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Airport Infrastructure Conference, Nairobi October 21, 2013
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Airport Infrastructure Conference, Nairobi October 21, 2013

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  • Good afternoon from Geneva. My name is….Unfortunately I am not able to join you at the conference as we are in the critical stages of a major project which requires my presence here in Geneva. The topic of my presentation today is: getting it right the first time: airport privatisation south of the sahara.My first job right after university, some 25 years ago, was at a foundation called the HSS in Germany – a foundation which aimed to help the newly democratized African nations in the democratization process. I was in charge of Sub-Sahara Africa and my job consisted of organising conferences and trips for deputies of the German Parliament, the Bundestag.One day I led a delegation to Kenya and because there were some protocol issues to sort out I landed in the office of the Nairobi airport director. I can’t remember the reasons for the visit, but what I can remember was a polished brass plat hanging in the visitor’s room. It said ‘Get it right the first time’. So I chose to make this my motto for today’s session because airport privatization is not something that governments do routinely – it has to go right or else it will be so much more difficult the 2nd time around (e.g. Douala)
  • We have also helped the United Nations in Geneva to establish an airport PPP centre of excellence which is now operational
  • Investor perspective: who are airport investors ?Specialised airport or infrastructure investor groups such as Macquarie or FerrovialPrivate equity groups Infrastructure fundsPension funds such as the Ontario teachers’ pension fundDifference in their risk/return expectations and requirements – hence they are not all interested in the same type of airports – pension funds will only be interested in 1. or 2. while private equity groups may also look at 4. For the fifth category, there is almost no interest in the markets as risk is considered too high (and importantly, no bank will be ready to finance a deal) 3. e.g. JRO – Kilimanjaro International Airport4. e.g. Eldoret Airport (EDL) close to Ugandan borders – important role for the Kenyan economy , also underpinned by the operations of cargo carriers5. e.g. in the industrialized world, there are a large number of airports not having any economic justification, some nonetheless disposing of the latest and best airport infrastructure - we will get to that later.The last two categories are in red as they present a red flag to potential investors. Hence the interest of airport owners wanting to privatize want to move up the airport value chain
  • Top right: Bydgoszcz, central Poland: biogas plant converting the grass which needs to be mowed as well as all organic waste into biogas. The plant was built for 1.5 M Euros in 2007 and will have itself repaid through savings on natural gas next year. From then on it will generate net savings of 150k EUR per year.Bottom right: recultivation of a dump site for household and non-industrial waste. The dumpsite located next to Vienna airport had produced ca 300 k Euros per year in revenues which stopped when it was full – we devised a project to recultivate the dumpsite by compressing it and additionally by putting in 280 concrete columns reaching down 15 meters to the bottom of the site to provide a solid base to pose concrete slabs on which freight hangars will be built. Those hangars will produce rental income of ca. 350 k Euro / year on an EBIT basis.Finally, comprehensive airport commercial development concept for Sion airport which included 10 hangars for private jets up to B-737 BBJ size, a comprehensive route development plan and the replacement of the old heat distribution system by a heat pump system (surface water just one meter below the airport) – the Rhone, one of Europe’s big rivers runs alongside the airport. The combined income and savings will make the airport break even in 2015 (before, it was making a loss of EUR 3 M/a)
  • More traditional, yet original ways to increase revenues – e.g. DC 6 at CVT, UKOther possibilities: renting of empty car parking space to car leasing companies like Hertz or AvisRenting of paved spaces to freight forwarders (storage of containers)Supermarkets at airports (landside)In general: landside restaurants are often among the busiest ones in their communities as the airport attracts many visitors and plane-spottersSo those were a few concepts we came up with at the request of customers and which have helped them create those all-important additional revenue streams, be it to reduce dependency from public funding, or to prepare airports for privatization. Maybe some of the examples can be a source of inspiration for those of you who are in charge of airport operations – or airport finances.Of course, every airport is different, and airports across Africa operate in a different environment than those on other continents. The point is not that biogas would be a solution for airports in Africa – on many occasions there is just not enough grass around. Only few airports will have dumpsites on their land, and my guess is that WW II bunkers are quite a rare sight at African airports. That s not the point. The point is that it is worth thinking outside the box and not exclusively to focus on developing passenger traffic or cargo. I can guarantee you that for every airport there are opportunities to grow the bottom line often with very with limited investments (for which btw ADB or other funding would be available)Before we go deeper into the matter of privatization, let me briefly give you an example of an airport in central Spain, Ciudad Real. The reason why I bring it up is to exemplify the key issue of airport valuation.
  • Valuation: surely an asset like this has a value – but how should the value be determined from an investor point of view ?What is the financial value of such an airport ? It would sound plausible to determine its value by establishing the value of the land plus the cost of all the equipment minus depreciation i.e. several hundred million of EurosOr is it the value of the land (depending on the zoning, in other word the possible use as determined by the authorities, e.g. farmland, development land, etc.) minus the cost of removing of the buildings, infrastructure, etc. ?Investors acquire an income stream, not land and buildingsInvestors pay for a multiple of the income streamThe value of the income stream is dependent on prices paid for similar assets in the past (so called comparables or ‘comps’)The EBIT multiple for airports historically range from 5 to 50 times annual EBITA chronically loss-making airport has a priori no financial value (although it may well have huge economic value)The value is determined by looking at the income stream that could be generated from the airport. In this case it would be a priori 0, so the task at hand would be either to find ways to attract airlines or air cargo carriers (failed so far) – which would almost certainly require investments / provision of incentives – or to find alternative uses for the airport. Revenues and profits – no matter from what activities at the airport they come from - are the most important yardsticks for investors – let’s have a look at the typical income streams at airports
  • Those are the traditional revenue streams at airports, the aim being to balance aeronautical and non-aeronautical income. Typically, non-aeronautical revenues provide 50% of the revenues but 75% of the profits. The projects described before helped increase the non-aeronautical side of revenues, often in the absence of sufficient air traffic, boosting the airport’s bottom line with relatively modest few investments.Let’s now turn back to our topic of today – airport privatization. You may with a varying degree of interest have listened to me talking about the opportunities that exist to increase airport revenues. Some of you may asked themselves: That’s all very nice – but what has it got to do with airport privatization ? Well, a lot as I will show you now.So, to resume the slides you have seen so far: it’s all about the revenues, or profitable revenues.You may however say: Savings of 150 k per year on gas is not a big deal – why bother ?It’s a matter of scale – we consult typically smaller to mid-sized airports. For bigger airports those effects would be more importantThey matter because albeit savings or additional revenues may sound small, their impact is much greater when the airport is privatized, as we will see on the next few slides
  • Let’s assume there are two airports of equal sizeEarning before interest and taxes = gross profit
  • This explains why no stone should be left unturned to generate additional revenues – or to reduce costs where possible – before a change of hands of an airport, or privatisation via a PPP.So, in the final few minutes I would like to talk about PPP – although this topic alone is the subject of entire conferences. PPP is now the most frequent and ‘popular’ kind of privatization.
  • Fundamentally, Property rights should guranteed by the state
  • Consultants aim to make clients dependent on their services so that they will get paid their fees as long as possible – the last thing they will do is train their clients or transfer knowledge to them.
  • Transcript

    • 1. Getting it right the first time: Airport Privatization South of the Sahara Presented by Dr. Thomas Frankl Managing Partner Geneva/Switzerland
    • 2. Agenda • Who we are and what we do • Airport privatisation: the investor perspective • A tale of two airports • Five plus one best practices for PPP’s • Alternatives to privatisation • Conclusions
    • 3. Airport Development Partners SA • Headquartered in Geneva • Managing Partner & CEO: Dr.Thomas Frankl • Chairman: Marc Brutten, founder & owner BruttenGlobal • Members of our Board: • Bob Aaronson, former Director General ACI • Joseph In-Albon, former CEO Swissport • Hans-Peter Kohlhammer, former CEO SITA S.C.
    • 4. we do • We support public and private airport owners in three areas: • Assistance to public and private airport owners in preparing for a sale / PPP concession / management contracts • Increase of efficiency of operations • Development of new commercial income streams / alternative use scenarios • On occasion, we also become equity partners in PPPs What
    • 5. The Investor Perspective 1. Hub Airports (e.g. JNB) 2. Regional hubs with large catchment areas (e.g. NBO) 3. Economically viable, non-hub airports, incl. niche airports (e.g. JRO) 4. Financially non self-sufficient, underutilized airports 5. Economically and financially non viable airports
    • 6. A Case in Point: Ciudad Real Airport Alternative / Supplemental Airport Utilization Concepts, I
    • 7. A Case in Point: Ciudad Real Airport Alternative / Supplemental Airport Utilization Concepts, II
    • 8. A Case in Point: Ciudad Real Airport Supplemental Airport Utilization Concepts
    • 9. A Case in Point: Ciudad Real Airport • Spain, 140 km from Madrid • 4000 m x 60 m runway • Terminal infrastructure (initially) for 10 m pax • ILS CAT III • Only issue: No airlines, no pax, no cargo • EUR 1.1 bn of public funds invested • Current valuation ?
    • 10. A Case in Point: Ciudad Real Airport
    • 11. Airport Revenues
    • 12. A Tale of Two Airports Airport A Airport B (Both A and B have an EBIT of USD 3.6 M and 300 staff) Sold to an investor at • Three-year action plan: a 10 x EBIT multiple – Route development @ cost of USD 200k (3 new for USD 36m routes) – Mobile terminal to accommodate new routes: cost of USD 400k – Voluntary staff reductions by 20% : cost of USD 700k – Increase of retail space: cost of USD 500k
    • 13. A Tale of Two Airports Airport A Airport B • Three-year action plan: – Total costs: USD 2 M – Additional EBIT: – Aeronautical revenues: +USD 200k – Commercial revenues: +USD 300 k – Operational efficiencies (IT, multi-tasking, energy savings, etc.): +USD 100k – Additional EBIT generated from year 3: USD 0.6m
    • 14. A Tale of Two Airports Airport A Airport B • EBIT (2010): USD 3.6m • EBIT (2014): USD 4.2m • Sold to a private investor in 2015 at a 10 x EBIT multiple for USD 42m • ROI of action plan at the time of airport sale: USD 6m vs. USD 2m investment = 300 % !
    • 15. Five Best Practices for PPP’s 1. Generate an ‘investment climate’ conducive to attracting investors 2. Enact appropriate PPP legislation 3. There is nothing ‘warm & fuzzy’ about PPP – be prepared for ‘commercial’ behaviour 4. Build in generous contingencies (time, money, people) 5. Maintain a regular dialogue between partners and stakeholders on all operational, financial and community aspects
    • 16. The Sixth Best Practice 6. Build your own PPP capacity • The interests of governments and those of ‘PPP consultants’ do, a priori, not match • PPP capacity enables you to manage the process efficiently, and to select the right consultants for your project • Use the United Nations PPP Centre of Competence in Geneva – I will be happy to make the introductions !
    • 17. Alternatives to Privatisation • Transfer of ownership to local municipality • Management contract covering all or some parts of operations (e.g. airport terminal) • Sale of minority interest, or airport real estate (e.g. long term lease) to finance the development of infrastructure / new revenue streams • Issue individual concessions (fuel, FBO, retail, etc.) to reduce operational costs, drive revenues 18
    • 18. Five Conclusions 1. Airports are strategic assets: any form of privatisation should take that into account 2. Profits are the yard stick for financial valuations, but not necessarily for economic value 3. Airports should seek to develop their revenue potential first, and privatise later 4. PPP is an effective form of privatisation for the well prepared 5. Avoid unhealthy dependencies on PPP consultants: build your own PPP capacity and…get it right the first time !
    • 19. Getting it right the first time Asante Sana - Thank You ! You can reach me at: tfrankl@adp.aero +41 797 161 161
    • 20. PPP – A ‘Public-Private Panacea’ ? The Pro’s:  Politically acceptable  Investors willing to take a long-term development view  Keeps investor and government objectives aligned  Transparent process  Distribution of risks between partners  Predictable airport development via mandatory phased investment programme  Last-resort option to revoke concession exists in case of contract breach
    • 21. PPP – A ‘Public-Private Panacea’ ? The Con’s:  Legislation needs to be ‘PPP compatible’  Long time lag between initial decision and award of the tender – often derailed by change in governments  Requires responsive and business-minded project team involving government and airport authorities  Cumbersome and slow process  Quality of tender all-important (rules and conditions, definitions, realistic time lines)  Calling-off of tender (e.g. too few interested parties, change in government, etc.) damaging  Risk of renegotiation once deal signed
    • 22. Five Best Practices for a Trade Sale 1. Start with the end in mind: what does the public owneroperator wish to achieve by involving private partners, and by when ? 2. Document the sales arguments (airport and economically relevant region) in an Information Memorandum: assumptions about catchment area, growth and longterm development potential should be conservative 3. Test market interest: start with investors having previous (e.g. Africa) experience 4. Build in contingencies (time, budget, people) 5. Maintain a regular and intensive ‘institutionalized’ dialogue between the partners and stakeholders
    • 23. Five Best Practices for Management Contracts • ‘Off-market’: research and approach operators directly • Future manager should already operate similarly-sized airport(s) • Be mindful of cultural differences / language issues • Agree early a healthy balance between base fee and success fee • Ensure sufficient and continuous staffing and physical presence by manager (resident team)
    • 24. How Avoid Future Catch-22 Situations ? 2. Manage public expectations effectively: – Establish a communications strategy – Be (very) wary of traffic forecasts – understand the forecast methodologies – Don’t overestimate bidder interest – Don’t raise unrealistic expectations – even if a future government will have to deliver – Define, and communicate, what will constitute success and failure – Have a plan B
    • 25. How Avoid Future Catch-22 Situations ? 3. Re-structure or re-organize projects in response to a changing environment (e.g. higher private sector risk aversion, interest rates, etc.) – Communicate early to stakeholders and the wider public – Consider conversion into a shorter-duration management contract and re-issue when the environment has improved
    • 26. How Avoid Future Catch-22 Situations ? 4. ‘Grey list’ dodgy bidders – Successful non-fair play bidders can damage the reputation of governments – and of PPP in general – ‘Grey Listed’ parties would flag warning signal, not mean automatic exclusion – World-wide exchange of PPP practices and experience – Don’t just look at the success stories - more is often learned from tough challenges and failures
    • 27. How Avoid Future Catch-22 Situations ? 5 . Immunize PPP projects from external political influence – Anticipate political influence for highvalue and high-profile PPPs – Communicate policies and procedures clearly from the beginning – Refer to them and stick to them