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Hong Kong’s third runway and Vietnam’s airport privatisations attract attention in the region

There are numerous airport expansion projects taking place presently that are attracting more attention than Hong Kong’s third runway - for example, Beijing, Istanbul, Mexico City and others.

There are airport privatisations that are more noteworthy than Vietnam’s - such as AENA, Greece etc.

Bu the combined effect - and complex features - of these Hong Kong and Vietnam events have great significance for the region, with many parallels with other parts. Funding, environmental issues, politics and more; all are part of the move to expand much needed infrastructure in the region's booming marketplace.

1. Hong Kong International Airport's third runway

The debate over a third runway has rumbled on in Hong Kong for several years and occupies almost 3000 words of text in the comments column of the entry for Hong Kong International Airport (HKIA) in the CAPA Airport Construction and Cap Ex database.

HKIA is a very significant airport in global terms. Just failing to enter the world’s top 10 by passenger numbers in 2013 it did so in 2014 with almost exactly the same growth percentage as the year before, of 6%, to 63.2 million.

Growing slightly more quickly than 9th place Dallas-Fort Worth and considerably more so than 8th placed Paris CDG, it could move further up the table this year.

Hong Kong International Airport annual passenger numbers

And HKIA is an important regional and global cargo airport in addition, with freight capacity to be more than doubled in the coming years.

Hong Kong International Airport cargo capacity per week by carrier (cargo payload [kg]), 30-Mar-2015 to 05-Apr-2015


HKIA's third runway's anticipated opening date is 2023

We pick up the story of the debate on the third runway – which in some ways echoes that of the argument over a third runway for London's Heathrow Airport and Munich Airport - in early 2014 when Hong Kong SAR’s Financial Secretary John Tsang was quoted as saying the airport’s two runways will not be able to meet long-term growth projections. He added that cities such as Singapore, Seoul and Guangzhou were planning airport expansion, and a third runway construction at Hong Kong Airport must be carried out without delay if Hong Kong was to maintain its position as an aviation hub in the region.

The environmental assessment of the third runway project was expected to be completed in 3Q2014 and the government was aiming for the facility to open in 2023, by which time Hong Kong Airport's annual passenger throughput will reach 97 million, and cargo volume will reach 8.9 million tonnes. The government was assisting the Airport Authority to proceed with planning for a three-runway system. The project was originally estimated to cost over HKD100 billion (USD12.89 billion).

But that cost was subsequently estimated to have risen, amid increasing civil engineering work expenses, to HKD150 billion (USD19.3 billion). Furthermore, Hong Kong's Legislative Council on Economic Development was concerned the third runway project could see costs increase further amid delays. It estimated a one-year delay would add HKD9 billion (USD1.2 billion) to HKD10 billion (USD1.3 billion) to the project cost.

Tony Tyler, the Director General of IATA, and who has a special interest in this project brought about by (a) his concerns about high charges at airports across parts of Asia and (b) his previous tenure as CEO of the Hong Kong based Cathay Pacific Airways, put his own estimate at USD18 billion.

IATA and other organisations argue financing should come from borrowing rather than airport charges

IATA went so far as to outline a framework that would allow the infrastructure to be built “without increasing airline charges, without placing a burden on taxpayers, without making it more expensive for travellers, without adding an extra burden to shippers and while increasing competitiveness of the hub’s air transport network”. IATA noted that HKIA is consistently profitable and has very little debt - just about 10% of total capital. IATA therefore proposed “that the airport use its advantageous financial situation to fund its expansion through borrowing via commercial loans or bonds”. The current level of charges (applied to both existing facilities and newly built infrastructure) and business model would provide sufficient revenue for loan repayment.

HKIA's  then-CEO Stanley Hui declined to say whether fees would be raised to cover the cost of a third runway. He however noted that international airports usually apply the “user pay” principle when covering the cost of such infrastructure.

The price tag is in the same ballpark – but they are all expensive

These are large investment sums indeed but roughly in the same ballpark as similar infrastructure elsewhere. If we compare the estimated price tags of other proposed runway infrastructure in London for example, they are up to GBP19.6 billion (USD29 billion) at Heathrow and up to GBP9.4 billion (USD13.9 billion) at Gatwick. These are the estimates of the independent Airports Commission and are slightly more (+GBP2 billion and +GBP4 billion respectively) than those of the airport operators and their financial backers. In Heathrow’s case the sum included extensive surface transport works as well.

On the other hand the total envisaged construction cost for both the new Istanbul and Mexico City airports is put at around USD12 billion.

The British engineer Mott MacDonald, as lead consultant, designed the third runway, infrastructure and concourse at the airport on behalf of the Hong Kong Airport Authority. The expansion will allow 620,000 flight movements, enabling over 102 million passengers and approximately nine million tonnes of cargo per annum.

The passenger concourse and runway will be created on a reclamation platform north of the existing airport island. The work includes design of all associated taxiways, roads and tunnels, storm water culverts and drainage, ancillary buildings and utility services, as well as airfield systems such as aviation fuel supply, airfield ground lighting, high mast lighting, fixed ground power, communication and control systems, fire services and cable ducting systems.

The design also embraces automated people mover and baggage handling systems for the new concourse which will provide approximately 60 bridge-served stands and 40 remote stands. Additionally, Mott MacDonald is working on a midfield concourse and various other associated infrastructure contracts at the airport.

Airspace and environmental issues need to be overcome

As is usually the case the Green lobby has had much to say on the subject. Paramount among the concerns are those of the Hong Kong environmental institution Green Sense, which said a third runway would not solve the low efficiency of services at the airport due to mainland China's airspace restrictions, such as unexplained airspace closures and the entry height level at 15,700ft.

AAHK had earlier said only 23% of all services were affected by the restrictions. Green Sense conducted a study with the Airport Development Concern Network, concluding that three of 10 services are affected because of restrictions set by Chinese military airspace restrictions. The Chinese government has indicated the airspace problem could be resolved via coordination with mainland departments.

Meanwhile, Hong Kong's Policy Convenor of Professional Commons warned that constructing a third runway could cause significant environment damage across the border as mainland China industries may have to relocate existing marine infrastructure once the runway becomes operational. The Advisory Council on the Environment's impact assessment subcommittee responded that environmental advisers were prepared to approve the third runway after the airport operator offered new and additional plans to protect the marine ecology. The plans will cover a period before and during construction and include efforts to protect the endangered Chinese white dolphin that may extend across the border.

The approval was granted in Nov-2014.

Moving into 2015, HKIA awarded Turner & Townsend a contract to provide master planning, procurement strategy and risk management services for the development of the new three-runway system (3RS) at the airport. The 3RS will include the formation of 650 hectares of land north of the existing airport island, the construction of the new runway and related airfield infrastructure, and expansion of the existing Terminal 2. The construction programme is expected to last approximately eight years.

Overseas passengers may pay more than their fair share

Government Finance Secretary John Tsang said HKIA planned to commence construction on the runway in 2016 (subsequently brought forward to 2015), with an opening date of 2023. The Executive Council was by now getting excited about the 3RS as it would “consolidate our city’s status as an international and regional aviation hub, spur economic development and create hundreds of thousands of jobs”. The Council must have been listening to IATA because it has adopted a “joint contribution and user-pay” principle.

According to the Airport Authority, the project will be funded through three channels:

  • Bank loans and bonds;
  • HKIA’s operational surplus, which has typically been paid to the Government as dividends;
  • End-users, including passengers and airlines.

Around 70% of HKIA’s passengers are not Hong Kong residents so the suggested user-pay principle is deemed to make good sense, because subsidising the project through the Government means local taxpayers would be footing the bill for overseas passengers - despite the resultant job creation and other economic inputs.

In the 12 months ended 31-Mar-2014 HKIA recorded revenue of HKD14,810 million (USD1909.2 million), which was +12.8% year-on-year. EBITDA was HKD9938 million (USD1281.1million), +12.3%; an net profit: HKD6454 million (USD832 million), +14.9%. Passenger numbers were 60.7 million, +6.1%; Cargo volume was 4.2 million tonnes, +3.4%; and aircraft movements: 377,000, +6.3%.

Cathay Pacific is very supportive but believes it has bought the right to a big say in the funding

Cathay Pacific is – not unexpectedly – buoyant about the Executive Council decision to approve the project. The airline, which has 47.5% of seat capacity at HKIA inclusive of subsidiary Dragonair, reiterated its unequivocal support for the development of a third runway which it believes is necessary to maintain the long-term competitiveness of Hong Kong as a premier aviation hub as other hubs are built or expanded in mainland China and elsewhere across the region.

At the same time Cathay took the opportunity to ram home its message on how it should be paid for, noting that “the Airport Authority is fully capable of financing the construction of the third runway through its own means without the need to impose additional financial burden on users. The airline also holds the view that the Airport Authority, as a public body, should reinvest its income in the development of the third runway so that the airport can maintain its premier hub status and continue to make an important economic contribution to Hong Kong.”

Cathay’s management believe they have invested so much in the airline’s own future at Hong Kong that they have the right to a larger say in the runway’s funding.

Hong Kong International Airport capacity, seats per week, all carriers, 30-Mar-2015 to 05-Apr-2015

Similarly the Board of Airline Representatives in Hong Kong (BAR HK), which points out that BAR HK also opines that the Airport Authority has the capability to finance the construction of the third runway through its own means without the need to increase charges for the travelling public and airline users. The Association of Asia Pacific Airlines (AAPA) took a similar line.

HKIA will stop sharing its profit with the Government for 10 years to help fund the project. It is also proposing, still, that passengers pay an airport construction fee of HKD180 (USD23) from 2016. However, the Government has asked the authority to consider boosting external borrowing to lower the passenger charge. There is now a suggestion that charges to short and long haul passengers may be variable.

Towards the end of Mar-2015 the Transport Minister said the Government is considering establishing an advisory committee to monitor the controversial project. It would be similar to the Advisory Consultative Committee created in 1991 to monitor the airport's construction.

The process of gaining widespread approval for this runway project can be compared with that of doing the same in the case of the London and Sydney airports - except that in those instances it has taken many years and while the Sydney case looks to be resolved the London one is not and may well not be even after a forthcoming General Election in May-2015.

The issues are very similar also: costs; funding and its allocation; competitiveness; economic development; loss of vs. retention of ‘status’; and environmental issues.

In Hong Kong’s case though there has been a much swifter movement towards a conclusion. This particular project also demonstrates how the changing nature of the air transport environment is throwing up some surprising figures. Remember that HKIA intends to get by on its two existing runways – on the basis a third cannot be constructed any faster – until 2023, when 97 million ppa are anticipated.

That compares with 73.4 million at London Heathrow in 2014 where a new runway – assuming it is given the go-ahead – cannot be opened before 2025. But Heathrow is invariably described as “98% full” and struggles to fulfil its mission whenever there are adverse circumstances such as bad weather, an ATC issue or other external influence.

2. Vietnam’s Long Thanh Airport is a stop-start affair

The construction of a new airport rather than a runway is the big event in Vietnam, but it is connected to a privatisation procedure that is very much under way there - even if it is really only attractive to domestic investors.

The new airport is earmarked for Long Thanh, an international development project which is planned to alleviate traffic congestion at Ho Chi Minh City Tan Son Nhat airport. That airport is forecast to exceed its capacity of 25 million passengers per annum by 2020. The USD18 billion (total) project – a similar ticket to that at Hong Kong for a new runway - was designed to have capacity for 100 million passengers and five million tonnes of cargo per annum.

The original cost estimate was USD7.8 billion, one that ballooned as further stages were added. The proposed airport is to be located 40km northeast of the existing Ho Chi Minh City airport. A decision by the country’s congress on whether to approve the airport was once pushed back to 2018 but the urgency of the capacity problem at Ho Chi Minh City won the day.

Ho Chi Minh City Tan Son Nhat Airport annual passenger numbers

Construction had been intended to commence in 2014. But how it would be financed has always posed a problem.

Back in 2013 the airport’s estimated cost was intended to be more than 50% financed through Official Development Assistance (ODA) loans from Japan, and public funds. But that proposal was sullied by allegations of corruption between Vietnam Railways and Japan Transportation Consultants in respect of a separate contract. The development was permitted to progress as the project would not be solely dependent on Japan's ODA.

In Sep-2014 Airports Corporation of Vietnam submitted an updated investment plan by which the proposed airport would receive financial assistance in two payments to coincide with the project's USD7.5 billion first phase development programme, now scheduled to commence in 2016. ACV planned to finance the USD5.6 billion initial construction costs with official development assistance (ODA) grants, bonds and Government funding programmes expected to generate USD2.7 billion in total.

A public-private partnership (PPP) programme would generate an additional USD2.9 billion to cover construction costs for the passenger terminal building and MRO facilities by 2023. More detail was added later. ODA grants would cover approximately 48.7% of the total investment to USD3.8 billion, while a joint-stock initiative and the PPP programme would cover approximately 51.3% to USD3.7 billion.

The Ministry of Transport (MoT) approved the use of public-private partnership investment programmes following the successful review of the PPP draft and the Ministry of Planning and Investment approved the PPP law, allowing the regulation to be in effect from as early as Jan-2015. Domestic and foreign financial participation was actively sought.

But concerns were being expressed over funding. The National Assembly's Ethnics Group for example supported the project but pointed out that Parliament had decided not to issue government bonds in 2015, so where would those funds come from?

Following investment uncertainty, the project was downsized

At this stage France’s Aéroports de Paris arrived on the scene, via its subsidiary Aéroports De Paris Ingénierie (AdPI) with an apparent offer to allocate approximately USD2 billion towards the financing of the first stage of the Long Thanh Airport project under an ODA package. However, this offer was either misreported or it was made and then subsequently withdrawn.

Whichever way, the Transport Ministry then reported that no official document had been signed. At the same time though it announced that sister company Aeroports de Paris Management Company (ADPM) had expressed interest in contributing USD500 million to the development, and to develop a JV investment of USD1 billion with banking partners to construct a passenger terminal and support infrastructure.

By now the entire project was coming under pressure as the National Assembly added up the cost of debt and state funding programmes. It was looking increasingly as if it would be suspended because of the state budget situation and rising debt. The Ministry was pressured to justify why it had rejected plans to expand the Ho Chi Minh City Airport.

As is often the case in situations like this the project was then downsized, at least in the opening stage. Phase one works were re-estimated to cost USD5.2 billion following the review, down from USD7.8 billion previously outlined in the capital investment plan. The investors were re-presented as:

  • Official development assistance (ODA) funding programmes, to contribute approximately USD1.3 billion;
  • State budgetary allocations to contribute approximately USD578 million;
  • Airports of Corporation Vietnam (ACoV) expected to invest approximately USD3.2 billion to the project. (And ACoV to be privatised).

A state funding ceiling was set at a maximum of 30% of total construction costs via public-private partnership and ODA programmes. Provision was also made for additional funding, if required, through a government equitisation plan for Phu Quoc Airport and the proposed partial privatisation of Hanoi Airport terminals (see later).

Korean company Samsung was attracted as a potential participant in construction and duty free tenders, subject to the project's approval. The electronics company is undertaking a USD20 billion expansion plan, aimed at supporting transport projects in Vietnam. Samsung launched a feasibility study on the proposed investment plan for the airport in the first quarter of 2015.

The project was still considered to be in the balance but two key events took place early in Mar-2015. Firstly the Executive Committee (or Politburo) finally agreed to invest in Phase I but the Ministry of Transport was forced to confirm the state funding ceiling of 30% for the entire airport project, now estimated at USD15.8 billion. The new proposal aims to construct a one-runway airport to facilitate 30 million passengers per annum.

Secondly, Aeroports de Paris came back into the frame again, this time partnering with Credit Suisse, which has not been directly involved with the airport sector in terms of new acquisitions or projects for several years. The two will partner with the aim of raising approximately USD3 billion for the Long Thanh International Airport development.

There will be more twists and turns to come but at least the prospect of this airport being built to a single runway standard appears more likely than that it will not be constructed at all. The reduced ambition for the scale of the project has been matched by the attraction of a foreign strategic investor.

Vietnam's Government is making a bold attempt to privatise airports but hampered by mechanisms and slowing traffic

(This section is based on comment in the recently published CAPA Airport Finance & Privatisation Review 2014/15).

There is a wide ranging privatisation pilot programme in place in Vietnam already as part of the Government’s attempts to divest state assets. The government wishes to optimise the sales process as much as possible but there are calls from some quarters to limit divestments so that the government retains 51% of the equity in each case and, thereby, overall control.

There is additional concern that insufficient mechanisms and policies are in place to attract private investors in the first place. The Vietnam International Arbitration Centre insists the country should consider airport privatisation methods undertaken by other countries first.

The Ministry of Transport intends to introduce a phased privatisation plan, releasing each operate-and-maintenance airport contract separately “one at a time.” The airport contracts will be offered to local investors in the first phase, ahead of an official release to international investors. Flight management, ATC and infrastructure projects related to military operations will not be included in the phased tender programme.

So Vietnam is calling in the first instance for domestic investors to participate in airport PPPs and the government has recently recommended the privatisation of Airports Corporation of Vietnam (ACoV) in its entirety, estimated to be worth VND5 trillion (USD234 million). ACoV advised it would launch an IPO in the first quarter of 2015 and later increased the amount of equity to be made available from 25% to 35%.

Vietnam has similar issues to China with airport profitability. The Hanoi and Ho Chi Minh airports are the only two out of 22 Vietnamese airports that have reported year-on-year revenue growth, despite the country recording average year-on-year air traffic growth of approximately 20% per annum over the last three years. Moreover the privatisation procedure is being enacted at a bad time as Vietnam has now experienced nine successive months of falling air traffic caused in the main by a sharp drop in Chinese and Russian visitors.

So there is no clear reason why foreign investors at least should be attracted to Vietnam right now. Some, such as ADC&HAS (now Airports Worldwide) in the US have already done so but backed away. Vietnam is one of those places that seem to hold much promise for the future but that future never quite arrives.

Privatisation activity has been manifested in the following ways:

(i) Nha Trang Airport

The local Khanh Hoa Provincial Government has been calling for domestic investors only to participate in the public-private partnership project at Nha Trang Airport. Unnamed US based investors had expressed interest in the project, but overturned their decision owing to the Ministry of Defence's involvement.

(ii) Phu Quoc Airport

ACoV is working towards selling Phu Quoc Airport as part of its wider programme to fund future airport projects and declared it would divest its 100% stake by the end of 2015. But early in Mar-2015 the Deputy Transport Minister Nguyen Hong Truong advised the country would not sell its entire controlling stake but could sell 60%-70%. One of the first companies to declare an interest is a newcomer to the airport sector, the Vietnamese real estate investor T&T Group. There will probably be more of these newcomers from within the country itself.

The Ministry of Transport has ordered ACoV to prepare an equitisation plan for the airport sale and is keen for low cost airlines to participate. The overall assets programme has received support from the Ministry of Transport, with plans in place to option more Vietnamese airports to private investors. However, ACoV chairman Nguyen Nguyen Hung expects the programme will face opposition from the country’s military and air force, considering most Vietnamese airports are utilised for both military and civil operations.

(iii) Da Nang and Cam Ranh airports.

Following on from Phu Quoc, ACoV has been ordered to continue its pilot privatisation programme with the partial divestment of Da Nang and Cam Ranh airports.

Vietnamese LCC Jetstar Pacific applied to the Ministry of Transport for the concession to operate the old passenger terminal at Da Nang Airport, intending to develop the facility for low-cost operations.

(iv) Hanoi Airport

Finally, the Ministry of Transport will consider transferring terminal operator rights at Hanoi Airport to a private carrier though only one of the two terminals will be available under a proposed tender. Vietjet has expressed interest in the proposal, submitting a letter of intent (LoI) to take over T1 operations, subject to a tender issuance.

Vietnam capital expenditure projects (not including Long Thanh)

Airport

Classification

Investment USD

Target completion date

Chu Lai International

Runway redevelopment and associated works

n/k

1-Jun-2015

Hai Phong Cat Bi

New terminal/New runway

173,000,000

13-May-2016

Hanoi Noi Bai

New passenger terminals/terminal expansion/runway upgrade/new cargo terminal

n/k

31-Dec-2020

Ho Chi Minh City Tan Son Naht

Terminal expansion/Apron expansion/Car park

109,000,000

31-Dec-2016

Nha Trang Cam Ranh

Runway, taxiway and apron improvements/New runway/New terminal

480,000,000

31-Dec-2030

Pleiku

Runway extension/Taxiway and apron works

45,000,000

25-Oct-2013

Qui Nhon Phu Cat

Terminal expansion

23,000,000

29-Feb-2016

Thanh Hoa

General airport expansion

28,000,000

31-Jan-2016

Summary and conclusions

  • The reasons why a third runway is needed at Hong Kong are no different from those at London, Munich and elsewhere: failure to meet long-term growth projections; regular operational problems caused by working at or close to capacity; lack of connectivity; falling behind the competition; loss of status.
  • As is the case in London, airlines and their representative bodies are urging the HKIA to ensure that the ‘user pays’ principle is applied;
  • Hong Kong is closer to the camp of Beijing, the Gulf States and Istanbul than it is to London when it comes to getting ahead of the game and ensuring that necessary infrastructure is constructed.
  • Vietnam’s Long Thanh airport – a major project - is still in the balance but the requisite strategic investor seems, at last, to be on board.
  • The airport privatisation efforts in Vietnam are necessary in order to help maintain state funding of essential services but there is little incentive for foreign firms to get involved just yet. AdP has done (at Long Thanh) but it does have experience in the region.

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