And the gold medal for PPP goes to…Galeão International Airport’s record-setting deal

When the Olympic Games comes to Rio in 2016, new medal-worthy sports will include kitesurfing, golf, and rugby sevens. If the Olympic Committee ever considers including our “sport” – the practice of public-private partnerships (PPPs) – the top medal would surely go to the home-grown Galeão International Airport PPP, which set the 2014 record as the largest PPP deal that closed globally. For this gateway to Rio – which is in the midst of preparing to accommodate more than 10,000 athletes and tens of thousands more visitors for the 2016 Olympics – even the concessions merit global rankings.
 

Standing by for liftoff
The concession of Galeao International Airport (official name: Rio de Janeiro/Galeão–Antonio Carlos Jobim International Airport) got off the ground in the second round of airport concessions. The first round dates back to early 2012, when the government issued tenders for three major airports: Guarulhos (São Paulo), Viracopos (Campinas) and Brasília.  

In mid-2012, following the successful outcome of these three projects, the Brazilian National Development Bank (BNDES) approached IFC to assist with a second round of airport concessions, including Confins airport (Belo Horizonte) and Galeão (Rio de Janeiro).  IFC teamed up with the Estruturadora Brasileira de Projetos (EBP), a project preparation company owned by some of the biggest Brazilian commercial banks and BNDES. Together, IFC and EBP were responsible for the financial, technical/economic/engineering, and environmental studies. 

Galeão – a major air transportation hub for the country and region – is the primary commercial airport in the Rio de Janeiro area, the second busiest in Brazil and the fourth busiest in Latin America. As an international gateway with a large origin and destination passenger base and a strong inbound visitor market, interest was especially high. 

When the call went out for bidders, the 2014 World Cup had not yet taken place, and the 2016 Summer Olympics was already on the calendar. So the move toward private sector involvement to improve this particular airport took on significance and urgency. The economic relevance of the airport remains despite overall economic growth in Brazil tapering off in recent years, and may even increase in the decades to come.

Auction action
Being part of the IFC team responsible for concessioning Galeão airport was intellectually challenging, and even after the PPP has closed, we continue to think about it and ask questions (some of which we have outlined below). Personally and professionally, it was also very exciting to work on because we have flown in and out of the airport hundreds of times over the years. We have always understood firsthand how a PPP could dramatically improve the quality of service to over 17 million travelers that pass through it annually while significantly contributing to the federal government’s revenues through the payment of large concession fees and taxes, as well as transfer of investment obligations.  

As a team, our expectations for the Galeão auction were ambitious because long-term tracking of the market convinced us that the potential of a PPP dovetailed with favorable political and economic circumstances. When the auction for Galeao was held in November 2013, the global airport investment community responded with great interest. Five bids were received, including the winning bid of R$19 billion (US$8.3 billion at that time) from Aeroportos do Futuro , a consortium between Odebrecht (60%) and Singapore’s Changi Airport Group (40%). As recounted later, “this was about four times the minimum acceptable bid set by the Brazilian government.”

Further, the Galeão airport winning bid was the highest bid to date in Brazil’s  airport concessions process. The Galeão project was structured as a 25-year concession, through which the operation and management of assets is transferred to the concessionaire along with the responsibility for all lifecycle investments and those necessary to meet growing demand in the concession period (such as a new terminal and a third runway) .
 
A PPP worthy of continued reflections
Details of the record-setting Galeão PPP continue to pull in not only those of us who worked directly on it, but an international audience of analysts, students of government, and business leaders. In fact, Harvard’s Kennedy School of Government (HKS) recently wrote a case study on the Galeão concession, the subject of a discussion among classes there.  
 
The HKS case study raises a number of important issues. For example, as stated in the HKS write-up, the fundamental question is: How can the winning bidder have submitted a bid so much higher than the original auction price (and much higher than the second bidder, in a competitive setting)?
 
From this inquiry, we can speculate on various scenarios from an ex-post analytical perspective, although some of them could pull in opposite directions (for example, lower capex and higher demand):

• Was it the result of substantial differences in capex assumptions (as compared to the original study and to the competitors’ business cases)? And related to this: Does the private concessionaire have a distinctive way of solving the main engineering challenges posed by an airport of that size  under the defined investment plan?
• Was it the result of substantial differences in demand assumptions and, as a consequence, the level of commercial revenues accruing to the concessionaire?
• Does it represent a substantial difference in assumptions about the level of efficiencies?
• Is there any underlying probability of opportunistic behavior that could ultimately result in a renegotiation of the contract?
• Are there differences in cost of capital and, as a result, different return expectations as compared to the winning bidder competitors (debt was to be provided by BNDES at the same conditions to all bidders)? 

Brazil closed 30 PPPs in 2014, and the Galeão Airport project was a landmark: it allowed Brazil to reach its second-highest annual PPP investment total ever (second only to 2012’s US$41.9 billion). With the upcoming Olympics, more records will be set, but to our team, this is the first significant win for Brazil, and the one that will stay with us longest.
 
Editor’s note: The source of the many of the statistics in this post is the Private Participation in Infrastructure (PPI) Database, which is a rich source of data on PPPs. To explore the PPI Database and publications including PPI Notes on individual sectors and regions, please see http://ppi.worldbank.org.