MuniLand

Puerto Rico’s airport giveaway

By Cate Long
October 5, 2012

Puerto Rico is drowning in debt. It is now in the process of leasing its Luis Munoz Marin International Airport to a Mexican firm Aeropuertos del Sureste (Aerostar). The airport (LMM) is the largest in the Caribbean, and it could become an international gateway to Central and South American cities. The lease deal lasts 40 years. However, studying the financial terms of the deal, it is not clear that Puerto Rico will really benefit much financially from privatizing the airport.

ASUR, a Mexican airport operator with concessions to operate, maintain and develop several airports in the southeast of Mexico, is doing the deal in partnership with Highstar Capital, an American infrastructure investment firm.

Looking at the financial data, which is sparse and hard to find, the deal is unlikely to generate any substantial cash for Puerto Rico. From the FAA application (page 9):

Aerostar will make a one-time cash payment to the PRPA of $615 million (the “Leasehold Fee”) at the time of closing the Lease.

The deal is structured with tiny annual cash payments from ASUR to Puerto Rico for the first five years. ASUR will pay $2.5 million per year for five years, for a total of $12.5 million. In years six through 30, ASUR will pay Puerto Rico five percent of gross airport revenues. It will pay ten percent of gross airport revenues in years 31 through 40. ASUR will also reimburse Puerto Rico $2.8 million per year for the costs of police and fire services. This amount will be adjusted once actual costs have been determined.

The airport lease also calls for “General Accelerated Upgrades” to the airport, but it does not require any major capital improvements. ASUR is not obligated to offer employment to airport employees. If the conditions are worked out, then ASUR can take control of the Puerto Rico Air National Guard facilities also.

Juan Carlos Batlle, President and CEO of the Government Development Bank for Puerto Rico (GDB), was asked at the Bloomberg State & Municipal Finance Conference about the transaction. He said that the $615 million upfront payment would go to retire airport debt, and he did not know how financially advantageous the deal was for the buyers.

But knowing the advantages of the deal seems to be a basic fiduciary responsibility for the official in charge of the government agency that did the analysis of the deal. Batlle eventually conceded that Puerto Rico essentially receives no benefit from the upfront payment other than retirement of debt. He fudged his answer on any longer term benefits.

The key to understanding the deal is knowing how much ASUR will earn. The company will receive $62 million per year from airlines that use the airport’s gates and facilities. ASUR will also earn approximately $36 million per year from “Passenger Facility Charges.” The FAA allows the airport operator to collect a $4.50 fee per ticket from passengers to use for capital improvements to the facility. ASUR will also receive revenues from commercial concessionaires.

It’s likely that ASUR will fund the capital improvements of the airport with these fees along with grants from the FAA. However, the rational is not clear to me why the U.S. federal government will give multi-million dollar grants to private firms that are taking control of public assets.

According to the financial statements of the Puerto Rico Port Authority for 2011, LMM generated $99 million in total revenue, including $70 million of operating revenue. Earnings (EBITDA) were approximately $40 million. 2011 was also the lowest year for passenger traffic (see chart above).

2012 numbers have already rebounded and are tracking to reach nine million passengers. This means that revenues and earnings will earn ASUR an even better deal.

The deal is currently awaiting final approval from the FAA because the airport is in a federal pilot program to privatize U.S. airports, but it appears unlikely that the FAA would take steps to derail the deal.

It was hard for me to do any deeper analysis because the financial statements of the Port Authority combines the activities of the airport and the marine terminals that provide bulk freight and cruise ship services. But the LMM deal is being lauded in financial circles, which means that investors will likely do very well. I think over time this deal will be viewed like the plan to privatize Chicago’s parking meters, which left a lot of taxpayer money on the table.

Comments
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Readers should be able to have more details in order to coincide with this conclusion. This analysis seems very weak. The valuation of an asset such an airport is a complex matter and this does not even seem to come close to what is a simple asset valuation.

Posted by Ahora | Report as abusive
 

My name is Juan Carlos Batlle, President of the Government Development Bank for Puerto Rico. I am writing to clarify certain information on Cate Long’s October 5 MuniLand blog post, “Puerto Rico’s Airport Giveaway,” regarding remarks I made at the Bloomberg State Municipal & Finance Conference. With all due respect, her reference to my comments are, in fact, highly inaccurate, misleading and defamatory. As a transcript of my remarks at the Bloomberg State Municipal & Finance Conference on October 3, 2012 clearly reflects about the Public-Private Partnership for the Luis Munoz Marin International Airport:

- It provides important and tangible financial benefits to the government of Puerto Rico and its citizens; to the tune of $615 million upfront cash payment, annual revenue sharing of over $550 and investment in capital improvements of $1.4 billion over the life of the lease
- Enables Puerto Rico to retire approximately 45% of the Ports Authority’s debt;
- Sets up funds to support regional airports and other purposes; and
- Helps reestablish the financial stability of the Puerto Rico Ports Authority.

As I said at the Conference, given Puerto Rico’s high debt load, among the main objectives of our Public-Private Partnership Program are to reduce overall debt levels and reactivate infrastructure investment.

This transaction allows us to accomplish both objectives at the Ports Authority: “tackle the issue as we have to start lowering our debt load,” and “invest $1.4 billion over the life of the lease.” (these quotes taken directly from such transcript).

Posted by jcbatlle | Report as abusive
 

Mr Batlle’s comments do not contradict Ms Long’s analysis. The only thing that is clear from his arguments is that the airport lease amounts to $615 million and that the main benefit is that of reducing debt load.

$550 million dollars of annual revenue sharing seems very high. The amount is equivalent to 25% of all personal taxes raised last year. Please cite where in the contract can one find that number?

$1.4 billion in capital improvements. If this comes from passenger fees, they are independent of the contract.

All other island airports lose money. If a fund for subsidizing them comes from passenger fees, it is independent of the contract.

Any transparent government would just publish the contract. As the saying goes, sunlight, sir, is the best disinfectant.

Posted by HKohl | Report as abusive
 

The Puerto Rico airport privatization process is a bad deal for both the US and Puerto Rico. Initially, it was sold to us as a way to retire the entire PR Ports Authority debt, and have some money left to resolve some problems. Now it turns out that it will only serve to retire 45% of the PRPA debt, according to Mr. Batlle. On Feb. 25. 2009, S&P isued its most recent rating of the PRPA debt; at the time, it downgraded the debt to BBB- with a stable rating, and indicated as weaknesses (i) the Authority’s fiscal performance and its link to the GDB’s, (ii) significant volatility in airport enplanements, and (iii) relatively high dependence on American Airlines. On the other hand, S&P indicated as strenghts (i) strong support from the GDB, (ii) monopolistic control of all the airports and (iii) operational and financial diversity from the PRPA’s two principal facilities (LMM airport and Port of San Juan). While all the listed weaknesses remain, with the LMM privatization the strenghts would dissapear; particularly when the upfront payment will be dependent upon a bond issue GUARANTEED by GDB’s letters of credit. This transaction will not only place the viability of the PRPA at serious risk, it places the already overextended GDB at risk, with a possible further downgrade of its debt. In the meantime, as concluded by a reputable economist in Puerto Rico, the PRPA fails to earn at least $1.088 billion during the life of the contract, and the non-competition clause of the contract threatens the viability of the regional airports, for which the US taxpayers have made serious economic investments For a more in-depth analysis of these matters, Ms. Long, you can send me your email address at mpabon2008@hotmail.com. THANKS.

Posted by MPabonPR | Report as abusive
 

So we are supposed to take jcbatlle’s words as a given?! JCBatlle where is the evidence to prove all of your numbers and claims? And NO, a transcript that contains your own words cannot be used to prove your own words. And just because it says “Bloomberg” on it does not change the fact that it only contains your words and numbers which you have not shown a shred of evidence to prove. It does not change the fact that these are only your claims which have not been proven at all. JCBatlle works for the Republican PNP government of Puerto Rico which wants to sell the entire country to foreigners and then when we are left with nothing else to sell they will just blame their rivals the PPD party as they do for absolutely everything! He is just trying to give cheap excuses and unproven claims & numbers to hide his failure and those of the government he works for!

Posted by Anonymous | Report as abusive
 

The LMM deal is not clear, even for those of us experienced in financial analysis. The fact that the npp is in a rush to get FAA’s approval before year end should raise a suspicious flag. Our past experience with corrupt npp and ppd politicians bribed for giving away public assets in transactions that make sense only for the investor who bribed them is long and shameful.

So Mr. Battle, fulfill your fiduciary responsibility and make all the facts of the transaction public, not only those who benefit the npp position. It’s the right thing and honorable thing to do.

Posted by FJPR | Report as abusive
 

Puerto Rico SE VENDE!!!
Y Fortuño va a seguir vendiendo a la isla de Puerto Rico? Si no puede gobernar un pais y tiene que privatizarlo, que se quite!!!

Posted by Onyx13 | Report as abusive
 

I do not necessarily agree with the negative side of Cate Long’s stance on the privatization of LMM Airport. This has not been the first time that she has taken things out of context and opines as if she knows 100% that her conclusions on a given matter will come to pass just like she stated. As far as the privatization of such large scale airport like LMM goes I am siding with the financial circles that are lauding this deal.

Posted by Angioletto | Report as abusive
 

Juan, who told you what to write? It is obvious that someone in high goverment told you to write this answer when you could not provide one on the spot. Actually I am sure this was written by someone else, because no one has a clue about this deal. It has been fodder that this is a bad deal for us and a GREAT deal for Aerostar. Only Republicans are capable of basically giveaway a goverment asset just to pay a debt. Do you really expect us to believe that this deal was done so that the bathrooms were cleaned 16 times a day, and to make sure that proper maintenance of the facilities was done. PR is losing a huge chunk of money because the goverment is unwilling to look after the maintenance of public buildings. I only wish, and I know is going to happen, that the FAA disapproves the deal. Viva Puerto Rico Libre de Fortuño y sus sequaces.

Posted by elguaynabito | Report as abusive
 

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