Considering and Evaluating Airport Privatization (2012)

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B-1 63-20 financing: The issuance of tax-exempt bonds by nonprofit entities to finance tangible public assets pursuant to IRS revenue ruling 63-20 of 1963, typically under long- term leases. For example, the 63-20 financing structure has been used to build hospitals, toll roads/bridges, university buildings, city halls, water and sewage facilities, hotels, and convention centers. Aeronautical: Aeronautical use includes services provided by air carriers related directly and substantially to the move- ment of passengers, baggage, mail, and cargo on the airport and any activity which involves, makes possible, or is required for the operation of aircraft, or which contributes to or is required for the safety of such operations. Airport and Airway Trust Fund (AATF): A fund estab- lished by the Airport and Airway Revenue Act of 1970 (the Act) that provides the revenues used to fund AIP projects and the administration of AIP. The Act, as amended, authorizes the use of funds from the AATF to make grants under AIP on a fiscal year basis. The U.S. Congress authorizes obligation authority to distribute AATF revenues to U.S. airports. Rev- enues for the AATF are derived from passenger ticket taxes and other excise taxes. The AATF provides multiyear capital for aviation system infrastructure such as facilities and equip- ment (F&E) and AIP and has helped fuel predictable growth in aviation infrastructure. Because the AATF is funded with user money, it keeps reliance on taxpayers to a minimum. Airport Compliance Manual: Order 5190.6B that was released in September 2006, which sets forth policies and pro- cedures for the FAA Airport Compliance Program. It provides basic guidance for FAA personnel in interpreting and admin- istering the various continuing commitments airport owners make to the United States as a condition for the grant of federal funds or the conveyance of federal property for airport pur- poses. Order 5190.6B discusses the obligations set forth in the standard airport sponsor assurances, addresses the application of the assurances in the operation of public-use airports, and facilitates interpretation of the assurances by FAA personnel. Airport Improvement Program (AIP): The federal grants- in-aid program that provides grants to public agencies—and, in some cases, to private owners and entities—for the plan- ning and development of public use airports that are included in the National Plan of Integrated Airport Systems (NPIAS). Eligible projects include those improvements related to enhanc- ing airport safety, capacity, security, and environmental con- cerns. For large and medium primary hub airports, the grant covers 75% of eligible costs (or 80% for noise program imple- mentation). For small primary, reliever, and general aviation airports, the grant covers 95% of eligible costs. AIP Entitlement Grants: AIP funds that must be appor- tioned by formula each year to specific airport sponsors, types of airports, or states under statutory provisions. AIP Discretionary Grants: AIP funds remaining after entitlement funds are determined. FAA approves discretion- ary funds for use on specific projects after consideration of project priority and other selection criteria. The FAA allo- cates discretionary funds to high priority project needs in a manner that best advances statutory goals and objectives to enhance the national airport system. Investment decisions are made using structured selection criteria that include a vari- ety of factors that help identify critical annual development needs within associated AIP funding levels. Airport Master Plan: A long-range plan for development of an airport, including descriptions of the data and alterna- tive analyses on which the plan is based. Airport Privatization: In its generic form, airport privati- zation can mean any one of the various strategies described above, meaning a broad range of arrangements under which activities once performed by government are to varying degrees turned over to private entities. A p p e n d i x B Glossary of Privatization Terms

B-2 Airport Privatization Pilot Program or APPP: A pro- gram under the category of long-term lease or sale called the Airport Privatization Pilot Program (49 U.S.C. Section 47134), which was enacted by the U.S. Congress in 1996 and amended in 2003 and 2012 to allow up to five airports to be leased or sold under specific conditions as approved by the Secretary of Transportation. The APPP was created to address barriers to privatization in the United States by permitting the U.S.DOT to grant exemptions from certain federal obligations that historically discouraged full privati- zation by requiring the airport owner and private operators to satisfy rigorous conditions in exchange for the exemp- tions and approvals. Airport Sponsor: A public agency or tax-supported orga- nization, such as an airport authority, city, county, state or federal government, that is authorized to own and operate an airport, to obtain property interests, to obtain funds, and to be legally, financially, and otherwise able to meet all appli- cable requirements of the current laws and regulations. Amortization: The repayment of principal, through sched- uled mortgage payments. The scheduled payment, less the interest, equals amortization. Anti-Head Tax Act or AHTA: The act passed in 1973 (49 USC Section 40116) that allows a publicly owned airport authority to collect only reasonable landing fees and charges from airlines using airport facilities. Build America Bonds or BABs: State or local governmental bonds that could be issued as tax-exempt bonds, but which the issuer elects to treat as BABs. Interest on BABs is tax- able to the bondholder, but a federal income tax credit (of 35% of the interest paid on the bond in each tax year) is pro- vided in lieu of the tax exemption. BABs were included in the American Recovery and Reinvestment Act of 2009 and were available for bonds issued between February 17, 2009 and December 31, 2010. Build-Operate-Transfer (BOT): An approach where the private partner builds a facility to the specifications set by the airport owner, operates the facility for a specified time period, and then transfers the facility to the agency at the end of the contract. In most cases, the private partner will also provide some, or all, of the financing for the facility. There- fore, the term of the contract must be sufficient to enable the private partner to realize a reasonable return on its investment through user fees. Build-Transfer-Operate (BTO): An approach that is simi- lar to the BOT model except that the transfer to the airport owner takes place at the time construction is completed, rather than at the end of the lease period. Building Blocks: Within a CPI-X approach to regulation, a methodology where costs are defined as operating costs, and return of and on capital. CapEx: Capital expenditures. Claw Back: A feature of regulation where excess profits made in one regulatory period are recovered by the regulator in the subsequent period. Commercialization: Refers to the application of business- like approaches to the management and operation of airports by shifting aviation management and operations from gov- ernment department to a business-focused entity to allow market forces, incentives, and mechanisms drive the delivery of services. It is a shift in management not ownership of the airport. Committee on Foreign Investment in the United States (CFIUS): The inter-agency committee of the U.S. govern- ment that reviews the national security implications of for- eign investments in U.S. companies or operations. Chaired by the Secretary of the Treasury, CFIUS includes representatives from 16 U.S. departments and agencies, including the Com- merce, Defense, Homeland Security, and State departments. Concession: Contract to transfer rights to manage and/ or operate a property for a certain period, usually without property rights. Consumer Price Index (CPI): Measures inflation by calcu- lating the change in price of a “fixed market basket of goods and services,” purchased by a specified population during a “base” period of time. CPI bears little direct relationship to actual costs of building operation or the value of real estate, but is commonly used to increase the base rental periodically, as a means of protecting the landlord’s rental stream against inflation, in lieu of the landlord undertaking the record keep- ing necessary to determine the true change in operating expenses. Construction Manager at Risk (CM at risk): A project delivery method where the construction manager commits to deliver the project within a Guaranteed Maximum Price (GMP). The construction manager acts as consultant to the airport owner in the development and design phases and as a general contractor during the construction phase. Due to the financial commitment, the CM at risk has an incentive to manage and control construction costs to not exceed the GMP. Corporatization: The process by which an airport previ- ously subsumed within a government agency is transformed into a government-controlled corporation in order to intro- duce corporate management culture and efficiency.

B-3 Cost Per Enplanement (CPE): A standard metric in the United States to compare total airline payments (including landing fees and terminal rentals) expressed on a per enplaned passenger basis. Contracting Services or Outsourcing: Airport owners routinely contract out to the private sector certain airport services traditionally provided by government or inter- nal employees in order to (1) achieve operating efficiencies through outsourcing the operation of functions that read- ily are available through the private sector (e.g., janitorial, escalator/elevator repair, non-police security, parking opera- tions), (2) enhance nonairline revenue (e.g., terminal con- cessions), or (3) provide project design and delivery (e.g., construction management and program management) for capital improvements. Commercial Service Airports: Public airports receiving scheduled passenger service and having 2,500 or more enplaned passengers (also referred to as boardings) per year. There were 501 commercial service airports in calendar year 2010. CPI-X: A regulatory regime in which aeronautical prices increase by inflation (the consumer price index) less a specified percentage (X). Customer Facility Charge (CFC): A rental car Customer Facility Charge (CFC) is a per transaction day, or a per trans- action, charge imposed on the rental car customer by the air- port, collected by the rental car companies, and remitted by the rental car companies to the airport. Imposition of a CFC has been key to the financing of consolidated rental car facilities. Depreciation: Spreading out the cost of a capital asset over its estimated useful life or a decrease in the usefulness, and therefore value, of real property improvements or other assets caused by deterioration or obsolescence. Design-Build-Operate-Maintain (DBOM): An approach where a single contractor is responsible for designing, con- structing, operating, and maintaining a facility with financing secured by the airport owner. The owner maintains owner- ship and retains a significant level of oversight of the opera- tions (as set forth in the contract). Under this model the risk for construction cost overruns and responsibility for annual operating expenses belongs to the private contractor. Design-Build-Operate-Maintain and Finance (DBOM/F): An approach where the contractor also is responsible for financing the project. Most examples of airport project finance transactions in the U.S. involve special purpose facilities for single or multi-tenant use, typically an airline, one or more cargo tenants, or rental car companies. The revenues from such special purpose facilities are pledged to pay debt service on the obligations incurred for such special purpose facilities and are not included in general airport revenues. Project finance is also used on behalf of private, third parties that are not tenants of the facilities Design-Build-Operate-Transfer (DBOT): An approach where a private partner designs, constructs, and operates a facility and hands over ownership of the facility to the airport owner after operating it for a specified period of time. Under this model the responsibility for construction cost overruns and annual operating expenses belongs to the private contractor. Developer Financing: A form of project financing, but is distinguished by the private sector also putting its own equity capital at risk as well as managing and operating the facility. Dual till: An approach to regulation of aeronautical charges where the level of charges is set to recover aeronautical costs only. Earnest Money: The monetary advance, by a buyer, of a portion of the purchase price in a real estate transaction, to indicate the intention and ability of the buyer to carry out the contract. EBITDA multiple: The implied enterprise value divided by the airport’s EBITDA (earnings before interest, tax, and depreciation). It should be noted that in some cases this mul- tiple is specified publicly for a sale even though the assump- tions on EBITDA and Enterprise Value are not themselves directly stated. FAA Order 5190.6B: The order released in September 2010 also called the Airport Compliance Manual, which sets forth policies and procedures for the FAA Airport Compli- ance Program. It provides basic guidance for FAA person- nel in interpreting and administering the various continuing commitments airport owners make to the United States as a condition for the grant of federal funds or the conveyance of federal property for airport purposes. Order 5190.6B dis- cusses the obligations set forth in the standard airport spon- sor assurances, addresses the application of the assurances in the operation of public-use airports, and facilitates interpre- tation of the assurances by FAA personnel. Fair Market Value (FMV): The sale price at which a prop- erty would change hands between a willing buyer and willing seller, neither being under any compulsion to buy or sell, and both having reasonable knowledge of the relevant facts. Federal Aviation Administration (FAA): The United States government agency responsible for ensuring the safe and effi- cient use of the nation’s airports and airspace. Federal Aviation Regulation (FAR): Regulations estab- lished by the Federal Aviation Administration (FAA) to govern the operation of aircraft, airways, and airmen.

B-4 Fee Simple Ownership: The full purchase of land and improvements. Fixed Base Operator (FBO): Provides aviation services to the general public, including, but not limited to, the sale of fuel and oil; aircraft sales, rental, maintenance, and repair; parking and tie-down or storage of aircraft; flight training; air taxi/ charter operations; and specialty services such as instrument and avionics maintenance, painting, overhaul, aerial applica- tion, aerial photography, aerial hoists, and pipeline patrol. Freehold sale: An estate in land, a form of fee simple ownership. Full Privatization: Full privatization refers to strategies where the full control and/or operation of an entire airport are vested with a private entity, including the long-term lease or sale, whether through the APPP or otherwise. As noted above, APPP is a program under which a long-term lease or sale can occur with full control vested in the private opera- tor except for certain residual powers retained by the airport owner. General Aviation (GA): That portion of civil aviation that encompasses all facets of aviation, except air carriers. Golden share: A share held usually by government with- out economic value which conveys defined voting rights over airport strategic and other decisions. Gold plating: A perceived problem of systems of economic regulation that incentivize over-investment. Governmental Bonds or non-AMT Bonds: Bonds as defined in Section 141 of the Code where interest is fully free of taxation for bondholders. Grant Assurances: Obligations attached to FAA adminis- tered airport financial assistance programs that require the recipients to maintain and operate their facilities safely and efficiently and in accordance with specified conditions. Heavy handed regulation: An approach to regulation of aeronautical charges where price approval is set with maximum regulatory intervention. Hybrid till: An approach to regulation of aeronautical charges where the level of charges is set to recover aeronauti- cal costs less a subsidy from the profits of non-aeronautical activities. Financial Investors: Providers of equity, including private equity funds, infrastructure funds, and pension funds. Lease: An agreement whereby the owner of real property (landlord or lessor) gives the right of possession to another (tenant or lessee) for a specified period of time (term) and for a specified consideration (rent). Lease Term: A fixed, noncancelable period of time for which a lease agreement is in force. This terminology refers to the lease period. Lenders: Providers of debt financing to support an acqui- sition or as ongoing lenders, including lending bankers, infra- structure funds, and the bond market. Many airports are financed by a mix of equity, bank debt, and bond debt. Light Handed Regulation: An approach to regulation of aeronautical charges where price approval is set with minimal regulatory intervention, potentially through reserve powers regulation. Reserve powers regulation is an approach to regu- lation of aeronautical charges where price approval is set by agreement between airports and airlines, with an indepen- dent regulator deployed if agreement is not reached. Long-term Lease or Sale: A long-term lease, long-term concession, sale, or other transfer of an entire airport to pri- vate operation and/or ownership (e.g., BAA in the United Kingdom, Australian airports). Management Contract: An approach where a private entity manages an airport or certain airport facilities for a specified period of time and typically provides little or no capital investment. The private manager’s objective is to improve the financial and operational efficiency of the facil- ity for which the manager is paid a fee and is reimbursed for its expenses, subject to a budget that is usually set by the manager and approved by the airport owner. Most air- ports operate their public parking facilities using a manage- ment contract, and some use a management contract for the operation of individual terminals or master terminal con- cessions, hangars, warehouses, or, in a few cases, for their entire airport. Master Terminal Concession Developer: An approach where the developer acts as the airport owner’s master lessee and is responsible for developing and managing terminal concession and retail activities, including merchandising, retail, food and beverage, and sometimes advertising services. Typically, the concession developer is not authorized to oper- ate terminal concessions except in the case of a vacancy. The airport owner and developer share in the revenues under var- ious formulas. Often the developer is required to contribute to a repair and replacement fund to cover certain repair and replacement costs. National Plan of Integrated Airport Systems (NPIAS): A document that is prepared and published every 2 years by the FAA, which identifies public-use airports that are important to public transportation and contribute to the needs of civil aviation, national defense, and the Postal Service. Airports under the NPIAS are eligible for AIP grants.

B-5 Non-aeronautical: Uses and services that are not related to the movement of aircraft, passengers, baggage, mail, and cargo. Nonprimary Airports: Airports with less than 10,000 annual passenger enplanements (boardings), of which there were 125 in calendar year 2010. Outsourcing: The delegation of operations from the pub- lic sector to a private entity that specializes in the operation, maintenance, or management of that activity. Parking Concession Agreements: An approach where the private operator is typically responsible for all aspects of day-to-day parking operations, including shuttle buses, facil- ity maintenance, and fee collections. As payment for their services, the concessionaire receives a percentage of the gross revenues from parking operations, but is required to pay the greater of this percentage amount or a minimum annual guaranteed amount to the airport owner. Therefore, the con- cessionaire assumes most of the risk for potential downturns in parking revenues, but also receives greater rewards if there is an unexpected increase in airline passenger traffic. Partial Privatization: Partial privatization refers to all other strategies where partial control and full ownership of an airport remains vested with the public owner. Passenger Facility Charges (PFCs): A charge per eligible enplaned passenger in the United States authorized by 49 U.S.C. 40117 and regulated by 14 CFR Part 158 for FAA-approved capital improvements. PFCs are an exemption from the Anti- Head Tax Act. Primary Airports: Airports with more than 10,000 annual passenger enplanements (boardings), of which there were 375 in calendar year 2010. Private Airport Operators: Participants in full airport privatization that do not have an equity interest in the trans- action but operate the facility. Private Activity Bonds or AMT Bonds: Bonds that are generally excluded from taxable income of the holder, is an item of tax preference under the alternative minimum tax provisions of Section 142 of the Internal Revenue Code of 1986 (as amended) and the Treasury Regulations. AMT Bonds are issued for facilities that will have excessive use by private users (e.g., terminal buildings). Private Airport Development: Development of an entire airport without the aid of federal or state grants by private investors to be operated as a for-profit business. It should be noted that private airport development without government support is not considered to be airport privatization for pur- poses of the guidebook since it does not involve the transfer of control or ownership from the public sector to the private sector. For example, Branson Airport, which was developed without government funding, is not considered a form of air- port privatization. Project Financing: Project financing is the most common way to channel private sector investment into public sector infrastructure. Money is borrowed (often through a tax-exempt conduit issuer of municipal bonds) for the specific purpose of financing a project, and lenders are repaid only from the cash flow generated by the project or, in the event the project fails, in some cases, from the value of the project assets. Thus, if project revenues never materialize because the project is abandoned during construction or if project revenues are disrupted because of operational problems, there is no alter- native source of cash flow to meet debt service requirements. Most examples of airport project finance transactions in the United States involve special purpose facilities for single or multi-tenant use, typically an airline (e.g., unit passenger terminal, terminal equipment, or fuel storage and distribu- tion systems), one or more cargo tenants (cargo buildings), or rental car companies (consolidated rental car facilities). Public-Private Partnerships or PPP or P3: P3s are strate- gies in which a public agency (federal, state, or municipal) grants a private entity the right to design, build, maintain, operate, or finance airport infrastructure (e.g., terminal building, cargo building, entire airport) for a contracted period while the public agency maintains rights or obliga- tions during the contract period and maintains ownership of the asset. PPPs can confer a wide range of options in terms of capital allocation and respective levels of participation, ranging from a design/build contracting process to innova- tive approaches where a private operator takes charge of the construction, financing, and management of an asset over a long-term concession. Public-use Airport: An airport open to the public that also meets the following criteria: (1) publicly owned, (2) privately owned but designated by FAA as a reliever, or (3) privately owned but having scheduled service and at least 2,500 annual enplanements. OpEx: Operating expenses. Regulatory Asset Base (RAB): The investment base upon which the operator is permitted to earn a reasonable return. Surplus Property Act: An act of the U.S. Congress enacted October 3, 1944 to provide for the disposal of surplus gov- ernment property to “a State, political subdivision of a State, or tax-supported organization” that puts limitations on the sale, lease, encumbrance, transfer, or disposal of any part of the airport owner’s title or other interests in such property.

B-6 Tax-Exempt Debt: Instruments such as governmental bonds, private activity bonds, and other debt obligations, which are exempt from certain federal taxes and sometimes state taxes. Interest on “Private Activity Bonds” or “AMT Bonds,” although generally excluded from taxable income of the holder, is an item of tax preference under the alterna- tive minimum tax provisions of Section 142 of the Inter- nal Revenue Code of 1986 (as amended) and the Treasury Regulations. Interest on “Governmental Bonds” or “non- AMT Bonds” as defined in Section 141 of the Code is fully free of taxation for bondholders. AMT Bonds are issued for facilities that will have excessive use by private users (e.g., terminal buildings). Non-AMT Bonds are used for facilities that do not have an excessive level of use by private users (e.g., roadways and sometimes parking and airfield facili- ties). The federal subsidies for AMT and non-AMT bonds result in lower interest costs on long-term debt, which pro- vide a comparative advantage for public entities financing infrastructure improvements. Vision 100–Century of Aviation Reauthorization Act (Vision 100): Public Law (P.L.) 108-176, which authorized obligation authority for AIP for federal fiscal years 2004 through 2008.