Leveraging PPPs for Airport Management … AFR/Events/assembly2012/Speeches a… · Leveraging PPPs for Airport Management and Development 28 August, ... Overcoming the challenges

Leveraging PPPs for Airport Management and Development

www.pwc.com

28 August, 2012 Livingstone Zambia

ACI 21st African Region Annual Assembly, Conference and Exhibition: Overcoming the challenges of Airport development in Africa

Sotiris A. Pagdadis, Ph.D.

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Background to Airports and Air Traffic in Africa

21st ACI Africa Regional Conference, Assembly & Exhibition 27 - 29 August 2012

PwC

African region still forms a small proportion of the global air traffic

30%

27%

28%

8%

5%

2%

Total Passenger Market Share (Revenue Passenger Kms)

Europe Asia Pacific North America

Middle East Latin America Africa

22% 39%

24%

11% 3%

1%

Total Freight Market Share (Freight Tonne Kms)

Europe Asia Pacific North America

Middle East Latin America Africa

Source: IATA

Africa contributes less than 2% of passenger and freight traffic

Source: IATA


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However, it is also one of the world’s fastest growing regions for both categories...

-15%

-5%

5%

15%

25%

Air Traffic Growth in Key Regions (YTD ‘12 vs YTD ‘11)

RPK Growth FTK Growth

Africa is showing consistent growth across passenger and cargo traffic,

surpassed only by Middle East

Source: IATA

GDP growth rate

2012 (Projected)

2013 (Projected)

Africa 5.4% 5.3%

World 3.5% 3.9%

In general, air traffic growth mirrors global GDP growth, and based on IMF data, Africa is poised to grow at a much faster rate than the average world economy

... and the trend is expected to continue

Source: IMF


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Air traffic indicators in Africa have recovered well after the slowdown

Barring 2008-09 which saw the global airline industry take a hit, the passenger traffic for Africa has been

consistently growing

50

55

60

65

70

75

80

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

2005 2006 2007 2008 2009 2010 2011 YTD12

Air Traffic Indicators in Africa

Growth in Revenue Passenger KMs Growth in Available Seat KMs

Growth in Freight Tonne KMs Growth in Available Freight Tonne KMs

Passenger Load Factor (PLF)

Average Growth

Including 2008-09

Excluding 2008-09

RPK 4.8% 7.9%

ASK 4.9% 7.4%

FTK 1.7% 4.8%

ATK 3.7% 6.3%

PLF Growth %

Source: IATA


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...and it is forecasted that it will be the next big driver for global economic growth

-

500

1,000

1,500

2,000

2,500

Fleet inservice

Population(Million)

RPK(Billion)

GDP (USBillion)

Forecasts: African Economy & Air Traffic

2010

2030

Key Drivers

• Large base effect caused by the opening up of under-developed economies

• Of 45 countries, 11 have more than doubled in size since 2000.

• New Development of industries and diversified growth

• Chinese and Indian investments seeking natural resources

• Development of domestic feeder services and development of hub-spoke model

• Need for substitution of poor road and non-existent fast train network

Source: OAG, McKinsey, IMF estimates and Public Information


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However, airport and routes have been traditionally concentrated in a few pockets

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Distribution of Air passenger traffic by countries in 2011 (in million passengers per annum)

Passengers 2010 Passengers 2011

8 countries contribute to more than 80% of Africa’s traffic

2 countries and 6 airports contribute to more

than 40% of all traffic

Source: ACI

Less than 20% of Africa’s 150+ operational airports have traffic of more than 1 million passengers per annum


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... with continued poor quality of infrastructure

Note: includes commercial and non-commercial airports

Source: World Bank Survey

• Lack of terminal facilities

• Inadequate customs/ immigration, baggage handling facilities etc.

• Inadequate runway capacity and air traffic facilities

• Lack of night landing and take off lights

Physical

• Unreliable Power Supply

• Disorganised customer handling services Peripheral

• Inadequate IT networks

• Absence of services like CUTE/ CUSS

• Absence of basic airport automation like boarding systems, cargo handling systems at many airports etc

IT Infrastructure


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As these airports are upgraded, significant financing challenges are envisaged requiring Private Sector Participation

Current spend = $ 45.3 bn Financing gap = $ 48.0 bn Resources from public sector and other developing agencies are limited and can only cover part of these financing needs Therefore it is important to leverage private sector financing to support infrastructure developments

DFIs & bilaterals,

6.1

Public sector, 9.4

Private sector,

29.8

Financing gap, 48

Source : Africa Infrastructure Country Diagnostic

Annual Financing Needs = $ 93.3 billion


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PPP for Airport Development Key considerations


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Private Sector Participation in the PPP model bring important benefits to infrastructure projects

Benefits of Private Sector

Participation

• Extracting long-term value-for-

money through risk transfer

• Improving Efficiency and

Competitiveness

• Ensuring transfer of skills

• Supplementing limited public sector

capacities

• Providing critical financial support

• Bringing innovation


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However, PPP projects also have inherent challenges and risks associated with them

• Does the benefits of a PPP model outweigh costs? High Development, bidding

and ongoing costs

• Need for sufficient commercialization potential to incentivize private sector Higher return expectations

• Ensuring the ability to finance the project, especially under uncertain demand through adequate supporting clauses

Financing challenges

• Perceptions on various issues including tariff increases, perceived loss of control, land procurement and job losses

Political and social challenges

• Even if the government has minimal stake in the project, public will continue to hold the government responsible

Incomplete transfer of performance risks

• Re-negotiation of contract terms may ensue during the project implementation to factor in unanticipated externalities

Unanticipated events in

the long term


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There are several conditions precedent to a successful PPP process

• Political stability

• Favourable policy environment

• Effective legislative, legal and controls framework

• Internal government expertise in PPPs

• Need for strong sponsor units

• Robust project prioritization and preparation

• Standardization of agreements and track record for sanctity of contracts

Macro factors

• Adequate scope and complexity of the project

• Sufficient demand and commercialization potential

• Demonstrable social and economic benefits

• Measurable output indicators

• Framework to ensure adequate competition for the project

• Clearly defined value addition for government

Project-specific factors


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Size of the airport is an important factor for possible development on a PPP basis

1. Relatively larger airports that can be commercialized

2.Relatively smaller airports present challenges for commercialization

• Higher volumes and typically more predictable growth patterns leading to lower risk profiles

• Greater ability for private sector to finance the project purely on the basis of revenues and concession contracts

• Larger potential for non-traffic revenues, leading to off-airport development

• Uncertainty in pace of growth (leading to high demand risk)

• Less attractive to investors and need for substantial concessions and grants

• Lower potential for commercialization inside the fence

• Minimal scope for non-traffic revenues, and limited scope to operations within airport premises, possibly restricting investor classes


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It is further important to recognize the various forms of Public Private Partnerships...

Fee-Based Contract Services

Construction Manager at

Risk Design Build Finance Operate

Full Service Concession

Asset Sale

EPC models

Low High

Developer models

DBFO/DBFOT models

BOT/BOOT models

BOO/Joint Development models

Concessions can be creatively structured based on desired private sector involvement in the airside, terminal-side and city-side infrastructure which carry different risk-reward profiles.


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... and choose the most optimal one to meet the present and future needs

Needs Assessment

Define the service needs and objective

clearly

Quantifiable and measurable objectives

Important for future monitoring and

analysis

Risk Allocation

Design, Financing and Construction

Service delivery

Operation and Maintenance

Service Delivery Components

Project design

Procurement and construction

Financing

Ownership

Operations and maintenance

Budget Refinement

Determining the overall cost saving

Providing a benchmark to private players


The information contained in this document is provided 'as is', for general guidance on matters

of interest only. PricewaterhouseCoopers is not herein engaged in rendering legal, accounting,

tax, or other professional advice and services. Before making any decision or taking any

action, you should consult a competent professional advisor.

© 2012 PricewaterhouseCoopers Private Limited. All rights reserved. In this document, “PwC”

refers to PricewaterhouseCoopers Private Limited (a limited liability company in India), which is

a member firm of PricewaterhouseCoopers International Limited, each member firm of which is

a separate legal entity.

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Leveraging PPPs for Airport Management … AFR/Events/assembly2012/Speeches a… · Leveraging PPPs for Airport Management and Development 28 August, ... Overcoming the challenges