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

1. 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 1

2. 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 2

3. 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. 3

4. 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) 4

5. Type of infrastructure 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 areoften government provided but with airports being expected to make increasing contributions. Airport 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 Sector Structure 5

6. 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. 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) 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. 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. Sector Structure 6

7. 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 7

8. 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 8

9. 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) 9

10. 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 10

11. 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.) 11

12. 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 12

13. 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) 13

14. Airports 1 2 3 4 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 14

15. Airports 1 2 3 4 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 15

16. ANS Infrastructure Financing 16

17. 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. 17

18. 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. 18

19. Thanks World Bank Group Infrastructure Economics and Finance March 4th, 2005