Deloitte report says alternative sources of financing are needed, with public-private partnerships one solution
The expansion of airport infrastructure in the Middle East is likely to be hit by the decline in oil prices, as regional governments tighten their budgets, a new report by Deloitte has claimed.
Alternative forms of funding required to deliver the required infrastructure across Middle East airports were highlighted in Deloitte’s report, which also focused on the need to counteract the potential reduction in the ability to raise the necessary finance.
“Airport privatization and the appeal of Public-Private Partnerships (PPPs) have long been talked about in the region with varying application of PPPs as a financing solution,” said Dorian Reece, Deloitte Corporate Finance Limited Middle East’s Head of Aviation.
“However, there is a broad spectrum of differing financing options across the risk, return and control considerations when tapping the PPP market.
“The track record of successful airport PPPs provides a cautionary tale and one that the Middle East region’s governments and investors should consider. Some of the challenges witnessed include: lack of regulatory clarity, optimism bias, and weak dispute resolution,” he added.
There are varying models being applied to airports across the spectrum of privatisation options, the report said. When structuring the best airport PPP, it is key to achieve the best value for money, which will come from achieving the appropriate risk allocation between the public and private sectors.
It is also important to ensure that the required controls are in place to protect the travelling public, while also putting in place pricing mechanisms that maximise financial returns, the report added.
One strong indication of the appetite for airport PPP’s is the interest from leading global airport operators who are looking to secure airport transactions or management agreements within the region. These include the likes of Malaysian Airports, the Airport Company of South Africa and Changi Airport Group.
The Deloitte report also predicts that the Middle East’s airports will continue to enjoy success, with the likes of Abu Dhabi, Dubai and Doha likely to be market leaders. This success will enable them to leverage their global brand and pursue international opportunities, it said.
“With declining funding from government for major projects, we are also observing the region’s airports increasing their focus on maximizing returns from existing assets as well as leveraging PPPs delivery models of standalone projects such as baggage system upgrades, security and car parks,” it explained.
“We are increasingly seeing airports within the region seeking to better understand opportunities to generate additional revenue to improve overall profitability. Recent examples of this are a number of airports introducing a transfer charge of c.$8 – 10 for all passengers,” added Cynthia Corby, partner and construction leader at Deloitte in the Middle East.
“This likely to see further airports in the region implementing similar charges to enhance the financial returns that airports deliver. We are also seeing the need to drive improvements in performance through airport operators gaining greater insight into the true performance (Return on Investment, Return on Equity) of their assets. This is through airports improving cost allocation and improving the modelling to assess the whole life cost of the assets to ensure the right level of capital investment is being made as efficiently as possible.”