Why the Philippines chose to privatize its largest airport

Ninoy Aquino International Airport (NAIA) in Manila is the largest airport in the Philippines and the main international gateway to the country. It is a busy airport, with almost… 31 million passengers by 2022 and more than 45 million by 2023. Built to handle roughly 32 million passengers per year, NAIA already has excess capacity, even as demand for air travel is expected to continue to rise in the coming years.

NAIA, which has been run by a government corporation called the Manila International Airport Authority since 1982, is also often ranked as one of the worst airports in the region, plagued by flight delays and other operational problems. For example, last year there were several staff members caught extorting money from a tourist passing through the airport.

The government is aware of these problems and has decided that the best way to solve them is to turn to the private sector. NAIA has been the target of privatization efforts in the past, but it was the Marcos administration that finally initiated the process last year, with several companies bidding for a 15-year concession to operate the airport.

The concession was awarded to San Miguel Corp (SMC), a huge conglomerate that controls much of the Philippine economy. San Miguel is known for its global beer brand, but has interests in a wide variety of sectors, including real estate, energy, oil and transportation infrastructure.

In addition to operating a number of highways and public transportation systems in the Philippines, SMC is currently developing the New Manila International Airport, which is located approximately 35 kilometers north of Manila and is expected to be operational in 2027 or thereabouts. Now, in addition to developing the new Manila International Airport, SMC has the right to operate the old International Airport for a period of 15 years, with a possible extension of 10 years.

At first glance, the deal seems extremely favorable for the government. Under the terms of the concession, SMC (which works with South Korea’s Incheon Airport) will invest heavily in NAIA’s rehabilitation. According to media reportsThe deal calls for SMC to invest 88 billion Philippine pesos (about $1.5 billion) in upgrades and increase the airport’s passenger capacity to 62 million within the first six years.

The financial side of the deal is also very generous for the government, with the concession structured in such a way that around 60 percent of annual revenue goes directly to the state. The other bidders, including existing operator Manila International Airport Authority, were well below that, offering a revenue share of somewhere between 25 and 35 percent. In addition, SMC must pay an upfront payment of 30 billion pesos, which amounts to approximately $500 million.

Interestingly, despite chronic underinvestment and poor management, Ninoy Aquino International Airport has traditionally been a… profitable property for the national government. Under the old arrangement with the Manila International Airport Authority, the government took 20 percent of the airport’s gross revenues and at least 50 percent of its annual net revenues as dividends.

Including taxes and other fees passed on to passengers, NAIA will have generated an estimated 6.75 billion pesos ($115 million) for the state in 2023. The government obviously thinks revenues will be higher under private management, and now it will also be off the hook for the costly capital expenditure required to modernize the airport.

One might wonder how exactly SMC plans to invest billions of dollars in modernizing an aging airport, while providing the government with a very generous revenue share, and still make a profit. That’s a good question and the plan, whatever it is, will most likely involve higher prices, with the Department of Transport already announcing various rate increases would start later this year. Existing tenants and companies at the airport are too expect cost increases while new management takes over.

The Philippines, more so than many of its neighbors, often shows a willingness to transfer key infrastructure such as electricity, municipal water and now the largest international airport to private market players. This often results in higher prices for consumers, which is of course part of the trade-off when using the private sector to provide and manage critical infrastructure. Given NAIA’s well-documented operational problems and the government’s unwillingness or inability to invest the necessary funds to bring the system up to date, it may be a trade-off worth making in this case.