Public–Private Partnerships: What Are the Lessons Learned? (2020)

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5 SESSION 1 The Landscape of P3s Peter Kirsch, Kaplan Kirsch & Rockwell, Presenter Stephen Van Beek, Steer, Presenter Peter Kirsch and Stephen Van Beek highlighted the landscape of P3s at U.S. airports. Kirsch noted that over the past 2 years, there has been recognition of the need for infrastructure investment at U.S. airports and new models for delivering financing for those investments. He added that the idea of valuing airport assets is also new in the United States. Van Beek stated that the past 10 years of growth in the aviation industry is unprecedented, and the country’s largest airports are facing capacity challenges. While revenue comes incrementally, costs are growing exponentially. There are precedents for airport privatization and P3s internationally (e.g., in Australia), but the United States has been slow to adopt those models. Van Beek noted that P3s come in many different forms for different types of assets. He added that, compared with 25 to 30 years ago, there is significantly more capital available now for investments in lower-risk projects, such as those at airports. Kirsch provided two definitions for P3s: • An arrangement by which one or more services or projects that traditionally have been provided or performed by a public sponsor are instead provided or performed by a private-sector entity. • An arrangement through which a private-sector partner will exercise greater control, have greater responsibility, and/or make a greater financial investment than would customarily be the case with respect to a particular type of airport contract, service, or project. Van Beek added that with P3s, the lease with the commercial entity becomes a key governing document for the airport. Kirsch stated that, historically, there have been very clear definitions of the roles of the federal government, local government, and private sector at airports, which is not the case at airports internationally. Van Beek noted that these roles are beginning to change with the increased use of private capital and role of private entities in managing certain airport functions. Kirsch stated that there are very few domestic private commercial airports, but many publicly owned general aviation airports. He noted that the public and private sectors have always been very connected, although the dynamic between public- and private-sector stakeholders can vary significantly across airports and across airport transactions (e.g., a rental car facility versus terminal construction). Kirsch noted that state legal frameworks

6 for P3s have also changed significantly within the past several years, with states becoming more amenable to private–sector involvement in owning, operating, and funding infrastructure. Van Beek noted that unlike elsewhere in the world, U.S. airports are heavily regulated to ensure safety, security, and environmental protection. Kirsch added that this is important because so much private investment comes from international sources, and investors must be educated on how U.S. airports are owned, operated, and regulated and understand the limitations this imposes. Kirsch noted that airline lease agreements may be new to foreign investors. Kirsch described FAA’s Airport Investment Partnership Program (AIPP), which is designed to provide an offer to private capital that FAA can control. He added that domestically, airports are valued for the indirect benefits they bring to a community or region, not direct economic benefits such as economic returns to stakeholders. Kirsch noted that while it is not impossible to align direct and indirect benefits, a deal with a private investor must ensure that community goals also meet investors’ goals, and vice versa. Van Beek noted reasons for examining new financing alternatives, including accessing traditional and nontraditional sources of capital, new partners, and global expertise. He stated that the key issues regarding P3s include who takes on what risks, how much those risks cost, what the alternatives are, and how to obtain the best deal. Kirsch reviewed sources of capital funding for airports, including the AIPP, private capital, general airport revenue bonds, and passenger facility charges. Van Beek noted that these sources come with either grant assurances, passenger facility charges, or a bond covenant and that the challenge for airports is to decide which source of funds pays for what, and when, and to put the funding package together. Kirsch noted the continuum of private–sector engagement, including advisory services to product or service sales; service contracts; management contracts; developer financing and operations; full privatization; and full airport development by the private sector. He observed that the latter is very uncommon and will likely remain so and that there are different iterations within the developer financing operation category, including design–build (DB), design–build–transfer, design–build–operate–maintain, design–build–finance, and design–build–finance–operate–maintain (DBFOM). He stated that understanding how to shift control from the public to the private sector becomes an important factor in deciding where to obtain funding from. Van Beek stated that ACRP Report 66: Considering and Evaluating Airport Privatization1 is an excellent resource on the spectrum of public- and private-sector involvements in airports. 1 Ernico, S., B. Boudreau, D. Reimer, and S. Van Beek. ACRP Report 66: Considering and Evaluating Airport Privatization. Transportation Research Board, Washington, D.C., 2012.

7 Kirsch stated that the basic concepts behind privatization are not the same as those behind P3s; privatization involves taking a municipal asset and monetizing it. Van Beek noted that renewed interest in P3s in today’s market is being driven by public-sector challenges, including growth (in particular, passenger growth, which is swamping operational growth), increased efficiency, limited revenue sources, and the need for additional capacity in ground transport systems and elsewhere. He stated that the airport sector is attractive to investors who may be backing pension funds but may appear riskier to real estate investors. Kirsch stated that there is no standard airport P3 contract; deal structures are complex and unique, and risk is allocated differently at each airport. Van Beek noted five key factors for determining transaction type: market or traffic risk, cost, revenue, rights and obligations or service, and term. He added that it is important not to overspecify the terms of the deal up front. Van Beek noted that in the business planning stage, investors will want to look at airport traffic, commercial revenues, aeronautical revenues and regulation, operating expenditures, and capital expenditures and develop forecasts. He stated that investors need to look across the entire airport operation and identify how to create additional value in the airport’s business plan. Van Beek stated that to make a deal more attractive, airports should protect their goals for the transaction, conduct advanced homework (e.g., develop a shadow bid), talk with investors, encourage innovative solutions, provide ideas to investors to be integrated into the bid, and solicit competition from at least three interested firms.