Never sell crown jewels - IATA warns on airports privatisation

Public enterprises minister Leone Jooste said partially privatising Hosea Kutako International Airport was viable as the International Air Transport Association (IATA) director general Alexandre de Juniac's warned against privatising international airports.

Namibia is mulling partially privatising the Hosea Kutako International Airport after finance minister Calle Schlettwein sought World Bank assistance to evaluate the airport project as a possible project to be financed under a PPP arrangement. 

Addressing the 74th IATA Annual General Meeting (AGM) and World Air Transport Summit in Sydney, Australia on Monday this week, De Juniac warned the government "never to sell the crown jewels just to raise cash". 

According to De Juniac, governments struggle to build required airport infrastructure because expecting privatisation to be the magic solution is a wrong assumption.

"We need more airport capacity. But be cautious. Expecting privatisation to be the magic solution is a wrong assumption," he said.

De Juniac also said that even airlines had high hopes that the private sector investment and business acumen would bring benefits, but were outnumbered by disappointments. 

"There were some quick wins. As customers of many airports in private hands, airlines have far too many bitter experiences," he said, adding that travelers also sensed the problem and preferred public airports.

"We commissioned performance benchmarking," De Juniac explained, " Privatised airports are definitely more expensive. But there is little difference in efficiency or investment levels compared to airports in public hands."

The answer, he said, is that when the government maintains its skin in the game, generally provide better outcomes for consumers and the wider economy.

He also said as IATA, they came to three conclusions - first, never sell the crown jewels just to raise cash; second, airports focus on what is important when performance improvement goals are set in consultation with airlines, and third, airports have strong - monopolistic - market power that can only be curbed with firm regulation.

De Juniac said governments should:

1.  Focus on the long-term economic and social benefits of an effective airport as part of the country’s critical infrastructure,
  2. Learn from positive experiences with corporatization, new financing models, and alternative ways of tapping private sector participation
   3. Make informed decisions on ownership and operating models to protect consumer interests, and
    4. Lock-in the benefits of competitive airport infrastructure with firm regulation.

Jooste told The Villager this week that the World Bank's feasibility study shows that the Hosea Kutako public-private partnership was viable and should be the route to take.

"The fact is that we desperately need a new (or vastly upgraded) airport and the interventions being undertaken by the Namibian Airports Company will only allow us to cope for the next few years," Jooste said.  

According to Jooste, the cost of upgrading Hosea Kutako could be around N$2.8b, which is a large amount considering Namibia's current economic climate. 

"My impression is that one should consider the difference between privatising airports and the various public-private partnership models that may be considered in this particular case," he said, adding that the privatising of an airport implies that full ownership and control of the infrastructure is transferred to the private sector. 

Jooste also said airports are strategic assets and he would be reluctant to support the full privatisation of Hosea Kutako, and that a conventional approach to the project would be difficult under current circumstances and alternative funding mechanisms and operating models may have to be considered if Namibia wants to implement the project. 

He further said that the provisions of the Public-Private Partnership Act are well-defined and explain a thorough process before agreements may be concluded. 

"The ball is now in our court to discuss and agree on the most appropriate method of financing and implementing this critical project and our final recommendations will be determined by the outcome of due diligence in discerning what the best possible option in the best interest of the country is," Jooste said.

Schlettwein said, “They have made their recommendations. We have not taken a decision on the recommendation and that’s where we are.”

However, the veil that divides partial privatisation and privatisation is so thin that in most cases government has been seen folding hands while the private partners run the day to day affairs of companies.

This brings a fear that if Namibia is to go the PPP route on its airports, the country will fall into the trap of all things negative that IATA has warned about.

 

“I agree with you; many PPPs are just like that. All the risk is with the public sector all the profits are with the private sector and that is exactly what must be avoided in a good PPP arrangement,” the finance minister also said.

 

“That again is an indication of a bad arrangement that we entered into where the private sector is allowed to just go on without having the obligation to be there for the long haul and be sustainably involved but it does not dismiss that a good PPP, where you rope in private sector capital, can be sustainable,” he said.

 

It is the way the PPP is structured and to what extent the terms for sustainably and   risk sharing are agreed upon so that the private sector is part and parcel of sharing the risks and not just the profits, said the minister.

If government is to partially privatise, Schlettwein said there is a need to make sure as a public sector, its terms are incorporated in such an agreement. 


The director general of the Airports Council International-North America, Angela Gittens, in her paper on the privatisation of airports said to assess the state of airport privatisation, a good starting point is to take a look at the ownership structures of the world's largest airports. 

"If you are thinking that the majority of the world's top airports operate under private or mixed public/ private ownership, a reality check reveals the exact opposite," she said.

According to Gittens, only three airports  - Rome Fiumicino, Sydney and London Heathrow - are 100% privately owned, while 19 airports are under strict public ownership while eight operate under some public-private partnership.

In the US, Gittens maintained, only New York JFK can be considered as a public-private partnership with Terminal 4 is owned and operated by the Schiphol Group. 

"The Schiphol Group itself, however, is not a private company either, being majority owned by the Dutch government and municipalities," she said, adding that this makes an important piece of infrastructure in the U.S. is therefore in the hands of a foreign government-owned entity.
 
Gittens further said that a lot of so-called private airports such as Frankfurt, Copenhagen, Brussels and Vienna still have substantial or even majority public ownership as is the case with Fraport where the city of Frankfurt and the Federal State of Hesse are majority owners. 

"Airports are strategic assets, and as such, they are very much of interest to local, regional or national governments that prefer to retain a stake in the asset. If we talk privatisation today, we primarily mean corporatisation," Gittens said. 

Governments, Gittens said, need to provide a sound framework that investors can rely on instead of rushing to tender or sell airports before sketching a regulatory framework leads to uncertainty and lack of confidence.

According to Gittens, governments should also be cautious to reach for excessive prices, concession payments or fees. 

"Money must not be the only criteria when it comes to awarding contracts. Expertise, strategic planning, service quality and a long-term strategy for growth and capacity are equally important factors. 

"Airport infrastructure is too important an asset for the local and national economy to be simply awarded to the highest bidder," she said. 

 

Photo source: The Patriot