I was President and CEO of Airports Council International – North America (ACI-NA) for eight years, from July 1, 2005 through June 30, 2013. During those eight years, I had more conversations than I could possibly count with people who wondered why airport privatization has not taken off in the United States. Many of these conversations were with people heavily involved in running or financing privatized airports around the world. Many were held with U.S. colleagues who thought privatization would provide benefits. In the world’s largest economy, and primary bastion of capitalism, airport privatization has remained the rarest of infrastructure animals. Why?
In my first article Public Private Partnership (PPP): What You Need to Know, I explained the role of Public Private Partnerships (PPP) and their significance in the development of airports. The activity involves consolidating numerous variables, and disparate interests and motivations into a single working framework i.e. the Airport Master Plan. In this article, I will outline the process that enables these variables to be rationalised and how the PPP mechanism is kick-started.
Public Private Partnership Process
An airport Public Private Partnership exercise is a deal-making activity similar in principle to a merger and acquisition initiative. It is propelled forward by certain built-in logic and compelled by an affinity for the asset. There is a seller-buyer relationship with “offeror” and “offeree” interactions.
The PPP process is usually a one-off, non-standard activity, and is often supported on both sides by external specialists; legal, financial and technical. As in any sale and purchase interaction, there is tension between seller and buyer that is played out. In the PPP instance, conclusion to the deal-making is marked by a milestone which is designated in this article as “Transaction Close”.
At Transaction Close, a Concession Agreement between the parties is signed. The terms and conditions in the transaction will thereon chart the path of the airport’s future development.
Transaction Close is therefore pivotal to an airport’s intended PPP development transformation. This point paves the way for the implementation of design and construction activities (or variations thereof), and the structuring of associated financial and legal frameworks. It is also the point for introducing changes in the management and operational regime at an airport.
The process of reaching Transaction Close is nevertheless intricate and challenging. Elaborating this in a simple way is the main aim of this article.
Getting to Transaction Close may be described as a 4-phase process (see figure).
Phase 1 - Recognition and Conception
This initial phase is usually seller-driven. An airport’s owner needs to appreciate the particular attributes of their airport as a productive and performance-based asset. The airport needs to internally acknowledge its commercial potential or enterprise value. A comprehensive understanding of these attributes is fundamental in transforming an airport as bait to lure-in investors.
Firstly, the operational and performance attributes of an airport asset needs to be articulated. It includes calibrating the airport’s socio-economic significance to the local and wider national economy. This is also the point where mandated Strategic Development Goals (SDG’s) are leveraged into the overall Public Private Partnership strategy.
Leveraging an airport’s attributes and articulating its asset value are important. An investor needs information to quickly judge whether an airport can be a viable business proposition, or otherwise. The investor also needs to know if extraneous burdens and risks are within tolerable limits. This represents the public sector offering. Setting this up often requires a shift in the seller’s operational and management mindset.
Then a plan needs to be hatched and resources deployed to present the airport as a prospectus to investors. Internal operational adjustments may also be instituted in parallel to embellish the offering.
As this is typically a detailed non-standard and one-off activity, the services of external specialists are usually brought in. Amongst the output produced is a comprehensive and integrated Airport Master Plan, that coincidentally also includes an Airport Business Plan.
The end result is both parties (seller and buyer) must pick up a compelling belief in the asset’s future potential. Their respective goals in this context must appear tenable. Both establishment and corporate buy-ins are therefore essential; to motivate moving forward and to commit further resources towards advancing the scheme.
For a prospective airport investor, acquiring a positive affinity for the airport asset is important. At this stage, the prospective investor must already sense enterprise value in the airport’s operational future.
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Phase 2 - Viability and Validation
This stage of proceedings is essentially investor-driven.
Mutual interest arising from the parties is formalised through some form of Memorandum of Understanding (MOU). For the public sector offeror, enabling policies, legislative and regulatory frameworks should be suitably deliberated and mandated. Similarly for the private sector investor, Board approvals would be needed as a precondition to proceed.
An MOU defines the rights and obligations, and the mode of conduct in further proceedings. This is especially important with respect to the access and exchange of confidential and/or commercially sensitive information. An MOU invariably also describes an exit plan; i.e. the process in which parties may abort proceedings at various stages of inquiry.
Formal due diligence and the gathering of detailed information begins here. The objective is to obtain robust evidence to ensure enterprise value exists and can be potentially drawn out from the airport’s future [improved] operations.
Amongst data exchanged and examined are all manner of technical, financial and legal information in accordance with the provisions of the MOU. They will study the airport’s facilities and systems, its organisation and human resources structures. There will also be analyses of contractual and commercial arrangements that are currently in place. The quality and presentation of data (i.e. consistency with accepted business best practice) play an important part in catalysing positive affinity towards the asset.
On the seller’s side, due diligence entails reviewing the potential investor’s financial standing, including its managerial and technical capacity to fulfil future expected obligations in the airport context.
The respective findings of the parties are exchanged and deliberated. For the public offeror, these are assessed for compliance against prevailing policy, legislative and regulatory mandates.
For the private investor, the information is checked for compliance against existing Board mandates. Non-compliances arising are further deliberated until revised mandates and/or approvals may be obtained.
As data are gathered and parties become more informed, the nitty-gritty starts and the plot thickens. If conditions at this stage appear tenable, the prospects for partnership will gain traction. Gradually, the fabric of a Public Private Partnership will take shape.
A satisfactory outcome from the above proceedings will lead to the drafting of a Concession Agreement, the next phase.
Phase 3 - Constructing the Mechanism
The foundations of a PPP are formed through the assembly and alignment of technical, contractual and financial variables associated with an asset and its future outlook. Abstract visions and expectations are massaged into solid financial and contractual form that aligns with technical realism.
There are many bundled obligations and various layers of sub-components to bind together. Counter-measures against inherent vulnerabilities need to be formulated.
This gets rather complicated for airports. There will be constraints imposed by each element, and will infringe on the respective interests of the parties. For instance, technical or regulatory requirements may demand capital commitments that are higher than original investor expectations. Borrowing regimes may be obstructive and workers’ unions require excessive pandering. Or contractual provisions may become too onerous, and timelines stretched, and so on.
Provisions are also made to respond to a changing world in the long-term; where established or understood regulations may be vulnerable to political and bureaucratic machinations and change. These risks need to be mitigated and provisions for adjustments and exit strategies need to be put in place.
During this phase, tolerances and compromises to entrenched interests are tested, reworked and assessed. Cohesiveness and the spirit of collaboration between parties must prevail to draw all variables and conflicting interests into balanced convergence.
From the above, a Concession Agreement is constructed. This is the point where serious semblance of a Public Private Partnership would begin to appear.
Phase 4 - Reaching Consensus
The Concession Agreement is a pivotal component that formally binds relevant contractual, technical and financial variables together to make the PPP pursuit work. It is a comprehensive document that instructs on the duties and obligations of the relevant parties within the PPP construction.
During this phase, the negotiating parties will jockey to establish a strong bargaining position.
Both parties will formally define their respective objectives for negotiation and parameters of acceptances.
The final aggregation of these elements is the result of repeated cycles of negotiation and deliberation where internal and external variables, persuasive and dissuasive, are all rationalised, to the best extent possible. They normally have to be passed by the Regulatory Authorities (Public Sector) and Executive Board (Private Sector) for formal approval.
Assuming the trajectory is positive, deal-making is completed when consensus is reached and the Concession Agreement signed. This is when Transaction Close is attained, and when the Public Private Partnership initiative becomes a reality.
The substance of the Concession Agreement will stipulate downstream parameters for the airport throughout the PPP concession period; design and construction requirements, and its future operational and management regime. Along with contractual provisions, financial arrangements are similarly aligned in sync. Its substance (or lack of) is pivotal to the success (or failure) of the entire PPP endeavour.
This article paints an overly simplistic picture of an undeniably complex process. There is certainly much of the devil lurking in the detail.
The four phases described in reaching Transaction Close do not necessarily play out as distinct sequential activities. Rather they merge from one-phase to another. Often, reversals and backtracking may arise. The path that eventually plays out may be rather contorted and protracted.
At the same time, airport development pursuits are characteristically substantial capital items and are operationally complex. Airports are also variously different from one to another in operational character and technical attributes. Their risk profiles are different. Pitfalls are many. Public Sector leveraging of SDG’s needs to be done with judgemental care as do the pacifying of excessive expectations on returns-on-investment. Standard textbook processes may be limiting in this context and may be an anathema to understood sensibilities.
As proceedings draw closer to Transaction Close, the dialogue tends to be increasingly dominated by financiers and lawyers. As part of a box-ticking process of elimination motivated by time-cost expediency, it is also convenient for technical aspects to be deemed resolved or “fixed” by this stage. This is when technical elements risk being prematurely marginalised. In an airport environment, interdependencies between technical, financial and contractual are inextricable. Any alienation of technical considerations can unwittingly permeate imbalances and performance vulnerabilities in the critical finalisation of the Concession Agreement. This is a compelling point in airport PPP’s.
Garnering cohesiveness and collaboration to advance the process towards multi-party convergence is therefore daunting. Data quality and the nuanced delivery of information matter. Shepherding parties, to commit resources towards a complex activity where the outcome depends upon the solidarity of others, requires a well rounded team, and insightful leadership.
Alas, our reality remains imperfect. And perfection tends to be a troublesome beast easily downtrodden by advocacies of distorted cost-consciousness and reckless quick-fixes. In an airport environment, ill-judged shortcuts taken in the name of expediency is indeed risky. Their results can be severely punishing.
That being said, insightful and thorough scoping remains doable for a balanced and well calibrated Concession Agreement. With diligence and depth of care, a good Transaction Close for airports certainly remains a viable and worthy goal. I hope this article has offered some clarity in advancing your airport Private Public Partnership intentions or have triggered further thoughts on the subject. Will you leave questions or comments in the area below?
References and Suggested Reading Throughout the article, the term “asset” refers primarily to airports, their related infrastructure and facilities. There may be overlapping generalities that may apply to other classes of assets. Notwithstanding, this article is to be read in the context of airports and their particular characteristics as a special facility that processes aircraft, people and cargo. For simplicity, Transaction Close as used throughout this post shall mean to encompass both “Commercial Close” and “Financial Close”. There are variations and different interpretations of this process. An alternative example by EPEC may be found here In the context of this article, the term “investor(s)” may also refer to lender(s) to the transaction. Although this first phase of activity is usually driven by the Public Sector (seller), unsolicited Public Private Partnership proposals or those catalysed by the Private Sector do exist. They nevertheless invariably require the concurrence of the Public Sector in order to proceed.Generalised (non-airport) details on Public Priave Partnerships may be gleaned from the World Bank PPP Reference Guide How Berlin’s Futuristic Airport Became a $6 Billion Embarrassment
Figure is by author
Editor's Note: When we published the Introduction to Airport Planning post June 2014, we had no idea that it would be one of the best read posts. So today, I am pleased to welcome Azlan Morad who is writing for us about a hot topic: Public Private Partnership, aka PPP, P3 or 3P. We welcome your comments!
Airports that are well and professionally-run generally present themselves as attractive assets. They become even more valuable if they can also make business sense and demonstrate profitability as operational enterprises in their own right.
Being both operationally efficient and profitable is an enviable state for a modern airport to be in; where operational capacities are in equilibrium with profit generation; where there is sufficient plough-back potential to make the airport asset self-sustaining and viable as a going-concern. In the context of an airport, this self-sustainability exemplifies “value”; it demonstrates continuity and an airport’s ability to catalyse the local economic multiplier.
Operational Concept of an Airport
Balancing operational efficiencies in-line with meeting private investor prerogatives is nonetheless a complex process.
This article aims to outline a perspective into this world; of merging private investor/lender interest with publicly-owned airport infrastructure assets. It is an example of juggling intricate variables for transforming airport operations and its ownership into a sensible business proposition. From the underpinnings influencing decision-making, the post also alludes to the use of the airport master plan(see 515 - Master Plans) as a tool; to structure discourse, to help close the trust deficit, and to draw-in group consensus towards reaching transaction close.
Manoeuvring to balance operational efficiencies whilst aligning with investor/lender prerogatives also implies dealing with inherent complexities that make up the nature of airport operations. Intricacies associated with a typical mainstream airport may include:
Consolidating Operational and Commercial Considerations at Airports
Reading into the crystal ball of future air traffic growth remains an inexact science. Deciphering their implications for fresh capital to upgrade or replace existing airport facilities requires acute technical judgement. Dealing with risk-averse investor/lenders requires added commercial acumen. In a traditional airport environment, juggling with these issues within a private-sector context is often a departure from airport operational norms. Soliciting specialist input and the use of appropriate tools in these circumstances become compelling.
Over recent decades, there has been unprecedented demand for larger airports capable of handling ever larger aircraft and more passengers and cargo.
In the 1930’s, a typical aircraft carried about 10 passengers. Today, an Airbus A320 or Boeing B737, the industry’s workhorses, carries around 150 - 170 passengers each.
Since the 70’s, with the advent of larger aircraft such as the Boeing B747 (c.400 pax), and latterly the Airbus A380 (c.550 pax), operations and processes at mainstream airports needed rapid scaling up. By 2012, the successful market penetration of Low-Cost-Carriers (LCCs) and the opening up of former Soviet Block countries have dramatically escalated air traffic growth around the world.
The overall traffic increases not only demanded physically larger airport facilities but also required more complex technology adoptions, systems and HR specialisation (1).
These have spurred airport investments across the globe. In 1995, worldwide cumulative annual investments in airports stood at c.USD 15 bil. By 2015, the annual figure was c.USD 60 bil. Cumulative airport investments by 2025 is projected to be c.USD 80 bil. per annum (2).
Scaling-up and the Motivation for Attracting Private Investments at Airports
Public Private Partnership
Airports are traditionally state-owned assets operated as an extension of the government bureaucratic machinery. With dramatic increases in air traffic and congestion, legacy airport stakeholders face unprecedented complications. They often impose heavy demands that could no longer be expediently accommodated within existing bureaucratic structures. Their large investment budgets additionally strain government coffers that also challenge other pressing social obligations, e.g. in housing, health, education, and so on.
These financial burdens add unwanted strains to public authorities and have triggered interest in drawing private investment into financing airport infrastructure development. And the Public Private Partnership (PPP) model provides the guidelines to fulfil this aim.
Although a sensible proposition, soliciting private money into the realm of public-owned airport assets brings with it a number of issues and complicates the airport development equation. It is no longer enough for airports to operate in a technically compliant manner to fulfil safety prerogatives. To attract private investment, airport stakeholders must now fulfil additional commercial requirements to demonstrate that investment in their airport is “worthwhile”.
To feed investor appetite, legacy airport stakeholders need to consider and prove:
Profitability and growth;
Effectiveness of institutions for safeguarding investment;
Concession given by incumbent beneficiary to the investor/lender is equitable;
Operational and investment risk can be managed within acceptable thresholds.
These are some considerations airport stakeholders and investors juggle with to draw out a business dimension from airport operations and ownership. If successful, the resolution of these issues collectively forms the basis for authorising the release of monies for investment.
Paradigm Shift in Airport Operations and Ownership
Consolidating Operational and Investment Prerogatives
A comprehensive “big-picture” appraisal is essential to forge critical decision-making (Figure 2). It requires broad-spectrum analyses where numerous technical, financial and legal data are consolidated into a coherent whole. This is the path both airport stakeholders and investors take to reach a comprehensive and balanced plan-of-action.
In a Public Private Partnership transaction, strategy plans may include, but are not limited to:
Growth strategy plan
Commercial and budgetary optimisations
Operational efficiency enhancement
Stakeholder and key constituent buy-in
Technology adoption and integration
Governance strengthening and culture change
Each of the above headings necessarily carries significant detail intertwined with technical, legal and financial considerations. They document strategies that translate into their airport’s process flows, their facility requirements, technology required, the HR needs and management structures, contractual frameworks, financial statements, and so on.
Closing the Trust Deficit
Merging the variables into a coherent whole is challenging. The process of deliberation and negotiation goes back and forth through a range of topics; to garner joint sensibilities, and to eventually distil a final conclusion. Throughout the balancing process, it is important that protagonists steadfastly believe that their goals remain firmly valid and worthwhile.
Through this process, key constituents resolve to forge the business case that validates both operational and investment demands.
The reality of moving forward is therefore fraught with obstacles and conflicting interests. Bringing together such disparate interests invariably gives rise to complex negotiations. Leadership, judgement, coordination and structured guidance are essential ingredients to overcome conflicts and close trust deficits.
Converging Towards a Business Case for Airport Investment
To reach a business case, a number of conditions need to be variously met. They include:
Charting clear and targeted trajectories to navigate
Defining timeframes for tasks and for reaching targeted milestones
Nature of information sharing and methods for dealing with confidentiality and other sensitivities
Information/data requirement for staging forward planning and for anticipating problems
Delegation of tasks and responsibilities
Criteria confirming robustness and validation of analytics
Structured, transparent and objective documentation, reporting and communication of relevant issues
It is important that all information be well articulated and consolidated. They need to be brought into a common framework; a shared information dashboard to help structure information and merge ideas; to provide objective guidance and achieve convergence. These are attributes required to reach consensus - a single point where the trust deficit can be equitably closed.
The weight of tasks embedded in these processes can be easily misjudged and under-resourced.
In simplistic terms, the above is the likely scenario that pans out in an airport Public Private Partnership (PPP) type transaction.
Tools and Methods
As with all trades, a master craftsman uses appropriate tools. And with a measure of competence, s/he knows how to use such tools to extract value from them.
From my standpoint, the fundamental tool to navigate public private partnership type airport endeavours towards transaction close is the airport master plan.
The Role of an Airport Master Plan
If properly constituted, the airport master plan framework and analytics represents an invaluable instrument that fosters collaborative decision-making. The process provides a structure for articulating and consolidating a broad range of information, formatted in accordance with accepted conventions that is understood by, and carries relevant significance to key constituents; sector specialists, bureaucrats, policy makers, lawyers and bankers alike. It facilitates buy-in and consensus building. A well articulated airport master plan is a comprehensive tool that transaction protagonists can use to:
Analyse and interpret airport data
Rationalise capital and operational expenditures
Establish compliance to required industry and governance standards
Calibrate equitable charging regime for accruing aeronautical revenues
Optimise non-aeronautical commercial potential
In deliberations and negotiations leading towards transaction close, the possession of well articulated and credible information lends commonality to disparate parties; it presents a structured path to demonstrate an airport’s bankability as a business proposition.
The airport master plan is certainly not a magic potion to cure all ills. It requires setting-up and be well managed. Its misuse however can prove damaging (3). The airport master plan working framework can be substantial. Its scope and interpretation can vary. Harnessing its logic and structure to advantage however requires insight, leadership and knowledge.
References & Suggested Reading(1) For general sector updates, refer to: Connectivity and Growth - Issues and Challenges for Airport Investment (2) Source: PwC and Oxford Economics. Note: USD million, current prices, constant 2014 exchange rates(3) If proper Airport Master Planning principles, procedures and sensibilities are disregarded, the consequence can be costly and have damaging outcomes. Examples of such consequential damage arising can be referenced in: Investors Win Auction for Bankrupt Spanish Airport and India's Ghost Airports Highlight Investment Risks
More Related ArticlesThe Ownership of Europe's Airports 2016, report by ACI Europe EU Airports Increasingly Turn to Private Investment to Compete With Global Counterparts, Skift Japan Boosts Osaka Airports With Biggest Ever Project Finance Deal, Global Construction Review National Council for Public-Private PartnershipsGuidebook to Promoting Good Governance in Public-Private Partnerships, U.N. Economic Commission for Europe, Geneva, Switzerland: United Nations Publications, 2008
Image credits: Header is by Vitor Azevedo who created almost all of the beautiful photos you see on our website. Figure 1 is an adaptation from Sonia Sulzmaier's Consumer-Oriented Business Design: The Case for Airport Management (2000), ISBN no. 3-7908-1366-4Figures 2 through 6 are by the author