Public Private Partnerships In Airports: The Role Of The Public Sector

This article was prepared by Dr. Charles E. Schlumberger, Lead Air Transport Specialist, Transport & ICT, World Bank and will be published in Volume XL of the Annals of Air and Space Law, which features many other very interesting articles covering the entire spectrum of domestic and international air law and the law of space applications.
This article reviews the role of the public sector when establishing a Public Private Partnership (PPP) in airports. Countering the perceived notion that the public sector’s role diminishes when establishing a PPP, the authors argue that good governance, adequate supervision, and transparent communication with the public are key functions that governments need to provide. The article further discusses different models of PPP, which range from a simple management contract to full divestiture of an airport. One interesting particularity is that the commonly used term “concession” has a different meaning in terms of ownership and responsibilities in common law compared to civil law.
Public-Private Partnerships (PPPs)1 have gained popularity around the world in many industries. However, PPPs are not new and, in fact, they have a long history— beginning as early as 1438 when a
1, There is no single definition of a PPP. They can be broadly understood as a contract between a private party and a government agency designed to contribute or provide public
French nobleman was granted a river concession to charge fees for goods transported on the Rhine. Today’s operating environment is much more sophisticated and complex, with a multitude of regulatory, financial, political, and technical issues to consider. One area that is seeing increased private investment is airports. As demand for air travel continues to grow, governments face pressure to meet capacity and operational requirements while dealing with budget constraints. However, given that 67 percent of all airports globally operate at a net loss, the challenge of securing finance remains an obstacle that can be overcome with PPPs.
Traditionally, airports were merely publicly funded infrastructure providers. Today, many larger airports have become fully-fledged and diversified commercial businesses as they increasingly involve the private sector. Out of the world’s 3,000 commercial airports, 19 percent are PPPs and account for 30 percent of total passengers.
4, Under the right conditions, PPPs can offer a number of benefits including mobilisation of capital, improved management and operations, and optimized commercial results and profitability.
Nevertheless, there is a common misconception that PPPs diminish the government’s role and, in essence, handover the entire project to the private sector. The public sector, however, often plays a vital part in creating the enabling environment, including the political, legislative and regulatory framework, undertaking project preparation and supervision activities, and ensuring the public interest is taken into account. This article outlines the critical role government can play in facilitating a successful partnership for airport operations, financing, and development.
A typical PPP can offer a number of benefits for both public and private sectors. As governments face tightened budgets, PPPs provide a way to access private financing and mobilise capital markets at a time when public spending is overstretched. In the right circumstances, private sector participation can help improve profitability, management and operations, introduce innovation and operational efficiencies, and enhance overall service levels. Certain risks can be transferred from the public to the private sector, thereby reducing the overall responsibility and/or risk burden of the government. In developing countries, PPP arrangements can help enhance access to skills and technologies, provide greater incentives for improved efficiency and performance, and allow governments to enforce contracts more effectively.
5, Furthermore, private sector participation can often significantly improve governance since the private partner has a commercial stake in the venture.
In terms of income of airports, governments traditionally have relied on aeronautical revenues, which are generated from fees charged for core airport-related activities, such as landing charges, passenger and cargo fees, security, parking, and hangar charges.
6, These charges are regulated and tend to be driven by traffic and aircraft movements. Private sector involvement creates access to new revenue streams for the government, and the focus of many airports has shifted to non-aeronautical revenues, which are generated from activities outside the core business, such as duty free, retail, car parking, real estate, etc. The inclusion of non-aeronautical revenues can often determine the financial viability of an airport.
The airport sector has a number of attractive characteristics for private investors. For example, there is potential for revenue growth as demand for air travel continues to increase and forecasts remain optimistic. The sector also carries limited foreign exchange risk, as airports are able to generate substantial revenues in hard currencies.
8,The private sector is also able to introduce best practices, which can improve operational efficiencies, financial performance, and yields.
In terms of risk diversification, investors in airport PPPs regularly have the ability to diversify their revenue base through non-aeronautical commercial opportunities. The overall risk profile for airports can vary considerably, offering greater diversification of options for investors compared to other sectors.
9, It can range from low-volatility investments (e.g., major hubs with established traffic performance) to more volatile investments (e.g., secondary airports or airports in emerging markets). It is important, however, to thoroughly assess the viability of an airport for private sector involvement, and to define the structure and scope of the engagement.
A PPP should be seen as a delivery tool to achieve certain objectives, rather than an end in itself. A government must first define the project objectives and determine if they can and should be met through public funds or if they necessitate private sector involvement. The decision should be taken in consideration of business needs, the public interest, and value for money.
However, there is not one single model for a PPP that can be applied for any airport project. In some cases, the involvement of the private sector must be limited due to regulatory or operational limitations (for example, dual-use civilian and military airports), while in other cases a full takeover and operation by the private sector is preferred. There are also financial and market limitations, which may not allow for major private investment as profitability cannot be reached with current or expected traffic. Nonetheless, there are also cases where the general country risk, especially in the developing world, is perceived to be too high for major foreign private investment, and the domestic private sector does not have the necessary financial base for such an investment.
Therefore, the critical question for any government considering an airport PPP is: which PPP structure is possible under the given circumstance, and which is able to achieve the best outcomes for the key stakeholders— the public sector, the private investors, and the public in general? Choosing the appropriate PPP structure will always depend on a number of factors, including the project objectives, financing requirements, the market realities, the ability of the government to manage and supervise, and the political and regulatory landscape.
11, The scope of a given PPP project must also be well determined by a government (e.g., full scope would include airside, landside, and commercial developments, as opposed to only airside or one of several terminals).
PPPs can also vary in terms of ownership, investment, management and operations (see Figure 1). The traditional model is complete government control over ownership, investment, management and operations, and public ownership remains common in many parts of the world.
12 Private sector involvement in the airport sector can take a number of forms, with contract duration and risk burden for the private sector gradually increasing form model to model as the private sector becomes more involved (see Figure 2). Although not exhaustive, this section illustrates the types of PPPs commonly used in the airport sector.
Investment decisions remain with the public sector, however limited risks and responsibilities can be transferred to the private sector (e.g., performance risk). The operator can also take on even greater risk (e.g., risk of asset condition and replacement of equipment).
14,Management contracts tend to be a good option in countries with minimal PPP experience, or where legal and regulatory frameworks are still being developed. However, they typically include only a very limited commitment of the private partner, rarely involve any form of investment, and are therefore generally of short duration.
A concession grants a private concessionaire the responsibility for operations and maintenance, as well as financing and managing required investments of the asset over the concession period.
15, Ownership generally remains with the government or public authority, and rights and responsibilities are reverted back at the end of the concession term. A concession contract typically implies the “user pays” whereby the concessionaire generates revenue directly from consumers (e.g. through non-aeronautical revenues, fees, etc.).
16, Concession contracts, unlike management contracts, tend to be output-focused, i.e. delivering the actual service (the concessionaire determines how best to achieve this with agreed performance standards).
17, Given that the private concessionaire has much more influence and power to optimise revenue generated in the concession, and concessions typically have longer fixed durations, a more significant contribution is expected from the private concessionaire. Often, an important upfront investment for the construction is required. Also, a direct initial payment or high on-going concession fees to a government granting a concession are possible modalities that define an airport concession scheme.
There is, however, a distinction between concessions in civil law countries and concessions in the common law sense. A typical concession,as described above, are civil law arrangements, where the asset is under the responsibility and economic exploitation of the concessionaire who takes risks and invests. On the other hand, in a common law environment, a concession often has a much more limited scope, where the private sector may design, build, and operate the assets to meet certain agreed outputs, but takes much less risk as it is typically paid a predetermined amount by the owner.
Such common law concessions typically are Build-Operate-Transfer (BOT) projects— also known as Build-Own-Operate-Transfer (BOOT) project —in which the public authority grants a private company the right to develop and operate a facility for a specified period (usually between 20 to 55 years).
19, In air transport PPPs, this can involve an entirely new (“Greenfield”) airport investment. Nonetheless, often the project is limited to a smaller output (e.g., a new terminal). In a BOT, the operator receives its revenues through a fee charged to the government rather than to consumers.
20, The private company typically owns, finances, and builds the assets until the project is completed, when asset ownership is transferred back to the public authority. Nevertheless, during the concession period, a large share of the risk is transferred to the concessionaire.
In common law, a Design-Build-Operate (DBO) project can also be called a concession as it involves the private sector designing, building, and operating the assets, while the public sector continues to own and finance the construction. In this case, the operator takes on only minimal financial risk but remains responsible for the design, construction, and operations. The full integration of design, construction, and operation to one party can help minimise total project costs by taking advantage of efficiencies.
In a much narrower sense, there are also small commercial concession arrangements, such as in-terminal (e.g., retail) concessions. Once considered just ancillary services serving the travelling public, they have gained popularity as airports are often able to substantially increase non-aeronautical revenues while improving passenger satisfaction.
22, The main types of in-terminal concessions are food and beverage, convenience retail, speciality retail, duty free, advertising, and other services (e.g., ATMs, foreign exchange kiosks, salons, business centres, etc.). In-terminal hotels and fitness centres have also emerged as in-terminal concessions in some of the largest airports.
Divestiture is the most extreme form of private involvement and entails the sale of assets or shares of a State-owned entity (e.g., the airport company) to the private sector. This can be partial (where the government retains some partial ownership) or full divestiture (where the private sector has complete control over the investment and O&M of the asset). Unlike concessions, divestiture offers the private sector full ownership of the assets and the transfer is considered permanent.
In general, airports around the world are publicly owned, or have at least a mixed, public-private ownership structure. Globally, approximately 80 percent remain in public hands, while the remaining 20 percent is mixed and fully private share.
24, Nevertheless, the share of privately held airports may rise in the future, as some cash-strapped governments have recognised their airport network as an opportunity to raise capital and satisfy international borrowers.
According to ACI, òf all their member airports around the world in 2010, 78% were in public, 13% in mixed, and 9% in private ownership. See Airports Council International,
One clear statement on the role of governments in PPP comes from ICAO guidance materials which clearly stipulate that:
When considering the commercialization or privatization of airports and ANSPs, States should bear in mind that they are ultimately responsible for safety, security and economic oversight of these entities.
25,It is important to note that, in a PPP arrangement, despite increasing private sector involvement, the government maintains primary responsibility to meet and comply with all relevant obligations according to the Convention on International Civil Aviation (Chicago Convention), its Annexes, and related air services agreements.
The degree and nature of government involvement can vary depending on the PPP model selected. However, the full realisation of the benefits of a PPP can only take place in the context of an enabling environment, robust diligence and preparation, a fair, transparent, and competitive procurement process, and adequate regulatory and operational oversight led by government.
27, The responsibility of project selection, planning, and scoping remains under government purview. At the onset, the business needs and the objectives of a particular project must be well defined.
28, These must align to the core values of government, national development priorities, the aviation sector strategy, relevant airport master plans, and the public interest.
When required competencies are not available in-house, the government can enlist external consultants or advisors. The World Bank, for example, offers the full spectrum of advisory support for PPPs from upstream policy formulation, knowledge dissemination, public financing to private financing (debt and equity) and guarantees. Moreover, involvement of the World Bank and similar entities helps to bring credibility, objectivity, and transparency to the process. The proceeding steps in preparing a transaction typically include carrying out due diligence and feasibility studies on a given PPP project.
The government has a responsibility to ensure the bankability of a PPP, which generally refers to the financial and technical viability of the project including risk allocation.
29, The PPP structure needs to provide value for money compared to public provision and be economically viable, taking into account operating costs, maintenance, and capital requirements as well as anticipated returns.
For a PPP to be commercially viable, the structure of the deal must be able to generate sufficient market interest and attract investors. For an airport, this typically translates to robust traffic forecasts and potential for growth. The technical, design, and engineering aspects of the project need to also be evaluated to determine the technical and operational feasibility of the project. Finally, a so-called due diligence process should identify, among other areas, any environmental or social issues, and mitigation measures that may be required.
Opportunities for transferring risk are often a major consideration in structuring a PPP. The feasibility study should assess all potential risks that may arise, including: construction, completion, environmental, commercial, operating, demand, financial, political regulatory, and legal risk.
There is, however, often a tendency to transfer more risk to the private sector, which creates a mismatch between risk and anticipated level of returns that can dilute investor interest.
31, The general operating principle is that risk should be borne by the party best able to manage it, i.e. risk allocation needs to be fair and appropriate. As a general rule, a large share of construction and operational risk is managed by the private sector, while political, regulatory, and legal risk is more appropriately allocated to the government.
The appraisal of a proposed project may, in fact, reveal that a PPP approach may not be suitable, for example, if the enabling environment is uncertain or the transaction is not considered commercially viable and unable to generate market interest.
When the PPP is deemed a viable solution, the preparation of a transaction can proceed forward. Following the due diligence and structuring process, next steps for the government include deciding on a procurement strategy, marketing the PPP, inviting and qualifying bidders, selection of a preferred bidder, and contract awarding and negotiation.
To facilitate the implementation and management of a PPP, there needs to be a roadmap shaped by a clear policy with objectives, as well as a regulatory and legislative framework. Legislation and guidelines governing PPPs can cover a number of legal domains, including private contract law, competition law, tax law, foreign investment law, infrastructure sector laws, and others. Many countries have enacted PPP-specific legislation, such as a PPP Act, to clarify PPP laws and processes.
36 ,A PPP Act can define the division of responsibility between levels of government. It also needs to specify particular rights, roles, and responsibilities of the contracting authorities, the PPP unit, private parties, and transaction advisors. It can further refine criteria for the identification, approval, and implementation arrangements, and name the priority sectors and the types of PPP models permitted with guidelines on risk allocation.
As mentioned earlier, the government has an important responsibility in ensuring sufficient oversight. The oversight also includes economic aspects, as ICAO guidelines assert:
State, in view of the potential abuse of dominant position of airports, is responsible for the economic oversight of their operations. Economic oversight is defined as the function by which a State supervises the commercial and operational practices of an airport. In performing its economic oversight function, a State should, in particular, ensure that airports consult with users and that appropriate performance management systems are in place
In the area of economic regulation concerning airport charges, ICAO recommends that States regulate airport charges in accordance with its policies and guidelines.
3.9, In this regard, the key principle of ICAO’s policy is: “Tariff regulation is based on three main principles, enshrined in most national law: cost adequacy, non-discrimination and transparency”.
Where the government serves both the role of a regulator (i.e. technical and economic oversight function) and of a service provider or operator, ICAO further recommends a clear separation of the regulatory and operational functions to avoid any conflict of interest.
An independent regulator is critical to prevent overcharging and monopolistic behaviour, and to create incentives for more efficient performance. It should be noted that “[a] weak or non-existent regulatory system often opens the door to political influence on tariffs without adhering to transparent processes and objective economic principles”.
42 In developing economies, in particular, a sound regulatory regime is critical for attracting credible investors.
Aeronautical and non-aeronautical accounts are split into two distinct accounts to prevent cross-subsidies), or a hybrid approach (which includes a portion of the non-aeronautical revenues). The current situation is that generally most airports use the single-till system, although more and more airports are moving toward the hybrid system and an increasing number to a pure dual-till system. This new trend is consistent with the airport privatisation move, since a dual-till system encourages investors to enter into the airport business so as to enjoy higher revenues.
43 Aside from economic regulation and oversight, operational regulation and oversight are also essential for monitoring activities and protecting the users and public interests (e.g., ensuring environmental standards, health and safety, etc.).
In sum, the policy, regulatory, and legislative frameworks need to offer clarity and predictability for investors, protect the rights of various parties, and clarify their obligations. There needs to be a clear understanding of the restrictions that may apply to a given PPP project: what policy guidelines on PPPs currently exist, and which government agencies would be involved? This also concerns the procurement process of the PPP, which also states what government support will be required.
44 Insufficient legislative and regulatory frameworks can make the PPP process longer, more challenging to navigate, and less attractive for the investor community.
In instances where there has been a lack of political support and credibility about the feasibility and viability of a proposed PPP, the transaction has often failed. Generally, a PPP has a greater chance of being realised if it is supported and promoted by a “political champion”, someone high in the political ranks, who is committed to making the PPP happen.
45 ,In addition, a country’s readiness for PPP is often determined by the institutional set up helping to reinforce the legal, policy, and regulatory frameworks. However, most important is the promotion of good governance by upholding the principles of accountability, transparency, fairness, efficiency, and participation, which is the core
A lack of institutional capacity further raises the risk for a project. Preparing and managing a PPP draws on specialised skills, which may require capacity building and training within government. The principal areas of expertise in a government dealing with PPPs must cover financial, legal, contractual, and technical domains.
Additionally, the establishment of PPPs often requires institutional changes, since certain responsibilities (e.g., service provision) are transferred to the private sector whereas the government takes on the new responsibility of supervision and oversight. Governments need to decide early on whether to have a dedicated PPP unit to handle PPPs, and what authority and responsibilities to bestow upon it.
4.9, However, one limitation, which should be noted, is that any specialised PPP unit within the public sector may not be able to provide the required best practice in handling PPPs within a generally poorly performing government.
In many countries, a dedicated PPP unit has already been established to deal with the identification, development, and management of PPP projects.
51, However, the design of a dedicated PPP unit will vary according to the particular requirements of the country and to address specific government weaknesses. It is, thus, not a “one size fits all” approach (see Figure 3).
52, Research on PPP projects indicates that there is a positive correlation between strong performing PPP programmes and PPP units, which are able to perform the required functions with some delegated authority. Functions of the unit often include developing a strategy, project origination, appraisal, transaction management, contract management, compliance, monitoring and enforcement.
53, Finally, the PPP unit can also play an important role in coordinating efforts within government.
A good example is the Public Private Partnership Unit (PPPU) in Kenya, which was created following the mandate of the PPP Act of 2013 to champion the PPP agenda in the country and to provide necessary expertise. The role of the unit includes: assessing and approving projects, providing guidance in project identification, the development and procurement of a PPP, and building capacity and awareness.
54, Another critical role for government is to ensure a transparent, fair, and non-discriminatory procurement process. This includes having open competition for bidders, tackling corruption and anti-competitive behaviour, and providing access to information (e.g., methods of procurement, evaluation and bid criteria, design specifications, etc.). During the various project implementation stages, the government’s role continues with supervision activities. This must be carried out through oversight and performance monitoring with clear targets to ensure project objectives and that obligations are being met.
Given the complex nature of PPPs, public engagement and support is required to ensure that public interests can be taken into account and any potential conflicts are resolved. An important part of achieving transparency and accountability is to have a built-in mechanism for consultation with various stakeholders, including citizens and users as the main beneficiaries, in order to participate in decision-making and to voice any concerns.55 A good communication strategy includes the identification of stakeholders and engagement in consultations from within and outside the government from the very beginning of any project development.56 These measures aim at increasing political and public support of the project, and ensuring that social and environmental considerations are continuously taken into account from design to implementation of a PPP.
Public-Private Partnerships (PPPs) in air transportation can offer a number of key benefits. Raising private capital, which is often seen as the main argument for a PPP, is only one of several advantages. The involvement of the private sector can provide improved management to implement operational efficiencies, improve profitability, enhance service levels, and introduce innovation. PPPs also allow governments to transfer risk and free financial obligations, which is particularly appealing at times when fiscal spending is constrained.
Contrary to what many think, increasing private involvement does not mean that the government’s role is diminished. On the contrary, governments continue to play an essential, but varied, role. Their participation and adaptation to their new role of supervising and regulating the PPP is a vital element for success. Applying best practice principles, as mentioned above and securing good governance in the process of establishing PPPs forms the required foundation.
Another role of the government is to communicate well and convince the public at large about a planned PPP, which can be a challenge in itself depending on the culture and values of a given country. Opponents of PPPs often mobilise the public not to privatise airports with the argument to not “sell the crown jewels” or strategic assets of a government. Given the complex nature of any PPPs, governments must first establish and communicate the case for PPP by taking into account the project objectives, define value for money, and determine the project’s viability. This must be as compared to the continuation of public service provision without PPP, in terms of its economic, financial, and technical implications.
However, as this article lays out, in order to realise the benefits of a PPP, government involvement and participation is essential. In particular, the right “pillars” need to be provided by the public sector. Government involvement throughout the entire process is essential in creating an enabling environment and ensuring the political, legal, and institutional frameworks needed to successfully prepare, manage, implement, and monitor the project. The key principles for government to uphold in this process are accountability, transparency, and competition.
The highlighted factors from both the public and private sector need to be well-aligned for a PPP to be successful. Particularly in developing countries, having all the right conditions for a PPP can be difficult to achieve. However, they are key to improve the probability of success and to reap benefits for achieving sustainable development of the sector. Applying best practice principles from successful airport PPPs can help create new opportunities for both public and private sectors in an environment where development is often hampered by an inefficient public sector and the absence of a burgeoning private sector.

Source: eturbonews.com