The Role of the Public and Private Sector in Air Transport Infrastructure ATI

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The Role of the Public and Private Sector in Air
Transport Infrastructure (ATI) Seminar Public
Private Partnership (PPP), in the Transport
Sector in Russia Moscow, Russia, March 3-4, 2005
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Contents

• Introduction
• Sector Structure
• The Role of the Public and Private sector
• Safety and Security Safeguards
• Air Navigational Services
• Airports
• Air Transport Infrastructure Financing
• Key Risks
• Options and Models for Airport and ANS financing
• Potential Bank support in the sector
• Way forward

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Introduction

• Together with telecom, air transport represents
  the sectors that epitomizes globalization in an
  economic as well as in a socio-political sense
  worldwide.
• With todays competitiveness standards it is
  difficult to conceive a country or region that
  will be able to integrate into global markets
  without a well functioning communication and air
  transport systems. Without a well functioning
  domestic transport system and the best possible
  international linkages, national markets will be
  smaller.
• The sector has the potential to be fully
  financially self sustaining and the Government
  role can be primarily focused on safety and
  security regulation along with their standard
  role in competition policy (and economic
  regulation).
• The inter-action between efficient and effective
  ATI and local and regional economies can be
  significant (I.e., Dubai Airport, Emirates)
• There could be situations in transition
  economies, in post conflict countries and in
  relatively small markets where there are problems
  in ATI provision. In these situations carefully
  targeted government intervention and World Bank
  Group (WBG) assistance could assist and
  facilitate the transition of ATI to an
  economically efficient financially
  self-sustaining basis.

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Sector Structure

• Airlines (downstream air transport services
  provision)
• Mostly deregulated market
• Mostly private ownership dominance
• Extremely competitive
• Technological changes driven by globalization and
  aircraft manufacturing economics.
• Air Transport Infrastructure (ATI)
• Define as facilities and oversight required to
  provide efficient and on-time air transport
  services to the public organized as follows
• Airport Infrastructure
• Air Navigation Services (ANS) Infrastructure (air
  traffic control)
• Safety Oversight (technical regulation)

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Sector Structure
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Sector Structure
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The Role of the Public and Private Sector
Safety and Security Oversight

• This is a core Government responsibility as well
  as being required by international treaties and
  law. Full compliance with international rules and
  recommended best practice is demanding for
  smaller and developing countries yet there is
  considerable pressure and expectation to ensure
  quality operation of necessary regulatory
  services to assure continued international
  connectivity.
• In contrast to other markets where regulatory
  compliance is often an issue and as with aviation
  infrastructure, customers (airlines) are often
  willing to pay for such regulatory services
  provided they are effectively and efficiently
  provided
• User charges potentially allow for regulatory
  agencies to be operated on a cost-recovery basis
  with more autonomy than core government agencies.
  Subject to satisfactory accountability
  arrangements this could better allow for the
  aviation regulatory agencies to hire and retain
  the necessary technical staff to ensure the
  provision of regulatory and overseeing civil
  aviation capabilities and competences

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The Role of the Public and Private Sector
Air Navigational Services (ANS)

• Provision of ANS still remains a dominant public
  sector responsibility and the increase of
  security concerns and threats in this sector seem
  to indicate that this trend will be kept in the
  upcoming years.
• Few governments have attempted successfully at
  privatizing the provision of ANS (see Box 2).
  Indeed the UK NATS PPP is probably the only
  for-profit ANS. Even there, as the main
  partners are major UK airlines and the
  Government, there are not strong incentives for
  profit maximization.
• ANS outputs are still not well understood let
  alone specified. . This together with the
  statutory monopoly approach for the provision of
  core ANS supports a cautious approach to reform
  in this area. However, many of the governments
  in developed economies have successfully
  corporatized their ANS systems and moved them
  into cost recovery systems independent to a
  greater or lesser degree from governments
  budget  

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The Role of the Public and Private Sector
Canada, Privatization of the ANS, Nav Canada  
The Government of Canada has privatized the
provision of its air navigation services. On
November 1, 1996 Canadas Air Navigation System
was sold to a not-for-profit corporation,
NavCanada for Can 1.5 billion. An independent
Board of Directors composed of independent
members -- not government relatedbut some
related to end-users , comprise the Board of the
corporation. After four years of operation Nav
Canada has reduced overhead by 20, increased
investments by C 500 million and maintained a
three year average of approximately 2 operating
irregularities per 100,000 aircraft movements. As
of February 4, 2005 Nav Canada was rated AA by
Standards Poors (extremely low probability of
default on its financial obligations)
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The Role of the Public and Private Sector
Airport Infrastructure

• Since the privatization of the British Airport
  Authority, as BAA, in 1986 private sector
  participation in airport infrastructure has
  greatly expanded and evolved.
• There are currently (2004) more than 40 new
  separate projects in over 31 countries that have
  been undertaken through different approaches and
  adopted a wide range of forms and variations
  (i.e., Master Concession, BOT, Management
  Contracts, etc.).
• Given the global nature of the industry, airport
  related tariff and charges are usually based in
  major international currencies. Moreover, most of
  the fees paid directly by airlines (i.e., landing
  charges, ground handling, etc.) are usually
  calculated and paid in these currencies.
• Willingness to pay by end-users for valuable
  cost-effective services significantly above other
  type of transport infrastructure services offers
  sound airport operations a level of financial
  returns that make possible private investments
  and participation

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PPPs in Airports Available Options and Models
Other Type of Policy Considerations

• Airport Network and Cross-subsidies (e.g.,
  Mexico Grouping of Airports)
• Need to maintain non-commercial airports for
  public policy reasons
• (i.e., security, regional integration, etc.)

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Key Risks in Air Transport Infrastructure
Financing

• Contractual Risk (contract frustration /
  grantors default) Non-compliance of the
  grantor authority concession with contract
  obligations
• Tariff adjustment (e.g., important as a potential
  risk mostly in the cargo traffic).
• Early Termination (e.g., in sub sovereign
  projects, amount to be paid to lenders could
  represent a relative large portion of annual
  grantors budget).
• Regulatory Framework (i.e., set-up of regulations
  and procedures with adequate systems operations
  and staffed with professional expertise).
• Operational Risk Poor performance in the
  commercial related side of the business /1
• Existing Commercial Contracts (difficulties in
  replacing business conditions of commercial
  concessions in the case of existing airport
  infrastructure)
• Lack of Qualified Commercial Expertise applicable
  to local infrastructure (lack of presence of a
  solid commercial airport operator in the
  consortium and/or difficulties in the transfer of
  commercial technology to the local airport)

/1 lenders assume (subject to due diligence) that
the non-commercial side of the business is well
covered on the concession bidding documents
(required level of technical expertise
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Key Risks in Air Transport Infrastructure
Financing

• Environment existence of previous liabilities
  not identified through preliminary environmental
  assessment (i.e., a prerequisite in any
  international financing of relevance).
• Construction completion in the event of
  airport construction that requires movements of
  land and/or deviation of water sources, the
  period of completion as well as the final project
  costs are subject to a higher deviation from the
  standard (plan).
• Continuation Risk Development of airport
  infrastructure where the construction is
  segmented in phases which are interdependent for
  completion purposes (i.e., passenger terminal
  expansion on existing infrastructure or runway
  extensions)
• Market Risk Traffic deviations during first
  years of concession is determinant of projects
  repayment capacity. In the case of airport
  traffic the major factors affecting significantly
  number of passengers and/or cargo are (i) severe
  political conflict (e.g., Europe during the Gulf
  War, Sri Lanka in late 90s), (ii) strong
  economic downturn (e.g., USA in late 80s)

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Airport Infrastructure Finance
Capital Markets Securitization (A)
Country of Project Domicile
OFFSHORE
International Airlines
Payment Instructions
Payment of Airport Fees
Off-Shore Account
Debt Service
Institutional Investors
Government Entity ( Regulator)
Concessionaire SPC
Trust
Notes
Receivables Sale Agreement Proceeds of the Issue
(US)
Issue of Notes Proceeds (US)

• The Concessionaire sells future receivable (i.e.,
  landing and terminal fees) to an offshore trust
  that issues notes to capital markets investors
• A rated capital markets issue requires a
  demonstrable track record of payment of landing
  and other fees by creditworthy airlines (rated
  airlines BBB- or more).
• A capital markets issue is suitable for a one
  time sale of the future offshore receivable
  stream of the airports.

Waterfall Revenues Operating
Expenses Maintenance (CAPEX) Taxes Reserve
Accounts Debt Service Dividends
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Airport Infrastructure Finance
Capital Markets Securitization (C)
Country of Project Domicile
OFFSHORE
International Airlines
Payment Instructions
Payment of Airport Fees
Off-Shore Account
Debt Service
Institutional Investors
Government Entity ( Regulator)
Concessionaire SPC
Trust
Notes
Receivable Sale Agreement Proceeds of the Issue
(US)
Issue of Notes Proceeds (US)
Partial Risk Guarantee (Political Risk
Contract Frustration)
MLA
Two Debt Ratings from Major Institutions
Comprehensive Guarantee
Rating Agencies
Private Insurer
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ANS Infrastructure Financing
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Bank Support for Air Transport Infrastructure

• Technical Assistance (I.e. policy discussion and
  valuation of policy options, institutional
  building capacities, developing of PPP program
  and transaction design). e.g., Bolivia Air
  Transport Capitalization Program
• IBRD/IDA Investment Loans e.g., El Cairo
  International Airport Terminal
• IBRD/IDA Guarantees
• Partial credit guarantees cover debt service
  defaults on a specified portion of a loan or a
  bond.   
• Partial risk guarantees cover debt service
  defaults on a loan to a private sector project
  caused by a government's failure to meet its
  contractual obligations related to a private
  project. 
• Policy based guarantees cover a portion of debt
  service on a sovereign borrowing by an eligible
  member country from private foreign creditors in
  support of agreed structural, institutional, and
  social policies and reforms.
• IFC Loans and Guarantees e.g., Manila,
  International Airport Ninoy Aquino
• IFC Advisory Services e.g., Madagascar Airport
  System, PPPs
• MIGA Guarantees e.g., Quito, Ecuador, New
  International Airport.

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Way Forward

• Security Concerns and Technology Changes will
  drive air transport industry structure.
• Traffic growth in both passenger and cargo will
  continue as partner of the intensification of
  globalizations and increase in the tourism
  industry (with temporary hiccups due to economic
  turndown and security issues).
• Huge demand for infrastructure investments in
  both airport and air navigation services (i.e.,
  need to upgrade and rehabilitate existing
  infrastructure, need to expand, need to
  accommodate technological changes e.g., A-380).
• Sector is financially self sustainable if
  adequate policies are implemented. Continued
  growth of private sector participation in the
  airport operations and corporatization of ANS.
• PPPs in air transport infrastructure will
  continue with relative success.

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Thanks

• World Bank Group
• Infrastructure Economics and Finance
• March 4th, 2005