19th ACI AFRICA REGIONAL CONFERENCE HOW TO FINANCE AIRPORT DEVELOPMENT PRESENTED BY ALEXANDER HERRING ADVISER FINANCING DIVISION CBL-ACP 17th September 2010 Abuja/Nigeria 1
CHALLENGES & OPPORTUNITIES Strong growth of air travel Pressure on airport infrastructure to adapt to growing demand and changing technology Requirement of investment How to finance airport facilities or services to meet the growing demand? 2
EVALUATION OF CAPITAL COSTS Capital costs are large, periodic expenses which contribute to significant airport infrastructure improvement or expansion to provide modern, efficient, safe, secure facilities. Airport must evaluate the amount of foreign capital needed to finance the capital costs from public or private sources, or a combination of both. A business plan should be set up considering factors such as CAPEX, OPEX, expected revenues, etc. 3
SOURCES OF CAPITAL Self-financing: own Funds from retained earnings Governmental or international organization loans and grants Commercial loans Bonds (GARB) and share capital, equity or debt from commercial capital markets, including private investors, bank investment houses, or fund pools Contractor or supplier credit Pre-funding of capital projects through airport charges (only under strict conditions) 4
SOURCES OF CAPITAL Domestic Sources Foreign Sources - Bilateral institutions - Multilateral institutions Private Participation 5
DOMESTIC SOURCES Government sources Loans (sometimes grants) Commercial loans Financial institution asses forecast of future operating costs and revenue Generally obtainable against pledge of future revenues or against acceptable guarantor (government or others) Typically highest interest rates. Contractor credits Extension of credit by contractors and other enterprises engaged in the project 6
FOREIGN SOURCES BILATERAL INSTITUTIONS Bilateral development agencies = Loans negotiated between two governments with the purpose of promoting the nation s export trade and support developments. - Belgian Development Cooperation FINEXPO (Belgium) - Kreditanstalt für Wiederaufbau KfW (Germany) - Overseas Development Administration ODA (U.K.) - Agence Française de Développement AFD (France) - Swedish International Development Cooperation Agency SIDA (Sweden) - U.S. Agency for International Development USAID (USA) Export-promoting promoting agencies = assistance of certain governments in providing mainly guarantees to cover commercial loans. - DUCROIRE/DELCREDERE (Belgium) - HERMES (Germany) - Export Credits Guarantee Department (U.K.) - COFACE (France) 7
FOREIGN SOURCES MULTILATERAL DEVELOPMENT BANK (MDB) A group of donor countries have established several international banks and fund organizations to provide financing to the borrower countries to improve economic development particularly through infrastructure projects. Development Banks World Bank Group - International Bank for Reconstruction and Development (IBDR) - International Development Association (IDA) - International Finance Corporation (IFC) - Multilateral Investment Guarantee Agency (MIGA) Regional Development Banks - African Development Bank (AfDB) - East African Development Bank (EADB) - European Investment Bank (EIB) - Islamic Development Bank (IBD) - Arab Fund for Economic Development in Africa (BADEA) Development Funds Development Funds - European Development Fund (EDF) - Fund for Cooperation, Compensation and Development (ECOWAS Fund) - Kuwaiti Fund for Arab Economic Development (KFAED) - Saudi Fund for Development (SDF) - Millennium Challenge Corporation 8
FOREIGN SOURCES DEVELOPMENT PROGRAMMES UNDP or CDE provide technical assistance, expert advice, training, and grant support to developing countries, with increasing emphasis on assistance to the least developed countries. United Nations Development Programme (UNDP) Funding of: - Technical assistance in planning and execution phase - Training - Feasibility studies in preparation of master plan - Minor necessary airport equipment, but not for major projects, such as airport construction and expansion. Center for Development of Enterprises (CDE) ACP-EU Cooperation Agreement based on Cotonou Treaty. Similar to UNDP, but mainly for private companies or airport operators. 9
PRIVATE PARTICIPATION Privatization as a source of revenue: Involvement of a private entity for a limited period of time for a fee: Management contract transfer of management to a private Strategic Equity Partner (SEP) Transfer of minority ownership ownership transferred partially to private SEB or via an IPO (Initial Public Offer) on the stock exchange market. Method of raising cash but maintain management control. Private sector ownership and control transfer of full or majority ownership of the airport or of certain facilities/services (i.e. terminal, cargo warehouse or security services) to a private SEP Concession transfer of management and development to a private SEP BOT (Built-Operate-Transfer): ownership and management with the right to finance, built and operate over a long period of time. Shift financing risks, but also commercial and construction risks to private sector. Payment of variable (percentage of sales or net profit) or fixed concession fee. 10
AIRPORT REVENUE Once an airport is operating, it must generate sufficient revenue to retire debt and cover operating expenses. Revenue Categories Regulated aeronautical revenue out of air traffic operations Non regulated non-aeronautical revenue out of ancillary activities Non regulated Non-operating operating revenue (revenue derived from activities not related to movement of aircraft, passenger or cargo through the subject airport, i.e. revenues from real estate, consulting, management or investment at other airports) 11
AERONAUTICAL REVENUE Charges for services or facilities directly related to the processing of aircraft and their passengers and cargo in connection with facilitating travel. Aeronautical charges: - Landing (and/or take-off) - Terminal-area air navigation - Passenger service (terminals) - Aircraft Parking - Passenger Boarding Bridge - Police and security - Flight information display - Aircraft Plug Principles of aeronautical revenue - based on cost recovery - keeping cost competitive - Usually regulated 12
NON-AERONAUTICAL REVENUE Charges related to the ancillary commercial services and facilities available at the airport. Non-Aeronautical charges: - Parking - Hangars - Freight warehouse - Ticket counters - Baggage Handling Facilities - Ground Equipment Rentals - Retail Concessions - Restaurant - Bus shuttle - Amusements - Display advertising - Office rental Principles of non-aeronautical revenue - Commercial and market based pricing - Surplus to fund infrastructure development - Usually not regulated 13
FINANCING AGREEMENTS WITH AIRLINES Residual Agreement Airline agree to assume the financial risk for any revenue shortfall at the airport and guarantee to provide sufficient revenue to cover operating and debt-service costs. Compensatory Agreement Airline typically pay only for the facilities and services they actually use, leaving the airport to assume the financial risks. Hybrid Agreement Hybrid Agreement Variation of residual and compensatory agreement in excluding selected non-airline activities from the residual costs pool (cost center approach). 14
CONTACT FINANCING DIVISION ALEXANDER HERRING ADVISER 15 RUE MONTOYER 24 (B. 5) 1000 BRUSSELS, BELGIUM TEL.: +32 2 512 99 50 FAX: +32 2 512 28 29 alexander.herring@skynet.be www.cblacp.org