AIRPORT CONCESSION: WHY THE CHERRY PICKING?

(article written June 2008)


In Nigeria, the word concession has always been accompanied with deep suspicion, resistance or applause depending on which side of the divide you take during the process. The recent concession involving airport terminal building and the airside of the airport has introduced a new vista into the process.

Before now, the industry was used to the non-aeronautical concession at our airports such as retailing, restaurants, property development, car parks etc. The “build operate and transfer” (BOT) option of MMA2 and the concessioning of the terminal building of the Nnamdi Azikiwe Airport, Abuja to Bi-Courtney and Aeroport Gateway Company (AGC) respectively by the last administration has generated so much controversy. To add to the controversy was a recent decision of the Federal Government to concession Lagos, Port-Harcourt, Kano and Abuja International Airports. The question is what happens to other government owned but under-utilized airports. This is the crux of the matter.

What are other countries doing to improve their airport system?

Australia: State-owned airports are managed by Australia Pacific Airports Corporation, which is 15% owned by the British Airport Authority (BAA). The major international gateways such as Sydney, Brisbane and Melbourne have been privatized while those owned by states are also going through the same process. The Queensland government is privatizing three airports, a process which is expected to generate $800million. The funds will be used to pay for three new hospitals in that state.

United Kingdom: It has been over 30 years now that the British government privatized BAA, the custodian of British airports. BAA has gone ahead to invest in other airports round the world. They are bidders in South Africa, already manage US airports, Indianapolis and Harrisburg and have taken control of Naples Airport in Italy and have a stake in Melbourne. In July 2006, a Spanish company Ferrovial-led consortium Airport Development and Investment (ADI) acquired BAA for $16 billion. ADI owns and operates seven UK airports and has management or equity stakes in 10 airports outside the UK. Unbelievably, the three major airports in London are in their stable namely Heathrow, Gatwick and Stansted, which might be responsible for a recent report of UK Competition Commission denouncing services and charges at these airports, which are not competitive.

China: The Civil Aviation Administration of China (CAAC) is to release investment guidelines later this year to enable foreign companies to take up to a 49% stake in the country's airports. The move follows a worldwide drive towards airport privatization. China's official Xinhua News Agency reports that foreign investors will be offered opportunities in ground services, airport concessions, hotels and aircraft maintenance in return for taking a share in the construction and operation of major new airport projects.

South Africa: Airports Company South Africa (ACSA) is an equivalent of our FAAN. ACSA owns and manages 11 of South Africa's airports. In February, a consortium compromising GVK and ACSA was granted a 74% stake in Mumbai airports by the Indian government. Also, Italy's Aerporti di Roma (ADR) currently in the run-up to the final phase of privatization is near to completing its deal to take a stake in ACSA. ADR will pay R100 million ($20 million) for a 20% stake in ACSA. They also have an option to acquire another 10% from the South African government when the airport company moves to a full listing on the Johannesburg stock market in the next couple of years. Also 10% will go to a black empowerment group and 9% to airport staff at some point.

Bolivia: Bolivia will break all records for airport privatization this year. Following the sale of the Bolivian airport system to US-based Airport Group International (AGI), Lima aims to have 'wrapped up' the sale of its airports by the end of the year.

Argentina: The government of Argentina sometime in 1998 started by awarding a 30-year, $5 billion concession for all 33 of the country's airports to a group led by Milan airport operator, Societa Esercizi Aeroportuali (SEA). The final bid for the Argentinean airport concession offered the government $171 million in annual fees. For Argentina, it is way too early to tell whether it will be a successful model. At that time the government needed $800 million over the next five years to prevent Argentina's airports from becoming inoperable and to secure this the Argentinean government tied a £2 billion capital investment spend to the sale. Duty free, ground handling and warehousing was not included in the concession until the contracts, already awarded before privatization, expires in 2010. Also, only eight of the thirty three airports sold in Argentina are profitable and they will have to subsidize the rest. Therefore it is suspected that international airlines will pay for more than they use.

India: The government invited foreign investors to develop their airports on public and private participation basis (PPP). They started by dividing the airports into Greenfield (new airport built from scratch) and Brownfield (modified or upgraded from existing facilities) Airports. Government retained 26% shareholding in these airports (either through the Airport Authority of India or through the State Government). This crucial 26% shareholding ensures that the Government is able to veto certain "fundamental resolutions". The backbone of the project is the large chunk of land given for commercial development, which are to develop along with the airport for any commercial purpose it may please (subject to local laws). Here it may set up not only hotels or malls - it can even go for Special Economic Zones, manufacturing factories, country clubs, golf courses, power plants etc for free. To protect the public, airlines and other airport users, the government set up an independent regulatory body to monitor and regulate the public and private airports. This was done to ensure compliance, benchmark service level and generally resist any form of monopolistic tendency, and set up a scheme called “Viability Gap Funding”. To protect, attract and support investors for the Non-Viable airports, the government provides funds which can only be accessed by interested investors through a bidding process. Also, the government ensured states where these airports are located are not left out by providing an additional state support agreement to boost the confidence of investors, while also wielding a stick called “Liquidated Damages,” which are charged for defaults

Nigeria: Every airport in the country, with the exception of Osubi, Eket, Escravos and NAF Port Harcourt is managed by the government represented by the Federal Airport Authority of Nigeria (FAAN). FAAN was saddled with the responsibility of concessioning most non aeronautical activities at the airports in the past, but of recent the Ministry of Aviation and Bureau of Public Enterprises (BPE) participated in the concession of MM2 (Local Airport) and the Abuja International Airport.

The present government has stopped further negotiations/discussions with Aero port Gateway Company (AGC), the Abuja Airport concessionaires. Bi-Courtney was smart enough to hurriedly rush completion and operations before the departure of the last regime in spite of glaring lapses that are already rearing their ugly heads. Though Bi-Courtney figures are shrouded in mystery, AGC indicated after the cancellation that the concession period is 25 years at $110 million net with over $400 million accruing to government over the course of the concession. The company has deposited $10million with the Federal Government while Bi-Courtney has not come out with any figure (actual or projected), but have been able to amend the agreement period from 12 years to 36 years and build a safety cocoon that inhibits the development of or maintenance of any other domestic terminal in Lagos during the period.

There are other concessions or partnership programme with FAAN that are commendable one of such is the Unisys/Maevis, which was almost truncated early this year. The company will be providing facilities that will aid facilitation in line with IATA simplifying passenger travel (SPT) concept.

The former HMA announced plans to privatize the MM1, Port-Harcourt, Abuja and Kano International Airports respectively. The question is what happens to the remaining airports in an environment of decaying infrastructure, diminishing government resources and a continuous process of appointing a Chief Executive, Board and accompanying GMs & Directors whenever a new minister is appointed and states are coaxed to part with resources meant for basic amenities to support government owned airport in their domain.

Selecting a few airports or taking the airports in totality?
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Airports are the gateways that will open major cities in Africa for the development of tourism and investments. In Europe, there are other alternate modes of transportation, but here we have no option than to develop the airports as the alternate modes are extremely time consuming, stressful and risky for serious investors or tourists. Globally, national and local governments worldwide are abandoning responsibility for costly airport development, while filling the treasury coffers, by either concessioning or privatizing to bring in outside operational expertise, and this is practically obligatory in all cases.

Expertise is required in airport management and in generating non-aviation income. One of the main reasons why BAA is seen as a model is its success in bringing the contribution of non-aviation income to some 70% of total turnover which presently is 15% in FAAN. Airports world over are seeking to increase non-aviation income. The UK experience of privatizing worked well in a very mature and regulated environment.

In less developed countries like ours, governments should be tilting towards building and enhancing the transport system rather than just offloading the assets. This is to avoid a situation whereby we move from ugly state-owned airports to even uglier privately owned airports. It is noteworthy that most reputable private sector investors would not consider buying an airport with fewer than one million passengers. This is why airports have often been sold as a package - good and bad, small and large, domestic and international.

By setting up the Infrastructure & Regulatory Commission, the government has made it clear that it is taking a concessionary posture through PPP is about the only option open to government, considering FAAN has never made profit, publish an audited account nor invested financially or managerially beyond Nigerian shores when compared to their counterparts in South-Africa, Ethiopia, e.t.c.

I sincerely, recommend that the government should consider a mix of the Argentine and Indian government models. The government of Argentina negotiated the whole 30 airports as one package ensuring profits are ploughed into other non-viable airports. The main complainants are foreign airlines that usually cart away their earnings and snip for increased frequency and destinations. The government of India divided the airports into green and brown field airports. The brown fields were further sub-divided into viable and non-viable airports while the airport India an equivalent of FAAN was converted to a regulatory body. The common factor in these agreements are capital being injected, development & expansion of airports, returns to the government annually, protection and interest of the public and other operators are also made paramount, using penalties for default or delay. Also the agreements were clearly stated and open to the public right from the bidding stage, can we replicate in Nigeria.

Looking critically at what other countries have done, it can be exemplified here though, with a spice of our socio-economic background. We can easily get out of the woods and move to the desired level of having viable and efficiently managed airports with a little investment from government. It will however not be by sacrificing qualified FAAN staff and accompanying experience, but by sacrificing its ineptitude and gross interference. It is annoying that Port-Harcourt Airport that was closed for over one year with N2 billion loans from the state government could not provide basic medical amenities to passengers during a recent incident, that a Shell Clinic, in the city had to be called to provide this amenity for bleeding passengers.

In achieving the objective, the government should as a first step invite reputable international airport management companies, who will often achieve what governments can no longer take care of - improvements in capacity, efficiency and safety. These private investors and internationally recognized airport operators with track records who can be sourced and verified by a click on the mouse, should bid for and act as advisors or management consultants to government within a limited time frame. I am not referring here to the usual masquerades that form a ‘quickie’ consortium and rush to Corporate Affairs Commission for registration.

One thing is certain, airlines, regulators, agencies and other airport users need to get used to the idea that airports are shifting away from the traditional concept of public entity and moving into private ownership in whatever form this might be. Presently, there are over 20 airports in the stock exchange world over and the number is increasing.


I am also of the view that government should not forget in a hurry some knotty agreements in the past such as the hasty open-skies with the US, the genuflecting with Virgin Atlantic, figure and date juggling with Bi-Courtney, but should rather leave it to the public to succinctly assess it like their counterparts in India and Argentina did. The Distinguish Senators from states whose airport are non-viable and those who do not have at all should use all legislative means to fight for their constituency just like their counterparts in the US do, with issues bordering on air transportation. The Honorable Minister should consider taking the airports in totality which is a better option to the cherry-picking option of his predecessor, because it will be a win-win for all.