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Airport privatization with public finances under stress: An analysis of government and investor's motivations
Journal of Air Transport Management 62 (2017) 197e203
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Journal of Air Transport Management journal homepage: www.elsevier.com/locate/jairtraman
Airport privatization with public finances under stress: An analysis of government and investor's motivations Carlos Oliveira Cruz a, *, Joaquim Miranda Sarmento b a b
CERIS/ICIST, Instituto Superior T ecnico, Universidade de Lisboa, Portugal ADVANCE/CSG, ISEG-(Lisbon School of Economics and Management), Universidade de Lisboa, Portugal
a r t i c l e i n f o
a b s t r a c t
Article history: Received 3 October 2016 Received in revised form 22 February 2017 Accepted 27 April 2017
The management model of airports has long stood as a central research area in the transport sector. There are a wide range of studies that focus on the potential benefits and pitfalls of private airport management. The results of these efficiency studies have not provided irrefutable evidence for the superiority of private management over public management, but the momentum towards privatizing airports is growing. The reason for privatization has been more related with privatization revenues for governments, rather than more efficient management. The search for maximizing the sale value can have negative impacts from a welfare perspective, for example, through excessive increases in tariffs for passengers. This research reflects on the motivations for governments to privatize, and is illustrated by a case study e Portugal e in which the privatization occurred as a result of three main large drivers: 1) a bailout programme by the IMF, the EU, and the ECB; 2) a revision of the regulatory model, and; 3) the need to increase the capacity of Lisbon's airport system in the medium term. © 2017 Elsevier Ltd. All rights reserved.
Keywords: Privatization Airport regulation Concessions Public-private partnerships Portugal
1. Introduction Over the last few decades there has been a steady increase of private sector involvement in the development and management of airport systems through long term contracts, or partial/full privatization processes (Oum et al., 2006). This trend has also impacted in other infrastructure sectors (e.g. energy with the total or partial privatization of production and distribution system, transportation particularly in ports, airports and motorways, although in the former case the model was public-private partnerships and not pure privatizations, or the environment, in waste collection, water supply or waste water systems) (Van de Walle, 1989; Neto et al., 2016; Singh et al., 2016). Several countries, such as Italy, Australia, New Zealand, Denmark, Mexico, Portugal, UK, and India have privatized some or all of their airports, either entirely or partially (Hooper, 2002; Galeana, 2008). The case of BAA is a textbook example, not just because it was one the first examples of airport privatization, but also because of the concerns regarding antitrust and market power (Bush and Starkie, 2014). In this case, BAA was forced to sell three airports e Gatwick, Stansted and Edinburgh -
* Corresponding author. E-mail addresses: [email protected] (C.O. Cruz), jsarmento@iseg. ulisboa.pt (J.M. Sarmento). http://dx.doi.org/10.1016/j.jairtraman.2017.04.007 0969-6997/© 2017 Elsevier Ltd. All rights reserved.
the British anti-trust authority. Concerns about excessive market power and lack of competition between the airports, forced this “post-privatization unbundling”. Years earlier, Starkie and Thompson (1985) proposed that the ownership f BAA's airports should be divided and the London Airports should have separate ownership to introduce more competition. The same authors used the example of Stansted and Gatwick as potential competitors for similar markets. The reality confirmed the concerns of the authors, as regulating a private monopoly is extremely complex, and the likelihood for success is low. There have been different models for privatizing airports (Cruz and Marques, 2011). The authors use the term “privatization” to refer to private sector management of airport infrastructure and operations, and not strictly the concept of ad aeternum material privatization. In many cases, there was a full privatization, while in others, a concession was awarded to the private sector. Two main forces have been driving private sector participation in airports operations: first, an increase necessity for investments in this area as at the same time there are strong fiscal constraints exist in most of the countries [during the first decade of the 21st Century the world's airports would require an investment of $250 billion (Spillers, 2000)]; secondly, and related with those fiscal constraints, the need of governments to obtain “lump-sum” revenues by selling or by granting concessions for infrastructures. Furthermore, private
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sector involvement in infrastructures has been motivated “ideologically” by the tendency to look for private sector management skills as a means of addressing public sector inefficiencies (Oum et al., 2008). However, the discussion on privatization has often been supported by political or ideological arguments, rather than by any theoretical analysis or empirical evidence (Vasich and Haririan, 1996; Oum et al., 2008). Among others, we highlight several benefits from airport privatizations, such as: stimulate competition; improve project delivery; improve efficiency (thus reducing costs to end users), and; reduce political/administrative interference with the commercial management of airports (Carney and Mew, 2003; Costas-Centivany, 1999; Poole, 1997; Cruz and Marques, 2011). With regards to the issue of efficiency, several authors found evidence of the higher efficiency of fully-privatized airports (Boardman and Vining, 1989; Hooper, 2002; Oum et al., 2008; Gillen, 2011), and also that partially-privatized airports are less efficient than public ones (Oum et al., 2008). Public ownership is susceptible to political interference and is highly bureaucratic (Benitez et al., 2012) thus creating more difficulties for improving operational performance. However one of the primary motivations for privatizing airports (if not the first, and sometimes the only one) has been the “cash-in” of capital (Truitt and Esler, 1996; Hooper, 2002). Airports are among the most valuable systems in the air transport value chain (Button et al., 2007), and are thus susceptible to the financial clawback strategy of governments, particularly those requiring capital liquidity (as most governments were in 2007e2011 in the midst of the global and financial crisis; and still face strong fiscal constraints in the aftermath of the financial crisis). The commonly-referred to example of the UK London-based airports privatization in 1987 in the Thatcher era, was a first move towards quick cash-in in a profitable market that was relatively well protected, ensuring a stable, close to risk-free, return on investment. Although the superiority of airport private management is yet to be proved (Oum et al., 2006), several countries have followed, and are still following this trend (e.g. New Zealand, Italy, Austria, just to name a few examples) (Abbott, 2015). The question is how far is a government willing to go to maximize its cash generation when privatizing an airport, or an airport system. The discussion about airport privatization generally involves a discussion on regulation and anti-trust mechanisms, given the characteristics of monopolies for many airports, particularly those smaller and medium airport systems (Humphreys et al., 2007; Beesley and Littlechild, 1989). Starkie (2008) argues that most airports are local monopolies, but not natural. Airports can evolve into competitive structures, such as industries competing in spatial markets, meaning that for a significant share of the market, airlines can choose alternative airports. This competition can be even higher under the model of hub-and-spoke used by most airlines. In the hub-and-spoke model, airlines can choose the most competitive airport to serve as the hub. This paper addresses the privatization of the Portuguese airport system which occurred in 2012. We aim to discuss and clarify the following issues: 1) what motivated the Portuguese government to undertake this privatization?; 2) As the winning bid paid a substantial premium price, what was the bid price a potential monopoly price for the private sector?, and; 3) What other motivations could have led Vinci to pay for such a premium? This paper is organized as follow: Section 2 briefly describes the Portuguese airport system and the privatization process. Section 3 provides a discussion and some evidences of the motivations that guided the government's decision to sell the airport company, thus answering our first research question. Section 4
analyses the potential monopoly premium (Research Question 2) and Section 5 elaborates on other potential benefits to Vinci that could explain the price of the operation (Research Question 3). Section 6 concludes. 2. Setting the context 2.1. Economic and financial background Understanding the process of privatization of the Portuguese airports requires an overview of the overall economic and political framework. In 2011, Portugal required official financial aid (a “bailout” programme) from the International Monetary Fund (IMF), given its impossibility to comply with its financial responsibilities. The IMF, the European Commission (EC), and the European Central Bank (ECB) all established an agreement with the Portuguese Government - the Memorandum of Understanding (MoU), setting up the requisites, in terms of reforms, to sustain the financial aid. Among several public reforms that were agreed was the privatization of state-owned companies, opening up to private initiative those infrastructures that still remained within the Government's responsibility, one of them being the airport sector. Up until 2012, Portugal was one of the few countries in Europe where the government was still the only owner, or the major stakeholder of the air transport sector: both the national flag carrier (TAP), and the airport owner and manager (ANA). The MoU clearly established as a priority, the opening of traditionally governmentowned companies to private initiative, particularly in the transport sector. The Troika Memorandum established, among several fiscal, financial, and budgetary objectives, that the Government would be able to raise up to 5.500 million Euros with the privatization of several companies, including ANA and TAP. The privatization of ANA in 2012 end up representing more than half of this value. Taking into account the political decision of privatizing these air transport-related companies e the airport manager and the airline e both being companies with highly correlated activities, what is the best way to ensure that both processes are articulated in order to maximize social welfare? TAP is the largest client of ANA, and its operational basis located at Lisbon Airport, working as a hub linking Europe to Brazil, and Europe to African Portuguese-speaking countries (e.g. Angola, Mozambique, Cape Verde, and S~ ao Tome). ANA handled around 38.9 million passengers in 2015, and TAP handled around 12 million. A significant volume of TAP's passengers does not have as an origin/destination any of ANA's airports (Lisbon, Porto, or Faro) but are transit passengers passing through Lisbon's hub. Therefore, the future of TAP, and particularly its strategic decisions regarding the Lisbon hub, are determinant to setting ANA's economic value, given its impact on ANA's expected traffic. Much of the potential of the airport relies in the existence of a Hub, local traffic being dependent on tourism and economic growth. The most economically-rational approach would have been to first privatize TAP, and then to privatize ANA, given that the first would influence the second. Although this would have been the logical decision, the sale price of TAP is incomparably lower than ANA. As discussed by Button et al. (2007), most legacy airlines have low profit margins and since 1997 they have operated in Europe in a highly competitive market. In fact, many airlines are struggling to breakeven and during large periods of time, airlines experiment negative cycles, e.g., in the period 2001 to 2007. On the other hand, airports have bigger profit margins and less competition. TAP was partially privatized in 2015, for 10 million Euros, with significant
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Governmental guarantees regarding pending debt (in excess of 1 billion Euros).
2.2. Regulatory framework and concession contract The decision was to privatize ANA first, and then TAP. The privatization of ANA was conditioned by two institutional and regulatory changes: 1 e the revision and clarification of the regulatory model, and; 2 e the establishment of a concession contract between ANA and the Portuguese State to contractually formalise the right of the former to operate the Portuguese airports. Before privatization, a new regulatory model was implemented. The new model is a “single till” model (where there is no distinction between aeronautical and non-aeronautical revenues) and it has a price-cap mechanism, establishing maximum average revenue per passenger. The maximum revenue per passenger is variable and is linked to the expected evolution of passengers. A baseline forecast is used as a reference, and if the actual traffic is above the baseline reference, then the maximum revenue per passenger permitted can increase, if it is below, then the revenue-cap is decreased. The price cap is indexed to CPI and the fact that the charges allow to increase when the traffic increases, has the underlying principle, that there are no economies of scale, which can be arguable. But there are some technical reasons for such mechanism. First, the fact that Lisbon Airport operates under capacity constraints. A significant increase in traffic will force the airport manager to search for alternative airports for capacity increase, being forced to anticipate significant investment. On the other hand, this model is a direct incentive to purely technical efficiency, considering that the exiting capacity constraints limit scale efficiency. Figs. 1 and 2 illustrate the passengers’ growth and the historical growth rates in ANA and Lisbon airport in particular. Furthermore, prior to the privatization of the airport company, it was necessary to formalise the concession of the Portuguese airport system to ANA. The concession was awarded in 2012, for a period of 50 years, and grants the concessionaire e ANA e the exclusivity of managing, upgrading, and operating the airport system (3 major airports in continental Portugal e Lisbon, Porto, and, Faro; a secondary airport e Beja, and; 4 airports in the Azores islands).
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However, only Lisbon and Oporto are profitable, with Faro being break-even. The others run operational deficits. The concession also includes the potential construction of the new Lisbon Airport, which is a large airport to be built in the outskirts of Lisbon, to replace the existing old airport, which is located near the city centre. The existing airport (Airport Humberto Delgado) has capacity for 22 to 25 million passengers, and in 2016 reached the 22 million traffic. The rationality of the construction of the new airport, although included in the concession contract was questioned, and the probable solution for the increase in capacity is now the utilization of a military base in the outskirts of Lisbon. The utilization of a military base provides a quicker solution, because it can be operational in 1 or 2 years, and a significantly lower level of investment (the upgrade would cost 200 to 300 million, compared with 4 or 5 billion for a new airport). Nevertheless, the concession contract is not clear about the responsibility for financing the project (private vs. public). This ambiguity will certainly mean that there will be public financing of the construction of a second Lisbon airport, or upgrading of a military base. . The concession contract was signed on the 14th December, 2012 between ANA and the Portuguese Government. The public service concession for airport infrastructure had belonged to ANA since 1998, but was not formalized in a concession contract. The process of selling the company was the trigger to accelerate the formalisation of the contract. The concession contract granted ANA the exclusivity for operating and managing the Portuguese main airport system for a 50-year period. The signature of the concession agreement included a payment, from ANA to the Government, of 1.2 billion euros for the rights established in the concession. All the public service obligations related to the availability of airfield infrastructures and access to the infrastructure are also regulated in the concession contract. Table 1 presents the main features of ANA's concession contract.
2.3. Tender process The privatization process of ANA started in late 2012, and was concluded in early 2013, with the selling agreement to be signed
Fig. 1. Passenger evolution in Lisbon Airport and ANA (2005e2015).
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Fig. 2. Growth rates in Lisbon Airport and ANA (2005e2015).
with the international operator VINCI. There were 4 bidding offers from the following consortiums: Zurich Airport, the EAMA con n Ame rica), Atlantic Consortium (Fraport AG/ sortium (Corporacio IFM) and Vinci Concessions, which were presented on the 14th December, 2012. The draft of the concession contract was one of the elements made available to the potential investors contacted at the first stage. These potential investors were able to evaluate the document and to propose what would be the main changes they would require to present a binding offer. One can argue about the merit of such an approach. Typically, the concession contract, as well as the regulatory model, are defined by the government, and are used by potential bidders as restrictions in setting their offer. The process was structure in a two-stage model. The process was divided into two stages: 1) a first initial stage to assess the potential interest of investors; 2) after this initial stage the Government elaborates a short list of those authorized to proceed to the second stage, and a second stage, where the selling process actually takes place. The selection criteria were: indicative price; robustness of business; terms of the concession contract proposed; financial capacity, and; strategic plan. But the main award criteria was the price and payment conditions. The design of a tender process based essentially on the value offered, and using the model of individual negotiation with potential bidders raised some questions. The disposal of ANA was not simply a selling process of a public enterprise, as ANA already held the concession for the
management and operation of the Portuguese airport system. The government argued that the individual negotiation allowed for the maximizing and acceleration of the selling pricing, thus facilitating the fulfilment of the Financial and Economic Assistance Programme signed with the EU, the IMF, and the ECB. As a result of the tender process, 4 binding offers were presented, ranging from 2000 to 3080 million Euros, or, in terms of the value offered as multiple of EBIDTA, between 10.2 and 15.3. Table 2 summarises the results. The analysis of the values offered (as a multiple of EBIDTA) are presented in Table 2, which shows a significant difference between the offers. The winning bidder (Vinci) presented a proposal that was 26% higher than the next best offer. There is some evidence that winner's curse in auctions for transportation is relatively common (Gruyer and Lenoir, 2003; Athias and Nunez, 2009), due to large competition, uncertainty or likelihood of future renegotiation. Yet, as we will see during this paper, this over-optimistic or apparently aggressive offer is not however a case of winners curse (Hong and Shum, 2002). There were several aspects of this privatization that lead Vinci to be able to bid higher than the other competitors. The significant growth in traffic, and correspondent increase in airport charges, shows evidence that there is not a winners curse phenomenon in this example. Table 3 presents the value of the main transactions in the airport sector since 2010. These transactions have distinct operations: partial sales; full sales; PPP; concessions; etc. Nevertheless, the values represent the implicit valuation made to the airport (or the
Table 1 Main features of ANA's concession contract. Contract main features
Description
Concession price Duration Risks
1200 million Euros 50 years (with possibility to extend if, for example, a new airport is built) Fully allocated to ANA Fully allocated to ANA Fully allocated to ANA Fully allocated to ANA Fully allocated to ANA 1% of annual revenues, up to year 15 2% of annual revenues, between years 16 and 20 3% of annual revenues, between years 21 and 25 4% of annual revenues, between years 26 and 30 5% of annual revenues, between years 31 and 40 10% of annual revenues, between years 41 and 50 Fully allocated to ANA
Maintenance and operation Capacity increases Environmental risk (construction and operation) Fiscal risk Financial Revenue sharing with the government
Future expropriations
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Table 2 Results of the tender process. Bidder
Value offered (million Euros)
Value offered (as EBIDTA multiple)
Vinci Fraport n America Corporacio CCR/Zurich
3080 2442 1408 2000
15.3 12.1 7.0 9.9
airport business). Comparing Tables 2 and 3, it is possible to highlight that Vinci was the only bidder that offered a higher value than the average of the EBIDTA multiple transactions that took place in 2012. The other 3 bidders presented proposals significantly lower than the average of that year. Later on, this paper will reflect on the potential motivations for Vinci to present such a different offer. 3. Government motivations As we have seen, the main driver in many airport privatizations has been the need for additional revenues from governments, in order to reduce the deficit and public debt. As mentioned earlier, airports are among the most valuable systems in the air transport value chain (Button et al., 2007; Gustavo, 2008; Gong et al., 2012), and are thus susceptible to the financial claw back strategy of governments, particularly those necessitating capital liquidity (as most governments are the midst of the recovery from a global and financial crisis). In this case, we present several arguments that support that this selling was mainly focussed in the selling price. The first argument was the MoU signed between Portugal and the “Troika”. This agreement determined, among several fiscal, financial and budgetary objectives, that the Government would be able to raise up to 5.5 billion Euros with the privatization of several
companies, including ANA and TAP. This objective was due to be meet by May of 2014, when the bailout programme was forecast to end. It was also established that the government would go even further with this effort, if possible. The MoU was also explicit for the need to accelerate the privatization programme. There was not many companies left to privatize, and ANA was the major company still remaining as an SOE. Therefore, the first argument is that a lower selling value could have jeopardized this objective. This leads us to the second argument. The programme was subject to an evaluation by the international creditors on a quarterly basis. Each positive evaluation was follow by the payment of a new tranche of money. Therefore, it was vital for the Portuguese government to quickly achieve this benchmark regarding privatization. It is important to stress that this was a critical benchmark, and that failure would have created a pitfall in the programme's execution. The third argument was that an increase in the company's value would reduce the finance needs of the government, thus reducing the pressure of issuing public debt in the financial markets. A final evidence is that this privatization was mainly driven by the budgetary purposes set from the international creditors of this goal for the Portuguese government. From a theoretical perspective, it would make more sense to first privatize the airline
Table 3 Benchmark of airport transactions. Airport
Transaction year
EBIDTA multiples
Average EBIDTA multiples (same year)
Gatwick Ghangi Airports Gatwick Naples Copenhagen Brussels BAA F2i TAV Edinburgh (by BAA) Puerto Rico BAA Newcastle BAA ANA F2i Stansted (by BAA) Gemina Hochtief Airports AdP Belfast and Stockholm Luton HAH ISG Ljbiana Bristol ISG Aberdeen, Glasgow, Southampton Vienna Greek regionals Toulouse
2010 2010 2010 2011 2011 2011 2011 2012 2012 2012 2012 2012 2012 2012 2012 2013 2013 2013 2013 2013 2013 2013 2013 2014 2014 2014 2014 2014 2014 2015 2015
9.1 11.7 9.5 13.3 15.1 11.1 11.3 16.5 16 13.1 16.3 13.1 16.3 13.6 15.3 8.3 15.6 11.5 15.1 10.4 10.9 10.9 12.4 14.2 22.1 18.4 12.4 15 9.8 21.3 18.1
10.1
Note: some transactions appears more than once because they are refinancing transactions. (Source: adapted from RDC, 2016)
12.7
15.0
11.9
15.3
19.7
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company, and then the airport manager - ANA. This way, the buyer of the latter could have a clearer picture as to where the privatization of the former would lead the market. However, the government decided to privatize ANA first, in 2013, and TAP later on, in 2015. 4. Investor motivations In today's global economy, the value offered by competitors reflects more than just a simple cash-flow based evaluation and a risk analysis of the potential growth of the airports. In this case, a series of distinct factors influenced the valuation by Vinci of the Lisbon Airport, particularly: - A closed monopoly without any airport, within Portugal, able to provide any competition; - Traffic growth; - Vinci's development strategy; - Indirect gains from the ownership of connecting infrastructure (e.g. bridges). Turning to the case of the winning bidder, Vinci, is a company which was already present in the Portuguese infrastructure sector. One of the participations of Vinci is the concessionaire of Lusoponte, which operates Lisbon's crossings over the Tagus River (The 25 of April bridge, and Vasco da Gama bridge), which link the north bank to the south bank. In this case, Vinci also has a statutory monopoly just like in the case of airports. The Lusoponte shareholder structure is the following: MotaEngil 38% (a Portuguese construction company); Vinci 37%; Atlantia 17.5% (an Italian road concessionaire), and Teixeira Duarte 7.5% (a Portuguese construction company) (see Sarmento and Renneboog, 2016 for more details on Lusoponte operation). The concession model of Lusoponte grants the exclusivity of Tagus river crossings within the Metropolitan Area, and transfers the traffic risk to the concessionaire. This means that any substantial increase in traffic between the two banks benefits Lusoponte, and, indirectly, Vinci. This was an important revenue stream to consider when bidding for ANA, as any solution in the medium to long term to increase the airport capacity in Lisbon will be based on the south bank, probably the use of a military base, as discussed earlier. If the choice is to build a new large airport, replacing the existing Portela airport on the north bank, then the preliminary analysis shows that the more advantageous location, in terms of space availability and environmental impact, will be on the south bank. If the solution to increase the airport capacity relies on using a military airport, to where low cost traffic can be transferred, then it will also have to use an existing military airport on the south bank (Montijo). Each solution will have different impacts on the volume of traffic over the Vasco da Gama bridge, but an interval of between 50% and 200% should be expected, which can represent an increase in revenue for Lusoponte of around 6 to 22 million Euros annually, considering the existing toll value of 1.70 Euros for light vehicles. This would potentially add 1 to 1.5 EBIDTA multiples in terms of potential valuation. The empirical studies suggest that there is a higher market orientation in privately-owned airports (Advani and Borins, 2001; Marques and Barros, 2011), meaning a more active and efficient commercial management of the infrastructure that translates into a higher technical efficiency. However, there is conflicting evidence regarding the effects of these managerial market-oriented focusses on the final charges. Some authors found that the aeronautical taxes tend to decrease in privately-managed airports (Bilotkach et al. (2012), while others argue that the lack of proper regulation leads to higher charges (Bel and Fageda, 2009; Basso, 2008).
The financial premium offered by Vinci resulted from other factors besides the monopoly premium. We have identified three main motivations. The first motivation was a decision from the Vinci group (which is a large and multinational company in construction and utilities) to expand its activities to the airport business. Up until this operation, Vinci's presence in airports management was marginal in terms of the group's operations. By buying the Portuguese company, Vinci acquired dimension and “know-how” and thus Vinci was willing to pay more for ANA, because this was one of the few available business at the time that would allow Vinci to become a relevant player in this area. Another motivation concerns the fact that Vinci has increased airports charges several times, much above the initial case-base. Since 2012 and up until 2016, airport fares were increased 10 times, more than 2 times a year, with some increases being of up to 6%. The third main motivation regards the expectation from Vinci to obtain a higher revenue than the initial baseline forecast, particularly with regards to Lisbon airport, but also for Oporto. Barret (2000) argues that the higher flexibility of the private sector facilitates the negotiation and further attraction of new airlines, particularly low cost carriers, given the more flexible commercial approach and the ability to apply discounts. These two effects (increase in charges and toll traffic) combined result in higher revenues and cash-flows from the operation. As Vinci expects to continue to increase its revenues, it thus bill reduce the real value of the initial premium. As in other cases (see for instance Gillen, 2011), this airline deregulation has proved to be a significant market force, affecting the airport business, its strategy, positioning, and, ultimately, its governance model. In this particular case, Vinci used ANA as a gateway to the airport sector. Before 2012, the Vinci group just had a small presence in the airport sector, mainly being a regional French operator. Back in 2011, the group had 11 airports, almost all located in France, but outside Paris.1 Total revenues were 150 million Euros, with a total of 8.5 million passengers. After 2012, Vinci started an extremely fast and ambitious expansion program for the management of airports around the world. It is currently, according to the firm, the fifthlargest airport operator in the world. Buying ANA has provided expertise and knowledge in all the fields of the airport business, in: developing, financing; building, and; operating airports. This has leveraged the investment capability, international network, and know-how. Furthermore, it has allowed Vinci to optimize the management of existing airport infrastructures and to carry out facility extensions, and new construction. Vinci now has 34 airports, 12 in France, 10 in Portugal (including the hub of Lisbon), 3 in Cambodia, 2 in Japan, 6 in the Dominican Republic, and Santiago airport in Chile. With the acquisition of two airports in Japan (Kansai region), it has grown to around 100 million passengers, 8500 employees, and over 1 billion Euros in annual revenue. Compared with 2011, this represents an increase of passengers of more than 1000%, and of revenues by more than 600%, in less than five years. Therefore, buying ANA allowed Vinci to commence a strategy of becoming a global player in the airport business. The knowledge and expertise of ANA in managing airports was a valuable resource to a newcomer, such as Vinci. This is another reason to justify the premium that the group paid for the ANA airports.
1 Nantes-Atlantique, Rennes-Bretagne, Clermont Ferrand-Auvergne, Grenoblere, Chambe ry-Savoie, Dinard-Bretagne, Quimper-Cornouaille, Saint NazaireIse Montoir and Ancenis (Source: Vinci).
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5. Conclusions The privatization of airports is an irreversible world-wide trend. Although the literature has provided several pros and cons regarding the privatization process, this paper intended to reflect the several underlying motivations in a privatization process for governments and investors, illustrating that completely distinct drivers exist behind a privatization process, which can impact both the value of sale, and the development strategies for airports. Most governments that have chosen to privatize, have invoked the superiority of private management over public management, which thus results in improving the efficiency levels of airports, increasing the social well-being. The reality is far more complex. Airports provide a quick cash-in solution, which, given the difficulties governments face with public budgets, provides an attractive political option. International organizations such as the IMF, the World Bank, the European Investment Bank, and the European Bank for Reconstruction and Development, all share the same bias towards the privatization of public infrastructure, particularly those subjected to competitive markets, such as air transport. Portugal was no exception, and being in a period of severe stress on public finances, it privatized (fully or partially) two large stakeholders in the air transport sector (ANA and TAP). The case of ANA is a unique example of how several drivers can influence, and in this case, increase the selling value of an infrastructure asset. This case also raises an important question regarding fairness and transparency for the public procurement of large infrastructure assets. The strategy of the investors and their “hidden” indirect benefits that arise from the inter-dependency of infrastructures have a significant impact on the process, which are not explicit during the procurement process. One may argue that the success of the process should be measured by the selling value, and that any other driver would ultimately have an impact on this variable, which certainly is a challenging subject for those interested in privatization. Finally, we turn to the question of monopolies. Selling a network as a monopoly may increase the selling value of the system (monopoly premium), but it can have a negative impact from the perspective of the maximization of social well-being. Increases in airport charges erodes the economic value of the infrastructure, although it maximizes cash-flow for the private investor. There is a clear trade-off between short term and long-term vision for the system. The pressure to quickly cash-in airport privatization jeopardizes the long term social welfare, and provides excessive market power to a single operator, while deleting the benefits of competition in the market. As discussed by Starkie (2008), airports have the potential to compete on a geographical basis. These long terms losses need to be taken into account when designing privatization processes, particularly, the possibility for unbundling before the privatization. The example of BAA is a clear example supporting this hypothesis. As the number of airport privatization increases worldwide, both in large airports and in medium/small airports, this is a crucial issue, which will certainly foster new research in the short term. Acknowledgments I gratefully acknowledge the financial support received from ^ncia e Tecnologia (Portugal), and the naFCT- Fundaç~ ao para a Cie tional funding obtained through a research grant (UID/SOC/04521/ 2013). References Abbott, M., 2015. Reform and efficiency of New Zealand's airports. Util. Policy 36,
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Regulation, privatization, and airport charges: panel data evidence from European Airports. J. Regul. Econ. 42 (1), 73e94. Boardman, A.E., Vining, A.R., 1989. Ownership and performance in competitive environments: a comparison of the performance of private, mixed, and state owned enterprises. J. Law Econ. 32, 1e33. Bush, H., Starkie, D., 2014. Competitive drivers towards improved airport/airline relationships. J. Air Transp. Manag. 41, 45e49. Cruz, C., 2007. Ability to recover full costs through price Button, K., Costa, A., discrimination in deregulated scheduled air transport markets. Transp. Rev. 27 (2), 213e230. Carney, M., Mew, K., 2003. Airport governance reform: a strategic management perspective. J. Air Transp. Manag. 9 (4), 221e232. Costas-Centivany, C.M., 1999. Spain's airport infrastructure: adaptations to liberalization and privatization. J. Transp. Geogr. 7 (3), 215e223. Cruz, C.O., Marques, R.C., 2011. Contribution to the study of PPP arrangements in airport development, management and operation. Transp. Policy 18 (2), 392e400. Galeana, O.A.R., 2008. The privatization of Mexican airports. J. Air Transp. Manag. 14 (6), 320e323. Gillen, D., 2011. The evolution of airport ownership and governance. J. Air Transp. Manag. 17 (1), 3e13. Gong, S.X.H., Cullinane, K., Firth, M., 2012. The impact of airport and seaport privatization on efficiency and performance: a review of the international evidence and implications for developing countries. Transp. Policy 24, 37e47. Gruyer, N., & Lenoir, N. (2003, July). Auctioning airport slots (?). In ATRS 2003, Air Transport Research Society World Conference. Gustavo, A.L., 2008. The privatization of Argentine airports. J. Air Transp. Manag. 14, 8e15. Hong, H., Shum, M., 2002. Increasing competition and the winner's curse: evidence from procurement. Rev. Econ. Stud. 69 (4), 871e898. Hooper, P., 2002. Privatization of airports in asia. J. Air Transp. Manag. 8, 289e300. Humphreys, I., Francis, G., Fry, J., 2007. Lessons from airport privatization, commercialization and regulation in the United Kingdom. Transp. Res. Rec. J. Transp. Res. Board 1744 (2001), 9e16. Marques, R.C., Barros, C., 2011. Performance of European airports: regulation, ownership and managerial efficiency. Appl. Econ. Lett. 18 (1), 29e37. Neto, C.M.S.P., Casagrande, P.L., Lancieri, F.M., Moraes, J.N.P., 2016. Pro-competition rules in airport privatization: international experience and the Brazilian case. J. Air Transp. Manag. 54, 9e16. Oum, T.H., Adler, N., Yu, C., 2006. Privatization, corporatization, ownership forms and their effects on the performance of the world's major airports. J. Air Transp. Manag. 12 (3), 109e121. Oum, T.H., Yan, J., Yu, C., 2008. Ownership forms matter for airport efficiency: a stochastic frontier investigation of worldwide airports. J. Urban Econ. 64 (2), 422e435. Poole, R.W., 1997. Privatization: a new transportation paradigm. Ann. Am. Acad. Political Soc. Sci. 553, 94e105. RDC, 2016. Airport Transaction Update and 2016 Outlook. RDC aviation economics. Sarmento, J.M., Renneboog, L., 2016. Anatomy of public-private partnerships: their creation, financing and renegotiations. Int. J. Manag. Proj. Bus. 9 (1), 94e122. Singh, D.P., Dalei, N.N., Raju, T.B., 2016. Forecasting investment and capacity addition in Indian airport infrastructure: analysis from post-privatization and posteconomic regulation era. J. Air Transp. Manag. 53, 218e225. Spillers, C.A., 2000. Airports privatizations: smooth flying or a crash landing. J. Struct. Finance 6 (2), 41e47. Starkie, D., 2008. The Airport Industry in a Competitive Environment: a United Kingdom Perspective. Discussion Paper No. 2008-15. OECD/ITF Joint Transport Research Centre. Starkie, D., Thompson, D., 1985. Privatising London's Airports. The Institute for Fiscal Studies, Oxford, ISBN 0-902992-47-3. Truitt, L.J., Esler, M., 1996. Full divestiture and its alternatives. 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Journal of Air Transport Management journal homepage: www.elsevier.com/locate/jairtraman
Airport privatization with public finances under stress: An analysis of government and investor's motivations Carlos Oliveira Cruz a, *, Joaquim Miranda Sarmento b a b
CERIS/ICIST, Instituto Superior T ecnico, Universidade de Lisboa, Portugal ADVANCE/CSG, ISEG-(Lisbon School of Economics and Management), Universidade de Lisboa, Portugal
a r t i c l e i n f o
a b s t r a c t
Article history: Received 3 October 2016 Received in revised form 22 February 2017 Accepted 27 April 2017
The management model of airports has long stood as a central research area in the transport sector. There are a wide range of studies that focus on the potential benefits and pitfalls of private airport management. The results of these efficiency studies have not provided irrefutable evidence for the superiority of private management over public management, but the momentum towards privatizing airports is growing. The reason for privatization has been more related with privatization revenues for governments, rather than more efficient management. The search for maximizing the sale value can have negative impacts from a welfare perspective, for example, through excessive increases in tariffs for passengers. This research reflects on the motivations for governments to privatize, and is illustrated by a case study e Portugal e in which the privatization occurred as a result of three main large drivers: 1) a bailout programme by the IMF, the EU, and the ECB; 2) a revision of the regulatory model, and; 3) the need to increase the capacity of Lisbon's airport system in the medium term. © 2017 Elsevier Ltd. All rights reserved.
Keywords: Privatization Airport regulation Concessions Public-private partnerships Portugal
1. Introduction Over the last few decades there has been a steady increase of private sector involvement in the development and management of airport systems through long term contracts, or partial/full privatization processes (Oum et al., 2006). This trend has also impacted in other infrastructure sectors (e.g. energy with the total or partial privatization of production and distribution system, transportation particularly in ports, airports and motorways, although in the former case the model was public-private partnerships and not pure privatizations, or the environment, in waste collection, water supply or waste water systems) (Van de Walle, 1989; Neto et al., 2016; Singh et al., 2016). Several countries, such as Italy, Australia, New Zealand, Denmark, Mexico, Portugal, UK, and India have privatized some or all of their airports, either entirely or partially (Hooper, 2002; Galeana, 2008). The case of BAA is a textbook example, not just because it was one the first examples of airport privatization, but also because of the concerns regarding antitrust and market power (Bush and Starkie, 2014). In this case, BAA was forced to sell three airports e Gatwick, Stansted and Edinburgh -
* Corresponding author. E-mail addresses: [email protected] (C.O. Cruz), jsarmento@iseg. ulisboa.pt (J.M. Sarmento). http://dx.doi.org/10.1016/j.jairtraman.2017.04.007 0969-6997/© 2017 Elsevier Ltd. All rights reserved.
the British anti-trust authority. Concerns about excessive market power and lack of competition between the airports, forced this “post-privatization unbundling”. Years earlier, Starkie and Thompson (1985) proposed that the ownership f BAA's airports should be divided and the London Airports should have separate ownership to introduce more competition. The same authors used the example of Stansted and Gatwick as potential competitors for similar markets. The reality confirmed the concerns of the authors, as regulating a private monopoly is extremely complex, and the likelihood for success is low. There have been different models for privatizing airports (Cruz and Marques, 2011). The authors use the term “privatization” to refer to private sector management of airport infrastructure and operations, and not strictly the concept of ad aeternum material privatization. In many cases, there was a full privatization, while in others, a concession was awarded to the private sector. Two main forces have been driving private sector participation in airports operations: first, an increase necessity for investments in this area as at the same time there are strong fiscal constraints exist in most of the countries [during the first decade of the 21st Century the world's airports would require an investment of $250 billion (Spillers, 2000)]; secondly, and related with those fiscal constraints, the need of governments to obtain “lump-sum” revenues by selling or by granting concessions for infrastructures. Furthermore, private
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sector involvement in infrastructures has been motivated “ideologically” by the tendency to look for private sector management skills as a means of addressing public sector inefficiencies (Oum et al., 2008). However, the discussion on privatization has often been supported by political or ideological arguments, rather than by any theoretical analysis or empirical evidence (Vasich and Haririan, 1996; Oum et al., 2008). Among others, we highlight several benefits from airport privatizations, such as: stimulate competition; improve project delivery; improve efficiency (thus reducing costs to end users), and; reduce political/administrative interference with the commercial management of airports (Carney and Mew, 2003; Costas-Centivany, 1999; Poole, 1997; Cruz and Marques, 2011). With regards to the issue of efficiency, several authors found evidence of the higher efficiency of fully-privatized airports (Boardman and Vining, 1989; Hooper, 2002; Oum et al., 2008; Gillen, 2011), and also that partially-privatized airports are less efficient than public ones (Oum et al., 2008). Public ownership is susceptible to political interference and is highly bureaucratic (Benitez et al., 2012) thus creating more difficulties for improving operational performance. However one of the primary motivations for privatizing airports (if not the first, and sometimes the only one) has been the “cash-in” of capital (Truitt and Esler, 1996; Hooper, 2002). Airports are among the most valuable systems in the air transport value chain (Button et al., 2007), and are thus susceptible to the financial clawback strategy of governments, particularly those requiring capital liquidity (as most governments were in 2007e2011 in the midst of the global and financial crisis; and still face strong fiscal constraints in the aftermath of the financial crisis). The commonly-referred to example of the UK London-based airports privatization in 1987 in the Thatcher era, was a first move towards quick cash-in in a profitable market that was relatively well protected, ensuring a stable, close to risk-free, return on investment. Although the superiority of airport private management is yet to be proved (Oum et al., 2006), several countries have followed, and are still following this trend (e.g. New Zealand, Italy, Austria, just to name a few examples) (Abbott, 2015). The question is how far is a government willing to go to maximize its cash generation when privatizing an airport, or an airport system. The discussion about airport privatization generally involves a discussion on regulation and anti-trust mechanisms, given the characteristics of monopolies for many airports, particularly those smaller and medium airport systems (Humphreys et al., 2007; Beesley and Littlechild, 1989). Starkie (2008) argues that most airports are local monopolies, but not natural. Airports can evolve into competitive structures, such as industries competing in spatial markets, meaning that for a significant share of the market, airlines can choose alternative airports. This competition can be even higher under the model of hub-and-spoke used by most airlines. In the hub-and-spoke model, airlines can choose the most competitive airport to serve as the hub. This paper addresses the privatization of the Portuguese airport system which occurred in 2012. We aim to discuss and clarify the following issues: 1) what motivated the Portuguese government to undertake this privatization?; 2) As the winning bid paid a substantial premium price, what was the bid price a potential monopoly price for the private sector?, and; 3) What other motivations could have led Vinci to pay for such a premium? This paper is organized as follow: Section 2 briefly describes the Portuguese airport system and the privatization process. Section 3 provides a discussion and some evidences of the motivations that guided the government's decision to sell the airport company, thus answering our first research question. Section 4
analyses the potential monopoly premium (Research Question 2) and Section 5 elaborates on other potential benefits to Vinci that could explain the price of the operation (Research Question 3). Section 6 concludes. 2. Setting the context 2.1. Economic and financial background Understanding the process of privatization of the Portuguese airports requires an overview of the overall economic and political framework. In 2011, Portugal required official financial aid (a “bailout” programme) from the International Monetary Fund (IMF), given its impossibility to comply with its financial responsibilities. The IMF, the European Commission (EC), and the European Central Bank (ECB) all established an agreement with the Portuguese Government - the Memorandum of Understanding (MoU), setting up the requisites, in terms of reforms, to sustain the financial aid. Among several public reforms that were agreed was the privatization of state-owned companies, opening up to private initiative those infrastructures that still remained within the Government's responsibility, one of them being the airport sector. Up until 2012, Portugal was one of the few countries in Europe where the government was still the only owner, or the major stakeholder of the air transport sector: both the national flag carrier (TAP), and the airport owner and manager (ANA). The MoU clearly established as a priority, the opening of traditionally governmentowned companies to private initiative, particularly in the transport sector. The Troika Memorandum established, among several fiscal, financial, and budgetary objectives, that the Government would be able to raise up to 5.500 million Euros with the privatization of several companies, including ANA and TAP. The privatization of ANA in 2012 end up representing more than half of this value. Taking into account the political decision of privatizing these air transport-related companies e the airport manager and the airline e both being companies with highly correlated activities, what is the best way to ensure that both processes are articulated in order to maximize social welfare? TAP is the largest client of ANA, and its operational basis located at Lisbon Airport, working as a hub linking Europe to Brazil, and Europe to African Portuguese-speaking countries (e.g. Angola, Mozambique, Cape Verde, and S~ ao Tome). ANA handled around 38.9 million passengers in 2015, and TAP handled around 12 million. A significant volume of TAP's passengers does not have as an origin/destination any of ANA's airports (Lisbon, Porto, or Faro) but are transit passengers passing through Lisbon's hub. Therefore, the future of TAP, and particularly its strategic decisions regarding the Lisbon hub, are determinant to setting ANA's economic value, given its impact on ANA's expected traffic. Much of the potential of the airport relies in the existence of a Hub, local traffic being dependent on tourism and economic growth. The most economically-rational approach would have been to first privatize TAP, and then to privatize ANA, given that the first would influence the second. Although this would have been the logical decision, the sale price of TAP is incomparably lower than ANA. As discussed by Button et al. (2007), most legacy airlines have low profit margins and since 1997 they have operated in Europe in a highly competitive market. In fact, many airlines are struggling to breakeven and during large periods of time, airlines experiment negative cycles, e.g., in the period 2001 to 2007. On the other hand, airports have bigger profit margins and less competition. TAP was partially privatized in 2015, for 10 million Euros, with significant
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Governmental guarantees regarding pending debt (in excess of 1 billion Euros).
2.2. Regulatory framework and concession contract The decision was to privatize ANA first, and then TAP. The privatization of ANA was conditioned by two institutional and regulatory changes: 1 e the revision and clarification of the regulatory model, and; 2 e the establishment of a concession contract between ANA and the Portuguese State to contractually formalise the right of the former to operate the Portuguese airports. Before privatization, a new regulatory model was implemented. The new model is a “single till” model (where there is no distinction between aeronautical and non-aeronautical revenues) and it has a price-cap mechanism, establishing maximum average revenue per passenger. The maximum revenue per passenger is variable and is linked to the expected evolution of passengers. A baseline forecast is used as a reference, and if the actual traffic is above the baseline reference, then the maximum revenue per passenger permitted can increase, if it is below, then the revenue-cap is decreased. The price cap is indexed to CPI and the fact that the charges allow to increase when the traffic increases, has the underlying principle, that there are no economies of scale, which can be arguable. But there are some technical reasons for such mechanism. First, the fact that Lisbon Airport operates under capacity constraints. A significant increase in traffic will force the airport manager to search for alternative airports for capacity increase, being forced to anticipate significant investment. On the other hand, this model is a direct incentive to purely technical efficiency, considering that the exiting capacity constraints limit scale efficiency. Figs. 1 and 2 illustrate the passengers’ growth and the historical growth rates in ANA and Lisbon airport in particular. Furthermore, prior to the privatization of the airport company, it was necessary to formalise the concession of the Portuguese airport system to ANA. The concession was awarded in 2012, for a period of 50 years, and grants the concessionaire e ANA e the exclusivity of managing, upgrading, and operating the airport system (3 major airports in continental Portugal e Lisbon, Porto, and, Faro; a secondary airport e Beja, and; 4 airports in the Azores islands).
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However, only Lisbon and Oporto are profitable, with Faro being break-even. The others run operational deficits. The concession also includes the potential construction of the new Lisbon Airport, which is a large airport to be built in the outskirts of Lisbon, to replace the existing old airport, which is located near the city centre. The existing airport (Airport Humberto Delgado) has capacity for 22 to 25 million passengers, and in 2016 reached the 22 million traffic. The rationality of the construction of the new airport, although included in the concession contract was questioned, and the probable solution for the increase in capacity is now the utilization of a military base in the outskirts of Lisbon. The utilization of a military base provides a quicker solution, because it can be operational in 1 or 2 years, and a significantly lower level of investment (the upgrade would cost 200 to 300 million, compared with 4 or 5 billion for a new airport). Nevertheless, the concession contract is not clear about the responsibility for financing the project (private vs. public). This ambiguity will certainly mean that there will be public financing of the construction of a second Lisbon airport, or upgrading of a military base. . The concession contract was signed on the 14th December, 2012 between ANA and the Portuguese Government. The public service concession for airport infrastructure had belonged to ANA since 1998, but was not formalized in a concession contract. The process of selling the company was the trigger to accelerate the formalisation of the contract. The concession contract granted ANA the exclusivity for operating and managing the Portuguese main airport system for a 50-year period. The signature of the concession agreement included a payment, from ANA to the Government, of 1.2 billion euros for the rights established in the concession. All the public service obligations related to the availability of airfield infrastructures and access to the infrastructure are also regulated in the concession contract. Table 1 presents the main features of ANA's concession contract.
2.3. Tender process The privatization process of ANA started in late 2012, and was concluded in early 2013, with the selling agreement to be signed
Fig. 1. Passenger evolution in Lisbon Airport and ANA (2005e2015).
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Fig. 2. Growth rates in Lisbon Airport and ANA (2005e2015).
with the international operator VINCI. There were 4 bidding offers from the following consortiums: Zurich Airport, the EAMA con n Ame rica), Atlantic Consortium (Fraport AG/ sortium (Corporacio IFM) and Vinci Concessions, which were presented on the 14th December, 2012. The draft of the concession contract was one of the elements made available to the potential investors contacted at the first stage. These potential investors were able to evaluate the document and to propose what would be the main changes they would require to present a binding offer. One can argue about the merit of such an approach. Typically, the concession contract, as well as the regulatory model, are defined by the government, and are used by potential bidders as restrictions in setting their offer. The process was structure in a two-stage model. The process was divided into two stages: 1) a first initial stage to assess the potential interest of investors; 2) after this initial stage the Government elaborates a short list of those authorized to proceed to the second stage, and a second stage, where the selling process actually takes place. The selection criteria were: indicative price; robustness of business; terms of the concession contract proposed; financial capacity, and; strategic plan. But the main award criteria was the price and payment conditions. The design of a tender process based essentially on the value offered, and using the model of individual negotiation with potential bidders raised some questions. The disposal of ANA was not simply a selling process of a public enterprise, as ANA already held the concession for the
management and operation of the Portuguese airport system. The government argued that the individual negotiation allowed for the maximizing and acceleration of the selling pricing, thus facilitating the fulfilment of the Financial and Economic Assistance Programme signed with the EU, the IMF, and the ECB. As a result of the tender process, 4 binding offers were presented, ranging from 2000 to 3080 million Euros, or, in terms of the value offered as multiple of EBIDTA, between 10.2 and 15.3. Table 2 summarises the results. The analysis of the values offered (as a multiple of EBIDTA) are presented in Table 2, which shows a significant difference between the offers. The winning bidder (Vinci) presented a proposal that was 26% higher than the next best offer. There is some evidence that winner's curse in auctions for transportation is relatively common (Gruyer and Lenoir, 2003; Athias and Nunez, 2009), due to large competition, uncertainty or likelihood of future renegotiation. Yet, as we will see during this paper, this over-optimistic or apparently aggressive offer is not however a case of winners curse (Hong and Shum, 2002). There were several aspects of this privatization that lead Vinci to be able to bid higher than the other competitors. The significant growth in traffic, and correspondent increase in airport charges, shows evidence that there is not a winners curse phenomenon in this example. Table 3 presents the value of the main transactions in the airport sector since 2010. These transactions have distinct operations: partial sales; full sales; PPP; concessions; etc. Nevertheless, the values represent the implicit valuation made to the airport (or the
Table 1 Main features of ANA's concession contract. Contract main features
Description
Concession price Duration Risks
1200 million Euros 50 years (with possibility to extend if, for example, a new airport is built) Fully allocated to ANA Fully allocated to ANA Fully allocated to ANA Fully allocated to ANA Fully allocated to ANA 1% of annual revenues, up to year 15 2% of annual revenues, between years 16 and 20 3% of annual revenues, between years 21 and 25 4% of annual revenues, between years 26 and 30 5% of annual revenues, between years 31 and 40 10% of annual revenues, between years 41 and 50 Fully allocated to ANA
Maintenance and operation Capacity increases Environmental risk (construction and operation) Fiscal risk Financial Revenue sharing with the government
Future expropriations
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Table 2 Results of the tender process. Bidder
Value offered (million Euros)
Value offered (as EBIDTA multiple)
Vinci Fraport n America Corporacio CCR/Zurich
3080 2442 1408 2000
15.3 12.1 7.0 9.9
airport business). Comparing Tables 2 and 3, it is possible to highlight that Vinci was the only bidder that offered a higher value than the average of the EBIDTA multiple transactions that took place in 2012. The other 3 bidders presented proposals significantly lower than the average of that year. Later on, this paper will reflect on the potential motivations for Vinci to present such a different offer. 3. Government motivations As we have seen, the main driver in many airport privatizations has been the need for additional revenues from governments, in order to reduce the deficit and public debt. As mentioned earlier, airports are among the most valuable systems in the air transport value chain (Button et al., 2007; Gustavo, 2008; Gong et al., 2012), and are thus susceptible to the financial claw back strategy of governments, particularly those necessitating capital liquidity (as most governments are the midst of the recovery from a global and financial crisis). In this case, we present several arguments that support that this selling was mainly focussed in the selling price. The first argument was the MoU signed between Portugal and the “Troika”. This agreement determined, among several fiscal, financial and budgetary objectives, that the Government would be able to raise up to 5.5 billion Euros with the privatization of several
companies, including ANA and TAP. This objective was due to be meet by May of 2014, when the bailout programme was forecast to end. It was also established that the government would go even further with this effort, if possible. The MoU was also explicit for the need to accelerate the privatization programme. There was not many companies left to privatize, and ANA was the major company still remaining as an SOE. Therefore, the first argument is that a lower selling value could have jeopardized this objective. This leads us to the second argument. The programme was subject to an evaluation by the international creditors on a quarterly basis. Each positive evaluation was follow by the payment of a new tranche of money. Therefore, it was vital for the Portuguese government to quickly achieve this benchmark regarding privatization. It is important to stress that this was a critical benchmark, and that failure would have created a pitfall in the programme's execution. The third argument was that an increase in the company's value would reduce the finance needs of the government, thus reducing the pressure of issuing public debt in the financial markets. A final evidence is that this privatization was mainly driven by the budgetary purposes set from the international creditors of this goal for the Portuguese government. From a theoretical perspective, it would make more sense to first privatize the airline
Table 3 Benchmark of airport transactions. Airport
Transaction year
EBIDTA multiples
Average EBIDTA multiples (same year)
Gatwick Ghangi Airports Gatwick Naples Copenhagen Brussels BAA F2i TAV Edinburgh (by BAA) Puerto Rico BAA Newcastle BAA ANA F2i Stansted (by BAA) Gemina Hochtief Airports AdP Belfast and Stockholm Luton HAH ISG Ljbiana Bristol ISG Aberdeen, Glasgow, Southampton Vienna Greek regionals Toulouse
2010 2010 2010 2011 2011 2011 2011 2012 2012 2012 2012 2012 2012 2012 2012 2013 2013 2013 2013 2013 2013 2013 2013 2014 2014 2014 2014 2014 2014 2015 2015
9.1 11.7 9.5 13.3 15.1 11.1 11.3 16.5 16 13.1 16.3 13.1 16.3 13.6 15.3 8.3 15.6 11.5 15.1 10.4 10.9 10.9 12.4 14.2 22.1 18.4 12.4 15 9.8 21.3 18.1
10.1
Note: some transactions appears more than once because they are refinancing transactions. (Source: adapted from RDC, 2016)
12.7
15.0
11.9
15.3
19.7
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company, and then the airport manager - ANA. This way, the buyer of the latter could have a clearer picture as to where the privatization of the former would lead the market. However, the government decided to privatize ANA first, in 2013, and TAP later on, in 2015. 4. Investor motivations In today's global economy, the value offered by competitors reflects more than just a simple cash-flow based evaluation and a risk analysis of the potential growth of the airports. In this case, a series of distinct factors influenced the valuation by Vinci of the Lisbon Airport, particularly: - A closed monopoly without any airport, within Portugal, able to provide any competition; - Traffic growth; - Vinci's development strategy; - Indirect gains from the ownership of connecting infrastructure (e.g. bridges). Turning to the case of the winning bidder, Vinci, is a company which was already present in the Portuguese infrastructure sector. One of the participations of Vinci is the concessionaire of Lusoponte, which operates Lisbon's crossings over the Tagus River (The 25 of April bridge, and Vasco da Gama bridge), which link the north bank to the south bank. In this case, Vinci also has a statutory monopoly just like in the case of airports. The Lusoponte shareholder structure is the following: MotaEngil 38% (a Portuguese construction company); Vinci 37%; Atlantia 17.5% (an Italian road concessionaire), and Teixeira Duarte 7.5% (a Portuguese construction company) (see Sarmento and Renneboog, 2016 for more details on Lusoponte operation). The concession model of Lusoponte grants the exclusivity of Tagus river crossings within the Metropolitan Area, and transfers the traffic risk to the concessionaire. This means that any substantial increase in traffic between the two banks benefits Lusoponte, and, indirectly, Vinci. This was an important revenue stream to consider when bidding for ANA, as any solution in the medium to long term to increase the airport capacity in Lisbon will be based on the south bank, probably the use of a military base, as discussed earlier. If the choice is to build a new large airport, replacing the existing Portela airport on the north bank, then the preliminary analysis shows that the more advantageous location, in terms of space availability and environmental impact, will be on the south bank. If the solution to increase the airport capacity relies on using a military airport, to where low cost traffic can be transferred, then it will also have to use an existing military airport on the south bank (Montijo). Each solution will have different impacts on the volume of traffic over the Vasco da Gama bridge, but an interval of between 50% and 200% should be expected, which can represent an increase in revenue for Lusoponte of around 6 to 22 million Euros annually, considering the existing toll value of 1.70 Euros for light vehicles. This would potentially add 1 to 1.5 EBIDTA multiples in terms of potential valuation. The empirical studies suggest that there is a higher market orientation in privately-owned airports (Advani and Borins, 2001; Marques and Barros, 2011), meaning a more active and efficient commercial management of the infrastructure that translates into a higher technical efficiency. However, there is conflicting evidence regarding the effects of these managerial market-oriented focusses on the final charges. Some authors found that the aeronautical taxes tend to decrease in privately-managed airports (Bilotkach et al. (2012), while others argue that the lack of proper regulation leads to higher charges (Bel and Fageda, 2009; Basso, 2008).
The financial premium offered by Vinci resulted from other factors besides the monopoly premium. We have identified three main motivations. The first motivation was a decision from the Vinci group (which is a large and multinational company in construction and utilities) to expand its activities to the airport business. Up until this operation, Vinci's presence in airports management was marginal in terms of the group's operations. By buying the Portuguese company, Vinci acquired dimension and “know-how” and thus Vinci was willing to pay more for ANA, because this was one of the few available business at the time that would allow Vinci to become a relevant player in this area. Another motivation concerns the fact that Vinci has increased airports charges several times, much above the initial case-base. Since 2012 and up until 2016, airport fares were increased 10 times, more than 2 times a year, with some increases being of up to 6%. The third main motivation regards the expectation from Vinci to obtain a higher revenue than the initial baseline forecast, particularly with regards to Lisbon airport, but also for Oporto. Barret (2000) argues that the higher flexibility of the private sector facilitates the negotiation and further attraction of new airlines, particularly low cost carriers, given the more flexible commercial approach and the ability to apply discounts. These two effects (increase in charges and toll traffic) combined result in higher revenues and cash-flows from the operation. As Vinci expects to continue to increase its revenues, it thus bill reduce the real value of the initial premium. As in other cases (see for instance Gillen, 2011), this airline deregulation has proved to be a significant market force, affecting the airport business, its strategy, positioning, and, ultimately, its governance model. In this particular case, Vinci used ANA as a gateway to the airport sector. Before 2012, the Vinci group just had a small presence in the airport sector, mainly being a regional French operator. Back in 2011, the group had 11 airports, almost all located in France, but outside Paris.1 Total revenues were 150 million Euros, with a total of 8.5 million passengers. After 2012, Vinci started an extremely fast and ambitious expansion program for the management of airports around the world. It is currently, according to the firm, the fifthlargest airport operator in the world. Buying ANA has provided expertise and knowledge in all the fields of the airport business, in: developing, financing; building, and; operating airports. This has leveraged the investment capability, international network, and know-how. Furthermore, it has allowed Vinci to optimize the management of existing airport infrastructures and to carry out facility extensions, and new construction. Vinci now has 34 airports, 12 in France, 10 in Portugal (including the hub of Lisbon), 3 in Cambodia, 2 in Japan, 6 in the Dominican Republic, and Santiago airport in Chile. With the acquisition of two airports in Japan (Kansai region), it has grown to around 100 million passengers, 8500 employees, and over 1 billion Euros in annual revenue. Compared with 2011, this represents an increase of passengers of more than 1000%, and of revenues by more than 600%, in less than five years. Therefore, buying ANA allowed Vinci to commence a strategy of becoming a global player in the airport business. The knowledge and expertise of ANA in managing airports was a valuable resource to a newcomer, such as Vinci. This is another reason to justify the premium that the group paid for the ANA airports.
1 Nantes-Atlantique, Rennes-Bretagne, Clermont Ferrand-Auvergne, Grenoblere, Chambe ry-Savoie, Dinard-Bretagne, Quimper-Cornouaille, Saint NazaireIse Montoir and Ancenis (Source: Vinci).
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5. Conclusions The privatization of airports is an irreversible world-wide trend. Although the literature has provided several pros and cons regarding the privatization process, this paper intended to reflect the several underlying motivations in a privatization process for governments and investors, illustrating that completely distinct drivers exist behind a privatization process, which can impact both the value of sale, and the development strategies for airports. Most governments that have chosen to privatize, have invoked the superiority of private management over public management, which thus results in improving the efficiency levels of airports, increasing the social well-being. The reality is far more complex. Airports provide a quick cash-in solution, which, given the difficulties governments face with public budgets, provides an attractive political option. International organizations such as the IMF, the World Bank, the European Investment Bank, and the European Bank for Reconstruction and Development, all share the same bias towards the privatization of public infrastructure, particularly those subjected to competitive markets, such as air transport. Portugal was no exception, and being in a period of severe stress on public finances, it privatized (fully or partially) two large stakeholders in the air transport sector (ANA and TAP). The case of ANA is a unique example of how several drivers can influence, and in this case, increase the selling value of an infrastructure asset. This case also raises an important question regarding fairness and transparency for the public procurement of large infrastructure assets. The strategy of the investors and their “hidden” indirect benefits that arise from the inter-dependency of infrastructures have a significant impact on the process, which are not explicit during the procurement process. One may argue that the success of the process should be measured by the selling value, and that any other driver would ultimately have an impact on this variable, which certainly is a challenging subject for those interested in privatization. Finally, we turn to the question of monopolies. Selling a network as a monopoly may increase the selling value of the system (monopoly premium), but it can have a negative impact from the perspective of the maximization of social well-being. Increases in airport charges erodes the economic value of the infrastructure, although it maximizes cash-flow for the private investor. There is a clear trade-off between short term and long-term vision for the system. The pressure to quickly cash-in airport privatization jeopardizes the long term social welfare, and provides excessive market power to a single operator, while deleting the benefits of competition in the market. As discussed by Starkie (2008), airports have the potential to compete on a geographical basis. These long terms losses need to be taken into account when designing privatization processes, particularly, the possibility for unbundling before the privatization. The example of BAA is a clear example supporting this hypothesis. As the number of airport privatization increases worldwide, both in large airports and in medium/small airports, this is a crucial issue, which will certainly foster new research in the short term. Acknowledgments I gratefully acknowledge the financial support received from ^ncia e Tecnologia (Portugal), and the naFCT- Fundaç~ ao para a Cie tional funding obtained through a research grant (UID/SOC/04521/ 2013). References Abbott, M., 2015. Reform and efficiency of New Zealand's airports. Util. Policy 36,
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