Privatesector P U B L I C P O L I C Y F O R T H E Note No. 202 November 1999 Private Participation in the Airport Sector—Recent Trends Gisele F. Silva During the 1990s private sponsors have partici- oping country airports face from other airports pated in projects involving eighty-nine airports and from other modes of transport. Motivating in twenty-three developing countries, with governments’ interest in private participation investment totaling US$5.4 billion.1 About three- have been a desire for increased efficiency and fifths of this investment was carried out in 1998 service quality at airports and the constraints on alone, and about two-fifths related to the award public sector budgets at a time that changes in of the Argentine airport system in 1998, which aviation technology and growing demand for air attracted US$2 billion in investment commit- travel are increasing investment requirements. ments (figure 1). This Note, which draws on the World Bank’s Private interest in the airport sector has been Private Participation in Infrastructure (PPI) spurred by the growth in air transport and air- Project Database, analyzes the patterns in airport port revenues fueled by deregulation and the projects with private participation that reached establishment of “open skies” agreements financial closure in 1990–98 (box 1). The data- among countries. Airport revenues are denomi- base covers projects with potential natural nated largely in foreign currency and operational monopoly elements: construction or rehabilita- costs mostly in local currency, which provides a tion and operation of facilities required for take- hedge against currency risk, facilitating project off and landing, traffic control towers, and financing. Revenue security has also been passenger and cargo terminals. Separate conces- enhanced by the limited competition most devel- sions for shopping areas, restaurants and lodg- ing, and similar services are excluded. FIGURE 1 TOTAL INVESTMENT IN AIRPORT PROJECTS WITH Private participation in the airport sector is still PRIVATE PARTICIPATION IN DEVELOPING COUNTRIES, in the early stages and has attracted less invest- 1990–98 ment than privately sponsored projects in other transport segments. Still, initial patterns have 1998 US$ millions emerged: 3,500 ▪ Operations and management contracts with 3,000 major capital investment have been the main 2,500 Argentina vehicle for private participation. 2,000 ▪ Projects involving both terminals and runways 1,500 have been more common than those involv- ing unbundled facilities. 1,000 ▪ Transferring airport networks to private spon- 500 sors has become a common alternative to 0 awarding single airports or stand-alone facilities. 1990 1991 1992 1993 1994 1995 1996 1997 1998 ▪ Latin America and the Caribbean has led devel- Source: PPI Project Database. oping regions in private participation in the airport sector. The World Bank Group ▪ Finance, Private Sector, and Infrastructur e Network Private Participation in the Airport Sector—Recent Trends BOX 1 PPI PROJECT DATABASE: PROJECT CRITERIA AND DATABASE TERMINOLOGY Database coverage ▪ Greenfield project. A private entity or a public-private joint ven- ▪ Projects that have reached financial closure and directly or in- ture builds and operates a new facility. This category includes directly serve the public. build-own-transfer and build-own-operate contracts as well as ▪ Projects in water, transport, electricity, telecommunications, and merchant power plants. natural gas, but excluding movable assets, incinerators, stand- ▪ Divestiture. A private consortium buys an equity stake in a state- alone solid waste projects, and small projects such as wind- owned enterprise. The private stake may or may not imply private mills. management of the company. ▪ Low- and middle-income developing countries, as defined and classified by the World Bank. Definition of financial closure. For greenfield projects, and for opera- tions and management contracts with major capital expenditure, Definition of private participation. The private company must assume financial closure is defined as the existence of a legally binding operating risk during the operating period or assume development commitment of equity holders or debt financiers to provide or mobi- and operating risk during the contract period. A foreign state-owned lize funding for the project. The funding must account for a signifi- company is considered a private entity. cant part of the project cost, securing the construction of the facility. For operations and management contracts, a lease agreement or a Definition of a project unit. A corporate entity created to operate infra- contract authorizing the commencement of management or lease ser- structure facilities is considered a project. When two or more physi- vice must exist. For divestitures, the equity holders must have a cal facilities are operated by the corporate entity, all are considered legally binding commitment to acquire the assets of the facility. as one project. Recording of investments. Investments and privatization revenues Project types generally have been recorded on a commitment basis in the year of ▪ Operations and management contract. A private entity takes financial closure (for which data are typically readily available). over the management of a state-owned enterprise for a given Actual disbursements have not been tracked. Where privatizations period. This category includes management contracts and and new investments are phased and data were available at finan- leases. cial closure, they are recorded in phases. ▪ Operations and management contract with major capital expendi- ture. A private entity takes over the management of a state-owned Sources. World Wide Web, commercial databases, specialized publi- enterprise for a given period during which it also assumes signifi- cations, developers, sponsors, and regulatory agencies. cant investment risk. This category includes concession-type con- tracts such as build-transfer-operate, build-lease-operate, and Contact. The database is maintained by the Private Participation in build-rehabilitate-operate-transfer contracts as applied to existing Infrastructure Group of the World Bank. For more information contact facilities. Shokraneh Minovi at 202 473 0012 or sminovi@worldbank.org. Operations and management Hungary. Build-own-operate (BOO) contracts contracts with major private capital were used for two small airports in India and expenditure in the lead Thailand and four new cargo terminals in the Czech Republic, Hungary, Kenya, and Peru. Outright privatization of airports often meets political resistance, as airport assets tend to be Divestitures have attracted about 20 percent of the seen as strategic for national security. Thus oper- investment in airport projects with private partici- ations and management contracts with major pation, but only two of the seven partial privati- capital expenditure have been the most common zations have involved private management of the way to involve the private sector, accounting for facilities (the Russian Federation and South Africa). about 70 percent of the investment in airport pro- In China and Poland state-owned operators have jects with private participation (table 1). raised funds for airport rehabilitation or expansion through public stock offerings, but have never- Few greenfield projects have been implemented; theless continued operating the facilities. they account for only about 10 percent of the investment in private airport projects. Other than Operations and management contracts without the new passenger terminal in Hungary’s main air- major capital investment have been scarce. Only port, greenfield projects have involved either two Colombian airports and the Madagascar air- stand-alone cargo terminals or secondary airports. port system have involved this type of contract- Build-own-operate-transfer (BOOT) arrange- ing. The paucity of these schemes may result from ments were used for the construction of three new governments’ interest in private sector engage- airports in Egypt and the passenger terminal in ment primarily as a way to raise funds for infra- TABLE 1 TOTAL INVESTMENT IN AIRPORT PROJECTS WITH PRIVATE PARTICIPATION IN DEVELOPING COUNTRIES BY TYPE OF PROJECT, 1990–98 Total Share of structure rather than as a preferred approach to investment total investment management. (1998 US$ in sector Type millions) (percent) Few stand-alone runways Divestiture 1,102.5 20.3 Most projects have involved terminal and runway Greenfield 540.4 9.9 facilities or terminal facilities alone (table 2). Operations and management Projects involving terminals are attractive to private with major capital expenditure 3,801.9 69.8 sponsors because they offer potentially large “non- Operations and management 0.0 0.0 aeronautical” revenues. While aeronautical or traf- Total 5,444.8 100.0 fic revenues originate from passenger fees, aircraft landing and parking fees, and cargo and luggage Source: PPI Project Database. handling fees, nonaeronautical revenues come from commercial services. Since airports have been TABLE 2 TOTAL INVESTMENT IN AIRPORT PROJECTS WITH seen as facing only limited competition from other PRIVATE PARTICIPATION IN DEVELOPING COUNTRIES airports and transport modes, traffic fees have gen- BY SEGMENT, 1990–98 erally been subject to price regulation. By contrast, nonaeronautical activities offer unregulated, often Total Share of large revenue streams, which are highly attractive investment total investment to private sponsors. Concession fees from these (1998 US$ in sector activities often accrue to private airport operators. Segment millions) (percent) Terminals and runways 3,997.3 73.4 Except for projects implemented in Africa in the Terminals alone 995.2 18.3 early 1990s, all airport projects involving termi- Runways alone 452.3 8.3 nals have granted private sponsors the right to Total 5,444.8 100.0 raise revenue by selling concessions for com- mercial activities (such as restaurants, parking Source: PPI Project Database. facilities, and duty-free shops). On average, these projects derive about half their revenue TABLE 3 TOTAL INVESTMENT IN AIRPORT NETWORKS from nonaeronautical services. WITH PRIVATE PARTICIPATION IN DEVELOPING COUNTRIES, 1990–98 Only two projects involving runways alone have Total Share of total been implemented, in China and Colombia. investment investment Although stand-alone runway projects rely (1998 US$ in sector mostly on aeronautical activities for revenue, reg- Country Year Airports millions) (percent) ulation of traffic fees only partially explains their scarcity. The environmental problems associated Argentina 1998 33 2,000.0 36.7 with the size and location of runway projects, and Bolivia 1996 3 104.0 1.9 the ability to absorb growth in air traffic by using Cameroon 1993 7 34.8 0.6 larger airplanes and higher load factors, have led Madagascar 1991 12 0.0 0.0 many airport authorities to focus on relaxing cur- Total n.a. 55 2,138.8 39.2 fews or building new terminals rather than sim- All airports with ply adding runways.2 private participation n.a. 89 5,444.8 100.0 Network projects more common n.a. Not applicable. Source: PPI Project Database. Awarding airport networks to single private operators has become more common in recent Private Participation in the Airport Sector—Recent Trends TABLE 4 TOTAL INVESTMENT IN AIRPORT PROJECTS WITH PRIVATE PARTICIPATION IN DEVELOPING COUNTRIES BY REGION, 1990–98 Total Share of investment total investment Most private investment in Latin (1998 US$ in sector America Region millions) (percent) Private participation in airports has been concen- East Asia and the Pacific 1,243.1 22.8 trated in three regions: Latin America and the Europe and Central Asia 1,153.6 21.2 Caribbean, East Asia and the Pacific, and Europe Latin America and the Caribbean 2,450.3 45.0 and Central Asia (table 4). Latin America has dom- Middle East and North Africa 197.7 3.6 inated in investment. Within Latin America, South Asia 137.6 2.5 Argentina has dominated, with the transfer of its Sub-Saharan Africa 262.5 4.8 airport system to private sponsors in 1998 Total 5,444.8 100.0 accounting for four-fifths of the investment com- Source: PPI Project Database. mitment in the region. Private participation has also occurred in Bolivia, Chile, Colombia, Peru, Uruguay, and Venezuela. Latin America’s experi- years. Of the eighty-nine airports with private ence with private participation in other infra- participation, fifty-five in four countries were structure sectors, and the regulatory framework awarded as network projects, accounting for and implementation expertise that resulted, have about two-fifths of the investment in airport facilitated private involvement in airport projects. projects with private participation (table 3). Viewpoint is an open Other network projects are expected in the near Private airport projects in East Asian countries— forum intended to future, notably in Latin America and the China, Cambodia, and Thailand—have attracted encourage Caribbean. The Dominican Republic and about a quarter of the investment in the sector. dissemination of and debate on ideas, Mexico transferred sections of their airport net- In Europe and Central Asia investment in private innovations, and best works to private sponsors in 1999, and Guate- airport projects has been concentrated in the practices for expanding mala and Honduras are expected to do the Czech Republic, Hungary, and Turkey. the private sector. The views published are same in coming years. those of the authors and Conclusion should not be attributed The potential benefits from scale economies and to the World Bank or any of its affiliated from financing less profitable airports have been Although public provision of airport facilities and organizations. Nor do the main argument for transferring airport net- services remains dominant, the prospects are any of the conclusions works as a whole to the private sector. Still, it is strong for growth in private participation in air- represent official policy of the World Bank or of unclear whether these benefits are greater than ports. The steady expansion in air transport com- its Executive Directors those that could be derived from introducing bined with the revenue security and limited or the countries they competition for individual facilities, hubs for competition in the sector can be expected to represent. cargo and passenger operations, overlapping continue to attract private participation in airport To order additional hinterlands, and transparent subsidies for less projects. Several countries, notably in Latin copies please call attractive airports. America, have announced plans to carry out pro- 202 458 1111 or contact Suzanne Smith, editor, jects in the near future. Room F11K 208, In Cameroon private sponsors made commit- The World Bank, ments to finance both profitable airports and sec- 1 All dollar amounts are in 1998 U.S. dollars. The PPI Project 1818 H Street, NW, Washington, D.C. 20433, ondary facilities that have traffic flows too small Database records total investment in infrastructure projects with or Internet address to break even but are essential for integrating private participation, not private investment alone. 2 Load factor is the percentage of available seats paid for and occu- ssmith7@worldbank.org. areas inaccessible by other transport modes. By The series is also pied in an airplane. available on line contrast, in the Argentine and Bolivian networks (www.worldbank.org/ only financially sustainable airports have been html/fpd/notes/). awarded to private sponsors; unprofitable air- Gisele F. Silva (gsilva@worldbank.org), George Printed on recycled ports have been financed through the conces- Mason University and Private Participation in paper. sion fees for the profitable ones. Infrastructure Group