Councils’ debt takes flight – The Privatisation of Regional Airports

Over the last 12 months, there has been much media speculation about Australia being poised for the first major wave of airport privatisations in more than a decade, with debt laden Councils looking to sell or lease their airports to superannuation and infrastructure funds. The Town of Port Hedland last month led the way by voting to privatise its regional airport through a long-term leasing deal with AMP Capital and Infrastructure Capital Group to run this regional airport for the next 50 years.

This month, the Whitsunday Regional Council followed the Town of Port Hedland’s lead and is seeking expressions of interest for a 49 per cent stake in its airport. Other regional councils such as the Sunshine Coast Council, Newcastle City Council and Port Stephens Council, Ballina Shire Council and Lismore City Council have all been reported in the press as considering whether there is the opportunity for private sector investment to shoulder the significant costs involved in operating an airport.

The Councils are aware that the privatisation of their respective airports has the potential to realise sale proceeds that can be invested back into their community for future generations to pay for new cultural centres, local facilities, local roads, footpaths, parks and gardens and community services.

A study conducted by Deloitte Access Economics on behalf of the Australian Airports Association showed that in 2011 Australia’s airports generated a total economic contribution of around $17.3 billion, which equated to 1.2% of the Gross Domestic Product.

It was estimated that the major Australian airports will invest something in the vicinity of $9 billion over the next decade in infrastructure development.

If the benefits of the privatisation of the 21 Commonwealth-owned airports under long term leases to private entities between 1997 and 2003 is anything to go by, then not only will local authorities and their communities benefit, but so too will our nation’s airport infrastructure network.

The privatisation of regional airports is not solely an Australian phenomenon. Greece recently agreed to privatise 14 regional airports to German-based Fraport AG which currently runs Frankfurt Airport and others around the world as part of its attempt to secure a $86 billion bail-out loan to prevent Greece crashing out of the Eurozone.

So if the media reports are correct in saying that many of our regional councils are cash strapped, and there are a host of superannuation and infrastructure funds ready to buy their airports, why hasn’t this new wave of airport privatisation broken sooner?

While privatisation may be economically sound, it may not necessarily be good politics.

It is important to remember that local authorities are still “political beasts”. Local councillors depend on the votes of their community to remain in office and so naturally, they listen very carefully to their electorate’s concerns.

Many of the voting public want public infrastructure to remain out of private hands. The lessons learnt by the former Queensland LNP Government when it lost its re-election campaign on the platform of selling government assets, has naturally made many local authorities think twice about selling off their airports. A large proportion of the voting community questions, if public assets need to be sold off because the Government can’t afford to maintain them, then what is the Government doing with all of the taxes it collects from us?

There is also the general public belief that airports are natural monopolies and therefore the voting public feel more comfortable and protected by keeping some government involved in airport regulation and supervision. This concern is also often shared by the airlines who believe that without some government involvement, privatisation can lead to higher landing fees and user charges which eventually translate into higher ticket prices for the airlines’ customers.

However, notwithstanding the concerns of some sectors of the voting public, regional councils have identified many reasons to privatise. The Australian Airports Association estimates that as many as 50% of Australia’s regional airports owned by local government are operating at a loss. Privatisation brings with it not only the ability for a local authority to raise additional capital and seek new resources from private markets to improve the aeronautical services of their airport, but at the same time increase competition among airlines providing greater choice and cost reduction for their passengers. Local governments are cognisant of the fact that revenues from the sale of assets can be banked away for future community benefits yet (depending on the privatisation model adopted) still produce an immediate income stream with rates and, for example, under a long term leasing arrangement, with periodic lease payments from investors.

While many Councils around Australia can be buoyed by the success of the Town of Port Hedland reportedly raising $205 million under its long-term arrangements with private investors, the reality is that there may only be a limited number of other airports around Australia owned by regional councils that are attractive for private sector investment.

Even though there are over 2,000 landing sites for aircraft in Australia, only around 250 airports receive regular public transport services (RPT). While many of those 250 airports are owned and operated by regional local authorities, not all of those airports are attractive for investment by the private sector.

There is a range of domestic and international economic trends and challenges that influence the private sector in investing in a particular regional airport.

In recent years, economic growth in Western Australia, Queensland and the Northern Territory has been driven by the mining boom, leading to a rapid increase in passenger movements to airports servicing that industry. Regional airports such as Gladstone, Mackay, Roma, Karratha, Port Hedland and Tennant Creek enjoyed burgeoning FIFO patronage. However, as the resource sector investment levelled out with the construction phase of major projects coming to an end, coupled with the dramatic fall in commodity prices, the decline in the FIFO market has presented challenges for the local authority owned and operated regional airports in recent times.

However, the continuing rise of the middle class throughout Asia brings with it new potential for regional airports situated in our tourist destinations.

At present there is a high level of interest by superannuation funds and financial institutions in investing in the right type of airport infrastructure. The Bankstown and Camden airports in Sydney this month are the subject of an off-market bid of over $200 million. Both the Bankstown and Camden airports were privatised in 2003, but the bid price for these assets evidences the desirability of airport infrastructure.

The reality is that while the private sector has a real appetite to acquire airport infrastructure at present, there are only a few regional airports around the country that are “privatisation ready”. Further, the private sector needs to be aware of the political sensitivities local authorities must manage when looking at the privatisation of their assets. While regional councils will be focussed on obtaining the maximum purchase price, they will also be looking for investors who are ready to work with the local authority to develop and grow the airport for the benefit of the local community.

Our firm has advised the public and private sectors, not only in Australia but around the world, in the privatisation of airport infrastructure and from lessons learnt, we have identified the following key issues:

• identification of the type of privatisation model that is best for the needs of the particular local authority e.g. long term lease, management agreement, sale of assets etc;
• comprehensive and detailed vendor due diligence is essential in achieving the best market price;
• a well-managed data room is a key element of a successful asset sale, in order for the local authority to ensure that data is well organised and easy to access for bidders and is accompanied by a streamlined Q&A process;
• a track record of good governance is vital to ensure a smooth transfer of ownership from the public sector to the private sector;
• successful airport privatisations involve early engagement of prospective bidders;
• the creation of detailed master plans and financial plans is essential;
• identifying and rectifying any impediments in tenure arrangements, prior to going to market, is also essential;
• obtaining the necessary State Government approvals and consents early on in the process;
• considering facilitative legislation to streamline the transfer of assets to the private sector; and
• when seeking public consultation to a privatisation proposal, this consultation should be broad enough to accommodate any change in the structure of the transaction to avoid the necessity for further public notification and input.

Until our country’s regional airports become “privatisation ready” and the private sector can address the political hurdles that local authorities face, the privatisation of our local owned regional airports may be a slower process than what has recently been reported in the media.