Latin America is the largest aviation growth market in terms of passengers in the world. Private sector participation has taken hold across the region for a number of reasons, such as the willingness of governments to implement projects, economic growth and the increasing size of the sector. This is particularly true in Chile, Brazil, Mexico and Argentina.

There is now an increase in interest in Peru, where the airport sector is remarkably active. Lima Airport, for example, is currently operated by a private European/ Peruvian consortium, and the Government is also planing to grant a concession in favour of a private operator of an integrated package of around 18 regional airports, including Cuzco, the second largest airport in the country.

Infrastructure is badly needed in Peru, especially in the transport sector. Tremendous distances separate Lima from the main cities located in the coast, desert, Andes or rain-forest. Therefore, the Government, led by Mr. Toledo, is busy organising a number of road, port and airport projects, with the aim of achieving integration and to promote trade, development and tourism, both nationally and internationally.

The Peruvian Government, however, has budgetary constraints on the ability to finance these projects itself. As privatisation is no longer an option, due to increasing political resistance against it in the country (as in the rest of South America, mainly due to Argentina's experience), concessions are currently being used as the best method for infrastructure procurement, since the ownership of assets that are perceived as ?national interest' is never transferred to the private sector. This is a less contentious option for bringing private capital into the country.

Lima Airport Concession

The concession for the airport of Lima, Jorge Chávez International Airport, was granted on 14 February 2001 to Lima Airport Partners (?LAP?), a consortium comprising Flughafen Frankfurt Main AG (42.75%), Bechtel Enterprises International Ltd (42.75%) and the local construction group Cosapi S.A. (14.5%). The airport of Lima is the biggest in the country with more than 4.5 million passengers per year and 10,000 metric tonnes of freight in 2000. The contract type used was a build-operate-transfer (BOT) for 30 years, which can be extended for 10 more years.

LAP is responsible for the provision of all airport services, excepting air traffic control and air navigation services. Airport tariffs are also regulated by Corpac1 through the contract. LAB in return is paying a concession fee to Corpac equivalent to 46.5% of the total revenues of the Airport of Lima per year (around $20 million). It has a commitment to invest $1.2 billion over the term of the contract (up to $12 million each year in the first 2 years) and has to build a second runaway within 11 years from the date of execution of the concession. LAB also has to ensure an IATA category ?B?.

Cuzco and the Regional Airports Concession

The Ministry of Transportation, Construction and Housing of Peru, though ProInversión (the governmental agency for the promotion of investment in the country), is currently organising the procurement of a concession for one single integrated package of 18 regional airports (which concentrate 98% of total regional traffic) under a design-build-finance-operate (DBFO) type concession. The exact number of airports in the package has yet to be defined. Under the concession, the Government will enter into an agreement with the selected airport operator to design, build, finance and operate a package of regional airports and purchase from such concessionaire both aeronautical and non aeronautical services to be detailed in an output specification and in return for an annual payment or canon.

Peru's regional airports, however, are not as profitable as Lima airport (their operation creates $6.6 million in annual losses) so it will be difficult for the selected operator to obtain non-recourse finance in the international markets for a non-bankable project. For this reason, and after the recent studies conducted by Masons and Currie & Brown on behalf of ProInversión, it was concluded that in order to achieve the Government's goals of attracting both private investment and skills into their regional airports, it will be advisable to grant the concession under a DBFO scheme based on PPP principles. Thus, the regional airports should be subsidised by the Peruvian Government through the payment of a unitary charge to the operator, on an annual basis, in return for airport services and ensuring an IATA Category ?C?. This payment of this canon will be financed by part of the concession fee that is being received by Corpac from Lima Airport. It is understood that the intention is that these monies will be privately managed through a special guarantee fund to be established in due course in order to reduce the payment risks of the project.

Cuzco's Velasco Astete International Airport is Peru's main regional airport and the second nation-wide after Lima. This airport is included in the package together with the airports of Arequipa, Iquitos, Tacna, Pucallpa, Trujillo, Piura, Tarapoto, Nazca, Juliaca, Chiclayo, Puerto Maldonado, Tumbes, Cajamarca, Ayacucho, Anta-Huaraz, Pisco and Chachapoyas (see Table 1)2.

Cuzco Airport has a maximum capacity of 1.9 million passengers per year (it currently has around 715,000 passengers per year). It has been calculated that, taking into account optimistic growth forecasts3 for the airport, it will be necessary to start the construction of a new airport at Chinchero, in Cuzco (Chinchero International Airport), approximately four years before reaching such capacity.

The total required investment for the package of 18 airports, including the eventual construction of Chinchero Airport, is estimated at $310 million over the coming 20 years (see Table 2).

OSITRAN, the transport regulator, will supervise the compliance of the concession, as it does with Jorge Chávez Airport in Lima.

What is the Peruvian Government looking for?

The overall aim of the Peruvian government is to obtain long-term, efficient delivery of new infrastructure, new services and improvement of existing facilities, while maintaining control over such assets, reducing public sector borrowing, promoting foreign investment, social and economic benefits, creating employment opportunities and an optimum transfer of risks. With regard to the regional airports, the more specific goals of Peru are to modernise and develop its airport sector, introduce competition, create an intra-regional hub in Cuzco away from Lima's monopoly, and attract more tourists.

The transfer of risk is crucial for this project. The Government is particularly keen to transfer to the private operator the design, planning, completion, termination, operation, insolvency and finance risks.

It is believed that ProInversión's selection criteria in the tender will be based on the minimum proposed unitary charge or canon to be paid by the Government to the selected operator.

Airports are strategic assets anywhere and, in Peru, the Government wishes to retain both their ownership and a degree of control over them, while requiring the operator to invest in the upgrade of the airports and to render a number of airport services both aeronautical and non-aeronautical (see Table 3). This can be based on a concession structure that enables Peru to get a long-term commitment from the selected operator and also a share of future revenues.

It is important that operators interested in participating in the forthcoming international tender for the regional airports clearly understand the above mentioned goals of the Peruvian Government before submitting their offers. In this regard a series of roadshows giving more details of the project are planned.

PPPs in Peru?

It is clear at this moment that, if the project goes ahead as planned, some of the main PPP elements will be put in place, namely that:

? the public sector will be seeking long term efficient delivery of infrastructure

? the public sector will be purchasing services not assets

? the project will be based on a DBFO concession model

? project performance will be defined by an output specification

? optimum risk transfer is to be achieved through the project structure

? a payment and performance regime will be used to secure delivery of airport services, maintain quality and retain control of the project

Nevertheless, there are a number of key considerations the Government needs to take into account before embarking on this process in order to achieve a successful PPP, namely:

? putting in place the right legal and regulatory framework

? establishing the right organisational structure or task forces to develop this and other PPP projects

? clearly establishing the role the Government wants the private sector to play, and detailing the degree of control in the project that the Government wants to retain

? establishing the areas of the project which must remain the responsibility of the public authority, and identifying all the risks that the Government is looking to transfer to the private operator and all risks it is willing to retain

? setting out the innovation that the public authority is looking for, and

? identifying funding resources available to the project

It is fair to say that fiscal restraint is driving the adoption of PPPs in Peru. However, there is a political will to proceed with the PPP, and the project looks destined to improve air transport throughout the country.

Conclusions

Governmental support is not uncommon, even in airport projects in Europe or Asia, where usually there is a fair degree of state support because of the national importance of the projects. This is no different in Peru where public money will be needed for the regional airports project. This is basically because of the Government's decision to avoid other options for private sector participation in its airport sector, such as a full privatisation or a trade sale.

Furthermore, the Government is also looking to support the project at this stage by using part of the resources received from Lima airport due to the current low traffic volume of passengers per year in the regional airports, which makes it impossible to obtain non-recourse finance for the project based on its own cashflow.

The Government, however, expects that this situation will change in the near future due to the country's internal growth and, more importantly, Peru's immense tourism potential based in its archaeological heritage, which will attract more visitors going to the several ruins, tombs and other discoveries such as a recently discovered new lost city close to Machu Picchu. This should create more operator revenues, derived mostly from charges levied on passengers using the regional airports, aircraft take-off and landing charges and other aeronautical and non-aeronautical charges, which in turn will reduce the need for the Government's subsidy to the project and maybe will create an opportunity to share revenues. The Government thus is sure that the key to success will be passenger volumes and their average spend while they are in the regional airports.

A robust legal and regulatory framework is in place supporting the planned concession structure. What is still necessary is to ensure that the tender is transparent and fair, the risks are fully identified at the outset and correctly allocated, the payment mechanism is sound, that there is a performance monitoring regime against measurable criteria, and the operator's performance is incentivised with realistic bonus penalty mechanisms and efficient delivery of quality services. n

Dr Paulo Falconi, Masons, e-mail: paulo.falconi@masons.com

Footnotes

1 Corpac is a company wholly owned by the Government that currently operates and maintains 52 airports and airfields in the country

2 ProInversia company wholly owned by the Government that currently operates and maintains 52 airports and

3 3.5% per year ? 25 years; 6% per year ? 10 years