Puerto Rico’s airport giveaway
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.
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.