ADB Safegate is a leading provider of solutions that boost efficiency, improve safety, raise environmental sustainability and reduce operational costs for airports and airlines worldwide. With 900 employees and intelligent solutions spanning airside wide over gate airfield and the tower, the company partners with airports and airlines worldwide to increase airport performance, from approach to departure.
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