Issues in airport privatizationThe case of SJO, Costa Rica

Bruno Miller16.781 Final Project PresentationDecember 5th, 2002

Outline

• Arguments for/against privatization

• Guidelines for successful privatization

• Analysis of privatization contract for SJO*

• Conclusions

Discussion based on contract available on the website of Costa Rica’s General Directorate of Civil Aviation (DGAC): http://www.mopt.go.cr/Aviacion/Principal.htm

Arguments for privatization

• From government’s perspective:• Source of immediate and possibly long-term revenue

• Construction of facilities without having to invest own funds

• Private operators may have more expertise in airport management

• From investor’s perspective:• Airports are natural monopolies potentially high ROI

• From user’s perspective:• Better service through state-of-the-art facilities and

management at no extra cost

Arguments against privatization

• Running airport as a business may hurt the public interest:

• Monopolistic pricing

• Safety, security, LOS may suffer if profits are main objective

• Without right incentives, private investor may not be as efficient and productive, adequate investments may not happen

• Private and regional interests may diverge

Need to protect public interest with public/private partnerships and/or economic regulation

Guidelines for successful privatization

• Goal: Airport design, development and management that

reconciles private and regional interests

• Need a regulatory framework that*:1. Balances the interests of the stakeholders2. Involves stakeholders in decision-making: planning,

design and management3. Provides flexibility to adjust to changes in the

market

*Based on: de Neufville and Odoni; Ospina, Escobar presentations at ICAO Airport Privatization Seminar for the NAM/CAR/SAM Region, Guatemala City, 1999

Guidelines for successful privatization (2)

• Need a regulatory framework that*:4. Provides shared allocation of management control

5. Economic regulation:– Avoids monopolistic pricing

– Gives incentives to maintain efficiency and build new infrastructure (e.g. RPI-X charges)

– Standards for performance and quality must be guaranteed

– Transparency of the airport’s income, cost and investment

*Based on: de Neufville and Odoni; Ospina, Escobar presentations at ICAO Airport Privatization Seminar for the NAM/CAR/SAM Region, Guatemala City, 1999

Juan Santamaría Airport (1996)

•6 contact gates•9 aircraft stands (?)•Out-dated passenger and cargo bldgs.

Source: DGAC Costa Rica

Juan Santamaría Airport (2018?)

•New surface of main runway•Expanded taxi-way•15 contact gates, 3 remote gates•20 aircraft stands•Expanded passenger and cargo bldgs.

Source: DGAC Costa Rica

Following the guidelines

1. Balance of interests of stakeholders: Government– Contract given to Alterra Partners (conformed by

Singapore Changi Airport, Bechtel Enterprises)

– Government receives yearly payments from Operator (pax fees, ATC fees, US$1M per year for new airport)

– Operator assumes all financial obligations for improvements according to a master plan (~US$140)

Following the guidelines (cont’d)

1. Balance of interests of stakeholders: investors– Financial balance guaranteed if profit loss due to:

- Traffic reduction of more than 15% in 12 months

- Changes in FAA’s IASA category

- Changes in the risk classification of the country

- A new international airport that competes with AIJS from Costa Rica

- Changes in charges that result in loss of competitiveness of the AIJS and reduced traffic

– Financial balance re-established by changing the capital investment schedule, payments to gov’t, etc.

Following the guidelines (cont’d)

1. Balance of interests of stakeholders: Users – LOS, safety, security and environmental standards

must meet ICAO, IATA, etc recommendations and must be furnished at minimum cost

– Monopolistic pricing avoided with economic regulation (price cap)

Following the guidelines (cont’d)

2. Involve stakeholders– Airlines and users consulted when setting fees

– User surveys can be used to measures LOS

3. Flexibility to changes– Design changes allowed (however, master plan not

necessarily made with flexibility in mind)

4. Shared allocation of management control– Regulated approach: Gov’t remains owner of

infrastructure that operator manages, develops

Following the guidelines (cont’d)

5. Economic regulation– Aeronautical fees:

• Economic regulation based on price-cap:

Chargenew = Chargeold * (1+US CPI – X) + P(capex)• Efficiency factor X specified through 2006; may

change based on LOS provided• P(capex) = amortize capital investment costs• Dual-till approach• If Chargenew results in loss of competitiveness, charges

may remain low and losses recuperated afterwards

Following the guidelines (cont’d)

5. Economic regulation (cont’d)– Non-aeronautical fees:

• Economic regulation based on:– Cost of providing service

– Average fees in similar airports for same service

– Operator must provide detail financial reports each year

– Fees revised each year

Conclusions

• Positive aspects:• Provision of world-class facilities and management• Gov’t retains ownership of facilities, receives

revenue• Flexible contract: Changes in design, fee structure,

etc allowed given market conditions and technology • Economic regulation to control monopolistic pricing

and guarantee profitability of investors• Transparency in finances• Long-term contract (20 years)

Conclusions (2)

• Negative aspects:• Weak participation of users in decision-making

• Who pays to guarantee profitability of investor?» Example: Airlines refuse to enter new terminal

• Will government revenues be re-invested in air transportation infrastructure?

Issues in airport privatizationThe case of SJO, Costa Rica

Bruno Millerbrunom@mit.edu