Brazil’s tough decision on airport concessions

Brazil sorely needs a strategy for its future airport concessions but the choice will not be easy. Although past concessions have brought visible improvements to the airports, there have also been plenty of problems. What are the lessons and how can Brazil model future airport concessions for success?

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Airport concessions during the boom

At the beginning of the decade, following unprecedented growth in the aviation sector led by Brazil’s recent booming economy and plans to host the World Cup and Olympic Games, it was clear Brazil’s airport infrastructure was insufficient and in need of immediate investment. This led the country’s government to open a bidding process for its most important airports. Since then, the heavy investments have translated into visible improvements in operations and passenger experience.

However, the original concession model, in which large amounts of required construction encouraged construction companies to bid and which kept state-owned operator Infraero as a majority shareholder, has proved problematic in the long run.

Adjusting the concession model

At Galeão in Rio, for example, the consortium of Odebrecht (construction), Changi (operator), and Infraero is in trouble. With the country’s troubled macroeconomic situation, operations have fallen short of the optimistic demand forecasts which had led to aggressive bidding by the consortium. Infraero cannot meet its payment obligations and Odebrecht, currently embroiled in scandals, will almost certainly leave the group. Their stakes will be acquired by the Chinese HNA Infrastructure.

By comparison, the four most recent airport concessions (Salvador, Fortaleza, Porto Alegre, and Florianopolis) were won by experienced airport operators, without the involvement of construction companies or Infraero, and successfully raised US$1.2 billion, a premium of 23% over the minimum licence fees. These figures were publicly celebrated by President Michel Temer and his staff.

Exploring airport concession model options

Last month, the government announced its intention to privatise Infraero, which currently still operates 56 airports nationwide. Protests from Infraero employees followed. Simply dissolving Infraero would indeed be complicated, especially with the restrictions for firing government workers.

Since 2012, a “voluntary resignation program” has resulted in only a small reduction in employees. One possible scenario for the future could be to require concession holders to guarantee Infraero employees jobs through 2020.

The Transportation Ministry is currently defining the terms of the IPO. One possibility being considered is combining airports into lots. Smaller, less lucrative airports would be bundled together with more profitable airports like Congonhas and Santos Dumont to ensure the sustainability of those operations. Brazil’s Transportation Minister, Maurício Quintella, said in a recent interview that a final decision on the IPO process and the fate of Infraero should be reached by the end of this month.

In our work supporting federal and local governments on aviation policy, and advising on airport operations and concessions, we have seen the complexity of these kinds of exercises. It will be critical for Brazil’s government to analyse the options and manage the consequences fully.

About To70. To70 was founded in The Netherlands in 2000 and has since expanded with offices in Europe, Australia, Asia and Latin-America. Our clients include airports, airlines, governments and air navigation service providers. At to70 we believe that society’s demand for transport and mobility can be met in a safe, efficient, environmentally friendly and economically viable manner. To achieve this, policy and business decisions have to be based on objective information. With our diverse team of specialists and generalists to70 provides pragmatic solutions and expert advice, based on high-quality data-driven analyses.

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