welcome ppp models to build airport infrastructure matching the demand in central europe 8 th cei...

Welcome

PPP Models to Build Airport Infrastructure Matching the Demand in Central Europe

8th CEI Summit Economic Forum

- 2 -8th CEI Summit Economic Forum,

Agenda

1. Need to Build Up Airport Infrastructure in Central Europe

2. Private Sector Involvement in the Airport Industry

3. Public Private Partnerships

4. Case Study: PPP-Structures as Means for Successful Airport Development


Agenda





1


Central Europe is in terms of traffic volume one of the smallest world’s markets but with strong growth potential

Western Europe26%

Asia-Pacific22%

Latin America

6%

Central Europe

3%

Middle East3%

Africa3%

North America

37%

Central Europe is a growing air traffic market and according to industry forecasts this will continue.

The 10 biggest national air transport markets in the continent account for 75% of the air passengers and 80% of the air freight

The relatively stabile level of demand is attributed to fast growing GDPs in the region

However, growth is limited

by lacking competition and insufficient airport infrastructure and

competition with railroad network and other modes of ground transportation

Asia-Pacific19%

Latin America

5%

Central Europe

3%

Western Europe28%

Middle East4%

Africa2%

North America

39%

Passenger Traffic by Regions 2004

Cargo Traffic by Regions 2004

Source: Airport Information 2004

Key Points

1


0

10.000.000

20.000.000

30.000.000

40.000.000

50.000.000

60.000.000

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

0

20.000

40.000

60.000

80.000

100.000

120.000

Pax Cargo

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)


…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)

0

5000000

10000000

15000000

20000000

25000000

30000000

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

0

2000

4000

6000

8000

10000

12000

14000

Pax Cargo


But for the next years GDP and passenger forecasts are above world average underpinning development potentials

GDP Development 2005-2005CEI countries vs World Average

Passenger Forecast 2005-2008CEI countries vs. World Average

Source: IATA, Global Insight, Lufthansa Consulting

1

0,0%

2,0%

4,0%

6,0%

8,0%

10,0%

12,0%

14,0%

2005 2006 2007 2008

CEI Pax Growth (no Austria, Italy) World Pax Growth

0,0%

1,0%

2,0%

3,0%

4,0%

5,0%

6,0%

2005 2006 2007 2008

CEI GDP (no Austria, Italy) World GDP


Increasing importance for aviation as main transport mode in international traffic flows

Rapidly developing transportation markets

Growing interests of the Low Cost Carriers, and market stimulation effect

Integration into EU Market

Participation of national carriers in Alliances (e.g. LOT – Star Alliance)

Seating capacity on international flights continually increasing

But: No domestic air transport markets in most of the Central European countries (except Italy and Poland)

Source: ACI, Albatross, Lufthansa Consulting; Sample of 49 Central European Countries

Passenger Traffic at Central European Airports 2004 Key Points

1

=> high growth potential

Italy 40.239 4.2%

Austria 13.917 4.0%

Czech Rep. 6.039 7.1%

Poland 4.828 7.5%

Hungary 4.523 5.8%

Romania 2.030 5.7%

Yugoslavia 1.776 7.7%

Ukraine 1.663 6.1%

Bulgaria 1.463 5.9%

Croatia 1.348 6.1%

Slovenia 797 5.4%

Albania 459 6.7%

Macedonia 403 6.0%

Bosnia/ 308 7.6%

Slovakia 208 5.1%

Belarus 191 5.3%

Moldova 153 8.1%

Country Passengers tsd %

80.345Total


There is a great potential for air cargo development

Italy 247.099 6,2%

Austria 63.893 5,2%

Hungary 19.895 -0,7%

Czech Rep. 15.427 6,9%

Poland 11.120 7,5%

Serbia / Mont 7.290 16,5%

Romania 4.214 1,6%

Ukraine 3.225 4,2%

Bulgaria 3.063 5,3%

Croatia 2.973 4,5%

Slovenia 1.824 3,0%

Macedonia 957 5,0%

Bosnia/Herz. 772 10,6%

Central European air cargo traffic accounts only for less than 3% of the world‘s air cargo market

Real intra-continent cargo flows does not exist yet.

80 % of inter-continental cargo traffic is related to trade with Asia and less than 10% to trade with Middle East countries.

Huge transit potential, but poor cargo infrastructure at the most of the Central European airports

Air imports are dominated by IT goods, pharmaceuticals, electronic, machinery parts and textiles goods

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 381.750


Capital expenditures in Central Europe airports increased in the last 5 years

Major Airport Developments in Central Europe(> 500 mill. USD)

1

:Rome-Fiumicino staged terminal expansion until 2005 US$ 2.9 billion

Lublin/Poland, completely new airport planned in eastern Poland US$ 2.3 billion

Vienna, new Terminal 3, apron, tower, office park US$ 880 million

Zagreb, Master Plan projects US$ 600 million

Prague, major terminal expansion, new runway US$ 585 million

Source: ACI Airport Economics Survey 2004

2.500

350

12.400

700

12.000

8.700

11.200

1.700

2.700 3.300

0

2.000

4.000

6.000

8.000

10.000

12.000

14.000

Africa / MiddleEast

Asia/Pacific Europe Latin America North America

2003

2004

Airport Capital Expenditure by Region(in mill. USD)


Barriers have to be removed to continue with infrastructure improvements allowing for sustained expansion

Bourgas and Varna

Copenhagen Airports emerged as the winner of the tender and was ready to invest in the expansion and modernization of the facilities. Fraport AG/BM Star consortium and the Frenche Vinci groups attacked this deciscion. Supreme Administrative Court demanded reopening of negotiations with the both airports 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

Example Bulgaria

Budapest Ferihegy Airport

Originally 10 consortiums were interested in Budapest Ferihegy Airport The initial tender was declared invalid by an employment court A single-round closed tender was launched then and opened to the five parties shortlisted in the original tender Copenhagen Airports was also participating in the process, but announced its

decision to pull out Also Australian Macquarie Airports dropped its bid Three bidders only went forth as the tender closed for the majority stake

Example Hungary

Source: local and international press

1


Agenda





2


Some privatisation trends...

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

Still only 4% of the world’s airports can be considered being privatised

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

Investor groups are diversifying and expanding their business scopes; IPOs and green-field developments are increasing (with mixed success)

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

2


Airport Privatisation activity is increasing after a period of standstill

1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

• BAA

• Vienna I• Pittsburgh

• Copenhagen I• East Midlands Belfast

• Vienna II• Birmingham• London City• Indianapolis

• Rome• Düsseldorf• Brisbane• Melbourne• Perth• Naples

• Newcastle• Cyprus

• ANA, Portugal• Sea• Frankfurt• Schiphol• Brussels

1

2

3

4

5

6

7

8

9

• Brussels• Guayaquil• Tirana• Cairo• Luxor• Abu Simbel• Hurghada• Sharm El Sheikh• Assuan

Nu

mb

er o

f P

riva

tiza

tio

ns

• Argentina• Australia II• Berlin• Santiago de Chile• London Luton• South Africa• Stewart , NY

• Athens• Copenhagen II• JFK IAT• Toronto• Bolivia

• Costa Rica• Mexico I• Mexico II• Maraba, Brasil• Montevideo• Dominican Rep (4)

• Hamburg• Zurich• Mexico III• Beica, Ethipia• Honduras 1• Cali , Colombia• Lima, Peru

• Sydney• Bangalore• Bogota• Barranquilla

• Phnom Penh• Cali

• Isla Margarita• Malta• Montego Bay• Prestwick• Tansania

1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

• BAA

• Vienna I• Pittsburgh• Vienna I• Pittsburgh

• Copenhagen I• East Midlands• Copenhagen I• East Midlands Belfast









1

2

3

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5

6

7

8

9



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Examples


Agenda





3


What is a public-private-partnership (PPP)?

A PPP is broadly defined as

“ 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.”

3


Understanding the motivation of the public and private sector as well as the lenders‘ one is key for any PPP

Enhancing the ability to raise capital

Transferring responsibilities and risks

Improving airport infrastructure and customer service

Increasing efficiency of airport construction and operation

Know–how transfer Privatisation proceeds

(concession fees, tax income)

Public Sector

3

Proper risk allocation among the parties through a balanced financing structure

Being repaid according to schedule while being adequately compensated for the risks which remain with the lender

Assuring competent airport management and market environment for the project (as part of risk mitigation)

Lenders

Strategic objectives (e.g. market entry)

Maximizing investor returns via sustainable growth, operational efficiency and commercial opportunities

Limit the project risks to those which can be managed by the private sector

Private Sector


Private Sector participation trend in airport infrastructure:Which model option meets the interest of all parties?

LDO = Lease-Develop-Operate

BTO = Build-Transfer-OperateBOT = Build-Operate-Transfer

BOOT = Build-Own-Operate-Transfer

BOT = Build-Operate-Transfer

BOOT = Build-Own-Operate-Transfer

RolesOption 1 Option 2 Option 3

Ownership

Investment

Management/

Operation

Policy Options/Roles

Option 1 Option 2 Option 3

Ownership

Investment

Management/

Operation

State

State

Private Sector

PPP Options

Service Concessions

Management Contracts

Multiple Concessions

3

State

Private Sector

Private Sector

Private Sector

Private Sector

Private Sector

BOT, BOOT, BTO etc.

Long Term Leases

Master Concessions

Multiple Concessions

Trade Sales

Capital Markets


Successful PPPs are based on attractive assets, clearly defined concessions, and a sound business plan 2

Size - traffic volumes at satisfactory levels

PAX profile - purchasing power to make commercial ventures viable

Traffic - regular and growing flow of traffic

Connectivity - The major markets (tourism and business) should be served frequently

Airport

Rights and obligations -of the Public and Private sector should be clearly defined and the technical requirements specified in detail

Exclusivity - airport development should be safeguarded from a detrimental level of competition

Termination rights -clearly linked to contractual defaults

Concession

Feasible Strategy - when it comes to generating additional traffic and maximizing aeronautical and non-aeronautical revenues

Realistic assumptions - with high and low scenarios and sensitivity analysis

Financing Structure -could make or break a deal

Integration - in the overall regional and industrial context

Business Plan


The regulatory environment and the qualifications of the project partners are prerequisites for goal achievement 2

To be open to foreign direct investment (FDI) with respective investment code and legal framework

To be stable with regard to tax laws and FX transfers

To provide a transparent aviation tariff scheme which leaves room for adjustment induced by legal or macro-economic factors

To provide clear approval mechanisms and a clear division of tasks among the various authorities

Regulatory Environment

To have the necessary know-how for the development of the project

To have the financial capacity to fulfill necessary equity payments and sponsor support obligations

To be well connected with the local authorities

To have specified their relationship among each other and third parties in a well drafted contractual and financial structure

Project Parties


Certain risk factors in the Central European airport market need to be addressed and managed

RISK!

3

Airport industry risk

Development of Central European airport industry

National/Regional competition

Growth in passenger and cargo volumes

Airline industry risk / airline pricing

Regulatory environment

1 Macro-economic risk

Economic reforms

Monetary environmentand regulation

FX risk / Inflation

Economic growth

Investment climate / FDI

Country rating

2

Political risk

National Privatization Program

Regional stability

Domestic stability

Government continuity

3 Project risk

Market shocks

Capital Availability

Role of Government

Management quality (know-how, track record)

Legal framework / Enforceability

4


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

AirportCompany Activity(Conces-sionaire)

GROWTH PHASESTART- UP PHASE

PROFIT

LOSS


Agenda





4


The capital’s new airport project presents elements of three separate transactions 4

Project ADevelopment of infrastructure between the city and the new airport site / preparation of new airport site

Project BConstruction of the new airport

ProjectCommercialization and sale of land of the existing airport in the central city (350 ha)


0

5.000

10.000

15.000

20.000

25.000

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

Car

go (i

n to

ns)

Optimistc Most-Likely ConservaitveOptimistic Conservative

The air transport market has distinct features

In 2002, the country had approx. 230.000 air passengers, of which 90% have been handled at the capital‘s airport

Regional traffic flows: Europe 31%, West Africa 34%, Other African countries 24%, and 11% to other regions

Passenger structure: 89% scheduled passengers 7% charter passengers and 4% non-commercial traffic

Today, Air Cargo exports are largely based on perishables (vegetables and fresh fruits); this dominance will decrease until 2027

Compared to exports, Air Cargo imports have played a minor role since 1981.

0

100.000

200.000

300.000

400.000

500.000

600.000

700.000

800.000

900.000

1.000.000

20

03

20

05

20

07

20

09

20

11

20

13

20

15

20

17

20

19

20

21

20

23

20

25

20

27

To

tal P

as

se

ng

ers

optimistic most likely conservative

Source: Lufthansa Consulting

Passenger Traffic 2003 - 2027 Key Points

Air Cargo Traffic 2003 - 2027

4


The development of airport capacity to meet future demand requires investments of approx. 200 – 250 mill. Euros 4

2006 2010

Phase 2Expansion

2015

Operation

Project A: “Infrastructure development”

Responsibility: Government

Investment: Government

Project B: “Construction of airport”

Responsibility: Concessionaire, (Government)

Investment: Concessionaire, private investors

Project C “Land commercialisation”

Responsibility: Government

Investment: t.b.d. after valuation

Development of existing airport/Access to the new airport

Land Commercialisation

Phase 1Construction


A Special Purpose Vehicle (SPV) as operating company of the airport is composed of a combination of private investors

The composition of investors is driven by Government interests, investor interests and availability of local, regional and international capital

The Government will take an appropriate capital share

Foreign investors / operators of the new airport will take a majority share

The split of shares in any PPP needs to in line with the risks and rewards associated with the investment.

4

Potential Split of Shares in the SPV


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

Privatization Model PPP; 25-year concession + renewal option The Government will have to subsidize the project with at least 45% of Phase I of the

project Phase 2 can be financed from internal sources

4


The privatisation strategy is based on a number of financial criteria for the SPV as the operating concessionaire 4

Government contribution of a substantial part of the investments in Phase 1

Start-up equity of the SPV usually should be at 50%, depending on the composition, i.e. cash vs. assets provided by construction firms

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

Internal Rate of return (IRR) of at least 12% for SPV to reflect various risk dimensions properly

Positive cash-flow during the term of the concession

Payments of concession fees to the Government

Dividend payments to the shareholders of the SPV

Tax holiday for the operating company

Debt Service ability of the SPV under various scenarios and loan structures


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


Conclusions

There is a huge need for infrastructure developments at many airports in Central Europe, but limited public budgets are available.

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.

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.

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.

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.

The uniqueness of each airport development requires always a tailored approach structuring a PPP.

4


For further contact:

Dr. Raphael von Heereman

Executive Director

Lufthansa Consulting GmbHVon-Gablenz-Str. 2 – 650679 CologneGermany

Tel.: +49 (0)221 88 99 6 - 56

Fax: +49 (0)221 88 99 6 - 60

e-mail: [email protected]

www.lhconsulting.com

Thank youfor your

attention

welcome ppp models to build airport infrastructure matching the demand in central europe 8 th cei...

Documents

cargo traffic

growing passenger

airport industry

ce countries

air cargo source

passenger forecasts

growing air traffic

airport information