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36 Revenue diversion prohibition--Federal policy and the grant assurances prohibit airport operators from divert- ing revenue to nonairport uses. A small number of airport operators are grandfathered from this provision, but the nonairport uses for which they can use airport revenues are generally other governmental or transportation pur- poses. The prohibition on revenue diversion makes it dif- ficult for a private airport operator to direct any airport profits to the company owners or shareholders. Access to tax-exempt and alternative minimum tax debt--Airport operators in the United States, as public entities, also have access to tax-exempt debt and AMT debt for eligible airport facilities, as discussed in chapter two. Private operators cannot access tax-exempt or AMT debt and must rely on taxable debt or sources of private equity, and therefore have higher costs of capital than air- port operators that are part of a governmental entity. FIGURE 28 Continuum of private involvement at airports. FULL PRIVATIZATION Overview of the U.S. Airport Privatization Pilot Program Since the 1980s, when the Thatcher government began sell- ing government-owned assets in Britain, privatization of Full privatization of U.S. airports; that is, the transfer of own- all or some airports has occurred in (see de Neufville 1999 ership from a local government to a private entity, has been p. 4, augmented with more recent examples): Argentina, possible for a limited number of airports for 10 years. As part Australia, Austria, Bolivia, Canada, Chile, Great Britain, of the Reauthorization Act of 1996, as codified under 49 USC Hungary, Italy, Macao, Mexico, The Netherlands, New Section 47134, Congress established an airport privatization Zealand, Philippines, and South Africa. pilot program to explore privatization as a means of generat- ing access to sources of private capital for airport improve- Some airports in the United States have been developed, ment and development. The act authorized U.S.DOT to grant financed, and operated privately throughout their entire exis- exemptions from certain federal statutory and regulatory tence, including Alliance Airport in Dallas, as well as various requirements, thereby allowing private companies to own, general aviation airports around the country. However, fully manage, and develop up to five public airports. Under the privatized commercial service airports are the exception in this pilot program: country. Barriers to privatization in the United States include: At least one of the airports must be a general aviation Access to federal grants--Airports in the United States airport, and no more than one large-hub airport may have access to AIP grants from the federal government, participate. unlike airports in many other parts of the world. Airport The secretary of U.S.DOT may exempt the airport spon- operators must agree to a series of grant assurances that, sor (i.e., seller) from the requirement: among other things, require all airport revenues to be To use airport revenues for airport-related purposes, expended for costs of the airport. particularly proceeds of the sale or transfer; To repay all or a portion of federal grants upon trans- fer of the airport ownership; and To return airport property deeded by the federal gov- ernment upon transfer of airport ownership. The private operator assumes the responsibility of upholding AIP grant assurances and may continue to receive AIP grants, although at a reduced share PFCs may continue to be collected for the airport. A minimum of 65% of the airlines at the airport repre- senting 65% of total landed weight at the airport in the preceding year must approve the deal. This requirement has, in the past, created a major challenge for airport sponsors interested in privatizing their airports. FIGURE 29 Los Angeles International Airport--Special facility FAA reserves the right to ensure that the private opera- bond terminal financing. tor is earning no more than a reasonable rate of return.

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37 fourth year, American Airports Lakefront would pay $300,000 in rental payments or 11% of the airport's gross income, not to exceed $3 million, plus 30% of the airport's gross income over $3 million (Carvlin 2006). Midway Airport, Chicago, Illinois--The city of Chicago is the first airport sponsor to submit a privatization proposal for a large-hub airport. Background and status are as follows: Chicago Skyway toll bridge precedent--The city's inter- est stems in part from the successful privatization of the Chicago Skyway toll bridge in January 2005, in which Macquarie Infrastructure Group and Cintra signed a 99- year agreement to operate the Skyway and paid the city $1.83 billion. State enabling legislation--The Illinois legislature passed a bill in the spring of 2006 that preserves the property tax FIGURE 30 Stewart International Airport--Airport privatization. exemption for the airport in the event that it is privately operated. The legislation requires the city to spend the majority of sale proceeds on infrastructure projects or to Any collective bargaining agreement that covers airport strengthen its pension funds, which have an average employees will remain intact after the transfer of airport funding level of 61%. ownership. The city's objectives--The city's initiative to privatize The private operator must submit a 5-year Capital Midway Airport is seen as a way to (Privatization of Improvement Program to FAA with its application. Chicago Midway International Airport 2006): Generate a new rate-setting methodology that can Status of Applications Under the Pilot Program give certainty and stability to the airlines; Increase operating efficiencies; FAA has received applications from six airports under the Improve customer amenities and satisfaction; pilot program; however, three were withdrawn for various Create economic benefits for the city; reasons. Ensure adequate upkeep of capital equipment and investment in capital improvements; and Stewart Airport, Newburgh, New York--The only airport Continue to provide a service to the public by main- that has received approval to date is Stewart Airport (see Fig- taining strict guidelines for noise and environmental ure 30). mitigation, safety and security requirements, and employee protection. New Orleans Lakefront Airport, New Orleans, Louisiana-- Bond defeasance--Approximately $1.3 billion of Mid- A final application filed in April 2002 by the Orleans Levee way Airport revenue bonds would have to be defeased District, which operates the airport, to privatize New Orleans as part of the privatization deal. Lakefront Airport was still pending as of January 31, 2007. Status--The city has assembled a team to provide finan- American Airports Lakefront LLC would operate the airport cial advisory services throughout the process, and sub- under a 50-year lease and pay the Orleans Levee District mitted its proposal to FAA in September 2006. As of $300,000 in annual rental payments for the first 3 years. In the January 31, 2007, the application was pending.