OUA AP Development

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8th CEI Summit Economic Forum
PPP Models to Build Airport Infrastructure
Matching the Demand in Central Europe
Welcome
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Agenda

• Need to Build Up Airport Infrastructure in
  Central Europe
• Private Sector Involvement in the Airport
  Industry
• Public Private Partnerships
• Case Study PPP-Structures as Means for
  Successful Airport Development

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Agenda
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• Need to Build Up Airport Infrastructure in
  Central Europe
• Private Sector Involvement in the Airport
  Industry
• Public Private Partnerships
• Case Study PPP-Structures as Means for
  Successful Airport Development

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Central Europe is in terms of traffic volume one
of the smallest worlds markets but with strong
growth potential
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Key Points

• 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

Source Airport Information 2004
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The CEI countries have been witnessing growing
passenger and cargo volumes until 2003..
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Passenger Volumes CEI countries (Number of Pax)
Cargo Volumes CEI countries (tonnes)
Source IATA, Lufthansa Consulting
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but, without Italy and Austria, CE countries
showed only growths in passenger traffic but none
in air cargo
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Passenger Volumes CEI countries (Number of Pax)
Cargo Volumes CEI countries (tonnes)
Source IATA, Lufthansa Consulting
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But for the next years GDP and passenger
forecasts are above world average underpinning
development potentials
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GDP Development 2005-2005CEI countries vs World
Average
Passenger Forecast 2005-2008CEI countries vs.
World Average
Source IATA, Global Insight, Lufthansa Consulting
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Increasing importance for aviation as main
transport mode in international traffic flows
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Passenger Traffic at Central European Airports
2004
Key Points

• 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)

Country
Passengers tsd

gt high growth potential
80.345
Total
Source ACI, Albatross, Lufthansa Consulting
Sample of 49 Central European Countries
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There is a great potential for air cargo
development
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Air Cargo Traffic at Central Europen Airports 2004
Key Points

• Central European air cargo traffic accounts only
  for less than 3 of the worlds 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

Country

Cargo
Total
Source ACI, Albatross, Lufthansa Consulting
Sample of 49 Central European Countries
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Capital expenditures in Central Europe airports
increased in the last 5 years
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Major Airport Developments in Central Europe (gt
500 mill. USD)
Airport Capital Expenditure by Region (in mill.
USD)

• 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
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Barriers have to be removed to continue with
infrastructure improvements allowing for
sustained expansion
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• 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
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Agenda
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• Need to Build Up Airport Infrastructure in
  Central Europe
• Private Sector Involvement in the Airport
  Industry
• Public Private Partnerships
• Case Study PPP-Structures as Means for
  Successful Airport Development

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Some privatisation trends...
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• 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 worlds 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

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Airport Privatisation activity is increasing
after a period of standstill
Examples
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Agenda
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• Need to Build Up Airport Infrastructure in
  Central Europe
• Private Sector Involvement in the Airport
  Industry
• Public Private Partnerships
• Case Study PPP-Structures as Means for
  Successful Airport Development

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

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Understanding the motivation of the public and
private sector as well as the lenders one is key
for any PPP
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Private Sector participation trend in airport
infrastructureWhich model option meets the
interest of all parties?
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Policy Options/
Option 1
Option 2
Option 3
Option 1
Option 2
Option 3
Roles
Roles

• Service Concessions
• Management Contracts
• Multiple Concessions

• BOT, BOOT, BTO etc.
• Long Term Leases
• Master Concessions
• Multiple Concessions

• Trade Sales
• Capital Markets

PPP Options
Ownership
Ownership
Private Sector
State
Private Sector
Investment
Investment
Private Sector
Management/
Management/
Private Sector
Private Sector
Operation
Operation
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Successful PPPs are based on attractive assets,
clearly defined concessions, and a sound business
plan
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The regulatory environment and the qualifications
of the project partners are prerequisites for
goal achievement
2
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Certain risk factors in the Central European
airport market need to be addressed and managed
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RISK!
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The projects funding life cycle is driven by the
partners objectives, by the nature of the
business and by associated risks
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GROWTH PHASE
START- UP PHASE
Traffic growth
Airport concept Air transport market potential
analysis
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)
PROFIT LOSS
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
Institutional Investors Public Market Securitizati
on
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
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Agenda
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• Need to Build Up Airport Infrastructure in
  Central Europe
• Private Sector Involvement in the Airport
  Industry
• Public Private Partnerships
• Case Study PPP-Structures as Means for
  Successful Airport Development

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The capitals new airport project presents
elements of three separate transactions
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The air transport market has distinct features
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Passenger Traffic 2003 - 2027
Key Points

• In 2002, the country had approx. 230.000 air
  passengers, of which 90 have been handled at the
  capitals 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.

Air Cargo Traffic 2003 - 2027
Source Lufthansa Consulting
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The development of airport capacity to meet
future demand requires investments of approx. 200
250 mill. Euros
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• 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
Phase 1 Construction
Operation
Phase 2 Expansion
Land Commercialisation
2006
2010
2015
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A Special Purpose Vehicle (SPV) as operating
company of the airport is composed of a
combination of private investors
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Potential Split of Shares in the SPV

• 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.

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Government participation in the transaction is
indispensable
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Revenues at the airport
Magnitude of the investment
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.
TTL investment is unlikely to be sourced from the
local and regional investment community alone
alternative ways of financing need to be found.
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

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

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To enhance the feasibility of the project to
investors, all revenue sources will have to be
transferred to SPV
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Cargo Handling Concessions
Airside Service Concessions
Pax and A/C Handling Services
Concession Revenue
SPV
Landside Service Concessions
...
Concession Revenue
...
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Conclusions
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• 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.

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For further contact
Dr. Raphael von Heereman Executive Director
Lufthansa Consulting GmbHVon-Gablenz-Str. 2
650679 CologneGermany Tel. [phone]
- 56 Fax [phone] - 60 e-mail
Raphael.Hereman_at_lhconsulting.com www.lhconsultin
g.com
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for your
attention
Thank you