Some of investment banking’s marquee names are competing to run Puerto Rico’s main airport under a privatization plan that’s part of a Federal Aviation Administration pilot program.
The Puerto Rico Public-Private Partnership Authority, or P3 Authority, is about to select three finalists among 12 consortiums for a concession of up to 50 years to operate the Caribbean’s busiest airport, Luis Muñoz Marin International, or LMM, just outside San Juan.
The P3 Authority, which may have its short list this week, envisions a winning bidder by year’s end or early in 2012, said executive director David Alvarez.
“It’s the largest, busiest airport in the Caribbean, but it hasn’t realized its potential,” Alvarez said in a lengthy interview. “Puerto Rico as a connection is very important, because of its geographic and strategic location. It’s gotten the attention of many players,”
Gov. Luis Fortuño, speaking in New York, called the airport concession “a transformative project for Puerto Rico.”
For commonwealth officials, it won’t come too soon. While LMM served more than 4.2 million air passengers and 223,000 short tons of cargo in fiscal 2009, a report by the P3 Authority in June 2010 said the airport has lagged key Caribbean peers in total passenger growth.
It cited buildouts at Dominican Republic airports and Miami International in 2008, when LMM traffic declined. San Juan also has lost European inbound market share to the Dominican since 2005.
“Luis Muñoz Marin International Airport does not adequately serve the needs of Puerto Rico’s air travelers, nor does it provide a substantial financial benefit to the” Puerto Rico Ports Authority, the report concluded. The Ports Authority operates the airport.
Australia’s Macquarie, whose airport fund holdings include international hubs in Sydney, Brussels and Copenhagen, is among the suitors. Macquarie has joined forces in the Puerto Rico bidding with the airports unit of Spanish infrastructure behemoth Ferrovial SA. Canadian pension funds PSP Investments and OP Trust Private Markets Group are also competing.
Infrastructure projects have been popular investments with pension funds since the leasing in 2005 of the eight-mile Chicago Skyway toll road. That transaction infused the city’s coffers with $1.83 billion through a 99-year lease, and drew worldwide attention from the capital markets.
Goldman Sachs Infrastructure Partners is also in the mix. Goldman in June won a toll-road privatization deal in Puerto Rico — the island’s first under the P3 program — with a $1.4 billion bid in conjunction with Spain’s Abertis Infraestructuras SA. Goldman is partnering this time with Fraport AG, which operates the Frankfurt airport.
“The fact that many big names are involved is a positive sign,” said Seth Lehman, lead airports analyst at Fitch Ratings. “Having this competition works best for the commuters, and means Puerto Rico could be in a good position to get a fair price.”
Airport P3 arrangements are common worldwide, but Puerto Rico looks to become the first to complete such a project in the United States. Puerto Rico is a U.S. jurisdiction, and its proximity to Central and South America is strategic for air traffic.
The FAA unveiled its airport P3 pilot program in 1997. Its active participants are San Juan, Chicago’s Midway International Airport, Briscoe Field airport near Atlanta, and AirGlades Airport in Clewiston, Fla.
A deal for Midway fell through in 2009, though new Chicago Mayor Rahm Emanuel, while seen as less enthused than predecessor Richard Daley about the project, has asked the FAA to save its approved slot.
Timetables are also being reworked in the Georgia and Florida projects.
According to the P3 Authority, aviation revenues at LMM remained flat from 2007 to 2010, while overall revenues were down 10%, excluding bad debts. That report also said LMM underperformed significantly in food and beverage, car rental and parking revenues on a per-passenger yield basis.
AMR Corp., parent company of American Airlines and American-Eagle, struck a staggering blow in September 2008 when it said it would reduce capacity at the airport by 45%.
That was an effective wakeup call for commonwealth officials, though red flags had appeared a decade earlier.
“It’s a trend that initiated in the 1990s, really,” Alvarez said. “We noticed that other jurisdictions, including Miami, the Dominican Republic, Jamaica and Panama City, took strong steps during that decade to make major investments in airport hubs. We decided that we had to heavily invest in infrastructure. When everything became very clear, we realize we had to step up to be more competitive.”
While officials have been unable to generate additional overall traffic from other airlines, one positive development has been the expansion of JetBlue Airways service. JetBlue serves 11 markets there and this year added Jacksonville and Tampa, Fla., to its San Juan coverage.
JetBlue’s San Juan-to-Jacksonville route is strategic to the port authority in that northeast Florida city; most of its cargo now comes from Puerto Rico.
A JetBlue spokeswoman last week said the airline views San Juan as a focus city and plans to continue expanding there.
“My feeling is that Puerto Rico has a solid local market and is situated in a location that can feature many carriers in and out,” said Fitch’s Lehman. “It’s been a challenge for U.S.-based carriers to find a successful model, but it’s close enough to the U.S. to attract a very strong partner.”
Alvarez hesitated when asked how much money Puerto Rico can obtain through the airport contract. “Obviously, the answer is the higher the better. I don’t have an exact number I can share, but obviously we have certain objectives.”
Island officials want to reduce most, if not all, of the more than $800 million of debt the Puerto Rico Ports Authority is carrying.
In the toll road project, at least 90% of the upfront payment went to pay down Puerto Rico Highways and Transportation Authority debt.
“I don’t have a percentage in mind, but the Ports Authority is heavily in debt and we are looking to defease a substantial part of it,” Alvarez said.
The ideal investment group, he added, should have a long-term interest in Puerto Rico, “not someone who just wants to make an immediate investment.”
The 2010 report warned that a downward revision of general obligation bond ratings for Puerto Rico or the Government Development Bank, the commonwealth’s investment wing, could pressure the Ports Authority’s ratings.
In August, Moody’s Investors Service downgraded Puerto Rico’s GO rating to Baa1 from A3, with a negative outlook. Moody’s cited severely unfunded retirement systems, weak economic trends and a tendency to fund budget gaps with borrowing.
“Of course, we always worry about any downgrades, but so far it has not created a negative situation” with the airport project, Alvarez said. “The response has been very enthusiastic.”
The project has also triggered debate among political players. Privatization itself is a sensitive matter on the island. In the 1990s, moves by the government to privatize the health care system and telephone company triggered protests.
Last month, Charlie Hernández, member of Puerto Rico’s House of Representatives, accused government officials of “a serious conflict of interest,” as quoted in the Puerto Rico Daily Sun, citing the $1.2 million of consulting contracts Macquarie already has with the commonwealth to develop guidelines for the P3 Authority.
In a response on its website, the P3 Authority denied any conflict, saying the agency received advice from Macquarie professionals not related to Macquarie’s investment funds, and that the advice related to the toll roads project and about P3 best practices worldwide.
“These projects always have some subplot with some politician getting into it. The key is to keep putting out information and keep the press informed,” Alvarez said. “We are talking all the steps necessary to protect the public.”
According to Alvarez, the toll road project gave the commonwealth a beneficial reference point both internally and on the outside.
“Investors have seen a process in which we were timely. Some of the steep learning curve has been completed,” he said.
“The toll road project was a success. Lenders know it and investors know it, and we expect the same for our airport projects.”
