PRELIMINARY ANALYSIS
Airport Development in Zanzibar
Preliminary PPP Analysis
August, 2014
Contents
Purpose & Scope
1
Background
1
Current Situation
1
Terminal 2 Development
3
Analysis
4
Traffic Projections
4
Revenue Projections
5
Options Under Consideration
10
1. Development of Terminal 2, Operated by ZAA
10
2. Development of Terminal 2, Operated by Private Company
10
3. Development, Financing, Maintenance & Operations of Zanzibar International
Airport
11
Preliminary Conclusions
12
Preliminary Recommendation
13
Figures
Figure 1 Aerial Photo of Existing Airport Facilities
2
Figure 2 Aerial photos of existing terminal and new terminal under construction at ZIA
3
Figure 3 Projected Growth in Passenger Traffic ZIA – 3 Growth Scenarios
4
Figure 4 Historical & Projected Revenue, Expenses and EBITDA – High-Growth Scenario – 20002040
6
Figure 5 Projected Revenue, Expenses and EBITDA – Medium-Growth Scenario – 2000-2040
8
Figure 6 Projected Revenue, Expenses and EBITDA – Low-Growth Scenario – 2000-2040
9
Tables
Table 1 Passenger Service and Security Charges, Domestic & International
5
Table 2 15 & 25-year present value of Revenues, Expenses & EBITDA 2016-2040 High-Growth
7
II
CONTENTS
Table 3 15 & 25-year present value of Revenues, Expenses & EBITDA 2016-2040 Medium-Growth 8
Table 4 15 & 25-year present value of Revenues, Expenses & EBITDA 2016-2040 Low-Growth
9
Purpose & Scope
This preliminary PPP analysis for the Abeid Amani Karume International Airport (Zanzibar
International Airport, or ZIA), has been developed as part of the activities under a contract
with the World Bank for development of a PPP Policy and Guidelines and preliminary
assessment of potential PPP projects for the Government of Zanzibar. Below we provide
details on the current state of ZIA, the Government of Zanzibar’s plans for development of
the airport and air transport sector, and recommendations for PPP structures to promote
those developments.
Background
Current Situation
The Zanzibar International Airport has undergone significant development over the last
several years to upgrade its capacity in terms of the size of aircraft it can accommodate as well
as an increase in the number of passengers processed at the airport. The runway and aprons
have recently been expanded, and a new 25,000 square meter terminal building with a
capacity of 1.6 million passengers p.a. is currently under construction. The two airports at
Zanzibar and Pemba together handled close to 800,000 passengers (estimated) in 2013 and
growth is expected to increase as more airlines provide regular service to the island, and as
the tourism sector on both islands continues to develop.
The Government’s vision for Zanzibar is to become a regional hub for East Africa, although
there is stiff competition from Nairobi, Addis Ababa, Kilimanjaro, and Dar es Salaam for this
position. Several additions, once the new terminal building is operational, are under
consideration for Zanzibar Airport including development of a new cargo terminal and fuel
farm, as well as potential development of a maintenance hangar for large Boeing aircraft and
other supporting infrastructure. Development of a heliport, aviation school, and airport hotel
are also under consideration. The government is open to the idea of bringing in a private
company to operate and maintain the airport, which would most likely include a requirement
to further develop the Pemba island airport.
This analysis will focus only on Zanzibar International Airport given its importance as the
main airport receiving passenger traffic for both Unguja and Pemba islands. Currently
2
approximately 50% of the arriving passengers come from Dar es Salaam while the remaining
50% come from other domestic and international origins. Having recently completed
extension of the runway and with ongoing taxiway and apron rehabilitation, the airport can
now handle up to Boeing 777 aircraft (Class E). All passengers must deplane on the apron and
walk to the terminal building – there are currently no boarding bridges.
As can be seen in the figure below, the airport area is quite large with room for development,
however enforcement of property lines has been lax over the last several years and housing
developments have encroached on airport property significantly. The airport area is a
designated free zone by ZIPA, however development of a free zone area has not yet taken
place and relocation is under consideration.
Figure 1
Aerial Photo of Existing Airport Facilities
Source: Consultant using photo from Google Maps
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AIRPORT DEVELOPMENT IN ZANZIBAR
Terminal 2 Development
As mentioned above, the new Terminal 2 building, located adjacent to the existing terminal
(as seen in the figure below), will include construction of a 25,000 square meter facility with
capacity to handle up to 1.6 million passengers to accommodate growth through the project
period. The new terminal will have 3 Class E boarding bridges and 2 bridges for Class D
aircraft. There is hope of doubling the number of international flights arriving directly to
Zanzibar (from 10 to 20 flights per week) with the addition of the new terminal building and
accompanying facilities.
The terminal is being built by Beijing Construction Engineering Group Ltd. and supervised by
ADPI through contracts with the Ministry of Infrastructure and Communication. The total
cost for the new terminal is estimated at US $130 million through what we understand to be a
turnkey construction contract with a loan from the Chinese Ex-Im Bank. Construction began
in 2011, was halted in 2012 pending disputes over aspects of the airport that did not meet
ICAO standards, and is expected to be completed in the third quarter of 2015. Exact details of
the financing are unknown.
The main issue affecting the project has been the location of the new terminal, which was
constructed too close to the taxiway limiting the size of aircraft that can park at the gates
facing the taxiway and runway. Redesign of the terminal will include expansion of the apron
to the south side of the terminal building where larger aircraft will be able to park. This will
significantly limit the number of aircraft that can board at one time, however it has been
determined that this redesign will be able to accommodate expected growth in both the
number of passengers and size of aircraft that will be using the new terminal.
Figure 2
Aerial photos of existing terminal and new terminal under construction at ZIA
Source: Consultant using photo from Google Maps
4
As shown in the photo above, the current terminal is too small to accommodate boarding
bridges and the apron limits the number of aircraft that can park at the airport. Additionally,
both large and small aircraft must compete for space in the same area. The photo above also
shows the new terminal construction, located quite close to the extended taxiway on the East
side and to housing developments which have encroached on airport property on the West
side.
Analysis
TRAFFIC PROJECTIONS
Below we present a preliminary analysis of both projected traffic and projected revenue for
the Zanzibar International Airport based on historical traffic data and tariff rates provided by
the Zanzibar Airport Authority. For the 25-year traffic projections, we estimate high, medium
and low-growth scenarios based on historical GDP growth in Zanzibar. These growth
scenarios are depicted in the graph below.
Figure 3
Projected Growth in Passenger Traffic ZIA – 3 Growth Scenarios
Source: Consultant analysis based on historical traffic data provided by ZAA
As the graph indicates, according to the high-growth scenario, total passenger traffic is
projected to increase to almost 4 million passengers in the year 2040 showing growth of 6.11%
CAGR between 2016-2040, while in the medium and low-growth scenarios passenger traffic is
expected to increase to approximately 3 million and 2 million passengers respectively
(representing 5.19% and 3.89% CAGR between 2016 and 2040). Planned capacity for the new
Terminal 2 is 1.6 million p.a. meaning that in all three scenarios, projected traffic will surpass
total capacity prior to the end of the 25-year projection period requiring expansion of the
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AIRPORT DEVELOPMENT IN ZANZIBAR
Terminal 2 facility or construction of a third terminal facility. In all three cases, terminal
expansion or construction of a new terminal would need to begin prior to 2040 in order to
accommodate growth. These scenarios are “unrestricted” scenarios assuming that the relevant
infrastructure (hotels, restaurants, access roads, energy production, water, solid waste,
housing, etc.) is developed with enough anticipation to cater to projected passenger growth,
either by the government or under PPP arrangements.
REVENUE PROJECTIONS
The revenue analysis provides a projection of estimated total revenues, operating costs and
EBITDA for the ZIA based on historical and projected traffic for the high, medium and lowgrowth scenarios. It is important to note that this revenue analysis is based on projections and
estimated operating costs based on similar airport operations and does not include
information from the ZAA’s audited financial statements. The analysis estimates a split of
50% international passengers and 50% domestic passengers with tariff rates as follows:
Table 1
Passenger Service and Security Charges, Domestic & International
Category
Rate
Domestic Passenger Service Charge
Tzs 10,000
Domestic Safety Fee
Tzs 1,000 (Increasing to 3,000 in 2015)
International Passenger Service Charge
US $40.00
International Safety Fee
US $8.00
Source: ZAA
The revenue analysis also takes into consideration the following additional assumptions:

Using historical and projected financial statements for the Tanzania Airports
Authority (TAA) as a comparison, passenger service charges are assumed to make up
approximately 60% of total revenues, and the remaining 40 percent includes landing
and parking fees as well as adequate development of commercial activities;

Using historical and projected financial statements for TAA as a comparison, total
operating expenses are assumed to make up approximately 80% of total revenues
through the first 3 years of project operations 2016-2018, decreasing by 5% every 3
years starting in 2019 based on an assumption of more efficient, modern facilities and
increasing operating efficiency under management of a private operator. Operating
costs reduce to 60% of operating revenues in 2030 remaining constant through 2040;

The safety fee charged to domestic departing passengers is assumed to increase from
Tzs 1,000 to Tzs 3,000 in the year 2015;

The terminal construction period is assumed to end in 2015, with 2016 as the first
year of operations;
6

Passenger service charge and security fees are assumed to grow at the rate of U.S.
inflation for international passengers and Tanzanian inflation for domestic
passengers, based on IMF inflation projections through 2019 (held constant
thereafter);

Present value of revenues, costs and EBITDA are calculated for the projected asset life
(2016-2040) at discount rates of 12% (Tanzania), 6% (China) and 3% (low-rate
comparison);

Revenues and costs were projected based on high, medium and low-growth
scenarios based on projected GDP growth, projected tourism growth, and projected
population growth, as described in the section on traffic analysis above.
The simple revenue analysis performed based on the assumptions above provided an
estimate of the ZAA’s or future airport operator’s ability to repay debt and fund additional
development activities. Below we present the results of the revenue analysis for the high,
medium and low-growth scenarios, as well as the 15 and 25-year sums and present values of
revenue, expenses and EBITDA (earnings before interest, taxes, depreciation and
amortization) at the benchmark discount rates of 12%, 6%, and 3%.
Under the high-growth scenario, total estimated revenues from the beginning of operations in
2016 to the end of the project period in 2040 grow from US $20.8 million to US $87.5 million
while operating expenses increase from US $16.6 to US $52.5 and EBITDA increases from US
$4.2 million to US $35 million representing a growth in EBITDA margin from 20% to 40%. The
graph below illustrates this high-growth trend.
Figure 4
Historical & Projected Revenue, Expenses and EBITDA – High-Growth Scenario – 2000-2040
Source: Consultant projections based on traffic & tariff data provided by ZAA
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AIRPORT DEVELOPMENT IN ZANZIBAR
Table 2
15 & 25-year present value of Revenues, Expenses & EBITDA 2016-2040 High-Growth
SUM 15-yr
(20162030)
PV 12%
PV 6%
$501,143,565
$200,944,594
Operating
Expenses
$341,818,355
EBITDA
$159,325,210
Operating
Revenue
PV 3%
SUM 25-yr
(20162040)
PV 12%
PV 6%
PV 3%
$304,122,912
$385,963,597
$1,183,914,897
$267,726,341
$508,033,525
$754,535,809
$143,724,150
$212,616,163
$266,559,851
$751,481,154
$183,793,198
$334,962,531
$487,703,178
$57,220,444
$91,506,749
$119,403,746
$432,433,742
$83,933,143
$173,070,994
$266,832,631
Source: Consultant projections based on traffic & tariff data provided by ZAA
Based on the revenue, operating expense and EBITDA projections above, the 15-year and 25year sum and present values were calculated to provide a clearer picture of the repayment
capacity of the airport based on the high-growth scenario and assumptions above. The 25year present value calculations, which consider the entire project period from 2016-2040, show
that at a 12% discount rate, present value of EBITDA would reach US $83.9 million, and at the
6% and 3% discount rates would reach US $173 million and US $266.8 million respectively. At
the 6% and 3% discount rates, repayment of the $130 million loan for Terminal 2 construction
could be paid back, however at the Tanzanian benchmark discount rate of 12%, repayment
would not be possible without government subsidization.
Under the medium-growth scenario, total estimated revenues from the beginning of
operations in 2016 to the end of the project period in 2040 grow from US $20.7 million to US
$70.1 million while operating expenses increase from US $16.6 to US $42 and EBITDA
increases from US $4.2 million to US $28 million represented in the figure below. This
scenario, based on tourism growth, shows a modest reduction in operating revenues,
expenses and EBITDA compared to the high-growth scenario, as well as a modest reduction
in the 15 and 25-year present value of revenue, operating expenses and EBITDA at the 12%,
6% and 3% discount rates, as shown in Table 2 below.
8
Figure 5
Projected Revenue, Expenses and EBITDA – Medium-Growth Scenario – 2000-2040
Source: Consultant projections based on traffic & tariff data provided by ZAA
Table 3
15 & 25-year present value of Revenues, Expenses & EBITDA 2016-2040 Medium-Growth
SUM 15-yr
(20162030)
PV 12%
PV 6%
$461,115,794
$188,546,865
Operating
Expenses
$315,740,515
EBITDA
$145,375,279
Operating
Revenue
PV 3%
SUM 25-yr
(20162040)
PV 12%
PV 6%
PV 3%
$282,644,609
$356,920,826
$1,027,476,680
$244,383,503
$452,480,657
$663,283,812
$135,367,578
$198,386,912
$247,481,733
$655,557,047
$168,869,561
$300,288,540
$431,299,525
$53,179,287
$84,257,698
$109,439,093
$371,919,634
$75,513,942
$152,192,117
$231,984,287
Source: Consultant projections based on traffic & tariff data provided by ZAA
Under the low-growth scenario, total estimated revenues from the beginning of operations in
2016 to the end of the project period in 2040 grow from US $19.6 million to US $49million
while operating expenses increase from US $15.6 to US $29.4 and EBITDA increases from US
$3.9 million to US $19.6 million, as shown in the figure below. This scenario shows a
significant reduction in operating revenues, expenses and EBITDA compared to the high and
medium-growth scenarios, as well as a significant reduction in the 15 and 25-year present
value of revenue, operating expenses and EBITDA at the 12%, 6% and 3% discount rates, as
shown in Table 4 below.
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AIRPORT DEVELOPMENT IN ZANZIBAR
Figure 6
Projected Revenue, Expenses and EBITDA – Low-Growth Scenario – 2000-2040
Source: Consultant projections based on traffic & tariff data provided by ZAA
Table 4
15 & 25-year present value of Revenues, Expenses & EBITDA 2016-2040 Low-Growth
SUM 15-yr
(20162030)
PV 3%
SUM 25-yr
(20162040)
PV 12%
PV 6%
PV 12%
PV 6%
PV 3%
Operating
Revenue
$393,346,413
$165,078,565
$244,373,786
$306,540,063
$809,908,448
$206,617,771
$370,026,602
$532,544,317
Operating
Expenses
$270,761,871
$119,100,284
$172,430,353
$213,683,155
$520,699,092
$144,023,808
$247,822,043
$349,285,708
EBITDA
$122,584,542
$45,978,281
$71,943,433
$92,856,907
$289,209,356
$62,593,964
$122,204,559
$183,258,609
Source: Consultant projections based on traffic & tariff data provided by ZAA
Based on the above analysis, the current Zanzibar International Airport Development project
is compatible with the Government’s PPP strategy. Our financial projections confirm that in
all cases the PPP will be able to pay in full its operating expenses and partially or totally
service the debt incurred for construction of the new terminal, depending on actual traffic
growth at the airport with the addition of the new terminal. In the most conservative
scenarios, the PPP formula will require some government funding for development of basic
airport infrastructure. Under a private operator, it is believed that greater efficiency and
development of commercial opportunities would be achieved, which would result in
increased revenue and greater cost savings, making the airport attractive to potential airport
operators.
10
Options Under Consideration
This section presents the main options for development and operation of the Zanzibar
International Airport including development of the new Terminal 2 facility.
1. Development of Terminal 2, Operated by ZAA
The first option presented involves a purely government approach to airport development
and operations, in line with the current Terminal 2 development. The Government of
Zanzibar, through a China Ex-Im Bank loan made to the Ministry of Finance and signed by
the Ministry of Infrastructure and Communication, has incurred debt of approximately US
$130 million for a turnkey construction project to develop a new terminal at the Zanzibar
International Airport, as described above. Once construction is finished, the airport will be
turned over to the Zanzibar Airport Authority who would assume operation of the new
facility. While this option falls in line with the status quo, the Government acknowledges that
the ZAA does not currently have the capacity or the necessary financial resources to operate
or maintain the Terminal 2 facility..
2. Development of Terminal 2, Operated by Private Company
The second option for consideration would involve development of the Terminal 2 facility
under the current arrangement (China Ex-Im bank loan and turnkey development of
Terminal 2 through existing construction contract), with operations of Terminal 2 contracted
to the private sector under a PPP arrangement, and operations of Terminal 1 remaining with
the ZAA. This option would involve a tendering process according to the proposed PPP
Policy to select the most qualified company willing to provide the best financial arrangements
to ZAA and the Government (including revenues sufficient to repay the China Exim Bank
loan for Terminal 2).
This option would allow ZAA to benefit from efficiency gains and additional financing from
the private operator to ensure the new terminal is run according to international standards, in
a manner likely to attract new airlines and flights and to leverage commercial opportunities in
the new Terminal. The PPP arrangement should include operations, maintenance, and
financing of future development related to Terminal 2. The structure of the PPP arrangement
will depend on a variety of considerations, including the projected traffic and resulting
revenues of the airport with the addition of the new terminal. As part of the PPP agreement,
the private sector operator would be required to pay the government a fixed and/or variable
fee adequate enough to contribute towards servicing the China Ex-Im Bank loan and provide
sufficient revenue to the government. This would be negotiated as part of the draft contract
included in the tendering documents for the concession.
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AIRPORT DEVELOPMENT IN ZANZIBAR
3. Development, Financing, Maintenance & Operations of
Zanzibar International Airport
The third option includes development of the Terminal 2 facility under the current
arrangement (China Ex-Im bank loan and turnkey development of Terminal 2 through
existing construction contract), with operations contracted to the private sector under a PPP
arrangement for the entire airport, including. the new Terminal 2. This option would involve
a tendering process according to the proposed PPP Policy to select the most qualified
company, willing to provide the best financial arrangements to ZAA and the Government
(including revenues sufficient to repay the China Exim Bank loan for Terminal 2)..
This option would allow ZAA to benefit from efficiency gains and additional financing from
the private operator to ensure the entire airport is managed according to international
standards, in a manner likely to attract new airlines and flights and to leverage commercial
opportunities at the airport. By including the entire airport, ZAA can ensure that future
investment requirements are met, particularly once Terminal 2 capacity is reached. The PPP
arrangement should include operations, maintenance, and financing of future development of
all airport facilities.
It is important to note that under Options 2 and 3, while this preliminary analysis indicates
that these options would be financially viable and attractive for private investors and the
Government, additional analysis is required to verify these conclusions and prepare a PPP
arrangement properly. Part of this analysis should focus on whether the private operator
would be responsible for only the landside facilities and investments, or whether airside
facilities and investments should be included under the PPP arrangement. Additionally, ZAA
has indicated its interest in further development of Pemba Airport. It will be important to
consider whether this development should be included as part of the PPP arrangement with a
private operator and how this would impact the attractiveness of the investment. This too will
require further detailed analysis to understand whether the PPP operator would be able to
deliver services in Pemba more efficiently (and cost effectively) than the Government.
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Preliminary Conclusions
Based on the above analysis and the options under consideration, the following preliminary
conclusions can be drawn:

The current development of Terminal 2 at ZIA is generally in line with projected
increases in passenger traffic over the next 25 years, however in all three growth
scenarios, additional capacity would be required within 10-15 years;

Considering these traffic projections, as well as competition from other regional hubs
including Addis Ababa and Nairobi and expansion of the airport at Dar es Salaam, it
is unlikely that Zanzibar International Airport will become a regional air transport
hub. Instead, ZIA should concentrate on catering to the international and domestic
tourist market, improving services in order to attract greater numbers of tourists
from existing and new countries of origin, and leveraging the presence of that tourist
traffic with new revenue generating opportunities;

Given the projected increases in traffic over the next 25 years under all three growth
scenarios, and the Government of Zanzibar’s acknowledgement that the ZAA does
not currently have the capacity to operate the new Terminal 2 facility or finance
future airport development in the short or long-term, Option 1 is suboptimal;

In order to improve efficiency, quality of service, and ensure continued development
and maintenance of airport facilities to the highest international standards, a private
operator should be contracted under a PPP arrangement;

Option 2 would ensure that any potential additional investments needed to operate
Terminal 2 are made, and that the new facility is operated efficiently and according to
international standards. Any lesser standard of operations of this new Terminal after
the high levels of investment by the Government would most likely result in reduced
efficiency, reduced revenue, and higher long-term costs.

Option 3 would leverage the presence of a private operator to the benefit of the entire
airport, and would ensure that proper investments are made to properly operate and
maintain Terminal 2 and the airport as a whole.
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AIRPORT DEVELOPMENT IN ZANZIBAR
Preliminary Recommendation
Based on the above conclusions, we recommend that the Government of Zanzibar consider a
PPP arrangement as described in Option 3 above as a 25-year concession for operation,
maintenance and development of the entire Zanzibar International Airport. Preparation of the
PPP transaction should begin as soon as possible, as it is essential that the PPP operator be
selected before the completion of the Terminal 2 construction in 2015. The preparation and
selection process is likely to take at least 12 months, therefore the process must begin
urgently. The public tendering process should be designed to select an experienced, reputable
international private sector operator with relevant experience managing similar, tourismbased airports. The more reputable and well-known the operator, the more comfortable and
interested airlines will be in developing new routes or increasing frequency of existing flights
to ZIA. In order to attract a world-class airport operator, it is essential that the Government
hire a high quality, highly experienced transaction adviser to prepare the project and drive
the procurement process.
Key decisions that will be part of the preparation process include further analysis to
determine whether to:

include only landside or landside and airside facilities as part of the concession,

include development of Pemba airport as part of the concession.
These decisions will significantly affect the attractiveness of the PPP arrangement, so it will be
important for the RGoZ to establish its objectives for airport development early on, and
undertake detailed analysis, with the help of technical advisors, to determine which
combination will produce the greatest benefit to the Government and the public as a whole.