Download PPP Models to Build Airport Infrastructure Matching the Demand in

8th CEI Summit Economic Forum
PPP Models to Build Airport Infrastructure
Matching the Demand in Central Europe
Welcome
Agenda
1. Need to Build Up Airport Infrastructure in Central Europe
2. Private Sector Involvement in the Airport Industry
3. Public Private Partnerships
4. Case Study: PPP-Structures as Means for Successful Airport
Development
8th CEI Summit Economic Forum ,
-2-
Agenda
1
1. Need to Build Up Airport Infrastructure in Central Europe
2. Private Sector Involvement in the Airport Industry
3. Public Private Partnerships
4. Case Study: PPP-Structures as Means for Successful Airport
Development
8th CEI Summit Economic Forum ,
-3-
Central Europe is in terms of traffic volume one of the
smallest world’s markets but with strong growth potential
Passenger Traffic by Regions 2004
Central
Middle
Africa Europe
North
East
Latin
3%
3%
America
America 3%
37%
6%
Western
Europe
26%
 Central Europe is a growing air traffic
market and according to industry
forecasts this will continue.
 The relatively stabile level of demand is
attributed to fast growing GDPs in the
region
Cargo Traffic by Regions 2004
Middle
Latin East Africa Central
America 4% 2% Europe
3%
5%
 However, growth is limited
North
America
39%
AsiaPacific
19%
8th CEI Summit Economic Forum ,
Key Points
 The 10 biggest national air transport
markets in the continent account for 75%
of the air passengers and 80% of the air
freight
AsiaPacific
22%
Source: Airport Information 2004
1

by lacking competition and insufficient
airport infrastructure and

competition with railroad network and other
modes of ground transportation
Western
Europe
28%
-4-
The CEI countries have been witnessing growing passenger
and cargo volumes until 2003…..
Passenger Volumes
CEI countries (Number of Pax)
1
Cargo Volumes
CEI countries (tonnes)
60.000.000
120.000
50.000.000
100.000
40.000.000
80.000
30.000.000
60.000
20.000.000
40.000
10.000.000
20.000
0
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
0
Source: IATA, Lufthansa Consulting
8th CEI Summit Economic Forum ,
Pax
Cargo
-5-
…but, without Italy and Austria, CE countries showed only
growths in passenger traffic but none in air cargo
Passenger Volumes
CEI countries (Number of Pax)
1
Cargo Volumes
CEI countries (tonnes)
30000000
14000
25000000
12000
10000
20000000
8000
15000000
6000
10000000
4000
5000000
2000
0
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
0
Pax
Cargo
Source: IATA, Lufthansa Consulting
8th CEI Summit Economic Forum ,
-6-
But for the next years GDP and passenger forecasts are
above world average underpinning development potentials
1
GDP Development 2005-2005
CEI countries vs World Average
6,0%
5,0%
4,0%
Passenger Forecast 2005-2008
CEI countries vs. World Average
3,0%
2,0%
14,0%
12,0%
1,0%
10,0%
0,0%
2005
8,0%
2006
CEI GDP (no Austria, Italy)
6,0%
2007
2008
World GDP
4,0%
2,0%
0,0%
2005
2006
CEI Pax Growth (no Austria, Italy)
2007
2008
World Pax Growth
Source: IATA, Global Insight, Lufthansa Consulting
8th CEI Summit Economic Forum ,
-7-
Increasing importance for aviation as main transport mode in
international traffic flows
Passenger Traffic at Central European Airports 2004
Country
Passengers tsd
%
Italy
40.239
4.2%
Austria
13.917
4.0%
Czech Rep.
6.039
7.1%
Poland
4.828
7.5%
Hungary
4.523
5.8%
Romania
2.030
5.7%
Yugoslavia
1.776
7.7%
Ukraine
1.663
6.1%
Bulgaria
1.463
5.9%
Croatia
1.348
6.1%
Slovenia
797
5.4%
Albania
459
6.7%
Macedonia
403
6.0%
Bosnia/
308
7.6%
Slovakia
208
5.1%
Belarus
191
5.3%
Moldova
153
8.1%
Total
80.345
1
Key Points
 Rapidly developing transportation
markets
 Growing interests of the Low Cost
Carriers, and market stimulation
effect
 Integration into EU Market
 Participation of national carriers in
Alliances (e.g. LOT – Star Alliance)
 Seating capacity on international
flights continually increasing
 But: No domestic air transport
markets in most of the Central
European countries (except Italy
and Poland)
=> high growth potential
Source: ACI, Albatross, Lufthansa Consulting; Sample of 49 Central European Countries
8th CEI Summit Economic Forum ,
-8-
There is a great potential for air cargo development
Air Cargo Traffic at Central Europen Airports 2004
Country
Italy
Cargo
%
247.099
6,2%
Austria
63.893
5,2%
Hungary
19.895
-0,7%
Czech Rep.
15.427
6,9%
Poland
11.120
7,5%
Serbia / Mont
7.290
16,5%
Romania
4.214
1,6%
Ukraine
3.225
4,2%
Bulgaria
3.063
5,3%
Croatia
2.973
4,5%
Slovenia
1.824
3,0%
Macedonia
957
5,0%
Bosnia/Herz.
772
10,6%
Total
381.750
1
Key Points
 Central European air cargo traffic
accounts only for less than 3% of
the world‘s air cargo market
 Real intra-continent cargo flows
does not exist yet.
 80 % of inter-continental cargo
traffic is related to trade with Asia
and less than 10% to trade with
Middle East countries.
 Huge transit potential, but poor
cargo infrastructure at the most of
the Central European airports
 Air imports are dominated by IT
goods, pharmaceuticals, electronic,
machinery parts and textiles goods
Source: ACI, Albatross, Lufthansa Consulting; Sample of 49 Central European Countries
8th CEI Summit Economic Forum ,
-9-
Capital expenditures in Central Europe airports increased in
the last 5 years
1
Major Airport Developments in Central Europe
(> 500 mill. USD)
Airport Capital Expenditure by Region
(in mill. USD)
14.000
12.400
11.200
12.000
12.000
10.000
8.000
8.700
3.300
2.700
2.500
1.700
2.000
350700
0
Africa / Middle
East
Asia/Pacific

Lublin/Poland, completely new airport
planned in eastern Poland
US$ 2.3 billion
 Vienna, new Terminal 3, apron, tower,
office park
US$ 880 million
2003
2004
6.000
4.000
 :Rome-Fiumicino staged terminal
expansion until 2005
US$ 2.9 billion
Europe
 Zagreb, Master Plan projects
US$ 600 million
Latin America North America
 Prague, major terminal expansion, new
runway US$ 585 million
Source: ACI Airport Economics Survey 2004
8th CEI Summit Economic Forum ,
- 10 -
Barriers have to be removed to continue with infrastructure
improvements allowing for sustained expansion
1
Bourgas and Varna
Example
Bulgaria
 Copenhagen Airports emerged as the winner of the tender and was ready to
invest in the expansion and modernization of the facilities.
 Fraport AG/BM Star consortium and the Frenche Vinci groups attacked this
deciscion.
 Supreme Administrative Court demanded reopening of negotiations with the
both airports
 Bourgas and Varna are now pressing hard to find measures of coping with the
lack of terminal capacity to serve the increasing volumes of passengers
Budapest Ferihegy Airport
Example
Hungary
 Originally 10 consortiums were interested in Budapest Ferihegy Airport
 The initial tender was declared invalid by an employment court
 A single-round closed tender was launched then and opened to the five parties
shortlisted in the original tender
 Copenhagen Airports was also participating in the process, but announced its
decision to pull out
 Also Australian Macquarie Airports dropped its bid
 Three bidders only went forth as the tender closed for the majority stake
Source: local and international press
8th CEI Summit Economic Forum ,
- 11 -
Agenda
2
1. Need to Build Up Airport Infrastructure in Central Europe
2. Private Sector Involvement in the Airport Industry
3. Public Private Partnerships
4. Case Study: PPP-Structures as Means for Successful Airport
Development
8th CEI Summit Economic Forum ,
- 12 -
Some privatisation trends...
2
 The privatisation run of the 1990s slowed down after 2000; the privatisation
wave is on a recovery path in Europe and North America, where we see the
highest level of activity – in line with anticipated worldwide traffic increases
 Still only 4% of the world’s airports can be considered being privatised
 Projects embrace all types of concessions and models and a wide range of
financial instruments; in developing countries (Asia in particular) Public-PrivatePartnerships are increasing
 Investor groups are diversifying and expanding their business scopes; IPOs
and green-field developments are increasing (with mixed success)
 Central Europe is still largely bypassed by infrastructure privatisation (due to
lack of market opportunities and capital, investment climate, etc.) – Total
investments have been declining
8th CEI Summit Economic Forum ,
- 13 -
Airport Privatisation activity is increasing after a period of
standstill
•
•
•
•
•
•
Examples
•
•
•
•
•
•
•
•
•
•
•
•
•
Rome
Düsseldorf
Brisbane
Melbourne
Perth
Naples
•
•
•
•
•
Athens
Copenhagen II
JFK IAT
Toronto
Bolivia
•
•
•
•
•
•
•
Costa Rica
Mexico I
Mexico II
Maraba , Brasil
Montevideo
Dominican Rep (4)
Argentina
Australia II
Berlin
Santiago de Chile
London Luton
South Africa
Stewart , NY
•
•
•
•
•
•
•
Newcastle
Cyprus
ANA, Portugal
Sea
Frankfurt
Schiphol
Brussels
Hamburg
Zurich
Mexico III
Beica, Ethipia
Honduras 1
Cali, Colombia
Lima, Peru
•
•
•
•
•
•
•
•
•
•
•
Isla Margarita
Malta
Montego Bay
Prestwick
Tansania
•
•
•
•
•
•
•
•
•
Sydney
Bangalore
Bogota
Barranquilla
Cali
Phnom Penh
Number of Privatizations
9
8
7
•
•
•
•
6
• BAA
5
Brussels
Guayaquil
Tirana
Cairo
Luxor
Abu Simbel
Hurghada
Sharm El Sheikh
Assuan
Vienna II
Birmingham
London City
Indianapolis
• Copenhagen I
• East Midlands
Belfast
4
• Vienna I
• Pittsburgh
3
2
1
1986
1987
1988
8th CEI Summit Economic Forum ,
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
- 14 -
Agenda
3
1. Need to Build Up Airport Infrastructure in Central Europe
2. Private Sector Involvement in the Airport Industry
3. Public Private Partnerships
4. Case Study: PPP-Structures as Means for Successful Airport
Development
8th CEI Summit Economic Forum ,
- 15 -
What is a public-private-partnership (PPP)?
3
A PPP is broadly defined as
“ a cooperative venture between the public and
private sectors, built on the expertise of each
partner, that best meets clearly defined public needs
through the appropriate allocation of resources, risks
and rewards.”
8th CEI Summit Economic Forum ,
- 16 -
Understanding the motivation of the public and private sector
as well as the lenders‘ one is key for any PPP
3
Public Sector
Private Sector
Lenders
 Enhancing the ability to
raise capital
 Transferring
responsibilities and
risks
 Improving airport
infrastructure and
customer service
 Increasing efficiency of
airport construction and
operation
 Know–how transfer
 Privatisation proceeds
(concession fees, tax
income)
 Strategic objectives
(e.g. market entry)
 Maximizing investor
returns via sustainable
growth, operational
efficiency and
commercial
opportunities
 Limit the project risks to
those which can be
managed by the private
sector
 Proper risk allocation
among the parties
through a balanced
financing structure
 Being repaid according
to schedule while being
adequately
compensated for the
risks which remain with
the lender
 Assuring competent
airport management
and market environment
for the project (as part
of risk mitigation)
8th CEI Summit Economic Forum ,
- 17 -
Private Sector participation trend in airport infrastructure:
Which model option meets the interest of all parties?
Policy Options/
Roles
Option 1
 Service Concessions
PPP Options
Option 2
 BOT, BOOT, BTO etc.
 Management Contracts  Long Term Leases
 Multiple Concessions
3
Option 3
 Trade Sales
 Capital Markets
 Master Concessions
 Multiple Concessions
Ownership
Ownership
State
State
Private Sector
Investment
Investment
State
Private Sector
Private Sector
Private Sector
Private Sector
Management/
Management/
Operation
Operation
Private Sector
BOT = Build-Operate-Transfer
BTO = Build-Transfer-Operate
BOOT = Build-Own-Operate-Transfer
LDO = Lease-Develop-Operate
8th CEI Summit Economic Forum ,
- 18 -
Successful PPPs are based on attractive assets, clearly
defined concessions, and a sound business plan
Airport
 Size - traffic volumes at
satisfactory levels
 PAX profile - purchasing
power to make commercial
ventures viable
 Traffic - regular and
growing flow of traffic
 Connectivity - The major
markets (tourism and
business) should be
served frequently
Concession
 Rights and obligations of the Public and Private
sector should be clearly
defined and the technical
requirements specified in
detail
 Exclusivity - airport
development should be
safeguarded from a
detrimental level of
competition
 Termination rights clearly linked to
contractual defaults
8th CEI Summit Economic Forum ,
2
Business Plan
 Feasible Strategy when it comes to
generating additional
traffic and maximizing
aeronautical and nonaeronautical revenues
 Realistic assumptions with high and low
scenarios and sensitivity
analysis
 Financing Structure could make or break a
deal
 Integration - in the
overall regional and
industrial context
- 19 -
The regulatory environment and the qualifications of the
project partners are prerequisites for goal achievement
Regulatory Environment
 To be open to foreign direct
investment (FDI) with
respective investment code
and legal framework
 To be stable with regard to tax
laws and FX transfers
 To provide a transparent
aviation tariff scheme which
leaves room for adjustment
induced by legal or macroeconomic factors
 To provide clear approval
mechanisms and a clear
division of tasks among the
various authorities
8th CEI Summit Economic Forum ,
2
Project Parties
 To have the necessary knowhow for the development of
the project
 To have the financial capacity
to fulfill necessary equity
payments and sponsor
support obligations
 To be well connected with the
local authorities
 To have specified their
relationship among each
other and third parties in a
well drafted contractual and
financial structure
- 20 -
Certain risk factors in the Central European airport market
need to be addressed and managed
1
2
Airport industry risk
Macro-economic risk
 Economic reforms
 Development of Central European
airport industry
 National/Regional competition
 Monetary environment
and regulation
 Growth in passenger and cargo volumes
 FX risk / Inflation
 Airline industry risk / airline pricing
 Economic growth
 Regulatory environment
 Investment climate / FDI
RISK!
 National Privatization
Program
 Country rating
 Market shocks
 Capital Availability
 Regional stability
 Role of Government
 Domestic stability
 Management quality
(know-how, track record)
 Government continuity
3
3
Political risk
8th CEI Summit Economic Forum ,
 Legal framework /
Enforceability
4
Project risk
- 21 -
The project’s funding life cycle is driven by the partners’ objectives,
by the nature of the business and by associated risks
START- UP PHASE
Airport
Company
Activity
(Concessionaire)
Airport concept
Air transport
market potential
analysis
GROWTH PHASE
Company formation
(SPV)
Facility and
process
improvement
Airport development
concept/masterplan
Operations concept
Start of operation
Traffic growth
Exploitation of
market potential
Route development and
airport marketing concept
PROFIT
3
New route
development
LOSS
Investment
Phases
Sources of
Financing
Seed
Start-up
Growth
Expansion
Maturity
Start-up Capital
(for Feasibility
Studies, Market
Testing, business
formation)
Validation of Concept
Revenue
Generation
Free Cash-Flow
generation
Full Operations
Private Funds
Government
Customers
Banks / Loans
Angels
Suppliers
Trade
Micro-financing
Strategic Partners
Lease
Financial
Institutions
Early Stage Equity Funds
Mezzanine Finance
Market Confirmation
Positive Income
(fuel growth)
ABLs
Revenue Growth
Capital Sourcing for
Expansion
Institutional
Investors
Public Market
Securitization
Mezzanine Finance
8th CEI Summit Economic Forum ,
- 22 -
Agenda
4
1. Need to Build Up Airport Infrastructure in Central Europe
2. Private Sector Involvement in the Airport Industry
3. Public Private Partnerships
4. Case Study: PPP-Structures as Means for Successful Airport
Development
8th CEI Summit Economic Forum ,
- 23 -
The capital’s new airport project presents elements of three
separate transactions
4
Project A
Development of
infrastructure between
the city and the new
airport site / preparation
of new airport site
Project B
Construction of the new
airport
Project
Commercialization and
sale of land of the
existing airport in the
central city (350 ha)
8th CEI Summit Economic Forum ,
- 24 -
The air transport market has distinct features
Passenger Traffic 2003 - 2027
Key Points
1.000.000
Total Passengers
4
 In 2002, the country had approx. 230.000
air passengers, of which 90% have been
handled at the capital‘s airport
900.000
800.000
700.000
600.000
500.000
400.000
300.000
200.000
optimistic
most likely
2027
2025
2023
2021
2019
2017
2015
2013
2011
2009
2007
2005
2003
100.000
0
conservative
Air Cargo Traffic 2003 - 2027
 Regional traffic flows: Europe 31%, West
Africa 34%, Other African countries 24%,
and 11% to other regions
 Passenger structure: 89% scheduled
passengers 7% charter passengers and
4% non-commercial traffic
25.000
 Today, Air Cargo exports are largely
based on perishables (vegetables and
fresh fruits); this dominance will decrease
until 2027
Cargo (in tons)
20.000
15.000
10.000
 Compared to exports, Air Cargo imports
have played a minor role since 1981.
5.000
Optimistc
Optimistic
Most-Likely
2027
2026
2025
2024
2023
2022
2021
2020
2019
2018
2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
0
Conservaitve
Conservative
Source: Lufthansa Consulting
8th CEI Summit Economic Forum ,
- 25 -
The development of airport capacity to meet future demand
requires investments of approx. 200 – 250 mill. Euros
4
 Project A: “Infrastructure
development”
 Responsibility: Government
Development of existing airport/
Access to the new airport
 Investment: Government
 Project B: “Construction of
airport”
Phase 1
Construction
 Responsibility: Concessionaire,
(Government)
Operation
 Investment: Concessionaire,
private investors
Phase 2
Expansion
 Project C “Land
commercialisation”
 Responsibility: Government
Land Commercialisation
 Investment: t.b.d. after valuation
2006
8th CEI Summit Economic Forum ,
2010
2015
- 26 -
A Special Purpose Vehicle (SPV) as operating company of the
airport is composed of a combination of private investors
4
Potential Split of Shares in the SPV
4%
 The composition of investors is
driven by Government interests,
investor interests and availability of
local, regional and international
capital
11%
 The Government will take an
appropriate capital share
 Foreign investors / operators of the
new airport will take a majority
share
57%
28%
 The split of shares in any PPP
needs to in line with the risks and
rewards associated with the
investment.
8th CEI Summit Economic Forum ,
Foreign investor / Operator
Local / Regional investor
Government
Strategic Investor
- 27 -
Government participation in the transaction is indispensable
Revenues at the airport
4
Magnitude of the investment
Revenues from the low passenger (2004:
TTL investment is unlikely to be sourced
240.000) and cargo volumes (2004: 4.800 t) do
from the local and regional investment
not justify the investment and do not present
community alone; alternative ways of
an attractive investment opportunity.
financing need to be found.
Government Participation in the privatization
Privatization Model PPP; 25-year concession + renewal option
 The Government will have to subsidize the project with at least 45% of Phase I of the
project
 Phase 2 can be financed from internal sources
8th CEI Summit Economic Forum ,
- 28 -
The privatisation strategy is based on a number of financial
criteria for the SPV as the operating concessionaire
4
 Government contribution of a substantial part of the investments in Phase 1
 Start-up equity of the SPV usually should be at 50%, depending on the composition,
i.e. cash vs. assets provided by construction firms
 According to similar projects, the long-term debt/equity-Ratio as based on a realistic
business plan shall not be lower than 70 : 30 during the term of the concession
 Internal Rate of return (IRR) of at least 12% for SPV to reflect various risk
dimensions properly
 Positive cash-flow during the term of the concession
 Payments of concession fees to the Government
 Dividend payments to the shareholders of the SPV
 Tax holiday for the operating company
 Debt Service ability of the SPV under various scenarios and loan structures
8th CEI Summit Economic Forum ,
- 29 -
To enhance the feasibility of the project to investors, all
revenue sources will have to be transferred to SPV
4
Cargo Handling
Concessions
Pax and A/C
Handling
Services
Concession Revenue
Airside Service
Concessions
SPV
Landside Service
Concessions
Concession Revenue
...
...
8th CEI Summit Economic Forum ,
- 30 -
Conclusions
4
 There is a huge need for infrastructure developments at many airports in Central
Europe, but limited public budgets are available.
 PPPs are not a panacea for government inability to fund necessary airport
infrastructure projects but can provide a solution when the resources of private
and public partners are bundled where conventional privatisations are not
possible.
 To be considered as investment opportunity by the private sector traffic has to be
above certain thresholds - but only few air transport markets in Central Europe
have sufficient traffic yet.
 PPPs with a fair allocation of risks and rewards provide a means to raise
necessary funds and know-how on the basis of a realistic business case.
 Risk mitigation strategies have to be developed to protect the public and private
partners, including e.g. re-definition of the airport value chain, tax advantages,
direct subsidies, etc.
 The uniqueness of each airport development requires always a tailored approach
structuring a PPP.
8th CEI Summit Economic Forum ,
- 31 -
For further contact:
Dr. Raphael von Heereman
Executive Director
Lufthansa Consulting GmbH
Von-Gablenz-Str. 2 – 6
50679 Cologne
Germany
Tel.: +49 (0)221 88 99 6 - 56
Fax: +49 (0)221 88 99 6 - 60
e-mail: [email protected]
www.lhconsulting.com
8th CEI Summit Economic Forum ,
- 32 -
for your
Thank you
attention