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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