Airport infra demand_central_europe


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Airport infra demand_central_europe

  1. 1. Welcome PPP Models to Build Airport Infrastructure Matching the Demand in Central Europe 8 th CEI Summit Economic Forum
  2. 2. Agenda <ul><li>Need to Build Up Airport Infrastructure in Central Europe </li></ul><ul><li>Private Sector Involvement in the Airport Industry </li></ul><ul><li>Public Private Partnerships </li></ul><ul><li>Case Study: PPP-Structures as Means for Successful Airport Development </li></ul>
  3. 3. Agenda <ul><li>Need to Build Up Airport Infrastructure in Central Europe </li></ul><ul><li>Private Sector Involvement in the Airport Industry </li></ul><ul><li>Public Private Partnerships </li></ul><ul><li>Case Study: PPP-Structures as Means for Successful Airport Development </li></ul>1
  4. 4. Central Europe is in terms of traffic volume one of the smallest world’s markets but with strong growth potential <ul><li>Central Europe is a growing air traffic market and according to industry forecasts this will continue. </li></ul><ul><li>The 10 biggest national air transport markets in the continent account for 75% of the air passengers and 80% of the air freight </li></ul><ul><li>The relatively stabile level of demand is attributed to fast growing GDPs in the region </li></ul><ul><li>However, growth is limited </li></ul><ul><ul><li>by lacking competition and insufficient airport infrastructure and </li></ul></ul><ul><ul><li>competition with railroad network and other modes of ground transportation </li></ul></ul>Source: Airport Information 2004 Key Points 1 Passenger Traffic by Regions 2004 Cargo Traffic by Regions 2004
  5. 5. The CEI countries have been witnessing growing passenger and cargo volumes until 2003….. Source: IATA, Lufthansa Consulting 1 Passenger Volumes CEI countries (Number of Pax) Cargo Volumes CEI countries (tonnes)
  6. 6. … but, without Italy and Austria, CE countries showed only growths in passenger traffic but none in air cargo Source: IATA, Lufthansa Consulting 1 Passenger Volumes CEI countries (Number of Pax) Cargo Volumes CEI countries (tonnes)
  7. 7. But for the next years GDP and passenger forecasts are above world average underpinning development potentials GDP Development 2005-2005 CEI countries vs World Average Passenger Forecast 2005-2008 CEI countries vs. World Average Source: IATA, Global Insight, Lufthansa Consulting 1
  8. 8. Increasing importance for aviation as main transport mode in international traffic flows <ul><li>Rapidly developing transportation markets </li></ul><ul><li>Growing interests of the Low Cost Carriers, and market stimulation effect </li></ul><ul><li>Integration into EU Market </li></ul><ul><li>Participation of national carriers in Alliances (e.g. LOT – Star Alliance) </li></ul><ul><li>Seating capacity on international flights continually increasing </li></ul><ul><li>But: No domestic air transport markets in most of the Central European countries (except Italy and Poland) </li></ul>Source: ACI, Albatross, Lufthansa Consulting; Sample of 49 Central European Countries Passenger Traffic at Central European Airports 2004 Key Points 1 => high growth potential Country Passengers tsd % 80.345 Total 8.1% 153 Moldova 5.3% 191 Belarus 5.1% 208 Slovakia 7.6% 308 Bosnia/ 6.0% 403 Macedonia 6.7% 459 Albania 5.4% 797 Slovenia 6.1% 1.348 Croatia 5.9% 1.463 Bulgaria 6.1% 1.663 Ukraine 7.7% 1.776 Yugoslavia 5.7% 2.030 Romania 5.8% 4.523 Hungary 7.5% 4.828 Poland 7.1% 6.039 Czech Rep. 4.0% 13.917 Austria 4.2% 40.239 Italy
  9. 9. There is a great potential for air cargo development <ul><li>Central European air cargo traffic accounts only for less than 3% of the world‘s air cargo market </li></ul><ul><li>Real intra-continent cargo flows does not exist yet. </li></ul><ul><li>80 % of inter-continental cargo traffic is related to trade with Asia and less than 10% to trade with Middle East countries. </li></ul><ul><li>Huge transit potential, but poor cargo infrastructure at the most of the Central European airports </li></ul><ul><li>Air imports are dominated by IT goods, pharmaceuticals, electronic, machinery parts and textiles goods </li></ul>Source: ACI, Albatross, Lufthansa Consulting; Sample of 49 Central European Countries Air Cargo Traffic at Central Europen Airports 2004 Key Points 1 Country Cargo % Total 10,6% 772 Bosnia/Herz. 5,0% 957 Macedonia 3,0% 1.824 Slovenia 4,5% 2.973 Croatia 5,3% 3.063 Bulgaria 4,2% 3.225 Ukraine 1,6% 4.214 Romania 16,5% 7.290 Serbia / Mont 7,5% 11.120 Poland 6,9% 15.427 Czech Rep. -0,7% 19.895 Hungary 5,2% 63.893 Austria 6,2% 247.099 Italy 381.750
  10. 10. Capital expenditures in Central Europe airports increased in the last 5 years Major Airport Developments in Central Europe (> 500 mill. USD) 1 <ul><li>:Rome-Fiumicino staged terminal expansion until 2005 US$ 2.9 billion </li></ul><ul><li>Lublin/Poland, completely new airport planned in eastern Poland US$ 2.3 billion </li></ul><ul><li>Vienna, new Terminal 3, apron, tower, office park US$ 880 million </li></ul><ul><li>Zagreb, Master Plan projects US$ 600 million </li></ul><ul><li>Prague, major terminal expansion, new runway US$ 585 million </li></ul>Source: ACI Airport Economics Survey 2004 Airport Capital Expenditure by Region (in mill. USD)
  11. 11. Barriers have to be removed to continue with infrastructure improvements allowing for sustained expansion <ul><li>Bourgas and Varna </li></ul><ul><li>Copenhagen Airports emerged as the winner of the tender and was ready to invest in the expansion and modernization of the facilities. </li></ul><ul><li>Fraport AG/BM Star consortium and the Frenche Vinci groups attacked this deciscion. </li></ul><ul><li>Supreme Administrative Court demanded reopening of negotiations with the both airports </li></ul><ul><li>Bourgas and Varna are now pressing hard to find measures of coping with the lack of terminal capacity to serve the increasing volumes of passengers </li></ul>Example Bulgaria <ul><li>Budapest Ferihegy Airport </li></ul><ul><li>Originally 10 consortiums were interested in Budapest Ferihegy Airport </li></ul><ul><li>The initial tender was declared invalid by an employment court </li></ul><ul><li>A single-round closed tender was launched then and opened to the five parties shortlisted in the original tender </li></ul><ul><li>Copenhagen Airports was also participating in the process, but announced its decision to pull out </li></ul><ul><li>Also Australian Macquarie Airports dropped its bid </li></ul><ul><li>Three bidders only went forth as the tender closed for the majority stake </li></ul>Example Hungary Source: local and international press 1
  12. 12. Agenda <ul><li>Need to Build Up Airport Infrastructure in Central Europe </li></ul><ul><li>Private Sector Involvement in the Airport Industry </li></ul><ul><li>Public Private Partnerships </li></ul><ul><li>Case Study: PPP-Structures as Means for Successful Airport Development </li></ul>2
  13. 13. Some privatisation trends... <ul><li>The privatisation run of the 1990s slowed down after 2000; the privatisation wave is on a recovery path in Europe and North America, where we see the highest level of activity – in line with anticipated worldwide traffic increases </li></ul><ul><li>Still only 4% of the world’s airports can be considered being privatised </li></ul><ul><li>Projects embrace all types of concessions and models and a wide range of financial instruments; in developing countries (Asia in particular) Public-Private-Partnerships are increasing </li></ul><ul><li>Investor groups are diversifying and expanding their business scopes; IPOs and green-field developments are increasing (with mixed success) </li></ul><ul><li>Central Europe is still largely bypassed by infrastructure privatisation (due to lack of market opportunities and capital, investment climate, etc.) – Total investments have been declining </li></ul>2
  14. 14. Airport Privatisation activity is increasing after a period of standstill Examples
  15. 15. Agenda <ul><li>Need to Build Up Airport Infrastructure in Central Europe </li></ul><ul><li>Private Sector Involvement in the Airport Industry </li></ul><ul><li>Public Private Partnerships </li></ul><ul><li>Case Study: PPP-Structures as Means for Successful Airport Development </li></ul>3
  16. 16. What is a public-private-partnership (PPP)? <ul><li>A PPP is broadly defined as </li></ul><ul><li>“ a cooperative venture between the public and private sectors, built on the expertise of each partner, that best meets clearly defined public needs through the appropriate allocation of resources, risks and rewards.” </li></ul>3
  17. 17. Understanding the motivation of the public and private sector as well as the lenders‘ one is key for any PPP 3 <ul><li>Enhancing the ability to raise capital </li></ul><ul><li>Transferring responsibilities and risks </li></ul><ul><li>Improving airport infrastructure and customer service </li></ul><ul><li>Increasing efficiency of airport construction and operation </li></ul><ul><li>Know–how transfer </li></ul><ul><li>Privatisation proceeds (concession fees, tax income) </li></ul>Public Sector <ul><li>Proper risk allocation among the parties through a balanced financing structure </li></ul><ul><li>Being repaid according to schedule while being adequately compensated for the risks which remain with the lender </li></ul><ul><li>Assuring competent airport management and market environment for the project (as part of risk mitigation) </li></ul>Lenders <ul><li>Strategic objectives (e.g. market entry) </li></ul><ul><li>Maximizing investor returns via sustainable growth, operational efficiency and commercial opportunities </li></ul><ul><li>Limit the project risks to those which can be managed by the private sector </li></ul>Private Sector
  18. 18. Private Sector participation trend in airport infrastructure: Which model option meets the interest of all parties? Roles Option 1 Option 2 Option 3 Ownership Investment Management/ Operation Policy Options/ Roles Option 1 Option 2 Option 3 Ownership Investment Management/ Operation PPP Options <ul><li>Service Concessions </li></ul><ul><li>Management Contracts </li></ul><ul><li>Multiple Concessions </li></ul>3 State Private Sector Private Sector Private Sector Private Sector Private Sector <ul><li>BOT, BOOT, BTO etc. </li></ul><ul><li>Long Term Leases </li></ul><ul><li>Master Concessions </li></ul><ul><li>Multiple Concessions </li></ul><ul><li>Trade Sales </li></ul><ul><li>Capital Markets </li></ul>LDO = Lease-Develop-Operate BTO = Build-Transfer-Operate BOT = Build - Operate - Transfer BOOT = Build - Own - Operate - Transfer BOT = Build - Operate - Transfer BOOT = Build - Own - Operate - Transfer State State Private Sector
  19. 19. Successful PPPs are based on attractive assets, clearly defined concessions, and a sound business plan 2 <ul><li>Size - traffic volumes at satisfactory levels </li></ul><ul><li>PAX profile - purchasing power to make commercial ventures viable </li></ul><ul><li>Traffic - regular and growing flow of traffic </li></ul><ul><li>Connectivity - The major markets (tourism and business) should be served frequently </li></ul>Airport <ul><li>Rights and obligations -of the Public and Private sector should be clearly defined and the technical requirements specified in detail </li></ul><ul><li>Exclusivity - airport development should be safeguarded from a detrimental level of competition </li></ul><ul><li>Termination rights -clearly linked to contractual defaults </li></ul>Concession <ul><li>Feasible Strategy - when it comes to generating additional traffic and maximizing aeronautical and non-aeronautical revenues </li></ul><ul><li>Realistic assumptions - with high and low scenarios and sensitivity analysis </li></ul><ul><li>Financing Structure -could make or break a deal </li></ul><ul><li>Integration - in the overall regional and industrial context </li></ul>Business Plan
  20. 20. The regulatory environment and the qualifications of the project partners are prerequisites for goal achievement 2 <ul><li>To be open to foreign direct investment (FDI) with respective investment code and legal framework </li></ul><ul><li>To be stable with regard to tax laws and FX transfers </li></ul><ul><li>To provide a transparent aviation tariff scheme which leaves room for adjustment induced by legal or macro-economic factors </li></ul><ul><li>To provide clear approval mechanisms and a clear division of tasks among the various authorities </li></ul>Regulatory Environment <ul><li>To have the necessary know-how for the development of the project </li></ul><ul><li>To have the financial capacity to fulfill necessary equity payments and sponsor support obligations </li></ul><ul><li>To be well connected with the local authorities </li></ul><ul><li>To have specified their relationship among each other and third parties in a well drafted contractual and financial structure </li></ul>Project Parties
  21. 21. Certain risk factors in the Central European airport market need to be addressed and managed RISK! 3 Airport industry risk <ul><li>Development of Central European airport industry </li></ul><ul><li>National/Regional competition </li></ul><ul><li>Growth in passenger and cargo volumes </li></ul><ul><li>Airline industry risk / airline pricing </li></ul><ul><li>Regulatory environment </li></ul>1 Macro-economic risk <ul><li>Economic reforms </li></ul><ul><li>Monetary environment and regulation </li></ul><ul><li>FX risk / Inflation </li></ul><ul><li>Economic growth </li></ul><ul><li>Investment climate / FDI </li></ul><ul><li>Country rating </li></ul>2 Political risk <ul><li>National Privatization Program </li></ul><ul><li>Regional stability </li></ul><ul><li>Domestic stability </li></ul><ul><li>Government continuity </li></ul>3 Project risk <ul><li>Market shocks </li></ul><ul><li>Capital Availability </li></ul><ul><li>Role of Government </li></ul><ul><li>Management quality (know-how, track record) </li></ul><ul><li>Legal framework / Enforceability </li></ul>4
  22. 22. The project’s funding life cycle is driven by the partners’ objectives, by the nature of the business and by associated risks 3 Traffic growth Airport concept Air transport market potential analysis Institutional Investors Public Market Securitization Banks / Loans Financial Institutions ABLs Customers Trade Lease Mezzanine Finance Government Suppliers Strategic Partners Early Stage Equity Funds Mezzanine Finance Private Funds Angels Micro-financing Sources of Financing Maturity Full Operations Revenue Growth Capital Sourcing for Expansion Expansion Free Cash-Flow generation Positive Income (fuel growth) Growth Revenue Generation Start-up Validation of Concept Market Confirmation Seed Start-up Capital (for Feasibility Studies, Market Testing, business formation) Investment Phases Facility and process improvement Exploitation of market potential New route development Start of operation Company formation (SPV) Airport development concept/masterplan Operations concept Route development and airport marketing concept Airport Company Activity (Conces-sionaire) GROWTH PHASE START- UP PHASE PROFIT LOSS
  23. 23. Agenda <ul><li>Need to Build Up Airport Infrastructure in Central Europe </li></ul><ul><li>Private Sector Involvement in the Airport Industry </li></ul><ul><li>Public Private Partnerships </li></ul><ul><li>Case Study: PPP-Structures as Means for Successful Airport Development </li></ul>4
  24. 24. The capital’s new airport project presents elements of three separate transactions 4 <ul><li>Project A </li></ul><ul><ul><li>Development of infrastructure between the city and the new airport site / preparation of new airport site </li></ul></ul><ul><li>Project B </li></ul><ul><ul><li>Construction of the new airport </li></ul></ul>Project Commercialization and sale of land of the existing airport in the central city (350 ha)
  25. 25. The air transport market has distinct features <ul><li>In 2002, the country had approx. 230.000 air passengers, of which 90% have been handled at the capital‘s airport </li></ul><ul><li>Regional traffic flows: Europe 31%, West Africa 34%, Other African countries 24%, and 11% to other regions </li></ul><ul><li>Passenger structure: 89% scheduled passengers 7% charter passengers and 4% non-commercial traffic </li></ul><ul><li>Today, Air Cargo exports are largely based on perishables (vegetables and fresh fruits); this dominance will decrease until 2027 </li></ul><ul><li>Compared to exports, Air Cargo imports have played a minor role since 1981. </li></ul>Source: Lufthansa Consulting Passenger Traffic 2003 - 2027 Key Points Air Cargo Traffic 2003 - 2027 4 Optimistic Conservative
  26. 26. The development of airport capacity to meet future demand requires investments of approx. 200 – 250 mill. Euros <ul><li>Project A: “Infrastructure development” </li></ul><ul><ul><li>Responsibility: Government </li></ul></ul><ul><ul><li>Investment: Government </li></ul></ul><ul><li>Project B: “Construction of airport” </li></ul><ul><ul><li>Responsibility: Concessionaire, (Government) </li></ul></ul><ul><ul><li>Investment: Concessionaire, private investors </li></ul></ul><ul><li>Project C “Land commercialisation” </li></ul><ul><ul><li>Responsibility: Government </li></ul></ul><ul><ul><li>Investment: t.b.d. after valuation </li></ul></ul>4 2006 2010 Phase 2 Expansion 2015 Operation Development of existing airport/ Access to the new airport Land Commercialisation Phase 1 Construction
  27. 27. A Special Purpose Vehicle (SPV) as operating company of the airport is composed of a combination of private investors <ul><ul><li>The composition of investors is driven by Government interests, investor interests and availability of local, regional and international capital </li></ul></ul><ul><ul><li>The Government will take an appropriate capital share </li></ul></ul><ul><ul><li>Foreign investors / operators of the new airport will take a majority share </li></ul></ul><ul><ul><li>The split of shares in any PPP needs to in line with the risks and rewards associated with the investment. </li></ul></ul>4 Potential Split of Shares in the SPV
  28. 28. Government participation in the transaction is indispensable Revenues from the low passenger (2004: 240.000) and cargo volumes (2004: 4.800 t) do not justify the investment and do not present an attractive investment opportunity. Revenues at the airport TTL investment is unlikely to be sourced from the local and regional investment community alone; alternative ways of financing need to be found. Magnitude of the investment Government Participation in the privatization <ul><li>Privatization Model PPP; 25-year concession + renewal option </li></ul><ul><li>The Government will have to subsidize the project with at least 45% of Phase I of the project </li></ul><ul><li>Phase 2 can be financed from internal sources </li></ul>4
  29. 29. The privatisation strategy is based on a number of financial criteria for the SPV as the operating concessionaire 4 <ul><ul><li>Government contribution of a substantial part of the investments in Phase 1 </li></ul></ul><ul><ul><li>Start-up equity of the SPV usually should be at 50%, depending on the composition, i.e. cash vs. assets provided by construction firms </li></ul></ul><ul><ul><li>According to similar projects, the long-term debt/equity-Ratio as based on a realistic business plan shall not be lower than 70 : 30 during the term of the concession </li></ul></ul><ul><ul><li>Internal Rate of return (IRR) of at least 12% for SPV to reflect various risk dimensions properly </li></ul></ul><ul><ul><li>Positive cash-flow during the term of the concession </li></ul></ul><ul><ul><li>Payments of concession fees to the Government </li></ul></ul><ul><ul><li>Dividend payments to the shareholders of the SPV </li></ul></ul><ul><ul><li>Tax holiday for the operating company </li></ul></ul><ul><ul><li>Debt Service ability of the SPV under various scenarios and loan structures </li></ul></ul>
  30. 30. To enhance the feasibility of the project to investors, all revenue sources will have to be transferred to SPV 4 SPV Pax and A/C Handling Services Landside Service Concessions ... Airside Service Concessions Cargo Handling Concessions ... Concession Revenue Concession Revenue
  31. 31. Conclusions <ul><li>There is a huge need for infrastructure developments at many airports in Central Europe, but limited public budgets are available. </li></ul><ul><li>PPPs are not a panacea for government inability to fund necessary airport infrastructure projects but can provide a solution when the resources of private and public partners are bundled where conventional privatisations are not possible. </li></ul><ul><li>To be considered as investment opportunity by the private sector traffic has to be above certain thresholds - but only few air transport markets in Central Europe have sufficient traffic yet. </li></ul><ul><li>PPPs with a fair allocation of risks and rewards provide a means to raise necessary funds and know-how on the basis of a realistic business case. </li></ul><ul><li>Risk mitigation strategies have to be developed to protect the public and private partners, including e.g. re-definition of the airport value chain, tax advantages, direct subsidies, etc. </li></ul><ul><li>The uniqueness of each airport development requires always a tailored approach structuring a PPP. </li></ul>4
  32. 32. For further contact: Dr. Raphael von Heereman Executive Director Lufthansa Consulting GmbH Von-Gablenz-Str. 2 – 6 50679 Cologne Germany Tel.: +49 (0)221 88 99 6 - 56 Fax: +49 (0)221 88 99 6 - 60 e-mail:
  33. 33. Thank you for your attention