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

Infrastructure Economics and Finance 1 February 2005

 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

Infrastructure Economics and Finance 2 February 2005

 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 today’s 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.

Infrastructure Economics and Finance 3 February 2005

 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)

Infrastructure Economics and Finance 4 February 2005

 Sector Structure
Type of infrastructure
Airport Infrastructure:
Infrastructure
 
Airside Services. The airfield, gates, jet-ways, and
all facilities associated with the movement of
aircraft. All facilities considered beyond the
passenger security areas (runways, taxiways,
aprons, etc.)
 
 
Landside Services. Facilities associated with the
movement of passengers and baggage away from
aircraft areas. Airport facilities devoted to service
passengers in to and inside the terminal areas
(i.e., passenger services, food and beverage
concessions, duty free, car parking, etc.)
 
Security & Safety services. Facilities associated
with the provision of police, security, customs,
  immigration, fire & rescue, etc.
Surface access: Road and rail services
Infrastructure Economics and Finance
Characteristics of the service provision
Services provided on a monopolistic mode by
nature. Pricing mechanism usually does not
incorporate a competitive factor in it (i.e., landing
charges, airport passenger charges, etc.) although
they could be subject of contracts with airlines.
Competition between airports is a relevant factor
as is regulation
Services provided on a competitive basis where
airlines and passengers can usually find different
providers. Pricing mechanisms tend to
incorporate some type of competitive factor,
however, highly influenced by the airport
landlord (i.e., owner, concessionaire, etc.)
 
Services provided directly by the relevant
municipal, regional or federal government agency
or provided as a result of regulation e.g. airport
run or contracted security services
 
Road Transport services are often government
provided but with airports being expected to
make increasing contributions.
5 February 2005
 Sector Structure
Air Navigation Infrastructure (air
traffic control)
Air Navigation Services (ANS) encompass
all activities necessary to safely separate
and efficiently operate and provide air
traffic services for a particular country’s
airspace. ANS will include the provision
of air traffic control services, en route
navigational services, etc.
Safety Oversight
 
Services and activities related to the
adequate achievement and safeguarding
of technical standards in safety and
security by all entities responsible for the
provision of air transport services (i.e.,
aircraft registration and inspection, pilot
training and qualifications, airport
infrastructure standards, air traffic
controllers certification, air navigation
equipment, etc.). Given the global nature
of the air transport industry, technical
standards tend to be international and
enforceable by international laws and
treaties.
Infrastructure Economics and Finance
Service Provision
 
The core services, given their nature, are
provided on a statutory monopoly mode.
International agreements require a cost
recovery non-discriminatory approach to
charging. Pricing mechanism usually does
not incorporate a competitive factor in it
(i.e., over-flight and approach charges)
 
 Provision of these oversight services and
the safeguarding of international
standards and recommendations are
provided by the relevant government
agency (es) responsible for the technical
regulation of the sector (i.e., civil aviation
authority, ministry of transport, etc.).
 
Well established global agencies such as
ICAO performs the role of international
oversight on air transport activities plus
contributes with the setting and
maintenance on international benchmarks
for air safety and security standards.
6
February 2005
 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

Infrastructure Economics and Finance 7 February 2005

 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
 

Infrastructure Economics and Finance 8 February 2005

 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 Canada’s 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 related—but 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)

Infrastructure Economics and Finance 9 February 2005

 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

Infrastructure Economics and Finance 10 February 2005

 PPPs in Airports : Available Options and Models
Policy Options Option 11 Option 21 Option 31
Allocation of State retains Ownership State retains Ownership of Ownership, Operations,
/Investment Responsibilities Airport but transfers and Investment
Responsibilities but transfers Airport Investment as well as Responsibilities are
Management and Operations to the Operations/Management transferred to
Private Sector to Private Sector the Private Sector
Ownership State State Private Sector
Investment / Financing State Private Sector Private Sector
Management / Operations Private Sector Private Sector Private Sector

Private Sector Participation Service Concessions BOT schemes (BOOT, Wraparound Additions
Options Contracting Out BTO, etc.) BOO
(commonly used) Management Contracts Long-term Leases (LDO, Strategic Buyouts
Multiple Concessions etc.) (MEBO, etc.)
Master Concessions Capital Markets

Recent Aéroports du Cote D’Ivoire Athens Int’l Airport British Airports Authority
Experiences Pittsburgh Int’l Airport Bolivia Airport System Belfast Int’l Airport
(from Case Studies2) Kai Tak Airport, Hong Kong Arturo Merino, Santiago Coppenhaguen Airport A (%)
Argentina’s Airport System Vienna Airport Authority (%)
JFK Int’l Terminal

1
Includes alternatives for selected airside activities, selected landside activities, and full airport activities.
2
For further information on Case Studies, see World Bank, “Airport Infrastructure: The Emerging Role of the Private Sector- Recent Experiences
Based on 10 Case Studies,” CFS Discussion Paper Series, Number 115, Washington D.C., 1995.

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.)

Infrastructure Economics and Finance 11 February 2005

 Key Risks in Air Transport Infrastructure
Financing
 Contractual Risk (contract frustration / grantor’s 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 grantor’s 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

Infrastructure Economics and Finance 12 February 2005

 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

project’s 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 90’s), (ii) strong
economic downturn (e.g., USA in late 80’s)

Infrastructure Economics and Finance 13 February 2005

 Airport Infrastructure Finance Capital Markets Securitization (A)

Country of Project Domicile “OFFSHORE”

International
International
Airports Payment
Airlines
Airlines
Instructions Payment of Airport Fees
11 22 33 44
Off-Shore
Off-Shore Account
Account

Debt Service
Government
Government Institutional
Concessionaire
Concessionaire Institutional
Entity
Entity Trust
Trust Notes Investors
SPC
SPC Investors
(( Regulator)
Regulator) Receivables
Sale Agreement
Issue of Notes
Proceeds of the Issue (US$)
Proceeds (US$)

 The Concessionaire sells future receivable (i.e., landing and

terminal fees) to an offshore trust that issues notes to
capital markets investors Waterfall Revenues
Waterfall Revenues
 A rated capital markets issue requires a demonstrable track
record of payment of landing and other fees by Operating Expenses
Operating Expenses
Maintenance (CAPEX)
creditworthy airlines (rated airlines BBB- or more). Maintenance (CAPEX)
Taxes
 A capital markets issue is suitable for a one time sale of the Taxes
Reserve Accounts
future offshore receivable stream of the airports. Reserve Accounts
Debt Service
Debt Service
Dividends
Dividends

Infrastructure Economics and Finance 14 February 2005

 Airport Infrastructure Finance Capital Markets Securitization (C)

Country of Project Domicile “OFFSHORE”

International
International
Airports Airlines
Airlines
Payment
Payment of Airport Fees
11 22 33 44 Instructions
Off-Shore
Off-Shore Account
Account

Debt Service
Government
Government Institutional
Concessionaire
Concessionaire Institutional
Entity
Entity Trust
Trust Notes Investors
SPC
SPC Investors
(( Regulator)
Regulator) Receivable
Sale Agreement
Issue of Notes
Proceeds of the Issue (US$)
Proceeds (US$)

Partial Risk Guarantee

(Political Risk + Contract Frustration)

MLA
MLA

“Two Debt Ratings from Major Institutions”

Comprehensive Guarantee

Rating Agencies Private

Private Insurer
Insurer

Infrastructure Economics and Finance 15 February 2005

 ANS Infrastructure Financing

Domicile of ANS Corporation (Country) Off-Shore Location

ANS Corporation International C arriers

(Concessionaire)
Provider of AT M (Payment Instructions)
Servic es

Overflight Fees US$ (deposit)

Approach Fees US$ (deposit)

Note Proceeds
US$ Off-shore Account
(acquisition of ATM equipment) Agent Bank

(Debt Service Payments US$ -- coupons)

Fiduciary Notes
F uture
R eceivables & Trust (Bonds)
Sales (Sale) Institutional Investors
A greement
(capital markets)
Issue of Notes (Proceeds US$)
(fees collection)
(Credit Enhanc ement )

MDB / ECA / Private Insurer

Provider of Political Risk
Insurance (C ontract Frustation)

Infrastructure Economics and Finance 16 February 2005

 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.

Infrastructure Economics and Finance 17 February 2005

 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.

Infrastructure Economics and Finance 18 February 2005

 Thanks

World Bank Group

Infrastructure Economics and Finance
March 4th, 2005