Privatization: A Good Idea for BWI?

By Mark R. Smith, EDITOR-IN-CHIEF

The word "privatization" has been bandied about quite a bit around Baltimore lately, notably at Seagirt Marine Terminal in Dundalk. That's where Ports America Chesapeake signed a 50-year lease and will build a 50-foot berth while it works in tandem with the Maryland Port Authority on the $106 million project.
With the state operating at a $2 billion deficit and legislators trying to think of ways to create revenue, it's not a surprise that some attention has turned toward discussing the privatization of BWI Thurgood Marshall Airport - one of the few such facilities in the nation that is owned by its home state.
While the O'Malley administration recently stated in interviews with the Financial Times and the Baltimore Sun that it is open to inquiries from parties that might be interested in striking such a deal, it has also stated that it is not actively seeking a buyer.
Although such a deal sounds intriguing to discuss and is much the norm in other countries, industry insiders stress that there's more to understand about privatization than initially meets the eye.

The State of Affairs
John Schmidt is a partner at Mayer Brown LLP in Chicago, a law firm that has been engaged in recent efforts to privatize the city's Midway Airport, the only such effort in progress in the U.S.
While the city submitted its plan for privatization two years ago, no team has come up with funding yet. It appeared a group that consisted of the CitiGroup Infrastructure Fund, John Hancock Insurance Co. and the Vancouver (B.C.) Airport Authority would complete the deal, but ultimately failed in its attempt to do so.
"The timing could not have been worse due to the recession, but I believe the privatization of Midway will eventually happen," said Schmidt, noting that its valuation was $2.5 billion and that BWI Marshall is bigger than Midway. "There is no question that airports have value and BWI probably has better growth potential, since Midway is in the city's confines and BWI is in a suburb."
But there is the problem of debt at BWI, he said. Also, current federal pilot privatization law dictates that only one airport that is considered a hub (which BWI is) can be privatized, among a total of only five in the country.
"While the current law may have to be expanded," he said, "it's a pilot law that I think would be fairly easy to expand, provided there was no opposition."
To privatize in the U.S., the airport in question also needs the support of 65% of its operating airlines, as well as the airlines with 65% of its traffic.
Schmidt did question the O'Malley administration's stance toward the possibility of a deal, however.
"If you are not proactive, working with the airlines and prepared to present the airport in a way that would be viable for the state, the airlines and a private operator, the chances of privatization happening are slight," he said.
Another issue for a private operator is to determine if the state is going to commit the time/effort to allow a potential private operator to become knowledgeable about the airport's finances, because it may not want to share that information.

On the Approach
Jack Cahalan, spokesman with the Maryland Department of Transportation, reiterated that the O'Malley administration is not actively looking to find a buyer for BWI Marshall.
"The state is open to new ideas," said Cahalan, "but any proposed public/private partnership must be evaluated individually and scrutinized very closely before any important decisions can be made."
His point is that the state does not see privatization of the airport as a silver bullet to boost the economy, and he stressed that "all public/private partnerships are different."
The key is that "any proposal would have to bring public value, like the new agreement with the Sea Girt Marine Terminal," Cahalan said. "It has to have a positive job impact, bring new funding to the table and provide service improvements over what exists today.
"What the Sea Girt deal accomplished," he said, "was address all three of those points: It created 5,700 hundred jobs; hundreds of millions of dollars in investment; and creates the potential, with the new 50-foot berth and Ports America's extensive reach, that we will see service improvements for our maritime customers."
But it's important to remember that observers can't "compare apples to oranges" and expect what happened at the port to necessarily be transferable to the airport. "All of the positives that are included at the Sea Girt agreement are not instantly transferable to another public/private project at the airport or anywhere else," he said.
As for BWI Marshall, "Right now, there is no realistic model in the U.S. aviation industry to take a look at," he said, "much less duplicate."

Convergence
That said, Bob Poole, Searle Freedom Trust Transportation fellow and director of transportation policy for the Reason Foundation in Los Angeles, would not be surprised if the O'Malley administration gets some inquiries from some of the large infrastructure investment funds that have been created in the past two or three years.
"All of the major U.S. and European investment banks, like CitiCorp, Goldman Sachs and Macquarie Bank (of Australia) have created funds for such investments, as have a number of private equity funds, like The Carlyle Group in D.C., " said Poole. "On one hand, you have investors who see seaports, airports and toll roads as good, long-term investments. There is a great deal of money looking for opportunities out there," he said. "On the other hand, you have cities, states and municipalities that are suffering today not only due to the effects of the recession and the lower tax revenues, but also larger, longer-term problems due to large, unfunded pension liabilities. That's an issue all over the country."
And today, those two factors are converging. "Owners of the infrastructure (i.e., governments) rarely thought about it until recently, but when they realize that they have an asset that's worth a billion dollars, they start to look at it as something they can market to address those financial issues."
In addition, finding a suitor wouldn't be hard.
"The fact is that there are close to a dozen serious and capable airport operating firms, such as BAA (which runs the retail concession at BWI Marshall - the company offered no comment for this story), Fraport AG and TBI Airport Management (which runs Orlando Sanford International Airport) that are, in many cases, running multiple airports in various countries."
It's interesting that the trend has never caught on domestically, because there was a wave of privatization in Europe in the '90s "and that is why you have so many companies now," said Poole. "Plus, they've had time to build track records in Europe."

Definitely Maybe?
The U.S. is ahead of the rest of the world in many financial areas, but there could be various reasons it's done little to speak of concerning airport privatization.
Such a deal could result in the locking of fees, a la Midway, which some people feel somewhat defeats the act of privatization for the operator. Politicians might fear not being able to control purse strings. Or a new owner might not be as easy to deal with as a government entity; given the new set of rules that would come with the facility being run as a business.
While industry sources have speculated that BWI Marshall's long underperforming international terminal would get a boost from the facility going private, the possibility seems relegated to discussion at present.
Still, the thought of BWI being privatized intrigues Schmidt.
"Since the governor was behind privatizing part of the port, he has shown industry that the state is open to the possibility," he said. "If I was a big international airport operator, that might pique my interest."