AFA - Aerospace Forum Asia

by Jonathan Sharp
Reprinted with thanks to HK Business Magazine
25 November 2004

Privatisation: "Sexy" But on the Right Flight Path?

The fundamental problem the government has is that "the skeptics can’t really see why they are doing it now or indeed whether now is the right time to do it," says Elizabeth Bosher, a former Airport Authority official.

Elizabeth Bosher was in at the birth of Hong Kong’s airport at Chek Lap Kok. During the facility’s gestation period she worked in the Economic Services Branch of the government with aviation as one of her top priorities. Then from 1995 until 1998, the year when Hong Kong International Airport (HKIA) came somewhat uncertainly into the world, she was an executive director with the Airport Authority, her last post being as planning director.

So what does Bosher, who is now Managing Director/Asia Pacific for US-based aviation planners Landrum & Brown, think about plans for the partial privatization of this hugely important asset she helped to nurture? Her bottom-line view is that if the sell-off is handled properly - well and good. At the same time, she sees that at the moment there are too many unanswered questions about the proposed privatisation and she is yet to be a true believer that it can be a success.

"The problem the government has is that they don’t really have a very solid reason for bringing private equity into the airport at the moment," she says. "Outside of China there aren’t many examples of partial privatisations of airports. The trend has been, in Australia and elsewhere, to go for a trade sale, in which case you sell the whole asset for 50 years or so."

Most governments sell off assets like airports to raise a large amount of cash - but Hong Kong says money is not the main factor in the case of HKIA. Rather, the government says it wants to impose a further layer of commercial discipline on the Airport Authority. But why, Bosher and others ask, is this necessary when nobody is complaining about the current performance of the airport, and it’s regarded as a wonderful facility.

What Hong Kong is doing is following the model set by the partial privatisation of the territory’s MTR rail network, whose IPO drew an enthusiastic market response. But as Bosher points out, when the government took the MTR to the market, it was already a mature asset with all the initial phases of construction completed.

The situation is completely different with the airport, where much investment and construction are needed before it can count as a mature asset. "So a lot of analysts say it’s really very difficult for somebody to come in at this stage and actually value the airport. You’ve got to make some pretty heroic assumptions about how much expenditure you are going to need.

"You could argue that it would be more sensible, and you would be more likely to get a real valuation of the worth of the facility, if you waited 10 or 15 years, and then you would really have an almost fully mature asset and you would know exactly how to price it."

So why is the government moving so quickly along the privatisation course? Number one, says Bosher, is to help reduce the budget deficit.

Number two? "Privatisation is sexy. I think there is an element of ‘let’s do it. It makes us look dynamic, we are bringing the people in as shareholders'"

For Bosher, whose hats include being Director-General of the Aerospace Forum Asia professional group, a fundamental concern over HKIA is not knowing what the regulatory regime will look like post-privatisation.

She cites the privatisation of Sydney airport, by trade sale to Macquarie Airports as a positive example of how the regulatory aspect should work. This includes tight control by the government over matters such as charges and development plans, especially in the first years, to ensure that the new operator, having bought the facility, does not simply pump money out of it.

"Now all of this is wonderfully unclear in the Hong Kong situation because you’re not handing it over lock, stock and barrel to an operator," Bosher says. "The same management will stay in place. All that will happen is that you are selling off a proportion of the shares, probably to individuals and to investment houses, and not to anybody who is going to rock the boat in the sense of saying we should be building another bit of the terminal, or another concourse. In other words they are investors who will be quite obviously purely looking for a return."

But the whole idea of Chek Lap Kok, at the outset at least, was to have an investment not just in aviation but in the whole economy and future of Hong Kong. So making a quick and lucrative investment was initially not a goal, and a reasonable return on investment was reckoned to be five percent over 20 years. "Whether you can maintain that sort of posture when you are bringing private money into the equation, I don’t know."

She adds: "A lot of critics are saying the only way you can get a reasonable return on the book value of the airport at the moment is to have a hell of a lot more revenue coming in than there is at the moment." One of the ways is to raise charges at the airport - and IATA says that Hong Kong’s charges are already second highest in the region, after those at Japanese airports. (The Hong Kong Airport Authority looks at things differently, saying that in global terms, its charges are at the lower end of the scale.)

"There’s a lot of scepticism. Many respected analysts don’t believe (the government) can sell the shares at book value. As a basic rule, you don’t sell it off unless you can" sell at book value.

Bosher concludes that she has no problem with privatisation as long as all the right sort of safeguards is in place to ensure that the public interest is served - because it’s Hong Kong’s only airport. Some argue that HKIA is no longer a monopoly because it competes with nearby Shenzhen and Guangzhou. "But from the point of view of the Hong Kong people it’s a vitally important asset and you have got to be sure that it’s being managed and operated totally in the public interest.

"What I am saying at the moment is that it is not clear how it’s going to be done," she says - although she is sure the government is aware of the issues to be faced. "The fundamental problem they have is that the sceptics can’t really see why they are doing it now or indeed whether now is the right time to do it"