How Congress can spur the modernization of U.S. airports

Global companies focused on public-private partnerships have long been frustrated by the apparent lack of a U.S. market for airport privatization. Over the last three decades, numerous large and medium-sized airports worldwide have been either sold or leased through long-term public-private partnerships (P3s). 

Airports Council International maintains a database indicating that in Europe, 75% of passengers use privatized airports. In Latin America, the figure is 66%, and in the Asia-Pacific region, it’s 47%.

Here in the United States, only 1% of passengers use privatized airports. The public-private partnership lease of the San Juan, Puerto Rico, airport is responsible for that 1%.

This significant disparity has puzzled many people in both industry and government. So, I was pleased to receive an invitation last fall from Ed Glaeser of Harvard University to submit a proposal for a research paper on a current problem and a potential policy-change solution for it. The problem I suggested was the dearth of U.S. airport privatizations. My proposal was one of a half-dozen that were accepted. The project was managed by the American Enterprise Institute and the Brookings Institution, and the paper went through rigorous peer review. It was released in August, and I hope it has a significant impact on improving airports. 

In the years following the privatization of the British Airports Authority by former Prime Minister Margaret Thatcher in 1987, there was significant interest in enabling similar transactions to take place in the United States. In 1996, Congress enacted an Airport Privatization Pilot Program under which five airports could be P3-leased. (Outright sale of U.S. airports was and remains against federal law.) 

A handful of small airports were P3-leased, but none were successful. In 2012, Congress made modest changes to the Airport Privatization Pilot Program (APPP). Under this program, Chicago attempted to lease Midway International Airport twice, and Puerto Rico successfully leased Luis Muñoz Marín International Airport in San Juan. 

Eventually, in 2018, Congress substantially revised the program, renaming it the Airport Investment Partnership Program (AIPP). The most important change was that the (generally up-front) lease payment can now be used by the airport owner’s jurisdiction (city, county, or state) for any governmental purpose, rather than being limited to being spent on airport improvements. 

Many of us thought this would finally lead to airport public-private partnership leases, but the only serious effort to lease one was St. Louis Lambert International Airport. In 2018, the Lambert effort was terminated by the city due to opposition from other governments in that metro area. This was despite very significant private-sector interest in a lease and support from the airport’s airlines.

My research topic was to review the literature on U.S. airport privatization and come up with policy changes that could open the door for long-term public-private partnership (P3) leases. I reviewed a major Transportation Research Board study from 2012 and several reports on the topic by the Governmental Accountability Office (GAO), Congressional Research Service, and others. One theme stood out to me: the non-level tax playing field between the United States and the rest of the world. U.S. airports are financed via tax-exempt bonds, which do not exist in Europe, Latin America, or the Asia-Pacific countries. This problem had not been addressed in the succession of changes made by Congress relating to airport public-private partnerships.

Fortunately, I had also saved the text of the major 2018 White House infrastructure report researched and written by D.J. Gribbin during the first Trump administration. I’d had occasional discussions with Gribbin while he was serving as the leading strategist of President Donald Trump’s $1.5 trillion infrastructure plan, and I remembered that it addressed the tax-exempt bond situation. The transportation portion of Gribbin’s report was also released as a report by then-Secretary of Transportation Elaine Chao, and it included the same discussion of tax-exempt airport bonds as a barrier to U.S. airport public-private partnerships.

In the new report, I propose two federal tax policy changes that were discussed in the White House report: (1) allow an airport’s existing tax-exempt bonds to remain in force, but with subsequent debt service becoming the responsibility of the private-sector partner, and (2) expand the availability of surface transportation tax-exempt private activity bonds (PABs) to airports and seaports, as proposed in 2014 by a bipartisan House Committee on Transportation and Infrastructure working group on P3s.

Congress’s Joint Committee on Taxation (JCT) and the U.S. Treasury Department generally oppose any expansion of tax-exempt debt. Their stated reason is their assumption that anything financed via expanded tax-exempt debt would have otherwise been financed via taxable debt—hence, the government would miss out on tax revenue if tax-exempts were expanded.

For U.S. airports, this is simply incorrect, as I explain in the report. Treasury receives no taxable revenue from airport finance today, since nearly all airport bonds are tax-exempt. No new U.S. airport public-private partnership leases are taking place, so Treasury is not getting any tax revenue from non-existent leases. 

Under the changes I propose, if airport P3 leases start to occur, there would be no immediate increase in federal tax revenue. However, as for-profit public-private partnership firms enter the U.S. airport market, assuming they are successful businesses, they will be subject to federal corporate income taxes. This could develop into a new U.S. industry, similar to what has occurred in surface transportation, thanks to long-term public-private partnerships for highways and transit. Today, the United States has a whole new tax-paying corporate sector of highway/transit public-private partnership companies, like what could develop as a new airport P3 industry in the years ahead.

The most important question is whether these tax changes would actually lead to more than the current single long-term airport public-private partnership lease. 

In my new report, I draw on my 2021 Reason Foundation study on airport P3 leases to estimate the impact those tax changes would make. Under current law, in an airport P3 lease, the airport owner (city, county, or state) must pay off its outstanding bonds before the deal can be finalized. 

In Europe, the airport owner receives the estimated gross value of the airport, generally based on a multiple of its EBITDA (earnings before interest, taxes, depreciation and amortization). But for a U.S. airport, under current law, the owner would receive the net value (gross value minus the bond payoff). That can make a significant difference in what can be considered as a major one-time financial windfall that the city, county, or state can use for any governmental purpose, under the current AIPP law.

For example, based on my 2021 analysis, which estimates the market value of 31 large and medium U.S. airports, for Hartsfield–Jackson Atlanta International Airport, the gross up-front payment would be $9.2 billion, compared with a net payment of $6.1 billion.

For the Los Angeles International Airport, the gross value of $17.9 billion contrasts with a net value of $10.6 billion. Similarly, for San Jose Mineta International Airport, the gross value is $2.5 billion versus $1.3 billion in net value. 

To make this even more tangible, the report compares the one-time windfall for each of 31 airports with the unfunded liability of that jurisdiction’s public employee pension funds. Atlanta, Los Angeles, and San Francisco are some of the cases with the gross value being more than sufficient to fully eliminate their pension system’s unfunded liabilities. In many of the 31 large and medium airports examined, the payment would make a significant dent in the jurisdiction’s public pension debt. 

Still, the question remains: would any U.S. airport owner consider such an airport lease to be worthwhile? 

I quote a former director of Miami International Airport explaining to Sadek Wahba of I Squared Capital how much elected officials enjoy micromanaging airports. That’s a real phenomenon, but this leads me to a question: What do elected officials think an airport P3 is? 

My hypothesis is that most think a P3 is a de facto sale. Even if their city or state already has one or more long-term DBFOM (Design-Build-Finance-Operate-Maintain) public-private partnership highway projects, they might not see that a long-term airport P3 lease is an ongoing partnership between the airport’s government owner and the selected private sector company or project entity. They may not be clear about the respective roles of the public and private partners in the long-term agreement. To be sure, elected officials will not retain their micro-managing ability of an airport if it is P3 leased, but they will have a significant role in major future decisions, such as expanded terminals or runway extensions, made by the airport. 

So, the airport P3 industry has an important educational role to play with policymakers and stakeholders. And despite my AEI/Brookings paper having the word “privatization” in the title, my first recommendation is to avoid using this term with regard to U.S. airport long-term public-private partnership leases. In the examples and cases described here, they are not sales; they are long-term partnerships that research has shown lead to significantly improved airport performance.

One encouraging word comes from Kevin Burke, chief executive officer of Airports Council International- North America. In an interview with Aviation Week reporter Aaron Karp last fall, Burke lamented Congress’s repeated failures to increase the amount of the federally authorized passenger facility charge (PFC), which has not been increased for 20 years and has lost half of its purchasing power. Without a near-term PFC increase, Burke said, U.S. airports would likely turn to “public-private partnerships to fund the multiple billions of dollars it takes” to improve airports. He noted that airport lease transactions would likely follow the financing model used in Europe and other regions where companies oversee airport management and development in decades-spanning leases with governments.

In looking for another reason for potential optimism, I’d also remind readers that the key tax changes proposed in my paper were first spelled out in the 2018 Trump White House Legislative Outline for Rebuilding Infrastructure in America. It would be wise for the current Trump administration to return to some of the proposed changes that Gribbin and the 2018 document outlined to help spur the modernization of airports through public-private partnerships. 

As I conclude in the study, Congress should make these changes to enable U.S. airports to improve their performance and compete on a level playing field with airport P3s in Europe, Latin America, and the Asia-Pacific.

A version of this column first appeared in Public Works Financing.

The post How Congress can spur the modernization of U.S. airports appeared first on Reason Foundation.

Source: https://reason.org/commentary/how-congress-can-spur-the-modernization-of-u-s-airports/