Public-private entities, investors must unite for best airport

The airport represents a once in a generation opportunity but it also represents a complex financing headache.

There has been a recent flurry of activity by the commonwealth regarding the planned construction and operations for the proposed Western Sydney Airport.

The federal budget committed up to $5.3 billion in equity over 10 years to the Western Sydney Airport Corporation.

Stage 1 involves a single runway catering up to 10 million passengers a year, due for completion in 2026. A second parallel runway will be required for a forecast ­capacity of 82 million annual passengers by 2063. Construction is expected to begin next year and the overall spend, including upgrades, is estimated to be $38bn.

The airport represents a once in a generation opportunity but it also represents a fiendishly complex financing headache.

The large upfront capital outlays, significant patronage risk, a lengthy construction period without positive cashflow, a staged construction to match demand forecasts and uncertainty regarding the profile of the airlines, passengers and businesses that will use the airport precinct all generate risk. This leads to significant difficulty in attracting foundation long-term users and traditional project financiers.

The solution is to appropriately balance the public and private sector’s role. Only the public sector can absorb significant operating losses through its revenue-raising capabilities and ability to raise cheap debt. This allows the public sector to fulfil its mandate to resolve the long-term aviation constraints in the Sydney basin, integrate the airport into the global aviation network, connect it with current and future road and rail networks and integrate the airport precinct into surrounding commercial zones and the national economy.

It will be ­vitally important for the private sector to be involved given its expertise in direct project delivery, the role of competition to efficiently allocate capital, and its appetite for investment in long-term infrastructure projects — all of which serve to defray the costs and risks to the taxpayer.

So what form of investments is the public sector likely to make? The commonwealth’s stated preference is for equity injections and concessional loans rather than block grants to the states. This is because such investments can be off the budget balance sheet (like the NBN), may generate a sizeable return upon sale and can be used to leverage further investment.

The government has cited projected long-term benefits for taxpayers of $1.80 for each $1 invested into the airport. Other options include guarantees, revenue-sharing or partnering in user-charging and value capture for ongoing funding of the project.

As for an eventual exit, the staged construction timetable points to a possible privatisation at the end of Stage 1 and using the proceeds to finance the considerable upgrades which are forecast to be required. The commonwealth should articulate its ­financing plan for all stages of the airport as soon as possible to ­attract private sector investment as the patronage and regulatory risks decrease.

The commonwealth’s reluctance in deploying block grants has implications for state government funding of supporting infrastructure for the airport. Through its Infrastructure Future Fund, NSW’s initial emphasis will be on road upgrades around the airport, a freeway link to Sydney’s arterial network and land-use arrangements outside the perimeter .

The missing piece is rail connectivity to the airport. It will be important for these arms of government to integrate their involvement, something the national partnership agreement on infrastructure will need to specifically address when it comes up for renewal in 2019. All levels of the public sector will need to work ­together and with the industry and investment community to realise a nationally significant piece of infrastructure without its being a burden on future generations.

Clive Cachia and Jeremy Prentice are infrastructure specialists from global law firm K&L Gates.