Against my better judgment, I have been asked to provide some substance related to the topic at hand, rather than the usual opinion unfettered by plebian concepts such as facts or actual analysis. So in this issue’s column, we will discuss financing airport and seaport public-private partnerships (PPPs); the companion column next quarter will examine PPPs for roads, bridges, and rail. Read together, both entries will parse the most pressing elements of the transport PPP trinity, breaking down the public, private, and partnership elements.
But first, it’s important to note some basic points about ports and airports, which offer a complex commercial context with a variety of services and sources of revenues. They are more of an asset on the corporate finance model—looking at existing demand and revenues as well as future revenues—compared to roads and rail, which tend to focus on future revenues and have a far more limited scope for associated commercial opportunities. For example, airports are often considered “shopping malls with airplanes,” a moniker unfamiliar to toll roads.
Airports and ports also offer a largely dollar-based revenue stream (at least for international services), facilitating access to global financial markets and foreign currency debt. This reduces or eliminates the need for government to help mitigate foreign exchange risk.
That understood, we can now delve deeper into the implications of this subset of transport PPPs.
Like roads and rail, government usually provides or pays for certain project assets. For airports, government often provides runways and taxiways (“airside” assets) that are also used for other purposes, such as military, police, or rescue. The private sector tends to focus on landside assets, like terminals, parking lots, and hotels. In ports, governments tend to provide marine services (pilotage, tugs, mooring), hinterland links (roads, heavy and light rail, pipelines, telecoms) and superstructure (dredging, breakwater, quays). This leaves infrastructure (cranes, gantries, equipment, warehousing) to the private sector.
Given their stronger traffic and revenue profile, airports and ports rely much less on government demand risk mitigation like traffic guarantees. More often, airports and ports involve sizable revenue sharing arrangements: some combination of up-front concession fees, fixed periodic fees, usage based fees, and gross revenue sharing.
Governments are often tempted to take key decisions out of private hands.
Airports and ports require a mix of commercial skills from the private sector, along with an important need to focus on the core operation of the facility. It is tempting for investors to lose focus and prioritize other revenue opportunities. In particular, operators of airports and ports are often linked or even tied to airlines or shipping lines, making certain conflicts of interest endemic to the sector.
These links are also strengths, however, ensuring certain key clientele for the facility. Government needs to be aware of the pros and cons to manage the situation proactively.
The nature of the partnership between public and private in airports and ports also differs from many other transport PPPs. Transport is normally focused on getting goods and people from A to B. Airport and port operations involve a complex series of movements across the globe. They have a direct impact on economic growth and jobs, raising distinctly political sensitivities. Closing a road, even a key arterial link, is bad; closing a port or airport can lead to disaster.
As a result, governments are often tempted to try to control airports and ports, to take key decisions out of private hands. In some cases this results in governments using public funds to build or refurbish the entire facility, using the private sector for management only. While this affords the government broad control and decision-making powers, it denies private innovation and incentive to invest in a manner required to make the project a success.
Government should invest in the basics, the minimum needed to make the project work, and leave the private investor to do the rest—with clear incentives to make the project a success for all involved.