The urgency of infrastructure development and the significance of private capital in the airport sector

ACI has a neutral position on airport ownership and does not suggest that airport privatization is the only suitable policy choice. There is, however, a global need to finance new airport infrastructure to meet future demand and if government spending cannot be relied upon as it has been in the past, there is increasing recognition and ample evidence of the value created by private investment in airports around the world.

There is no-one size fits-all model given the large variety of social and economic circumstances, needs and objectives across the globe but positive lessons can be learned from existing privatization processes, especially where they have been subject to stable, consistent and proportionate economic oversight.

Growth in air traffic

Airport passenger traffic has been growing at an average rate of 4.5% during the last decade (from 2007 to 2017) despite a series of macroeconomic shocks and adverse geopolitical events. In 2017 – the most recent year for which comprehensive global data is available – passenger traffic growth totalled 7.5% – more than two times faster than the global GDP (3.2%).

Concurrently, ACI World Airport Traffic Forecast (WATF) reveals that over the long run passenger traffic is projected to continue growing at an annualized rate of 4.5%, reaching 22.3 billion by 2040. This growth is expected to come primarily from the international passenger segment as well as from emerging markets and developing economies. Domestic passenger traffic and traffic in advanced economies is also forecasted to remain robust.

Demand for airport infrastructure

Considering strong growth in air traffic, many airports are near, at, or even exceeding their design capacities, causing congestion, lower levels of service and frustrated demand. Existing airport infrastructure cannot handle expected growth. This is what the industry refers to as capacity crunch. There are several indicators testifying to the capacity crunch, among which is the growing number of schedule-facilitated (IATA Level 2) and slot-coordinated airports (IATA Level 3): over 140 and over 200 respectively for the Summer season of 2019. Another indicator is that over the last couple of decades, despite new technology, scheduled flight times – i.e. how long an airline estimates it will take to complete a journey – have increased by as much as 50 percent, representing allowances for longer taxiing times at those airports that have become more congested.

Given the complexities involved in planning, getting approvals, financing and constructing new infrastructure, by the time the new infrastructure is ready for use, its traffic could easily be twice what it was when the project was conceived. This predicament of constant infrastructure shortage has negative economic consequences for the national economies as well as the key industry stakeholders. The delivery of sound and reliable airport infrastructure is an important factor of economic growth. However, the allocation of funds for infrastructure projects is insufficient to cope with the projected increase in demand.

Infrastructure financing

Many airports across the globe require more capital investment to accommodate growing passenger and cargo traffic. When governments face fiscal constraints and are not able to fund the much-need capacity, the injection of private capital in the airport sector becomes a valid option responsive to needs of States and of the travelling public.

The world now has over three decades of experience with airport privatization. Privatization and private participation in the airport sector have proved to deliver tangible positive results in terms of building new infrastructure and increasing capacity, improving airport service quality as well as growth prospects and operational efficiency.

The aims of privatization

The most import reasons for airports privatization are in the operational, economic and strategic domains. Privatization aims at achieving higher operational efficiency as well as better service standards for the users and end-users. Privatization can alleviate the State burden for airports development and transfer risks to the private sector. But most importantly, privatization represents a solution to gain capitals from external sources for infrastructure investments. It is a policy that enables airport development which, in turn, facilitates the economic development of a region.

At the beginning of the large privatization cycle (mid-1980s), privatization of airports was increasing mainly due to desire of disposing strain on State budget, especially in a context of competing government agenda. Government-run airports had to compete for financing with other areas of social services such as healthcare, education or national defense. Government expenses were associated with subsidizing airports services and investments related to infrastructure development (runways, aprons, terminals, etc.) and higher level of security. The constant increase in air traffic, and consequently the increase in costs related to developing and operating airports, led to the decision of many countries to hand over the management of the airport sector to commercially-oriented companies at arm-length from governments. Commercialization was succeeded by corporatization and naturally progressed towards privatization.

There is enough evidence supporting the thesis about private companies being more successful in managing corporate assets and assuring high standards of customer service. Private companies not only seek for the efficient sources of financing investments but are also profit-oriented. The profit motive is a natural incentive for effective costs management and ambitious revenue generation, especially outside the traditional aeronautical domain on the commercial side.

Transfer of risk is another important feature of privatization. The notion of risk is especially relevant to new investments and infrastructure development. Under privatization, the risk of building infrastructure can be shifted from taxpayers to the private sector. Privatization increases the likelihood that strategic decisions will be made based on economic considerations, rather than on the political basis.

Airport privatization experience

Nowadays about 15% of airports with scheduled commercial traffic have some kind of private sector participation. However, due to the fact that private capital tends to flow into bigger airports with high level of throughout, airports with private sector involvement handle 43% of global passenger traffic. The airport industry continues to attract private companies; more and more enterprises are entering the airport market, due to several factors including, but not limited to:

Strong growth in traffic and positive outlooks and forecasts
Economies of scale allowing for increases in marginal per-unit income
Enormous yet still not fully exploited commercial potential of airports

ACI World estimates that, on a per-traffic unit basis, airports with private sector participation invested 14% more in capital expenditures in the five years from 2012 to 2016 than their public counterparts and 12% more than the global average. Such figures testify to the commitment of the private sector to invest and develop infrastructure in return for reasonable profits in line with the weighted average cost of capital.

Since private airport operators are very often constrained by legal obligations stipulated in contracts, they deliver high-quality infrastructure assets that are completed on-time and within budget. As the opportunity cost of delays to improving and expanding infrastructure is real and quantifiable, private sector involvement in the airport sector represents a real benefit to the economy.

Privatization implies mobilizing cost-effective construction companies, leading equipment and technology suppliers, specialized equity funds backed by institution investors and other experienced stakeholders. Significant synergies arise from market-based interactions of the various parties involved, based on the principles of transparency, competition and efficiency. The international financial institutions (IFIs) and global firms have come together to create pools of knowledge and instruments for capacity building, but also have created a coordinated number of project preparation facilities dedicated to helping prepare, tender and deliver infrastructure projects.

The airport sector has witnessed the emergence of major international airport investor-operator specialized firms such as Groupe ADP, Fraport, Vinci, Grupo Ferrovial, Corporación América, GMR and Macquarie Infrastructure Corporation, to name a few. These and other companies contributed to renewing and building airside infrastructure as well as terminal buildings in all parts of the world, investing billions of dollars.

Investment climate and incentives

Investment climate refers to economic and financial conditions that affect companies’, banks’ and institutions’ willingness to lend money, acquire stakes and commit to long-term investment. It is a combination of many factors including political stability, regime certainty, taxes, rule of law, property rights as well as government regulations and transparency. All these factors affect the amount of private capital flowing into infrastructure projects including the airport sector.

Corporate finance makes up about three-quarters of private finance. Unleashing investment in privatized sectors requires regulatory certainty and the ability to charge prices that produce an acceptable risk-adjusted return, as well as enablers like regulatory incentives.

Infrastructure developments are capital intensive and have long time horizons. As the private sector takes significant risk associated with developing airports, it requires reasonable return on investment. More generally, the decision of private parties on whether to engage in an airport project is guided by a set of right incentives, encompassing stable, predictable, consistent and proportionate economic oversight, the ability to recover costs throughout the contractual period, dual or hybrid till approach as well as government support in a form of continued access to preferred infrastructure financing programs.

Success factors in airport privatizations

Securing the overall viability and sustainability of a private project requires that the government set appropriate parameters from the very start of the process. This requires a thorough analysis of the market into which airports are being privatized and the evolution of the airport industry as businesses in their own right in an increasingly competitive environment.

The involvement of governments is also considered indispensable for successful airport privatizations in the form of robust project preparation from technical, legal, financial, environmental and social standpoints. The tendering stage is essential to ensure that the right investor is selected for a project and government goals are fully met. These include the actual development of infrastructure, increases in efficiency and productivity, reduced government funding, return for taxpayers, connectivity and the wider economic benefits.