MuniLand

Airport privatization is approved in Puerto Rico, but won’t solve long-term problems

By Cate Long
February 27, 2013

Reuters reports:

The U.S. Federal Aviation Administration signed off on Tuesday on a 40-year lease of Puerto Rico’s Luis Munoz Marin International Airport to Aerostar Airport Holdings LLC, making it the first large U.S. airport to be placed in private hands.

The deal for the Caribbean’s busiest airport, with nearly 9 million passengers a year, is a milestone in Puerto Rico’s privatization program and a bid to expand tourism to help an economy that has long been ailing.

The report is a faithful approximation of the news release, which was the result of work by former governor Luis Guillermo Fortuño. The airport privatization deal was opposed by the current governor, Alejandro Javier García Padilla and his party. When Padilla was elected, he did not support the privatization deal, but he said he would honor the contract that the former governor had signed.

As I wrote when the deal was happening, the price paid by Aerostar to lease the airport was extremely low:

According to the financial statements of the Puerto Rico Port Authority for 2011, LMM [airport] generated $99 million in total revenue, including $70 million of operating revenue. Earnings (EBITDA) were approximately $40 million.

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.

Aerostar Airport Holdings will pay the government of Puerto Rico $615 million upfront and it will receive a minimum of almost $4 billion in cash flows over the term of the 40 year lease. It’s hard to know how much additional payment Aerostar will make to Puerto Rico. Other than the $12.5 million over the first five years, the estimate is based on revenue projections.

The real question is why Puerto Rico accepted such a financially disadvantageous deal. Governor Padilla answered this in a roundabout way in his press conference. News is my Business (@biznewspr), Puerto Rico’s digital English language business news source, tweeted:

Then this:

The fiscal situation is dire in Puerto Rico and the debt load is crushing. Privatizing the airport provides some immediate debt relief, but it also means a substantial loss of future revenues for the Commonwealth. There are few assets left to sell, and a massive debt pile remains. Puerto Rico’s troubles are not yet over.

Comments
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Ms. Long: I have always wondered where do you and many local (in Puerto Rico) economists come up with your valuations and arguments about the deal being undervalued for PR…well, the FAA has the best, simple explanations for us mortals. I have copied below the response of the FAA to this concern:

Concern: Aerostar’s Proposal undervalues SJU

Comments
A number of comments indicated that the Aerostar proposal undervalued the Airport

FAA Response:
The FAA reviewed and confirmed that the studies used an analyses based on simple extrapolations of historical airport operating data that compared the present value of future airport income, as estimated by the commenters, to the present value offered by Aerostar. Although each commenter made different assumptions, all commenters concluded that the terms of the proposed lease undervalue SJU. Generally speaking, the commenters’ annual revenue growth assumptions are not consistent with the historical operating results for SJU. Also, the revenue streams resulting from their respective forecasted growth rates do not accurately reflect the risks associated with investing in the stand-alone operation of the airport. A more moderate revenue growth rate and a higher discount rate reflecting the risks associated with investing in SJU would have resulted in a lower estimated valuation closer to the amount bid by Aerostar through the PRPA competitive solicitation process.

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