Airport Privatization

Airport Privatization

Airport privatization has been slow to develop in the United States.  Although Congress established the FAA’s Airport Privatization Pilot Program in 1997, there has been little success in implementing the program over the last several years.  As a result, design and management consultancies working domestically have had limited or no exposure to this form of airport ownership.

Outside the U.S., airport privatization is quite common.  Since the British Airports Authority (BAA) was privatized in 1987, airport facilities have been sold and leased in numerous countries, including Australia, Bolivia, Canada, Chile, Costa Rica, Cyprus, Germany, Greece, India, Mexico, New Zealand and Peru.

As U.S. firms begin to expand their airport design and management practice into the global marketplace, understanding the differences between doing business in the airport privatization arena, compared with working domestically for public agencies is vital to be successful.

There are a number of ways that consultancies can participate in the airport privatization business.  First, they may act as a technical or financial advisor to the government agency that is developing a tender process for privatizing one or several airports in its airport system.  Governments will often seek the advice of companies with previous international experience in developing these types of tenders.  Firms can also be involved in an airport privatization business by providing design and technical support – either directly to a private entity bidding on an airport concession tender or as part of a design-build team.

However, partnering with other companies who have experience in the privatization of airports is typically the best way to enter this market. Establishing relationships with one or more private entities or builders prior to the release of a bid is often the best way to ensure future participation.

Once the decision to bid has been made, private entities develop proposals that include details of how they will develop and operate the airport or airport system over a long-term concession period, given their experience and expertise.  The proposals typically include complete long-term development and operational plans upon which its commercial offering to the government agency making the tender is based.

Given the comprehensive nature of the technical proposal, the bidder often seeks the assistance of a design-build team to produce a long-range master plan and short-term development program indicating the facilities, costs and implementation strategy to meet the minimum technical and commercial requirements of the tender.

As a result, firms will typically be asked to produce a significant amount of planning and conceptual design work during the tender process to serve as the basis for an indicative construction cost estimate prepared by the builder. The private entity then includes the construction cost as well as the operational and financing costs in its financial model to determine its commercial offering.

There are a number of ways that private entities can compensate designers and builders for developing the financial model input. The most common approach is for the private entity to cover the design consultant’s direct salaries and out-of-pocket expenses to prepare the conceptual design and then award a success fee if the proposal is selected by the government agency and financial close is completed. Builders will often be similarly compensated for developing the implementation strategy but may not be paid for their time and effort preparing the actual construction bid, since this is a typical cost of doing business when competitively bidding on construction projects.

The design-build team is typically awarded the sole source contract to design and build the initial capital improvements identified in the proposal. Ultimately, it is important to note that implementation of the capital works program, in compliance with the terms of the privatization proposal, is essential to achieving the return on investment expected by the private entity.  Therefore, the plans, schedules and associated costs produced for the bid are typically considered legal commitments by the design-build team to deliver the project in compliance with the bid proposal.