Asset-stripping in airports

FT reports about asset stripping in the UK airports,

Investors in the UK’s busiest airports received £6.7bn in dividends in the past decade even as those airports issued billions of pounds in debt... The scale of the dividends has provoked criticism from some in the aviation industry given airports are imposing high landing charges on airlines — which are passed on to customers through air fares — and are preparing to invest in expensive new runways and terminal buildings... Payouts from.. Heathrow, which had 78m passengers last year... totalled £4.3bn since 2011, and in 2017 investors received £847m... At the end of September 2018, Heathrow had £13.8bn in net debt... Heathrow... is owned by a consortium that includes Spanish infrastructure company Ferrovial, Qatar’s sovereign wealth fund, a Canadian public pension fund and one of China’s sovereign wealth funds.

Asset skimming by way of dividend payouts and using leverage to finance investments is common place across privately owned infrastructure and has been a cause of controversy in UK. 

In the decade between 2006 and 2016, Australian infrastructure bank Macquarie, owner of Thames Water, paid itself and fellow investors £1.6bn in dividends, while the utility was loaded with £10.6bn of debt, ran up a £260m pension deficit and paid no UK corporation tax. The UK’s third and fourth busiest airports, Manchester and London’s Stansted, are both owned by the Manchester Airports Group, which has received around £760m in dividends since 2009. After payouts of £20m in the first three years, levels rose to more than £100m each year since 2015. Unlike Heathrow and Gatwick, Manchester Airports Group has a majority of local authority control, meaning dividends flow into the public purse: Manchester City Council owns 35.5 per cent and nine other Greater Manchester councils, 29 per cent. IFM Investors, owned by Australian pension funds, took a 35.5 per cent stake in 2013... Luton, the fifth-largest airport, is owned by the local council but is operated under a concession held by private equity firm AMP Capital (since April 2018) and Spanish airports operator Aena. It has paid out £152m in dividends since 2010.

Gatwick announced the sale of 50.01% stake from a consortium led by Global Infrastructure Partners (GIP) to the French transport group Vinci, the world's largest private airport operator with 46 airports. The deal values Gatwick at £8.3 bn. 

It is also a reminder of how fast the industry has been privatised: over 50% of European airports have some private participation, up from 22% in 2010. Nearly half of winning bidders since 2008 have been financial investors... Returns have been juicy. GIP bought Gatwick for £1.5bn in 2009; it and its co-investors have made twice that by selling half of the airport, and earned £1.5bn in dividends in the interim.

Asset stripping by way of excessive dividend payouts, running up pension deficits, using excessive leverage to finance capital expenditure, sale-and-lease back arrangements on assets, and so on have become standard operating procedure for private owners of not just infrastructure assets. They are the second generation issues of infrastructure contracting that governments which concession out such contracts have to bear in mind.

It is imperative that governments in countries like India learn from these trends and incorporate provisions in model contracts that limit these practices. The experience of Delhi Airport Metro was a foretaste of what could happen in India with its concessions. 

Make no mistake, there is a massive moral hazard lurking in these contracts. Everybody knows that the owners could easily recover their investments and walk away once the leverage becomes unsustainable and declare bankruptcy. Governments will have no choice but to takeover the assets and the pension liabilities. And given the bank exposures, especially public sector ones, those liabilities too would have to be borne by the tax payers. There is no point in crying hoarse then.