WTP°31 3 _ c /SS WORLD BANK TECHNICAL PAPER NUMBER 313 Airport Infrastructure The Emerging Role of the Private Sector Anil Kapur EEON LAN TENURE LNITI DUT U DEVELI ,CO, ON AND TI ICM EE 4~N NVIRONMI r E~~~~~~~~~Al ON URE Pi. 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Copyright ©) 1995 The International Bank for Reconstruction and Development/THE WORLD BANK 1818 H Street, N.W. Washington, D.C. 20433, U.S.A. All rights reserved Manufactured in the United States of America First printing December 1995 Technical Papers are published to communicate the results of the Bank's work to the development com- munity with the least possible delay. The typescript of this paper therefore has not been prepared in accor- dance with the procedures appropriate to formal printed texts, and the World Bank accepts no responsibili- ty for errors. Some sources cited in this paper may be informal documents that are not readily available. The findings, interpretations, and conclusions expressed in this paper are entirely those of the author(s) and should not be attributed in any manner to the World Bank, to its affiliated organizations, or to members of its Board of Executive Directors or the countries they represent. 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The complete backlist of publications from the World Bank is shown in the annual Index of Publications, which contains an alphabetical title list (with full ordering information) and indexes of sub- jects, authors, and countries and regions. The latest edition is available free of charge from the Distribution Unit, Office of the Publisher, The World Bank, 1818 H Street, N.W., Washington, D.C. 20433, U.S.A., or from Publications, The World Bank, 66, avenue d'lena, 75116 Paris, France. ISSN: 0253-7494 ISBN: 0-8213-3526-X Anil Kapur is the Principal Private Sector Development Specialist in the Public Sector Modernization and Private Sector Division, Latin America and the Caribbean Department, of the World Bank. Library of Congress Cataloging-in-Publication Data Kapur, Anil, 1947- Airport infrastructure: the emerging role of the private sector / Anil Kapur. p. cm. - (World Bank technical paper; no. 313) Includes bibliographical references. ISBN 0-8213-3526-X 1. Airports-Economic aspects-Case studies. 2. Airports-Law and legislation-Case studies. 3. Privatization-Case studies. I. Title. II. Series. HE9797.4.E3K37 1995 387.7'36-dc20 95-49151 CIP CONTENTS Page No. Foreword ....................................................................v Acknowledgments ................................................................... vii Acronyms ................................................................... ix Executive Summary ................................................................... xi Chapter 1: INTRODUCTION A. Infrastructure and Economic Development ....................................................................I B. An Agenda for the Transport Sector ....................................................................4 C. The Growing Importance of Air Transport ...................................................................S5 D. Objectives of the Report ....................................................................6 Chapter 11: AIRPORT FUNCTIONS AND PUBLIC OWNERSHIP STRUCTURES A. The Functional Activities of Airports ...................................................................8 B. Current Airport Ownership Structures ...................................................................9 C. Publicly-owned Airports .................................................................. 11 Chapter III: THE PRIVATIZATION EXPERIENCE OF AIRPORTS A. Privatization Approaches .................................................................. 15 B. Public Ownership with Private Operations .................................................................. 16 C. Private Ownership and Operations ..... ................................................................ 20 D. Preliminary Lessons Learned From Airport Privatizations ............................................................... 22 Chapter IV: AIRPORT REVENUES, PERFORMANCE, AND PRICING A. Sources of Airport Revenues .................................................................. 26 B. Financial Performance .................................................................. 30 C. Pricing of Airport Services .................................................................. 37 Chapter V: AIRPORT REGULATORY ENVIRONMENT A. The Evolution of Aviation Regulation .................................................................. 43 B. Current Institutional Structure of Aviation Regulations .................................................................. 45 C. The Need for a New Regulatory Framework .......................... ........................................ 54 Chapter VI: THE EXTERNAL CHALLENGES AHEAD FOR AIRPORTS A. Capacity Constraints .................................................................. 57 B. Efficiency Constraints .................................................................. 62 C. Limited Availability of Traditional Sources of Funds .................................................................. 65 D. Market Access .................................................................. 67 Bibliography .................................................................. 72 iii Text Figures 1.1 Average Economic Rates of Return, World Bank Projects, 1983-92 . ............................................1 1.2 Ownership Structures in Infrastructure Sectors ............................................................................2 1.3 Impact of Infrastructure Quality on Development: Investors' View ..............................................3 1.4 Regional Distribution of Air Passenger Traffic .......................................................5 1.5 Regional Distribution of Air Cargo Transport .......................................................6 3.1 Summa ry of Airpor t BOT Projects ...................................................... 18 3.2 Ownership Structure and Passenger Traffic ................................................................ 24 4.1 Average Airside Revenue per Aircraft Movement ...................................................... 28 4.2 Average Landside Revenue per Passenger by Ownership Structure ............................................ 30 4.3 Selected Credit Ratings by Ownership Structure ...................................................... 34 4.4 Share Price for Selected Public Utilities and Transport Sector Entities (UK) .............................. 36 4.5 Airside Landing Charges at Selected Airports by Ownership Structure ...................................... 41 5.1 Current Institutional Framework for Airport Regulation ....................................................... 44 5.2 Airport Activities Subject to Regulation ...................................................... 48 5.3 Institutional Process for Economic Regulation of Airports in the UK ......................................... 50 6.1 Relationship of Air Transport Growth and GDP Trends ....................................................... 58 6.2 Air Passenger and Cargo Forecasts by Region and the World, 1995-2005 .................................. 60 Text Tables 2.1 Principal Airport Functions ................................................. ..................................9............... 9 2.2 Inventory of Airport Ownership Structures in Selected Countries ............................... 10 2.3 Argentina-Principal Airport Functions ................................................ 11 3.1 Techniques Used for Private Sector Participation in Airports .................................. 15 4.1 Sources of Airport Revenues ................................................. 26 4.2 Traffic and Revenue Distribution, Selected Airports ................................................. 27 4.3 Average 1993 Financial Performance of Selected Airports ................................................. 31 4.4 Objectives Addressed under Different Airport Ownership Structures . ........................................ 31 4.5 Factors Influencing Airport Revenue Sources ................................................ 37 4.6 Aircrafl Landing Charges at Selected Airports ..39 5.1 Airport Regulatory Agencies by Ownership Structure ....................................... 47 5.2 Airport-Use Agreements at Selected US Airports ....................................... 52 6.1 Air Passenger and Cargo Traffic Growth by Region ....................................... 59 6.2 Inventory of New Airport Facilities ....................................... 66 6.3 Funding Sources for Airport Infrastructure in 67 States ...................................... 67 6.4 Restructuring of the Airline Industry ........................................ 69 iv FOREWORD In recent years there has been a rise in interest in private participation in infrastructure. This began with the power sector, water supply and some modes of transport. Lately this interest has spread to airports. Drawing on extensive interviews with airport authorities in both developed and developing countries, this report analyzes the current ownership and management structure and describes the privatization techniques used. It describes the growing importance of air transportation within the framework of other infrastructure, the types of ownership and management structures of airports, the privatization techniques used and their experiences, the financial performance of selected airports, the regulatory environment, and the external challenges. A central finding of the report is that among the five different ownership structures, there is no single model that has emerged in promoting efficiency and competition. Changing ownership structure has been a response to the curtailment of public investment funds for airport development. Alongside this trend, which is expected to continue, policy makers will be faced with new challenges that are likely to place additional pressures on the aviation sector. These emerging challenges--managing capacity constraints under conditions of cyclical growth, globalization of world industry, combined with continuing pressures to deregulate and privatize airlines, adapting to the growing importance of air traffic control--will test the managerial capabilities of the traditional airport managers. The analysis presented in this technical paper is intended to provide political leaders, policy makers, and the broader development community a clearer picture of the complexities of the world's changing airport ownership structure and the benefits achieved under each institutional structure. Airport Infrastructure: The Emerging Role of the Private Sector is the first publication undertaken by the World Bank in this area. The report raises a number of issues that merit further research, especially in the areas of airport privatization techniques and the role of regulation beyond technical and safety issues. Sri-Ram Aiyer Director Latin America and the Caribbean Region October 1995 v ACKNOWLEDGMENTS This report was prepared in joint collaboration with the Co-financing & Financial Advisory Services and Transportation, Water & Urban Development Departments. A number of World Bank Group staff assisted in the preparation of this report. Ellis Juan provided information on selected country specific cases, Albert Amos provided research and analytical support, and William Mayville provided presentation and editorial support. The report benefitted from valuable comments and suggestions from Malcolm D. Rowat, John Flora, Kevin Young, fivek Talvadkar, as well as from government and airport authority representativesfrom numerous countries vii ACRONYMS AAJ Airport Authority of Jamaica ACI Airports Council International ACNZ Airvays Corporation of New Zealand ADC Aeroports du Cameroon ADP Aeroports de Paris AENA Aeropuertos Espafioles y Navegacion Aerea (Spain) ASA Air Service Agreement ASC Airline Scheduling Committee ATC Air Traffic Control BA British Airways BAA British Airports Authority (United Kingdom) BBO Buy-Build-Operate BIA Belfast International Airport BOO Build-Own-Operate BOT Build-Operate-Transfer BOOT Build-Owvn-Operate-Transfer CAA Civil Aviation Authority (Colombia, New Zealand, United Kingdom) CAD Civil Aviation Department (Hong Kong) CRA Comandos de Regiones Aereas (Argentina) EATCHIP European Air Traffic Control Harmonization and Integration Program ECAC European Civil Aviation Conference FAA Federal Aviation Administration (United States) FAC Federal Airports Corporation (Australia) FIG Flughafen hmmobilien Gesselschaft (Zurich, Switzerland) GATS General Agreement on Trade and Services GDP Gross Domestic Product IATA International Air Transport Association ICAO International Civil Aviation Organization KIA Kansai International Airport (Japan) LAA Local Airport Authority (Canada) LDO Lease-Develop-Operate MAW Maximum Authorized Weight MEBO Management and Employee Buy-out MMC Monopolies and Mergers Commission MTOW Maximum Take-Off Weight MWAA Metropolitan Washington Airports Authority (United States) NAFTA North American Free Trade Agreement NAS National Airports System (Argentina) NIAL Northern Ireland Airports Limited (United Kingdom) OECD Organization for Economic Coordination and Development PAA Provisional Airport Authority (Hong Kong) PSA Prices Surveillance Authority (Australia) RPI Rate Plus Inflation SIA Sangster International Airport (Montego Bay, Jamaica) VIA Vienna International Airport WIAL Wellington International Airport Limited (New Zealand) WDR World Development Report WTO World Trade Organization ZAA Zulia Airports Authority (Venezuela) ix EXECUTIVE SUMMARY i. The contribution of infrastructure to national economic growth is receiving close scrutiny by developing and developed economies alike. It is increasingly clear that the emergence of regional and global trade relations will depend to a large extent on optimizing market efficiencies involving infrastructure. Over the last decade, governments faced fiscal crises that severely curtailed meeting critical investment needs in maintainance and rehabilitation of national stock vital for full participation in emerging global markets. To meet the urgent investment requirements and to increase competitiveness and sector efficiency, private sector involvement in infrastructure is a key element of economic growth strategies worldwide. ii. One sector that has received limited systematic attention in this regard is airports. This is surprising given the deregulation of the airline industry and the longstanding competition among private airline operators. Airports have evolved into multifaceted commercial operations. They contain hotels, conference centers, duty-free shops, shopping malls, and car-parking and rental activities, as well as provide a range of facilities and services for airlines. In this sense, they are the hub of a multimodal transport network that serves as host to a myriad of economic activities. The tremendous increase in international trade and passenger traffic has revealed capacity gaps that affect all airport constituencies: airlines, passengers, exporters and importers, and related services and industries. Closing the gaps will require more money, better management, and a sector policy framework, plus suitable harmonization of local, national, and international regulatory frameworks. If this occurs, airports worldwide, and particularly in developing economies, will be able to optimize their contribution to and become more fully integrated in the global markletplace. Ownership Structure iii. There is great variety in the ownership structure of airports with a tendency to experiment with more private sector modes of management and operations. There are five general types of airport ownership structure: (a) national or federal public ownership and public operation, usually managed by a government department--financed by direct government subsidies or multilateral and bilateral lending; (b) public ownership and public operations but run on a commercial basis (corporatization); and (c) regional ownership and operations (state governments, local communities, and municipalities, with user services occasionally run on a commercial basis--(b) and (c) financed by debt with government guarantees and by municipal bonds; (d) public ownership with operations contracted to the private sector; and (e) private ownership and operations often with a regulatory structure--(d) and (e) financed by debt with government guarantees; BOT (build, operate, transfer), BTO (build, transfer, operate), and leases; and quasi-equity and equity instruments. iv. Most airports worldwide are owned and operated by the Federal Government; however, there is an emerging trend to change the airport ownership structure. Among the countries involved in this process are, by region: Russia, Hungary, and Greece; China, Hong Kong, Malaysia, and Australia; and Bolivia, Colombia, Mexico, Venezuela, and xi Jamaica. Regional government ownership is the mode in the UK, the USA, and in France. Corporatization is the mode in Austria, Canada, Germany, the Netherlands, and Spain; Singapore; Brazil; and Nigeria and South Africa. Experimentation with private sector participation is beginnning in Austria (Vienna Airport), Japan (Kansai), Venezuela (Maracaibo), Mexico (Mexico City), Turkey (Istanbul), and Cameroon. The biggest shortcoming of publicly-owned airports is the potential for political interference in management and operations, restrictions on access to private capital, and management know-how. Financial Performance and Pricing Policy v. Financial performance of airports is mixed because of inconsistent pricing of services and a failure to capitalize on potential for landside versus airside revenues, the two primary sources of revenue generation. Landside revenues are derived from non- airport traffic activities that arise directly from the operations and landing of aircraft, passengers, or freight. Landside revenues flow mainly from non-aircraft-related commercial activities in the terminals as well as rents from airlines and concessions. Findings from a sample of airports show that governmental department airports have the lowest average levels of aircraft movement and passenger volumes and a high dependence on airside revenues, representing more that 70% of total revenues generated (compared to 40% for privatized airports, and somewhere in between for other ownership structures). vi. Pricing of airport charges falls into three categories: aircraft landing and parking charges, passenger fees, and miscellaneous airport charges. To a large extent, aircraft landing and parking charges are price driven based on international, bilateral, and national government agreements. However, in response to privatization initiatives, a few countries have established or are experimenting with some form of market-driven pricing mechanism for landing aircraft charges . Since airside charges for passenger fees and other airport charges are largely discretionary and contract driven, there is no standardized pricing methodology for these airport services. While there is uniformity in the structure of airport charges, the level of charge varies considerably. In the current environment, with the privatization and deregulation of airlines, the growing incidence of litigation between airlines and airports, and the need for increased commercialization of airports, governments are now faced with increasing pressure to establish and regulate prices for airport services. vii. Significant scope exists for exploiting landside revenues, which ranks last in average revenue per passenger at government-department-owned airports. A number of airports now are beginning to shift to a more commercial orientation in response to rapidly changing market conditions. Diversifying sources of revenue is one of the major challenges facing airport managers, as governments are increasingly unable to meet airport financial obligations. xii viii. The lack of a systematic approach to encourage commercial operations of airports seriously compromises investment requirements of the airport sector. The International Civil Aviation Organization (ICAO) estimates that US$259-350 billion will be needed over the next 10 years to meet forecast demand and to modernize existing airport facilities. The cost increases to US$500 billion if the cost of upgraded air traffic control systems, environmental regulations, intermodal linkages, and unreported quality constraints are included. ix. Currently, only a limited number of airport facilities are being developed to meet the increase in air traffic demand mostly in East Asia (Singapore, Japan, Hong Kong, Malaysia, and Thailand). Existing airports in North and South America and Europe are being reconstructed and/or modernized. However, few primary airports are being constructed in Africa, Latin America, the Middle East, and South Asia, where existing infrastructure is among the oldest in use. Regulatory Framework x. In most countries, the market for transport services has evolved into an area of public jurisdiction going well beyond health and safety regulations. Due to the strategic composition of the aviation industry, regulatory authorities in fact are dominated more by the needs of the airline industry than the changing requirements of airport infrastructure. There is an urgent need to develop a consistent regulatory framework for the airport sector. Economic regulatory frameworks are currently under review by a number of countries because of the profound structural and ownership changes within the aviation industry. Sector-specific economic regimes have been implemented in only three countries (Austria, South Africa, and the UK), but no independent airport economic regulatory entity exists. xi. Most airports are regulated by a civil aviation authority within a department or ministry of transport, responsible for related infrastructure, and economic matters, including air traffic control (e.g., Austria, Canada, Jamaica, and the United States). Less common are commercial airports regulated and administered by the military (Angola and Argentina). A few countries have created semi-autonomous airport authorities, which is a growing trend. They are publicly owned and generally self-sustaining, with access to private debt capital. xii. The current institutional framework for airport regulation includes the ICAO, bilateral agreements, national aviation authorities, and local government airport authorities. External influences on these participants include industry associations, regional trade blocs, domestic airlines, and local interest groups. Of increasing importance to the development of appropriate regulatory frameworks are environmental and economic factors. Environmental concerns pertain to noise abatement, emissions, water, sewage, fuel storage, and waste disposal. On the economic side are cost-recovery pricing, ownership structure, asset valuation and land use, market access, subsidies and cross- subsidies, concessions, economic pricing, and price versus profit controls. xiii Challenges Ahead xiii. In general, there is an urgent need for a coherent, integrated airport privatization strategy, reduced political interference, and increased transparency. Most airport divestitures are site-specific and rarely occur within an integrated strategy for restructuring and privatization of a national system. Most countries have undertaken privatization of large, major airports, leaving unviable operations to be funded by the government. This approach has enabled governments to foster private investment; it also has engendered deleterious economic and social effects given the lack of systematic planning. Whatever the form of privatization, if the govenrment objective is to increase the role of the private sector, then a better grasp of airport revenue performance and pricing will be needed. xiv External challenges have forced governments and airport authorities to review, and restructure existing ownership, management, and regulatory structures. On the demand side, the biggest challenge facing airports is accommodating air traffic transport with existing capacity constraints. Between 1982 and 1993, total world air passenger and cargo transport, which is highly sensitive to economic growth trends, grew 3.7% and 4.1%, respectively. Some of this growth can be attributed to the globalization of industry as well as airline industry deregulation and restructuring. Air traffic forecasts for the next 10 years range from 3% to 6%. Many existing facilities will need to be rehabilitated to accommodate larger planes that service long-haul destinations and carry loads of between 375 and 800 passengers. In addition, the growing awareness of environmental considerations will force airports to change operating schedules, prohibit certain users, and alter expansion and greenfield projects to meet higher standards. Also, airports will need to improve intermodal linkages to better integrate with national transportation structures and facilitate airport access. Finally, airports have historically relied heavily on government funding, and to a lesser extent, internally generated funds and commercial loans. Given the need for governments to reduce fiscal expenditures, private sector funding will need to be sought to meet anticipated investment requirements. Conclusions xiv. To meet future challenges facing the aviation sector, a number of countries have initiated programs to improve the efficiency of air transport, especially their airport infrastructure. Given the variety of responses by government relative to private sector involvement, a strategic framework will be needed to provide a blueprint for capturing the potential economic benefits of the airport sector to the national economy and to stimulate private sector involvement. This framework will need to consider the development of an integrated transport policy framework; facilitating private sector participation; a restructuring agenda; a privatization agenda; and a regulatory agenda at both the national and international level. xiv /. INTRODUCTION A. Infrastructure and Economic Development 1.1 Infrastructure services are a basic ingredient to the activities that promote economic growth and production, on average accounting for between 7% and 11% of GDP, with transport being the largest contributor. According to the 1994 World Development Report, infrastructure capacity grows in concert with economic output: a 1% increase in the stock of infrastructure is associated with a 1% increase in GDP across countries. Importantly, as national income rises, infrastructure adapts to support changing patterns of demand, with the shares of power, transport, and communications increasing relative to basic services, such as water and irrigation. 1.2 Developing countries invest about US$200 billion annually in new infrastructure or 4% of national output, which is nearly 20% of total investment, and between 40% and 60% of public investment. The average econornic rate of return for completed World Bank infrastructure projects is 16%, slightlv above the Bank's threshold of 15%. Returns are highest for transport and telecommunications and lowest (and declining) for power and irrigation projects. In the transportation sector, the Bank's portfolio has performed better in roads and ports compared to rail and airports (see Figure 1.1). FIGURE 1.1: Average Economic Rates of Return, World Bank Projects, 1983-92 30 29 25 2 1 20 20 1 9 Total Power T ele. Irrig. T roa n. Airport Road l'ort a I^i Source World Bank. 1994 World Development Report 1.3 Many countries made impressive strides in infrastructure expansion during the earlier stages of this public sector initiative; however, recent expefience has revealed serious and widespread misallocation of resources, as well as failure to take into account actual I 2 demand. Moreover, the preemptive instruments of public ownership, financing, and operation have not demonstrated any significant advantages. These deficiencies in performance are embedded in the prevailing system of institutional incentives for infrastructure supply. Consequently, some problems common to all infrastructure sectors are apparent: operational inefficiencies, inadequate maintenance, excessive dependence on fiscal resources, lack of user responsiveness, limited benefits to poor populations, and insufficient attention to environmental responsibilities. 1.4 According to the WDR, the efficiency and effectiveness of infrastructure derives not from general conditions of economic growth and development but rather from the institutional environment, which varies across these sectors. In response to such constraints, governments worldwide have embarked on market liberalization initiatives and are experimenting with different forms of private participation. During the past decade, the traditional monopolistic public utilities--airlines, telecommunications, and power--have undergone dramatic changes in ownership, structure, and performance. On consequence is that US$61.6 billion was obtained between 1988 and 1992 by developing countries from the privatization of state-owned enterprises. About one-third (US$21 billion) of this can be attributed directly to the privatization of infrastructure entities. Aggregate proceeds from infrastructure privatization have been highest in Latin America, with most activity in telecommunications. Some Asian countries, such as Malaysia and Korea, have opted for partial privatization. Outside Latin America and Asia, however, privatization has been limited. Figure 1.2 portrays the changing pattern of ownership in selected infrastructure sectors. FIGURE 1.2: Ownership Structures in Infrastructure Sectors' 100% X- 80%. 60%__ 40% 20% 0% Airline Telecom Elec. Rail Water Airport _ Private M Govt Corp * Reg Govt 0 Govt Dept Source: World Barnk Staff 1. Reg Govt = Regional Governnied vvfhich includes muniripal, auty, stale. and provincial govemnlws. 3 1.5 Given successfiul initial experiences, govemnments are beginning to privatize where market-friendly or competitive environments exist, and to put in place appropriate regulations in monopolistic or less open markets. In 11 of the 12 cases studied by the World Bank, divestiture led to a net increase in wealth. This increase in wealth was distributed unevenly, but with surprisingly positive consequences: foreign and domestic investors gained; some governments lost, but only marginally; employees as a group did not suffer in any case, and in a few instances profited substantially; consumers lost in only three cases as a result of much-needed price increases, but were not affected in five cases, and actually benefited in four. Behavioral changes within organizations were positive, with productivity increasing in three- quarters of the cases and remaining constant in the others. Investment constraints were often relaxed after privatization, enabling expansion in capacity and service enhancement.' 1.6 Foreign investment flows from new infrastructure entrepreneurs are on the rise. The poor quality of infrastructure in most emerging economies has led to inertia, just when economic growth is needed to generate funds to upgrade infrastructure quality; moreover, the existing uneven and poor quality of infrastructure restrains the economic growth that could attract the required private investment. A survey of investors found that infrastructure quality is the most important determinant of multinational investment in manufacturing and high technology (see Figure 1.3). FIGURE 1.3: Impact of Infrastructure Quality on Development: Investors' View Infrastructure / Lnbor Cost U Foreign Investment High Technology Manufa.cturing Industrialization Market SIze 0 0.6 1 1.5 2 2.5 3 Source: D. Wheeler and A. Mody, "International Investment Location Decisions," Jounal of International Economics, Vol. 33, Nos. 1-2, 1992. Note: No data were available on labor cost elasticity for rmanufacturing. Ahrned Galal, Leroy Jones, Pankaj Tandon, Ingo Vogelsand, "Welfare Consequences of Sellng Public Enterprises " World Bank, 1992. 4 B. An Agenda for the Transport Sector 1.7 In most developing countries, the demand for freight and passenger transport is growing faster than population and GDP growth rates. Moreover, the structure of freight transported has shifted dramatically. Globally, the share of raw materials moving between regions has declined while the share of cross-movements of manufactures and semi- manufactures has increased. Manufacturing exports now represent over 50% of total exports in low-income developing countries, more than 60% in middle-income countries, and in excess of 90% in Asia's newly industrialized econornies. The adequacy of infrastructure quantity and reliability is a key factor in the ability of countries to compete in intemational trade, even in traditional commodities. For example, infrastructure problems contribute to high shipping costs borne by the exporter. Thus, the competition for new exports and location of global industries largely depends on the quality of infrastructure. 1.8 During the past two decades, increased globalization of world trade in many countries arose not only from the liberalization of trade policies but also from advances in communications, transportation, and storage technologies. About two-thirds of production and sales in OECD countries are processed directly to order, with "just-in-time" delivery of products becoming the norm in many sectors. Significantly, 60% of all exports from developing countries are directed to OECD markets and must meet OECD standards. As service, delivery, and quality become increasingly more critical factors, transportation will replace labor costs in establishing an international competitive cost advantage. Shippers in developing countries wishing to compete in global markets or participate in global sourcing, must have access to state-of-the-art multimodal transport systems involved in containerization, which requires precise coordination by shippers across rail, ports, air, and road freight modes. 1.9 Despite many previous successes, inefficiencies in the current transportation system increasingly impedes the ability to respond to the changing requirements of world businesses and consumers. The transport sector historically has enjoyed the largest share of public investment among infrastructure sectors, typically absorbing 5% to 8% of total paid employment. Unlike other infrastructure sectors, transport has been slow to meet new development challenges. This is surprising given that it has outperformed all other sectors in rates of return achieved for Bank-sponsored projects. Currently, many national transportation systems are overbuilt with many non-viable components. 1.10 The transportation vision for the twenty-first century will need to focus on three key players in the industry: shippers, passengers, and carriers. Shippers must have an efficient, integrated transportation system that will create a level playing field for global competition; passengers must have a multimodal transportation system that is safe, reliable, and affordable; and carriers must be able to compete for business on an equitable basis. 5 C. The Growing Importance of Air Transport 1.11 The world is facing an era of greatly increased communications, more freedom of travel, international trade, and investment across borders. The growth in travel and tourism, which is now the world's largest industry, has been fueled largely by a shill in attitudes. Travel was considered a privilege of the moneyed elite; it is now viewed as a basic human right and economic necessity. The expansion of tourism, apart from widening cultural opportunities for millions of people, has led to greater economic prosperity in previously underdeveloped regions. 1.12 In addition, air transport has prompted a number of industries to expand their geographical markets and introduce "just-in-time" innovative distribution techniques. The globalization of production and markets has contributed to improving the use of resources worldwide. Today, fresh-cut flowers, vegetables, fruits, and a multitude of perishable commodities are available from remote corners of the world. To a large extent, this shift has occurred as a result of advances in air transport. 1.13 The supply of intemational air transport is provided by some 300 airlines that directly employ more that 3 million people and serve 14,000 airports worldwide, with a total fleet of about 15,000 aircraft. In 1993, the total number of passengers (both scheduled and charter flights) was more than 2.2 billion, of which a quarter were international passengers, while over 37 million tonnes of freight transported by air accounted for almost a quarter of the value of the world's manufactured exports (see Figures 1.4 and 1. 5, respectively). FIGURE 1.4: Regional Distribution of Air Passenger Traffic (1993) 100% = 2.2 Billion Passengers Africa & the N. America Middle East 47.9% 4.0% l: < ">' Europe 26.1% L. America 4.3% Asia/Pacific 17.7 % Source: Airport Council International, World Bank Staff 6 FIGURE 1.5: Regional Distribution of Air Cargo Transport, 1993 100% = 37.4 Million Tonnes Africa & the N. America Middle East 47.8% 3.7% Europe 21.1% L. America 4.0% Asia/Pacific 23.2 % Source: Airport Council IntemationaL World Bank Staff 1.14 To meet these challenges, many governments are reexamining their role in the air transport sector. A number of state-owned airlines around the world were privatized during the 1980s. Based on the successes achieved during the first wave of privatizing public enterprises, many developing countries are now embarking on the privatization of public services. At the head of this list is the privatization of airports. D. Objectives of the Report 1.15 Traditionally, the World Bank has viewed airports as extensions of the tourism sector. The Bank's involvement in the aviation sector generally has been limited to financing or expanding airport runways owned by the public sector as well as airport maintenance through Development Finance Credit (DFC) loans. Furthermore, the Bank's airport lending experience has not been impressive (see Figure 1. 1). Air transport infrastructure (airports) is critical to serving the growing demands of international trade and development. Airports should be integrated with other modalities of transport--seaports, trains, rail, and highways--and serve as key links in the globalization of world business. In light of emerging trends, the Bank will need to reexamine the role of airports in the context of national development objectives. .16 To further improve the Bank's knowledge in this sector-- especially reducing the role of the state and improving the efficiency of airport administration and regulation--a research report was initiated by the Bank in May 1994. This is the first review the Bank has undertaken in this area, and is intended to stimulate discussion on the experiences and preliminary lessons learned from an array of ownership structures and private sector participation in airports. 7 1.17 Numerous articles and conference papers have appeared in recent years dealing with various aspects of airport management. However, the literature is limited on how different forms of airport ownership structures are responding to changes in strategic aviation policies, such as the consequences of airline deregulation. Due to the limited availability of literature and the diversity of structures and approaches, the study team complemented its research with visits to selected airports in three geographical regions. The research team has met with government officials, representatives of airport regulatory agencies, airport and air traffic control managers, and consultants for selected airports. The selection criteria were to examine the conditions that permitted private sector participation in these ventures, the differences in regulatory structures, and the policy frameworks. Case studies on each airport selected will be included in a forthcoming report to be published by the Cofinancing and Financial Advisory Services Department (CFS). 1.18 The objectives of this sector report are to: (i) increase the awareness of policy- makers and Bank staff about the emerging trends in air transport and its links to global industry; (ii) analyze the different forms of airport ownership structures and regulatory frameworks, especially their effect on the cost and revenue structures of airports; (iii) assess the lessons learned from recent privatization experiences and their effects on the future role of the state; and (iv) develop an inventory and bibliography of recent experiences with airport corporatization and privatization. The next chapter focuses on the characteristics and ownership structures of airports. II. AIRPORT FUNCTIONS AND PUBLIC OWNERSHIP STRUCTURES A. The Functional Activities of Airports 2.1 An airport can be defined as one or more runways for aircraft together with associated terminals and buildings where passengers and freight are transported and processed. Domestic and international airports are considered to be large complex industrial enterprises. (Airstrips or "aerodromes" do not meet this definition and are therefore excluded from this study.) Airports act as a forum for disparate functions and related activities that combine to facilitate air transport traffic and the interchange between air and surface transport. The extent of an airport authority's involvement in these functions substantially affects revenue and cost structures and creates comparability differences among airports. Such differences are compounded when airport owners are conglomerates with substantial non-aviation activities, e.g., BAA Plc or the New York Port Authority. 2.2 For historical, legal, and commercial reasons, the activities performed within an airport vary among countries, and often among airports within the same country. In many developing countries, the three principal airport functions are typically owned and operated by a government entity, whereas in many industrialized countries, ownership functions are diffuse. Due to fiscal constraints, government entities are increasingly divesting many airport operational activities. A number of these countries have corporatized air traffic control systems, and police and security of the airport are frequently undertaken by private firms. Furthermore, traffic-handling activities (excluding customs and immigration) can either be supplied by an airport administrator or contracted under private provision to airlines, while commercial activities are generally provided under private concession. Fire, ambulance, rescue services, and maintenance continue to be handled by an airport authority. Within the overall umbrella, airport services and facilities can be classified into three groups: (a) Essential operational services and facilities. Such services are primarily concerned with ensuring safety of aircraft and airport users. This includes air traffic control (ATC) services to facilitate the approach and landing of aircraft, meteorological services, telecommunications, police and security, fire and ambulance services (including search and rescue), and runway and building maintenance. These facilities and services are generally provided by the airports themselves or by local or central government departments. The costs for such services differ among airports. (b) Traffic-handling services. Numerous traffic-handling activities occur at airports. Those associated with aircraft are commonly referred to as "ground handling." This includes cleaning, provision of power, fuel, and processing baggage and freight. Other ground- handling activities are more specifically traffic-related and cover the various stages of processing passengers, baggage, and freight through terminals and onto aircraft. Parts of the traffic handling process may be the responsibility of different authorities. JInabout half the larger European airports these activities are provided by either airlines or specialized handling agents. But there are several larger airports, such as those in Spain 8 9 and Austria, where these services are provided jointly by the airlines and the airport authority. (c) Commercial activities. At a number of airports in industrialized countries, commercial facilities are provided by concessionaires who are specialists in their fields. Airport authorities collect concession fees and/or rents from these companies. However, there are other countries where the airport authorities themselves are directly involved in running some or virtually all the commnercial outlets. In addition to the usual shops, some of the larger airports provide an extensive range of other services to their customers both within the terminal buildings and on airport property. Depending on the size of the airport, commercial activities range from duty-free shops, catering, and restaurants to car parking and car rental agencies, plus a myriad of other services. TABLE 2.1: Principal Airport Functions FUCTIONS:Qeitoia e':f'dte Traffl I*ng,ua oineda WA"tt O"~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~.a". d . l _. ,,....... 'L--m" 1. Air Traffic Control 1. Aircraft 1. Duty-Free and Shopping (Tuel, Ramp. lHanger) 2. Police and Security 2. Catering and Restaurants Principal 2. Baggage and Freight Functions 3. Ambulance, Fire and Rescue 3. Car Parking 3. Passengers 4. Maintenance 4. Car Rental 4. Customs and Immigration S. Specific Facilities 5. Other (Terminals, Airbridges) (News. Bank, Hotel) Source World Bank Slaff B. Current Airport Ownership Structures 2.3 A majority of commercial airports (excluding a handfiul of new and general aviation airports) were constructed prior to the mid-1960s, except during "the golden age of the public sector." Similar to other infrastructure sectors, airport ownership during this period traditionally was viewed as strategically important. Consequently, most of the airports in developed and developing countries became operational under public ownership. Many countries made impressive strides in airport expansion under this earlier stage of public leadership. The management and ownership of airports has undergone two distinct shifts. The first change began in the early 1 970s, when a number of countries created airport corporations under public ownership to improve efficiency and provide access to private capital markets. In the mid- 1980s, a second shift occurred within the context of restructuring the role of the state. A number of countries began to turn to the private sector for financing airport investments directly and further improving efficiency. 2.4 For comparative purposes, airport ownership can be classified under five broad categories (i) national or federal public ownership and pubLic operation normally managed by a government department; (ii) pubLic ownership and pubLic operations run according to commercial practices (a formn of "pubLic corporation"); (iii) regional ownership and operations (state governments or local communities or municipalities and user provisions that may be run based on "commercial practices"), (iv) pubLic ownership with operations contracted to the private sector; and (v) private ownership and operations, often with a regulatory structure. 10 Within a country, or sometimes within an airport, a number of variations exist along this ownership spectrum. For instance, only part of the United Kingdom's airport system is completely privatized, while the rest is under local ownership; in Canada, only Terminal 3 at Toronto airport is privatized, with the rest under federal and local government operations. Table 2.2 provides an inventory of current and planned changes (identified in capital letters) of airport ownership structures in selected countries. TABLE 2.2: Inventory of Airport Ownership Structures in Selected Countries Government Public Regional Joint Public- Private Ownership Department Corporation Govt. Private Venture Ownership EUROPE AND CZECH REP. AUSTRIA. BRITAIN * Share Flotation * Share Flotation NORTH GREECE CANADA Brussels BAA AMERICA HuNGARY GERMANY FRANCE Liverpool ROMANIA IRELAND UNITED STATES East Midlands * BBO RUSSIA ISRAEL Copenhagen London City SWEDEN NETHERLANDS Italy NORWAY Vienna * MEBO SPAIN Zurich Belfast BOT Birmingham Burbank BOOT Toronto (T3) ASIA AND CHINA AUSTRALIA None * Joint Venture None PACIFIC HONG KONG NEW ZEALAND Japan: Kansai MALAYStA INDIA SINGAPORE JAPAN THAILAND LATIN ARGENTINA JAMAICA None * LDO * BOO AMERICA BoLrVlA BRAZL Veriezuela: Dominican Rep: AND THE BOIAmB Maracaibo Punta Cana HXAITI - BOT Bahamas: Freeport MEXICO Mexico: Mexico UIRUGUAY VENEZUELA City CHILE MIDDLE NIGERIA None * BOT EAST AND ANGOLA Turkey: Istanbul AFRICA GABON SOUTH AFRICA T Istanbul KENYA Management SAUDI ARABIA Contract I .1 Cameroon .-. ; ; .- -. ...v.x ; YZ-. :: :.. .....:.. ,. -.: .s. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~. . . . . . . '. - .'.' Direct iovt. Subsidies Debt with Govt. Guarantees Debt with Govt. Guarantees A fultilateral Lending A lIunicipal Bonds BOT BTO; Leases Bilateral Lending Quasi-Equity Instrument Equity Instruments PUBLIC RISK SHARED RISK PRIVATE RISK Soure: Worid Bank Staff 11 C. Publicly-Owned Airports 2.5 Among the many differences between publicly- and privately-owned airports is the issue of access to financing sources. Publicly-owned airports--government department, public corporations, or regional ownership--have limited access to debt financing. In the case of government departments, debt financing is directly from government sources or indirectly through official lending institutions (multilateral and bilateral agencies). However, in the case of public corporations and regionally-owned airports, debt financing is extended to the private capital markets under some form of "implicit" government guarantee. The following is a description of the three different types of publicly-owned airports: * Public Ownership and Public Operations 2.6 The majority of airports around the world are directly owned and operated by the central government. In many countries a single government department, usually a civil aviation department or an airport administration, generally under the responsibility of the Ministry of Transport (sometimes the Ministry of Defense), operate all or most of the country's airports. A number of countries in Europe, Asia, and Latin America and the Caribbean are considering changing to the existing ownership structure mainly in response to investment needs of airport infrastructure. In many of the Middle East and African countries, the pace of airport ownership change is slower. There are a few publicly-owned airports, such as Hong Kong, that are efficient and profitable. A large number of publicly-owned and operated airports are generally inefficient, rely on large government subsidies to cover operating expenses, and are normally not in compliance with international safety and environmental standards due to limited government funding. 2.7 In Argentina, the Comando de Regiones Aereas (CRA, an arm of the Air Force), owns, administers, operates, and regulates an extensive airport infrastructure consisting of some 400 airports. Many of these airports are "aerodromes," general aviation airports, or airstrips owned by private individuals. Of this total, there are about 60 airports that are part of the Argentine National Airport System (NAS). The CRA employs approximately 5,500 staff. In addition to its traditional airport activities, the CRA is also involved in a number of commercial activities through joint ventures with private firms. The ownership and management structure of the airport is shown in Table 2.3. TABLE 2.3: Argentina-Principal Airport Functions m ~~~~~~~~~~........... Air Traffic CRA Ground and Intercargo Duty Free and Interbaires Control Ramp Handling Shopping Police and Security CRA Freight Edcadassa Catering and Buenos Aires Handling Restaurant Catering Ambulance, Fire CRA Baggage Intercargo Car Parking Caritas and Rescue Handling Maintenance CRA Passengers Intercargo Surface Manuel Tienda Transport Leon Specific Facilities CRA Customs and Customs Advertising Caled Air Force; Immigration Unit Other Province Source: World Bank Staff. 12 2.8 This ownership, administrative, and regulatory structure, all combined under one agency, makes it relatively unique compared to other countries. Although many countries began the ownership and administration of airports with Air Force participation due to their strategic nature, many governments have now separated commercial and military air traffic activities. The Argentine Government is among a handful of countries that now has decided to change the ownership structure of its national airports. 2.9 In contrast, the Civil Aviation Department (CAD) of Hong Kong, also a government agency, is managed by a small staff with active advisory participation of airlines and the private sector. The CAD is under the supervision of the Secretary of Economic Services, a government authority responsible for overseeing most public utilities. The existing airport--Kai Tak Airport--is profitable and efficiently managed, with annual profits of about HK$1 billion. CAD employs about 370 staff who provide air navigation services, technical regulation, and the administration of Air Services Agreements. Most of the airport's related activities are subcontracted to private concessionaires who employ some 23,000 staff. The CAD's work is complemented by specific boards and committees with advisory status to the government. The Aviation Advisory Board advises the government on broad policy matters, such as air transport services and operations. The Airport Operations Committee, which is composed of senior members from the airlines, CAD, and a representative of the Royal Air Force, provides assistance and counseling to the Director of CAD on operational issues. Finally, the Airport Facilities Committee is chaired by the airport general manager and senior staff from the airlines, Hong Kong Air Temuinal Services, tourist associations, and other members involved in passenger and cargo related activities. 2.10 To modernize its existing facilities and respond to fast-growing regional market needs, the Hong Kong Government has embarked on one of the most ambitious transport infrastructure development programs in building a new airport--Chek Lap Kok--on Lantau Island. The total cost of this mega-infrastructure project is US$21 billion. The Government is contributing 50%/6 of the capital requirements in the form equity investments and public works; and the remainder is being contributed by the private sector in the form of equity investment, commercial lending, and project finance (i.e., BOOT for the Westem Harbor Crossing Project). The Airport Corporation Bill, now under review by the Government of China, would create a fully autonomous government corporation. The staff of the Provisional Airport Authority (PAA), currently managing the construction of the new airport, are to be transferred to the new Hong Kong Airport Authority. * Public Owneship and Public Operations with Commercial Oientation 2.11 Airport public corporations were established to improve managerial and financial autonomy and provide access to private capital markets without foregoing changes in ownership. Established in 1966, the British Airport Authority (BAA) was the first national airport authority to be run according to commercial practice. Several national airport authorities were created in the 1970s and 1980s, some of which were modeled on BAA. Exarnples of corporatized airport authorities include: The Israeli Airports Authority; Aeropuertos Espanoles y Navegacion Aerea of Spain (AENA) and Aer Rianta of Ireland; the Federal Airport Corporation of Australia (FAC); Infraero (Brazil); the Airport Authority of Jamaica (AAJ); and the Local Airport Authorities of Canada (LAA). 13 2.12 In Australia, the FAC was established by passage of the 1986 Federal Airports Corporation Act, assuming responsibility for 23 airports, of which 8 were international and 3 owned jointly with the Department of Defense. One of these airports, Cambridge, was sold by FAC in 1993. The FAC Board of Directors is nominated by the Government and consists of members from the political, business, and academic arena, reporting to the Minister of Transport. The Board of FAC must focus its operations on achieving agreed performance targets and objectives determined in corporate plans within the accountability framework under which they operate. 2.13 In Canada, the Minister of Transport established a Task Force in 1985 to examine alternatives to the existing airport system. A year later, the Task Force recommended the establishment of "Local Airport Authorities (LAA)," which would be devolved to provincial and municipal governments. In 1992, the international airports owned and operated by Transport Canada in Vancouver, Calgary, Edmonton, and Montreal (Dorval and Mirabel) were leased to the LAAs. Each authority is a non-profit corporation headed by a board of directors. Members are nominated by local municipalities and other representative local groups, but cannot be elected politicians or civil servants. Profits generated by LAAs are plowed back into fuiture airport improvements, while losses are offset by Transport Canada through a reduction in lease payments. The LAAs are responsible for management, operation, and maintenance, as well as capital investment projects of the airports they lease. This includes runways, terminal buildings, industrial properties, parking, ground transportation, emergency response services, and financial, personnel, and administrative fuinctions. * Rerional Ownership and Operations (State, Municipal, and Local Community) 2.14 An altemative to federal participation is regional government ownership, in which there are a co-ownership arrangements between state, municipal, and local entities. This approach has been used most extensively in some of the larger industrialized countries, such as the United States, the United Kingdom (for airports not owned by the British Airport Authority), and France. Due to centralized governmental systems, developing countries have almost no experience with this type of ownership approach. Regional airport structures are usually established for the promotion of regional economic development (some are "non- profit"). A disadvantage of this structure is that many regional airport authorities have experienced the heavy-handed bureaucracy of the Federal Govemment through management and operational intervention. 2.15 The structure of regional ownership in industrialized countries is varied and complex. At some airports, regional ownership was the initial structure while for others this framework was established by govemment action. Management is selected by either federal/regional govenmments and/or the private sector. A number of regional airport authorities operate more than one airport, e.g., Aeroports de Paris (four), Aeroports de Montreal (two), the Port Authority of New York and New Jersey (three), and Metropolitan Washington Airport Authority (two). Much more widespread are local airport authorities that operate a single airport. Individual airport authorities generally have a single owner, namely the local municipality or government. A unique case is Basel-Mulhouse Airport on the French-Swiss border, which is jointly owned and administered by two regional governments. 14 2.16 In the United States, the Washington National and Dulles Airports are an anomaly because both entities remain federally-owned. In June 1987, the US Government established the Metropolitan Washington Airport Authority (MWAA) and defederalized airport operations from the Federal Aviation Authority (FAA). MWAA was given a 50-year lease to operate the two airports. It established an 11-member board of directors, one of whom is a Presidential appointee, while the others are elected officials from the District of Columbia and the others from the States of Maryland and Virginia. Congressional legislation and Presidential signature are required to overtum board policies. In addition to the board, the US Congress appointed an independent body, the Board of Review, to oversee and exercise veto power if necessary over decisions of the board of directors. However, in 1991, the Supreme Court ruled that the Board of Review's veto power was unconstitutional. 2.17 Publicly-owned airports, with a few exceptions, generally have not performed at the same level of efficiency as compared to airports with private sector participation. Reasons contributing to the inefficiency of publicly-owned airports include: political interference in the appointment of management, uneven commercial structures, operational inefficiency resulting primarily from overstaffing and limited commercial orientation, inadequate maintenance, a fiscal drain on the national economy when funds should be diverted to more social programs, the lack of responsiveness to user needs, and inadequate economic and environmental regulations. 2.18 To overcome these constraints and meet the future investment needs of airports, govenmments are pursuing changes in airport ownership structures. Table 2.1 shows that most of the ownership movement in airports is being spearheaded by publicly-owned airports, who are bypassing the intermediate stage of corporatization and proceeding directly to some form of privatization. Within the public corporation structure, Australia and Jamaica are among the few countries that have announced plans to privatize their airports. Regionally- owned airports have offered resistance in changing the ownership structure, especially airports operating in the United States and France. The next chapter addresses the techniques and experiences with airport privatizations. 111. THE PRIVATIZATION EXPERIENCE OF AIRPORTS A. Privatization Approaches 3.1 Deregulation and privatization policies in large measure have been driven by disenchantment with public sector performance, fiscal crises (often related), and technology changes that have increased the scope for competition. Privatization has been achieved by changes in either the management, capital, or ownership structures of the entity. In the airport sector, the use of privatization techniques is limited and no single model has emerged. Hence, the observation that pnivatization of airports is not a single theory with a single definition.' The range of options to date include divesting an entire airport system, individual airports, management, airside functions, or landside activities. Table 3.1 delineates the techniques used in the privatization of aiiports. TABLE 3.1: Tlchniques Used for Private Sector Participation in Airports _____ [L_1. Ah|i4e A1~or... Ownership State State Private State State State Private Investment State Private Private State Private Private Private Management Private Private Private Private Private Private Private PPI Options Management BOOT BOO Management BOOT Master Buyout Contract Contract Concession BTO BOOT BTO Capital Service Long-terni BOOT/BTO Markets Concession LDO Management Lease LDO Contract Wraparound MEBO .__ _ _ _ _ _ _ _I I Addition Source: World Bank Staff. 3.2 Airport privatization has been facilitated by outright asset sale through stock flotations, concessions, long-term leases, and joint ventures. Equity flotations have occurred in only a few cases, and almost exclusively in Europe. The largest single airport privatization took place in 1987 with the full divestiture of the British Airport Authority (BAA), which includes the three large airports in London. Private sector participation in airports in East Asia has revolved primarily around greenfield projects, e.g., Kansai (Japan), Hong Kong, and Kuala Lumpur (Malaysia). In the development of these new airport facilities, governments have maintained majority ownership. Although not limited to developing countries, the most common technique for airport privatization involves some variation of a Built-Own-Transfer (BOI) and/or management contract. These schemes are site-specific with long-tenn concessions and the transfer involve of operational functions to a private sector operator. The American Association of Airport Executives (AAAE); and the Airport Research and Development Foundation (ARDF). An Airport Erecutive's Guide to Privatization. AAAE and ARDF: Washington, DC, April 1992. 15 16 B. Public Ownership with Private Operations 3.3 Unlike the sale of productive tradable enterpfises, the privatization of infrastructure and services typically requires the creation of innovative financing and operating structures. For example, the state can continue to "own" infrastructure assets but still effectively privatize them. It can achieve this by allowing either the private sector to be a partner with the state (through joint ventures, majority, or partial shareholdings), or it can allow the private sector to bid for the right to collect user fees over a specific period, after which the govermment re-auctions the improved asset. Within this ownership structure, there are several models of privatization that have been implemented. The definitive element in a privatization project is the manner in which the public and the private sectors share risk, responsibilities, and rewards. The following are definitions of the modalities of this form of ownership arrangement: 3.4 Joint Ventures. The newly created Kansai International (KIA, Japan) which became operational in 1994, has a unique ownership structure. This is a joint venture between the public and the private sectors. The Government owns two-thirds of the shareholdings, with the reminder divided between 12 different local governments and 803 private companies and individuals. The total project cost was in excess of US$20 billion. This included the development of an artificial island, termiinals, runways, and transportation links to the mainland. KIA is administered as a private company, but is subject to the general supervision and control of the Ministry of Transport. Despite this joint venture structure, KIA has limited managerial and financial autonomy. Furthermore, there is no independent economic regulator to oversee airport pricing mechanisms. Due to its newness, it is too early to discuss the merits of this ownership structure. 3.5 Matoritv/Partial Divestitures. This form of ownership structure is more evident among the smaller European countries, which have used this technique as a means to obtain private equity funding for future airport expansion. An example of this ownership structure is Zurich Airport in Switzerland. Although the Canton of Zurich is the legal owner and operator, a private real estate company, Flughafen Immobilien Gessellschaft (FIG), has taken over airport operation from the Canton. Though the Canton maintains a 50% shareholding in FIG, the remaining shareholders are private, so that it operates as a private company. 3.6 Airport equity has changed in four other countries: The United Kingdom, Austfia, Denmark, and Italy. In the United Kingdom, Liverpool (76% owned by British Aerospace), and East Midlands were partially divested to the private sector. In 1992, the Government of Austria divested 27% of its equity shareholdings in Vienna International Airport (VIE), which had previously been a public corporation. Due to the success of the initial flotation and requirements for additional equity capital, the Austrian Government recently announced the sale of an additional 22. 1%. of equity. In one of the first examples of strategic partnerships between two airports in different countries, Schiphol Airport in Amsterdam was to acquire 1% of VIE's capital. In 1994, Copenhagen Airport utilized this technique to float 25% of its share capital on the stock exchange. In addition, some of the larger Italian airports are managed by companies holding an airport concession, with both public and private 17 shareholders. Alitalia, which is 30% privately owned, holds 56% of the shares in Aeroporti di Roma, 15% in Genoa, 10% in Florence, 5% in Naples, and 1% in Turin. Lastly, Birmingham Airport (UK) announced that 51% of its share capital would be sold in August 1995. Shortlisted bidders include Aer Rianta (Ireland) and Lockheed Martin. BAA plc. is likely to be excluded from the bidding process since they already own seven major airports in the UK. 3.7 Management Contracts. The management of all or part of the airport is contracted by the airport authority to a specialized operator for a given period of time and under specified conditions: performance criteria, economic incentives, maintenance and infrastructure commitments. Management contracts take different forms depending on the type of services managed, the level of autonomy in day-to-day operations, and economic incentives. Generally, the airport operator will subcontract commercial activities via concession agreements to a number of external specialists. In some cases, management contracts have included equity participation by the private entity. This mechanism is frequently used when the government wishes to maintain ownership and has made or is committed to major investments in airport infrastructure, but desires to divest operations and management functions to the private sector. This technique can also be used to privatize airport operations through the creation of a joint venture. 3.8 Under a management contract scheme, in 1993 the administration and operations of airport activities of 7 of 14 airports in Cameroon--including the newly- constructed Yaounde International Airport--were transferred to Aeroports du Cameroon (ADC). To facilitate this transfer, the Government of Cameroon created Aeroports du Cameroon (ADC) through a joint venture arrangement. Aeroports de Paris (ADP) is the largest shareholder of ADC (34%), followed by the Government of Cameroon (29%), and ASCENA, a pan-African aviation and air traffic control entity (20%).2 The remaining equity was distributed among three carriers that operate domestically-- CAMAIR (8%), UNITAIR (3%), and Air Affaires Afrique (3%)--and BICIC (3%), a major bank. ADC was granted a 15-year concession and is required to reinvest a percentage of its profits in the airport system. Investment responsibilities are relatively low and largely associated with remodeling and redesign of commercial space with some minor airside repairs. In consultation with the Government and airport users, ADC is responsible for establishing airside and landside charges. ASCENA retains responsibility for providing air traffic control and fuel concession services, maintaining military facilities, and the acquisition of safety equipment. In addition, ASCENA receives 2 % of all fees at selected airports. 3.9 Build-Operate- Transfer (BOQT. As a result of experiences in other infrastructure sectors, a number of countries are experimenting with private investment of airport terminals, runways and facilities as a means of reducing the capital financing requirements of airport owners. A BOT scheme is when a government grants a concession or a franchise to finance and build or modernize a specific facility to a private firm and to operate 2 ASCENA, or Agence pour ia Securite de Ia Navigacion Aerienne en Afrique et a Madagascar, is an African multinational agency legislated by the 16 signatories of the Dakar Convention of 1974. 18 and obtain revenue from the operations--airside, landside, or full airport for a designated period (10 to 50 years). The private sector operator typically assumes all commercial risk under the concession. At the end of the concession period, the government retakes ownership of the improved asset. Arrangements between the government and the private operator are set out in a concession contract that may or may not include any regulatory provisions. BOTs are widely used for infrastructure development and in airport privatizations generally have a long-term duration (20 to 50 years is typical). 3.10 Due to its attractiveness, this form of privatization has been completed or is underway in 17 countries. A number of such projects are underway in Eastern Europe and the former Soviet Union, and BOT airports or terminals are also beginning to appear in Latin America, Asia, and the Caribbean. Of the 18 BOT projects under consideration, 9 involve entire airports rather than simply a new terminal or runway. Figure 3.1 shows the airport BOT projects that are completed or underway. FIGURE 3.1: Summary of Airport BOT Projects, July 1994 F~~~~~~~~~ 2 Prolet state Airport Twaim Rl _ *uNp.M. Awifti M Isi Psfk M Loi Amid. I.- Sotces: Reusm FourdauM, World Bank Staff 3.11 While not all these projects will go forward, the trend is toward this form of privatization. This initiative is increasingly attractive to host governments because it provides access to private capital markets, transfers project risk to the private sector, and enables the project to benefit from the skills and experiences that may not be available in the host country. To the private sector, airport and airport terminal BOTs are attractive instruments due to relatively predictable (and usually rising) revenue streams and limited exchange rate exposure, especially at international airports. Several variations of this framework have been used, but most involve long-tern leases and predetermined investment commitments. 19 3.12 A long-term concession, which has a duration of 20 to 40 years, is given to a private firm for the exploitation of a particular service or facility--passenger terminal, cargo terminal, runway, or airport. The private firm has the responsibility to finance, build, and operate the facility for a specified period after which ownership of the facility reverts to the government at a notional cost. In return, the private firm collects revenues generated from the facility, which is used to cover accounting, capital and concessionaire costs. Excess revenues are accrued as profits to the private operator. This scheme allows governments to use private capital at no cost without project and commercial risk. 3.13 A notable example of a BOT scheme is El Dorado Airport in Bogota, Colombia. In 1994, the Civil Aviation Authority (CAA) of Colombia launched an international public bidding process for the development and maintenance of a second runway (3800m). Funding for the US$100 million project will be provided through a 20-year concession in which the private sector operator will collect revenues from landing fees above a guaranteed minimum. The selected private operator will also receive a 20% equity stake in the facility. The CAA will continue to provide air traffic control services, while the private sector operator will be responsible for maintenance of both runways at El Dorado. The selection process commenced in January 1995 and construction is expected to begin later this year. 3.14 Build-Own-Operate-Transfer (BOoT). A BOOT scheme is similar to a BOT except the private firm takes the property title of the facility during construction. Title is the transferred to the government at the end of the long-term concession. BOOT schemes typically are used when loan guarantees are required. The new airport in Athens, Greece and Terminal 3 in Toronto are examples of a BOOT. 3.15 One of the first airport BOOT projects was developed in Toronto, Canada. In 1987, Transport Canada, the national aviation authority, brought in a private consortium headed by a property development company to finance, construct, own, and operate a third terminal at Lester B. Pearson Airport in Toronto. Ownership is shared among two private entities--Claridge Properties (73%) and Lockheed Air (27%). The latter through a 60-year lease agreement with Transport Canada (20-year lease with two 20-year renewal options), is responsible for the administration and maintenance of Terminal 3 facilities, property and adjacent roadways and receives a 6% management fee for its services. Land ownership was retained by Transport Canada, which continues to operate the other two terminals at Pearson. Termlnal 3 operations are primarily limited to landside activities and begin at apron approach, when the aircraft switches from general to Terminal 3 tower control. Revenues are generated from airline rents and charges (50%), concessions (30%), and parking (20%), which are divided according to the existing ownership breakdown. Terminal 3 operates on a not-for- profit, cost-recovery basis with excess revenues from carriers used to offset future charges. Revenues from concessions are not shared with the airlines until a predetermined plateau is reached. In 1993, the Conservative Party administration attempted to privatize Terminals I and 20 2 through a Lease-Develop-Operate (LDO) scheme using fast-track bidding procedures. This transaction has yet to be completed as there are a number of pending legal issues. 3.16 Lease-Develop-Operate (LDO). A long-term concession is granted to a private firm on an existing facility. The private firm upgrades and expands the facility and manages cash flows. In retum, the govemment holds the property rights of the facility throughout the concession period and receives lease payments on the assets. Examples of a LDO scheme include: Atlantic City, New Jersey; Morristown, New Jersey; and Maracaibo, Venezuela. The experience of La Chinita Airport in Maracaibo provides several important lessons. The LDO scheme was initiated with the creation of the Zulia Airports Authority (ZAA), an autonomous corporation under the jurisdiction of the governor of the state of Zulia in 1993. Three airports--Maracaibo, Oro Negro, and Santa Barbara--were transferred to ZAA. Bidding took place in early 1993, and the LDO contract was awarded in May of that year to Consorcio Aeropuertos del Zulia, a consortium between a US-based consulting firm, a local civil engineering fimn, and an international airport equipment supplier. The terms of the LDO arrangement included: (i) a 20-year concession for the exploitation of all landside and selected airside services; (ii) an investment program; (iii) a 5% fee paid to ZAA; (iv) 15% charge of gross revenues to be placed in a local government trust fund for investment purposes; and (v) the imposition of economic regulation for passenger terminal fees. However, the scheme was unsuccessful as the consortium defaulted in a series of obligation included in the concession contract. Moreover, the changes in the political situation in the state of Zulia resulted in the cancellation of the LDO scheme in February 1994. 3.17 WraDaround Addition. An existing government-owned facility is expanded by a private enterprise, which holds title and operates the addition through a concession contract. This scheme is frequently used when existing passenger terminal areas need to be expanded through private sector participation. Also, this arrangement allows carriers to vertically integrate operations, especially at airport hubs, e.g., United Airlines at Chicago O'Hare or British Airways at Birmingham International Airport. However, vertical integration frequently results in excessive carrier influence and can lead to decreased competition at some airports. Wraparound additions can also be used to avoid assigning an initial value to an older terminal during the privatization transaction to achieve greater economies of scale. C. Private Ownership and Operations 3.18 At the end of the ownership spectrum are commercial airports owned and operated by the private sector. Full private ownership of airports has been more widespread among general aviation and aeroclub airfields. Two methods have been used for the privatization of airports. The first is the full or partial divestiture of existing airport assets after the airport has been established and has a track record as a public corporation. To date, full privatization of airport facilities has occurred primarily in the United Kingdom. The second mechanism, which has been used to a limited extent, is the creation and/or expansion of a new airport facility (for example a new terminal building) under private ownership. 21 3.19 Operating for more than 20 years as a public corporation, the British Government, in 1987, sold 500 million shares of BAA on the London Stock Exchange. In this divestiture, which was limited to the domestic market, 260 million ordinary shares were offered to the general public and 240 million shares were tendered to institutional investors. To encourage the stable ownership of shares, the UK Government instituted a bonus share program. Moreover, in an effort to avoid concentrated ownership and takeover battles, total individual shareholding was limited to 15%. Up to 25% of total capital was reserved for an employee stock program. Significantly, the Government maintained a symbolic "Golden Share," which legally gave the Secretary of State for Transport a voice over proposed additions and divestitures of airports, the dissolution of BAA subsidiaries, and the right to impose economic regulation. Since privatization, foreign ownership restrictions have been relaxed somewhat and foreign investors now hold 10% of total equity. To date, BAA is roughly 95% owned by individual investors. 3.20 Belfast Intemational Airport (BIA), the principal airport in Northern Ireland and the fourth largest in the UK, is another example of full airport divestiture. Prior to privatization, BIA was operated through Northem Ireland Airports Limnited (NIAL), a government corporate entity. In May 1993, the Department of Environment for Northern Ireland drafted legislation for the privatization of NIAL. Ten interested bidders were prequalified, of which four were short-listed for the sale. The winning bid of US$72 million was presented by the Management and Employee buy-out team consisting of 20 managers and 295 employees of NIAL. Significantly, US$49 million of the total bid was generated through employee funds and US$23 million was derived through NIAL's cash reserves. To date, BIA was not designated by the Civil Aviation Authority of the United Kingdom for economic regulation. Nonetheless, commensurate legislation to the 1986 Airports Act in the UK was drafted shortly after privatization, which could form the framework for future economic regulation. 3.21 A variant of the BOOT scheme is to bring in private capital and management without returning title to the public sector at the end of the concession period. This type of open ended concession can be accomplished through either Build-Own-Operate (BOO) or a Buy-Build-Operate (BBO) schemes. Under a BOO, ownership of the airport facility is not transferred back to the government at the end of the concession period. Within a BBO arrangement, underdeveloped or deteriorated facilities are purchased from the government through a concession agreement. The facilities are upgraded and/or expanded and the property title is retained by the private sector. Examples of a BOO or BBO schemes include: Freeport, Bahamas; London City Airport, United Kingdom; and Punta Cana, Dominican Republic. 3.22 The development of a new US$104 rnillion terninal (capacity 2.5 million passengers) at Sangster International Airport in Montego Bay provides a good example of a BOO scheme. Sangster and Norman Manley International airports in Kingston are presently owned and operated by the Airports Authority of Jamaica (AAJ), which was corporatized in 1974. The privatization initiative involves the creation of two new subsidiaries within AAJ--the 22 AAJ Holding Ltd. and Sangster International Airport (SIA) Ltd. The latter is expected to be 700/o owned by the private sector. To maximize its return on investment, the Government decided to sell shares in SIA, but due to the limited size of the capital market, equity will be sold in stages to local investors. Through a 25-year lease, the management of the new and existing termiinals and airside services currently provided by AAJ will be transferred to SIA. In return, AAJ will maintain ownership of airside assets, 30% ownership in SIA, and a notional Golden Share, which will give the Government of Jamaica special rights over foreign ownership restrictions, asset disposal, and company dissolution. As of this writing, SIA was scheduled to take over the management of the existing facilities and begin construction in the new terminal in May 1995. D. Preliminary Lessons Learned From Airport Privatizations 3.23 Among the airports surveyed, the principal objective for privatization has been to increase private investment as traditional sources of public funds are scarce. Unlike other infrastructure sectors, airports generally are not a drain on the fiscal budget, and are generally not required to adjust to rapid technological changes, meet service, quality, and efficiency standards. In fact, because they are a natural monopoly, airports are revenue producing and provide ample foreign exchange earnings. This means that the incentives for airport privatization differ from other infrastructure sectors. 3.24 The most common lessons learned from the limited number of airport privatizations completed is the need for a coherent, integrated airport privatization strategy, reduced political interference, and increased transparency. The following summarizes the lessons learned: * Privatization techniques have varied among countries. Airport privatization in selected European countries (e.g., Austria, United Kingdom) have generally been undertaken in two-steps. First, governments corporatized airports to rationalize cost structures, expand revenue generation, and improve investor confidence. These corporatized structures were maintained for 10 to 20 years and later, legislative actions were required to privatize. This two-step process has generally been followed by the flotation of shares on the domestic and international capital markets. In many developing countries, due to the limited depth of the capital markets and management talent in the public sector, privatization, though limited, have taken the form of a long-term concession. * Privatization of individual versus network airports lacks a strategic firaework. Most airport divestitures are generally site-specific and rarely occur within an integrated strategy for the restructuring and privatization of the entire national airport system. Most countries have undertaken privatization of the large major airports, leaving behind the non-viable operations to be funded by the government. Not all airports are profitable as many airports serve regional and social functions regardless of viability. 23 Airport size, type of traffic, and investment costs are factors that should be taken into account prior to privatization. Nevertheless, a few policy options are available, which will increase the attractiveness of poorly-performing airports to the private sector. Privatization could take place within the context of a network-system, which transfers the cross-subsidy issue to the private sector, e.g., BAA. Another option is privatizing only those airports that are self-sustaining, while the public sector retains ownership of unviable airports. Additional funding for poorly-performing airports could come from the sale of financially-strong airports. Lastly, the governnment could choose to auction the operations of unprofitable airports to the lowest bidder. This scheme would have the effect of retaining some commercial risk with the government, but allowing the private sector an opportunity to improve financial performance. * Efficient airport corporations will become global operators. Increasingly, airport (and air traffic control) corporations are expanding the scope of activities outside their respective domestic markets. Airport authorities, especially those in Europe, are providing management, engineering, planning, and commercial expertise to airports in developing and industrialized countries. BAA, which has been one of the more proactive airport operators, has expanded commercial activities at Pittsburgh Airport, assisted in designing the new airports in Kuala Lumpur and Hong Kong, and agreed to take over management functions at Indianapolis Airport (pending FAA approval). Examples of other airport authorities that have diversified activities into international markets include: Aeroports de Paris in Cameroon; Schiphol Airport in Ecuador; Munich Airport at Shenzhen, China; and the Metropolitan Washington Airports Authority in Moscow. Non-airport authorities, such as Lockheed and Aldeasa, have also become players in this market. In the coming years, airport operators will become more globalized with partnerships in different countries and a greater array of products offered. In the coming years, governments will need to decide on the necessity and role for these airport operators. + Awarding and monitoring of private concession contracts generally lacks transparency. The award of concession contracts to private firms for the delivery of public provisions at airports usually does not follow traditional government procurement procedures. As with other infrastructure sectors, the use of transparent mechanisms during the divestiture process, such as public bidding and adequate dissemination of information, tend to increase the economic value of the transaction as well as public goodwill. When governments are restricted to negotiating privatization of airport facilities with one partner, the fewest economic benefits accrue, and often there are inadequate incentives for future investment. In some cases, such as the proposed privatization of Terminals I and 2 in Toronto, the lack of transparency contributes to the failure of the initiative. Since concession 24 contracts are expected to grow in importance, policy-makers will need to strengthen further the procedures for awarding and monitoring such contracts. * No correlation e-xists between the type of airport ownership and levels of passenger traffic. While US carriers have the biggest share of overall air traffic, mainly because the domestic market is by far the single largest air transport market, European airlines still retain the lion's share of both international passenger and freight traffic. This distribution is due to the relatively large number of countries on the European Continent and the restrictions that the existing international regulatory regime imposes on the operation of carriers outside their national borders. In 1992, the largest number of international passengers, in rank order, were selected European airports ranging from about 25-40 million, selected Asian airports ranging from about 20-25 million, followed by selected US airports ranging between 10-20 million. International passenger traffic in most developing countries is typically less than 5 million. Figure 3.2 shows the type of ownership structure and passenger traffic for selected airports. FIGURE 3.2: Ownership Structure and Passenger Traffic (millions of passengers, 1993) uemnos Airs a Athens Hong Korng Monbgo 1 1111011002 Donrw 1 Slydne a Munche .r . . . . Boston .. ..*.. ... Paris COO ..S.- . . . . Mar. caiho bIfut IoU London Hcathffw 0 10 20 30 40 50 I *Private *Public-Private M RegionalGovt. U PublicCorp. 0 Govt. Dept. Source Auiport Council Intenational (ACI), ICAO, World Bank Staff 25 * A well-designed regulatory entity should be established before aiport activities are transferred to the private sector. Due to their unique structure, airports operate principally under monopolistic conditions. Therefore, regardless of the form of ownership structure-- public, mixed, or private-- policy-makers should be concerned about minimizing monopoly rents resulting from airport operations (see Chapter 5). Due to the public ethos associated with airports, airport revenues and their pricing and regulatory structures have remained somewhat of a mystery to many private investors. To minimize these rents, policy-makers need to analyze the relationships between sources of airport revenues, prices charged for airport services, and the regulatory framework for establishing and enforcing this relationship. Healthy competition in the provision of traffic handling and commercial activities will improve the financial performance of the airport and increase customer satisfaction. Thus, the interrelationship between revenues, pricing, and regulatory framework clearly can either foster or impede private sector participation. 3.25 Whatever form of privatization technique is used, if the government objective is to increase the role of the private sector, a better understanding of airport revenues, performance, and pricing will be needed. Airports have traditionally been labeled the "black box" on the ground. The next chapter analyzes the financial structure of airports and advantages realizedl under each form of airport ownership structure. IV AIRPORTREVENUES, PERFORMANCE, AND PRICING'I A. Sources of Airport Revenues 4.1 Airport revenues are generated from two primnary sources--airside and landside activities. Airside revenues derive from airport traffic activities related to the operation and landing of aircraft, passengers, or freight. Landside revenues are obtained mainly from non- aircraft-related commercial activities in terminals (e.g., shopping, restaurants, car parking, and car rentals) and rents from airlines and concessionaires. Landside revenues also can include nontraditional activities, such as hotel operations, real estate development, and consulting services. Table 4.1 delineates the various activities under the two main sources of revenue. TABLE 4.1: Sources of Airport Revenue * Aircraft Landing Fees Dutv-Free Shopping * Airport Parking Charges Catering and Restaurants * Passenger Fees Car Parking * Aimrraft Traffic Handling (grund and ramp) Car Rental * Cargo Handling News, Shops, Banks, etc. * Fuel and Oil Concessions Airline Tcrminal Rents * Commercial Rents * Utilitv Sales * Management Consulting * Real Estate * Investment Opportunities * Other (Hotel, Triavel Senices) Sore: W'orld Ean Staff. 4.2 Just as definitional and accounting system variations exist among countries, there are also differences in traffic volumes and the mix of airport revenues as well. Findings from a representative sample of airports indicate that government department airports have the lowest average levels of aircraft movement and passenger volumes. Although traffic volumes are low, the conventional wisdom that governments provide the safest airports may not always be true given constraints on revenue allocations for this purpose. Government airports also have the highest dependence on airside revenue, at about 70% of total revenues, compared to slightly over 40% for privatized airports, and about 55% on average for all other airport ownership structures. Table 4.2 shows the traffic and revenue distribution of selected airports by ownership structure. Definons and concepts for (is chapter wer based on Doganis Rigas. The Airport Business, Routledge, London and New York, 1991 26 27 TABLE 4.2: Traffic and Revenue Distribution, Selected Airports2 (In US$ millions) |-AVERAGE.- . ..... .. . . L Lt Public Reg~onaI Pl~. ....t.... . _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ Tie pt. C o p .. . . ..e Annual Aircraft Movements (000) 78 165 391 169 18X No. of Passengers (millions) 6.6 11.9 28.4 12.0 11.1 Airside as a % of Total Revenues 70% 50%° 36% 62% 43% Landside as a % of Total 30% 50% 64% 38% 57% Revenucs Source: Airport aniual reports and ICAO Airport and Route Facilities and World Bank Staff 4.3 Airside revenues generated by traffic handling and fuel concessions also vary significantly among airports. This is because these activities either can be owned and operated by a govermnent department, the airport authority, a private operator, or by the airlines. For example, aircraft traffic-handling activities are carried out by the Vienna Intemational Airport Authority and appear as a component of total airside charges. In Argentina and Hong Kong these activities are carried out by the private sector, with the respective airport authorities receiving only concession revenues. In the United States, the airlines perform this function within their dedicated terminal facilities, with no revenues shown on airport authority balance sheets. Given these differences, consolidated airside revenues are not easily comparable among airports. 4.4 To facilitate comparative analysis, airside revenues are subdivided into fixed and discretionary sources. Fixed revenues rely on established pricing schedules for aircraft landing and parking fees. These charges, which vary significantly among airports, are governed by international regulations. Other airside revenue sources--passenger fees, aircraft and cargo handling, and fuel concessions--are discretionary in nature and subject to individual concession contracts or regulation. Joint public/private and privatized airports generate about 40% of their total airside revenues from fixed airside revenues, while govemment departments and public corporations generate between 45% and 60%, respectively. Figure 4.1 shows the mix of average airside revenue per aircraft movement between fixed and discretionary sources. 4.5 A number of international airlines have argued that if airports were privatized, aircraft charges would likely increase, and thus weaken even more the financial position of the airline industry. Aircraft charges represent anywhere from 2% to 15% of total airline operating costs, depending on fleet composition and route schedules. According to traffic and financial information for a representative sample of airports the average revenue per aircraft movement at government-administered and privatized airports is about US$650. and is even lower for public corporatized and regional airports. The airside charges for jointly-owned airports is at the high end, at US$930, since revenues generated from aircraft handling services are inclu .led Government Department: Buenos Aires, Santiago, Mexico City, Quito; Libreville, Nairobi; Budapest; Athens; Gothenburg; NeA Delhi, Hong Kong, Bangkok, Kuala Lumpur. Public Corporation: Sydney; Auckland; Singapore; Rio de Janeiro; Amsterdam, Madrid, Vancouver and Montego Bay. Regional Government: Washington Bostonm Chicago, Pittsburgh, Atlanta, Dallas, Miami, Orlando; Paris; Basel-Mulhouse. Public-Private: Toronto, Vienna, Rome, Copenhage. Zurich, and Yaounde. Private: Heathrow, Gatwick, Stansted, Aberdeen, Edinburgh, Glasgow, and Southhampton. 28 If these adjustments were made to the revenues for public-private airports, only a marginal difference appears in the structure of airside revenues. For this reason, the hypothesis that airside charges increase as a result of changes in ownership structure cannot be substantiated. FIGURE 4.1: Average Airside Revenue per Aircraft Movement3 1000 / ............... 90% 80% 70% 60% 50% 30% 30% 10% Fixed $317 $275 $1X6 $354 $25S Discretionary $357 $174 $232 $576 S384 Total Airside $674 $449 $418X $930 S642 source. Derived 1rom samnple airports listed In table,S 2 using pnmary flnancial dat.a and lCAO reports 4.6 Subject to Federal Aviation Authority (FAA) approval, airports in the US have been able to collect revenues from passenger fees since 1990. Last year (1994), US airports generated between US$700 million to US$800 million from passenger fees. Airports in major cities of other countries (e.g., Buenos Aires, Bangkok, Madrid, Miontego Bay, Wellington, an.d Vancouver) derive a significantly higher percentage of total revenue from passenger fees without governmnent conditionality. It is noteworthy that many airports also collect airport passenger taxes that do not appear in the financial statements of airport authorities; instead, they are transferred to the national treasury. Estimated. Discretionary charges which were calculated using a weighted average of passengers charges during peak and no3- peak periods at HeathrowT Gatwick and Stansted multiplied by total airside charges for each listed airport. Fixed charges were determined as a residual afler fixed charges at the other four airports were discounted from total airside revenues generated by BAA The sum fpfixed charges at BAA airports was divided hy total aircraft movements. 29 4.7 At several airports commercial facilities are operated by speciaLized concessionaires who pay concession fees and rents to the airport authority. Commercial sources of revenue improve operational performance, increase resiliency to cyclical economic conditions, and minimize airline dominance. In the past, airport officials typically focused on operational fiinctions, such as baggage handling, and paid little attention to passenger food and shopping needs. At most government-owned airports the concentration of commercial revenues is limited to a small selection of duty-free shops and restaurant facilities and have been reduced due to the deregulation of duty-free facilities (i.e., the advent of in-flight, on arrival, and in-city duty-free shopping). A survey of airports operated by government departments yields the worst revenue generation results (US$4.88/passenger) among the five ownership structures (see Figure 3.2). Hence, significant scope exists for exploiting landside revenues, which essentially rely on a captive audience. 4.8 Historically, US airports have been much more dependent on revenues from automobile-related concessions (parking, rentals, and limousine service). The development is attributed to the size of the domestic market and limited availability of other forms of airport transportation links. US airports have become more proactive in pursuing expanded commercial activities in recent years. At Pittsburgh Intemational Airport, passengers previously spent an average of US$2.50; however, at the new airport facilities, managed by BAA-USA, passenger spending nearly tripled, primarily as a result of the expanded availability of shops. 4.9 A number of airports are beginning to shift from traditional "public utiLity management" to a more commercial perspective in response to changing market conditions. Diversifying revenues is one of the major challenges facing airport managers, as governments are increasingly unable to meet their airport financial obligations. An example of this new philosophy is BAA, which developed 355 shops within its 7 airports. In 1993, BAA generated US$731 million from landside activities, of which US$454 million was derived from Heathrow Airport. Approximately 25% of all books sold in the UK and 40% of the caviar in Western Europe are purchased at London's Heathrow Airport. BAA airports also have the highest average landside revenues per passenger, US$11.14 (see Figure 4.2). In addition to commercial activities, BAA has concentrated on hotel and real estate ventures as well as airport management services. The latter includes the development and management of the air mall in Pittsburgh International Airport and drafting designs for new airports in Kuala Lumpur, Malaysia, and Hong Kong. 30 FIGURE 4.2: Average Landside Revenue per Passenger by Ownership Structure 12 11.14 $/pax 6 4.88 4 2 0 Govt. Public Regional Public- Private Dept. Corp. Govt. Private Source: Data derived from sample airports listed in Table 3.2 B. Financial Performance 4.10 Variations in ownership of airport activities, differing objectives, and lack of standardized financial information complicate financial comparisons. Not only do accounting systems vary significantly among countries but often airport financial data within countries is not standardized. The latter frequently occurs where countries undertook decentralization and/or privatization initiatives. Moreover, industry-wide financial performance criteria are limited in magnitude and scope. In the years ahead, countries will need to concentrate on the standardization of financial data within airport systems and establish performance criteria that would facilitate benchmarking. Within these constraints, the following section shows the results of airports' financial performance. 4.11 In 1993, privatized airports had the highest profit margin (35.7%) compared to regionally-owned airports (13. 1%). At 31%, the profit margins of government department airports are comparable to those of privatized airports. These profit margins are impressive when compared to other infrastructure sectors. However, the overall financial performance of airports is influenced by the underlying philosophical differences among airports rather than ownership structures. On average, airports included in the survey were profitable in each ownership category, but the level of profitability varied. Regional government ownership, which occurs primarily in the US, shows the lowest profit margins, since these airports operate within a non-profit framework. Conversely, privatized airports are able to maximize shareholder profits. Table 4.3 displays the 1993 financial performance of selected airports by ownership structure. 31 TABLE 4.3: Average 1993 Financial Performance of Selected Airports' (in USS millions) Passenger Volumes 6.6 11.9 28.4 12.0 l I l Revenues 87.7 165.4 254.2 274.0 181.7 Costs 48.1 121.8 231.2 255.7 116.8 Staff/Total Costs (o/e) 22 23 24 38 32 Oper. /Total Costs (%) 53 44 26 48 46 Profit/(Loss) 39.6 43.6 23.0 18.3 64.9 Profit Margin (%) 30.8 23.3 13.1 15.9 35.7 Source: Airport annual Reports and ICAO Airport and Route Facilities, and World Bank Staff 4.12 Ownership structures address different objectives. In this sense, there is no optimal ownership structure. For instance, if the objective is to promote a national airport system-, government departments and public corporations address this better than other forms of ownership. If the objective is to increase access to capital markets, government departments pose a natural constraint with regard to limitations on direct borrowing from capital markets. In the absence of standardized financial data, the objectives addressed by each ownership structures will be examined (see Table 4.4). TABLE 4.4: Objectives Addressed under Different Airport Ownership Structures Promotes a Promotes a Promotes a regional Promotes Can promote national system national system system regional system regional system * Depends on the Increases financial Increases financial Raises funds for Raises funds for federal and managerial and managerial the national the national government autonomv autonomy treasury treasury * Encourages Minimizes - Minimizes cross- *Minmmizes * Eliminates subsidies and subsidies subsidies subsidies and cross- subsidies but not cross-subsidies subsidies cross-subsidies * Indirect or no Provides access to Provides access to - Provides access * Provides access access to capital capital markets capital markets to capital markets to capital markets markets - Minimizes Defined profit * Non-profit Increased profit Maximizes financial and targets objectives incentives profits incentives for shareholders * Fosters self- Fosters self- Fosters self- * Requires Requires regulation regulation regulation regulation regulation Source: World Bank Staff * National versus regional networks: Most large countries have a sizable network of commercial and general aviation airports. Generally, airports with large traffic volumes are profitable while smaller ones, which serve regional social needs, are Government Department: Hong Kong; Buenos Aires; Mexico City-, Nairobi; Bombay, Quito; Libreville; Budapest; a Gothenburg. PubUlc Corporation: Sydney Auckland; Vancouver, Singapore; Bangkok; Rio de Janeiro; Montego Bay. Amterdam; Madrid. Regional Governnent: Washington-National Boston; Pittsburgh; Orlando; Los Angeles; Paris CDG; Paris Orly; and Basel- Mulhouse. Public-Private: Toronto; Vienna; Copenhagen; Romne; Zurich; and Yaounde. P1ivate: Heathrow. Gatwick, Sianted, Aberdeen, Edinburgh, Glasgow, and Southhamnpton. 32 generally not viable. Of the 22 airports managed by the Federal Airports Corporation of Australia, only 7 are profitable. Public departments and corporations promote a national integrated system, which contributes to greater economies of scale. According to independent studies, airport operations financially can break-even with between two and three million passengers per year. Airports employing some type of private sector ownership optimize the financial performance of individual airports, which places the financial burden on the national system. In the United Kingdom and Austria, only a few airports were privatized, leaving the rest of the system to other types of ownership structures. Prior to changing the management or ownership structure of airports, governments should determine the economic benefits of maintaining a national or regional system, since certain ownership structures can achieve only limited objectives. Financial and managerial autonomy: Financial and managerial autonomy granted by the government to airport managers has contributed to increased revenues, rationalized costs, and improved operational efficiency. Based on the financial information of a selected number of airports, operating costs are between 10% and 25% higher for government department airports compared to other airports. Increased autonomy also reduces the number of bureaucratic procedures that affect airport operations. One government official observed that federal procurement procedures "require 41 administrative steps to replace a carpet, whereas under private management all that is required is a phone call from the maintenance manager to the supplier and the carpet can be replaced within a day." On the other hand, in a number of countries moving away from the government administration of airports has not assured freedom from political and operational interference. For example, the majority of the board members of the Airport Authority of Thailand, which is legally established as a public corporation, are appointed by the Ministry of Finance, Air Force, and Police Departments, respectively, with the Government financing certain operational expenditures and new investments. Subsidies and cross-subsidies: To a large extent, the allocation of subsidies and cross-subsidies is influenced by ownership structure. Generally airports, except those under full private ownership, receive (or formerly received) some form of direct government subsidy. Nevertheless, changes in management and ownership structure have reduced dramatically government contributions, since airports now have improved access to private capital. The most common form of direct subsidy is the investment grant which is disbursed by national/regional governments to fund specific infrastructure projects. Because governments are full or partial shareholders in airports through airport corporations or joint ventures, investment grants are viewed as a means of meeting national economic objectives. Some countries have institutionalized this subsidy through national programs. A notable example is the Airport Improvement Program (AIP), operated by the US Federal Aviation Administration (FAA), which in 1994 allocated $1.9 billion for airport capital investment projects. This amount is funded by a 10% domestic ticket tax, a $6 international departure fee, and a 6.25% air freight tax. 33 Importantly, indirect subsidies long have been overlooked in the analysis of airport financial performance. The most common form of indirect airport subsidy relates to the use, payment, and valuation of airport land and assets. Typically, the government does not assess the true market value of land in cases of rent or sale of the airport. If taken into account, these subsidies could significantly affect airport profitability. Other forms of indirect subsidies involve debt guarantees and tax exemptions for airport bonds (the latter arrangement is routine for airports under regional ownership). Both forms lower the costs of capital for airports; the former consists of an indirect payment and the latter represents revenues foregone to the governnment treasury. Neither subsidy appears in airport financial statements. Indirect subsidies also include tax exemptions on airport profits and property taxes. Although some form of cross-subsidy has been institutionalized within all ownership categories, results vary with ownership structure. Cross-subsidies can occur place between airports and/or between airport activities. The divestiture of a system network generally perpetuates cross-subsidies. For example, airport charges at the primary international airport could be used to subsidize the costs of unprofitable airports. Given the ownership structure of regional airports (i.e., one or more airports in the same geographic area), the extent of cross-subsidies among airports is minimized. Cross-subsidizing occurs when landside revenues cover the cost of airside services or vice versa. Regional airports that have low airside charge schedules due to pricing agreements often cross-subsidize activities. The effects of subsidies and cross-subsidies on the financial performance of airports could not be analyzed, since the literature on this subject is extremely limited. Access to capital markets: Airports owned and operated by government departments are largely restricted from obtaining private capital and are dependent on public investment funds for the development of infrastructure projects. However, constraints on national budgets have diminished greatly the level of government funding to airports. Consequently, providing access to private debt and equity capital has been an important objective for changes in airport ownership in several countries. Although not exclusively, US airports rely heavily on the issuance of airport bonds. This is due partly to the relatively large size of the municipal debt market and the increased availability of airport debt instruments. More significantly, US airports benefit from tax exemptions on airport bonds that provide interest rate differentials of 2 to 3 points. Revocation of the tax-exempt status of airport bonds resulting from changes in ownership structure or government policy would limit access to private debt capital drastically. In comparison, airports in some countries already are bound by borrowing restrictions (e.g., interest coverage and debt-to- asset ratios), which constrain total debt financing for government entities and public utilities. In general, airport credit ratings and subsequently airport cost of capital are mostly contingent on financial performance. There is no linear correlation between airport ownership structure and credit ratings, per se (see Figure 4.3). 34 FIGURE 4.3: Selected Credit Ratings by Ownership Structure' ............. .-- .- .. ..... I ., , .tx ˘ i .2=++ E1W<@