Airport Privitization Gets Bogged Down Before Any Discussion of Cost Benefit Analysis
Under Mayor Lyda Krewon the effort to privatize the City of St. Louis’s Lambert International Airport (the “Airport”) has seen resurgence with the City going as far as negotiating contracts with firms to serve as financial advisor for the evaluation and potential sale of the airport. (1) Privitization of the Airport would be a very complex process that would require a truly comprehensive planning and vetting proess to be successful. With great risk and great complexity comes the potential for great reward in the form of stabilization of the City’s balance sheet and the capital investment and innovaation needed to make St. Louis a top hub for air travel.
A thorough analysis may find privitization of the Airport to be financially inefficient or excissively risky and therefore not be feasible for the City of St. Louis. However, all elected officialy and regional influencers have the obligation to allow the review process to take place before taking a stance. Unfortunately, many on the Board of Alderman and in the media have decided to undermine any privatization efforts before any financial analysis can be performed. Instead of debating privitization on its merits opponants have chosen to sew seeds of doubt in the review process through unsubstantiated claims of insider deals and purposeful lack of transparency. .
I am in favor of as transparent and inclusive process as possible and admit that some steps taken by Mayor Lyda Krewson with honest intentions have created the optics of untransparency that her opponants have used to their advantage . Unfortunately, I suspect a completely transparent summary of the priviatization process to this point would be met with months of obstruction from elected officials in the form of unsubstantiated claims and disengenuous populist rhetoric. This form of dirty politics has only been enhanced by lazy journalism from the likes of Tony Messenger of the St. Louis Post Dispatchwho continues to publish sensationalistic articles such as “Krewson’s lament on integrity obscures serious issues with airport process” and “King Rex clears the chess board as he plots his Lambert privatization strategy” .
Instead of getting sucked into this unwinnable relativistic battle I have chosen to provide a genuine framework for analyzing the costs and benefits of airport privatization our region can use to move forward in a productive manner.
Framework for Cost Benefit Analysis of Privatization
Privatization of a public asset generally involves a private for profit organization entering into a long-term lease agreement (30 to 40 years) with a government entity in which the private entity pays a large up-front sum for operational control over a public asset and the rights to any and all profits generated by that asset over the time of the lease. These agreements also often incorporate minimum service and maintenance standards for the private operating entity and sometimes call for small annual payments be made to the City based on the years total profits.
Airport privitization materially impacts a City and its residents in three large ways:
Long-Term Net Present Value Analysis: In return for a large up-front payment the City of St. Louis would likely have to give up the vast majority of revenue generated by the Airport. According to the City of St. Louis’s 2019 budget projections the Airport will generate approximately $6.8 million in revenue for the City’s general fund. Assuming growth in airport revenue of 2% (in-line with City projections) over the next 40 years, remaining as a public the Airport would provide an NPV benefit of $206 million to the City (see Table 1 Below).
Annual lease payments from a private lease are projected to be between $24 million and $60 million per fly314.com. The low estimate of $24 million in annual payments would generate an upfront payment of approximately $526 million per the NPV analysis in Table 1. This back of the napkin analysis does not provide exact figures. However, it makes it clear that the up-front payment from privatization will almost certainly result in the City receiving significantly more than if it would if the airport remained public. Any additional payments negotiated as part of the lease structure would only provide additional financial benefic to the City.
Immediate Impact on City Finances: The large up-front sum paid by the private leasing firm can be used by the City in any manner approved by the Board of Alderman in accordinance with the City Charter. This payment would have an immediate positive impact on the balance sheet of the City of St. Louis by providing funds that could be used for needed capital improvements, to increase reserves or to offset decreased revenue due to a decrease in tax rates in order to incentivize new business to move into the City.
This capital influx will also provide an immediate boost to the strength to the City’s balance sheet in the form of increased cash and increased unrestricted fund balances. According to Moody’s Rating Agency general obligation debt rating methodology report cash and unrestricted fund balances are used in financial ratios that account for approximately 30% of the factors considered when roviding a general obligation bond rating(2). An increase in cash and unrestricted general fund balance of over $500 million would put 30% of the City of St. Louis’s financial ratios in the AAA category and could result in a credit rating increase from A3 to as high as AA and decrease the total cost of borrowing by as much as $2 million annually.
Impact on Services Provided by Sold Asset(s): The above analysis of long-term financial impact assumes that the private operator maintains and operates the Airport as well or better than the City of St. Louis over the next 40 years.
A for profit company makes investment decisions based on what maximizes revenues, decreases expenses and therefore maximizes profits. A private operator who attempts to decrease expenses by providing a lessor quality of service or cutting corners in the area of maintenance and capital improvements could create a situation in which the quality of the Airport deteriorates over time.
To minimize this risk Robert W. Poole, Chairman of the Reason Foundation recommends the public entity “include(e) explicit provisions to protect the public interest and require achievement of certain performance targets”(3).
In this same research report Mr. Poole notes that private operators can often provide increased operating efficiencies and increased capital commitments due to their compensation structures based on results, more flexible workforce, economies of scale, increased capital resources and industry specialty. The report also notes that private operators enjoy less protection against legal liability than government entities which provides a greater incentive to ensure safe conditions in order to avoid costly lawsuits(3).
A quality long-term partner must have incentives that align with the best interest of the City and the development of criteria for measuring the alignment of incentives and overall reputation of each private firm should be a mandatory step in the privatization process.
The flow chart above provides an overview of the areas that a government must review thoroughly before moving forward with a public private partnership agreement regarding an airport according to AirDev (4).
If the City of St. Louis follows a similarly comprehensive vetting and planning process airport privatization has the potential to provide a significant influx of cash flow to the City, strengthen the City’s financial position over the long-term, lower the cost of borrowing and increase the competitiveness of the airport. While a shoddy or incomplete vetting process could lead to a detiorization of the City’s financial position and a less competive airport. The stakes of this decision could not be greater and anyone wasting through arguements not based on the merits are doing a disservive to the region and the people they represent.