Suddenly airport outsourcing plans put on ice

ISLAMABAD: The federal cabinet has reportedly put the outsourcing of airports on ice till clearance by Steering Committee headed by the Finance Minister, well-informed sources told Business Recorder.

On August 29, 2023, the Aviation Division gave a detailed presentation to the Cabinet on the outsourcing of Islamabad International Airport.

It was explained that private sector participation in airports’ operations was an established and successful international practice for improvement in the quality of services, unlocking airports’ revenue potential and to attract investment.

Islamabad airport to be outsourced for 15 years: govt

The Cabinet was further informed that worldwide privately-operated airports accounted for 40% of global air traffic; that 40 of the highest revenue earning airports were based on public-private partnership model and that B major airports of India (including Delhi, Mumbai, Bangalore and Hyderabad) were leased out as public private partnership projects.

It was explained that several options were explored, and efforts were made since a few years, but outsourcing of Islamabad, Lahore and Karachi airports could not be materialised.

Fresh efforts were initiated in December 2022 and after much deliberation, it was decided to steer this effort within the framework of the Public-Private Partnership Authority Act 2017, through an international competitive process.

The aim was to procure a private partner to design, build, rehabilitate, finance, operate, maintain the airport and after termination of concession, transfer it back to Pakistan Civil Aviation Authority (PCAA).

It was added that this would be the first public-private partnership project in aviation sector of Pakistan. After Islamabad, this model is likely to be replicated for the airports of Karachi and Lahore.

The cabinet was informed that the International Finance Corporation (IFC), a member of the World Bank Group, was appointed as transaction advisor on April 11, 2023 under the Public Private Partnership Act, 2017, after seeking approval of the federal cabinet.

IFC enjoyed a rich experience in advising and supporting PPP projects and had already undertaken 360 projects in 120 countries since 1989, with 40 airport related projects since 2005. It was stated that IFC was currently engaged as transaction advisor for outsourcing the operations of Dhaka and Jakarta airports.

It was further informed that the IFC appointed a large team of local and international experts on the airports project and it was working with a team from PCAA under Additional Director General. The IFC team visited the three airports, met stakeholders and carried out necessary studies and due diligence with the support from CAA team.

The Cabinet was apprised that as far as the regulatory framework was concerned, the governing law was the Public-Private Partnership Act, 2017 and the implementation agency was PCAA.

The regulation and oversight were assigned to the Public-Private Partnership Authority (P3A) and Risk Management unit of Ministry of Finance. It was added that as stipulated by the Act, transaction structure was approved by PIA Board, which was headed by the Minister for Planning, Development and Special Initiatives.

It was explained that the Airport Security Force (ASF), Federal Investigative Agency (FIA), Anti-Narcotics Force (ANF) and Customs (Federal Board of Revenue) would continue to operate and play their respective roles, under the supervision of the Government of Pakistan.

Describing the salient features of the Islamabad International Airport, it was stated that the airport had emerged as a hub for PIA and was already the second busiest airport of Pakistan, after Karachi. It was relatively new and was built in 2018 with no major legacy issues, and mainly for this reason it was decided that the outsourcing shall commence from the Islamabad Airport.

The chair stated that the Aviation Division’s initiative looked satisfactory. However, he said that certain entities were deliberately carrying out negative reporting on the subject. He directed the Ministry of Information and Broadcasting to engage a smart team to fill in the information gaps with timely response and correct information be given to the people, and the government should ward off the negative criticism and project the true picture of such initiatives for information of general public.

The Aviation Division added that a Steering Committee, under Minister for Finance, was earlier set up to oversee and guide the outsourcing of the project.

As Islamabad Airport had no major legacy issues, it was decided to proceed with Islamabad airport first, to be followed by Lahore and Karachi airports. It was further informed that the committee had decided to keep the concession period at fifteen years.

The concession fee would comprise of an upfront payment of $100m and a variable component. It was informed that the committee also approved salient features of the concession and state support agreement. It was explained that the transaction structure was approved by P3A on July 26, 2023, by CDWP and ECNEC on August 4, 2023 and state support agreement was approved by Federal cabinet on August 9, 2023.

The Minister for Culture and National Heritage suggested that infrastructure like the airports were the showcases of national culture and being mindful of the cultural heritage our airports should have the depiction of Pakistan’s culture. He offered to provide artists and technical personnel to assist in the same work.

It was added that as far as the projected CAA revenue shares over concession period were concerned, 48% of total airport revenues were outside the PPP project scope and would continue to accrue to PCAA directly (navigation, taxiway, baggage). It was also informed that the approved transaction structure was based on a combination of upfront and variable fees.

With an upfront fee of $100m, more than half of revenues falling in the project scope would be transferred to PCAA. Over a fifteen-year period, variable fee accruing to PCAA was estimated at $1360mn in nominal terms and $598 m in NPV terms - actual value would depend on bids. Net value for money of the project was estimated at $214mn.

The Secretary also shared the salient aspects of concession agreement with the forum as follows: (i) PIA receivables - Concessionaire will be entitled to set off amounts unpaid by PIA; GoP will pay such amounts to PCAA as compensation and an internal agreement to be signed for this purpose; (ii) CAA employees will continue during the concession years, thereafter, concessionaire will offer employment to at least 25 per cent employees, remaining will continue on roll of PCAA; (iii) reserved functions – PCAA will perform reserved functions such as maintenance of runways and taxiways, provision of air navigation and rescue services, etc., as per required standards. FIA, ASF, Customs and ANF will perform their functions under a service level agreement with PCAA to ensure minimum level of service delivery; (iv) right of Armed Force-Concessionaire will provide armed forces of Pakistan and of such other country as the GoP so authorises access to airport for efficient performance of their functions; (v) Air Service- GoP will retain authority to enter into air service agreements and allocate landing rights; however, GoP will consider concessionaire’s reasonable request in this respect; (vi) Slot allocation- PCAA will retain authority to manage and allocate aircraft landing and timetable slots Concessionaire will allot stands to aircraft at the apron; (vii) Regulation of tariff - land side tariff is unregulated. Air side tariff will be revised by PCAA every three years with 50 year adjustment of cumulative inflation, risk of remaining 50 percent increase to be passed on to concessionaire in expectation of operational efficiencies; (viii) Foreign Exchange -GoP will support concessionaire to open and maintain foreign currency accounts, and for making available foreign exchange and convertibility and transferability in order to meet his foreign payment obligations; (ix) comprising three representatives each from PCAA and concessionaire for joint discussion considering actual and anticipated changes in the market and for efficient performance of concession agreement; (x) Concession Coordination Committee comprising representatives of GoP, PCAA, entities performing reserved functions and concessionaire for overall monitoring of the concession operations and for amicably resolving all issues; (xi) compensation event- if a compensation event occurs in which concessionaire incurs loss, such as breach of reserved functions by PCAA or any other entity, PCAA will make payment to concessionaire to rebalance the concession economically; (xii) Independent appointees - one engineer and one auditor appointed by PCAA out of panel of three each recommended by concessionaire to monitor construction and operation of airport, adherence to KPIs, determine nature and amount of compensation and termination events, calculate increase in tariff, monitor airport traffic etc. and capacity plans and ensure concessionaire does not earn a return beyond certain threshold; (xiii) Arbitration- such number of arbitrators as agreed, or in absence of such agreement, by a panel of three arbitrators appointed by ICC. Arbitration proceedings will be governed by ICC rules, seat of arbitration shall be London, while venue for such arbitration shall be Islamabad, governing law will be Pakistani law; (xiv) Termination compensation- PCAA will make termination payments to Concessionaire the quantum of which will depend on cause of termination such as termination due to Concessionaire’s default, PCAA’s default, force majeure event; (xv) the GoP guarantee users rebalance compensation- If entities responsible for reserved functions, fail to meet performance standards in a way that causes revenue loss to concessionaire, then GoP will have a secondary obligation to compensate the concessionaire; and (xvii) GoP guarantee termination compensation- If concession is terminated prior to the expiry date, PCAA will pay termination compensation to concessionaire, and in case of its failure, GoP will make this payment.

It was added that RFP had already been published through international and local press. There was; however, still a need to steer and guide the outsourcing exercise through the Steering Committee.

It was also planned to hold a pre-bid conference to confirm the scope to continue moving forward and to solicit suggestions from potential bidders and if required make adjustments in the concession documents. It was further indicated that a pre-bid conference is planned in September this year.

It was stated that there was need to work on preparation of service level agreements with entities performing reserved functions and between PCAA and GoP on compensation payment; this could be completed by end-September under the guidance of the Steering Committee. After receipt of bids, approximately forty-five days would be required for their evaluation. Commercial and financial close of the project could be obtained by mid-2024.

The Minister for Finance proposed that the technical details should be first deliberated upon in the Steering Committee constituted for the purpose. Thereafter, the decisions will be submitted to the Cabinet, as and when required. This was supported by the Cabinet.

Copyright Business Recorder, 2023