Public Private Partnership (PPP): What You Need to Know

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.

 

Airport Operational Concept

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.

Complexity

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:

  • Scale of technical/operational processes
  • Demand for new technology adoption
  • Multilateral political and bureaucratic complexion
  • Stringent regulatory regime
  • Socio-economic significance
  • Environmental impact
  • High CAPEX and OPEX regime
  • Increasingly specialised HR demands
  • Unpredictable market conditions

 

Airports Consolidating Operational and Commercial Considerations

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.

Scaling Up

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).

Airports Scaling-up and the Motivation for Attracting Private Investments

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.

Airport Operations and Ownership Paradigm Shift

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.

Airport Investment - Converging Towards a Business Case

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.

Airport Master Plan key in Public Private Partnership

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 Articles The 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 Partnerships Guidebook 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. 3-7908-1366-4 Figures 2 through 6 are by the author