Why U.S. airport public-private partnerships may finally happen

The conventional wisdom about airport privatization holds that the United States is different from other countries. In one sense, that is true. Airports Council International, for example, reports that 75% of airline passengers in Europe use privatized airports (as do 66% in Latin America and the Caribbean, and 47% of passengers in the Asia-Pacific region). Only 1% of airline passengers in the United States use privatized airports.

One part of this view is that there is a role for public-private partnerships (P3s), but only to add or modernize components of an airport—such as major terminal P3s at John F. Kennedy International and LaGuardia airports, P3 rental car centers at Los Angeles Internation and Newark Liberty International airports, and a P3 people-mover being installed at Los Angeles International.

Congress has liberalized the Federal Aviation Administration’s Airport Privatization Pilot Program several times, which initially allowed only five airports and had many other restrictions. Only one U.S. airport was successfully privatized via that program: San Juan International, which was transformed via a long-term public-private partnership lease, winning raves from airlines and passengers.

The latest revision, in 2018, changed the name to the Airport Investment Partnership Program (AIPP), which is more accurate since U.S. law forbids the sale of a commercial airport but welcomes long-term public-private partnership leases. Such leases have become the most common form of airport privatization worldwide.

AIPP now applies to all U.S. commercial airports. A critically important provision is that the revenue from lease payments (whether all up-front or spread over many years) may be used by the airport owner (city, county, or state government) for any governmental purpose rather than only on airport property.

The idea that no U.S. airport owner would consider a long-term P3 lease is falsified not just by San Juan but also by two serious attempts at privatizing Chicago Midway Airport and a more recent attempt in St. Louis.

The St. Louis Lambert International Airport effort led to 18 teams responding to the request for qualifications (RFQ), of which 12 companies were invited and gave detailed presentations to city officials and the airlines serving St. Louis. Before the city’s mayor abruptly terminated the process, the airlines had agreed to support the P3 lease.

Still, studies by the Government Accountability Office and the Congressional Research Service find that most U.S. airport owners are reluctant to give up control (true), that airlines are opposed (once true, but now false), and that U.S. tax laws create a significant obstacle, which is because, unlike in Canada, Europe, Australia, and Latin America, U.S. airport financing is primarily done via tax-exempt bonds. Current law requires that in the event of a change in control of an airport, existing tax-exempt bonds must be paid off. That leads to much lower net lease proceeds for a U.S. airport owner compared to airport owners just about everywhere else in the world.

Also, Congress has authorized tax-exempt private activity bonds (PABs) for surface transportation public-private partnerships but not for airport or seaport P3s. Those factors make U.S. long-term airport P3s more complicated to finance and manage than nearly all other countries.

However, a potential breakthrough has occurred, providing a reason for U.S. airport owners to consider long-term P3 leases. In an interview with Aviation Week, Kevin Burke, chief executive of Airports Council International-North America, lamented the loss in purchasing power of airport passenger facility charges (PFCs), a local user charge authorized by Congress but still capped by Congress at only $4.50 for the past 20 years. He told the magazine that U.S. airports have $151 billion in capital improvement needs over the next decade, but without a significant PFC increase (unlikely for at least five years when Congress is supposed to re-authorize the federal aviation program), the airports need a ‘Plan B’ to finance those projects.

Burke said the most likely option is to “move toward the airport financing model prevalent in Europe and other parts of the world where private companies take over development and management of airports under long-term leases with governments.”

Without a PFC increase, Burke continued, “You’re going to more than likely see…more public-private partnerships to fund the multiple billions of dollars it takes to [re]build airports.”

This is unprecedented. ACI-North America has never before taken a position on airport privatization and public-private partnerships. The American Association of Airport Executives, back when Midway and San Juan were in the news, held several conferences about airport privatization and P3s, at some of which I spoke. But never endorsed the idea, either.

There is still the likely resistance of most airport owners to “give up control of their airports.” That is partly a misunderstanding of what a long-term public-private partnership entails. The city, county, or state would remain the airport owner. And as the public-sector partner in the long-term concession, it would also be the regulator of its private-sector partner. To be sure, a city would have to give up its current ability to micromanage its airport, but it would have a voice in major capital improvements per the terms of the long-term agreement.

Congress has an opportunity to make airport public-private partnerships more viable when it takes up the 2026 reauthorization of the federal surface transportation program. In 2014, a bipartisan House panel suggested that the highways and transit private activity bonds program be expanded to include airports and seaports. Broadening PABs would need a very large increase in the current $30 billion cap on issuance. Ideally, the cap would be removed altogether since PABs for P3s are no longer experimental. And there is no federal cap on tax-exempt bonds for public-sector airports, utilities, etc.

At some point, Congress should also look into changing the rule that requires paying off tax-exempt airport bonds when there is a significant change in airport control. A long-term P3 lease does not change the ownership of the airport, and the owner will be the regulator of its private partner. 

Final points—Global airport companies and infrastructure investment funds see U.S. airports as the last great untapped airport public-private partnership market. And once airport owners realize they are sitting on billions of dollars worth of frozen capital, they may think seriously about this form of infrastructure asset-value recycling.

A version of this column first appeared in Public Works Financing.

The post Why U.S. airport public-private partnerships may finally happen appeared first on Reason Foundation.

Source: https://reason.org/commentary/why-u-s-airport-public-private-partnerships-may-finally-happen/