Public Sector Privatising airport could help boost economic climate

Privatising passenger and cargo operations at Owen Roberts International Airport would be a boon to the Cayman Islands economy and provide badly needed funding to upgrade an aging government-run facility trying to meet the growing demands of globalisation

So says an aviation industry analyst Edward Jerrard, a lecturer in air transport management at University College of the Cayman Islands.

Without significant investment for capital improvements, the George Town airport — which serves as the hub for the financial and tourism sectors that prove so vital to the Caribbean nation’s economic vitality — runs the risk of being left behind in a competitive and evolving international aviation market, he said.

Larger planes, longer flights and a faster-paced and increasingly time sensitive global passenger and freight network represent the future. To have a seat at the table in the 21st Century, Owen Roberts, and to a lesser extent Gerrard-Smith International Airport on Sister Island Cayman Brac, require sizeable investment to fund facilities upgrades, including a runway extension, terminal refurbishments and hangar and support facilities expansion.

But at a time when governments find themselves strapped for cash, and the words ‘reigning in spending’ is the catchphrase of the day, public sector agencies seeking funding for capital improvements are increasingly looking outside the halls of government and finding themselves instead in partnerships with private sector investors boasting heavy checkbooks.

“There is clear evidence of increasing opportunities and demand for air transport in the Cayman Islands,” Jerrard said. “Leaving aside the capital savings in not having to pay for development costs such as a new runway extension and upgrades to the terminal, cargo facility, etc., the anticipated net benefit to the government could be in the order of $30 million annually. Increasing business and all the ancillary economic benefits, including additional jobs and growth, are the goal of the partnership.”

Yet as the tide appears to have turned in favour of such public/private partnerships, there remain significant questions as to their best application practices and how to deliver the desired outcomes for all involved. The potential for privatizing airport operations in the Cayman Islands doesn’t come without its fair share of risk for all parties, including the successful concessionaire, the commercial banks and investors and also the host government ceding a degree of control over its operations.

“If it wasn’t for the fact the world had a general financial collapse these past few years, we wouldn’t be having this conversation,” said Gilbert McLean, a former minister of transportation turned political radio talk show host. “If we are to believe our politicians, Cayman is broke and cannot afford any upgrades to the airport. We must be careful how we proceed. The country must be mindful its image can be hurt if something goes wrong. The question really is, ‘What would be satisfactory to the people?’”

Jerrard and McLean squared off late last month at the University College of the Cayman Islands campus in Newlands during a panel discussion about privatizing airport operations in the Cayman Islands. The debate was the second in a series devoted to controversial topics — the first was held last year and covered the prospect of privatizing the heavily subsidized national carrier Cayman Airways — concerning the economic outlook for government spending in the Caribbean nation.

Privatization has become a hot-button issue the past few years in the Cayman Islands, and its fading from the forefront of political discussions anytime soon seems unlikely given the nature of global government finance.

The Cayman situation

Two years ago, in the wake of the worst international economic collapse since the 1930s, the Cayman Islands Government led by Premier McKeeva Bush commissioned an independent task force to study the fiscal health of the nation and examine new revenue options.

Led by James C. Miller III, the one-time budget director under former US President Ronald Reagan, the final report published in February 2010 said the Cayman Islands government, absent direct taxation and significant spending cuts, was no longer on the path to financial sustainability and recommended some government-owned enterprises be privatised to reduce the burden of payroll expenses and pending capital expenditures.

One of the entities targeted for privatisation by the commission was the Cayman Islands Airports Authority, a statutory authority under the Ministry of Financial Services, Tourism and Development, which owns and operates Cayman’s airport facilities.

According to the commission’s findings, the CIAA, which serves about 800,000 passengers and processes roughly 5 million pounds of freight a year, was losing money and in need of a government subsidy to balance its books. Further, the study recommended the government release a request for information as a way of discovering potential investor interest and the first step toward cutting its losses.

It is worth noting that following the release of the Miller report, the CIAA issued a statement denying it requires any government subsidy to achieve solvency and that, in fact, it has been operating with a net income since its inception in 2004. The authority went on to say the money referred to in the report as a subsidy was revenue collected as rent, utilities, parking and landing fees and passenger fees from various government agencies, and privatisation would not eliminate the need for public sector agencies to pay those fees.

“Personally, I doubt very much that the Cayman Islands government would condone or consider relinquishing the control of airports in the Cayman Islands to any one individual or entity which could result in creating a monopoly of our airport business,” former CIAA Board Chairman Norman Bodden said last year.

Nevertheless, as was noted in the CIAA’s updated master plan in 2007, it is without dispute that Owen Roberts is in need of significant facility upgrades if it is to meet the ever-changing demand of a growing global aviation market. An extension of the runway will be necessary to handle the larger aircraft airlines and cargo operators are increasingly using to fly their international routes. Also, upgrades are targeted for the main passenger terminal, as well as for hanger and maintenance facilities. The general aviation and cargo facilities also are eyed for expansion.

The CIAA has already constructed new staff, as well short- and long-term parking lots, while also adding roads to enhance traffic flow around the airport. But although the current national budget forecast sees the CIAA operating at a slight profit, the government has nowhere near the resources necessary to implement the more than $150 million in refurbishments called for in the master plan for Owen Roberts.

“Without the ability to grow, you stifle the economy of a country,” Jerrard said. “Taking the airport out of full control of the government will allow this sector to adjust its business models without the need for government funding or approval for the changes necessary to maintain a strong and growing air transport industry in the Cayman Islands. However, appropriate legislation including a clear term of reference that any potential operator must adhere to, must be enacted prior to any moves toward the privatization of Owen Roberts International Airport.”

Growing trend

The trend to privatise airports has been gaining momentum for decades, as the aviation industry worldwide continues to undergo change.

Beginning with the United Kingdom’s privatisation of Heathrow, Gatwick and Stansted in the late 1980s, nations have privatised their major airports either through contracting out operations through long-term leases, after which operations return to the government, or through the outright sale of an entity to a consortium of operators and investors, as noted in the Miller report.

During the past 20 years, additional airports across Europe have been privatised to varying degrees, as well as have facilities in Australia, New Zealand, Mexico, Ecuador, Peru and Jamaica. More recently, efforts have begun to privatise certain operations at airports in the United States.

Opened in 1952, Owen Roberts International Airport employs more than 100 people and last year processed more than 800,000 passengers, including tourists, business visitors and residents.

Along with Cayman Airways, a handful of globally-based commercial airlines and freight operators as wells as privately-owned planes accounted for nearly 24,000 aircraft movements in 2010 when considering actions at both Owen Roberts and Gerrard-Smith airports, according to figures published by CIAA.

In addition to the passengers, last year the airports processed nearly 5 million pounds of freight and 250,000 pounds of mail, the authority reported.

At the moment, despite a down economy, there is an active global market for airport acquisition and there is a considerable amount of expertise available to help governments and operators facilitate change.

“There are billions of dollars looking for a place to invest, and airports represent a great investment,” said D.J. Gribbin, managing director for Macquarie Capital Advisors of New York in an interview with Aviation Week magazine.

What is airport privatisation?

The privatisation approach to airport development is increasingly relied upon by nations unable to maintain, finance and develop their own airports. In all cases, public infrastructure development, including airports, had been the exclusive responsibility of public agencies, funded by taxes or through the issue of bonds, and in turn the costs offset by revenues collected from users, according to an aviation industry report prepared by analyst Victor Craig.

But more recently, with unprecedented budgetary constraints taking hold, an alternative approach to tap the capital resources of the private sector as partners in developing public infrastructure appears to be offering the means by which governments may implement needed capital projects.

The concept of airport privatisation, although originally applied on a project by project basis, has been extended to include regional systems and even entire national airport infrastructures.

Typically, the main elements of the air transport industry in a specific region include the airport, air traffic and meteorological services, the national airline and the regulatory authority. In most cases, privatisation focuses on the airport and the airline, while leaving the remaining functions to government.

“It is unusual for airports that are privatised to be sold off in the conventional way; rather, they are often leased to an experienced and financially sound operator who has a proven track record, for a period normally of 25 years, after which it is returned to the state,” Jerrard said. “The main reason for this period is for the operator to receive a fair return on their investment which is amortised over this period.”

Not a free-for-all

However, it must be noted even the most privatised airports remain under extensive government control, says Richard de Neufville, a professor at Massachusetts Institute of Technology who writes extensively on the issue of airport systems planning. Specifically, airports are not allowed to set their own standards of performance, nor can they set their prices in the marketplace as most businesses are free to do, de Neufville wrote in a 1999 report about airport privatisation in the United States. They also can’t restrict access to their products through licensing or franchise agreements, but instead must be open to all competent users who meet certain criteria.

Also, privatised airport systems often do not enjoy full ownership of the airport itself, as such outfits in Australia, Britain and Canada offer examples of entities not fully in private hands. Privatised airports in Australia operate under long-term leases of government property; the BAA airports in Britain have restrictions on the sale of the property to foreigners; and the Canadian airports are government operations with the license to act like businesses.

“In short, because of the public interest in the operation of the major commercial airports, there is no such thing as a fully privatised, completely private operation of these facilities,” de Neufville wrote. “The question is not whether the airports can be fully privatised, since this is in practice not acceptable. The question is how the government control will be exercised.”

Questions remain

In Europe and, in particular the UK where privatisation is a key strategy for minimising government spending, new laws had to be introduced to ensure enterprises do not abuse their market power, Jerrard said.

Similar controls certainly would be necessary in a privatised situation in the Cayman Islands, regulating the potential for abusive behaviours — i.e. predatory pricing, price gouging, and refusing to deal, etc. — by an entity ultimately with monopolistic influence.

Opponents also argue governments favour privatization as a way to divert airport revenue intended for developing aviation infrastructure to other government purposes, resulting in increased costs for airlines and passengers. There also are questions about ongoing safety operations at the airport, as well as concerns about what would happen to the workforce.

“Most people are satisfied with the airport the way it is,” McLean said. “Everything we hear from the Miller report is, ‘To fix Cayman, we have to sell it.’ But if we sell the airport, and we sell the utilities and we sell everything, what will be left for government with no income from payroll taxes? I don’t see anything wrong with private companies buying shares, but ownership needs to remain in government hands. And something would have to be done to help subsidise Cayman Airways.”

Tough sell

The road ahead to determine the makeup of airport operations in the Cayman Islands remains unclear.

Privatisation of public services, though a topic of profound discussion these days in the Cayman Islands, has been met the past few years with a high level scepticism from policy makers and the public alike. After all, changing the way things are done in the halls of government and altering long-held practices is never easy.

But as mentioned above, for an air transport facility operating near capacity for its existing facilities, and the funding required to make improvements to help usher Owen Roberts into a new era of expanded passenger and freight services proving elusive from government acquisition, some give and take will be necessary to achieve long-term growth.

“The present airport, and the way it operates, will have to change in the next 10 years,” said Roy Bodden, president of University College of the Cayman Islands and a former minister of education. “If we want to play, we are going to have to get with the programme or become a dinosaur. The question is, ‘To what point does vested interest control development in the Cayman Islands?’”