Welcome

1. 8th CEI Summit Economic Forum PPP Models to Build Airport Infrastructure Matching the Demand in Central Europe Welcome

2. Agenda • Need to Build Up Airport Infrastructure in Central Europe • Private Sector Involvement in the Airport Industry • Public Private Partnerships • Case Study: PPP-Structures as Means for Successful Airport Development

3. Agenda 1 • Need to Build Up Airport Infrastructure in Central Europe • Private Sector Involvement in the Airport Industry • Public Private Partnerships • Case Study: PPP-Structures as Means for Successful Airport Development

4. Central Europe is in terms of traffic volume one of the smallest world’s markets but with strong growth potential 1 Passenger Traffic by Regions 2004 Cargo Traffic by Regions 2004 Key Points • Central Europe is a growing air traffic market and according to industry forecasts this will continue. • The 10 biggest national air transport markets in the continent account for 75% of the air passengers and 80% of the air freight • The relatively stabile level of demand is attributed to fast growing GDPs in the region • However, growth is limited • by lacking competition and insufficient airport infrastructure and • competition with railroad network and other modes of ground transportation Source: Airport Information 2004

5. The CEI countries have been witnessing growing passenger and cargo volumes until 2003….. 1 Passenger Volumes CEI countries (Number of Pax) Cargo Volumes CEI countries (tonnes) Source: IATA, Lufthansa Consulting

6. …but, without Italy and Austria, CE countries showed only growths in passenger traffic but none in air cargo 1 Passenger Volumes CEI countries (Number of Pax) Cargo Volumes CEI countries (tonnes) Source: IATA, Lufthansa Consulting

7. But for the next years GDP and passenger forecasts are above world average underpinning development potentials 1 GDP Development 2005-2005CEI countries vs World Average Passenger Forecast 2005-2008CEI countries vs. World Average Source: IATA, Global Insight, Lufthansa Consulting

8. Increasing importance for aviation as main transport mode in international traffic flows 1 Passenger Traffic at Central European Airports 2004 Key Points Country Passengers tsd % • Rapidly developing transportation markets • Growing interests of the Low Cost Carriers, and market stimulation effect • Integration into EU Market • Participation of national carriers in Alliances (e.g. LOT – Star Alliance) • Seating capacity on international flights continually increasing • But: No domestic air transport markets in most of the Central European countries (except Italy and Poland) => high growth potential Total 80.345 Source: ACI, Albatross, Lufthansa Consulting; Sample of 49 Central European Countries

9. There is a great potential for air cargo development 1 Air Cargo Traffic at Central Europen Airports 2004 Key Points • Central European air cargo traffic accounts only for less than 3% of the world‘s air cargo market • Real intra-continent cargo flows does not exist yet. • 80 % of inter-continental cargo traffic is related to trade with Asia and less than 10% to trade with Middle East countries. • Huge transit potential, but poor cargo infrastructure at the most of the Central European airports • Air imports are dominated by IT goods, pharmaceuticals, electronic, machinery parts and textiles goods Country % Cargo Total Source: ACI, Albatross, Lufthansa Consulting; Sample of 49 Central European Countries

10. Capital expenditures in Central Europe airports increased in the last 5 years 1 Major Airport Developments in Central Europe (> 500 mill. USD) Airport Capital Expenditure by Region (in mill. USD) • :Rome-Fiumicino staged terminal expansion until 2005 US$ 2.9 billion • Lublin/Poland, completely new airport planned in eastern Poland US$ 2.3 billion • Vienna, new Terminal 3, apron, tower, office park US$ 880 million • Zagreb, Master Plan projects US$ 600 million • Prague, major terminal expansion, new runway US$ 585 million Source: ACI Airport Economics Survey 2004

11. Barriers have to be removed to continue with infrastructure improvements allowing for sustained expansion 1 Example Bulgaria Bourgas and Varna Copenhagen Airports emerged as the winner of the tender and was ready to invest in the expansion and modernization of the facilities. Fraport AG/BM Star consortium and the Frenche Vinci groups attacked this deciscion. Supreme Administrative Court demanded reopening of negotiations with the both airports Bourgas and Varna are now pressing hard to find measures of coping with the lack of terminal capacity to serve the increasing volumes of passengers Example Hungary Budapest Ferihegy Airport Originally 10 consortiums were interested in Budapest Ferihegy Airport The initial tender was declared invalid by an employment court A single-round closed tender was launched then and opened to the five parties shortlisted in the original tender Copenhagen Airports was also participating in the process, but announced its decision to pull out Also Australian Macquarie Airports dropped its bid Three bidders only went forth as the tender closed for the majority stake Source: local and international press

12. Agenda 2 • Need to Build Up Airport Infrastructure in Central Europe • Private Sector Involvement in the Airport Industry • Public Private Partnerships • Case Study: PPP-Structures as Means for Successful Airport Development

13. Some privatisation trends... 2 • The privatisation run of the 1990s slowed down after 2000; the privatisation wave is on a recovery path in Europe and North America, where we see the highest level of activity – in line with anticipated worldwide traffic increases • Still only 4% of the world’s airports can be considered being privatised • Projects embrace all types of concessions and models and a wide range of financial instruments; in developing countries (Asia in particular) Public-Private-Partnerships are increasing • Investor groups are diversifying and expanding their business scopes; IPOs and green-field developments are increasing (with mixed success) • Central Europe is still largely bypassed by infrastructure privatisation (due to lack of market opportunities and capital, investment climate, etc.) – Total investments have been declining

14. Airport Privatisation activity is increasing after a period of standstill Examples

15. Agenda 3 • Need to Build Up Airport Infrastructure in Central Europe • Private Sector Involvement in the Airport Industry • Public Private Partnerships • Case Study: PPP-Structures as Means for Successful Airport Development

16. What is a public-private-partnership (PPP)? 3 A PPP is broadly defined as “ a cooperative venture between the public and private sectors, built on the expertise of each partner, that best meets clearly defined public needs through the appropriate allocation of resources, risks and rewards.”

17. Understanding the motivation of the public and private sector as well as the lenders‘ one is key for any PPP 3 Public Sector Lenders Private Sector • Enhancing the ability to raise capital • Transferring responsibilities and risks • Improving airport infrastructure and customer service • Increasing efficiency of airport construction and operation • Know–how transfer • Privatisation proceeds (concession fees, tax income) • Proper risk allocation among the parties through a balanced financing structure • Being repaid according to schedule while being adequately compensated for the risks which remain with the lender • Assuring competent airport management and market environment for the project (as part of risk mitigation) • Strategic objectives (e.g. market entry) • Maximizing investor returns via sustainable growth, operational efficiency and commercial opportunities • Limit the project risks to those which can be managed by the private sector

18. Private Sector participation trend in airport infrastructure:Which model option meets the interest of all parties? 3 State State Private Sector BOT = Build BOT = Build - - Operate Operate - - Transfer Transfer BTO = Build-Transfer-Operate BOOT = Build BOOT = Build - - Own Own - - Operate Operate - - Transfer Transfer LDO = Lease-Develop-Operate Policy Options/ Option 1 Option 1 Option 2 Option 2 Option 3 Option 3 Roles Roles • Service Concessions • Management Contracts • Multiple Concessions • BOT, BOOT, BTO etc. • Long Term Leases • Master Concessions • Multiple Concessions • Trade Sales • Capital Markets PPP Options Ownership Ownership Private Sector State Private Sector Investment Investment Private Sector Management/ Management/ Private Sector Private Sector Operation Operation

19. Successful PPPs are based on attractive assets, clearly defined concessions, and a sound business plan 2 Airport Concession Business Plan • Size - traffic volumes at satisfactory levels • PAX profile - purchasing power to make commercial ventures viable • Traffic - regular and growing flow of traffic • Connectivity - The major markets (tourism and business) should be served frequently • Rights and obligations -of the Public and Private sector should be clearly defined and the technical requirements specified in detail • Exclusivity - airport development should be safeguarded from a detrimental level of competition • Termination rights -clearly linked to contractual defaults • Feasible Strategy - when it comes to generating additional traffic and maximizing aeronautical and non-aeronautical revenues • Realistic assumptions - with high and low scenarios and sensitivity analysis • Financing Structure -could make or break a deal • Integration - in the overall regional and industrial context

20. The regulatory environment and the qualifications of the project partners are prerequisites for goal achievement 2 Regulatory Environment Project Parties • To be open to foreign direct investment (FDI) with respective investment code and legal framework • To be stable with regard to tax laws and FX transfers • To provide a transparent aviation tariff scheme which leaves room for adjustment induced by legal or macro-economic factors • To provide clear approval mechanisms and a clear division of tasks among the various authorities • To have the necessary know-how for the development of the project • To have the financial capacity to fulfill necessary equity payments and sponsor support obligations • To be well connected with the local authorities • To have specified their relationship among each other and third parties in a well drafted contractual and financial structure

21. Certain risk factors in the Central European airport market need to be addressed and managed 3 2 Macro-economic risk 1 Airport industry risk • Economic reforms • Monetary environmentand regulation • FX risk / Inflation • Economic growth • Investment climate / FDI • Country rating • Development of Central European airport industry • National/Regional competition • Growth in passenger and cargo volumes • Airline industry risk / airline pricing • Regulatory environment • Market shocks • Capital Availability • Role of Government • Management quality (know-how, track record) • Legal framework / Enforceability • National Privatization Program • Regional stability • Domestic stability • Government continuity Political risk 4 Project risk 3 RISK!

22. The project’s funding life cycle is driven by the partners’ objectives, by the nature of the business and by associated risks 3 START- UP PHASE GROWTH PHASE AirportCompany Activity(Conces-sionaire) Airport concept Air transport market potential analysis Company formation (SPV) Airport development concept/masterplan Operations concept Route development and airport marketing concept Start of operation Traffic growth Facility and process improvement Exploitation of market potential New route development PROFIT LOSS Investment Phases Seed Start-up Capital (for Feasibility Studies, Market Testing, business formation) Start-up Validation of Concept Market Confirmation Growth Revenue Generation Expansion Free Cash-Flow generation Positive Income (fuel growth) Maturity Full Operations Revenue Growth Capital Sourcing for Expansion Sources of Financing Private Funds Angels Micro-financing Government Suppliers Strategic Partners Early Stage Equity Funds Mezzanine Finance Customers Trade Lease Mezzanine Finance Banks / Loans Financial Institutions ABLs Institutional Investors Public Market Securitization

23. Agenda 4 • Need to Build Up Airport Infrastructure in Central Europe • Private Sector Involvement in the Airport Industry • Public Private Partnerships • Case Study: PPP-Structures as Means for Successful Airport Development

24. The capital’s new airport project presents elements of three separate transactions 4 Project A Development of infrastructure between the city and the new airport site / preparation of new airport site Project B Construction of the new airport ProjectCommercialization and sale of land of the existing airport in the central city (350 ha)

25. The air transport market has distinct features 4 Conservative Optimistic Passenger Traffic 2003 - 2027 Key Points • In 2002, the country had approx. 230.000 air passengers, of which 90% have been handled at the capital‘s airport • Regional traffic flows: Europe 31%, West Africa 34%, Other African countries 24%, and 11% to other regions • Passenger structure: 89% scheduled passengers 7% charter passengers and 4% non-commercial traffic • Today, Air Cargo exports are largely based on perishables (vegetables and fresh fruits); this dominance will decrease until 2027 • Compared to exports, Air Cargo imports have played a minor role since 1981. Air Cargo Traffic 2003 - 2027 Source: Lufthansa Consulting

26. The development of airport capacity to meet future demand requires investments of approx. 200 – 250 mill. Euros 4 • Project A: “Infrastructure development” • Responsibility: Government • Investment: Government • Project B: “Construction of airport” • Responsibility: Concessionaire, (Government) • Investment: Concessionaire, private investors • Project C “Land commercialisation” • Responsibility: Government • Investment: t.b.d. after valuation Development of existing airport/ Access to the new airport Phase 1 Construction Operation Phase 2 Expansion Land Commercialisation 2010 2006 2015

27. A Special Purpose Vehicle (SPV) as operating company of the airport is composed of a combination of private investors The composition of investors is driven by Government interests, investor interests and availability of local, regional and international capital The Government will take an appropriate capital share Foreign investors / operators of the new airport will take a majority share The split of shares in any PPP needs to in line with the risks and rewards associated with the investment. 4 Potential Split of Shares in the SPV

28. Government participation in the transaction is indispensable 4 Revenues at the airport Magnitude of the investment Revenues from the low passenger (2004: 240.000) and cargo volumes (2004: 4.800 t) do not justify the investment and do not present an attractive investment opportunity. TTL investment is unlikely to be sourced from the local and regional investment community alone; alternative ways of financing need to be found. Government Participation in the privatization Privatization Model PPP; 25-year concession + renewal option • The Government will have to subsidize the project with at least 45% of Phase I of the project • Phase 2 can be financed from internal sources

29. The privatisation strategy is based on a number of financial criteria for the SPV as the operating concessionaire 4 • Government contribution of a substantial part of the investments in Phase 1 • Start-up equity of the SPV usually should be at 50%, depending on the composition, i.e. cash vs. assets provided by construction firms • According to similar projects, the long-term debt/equity-Ratio as based on a realistic business plan shall not be lower than 70 : 30 during the term of the concession • Internal Rate of return (IRR) of at least 12% for SPV to reflect various risk dimensions properly • Positive cash-flow during the term of the concession • Payments of concession fees to the Government • Dividend payments to the shareholders of the SPV • Tax holiday for the operating company • Debt Service ability of the SPV under various scenarios and loan structures

30. To enhance the feasibility of the project to investors, all revenue sources will have to be transferred to SPV 4 Cargo Handling Concessions Airside Service Concessions Pax and A/C Handling Services Concession Revenue SPV Landside Service Concessions ... Concession Revenue ...

31. Conclusions 4 • There is a huge need for infrastructure developments at many airports in Central Europe, but limited public budgets are available. • PPPs are not a panacea for government inability to fund necessary airport infrastructure projects but can provide a solution when the resources of private and public partners are bundled where conventional privatisations are not possible. • To be considered as investment opportunity by the private sector traffic has to be above certain thresholds - but only few air transport markets in Central Europe have sufficient traffic yet. • PPPs with a fair allocation of risks and rewards provide a means to raise necessary funds and know-how on the basis of a realistic business case. • Risk mitigation strategies have to be developed to protect the public and private partners, including e.g. re-definition of the airport value chain, tax advantages, direct subsidies, etc. • The uniqueness of each airport development requires always a tailored approach structuring a PPP.

32. For further contact: Dr. Raphael von Heereman Executive Director Lufthansa Consulting GmbHVon-Gablenz-Str. 2 – 650679 CologneGermany Tel.: +49 (0)221 88 99 6 - 56 Fax: +49 (0)221 88 99 6 - 60 e-mail: Raphael.Hereman@lhconsulting.com www.lhconsulting.com

33. for your attention Thank you