Privatize Cayman’s airports

Thirty years ago airports were assumed to be a basic function of government just about everywhere in the world. But in 1987 British Prime Minister Margaret Thatcher changed that perception by privatizing the British Airports Authority, owner/operator of London’s Heathrow, Gatwick and Stansted airports.

That successful initial public offering triggered a global shift in perceptions and practice that has led to some 450 airports around the world having some form of private investment and/or operation.

Among the major airports that have been privatized, in whole or in part, are Athens, Auckland, Cancun, Copenhagen, Frankfurt, Johannesburg, Lima, Lisbon, Madrid, Melbourne, Paris, Rio de Janeiro, Rome, Sao Paulo, Santiago, Sydney and Vienna – to name just a few.

This transition has given rise to global airport companies, many of which own or manage airports in a number of countries, among them AENA Aeropuertos, Aeroports de Paris, Fraport, Australia Pacific Airports and Grupo Aeroportuario del Pacifico (GAP). In Airline Business’s latest ranking of the world’s largest airport providers, 40 of the top 100 are investor-owned companies. Those 40 accounted for 50.5 percent of the revenues of the 100 providers.

Airport privatization in Europe has generally meant the outright sale of either a part-interest or 100 percent of an airport, either via competitive bidding process or an initial public offering of shares. Other developed countries, such as Australia and New Zealand, have offered long-term leases under which airport companies are invited to operate and manage the airport as a for-profit business.

But in smaller, developing countries, the most common form of privatization is the long-term concession. Companies or consortia bid for the right to design, finance, build, operate and manage a much-improved airport or set of airports, bringing the country’s aviation infrastructure into the 21st century.

In addition to global airport companies, another industry has developed in the last two decades: global infrastructure investment funds. When an airport is put up for privatization, it is quite common for typical bidders to be a joint venture of an airport company and an infrastructure investment fund.

That was the case with the 2013 bidding for the San Juan, Puerto Rico airport, in which the winning team consisted of New York-based Highstar Capital and Mexico’s ASUR, operator of nine airports in the country’s southeast. Infrastructure investment funds have raised some $300 billion in the past decade or so, to invest in portfolios of promising airports, seaports, electric utilities, pipelines, water projects, etc. There is ample capital available for upgrading infrastructure such as airports.

Why do governments, especially those in smaller countries, privatize their airports? The reasons generally include some combination of the following:

  • To finance and implement significant modernization and upgrading of airport facilities and services;
  • To change the business model to one that is explicitly commercial;
  • To de-politicize airport management, to enable the airport to actually be run as a business; and,
  • To increase tourism, by providing travelers with state-of-the-art airport facilities.

When I advised the government of Jamaica, in the 1990s, on the case for privatizing the airport in Montego Bay, the country’s main tourist airport, all four factors were part of the case for privatization (which the government did, successfully, in 2003). The recent Ernst & Young report, “Project Future: Creating a Sustainable Future for the Cayman Islands,” suggest that a similar case applies to the Cayman Islands’ three airports, and especially to Owen Roberts International on Grand Cayman.

Before getting into those specifics, it is worth addressing a question many are likely to ask. Would global airport companies and investment funds that deal with airports in London, Rome or Sao Paulo be interested in airports the size of those in the Cayman Islands? One way to answer this question is to review recent airport privatizations in the Caribbean. Table 1 lists recent long-term concession deals in neighboring island countries, suggesting that even the smaller island states can attract interest from these new industries. See Table 1 

Country     City and/or Airport   Date        Concession Term 
St. Martin Princess Juliana International Airport 1997    33 years
Jamaica    Montego Bay, Sangster International Airport 2003    30 years
Curacao     Curacao International Airport 2003    30 years
Bahamas    Nassau, Lynden Pindling International Airport 2007    30 years
Puerto Rico San Juan, Luis Munoz Marin International Airport 2013    40 years
Jamaica    Kingston, Norman Manley International Airport Under way  25 years
St. Lucia Hewanorra International Airport Under way 30 years

Copy-of-airport-overcrowding
The waiting area at Owen Roberts airport  

  
While the Cayman Islands is smaller than any of these, it is about 80 percent as populous as St. Martin, which was among the first Caribbean countries to privatize its airport. And while Cayman may not attract the interest of the largest global airport companies, there are a number of smaller firms, such as AFCO and Vantage Airport Group, that are investing in small but promising airports.
What would privatization do for Cayman airports?

Based on the information in the Ernst & Young report, Cayman’s airports are not providing competitive services needed for a modern Caribbean tourist destination. As Table 1 suggests, a growing number of competitor destinations have turned to private-sector investment and management to upgrade their airports. The Cayman Islands should do likewise. This is especially important given the recent thaw in U.S.-Cuban relations that could lead to Cuba becoming a far more significant competitor for American tourists in particular in coming decades.

The most obvious need is for significantly improved facilities, especially at the country’s primary airport, Owen Roberts International. It lacks modern boarding bridges (jetways), facilities for U.S. preclearance for returning passengers, enough terminal space to handle peak passenger loads, and modern infrastructure such as common-use boarding pass kiosks for passenger check-in. It also falls far short in state-of-the art shops and dining facilities that international travelers have come to expect.
 

On the airside, the main runway is not long enough for the largest jet airliners, and it also lacks a runway safety area. Whether these changes should be implemented at the existing property or should be the basis for a replacement airport on a different site is a question deserving further study.

A second serious problem is the airport’s politicization. Because it is required to pay an arbitrary dividend to the government, the airport is unable to be fully self-supporting on the basis of generally accepted accounting principles. And government policy deprives it of the primary method airports worldwide use to finance large-scale capital modernization: issuing revenue bonds.

If the airport were privatized under a long-term design-build-finance-operate-manage (DBFOM) concession, all airport revenues would go to the airport company. Its business model would shift from that of a non-profit government agency to that of a commercial enterprise, seeking ways of satisfying its airline, private pilot, and passenger customers by providing them services for which they were willing to pay.

An airport privatized with that kind of business model would give a significant boost to tourism, by providing tourists with a far more positive airport experience thanks to modern facilities and services.

And that would be greatly enhanced by the provision of preclearance for U.S. tourists, as they are used to in the Bahamas and Canada.

One question that remains to be analyzed is whether to offer the three airports as a package or to only privatize the most attractive one, Owen Roberts International. One way of testing the market’s interest would be to first issue a request for information (RFI), to find out reactions of airport companies and infrastructure investors to taking on the three-airport package versus simply dealing with Owen Roberts International.

The information gained from the RFI could be used to create a request for proposals (RFP) that would maximize serious responses from bidders. But in between the RFI and the RFP, the government would be wise to issue a request for qualifications (RFQ), inviting firms or consortia to document their track records and credentials in airport privatization. Assuming a decent response to the RFQ, the normal practice would be to select the several most-qualified teams.
 

Having only a small number of well-qualified teams respond to the RFP increases each team’s likelihood of success and avoids the need to spend time and money reviewing proposals from poorly qualified teams.

Tourism is a vitally important part of the Cayman Islands economy. Having state-of-the-art airports would enhance the Islands’ tourism, creating pleasant experiences that lead to repeat business. Airport privatization is a proven path to better airports.

Robert Poole is Director of Transportation Policy at the Reason Foundation and editor of its e-newsletter, Airport Policy News. He received two degrees in engineering from MIT and is a member of the U.S. Government Accountability Office’s National Aviation Studies Advisory Panel.
 

 

CI-Airport-sm

Owen Roberts International, Grand Cayman
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Robert Poole

Poole earned his B.S. and M.S. in mechanical engineering at Massachusetts Institute of Technology (MIT) and did graduate work in operations research at New York University.Robert Poole is director of transportation policy and Searle Freedom Trust Transportation Fellow at Reason Foundation. Poole, an MIT-trained engineer, has advised the Ronald Reagan, the George H.W. Bush, the Clinton, and the George W. Bush administrations.

Robert Poole
Director
Transportation Policy
Reason Foundation


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