the coming years, so we’ve decided to call for private sector investment in local airports.”
The government spends around USD12 million running all 69 of its airports each year.
It has already awarded a consortium of JALUX, Mitsubishi Corporation and SPA Project Management first refusal rights for the rehabilitation, improvement and 30-year operation of Mandalay International Airport.
Meanwhile, a consortium led by South Korea's Incheon Airport has been chosen as the preferred bidder to build a new USD1 billion airport in Myanmar, namely the Hanthawaddy Airport near Yangon, Myanmar's old capital and commercial centre, by 2018 and operate the airport for up to 50 years. It will have an annual passenger capacity of 12 million. The Incheon Airport consortium and Myanmar's Department of Civil Aviation are scheduled to sign a final contract at the end of 2013.
But the Japanese are much in evidence, with NKIAC having pitched for the Hanthawaddy project, while in Laos the Vientiane International Airport will receive finance for its planned expansion from Japan’s government.
But private investment is not high on the list for China
Again this year, China is not a country buzzing with private investor activity in its airport sector, even though it has attracted some big hitters in the past. That isn’t to say there is no airport construction. Indeed, there most assuredly is; a little matter of USD44 billion worth right now. And the government will carry on building them despite 134 of its 182 airports under the control of the Civil Aviation Administration of China (CAAC) reporting accumulated losses of CNY2900 million (USD453.1 million) in 2012, equivalent to CNY20 million (USD3.1 million) in losses per airport.
82 new airports will be built by 2015 to meet rising air travel demand, and CAAC takes the view that it should not merely see airport profits but take into account that an airport can largely boost the economy of the whole region – a philosophy that would undeniably attract Ryanair.
The government believes China is still lacking in the number of airports, particularly regional airports and that airport losses were mainly due to their method of operation, moreover that if the airports were public infrastructure facilities, they would make a profit. For the moment at least CAAC is quite content to prop then up with ever growing subsidies out of its Civil Aviation Development Fund, and to increase them further if necessary. A limitation may be placed on local government involvement in the operation of airports, so that they are permitted only to construct them. At present, local governments establish companies to construct and run airports in China.
So it would seem that there is little incentive for private organisations to become involved. The government is unlikely to give them subsidies and the ethos of the private sector has gone absent. On the other hand and as reported in this article last year, the China Civil Airports Association believes China needs to ensure it can raise sufficient funds before it accelerates the nation’s airport construction projects, as construction calls for big investments but the repayment is slow. That hints at a preference in that quarter for private sector involvement but the essential problem of big investment versus slow repayment remains. The big pension companies, which value longevity and which do not really go after ‘a fast buck’ might be attracted, but for others there are other opportunities elsewhere, outside the sector, where more rapid results can be realised.
One place where it is happening is Beijing, where the New Beijing Airport project at Daxing is expected to invest a total of CNY2000 million (USD312.5 million) this year. The project, which received state approval in Dec-2012, is expected to cost CNY70 billion (USD10.9 billion) in total with construction work to commence in 2014. Once completed, scheduled for 2018, the airport will have capacity to handle 45 million passengers per annum and 70 million passengers by 2025. An air transport-related economic zone is also planned, with an investment of CNY84 billion (USD13.4 billion).
Who will pay for all this? It is one example where the private sector might get a look in. At the start of 2013 Beijing Capital International Airport’s general manager welcomed private capital to support the construction of the new airport. Part of the funds required for the airport project will be provided by the government, part will be funded by BCIA and the remainder will be through external financing, for which various investment channels were being explored.
Site of Daxing Airport
Master plan competition
A city where it might happen – at long last – is Sydney in Australia. As with the UK, Australia has been waiting a very long time for a decision on new airport capacity, in this case at Sydney. But the tempo has noticeably increased in 2H2013 as the then government indicated that it intended to decide whether to proceed with the Badgerys Creek location (a long-time favourite) for a second airport serving Sydney by the end of 2013 in order to provide certainty to the aviation sector.
Unfortunately, a general election intervened, resulting in (as is the case of the UK) a coalition government where one party appears to be in favour of moving swiftly to a conclusion while the other is not so keen. Independent papers have called on the government to set 2027 as the official opening date and have estimated the cost as being AUD7 billion (USD7.3 billion) to AUD11 billion (USD11.5 billion), requiring funding from the Federal Government. The lack of clarity on funding is perplexing after all this time. Australia has privatised most of its airports with some degree of success (they have some of the world’s highest EBITDA rates) except that the airlines are consistently up in arms about landing charges. There are also calls for any new airport to operate without a curfew, which currently inhibits Kingsford Smith Airport.
While Sydney dawdles Melbourne is pressing ahead, through the Victorian State Government, with a plan to allow the construction of a new terminal at the privately owned Avalon Airport, 50km southwest of downtown Melbourne and accessible via a six lane highway. The existing international airport, Tullamarine, is, like Sydney, considered to be nearing capacity to handle international passengers.
One of the Australian airports that was not privatised in the 1990s, Newcastle Williamtown Airport in New South Wales (NSW), may offer 50% of its equity to private investors late in 2014 by the two city councils that own it. It was identified by Infrastructure Australia as a suitable privatisation target in a report issued in Oct-2012 and was corporatised just a month later. The NSW State Government has promised to invest AUD11.1 million (USD10.4 million) in developing the airport's terminal.
The International Finance Corporation (IFC) announced in Mar-2013 that the government of Timor-Leste, one of the world’s youngest countries, was seeking investors for the upgrade of Dili’s Presidente Nicolau Lobato International Airport. The public-private partnership project includes financing, construction and operation of new terminal facilities to increase passenger capacity and improve tourism. IFC was supporting the government in its efforts to find a suitable partner for the project.
Another problematic batch of PPPs for India?
The Indian subcontinent is, in its own way, as interesting as Brazil. India is progressing slowly and painfully towards a second round of PPPs, this time on a swathe of six airports, the government, Airport Authority of India and other interested parties having long debated the merits or disadvantages of privatising the main airports since the first round in 2006 (Delhi and Mumbai; also separately Bangalore and Hyderabad; and previously Cochin). The difference between Brazil and India of course is that the former moved on to the second stage of the procedure within a year while the latter took seven years and there is still no certainty of a conclusion.
The timescale, which has been advanced and subsequently put back over the last six months, calls for the privatisation of Chennai, Kolkata, Jaipur, Lucknow, Guwahati and Ahmedabad airports by the end of Mar-2014 with Chennai and Lucknow coming first. The Airports Authority of India (AAI) is expected to maintain a 26% stake in all the airports (as previously), with private players bidding for the majority stake. An inter-ministerial group recommended that the public-private partnerships be operated under an operate, maintain and transfer model (OMT), with a seven to 10 year contract life with the AAI remaining the controlling agency for the airports and a partner in the PPP model.
Chennai Airport annual passenger numbers
This batch of deals has to be seen within the framework of a reported intent by the Ministry of Civil Aviation partially to privatise 15 airports in total. Some of them (it is not clear which) may be operated under 30-year agreements. The Civil Aviation Minister evidently feels India needs “professional management for airports which will handle marketing and concessionaires” options under consideration include public-private partnerships, management contracts, build-operate-transfer concessions and joint venture agreements. Again, AAI would maintain an ownership share in all the partially privatised airports.
But as in 2006, there are many potential issues still lurking in the background. That first ‘formal’ privatisation procedure, which led eventually to the privatisation of the two largest airports, was characterised by confusion and much ‘goalpost shifting’ towards the end of the procedure. Following completion of the procedure the Indian Planning Commission even reached a decision not to proceed with any further privatisations in the airport sector.
Some of the issues stacking up this time are:
- The Ministry of Civil Aviation is reported latterly to have inserted terms in the privatisation documentation that ensures AAI receives aeronautical and non-aeronautical revenues from the airports and was also reported to be attempting to insert a clause that ensures lease rentals are paid to the Airports Authority of India...
...Which begs the question: “How are the private sector components supposed to earn any revenues? AAI chairman V P Agrawal said the body has demonstrated a capability to construct world-class airports but does not have “the requisite expertise to manage such huge facilities” and wants to enter joint ventures “with the best airport operators in the world” to manage its large airports. But those operators would be very wary indeed of such clauses.
- The government’s own Parliamentary Standing Committee on Transport, Tourism and Culture is “totally against” the decision of the Indian Government to privatise the six airports and allow the “transfer of assets to private entities”. It prefers that AAI should be allowed to offer long term management contracts for the airports instead. In Nov-2013 its chairman announced he was seeking an immediate halt, stating that there was “undue haste being shown in the whole process."
That is much the same as the Standing Committee’s UK equivalent suggesting that country’s privatised airport system should be renationalised. Also:
- IATA is unhappy with the ‘norms’ being used, suggesting they are in breach of a government report and may raise costs, having a subsequent negative impact on airlines and passengers.
- As was the case in 2006 the relevant trades unions are dead set against the proposals. The Airports Authority Union declared it “would not entertain any briefing” on the privatisation plan and was petitioning Indian authorities to terminate the privatisation process as it is “a brutal attack on AAI pushing it into financial distress situation” following the investment of INR50 billion (USD816.5 million) in the modernisation of these airports. The union’s general secretary called on the Indian Government to allow private companies to develop smaller airports in the country, instead of privatising existing major airports. While he was speaking employees at Kolkata Netaji Subhas Chandra Airport began a three-day hunger strike in protest against the government’s plans.
The response to the RfP has been good, though. Nine companies responded to the RfP for the privatisation and management contract for Chennai and they are believed to include several of the first round bidders in 2006 such as GMR Infrastructure (successful at Delhi), GVK Infrastructure (successful at Mumbai), Fraport (Delhi), also Reliance Industries, in addition to Tata Realty & Infrastructure (possibly bidding at both Chennai and Lucknow). Ahmedabad Airport is rumoured to have attracted interest from 16 parties.
The shortlist of bidders is due to be announced in early Jan-2014.
What is the future for this privatisation process in India, which has been so fiercely debated since 2006? There are conflicting signals.
On the one hand the Tata Group, which has a global presence, hinted it plans to start businesses across the entire aviation value chain, that would reportedly include operating airports, constructing an aircraft repair and maintenance facility and developing an information technology backbone for aviation services.
On the other hand the Civil Aviation Secretary has revealed that the government is looking at establishing up to 100 low-cost airports over the next two fiscal years, to increase connectivity to smaller regional centres and help relieve congestion at major airports facing capacity constraints “in the same way as mobile technology has gone to the smallest town of the country”. The AAI would have responsibility for the airports and is considering long-term bond issues to help it fund these developments. The Indian Government plans to invest more than USD120 billion in new airport infrastructure and expansion and development of existing smaller airports. (This is exactly what the Airports Union argues the private sector should be doing).
India’s equivalent of the River Thames Estuary Airport proposal, Mexico’s Texcoco, and Sydney’s Badgerys Creek is the Navi (New) Mumbai airport project, which has stalled badly. AAI is preparing a number of long-term funding options for its development, in case private developers are uninterested in the bidding process. The project has suffered more than five years of delays due to land acquisition and environmental concerns. Projected project costs have risen from INR47.660 billion (USD753 million) to INR145.73 billion (USD2.3 billion). CIDCO, the responsible Development Corporation, remains confident it will attract many bidders but there are many environmental lobbies against it.
One place where there will be no airport privatisation – a previous attempt having failed – is the Maldives, where a GMR-led consortium saw its contract annulled in 2012 at Male International Airport. In Oct-2013 the Maldives Government said it planned to conduct a partial sale of that airport to Maldives nationals. The consortium and the Maldives Government are engaged in continuing arbitration proceedings in Singapore. In Dec-2013 the Tourism Minister reiterated that the state-owned Maldives Airports Company would continue to operate the airport, arguing that “[while] we don't believe in monopolies...if there's just one airport, it should be under the direct of the government. I believe that we need to run the airport on our own”.
Investment swells in airport IT
Despite economic challenges in some regions, the survey shows that airports are confident about the future at least in this respect. Approximately 90% of airports expect their IT spending to either increase or remain stable in 2014, with a key focus on improving the passenger experience. This follows a compound annual growth rate (CAGR) of 12% in IT investment over the past three years, which considerably outpaced airports’ 2.83% CAGR in revenue.
Passenger processing technology is the top priority for airports globally. However, airports are also investing in technology to improve passenger services and information.
By 2016, approximately 95% of airports plan to invest in mobile apps to provide status information on flights and the airport, and to help passengers navigate through the airport. (Several airports have already discovered an alternative method of doing that, by signing up with Google Maps). In addition, 75% of airports will offer passenger services via social media by 2016, up from 56% today. And by 2016, passengers can expect to see baggage self-service go mainstream, with more than 80% of airports around the world providing bag tag printing and assisted bag drop. IT + DIY seems to be the ‘way to go’.
The survey also highlighted the growing importance of business intelligence (BI) (aka ‘Big Data’) which transforms data into useful and actionable information. Some 80% of airports plan to invest in new BI solutions for revenue optimisation and management by 2016. Airport operations, passenger flow monitoring and airport resource management represent other priorities for BI investment. This is consistent with airports’ declared focus to use BI to improve operational awareness and the passenger experience.
However, there is still a long way to go before airports reach their BI aspirations, according to the survey. Today, only 8% of airports surveyed have fully achieved the data quality requirements for their current BI initiatives. Data access and integration will continue to present challenges for airports as they implement BI solutions.
Airport privatisation remains in a state of flux
In conclusion, airport privatisation remains in a state of flux. Many of the established organisations have quit the sector or are scaling down their presence. Their replacements, a growing variety of funds, do not have the same degree of allegiance to the business and, for the most part, are fixated on the bottom line. Fortunately, their number includes organisations that are known to invest for the long term, offering continuing stability at least to many primary level airports.
At the secondary level prospects are not so good and we should expect more owners to seek to exit the business and potentially the re-engagement of the public sector.
In the aviation business generally, the future looks brighter than it has for some time with a breadth of positive indicators on, inter alia, oil prices, operating margins, airline share prices, airframe manufactures’ orders, premium traffic figures and so on. For the airline business, subject to another unforeseen ‘shock’ the tide may have turned.
But the acid test for the airport sector is the number of ‘deals’ to look forward to in 2014. At the moment it is around five or six major ones, which is par for the course judged on recent years.
About the CAPA Airports Data Suite
The Global Airport Investors Database is one component of the new CAPA Airports Data Suite. The Investor Database is a production of CAPA – Centre for Aviation, researched by David Bentley, who has previously researched CAPA's management reports on Global Airport Privatisation, and on Low Cost Airports & Terminals.
The Global Airport Investors Database, one of eight components of the comprehensive new CAPA Airports Data Suite, available as a premium add-on to the CAPA Membership service.
The CAPA Airports Data Suite contains a unique goldmine of airport information: