Airport PPPs: Benefits, drivers, and success factors

Airport PPPs:
Benefits, drivers,
and success
factors
January 22, 2015
Contents
1. WBG Overview
2. Airport PPPs
3. Lessons Learned & Getting PPPs Right
4. WBG Experience in Airports PPPs
2
1 – World Bank Group Overview
IBRD
International Bank for
Reconstruction and
Development
Est. 1945
Role:
Clients:
Products:
IDA
IFC
International Development
Association
International Finance
Corporation
Est. 1960
MIGA
Multilateral Investment
and Guarantee Agency
Est. 1956
Est. 1988
To promote institutional,
legal and regulatory reform
To promote institutional, legal
and regulatory reform
To promote private sector
development
To reduce political investment
risk
Governments of member
countries with per capita
income between $1,025 and
$6,055.
Governments of poorest
countries with per capita
income of less than $1,025
Private companies and
governments in member
countries
Foreign investors in member
countries
 Technical assistance
 Loans
 Policy Advice
 Technical assistance
 Interest Free Loans
 Policy Advice




Equity/Quasi-Equity
Long-term Loans
Risk Management
Advisory Services
Political Risk Insurance
Shared Mission: To Promote Economic Development and Reduce Poverty
4
WBG partner of choice in PPPs
Global market
knowledge
and experience as both advisor and
investor
350
projects since 1989
Objectivity &
transparency
Pioneering transactions
in frontier markets & sectors
in transactions
Neutral partner
balancing objectives of
government, consumers
and investors
Social and
environmental
focus
Risk sharing
and long-term
commitment
Only multilateral
organization offering direct
advisory services to
governments globally
Full spectrum of support
from upstream policy, advisory, public financing,
private financing (debt and equity), guarantees, PRI,
and mobilization
5
2 - Airport PPPs
PPP Variants in Airports
Private Sector Involvement
TAVMadinah
Airport
/
GMR-Delhi
Airport
MAHB –
Astana
Airport
SiemensLGW
Baggage
Handling
contract
ADPEgyptian
Regional
Airports
/
FraportCairo &
KAIA/KKIA
airports
TAV-Izmir
Airport
Concession
Lease
Vinci – ANA
(Portuguese
Airports)
Full Divestiture
Concession
Contract
25-30 yrs
Lease Contract
Technical
Assistance
Service
Contract
1-3 yrs
Management
Contract
3-5 yrs
5-15 yrs
Contract Duration
7
Airport PPPs benefit Governments
Construction
Significant reduction in
project development risk
with transfer of
construction risk to the
private sector
Revenues
O&M
Potential for new revenue
streams for
governments/airport
authorities
Transfer of risks related to
Operations and
Maintenance with clear
KPIs and performance
incentives
Public Sector
Benefits
Asset Transfer
Airport and related
developments return to
public sector ownership at
the end of the concession
Financing
Efficiencies
Access to private sector
financing, freeing
government budgets for
social sectors
Introducing operational
efficiencies with best in
class international
practices
8
Airports are also attractive Assets for Private Sector
Strong growth
Forecasted growth leading
to potential for significant
cash flow and improved
margins
Exchange rate risk
Low foreign exchange risks
as airports generate
substantial revenues in
hard currency
Commercial
Revenues
High potential for
improving airport amenities
thereby increasing nonregulated revenues
Attractive Assets
for Private Sector
Efficiencies
Significant ability to
introduce operational
efficiencies and improve
financial performance
Opportunities
Opportunities to develop
real estate, commercial
and auxiliary activities
outside of the regulated
perimeter
9
Private Investment in Airports
• Private investment in airports is on the rise again
post the 2007-2010 period where sector activity
waned due to lack of financing, traffic concerns,
and gaps in valuation expectations.
• Fundraising for infrastructure deals has remained
positive, and as of early 2014, there are 136
unlisted funds targeting $86bn in capital
commitments.
Source: Private Participation in Infrastructure Database (World Bank)
• Investors are likely to look to emerging markets
where expected returns are higher than in
developed markets.
Source: Preqin, 2013 Infrastructure Raising and Deals
1010
Evolving Business Model on Airports
Past
Today
Mere infrastructure provider
Fully fledged businesses/
Diversified activities
Exclusive public ownership
Competition for customers
Securing needs of flag carrier
Customers with different needs
Supported by public funding
Mobilization of private funding
11
Key Sector Players
• Traditional players
- Infrastructure funds;
- Construction firms (on
greenfield or brownfield
expansion).
• New players
- Direct investments by pension
funds with increasing focus on
emerging markets;
- Sovereign wealth funds;
- Private equity;
- Operator / financial institution
consortiums; and,
- Private equity (smaller airports
c. <5m pax).
 Global financial crisis has led to
an adjustment in mix of airport
investors.
12
Key Air Traffic Drivers
27
09
Competition
Market
Maturity
Hub Status
Economic
Health
Demographic
Changes
Population
Mix
Crises
Geography
Rise of LCCs
or foreign
carriers can
increase
affordability
and route
options
which drives
traffic
Increasing
maturity
eventually
leads to
saturation
Small
countries
with high air
connectivity
due to
airport hub
status
boosts
traffic
potential
(eg: Sing.,
UAE)
Higher
personal
income and
growth of
economy
(ie: GDP)
Growing
population
can raise
propensity to
fly
Countries
with high
immigrant
population
see large
visiting
friends and
relative
(VFR) traffic
(e.g: UAE)
Financial
crisis or war
/ terrorism
dampens air
traffic
Need for air
transport
higher in
island
nations or
isolated
regions with
big
distances
between
cities
13
What are the revenue streams?
Aeronautical
Non-Aeronautical
 Landing Fees
 Concession fees for Aviation Fuel & Oil
 Terminal Area Air Navigation Fee
 Concession fees for Commercial Activities
 Aircraft Parking & Hangar Charges
 Revenues from Car Parking & Car Rentals
 Airport Noise Charge
 Passenger Service Charge
 Security Charge
 Ground Handling Charges
 En Route Air Navigation Fee
 Night flight fees
 Rental of Airport Land, Space in Buildings &
Assorted Equipment
 Fees charged for Airport Tours, Admissions
etc.
 Other non-airport Revenues
Note: new charges can be envisaged in the case of projects with major expansion works to match revenue flow
levels with private sector return requirements (subject to regulatory framework of country where airport is being
developed)
14
Common Structuring Issues (1/3)
Issue
Description
Contract Type
Concession (BTO, BOT etc), Management contract, TSA; choice will depend
on requirements leveled on private partner, government preference,
accounting / regulatory issues etc.
Project Scope
Full scope (all of airside and landside including commercial developments),
only airside activities, limited to one terminal etc.
Investment
obligations
Expansion / rehabilitation requirements placed on investor at the
beginning of contract + future expansion requirements with appropriate
trigger mechanisms
Contract Term
Driven by concession type (ie: 15-25 years for concession, 3-5 years
management contract, etc), and financial return requirements
Basis for bidding
Weighting and defining components of technical and financial bid (ie:
input vs. output based design, upfront fees vs. ongoing concession revenue
sharing, pass/fail vs. scoring bids)
Regulatory
regime
Regulated tariffs set by concession contract or through existing country
wide regulatory framework
15
Common Structuring Issues (2/3)
Issue
Description
Role of Grantor
Define what role Grantor will play on project (eg: general facilitator,
providing vacant enjoyment of land / site, security, ATC, etc.).
Exclusivity
Specify any protection from existing airports or new airport developments
with no compete clauses (eg: no new international airport within 200km
radius)
Traffic risk
Protection against traffic risk (ie: investor assumes 100% or protected
below a certain traffic level)
Sponsor stability
requirements
Define any minimal equity participations by individual investors at bid and
lock in periods over contract term
Inflation
Define tariff indexation level and frequency of adjustments
FX protection
Potential requirement when local currency volatile and majority of
financing is international (and / or bidders are international). Can be
implemented through adjustments to aeronautical tariffs
16
Common Structuring Issues (3/3)
Issue
Description
Performance
Obligations
Define investor obligations throughout contract to adhere to service levels
or standards (eg: IATA level C, minimum technical requirements) and
penalties if breach occurs, through liquidated damages, performance
bonds, and default clauses
Existing airport
staff
Level of employment protection offered, requirements placed on investor
to accept them over defined term and conditions
Governing law,
arbitration
In most jurisdictions, international investors will have preference /
requirement for non-local law and international arbitration
Termination
Triggers and compensation levels for debt and equity on both grantor and
investor sides needs to be defined
Conditions
precedent
All conditions that need to be fulfilled by grantor and investor prior to
financial close need to be clearly defined in the contract and monitored
17
Impact of PPP on Responsibilities
PRE-PPP
PPP APPROACH
CAA /
Govt
Airport
Co*
Private
Sector
CAA /
Govt
Airport
Co*
Private
Sector
-overflight / ATC






-airport revenues**






Payment to Govt /
Airport Co
+
-

+/
+
-
Capex
/





Staff
/


/


Regulation






Supervision






Slot Coordination






Revenues
This allocation is one example amongst many and may vary from project to project depending on structure (eg:
security staff provided by State or private operator, capex subsidies required, etc.)
* May be contained within CAA in certain countries
** Payment of operating costs also falls on private sector under concession model
18
3 – Lessons Learned & Getting
PPPs Right
PPP = Preparation Preparation Preparation
•
MUST prepare for the main stages of a PPP
- Due Diligence;
- Structuring;
- Tendering;
- Award / Closing; and
- Implementation / Monitoring
•
Each of the stages requires careful methodical preparation - short cuts are costly.
•
Core to achieving a successful result is ensuring advisory team is highly experienced and
has all the required skill-sets (ie: financial, legal, technical, etc.) – even highly experienced
global infrastructure investors do not rely solely on their in-house expertise to complete
transactions.
•
The following section illustrates issues that can arise and the important role advisors play
in supporting clients to address these complexities.
20
Airport PPPs: some issues…
Terminal design
Laws & Regulation
Traffic
Environmental issues
Land value capture
Level of service
Tourism
Subsidy
Domestic Competition
Airside capex
Fuel
Road access
Lenders
Safety & Security
Immigration
Customs
International Competition
Exclusivity
Devaluation
Zoning
Passengers vs. Cargo
Resettlement
Ground transportation
Land acquisition
Electricity
National security
Investors
Ground Handling
Water and Water Treatment
Retail concessions
Concession fee
Sanitation
21
Lack of preparation leads to failure…
Preparation / Due Diligence: you can’t build a house from the roof up
•
Extensive analyses are ESSENTIAL (technical, commercial, financial, strategic) to test
proposed structure with market and meet Govt’s objectives;
•
Jump starting tender phase without preparation and structure is highly risky = almost
guaranteed to fail.
Structuring: inadequate project structure raises risk profile for all
•
Structuring allows Govt’s to design a project based on their objectives, capabilities, risk
appetite and market interest;
•
Structuring reduces uncertainty for bidders and gets them to make proposals based on
Govt’s needs, and at the highest value;
•
Structuring reduces the temptation of accepting spontaneous offers, which may not
provide best value for money for the Govt.
22
…as does weak framework, bankability…
Framework: Avoid Surprises
Uncertainty or new framework raises project risk profile and lowers bid value.
Commitment: Buy-In Critical At All Stages
Lack of government support / indecision leads to delays and conflict.
Bankability: Fair & Appropriate Risk Allocation is Key
•
Mismatch between risk / obligations and levels of return anticipated dilutes investor
interest;
•
Unrealistic demands set by public sector leads to failure in bids (eg: developing greenfield
airport with no / weak traffic record).
23
…and inadequate profiling of candidates along
with absence of competition
Partner Profile: Avoid Unqualified Candidates
•
Pre qualification allows to retain the most appropriate profiles of candidates;
•
Wrong candidate – inappropriate selection criteria is highly risky.
Competition: Maximises Public Sector Gains
•
Competitive tension results in much better offers for public sector;
•
Transparency from competitive tender improves credibility of process and public support.
24
For Govt’s to maximize gains, the right PPP model
is essential: control and benefits
Loss of Control – Misconception by Public Sector
Leads Govt’s to often shy away from concessions or O&M contracts preferring to keep a firm
hold over all aspects of airport operations
• In most concessions / BOT, despite private operations of airport, public sector maintains
full control via the concession contract and related obligations;
• Grantor (public airport company or CAA) are the pillar and should become reinforced –
focus on regulation and supervision.
Appropriate Size & Structure Needed to Maximise Benefits
• Management contracts separated from capex obligations or publicly funded projects have
reduced cost or time effectiveness
-
Public sector takes more risks and misses out on many of the gains;
Use of public instead of private finance: issue for IDA/Developing countries.
• Carving out activities dilutes value and efficiency of projects: carving out commercial
activities drastically reduces returns for private sector (hence less involvement in capex)
and fees for Govt’s;
• International operator brings more than just funding; expertise is key!
25
Post award failure risks greater without
monitoring, continued cooperation…
Lack of Monitoring / Institutional Capacity: risky for public sector
•
Grantor does not have the capacity to handle the complexities of a PPP contract
•
Lack of enforcement of contractual provisions and penalties if applicable
Lack of Cooperation / Coordination Among Players: Complicates Further
•
Unreasonable expectations / intrusion of authorities
•
Lack of capacity / coordination of stakeholders (ex. Police, Customs, Grantor)
26
…or with poorly designed contracts containing
inadequate provisions
Incomplete Contractual Provisions: Creates Sense of Unfairness
•
Lack of clarity on obligations and contribution, guaranties
•
Poorly conceived (or lack of) performance obligations and related penalties
•
Lack of clarity on unforeseen events, force majeure, modification of plans or structure
Inadequate dispute resolution mechanisms: Can Drag Disputes Longer
•
Lack of, or inadequate provisions on applicable laws, cure periods, step-in rights, etc.
•
Lack of clarity on exit strategy
27
4 - WBG Experience:
Investment and Advisory in Airports PPPs
(Majority IFC)
Airport Credentials
Concession
Concession
Concession
Concession
Concession
Loan
Nnamdi Azikiwe
International Airport,
Abuja, Nigeria
Male International
Airport in Maldives
Prince Mohammad bin
Abdulaziz Int’l Airport
in Madinah , Saudi
Arabia
Hajj Terminal at King
Abdulaziz Int’l Airport
in Jeddah, Saudi
Arabia
Queen Alia International
Airport in Jordan
Cambodia Airports
( Siem Reap and Phnom
Penh)
$27 ,500,000
IFC mandated as
Transaction Adviser
IFC mandated as
Transaction Adviser
IFC mandated as
Transaction Adviser
IFC mandated as
Transaction Adviser
Loan
Loan
Loan
Loan
Tbilisi Airport in
Georgia
Queen Alia Airport in
Jordan
Pulkovo Airport in
Russia
$27,000,000
$120,000,000
€70,000,000
Loan
Loan
$160,000,000
Syndicated Loan
€100,000,000
IFC mandated as
Transaction Adviser
IFC as Lender
Loan
Equity
Montego Bay in Jamaica
TAV - Tunisia
Lima JCIAirport in Peru
$45,000,000
€132,500,000
Loan
Loan
$45,000,000
€257,500, 000
Syndicated Loan
Syndicated Loan
IFC Lender & Arranger
IFC Lender & Arranger
$20,000,000
Syndicated Loan
IFC as Lender
IFC Lender & Arranger
IFC Lender & Arranger
IFC as Investor
29