The joy of flying: efficient PPP
airport concession contracts
Eduardo Engel, Ronald Fischer and
Alexander Galetovic
U. de Chile, U de Chile, U. de los Andes
Three organizational forms
to provide infrastructure
• Public/traditional
– Government plans and owns the infrastructure
– Government invests, operates and runs the infrastructure, many
times subcontracting tasks, mostly in unbundled fashion
– Direct link with budget
• Public-private partnership (PPP)
– Government plans and owns the infrastructure
– Private firm invests, builds, operates, runs and then transfers the
infrastructure back to the government (bundled contract)
– Direct (if opaque) link with budget
• Privatization
– Private firm plans and owns the infrastructure
– Private firm invests, builds, operates and runs the infrastructure
– No link with budget
Many airports are privately run
•
•
•
•
PPPs
PPIAF database: 141 airports
in low & middle income
countries are PPPs; 110
involve investment &
operation
20-50 years; 30 on average
Greece, Zagreb, Belgrade,
Mynamar, Cuzco
San Juan, (Kennedy), (La
Guardia), Madrid, Sydney,
Kansai, Osaka, 22 smaller
airports in France, …
Privatization
• Europe: Heathrow, Rome,
Vienna, Copenhagen,
Manchester, ….
Variable, exogenous demand
Non-aviation revenues
• Airports have two revenue sources
– Aviation revenue(e.g. passenger charges, landing
fees, terminal rentals)
– Non-aviation revenue (e.g. retail concessions, car
parking, real estate rents)
• Non-aviation revenue is a function of
– The exogenous demand for travel
– Effort, investment & effort of the operator
• Non-aviation revenue is important
Global airport revenues & costs (2012)
The problem
Design a PPP contract that:
(i) Reduces or eliminates costly exogenous,
(aviation-related) demand risk
(ii) Provides incentives to exert efficient effort to
increase non-aviation revenues
(iii) Can be awarded in a competitive auction
→ Exploit correlation between aviation and nonaviation revenue
The model
• Infrastructure
– Costs I
– Does not depreciate
• Exogenous demand risk (aviation revenue)
– PV of user fees: v, p.d.f. f(.)
– Corresponds to willingness to pay
– I  vmin  v  vmax
The model II
• Endogenous risk (non-aviation revenue)
– Concessionaire exerts non-contractible “effort”
(investment) e ≥ 0 before operation
– With probability p(e) generates value 𝜃v
– With probability 1 − p(e) generates no value
– p(0) ≥ 0; p(e) < 1; p’ > 0; p” < 0; p’(∞) = 0
• Risk-neutral planner
• Many risk averse firms
– VNM utility U(y,e) = u(y) ─ ke
– Outside option U(0,0) = u(0)
The model III
Principal chooses payment schedules which
depend on v and failure (f) or success (s) of nonaviation project:
{Rf(v);Rs(v)},
with
0  R f (v)  v ,
0  Rs (v)  v  v ;
and effort e
Principal’s problem

max (1  p(e)) [v  R f (v)] f (v)dv  p(e) [(1  )v  Rs (v)] f (v)dv

s.t.
u(0)  (1  p(e)) u(R f (v)  I) f (v)dv  p(e) u(Rs (v)  I)] f (v)dv  ke


e  argmax e (1  p(e)) u(R f (v)  I) f (v)dv  p(e) u(Rs (v)  I)] f (v)dv  ke 
0  R f (v)  v
0  Rs (v)  v  v
e  0.
Result 1: concessionaire bears no
exogenous risk
Take any {Rf(v);Rs(v)} that solves the principal’s
problem and replace it by {Rf; Rs} such that
u(R f  I)   u(R f (v)  I) f (v)dv ,
u(Rs  I)   u(Rs (v)  I)] f (v)dv.
Then both the PC and the ICC hold by construction
but
R f   R f (v) f (v)dv ,
Rs   Rs (v) f (v)dv ,
Reformulated principal’s problem
max (1  p(e))[v  R f ]  p(e)[(1  )v  Rs ]
s.t.
u(0)  (1  p(e))u(R f  I)  p(e)u(Rs  I)  ke
k  p(e) u(Rs  I)  u(R f  I)
e0
Result 2: some effort increases welfare
Let (e)  p(e)  e / p(e) . If
I
1  (e) 
v
there exists a contract of the form
Rs  (1  )R f
with e*  0 and (0,1] such that the principal
improves upon the contract Rs  R f  I
Result 3: cross-subsidy from
non-aviation to aviation business
Rs  (1  )R f  I  R f
I  Rs  (1  )R f  R f
Rs  (1  )R f  R f  I
Losses in both states
Profits in both states
Result 4: smaller Rf , more effort
Define e(Rf) via
p(e) u((1  )R f  I)  u(R f  I)  k
Because p’’< 0, to have e(Rf) decreasing, we need
R f  u((1  )R f  I)  u(R f  I)
decreasing in Rf
Result 4: smaller Rf , more effort
Defining J(R , ; )  u((1  )R f  I) , the condition
for e(Rf ) decreasing in Rf holds for all αθ > 0 if
2 J
(R f , )  0
R f 
Sufficient condition:

((1  )R f  I) 
.
1  
Economics: when condition holds and aviation
revenues are smaller, larger marginal return to
effort
Result 5: monotonicity
Now the principal’s objective function
V (R f )  1  p(R f ))[v  R f ]  p(e)[(1  )v  Rs ]
is decreasing in Rf; and the concessionaire’s PC
U(R f )  (1  p(R f ))u(R f  I)
 p(R f )u((1  )R f  I)  ke(R f )
is increasing in Rf, R f  (I / (1  ), I)
Result 5: monotonicity
Result 6: an PVR auction bidding on Rf
implements the contract
• Given α, firms bid on Rf
• Lowest bid wins
• Concession lasts until winning bid is collected
in aviation revenues
• Concessionaire collects R f in non-aviation
revenue if project is successful
*
• Competition forces to bid R f
• Works even if principal does not observe
ancillary revenue and   1
“Result” 7: optimal risk sharing (α)
Summary
• Efficient PPP contract implementable with a PVR
auction on aviation revenue only
• R f  I :concessionaire loses money in aviation business
• Concessionaire earns money in non-aviation business;
cross subsidy from non-aviation business
• Concessionaire is shielded against exogenous demand
risk in both businesses
• Fixed-term concession is not optimal
• Competition takes care of rent-extraction
• Works even if principal does not observe ancillary
revenue (value)
Thank you