Common sense changes to increase flow of private capital into airport infrastructure

chao airport privatization
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Airport Infrastructure

Ideas to Increase Private Capital

secretary chao airport privatizationAt the Department’s 50th Anniversary, Secretary Elaine Chao delivered some very thoughtful comments about use of private funds in developing the transportation infrastructure. These words, directly applicable to airports, were particularly instructive:

“This infrastructure has been the backbone of our country’s economy for the past 50 years, strengthening competitiveness and creating unprecedented mobility and opportunity.

Today, however, the infrastructure we all grew up with is aging

The President has consistently emphasized that one of his top priorities is modernizing our country’s outdated infrastructure.

Emerging technology also requires a regulatory approach that ensures safety, while encouraging innovation and preserving creativity. This last point is especially important. Creativity and innovation are part of the great genius of America—one of its hallmarks

The President’s plan hopes to unleash the potential for private investment in infrastructure by incentivizing public-private partnerships. This is one additional way to address the resource needs of transportation systems.

Investors say there is ample capital available, waiting to invest in infrastructure projects. So the problem is not money. It’s the delays caused by government permitting processes that hold up projects for years, even decades, making them risky investments. That’s why a critical part of the President’s infrastructure plan will include common-sense regulatory, administrative, organizational, and policy changes that will encourage investment and speed project delivery.

Secretary Chao’s able career and political staff will bring to her desk some of the many studies performed by brilliant academicians and some of the best minds of the public sector on airport privatization (statutory [49 United States Code §47134] or partial); articles, reports and studies such as these:

The FAA has a very instructive web page on how it has administered the Pilot Privatization Program, and at the end of 2016, a fact sheet was issued. The scoreboard of the applications submitted shows a telling pattern:

airport gao analysis of faa data

Airport Name Airport Location Application Status
Brown Field Municipal Airport San Diego, CA Application withdrawn 2001
Chicago Midway International Airport Chicago, IL Preliminary application withdrawn September 9, 2013
Gwinnett County Briscoe Field Lawrenceville, GA Application withdrawn June 11, 2012
Hendry County Airglades Airport Clewiston, FL Preliminary application approved October 18, 2010. Airport Sponsor is negotiating an agreement with a private operator. The airport sponsor is preparing a final application.
Louis Armstrong New Orleans International Airport New Orleans, LA Application withdrawn October 21, 2010
Luís Muñoz Marín International Airport San Juan, Puerto Rico Preliminary application approved December 22, 2009. Airport Sponsor published a Request for Qualifications in July 2011. Sponsor selected Aerostar Airport Holdings on July 19, 2012, to become the private operator. The FAA held a public meeting on September 28, 2012, to hear comments on the final preliminary application. The FAA approved the final application to privatize Muñoz Marín International Airport in San Juan, Puerto Rico, on February 25, 2013.
New Orleans Lakefront Airport New Orleans, LA Application terminated 2008
Niagara Falls International Airport Niagara Falls, NY Application withdrawn 2001
Rafael Hernández Airport Aguidilla, PR Application withdrawn 2001
Stewart International Airport Newburgh, NY The first commercial service airport to participate in the FAA’s privatization program from March 2000 to October 2007. The Port Authority of New York and New Jersey now operates the airport.
Westchester County Airport White Plains, NY Preliminary application accepted December 2, 2016

 

The prevalence of “WITHDRAWN” in the status column suggests that delay has been the death of the FAA PPP; WHY?

1. Political Science

a. The Governors

Institutionally, the owner (Board, City management, etc.; hereinafter collectively “Governor”) and the management are neither comfortable nor patient with the concept of “privatization. For example, the US Congress debated the transfer of control of National and Dulles Airports to an independent authority, many members questioned the wisdom of ceding their power to influence these two facilities to a Board over which they had no political leverage.

Take that political science lesson and apply it to a local level. There someone with governance responsibility exercises that power in very concrete ways. Everything from the mundane (summer job candidates) to significant (major contract awards, responding to noise complaints) gives that airport “governor” helps create a personal value to being on the Board. Collectively, these “governors” appreciate the gravity of their decisions and are loathe to relinquish it.

At some point in the dialogue of this Board (or City management) a serious debate initiates about existential issues:

  • Are we best qualified to run this complicated business?
  • In the case of an airport which has expenses greater than revenues, is this a risk better borne by the private sector?
  • Does the airport siphon off funds from other municipal demands or to reverse it to a positive statement, by “privatizing” the airport might we generate revenues to help sustain the city’s essential services?
  • ?

These are difficult questions and they are balanced against the apparent institutional benefits of the “governors.” The positive considerations are challenged by the municipal employee representatives, the current users (GA and/or airlines; both of which are concerned that the profit-minded private entity will increase charges) and the neighbors who are certain that privatization = increased usage.

The point is that the “Governors’” decision to support privatization abhors delay. Process which consumes time opens chances to defeat the decision for bad and good reasons.

b. The Management

Most US airports are well managed and do not require private intervention to assure their futures. Most US airport directors/Presidents & CEOs /managers are competent.

However, there are exceptions to this generalization and poor local leadership may be a valid basis for proposing privatization. Smaller facilities do not always create a cash flow to afford the talent needed to provide the needed level of safety, adequate marketing of the asset to the neighbors and to attract good users to support the investment.

This generalization illuminates the fact that at many airports for which privatization should be considered, it is rare to see the local management support such a transition. She/he can be a source for information and arguments against this change.

Delay in processing is most likely to engender a series of local editorials filled with propaganda against what may be a wise transition.

2. Finance

Financiers horde their capital; once they make a commitment to a project, those dollars are frozen. Transactions, which have a short span between opening and closing, equate to desirable inventory for retail companies. When a banker signs the papers supporting a specific deal, those dollars are locked up.

PPP has a deserved difficult reputation among the private sector institutions.

 

Common sense solutions:

•  Shorten the process by pre-qualifying privatization firms— Every FAA review involves the time needed for the FAA staff to assess the competence of the firm(s) seeking to acquire an interest in an airport. It might be more efficient to establish set criteria of what the Privatizer needs to demonstrate qualification. The primary dimensions of this a priori test might include:

  • Financial capacity—enough dollars to finance transactions between $X million and $YZ million;
  • Financial Competence– demonstrated track record to handle the expenses, debt payments, forecasting, revenue realization, etc.
  • Safety Expertise– staff ability to maintain Part 139 certificate and GA safety systems.
  • Marketing– part of a proposal may depend on the Privatizer’s ability to increase revenues; demonstrate generic ability to attract demand, increase use, develop collateral income, etc.
  • Environmental Compliance—experience and knowledge to meet all of the requirements
  • Community Relations– both the staff and the experience in communicating with neighbors, meeting the local government standards, etc.

•  Create an Independent Financial Expertise Panel— an expectation mentioned in the Secretary’s address is that creativity from the private sector should help fill this need. New financial structures are complex and will test the oversight ability of 800 Independence Ave., which is far removed from Wall Street. If mechanism which does not fit into past practices is brought to the FAA for review, the staff will require substantial time (i.e. delay) to become knowledgeable enough to pass judgment. An existing panel of sophisticated experts, not involved in municipal finance but with strong background in the debt markets, can expedite the time needed to review.

•  Support and supervise the Review Process— one of the most futile reforms intending to speed up bureaucracy is to establish mandatory deadlines. Forcing the timeline does not prohibit the FAA staff from posing a Hobbesian choice—grant me a deadline or denial of the application will be issued. Better approach—size the review team with adequate staff to manage the paperwork and assign someone to receive periodic updates on progress.

•  Educate the “Governors” on situations in which ‘privatization” makes sound governance sense— Privatization is not a panacea; it may not make sense in some instances. Equally, there are many cases in which the transfer of these attractive nuisances constitutes great public policy. Oddly enough, many of the proponents for this transaction have been local Democratic leaders. As noted earlier, there are valid concerns which are posed by these transfers; this information campaign could show the GOVERNORS HOW to premise the transfer on the Privatizer’s compliance with such continued neighbor needs.

 

These are common sense changes which the Secretary may implement without a long NPRM process. More may be done to incentivize creativity, like deleting the revenue diversion rule, but that alteration would require Congress to act. One AIP stricture which adds to the capital costs is Davis-Bacon Act wages (with which the Secretary is well versed), but that will require Congressional amendment. The Secretary might consider creating a data bank to help municipal employees displaced by a PPP approval to find other work. It might be appropriate to establish a task force to consider an even more streamlined PPP process of at risk GA airports.

While these suggestions involve the FAA’s formal statutory privatization process, this sector has already benefited from private involvement in developments without the transfer of title or long term lease; that realm could benefit from a more lenient interpretation of the AIP Grant Sponsor Assurances.

The existing body of commentary on PPP has been written largely by scholars with theoretical knowledge of these transactions. If common sense solutions are the Secretary’s goal, then she would be well advised to talk to the practitioners, the ones

  • who have spent thousands of hours negotiating these documents,
  • dealing with the processes, trying to contain costs or
  • bringing new financial instruments to the market.

THE DEVIL IS IN THE DETAILS; THESE PEOPLE KNOW THESE DEVILS.

airport infrastructure details

 


Sec. Chao: Regulations, not funding are holding up infrastructure advancement
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