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Airports

Airports provide access to and interlink regional, national and international markets. Investment in airport infrastructure is essential to economic development, job creation, attracting foreign investment and creating new commercial opportunities for the local economy. Traditionally, airports were owned, managed and operated by the public sector but there has been a worldwide trend towards private sector involvement with varying degrees of private ownership and management, including the use of PPP models.

Starting in the mid-nineties, a wave of ownership and management reform of airports took place in many countries around the world. Following a number of landmark cases, like the privatization of the British Airports Authority, and influenced by the spread of PPP models in the development of seaport terminals, governments began to recognize the potential benefits of private sector participation in airport operations and management. Private sector involvement represented an effective way of updating infrastructure and improving services without expending fiscal resources. At the same time, airports were no longer seen as public utilities but as commercial enterprises, presenting new opportunities for funding development.

When done right, private investment in airports can root out inefficiency and introduce customer oriented management styles. State owned enterprises are notorious for being overstaffed with overprotected workers. Engaging a private partner can create a focus on service and commercial performance by holding the firm accountable for its contribution to service improvements, rewarding it for controlling costs (by providing services with fewer staff, for example), and introducing a businesslike approach to billing and collection.

Issues

  • Aeronautical and non-aeronautical revenues

    Airport revenues can be separated into two distinct sources: aeronautical and non-aeronautical. Aeronautical revenues, also known as air-side revenues, are all those associated with the essential services provided by an airport, namely the...

    Airport revenues can be separated into two distinct sources: aeronautical and non-aeronautical. Aeronautical revenues, also known as air-side revenues, are all those associated with the essential services provided by an airport, namely the provision of runways and taxiways (landing fees), the provision of a parking stand at the apron (aircraft parking fees), the provision of a boarding bridge (boarding bridge fees) and the facilitation of a terminal building (passenger facility/service charge).

    Non-aeronautical revenues, also known as land-side revenues, can be further divided in two subgroups: commercial revenues (from the rental of spaces or collection of royalty payments from retailing, duty free shops, food and beverage, aircraft parking, advertising, etc.) and ancillary revenues (collected as access charges to service providers at the airport, such as in-flight catering companies, ramp handling companies, fuelling companies, rental of spaces to airlines, etc.).

    Each of these revenue streams require varying degrees of regulation. Aeronautical services are the most heavily regulated. While strict regulation limits the potential for improved efficiency of aeronautical revenues, these fees are generally US dollar based, making for valuable foreign exchange revenues.

    By contrast, non-aeronautical revenues face regulation depending on the service. Generally, commercial services are the least regulated given that market forces act as a regulator. That said, some of these services, like parking, can be considered a public access issue and as a result are regulated carefully. Ancillary services are also generally subject to some type of regulation in order to ensure that the access cost are capped, as they are transferred to the airlines.

    Given the complexities of the revenue landscape, regulation must be well defined and provide investors with a clear expectation of how fees and charges will evolve throughout the term of their involvement. This will include the definition of regulatory targets and the criteria for adjusting fees and charges year after year. Regulation may assume that commercial activities will compensate for the overall airport expenses (single till regulation) or that only the aeronautical revenues shall support the airport operation and development (dual till regulation).

  • Cost to users

    In many airport PPPs, reforms and upgrades of facilities and services will also mean an increase in fees and charges to airlines, passengers, and cargo. When developing regulation, the expectations of private investors for return on investment...

    In many airport PPPs, reforms and upgrades of facilities and services will also mean an increase in fees and charges to airlines, passengers, and cargo. When developing regulation, the expectations of private investors for return on investment should be balanced against the concerns of the users regarding cost.

    In an effort to attract investment, some governments may allow the private partner to increase fees and charges prior to any reforms. This encourages bidders to increase their offers for the acquisition of shares or decrease government concession fees, transferring the benefit of lower sale prices or concession fees from the user to the government. Curbing the desire to protect users from higher fees and charges is a challenging equilibrium for the government when designing the deals.

  • Delivering the infrastructure: monitoring and contract compliance

    In an airport PPP, it is crucial that a monitoring system is put in place to ensure the concessionaire carries out the agreed-upon reforms, upgrades, and tasks. Typically, the investments that are the responsibility of the private sector within...

    In an airport PPP, it is crucial that a monitoring system is put in place to ensure the concessionaire carries out the agreed-upon reforms, upgrades, and tasks. Typically, the investments that are the responsibility of the private sector within the PPP agreement fall into two categories: those necessary to comply with the international standards and recommended practices dictated by the International Civil Aviation Organization (ICAO) and those necessary to accommodate growth, assuring an optimum level of service.

    A monitoring body that oversees the provision of the infrastructure according to the agreement must to be in place on day one of a PPP. The body must be financially independent and technically empowered, with the authority to oversee and enforce the compliance of the contract.

    The success in the effective monitoring of the contract will depend on the institutional strength of the country and the relative power of the airport operator vis-à-vis the regulator. In some cases, providing too much power to one single operator has led to regulatory capture, diminishing the positive results of the PPP.

  • Land & environment

    For both brownfield and greenfield airport PPP projects, environmental issues must not be neglected. For brownfield projects, environmental audits are recommended to establish a baseline to cut off responsibility between the grantor and the new...

    For both brownfield and greenfield airport PPP projects, environmental issues must not be neglected. For brownfield projects, environmental audits are recommended to establish a baseline to cut off responsibility between the grantor and the new investor for pre-existing environmental liabilities. For greenfield projects, there are numerous other issues that must be addressed at the start. Who owns the land on which the airport is to be constructed? Are there rights of way that need to be considered? Is ownership of land by a private investor possible, or even necessary, in an airport project?

    Airport construction raises significant environmental and other permitting issues surrounding noise and air pollution. Local residential populations may not react positively to the possibility of construction of a new airport in their region given the potential for noise pollution and the reduction of property value. At the same time, it should be noted that the location of a new airport can significantly improve land values, in particular in developing countries where the location of jobs and transportation may involve more complex, socio-political issues.

Models

  • The private investment models in airports range from the greatest involvement of the private sector, as full privatizations or sale of shares, to the more traditional PPP approach through a concession agreements, up to the lightest participation...

    The private investment models in airports range from the greatest involvement of the private sector, as full privatizations or sale of shares, to the more traditional PPP approach through a concession agreements, up to the lightest participation through short term management contracts.

    The full privatization implies the complete transfer of shares and ownership of the airport. After being showcased with British Airports Authority, this model spread across the UK and other countries such as Australia, New Zealand, Canada and South Africa. Many Western European airports have seen partial privatization through a divestiture of a portion of the ownership.

    The concession model, wherein the private sector is involved in upgrading the airport infrastructure, operating it and transferring it back to the government at the end of the concession period typically ranging between 15 to 35 years, has seen widespread use in the developing world, namely in Latin America, Africa and Eastern Europe.

    The management contract implies less private involvement/control, and has been implemented in a few countries with relative short durations. Many of these contracts have not been renewed at their expiration and some have been transformed into concessions.

Tools & Guidance

    • 2010
    • Mustafa Zakir Hussain, Editor
    • World Bank Group (WBG), PPIAF

    Investment in Air Transport Infrastructure

    Guidance for developing private participation

    This paper discusses the development of appropriate private sector participation (PSP) to optimize the provision of air transport infrastructure (ATI). It is aimed primarily at government policy makers in low- and middle-income countries and their advisors. This paper answers a number of questions, including the following: When is it appropriate to allocate the responsibilities involved in ATI provision to private firms rather than continue to allocate them to governments and their agencies? If policy makers decide to vest certain responsibilities with private firms, what considerations are important during this allocation process? How is it best to achieve the transition, and what kinds of private firms should be involved?

    • 2012
    • Airport Cooperative Research Program

    Resource Manual for Airport In-Terminal Concession

    ACRP Report 54: Resource Manual for Airport In-Terminal Concessions provides guidance on the development and implementation of airport concession programs. The report provides information on the airport concession process; concession goals; potential customers; developing a concession space plan and concession mix; the Airport Concessions Disadvantaged Business Enterprise (ACDBE) program; and concession procurement, contracting, and management practices. Case studies are provided to illustrate key areas. This report will help airport managers understand market potential and implementation requirements for an effective in-terminal concession program while recognizing evolving challenges. This report will serve as a valuable tool for...

    • 2011
    • Airport Cooperative Research Program

    Guidebook for Developing and Leasing Airport Property

    ACRP Report 47: Guidebook for Developing and Leasing Airport Property discusses the key issues associated with developing and leasing available airport land and summarizes best practices from the perspective of the airport sponsor. The guidebook presents a diverse set of case studies that show several approaches airports have taken to develop and lease property for both aeronautical uses (e.g., aircraft maintenance facilities, fixed-base operator facilities, hangars, training centers, and cargo facilities) and nonaeronautical uses (e.g., light industrial and commercial facilities). A glossary of terms is also included. This guidebook will therefore be of interest to anyone desiring a better  understanding of the process for developing...

Projects & Case Studies

    • 2010
    • O.P. Agarwal and Jose A. Gomez-Ibanez
    • PPIAF

    Case-Study on Delhi Airport Metro Express

    This case was written by O.P. Agarwal of the World Bank and Jose A. Gomez-Ibanez of the Harvard Kennedy School. The case is intended to serve as a basis for class room discussion only. It does not purport to provide a complete and accurate description of the situation and should not be used as a source of primary material. The development of this case was supported by the PPIAF and ESMAP.

    • 2012
    • Tomás Serebrisky
    • PPIAF

    Airport Economics in Latin America and the Caribbean

    Benchmarking, Regulation, and Pricing

    The book presents a positive and unbiased analysis of events, rather than a normative analysis of what should be done to reform the airport sector or to attract private participation. It focuses on three dimensions of performance: productive efficiency, the governance of the sector, and financing of airport infrastructure.

Lessons & Analysis

    • 2001
    • Asian Development Bank (ADB)

    Developing Best Practices for Promoting Private Sector Investment in Infrastructure: Airports and Air Traffic Control

    This is one volume of a five-volume set presenting the findings of an ADB regional technical assistance study which developed sector-specific best practices for promoting private sector participation in key infrastructure sectors in ADB's developing member countries. The best practices cover the role of government, institutional reform, strategic planning, legal and regulatory frameworks, unbundling and competition, contractual arrangements, sources of financing, and the allocation of risk. This volume examines the underlying economics and alternative models of private sector participation in the airport sector, and recommends approaches to encourage successful private sector participation.  

    • 2012
    • International Finance Corporation (IFC)

    Handshake Issue #6: Air & Sea PPPs

    Handshake Issue #6: Air & Sea & PPPs examines how public-private partnerships (PPPs) push air and sea transport development forward with greater speed and richer benefits.

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