Public-Private Partneship (PPP) enables Infrastructure Development

ICAO Journal – 2015 – Vol.70 No.4 (pages 38-39)

cap3-7Airports and air navigation service providers in Brazil, China, Congo, Egypt, France, Ghana, India, Jamaica, Jordan, Saudi Arabia, South Africa, the United States, and elsewhere around the world are building the capacity of air transport infrastructure through government partnering with private enterprises.

In September 2015, the African Development Bank (AfDB) approved their first private- sector investment in Ghana’s transport sector – a US$120 million corporate loan to support construction of a new terminal at Kotoka International Airport (DGAA) in Accra and rehabilitation of other airports including Kumasi, Tamale, Ho, and Wa.

The bank stated: “The programme will support the country’s ambitions of modernizing vital infrastructure in Ghana through upgrading the airport to a gateway for West Africa and a regional aviation hub. The programme will also increase air passenger handling capacity and improving airport safety standards and efficiency at KIA and the regional airports. Through strengthening the country’s airport infrastructure, the programme is expected to boost the country’s economy, in particular the growing tourism and oil and gas sectors, through facilitating connectivity to markets and reducing the cost of doing business. Developing national airport infrastructure will be critical building blocks for regional integration as Ghana has been serving as a platform in connecting regional landlocked countries to international markets and support inter-African trade.”

This is just the latest of a growing number of Public-Private Partnerships (PPP). In the spirit of ICAO’s No Country Le Behind capacity building initiative, PPPs can supplement limited public sector capacities and raise additional finance in an environment of budgetary restrictions.

Taking into account both fully privatized airports and those operated under PPPs, one-third of global airport traffic is now managed and/or financed by private stakeholders. A new section on the ICAO website highlights case studies of dozens of such projects (www.icao.int/sustainability/Pages/im-ppp.aspx).

ALTERNATIVE TO TIGHT CREDIT

Why are PPPs gaining in popularity? One reason is the tightening of government budgets, the difficulty developing States have borrowing funds in the current economic climate, and the spectre of future interest rate hikes. The 2014 ACI Airport Economics Report, published by the Airports Council International, noted: “In an economic climate where States are increasingly cu ing government expenditures to reduce growing debts hanging over their economies, government financing and ownership of airports is not always a viable and sustainable option. However, incentives for private-sector participation help capital flow to the airport industry.”

ACI stated, “There is no denying that private investment and entrepreneurship go hand in hand. Entrepreneurs generate innovations and value for customers, but they also expect a return for the risk that investors must bear in so doing. From a financial perspective, airport operators perform be er when they are free to grow and build both the aeronautical and non-aeronautical sides of their businesses independently. Based on the available evidence, private airports also tend to use resources more efficiently and create greater value for investors compared to airports with other ownership models.”

One example of a highly successful PPP is Sangster International Airport (MKJS), Jamaica’s largest airport and gateway to the island’s vital tourist industry. Sangster is operated by MBJ Airports Limited, which has invested nearly US$200 million into the expansion of the facility and improvements, and won the Caribbean Leading Airport by the World Travel Awards five years running. MBJ Airports Limited is now comprised of Abertis Infraestructuras SA (formerly Dragados), a European leader in infrastructure management and one of the world’s major benchmark companies in the field, together with Vantage Airport Group, among the world’s premier airport operators.

Elizabeth Brown Sco on, Chief Commercial Officer for MBJ Airports Limited, said, “The beauty of the privatization is that the airport operator can be proactive rather than reactive in terms of decision making, service levels, and the management of partnerships that make up the entire team at Sangster International Airport. Operating as an entrepreneur, focused on business decisions, allows for the flow of new ideas and quick implementation.”

DIMENSIONS OF PPP

Just as each airport has a different set of challenges, opportunities, and circumstances, there is no “one size fits all” model for PPPs. Within the ICAO case studies, you will find projects which are majority-owned by governments, projects in which private consortiums own more than 50 percent, and even some with 100 percent private equity. The tasking might involve build-operate-transfer, design-finance-operate, or any of a number of other agreements. Some deals encompass 20 or 30 years, a few as long as half a century.

ICAO has been working with subject experts in airport and ANSP operations, PPP investors such as the World Bank, legal, regulatory, and other specialists to develop a framework and guidance for States interested in public-private partnerships. The intent is not to promote one business model over another but rather to enable the Member State to address its unique situation.

When planning a PPP, States should thoroughly consider these main dimensions:
1. Effects–forexample,willtheprivateoperatorbuilda‘greenfield’ development or take over existing infrastructure?
2. Functions and activities – such as infrastructure design, financing, build, operate, maintain, own.
3. Payment mechanisms – user fees? Performance-based fees? Or both?

To a ract private sector funding requires a solid business plan based on market realities. This may involve bringing in some experts from outside the State – such as members of ICAO’s technical team – who have a regional or global perspective.
The ACI report noted, “Private investment typically flows to airports with a sufficient critical mass of traffic.” If it cannot be demonstrated that an airport will a ract sustained traffic over years and decades, and thus generate a solid return on investment, the investors will not fund the project.

PPP projects should also have demonstrable social and economic benefits and a favorable policy environment. A strong political will is critical, and an appropriate regulatory environment – including an effective legislative, legal, and controls framework – will greatly facilitate privatization and should be put in place prior to the transaction.

The best use of private sector operational efficiencies can increase the quality, efficiency, and competitiveness of public services, as well as speed up infrastructure development.

When considering the commercialization or privatization of airports and ANSPs, States should also bear in mind that they are ultimately responsible for safety, security, and economic oversight of these entities. Privatization should not in any way diminish the State’s requirement to fulfil its international obligations, notably those contained in the Chicago Convention, its Annexes, and in air services agreements.