ISLAMABAD: The Inter­national Finance Corporation (IFC), a commercial arm of the World Bank, has alerted the Pakistan authorities about a series of key challenges that could hamper the successful outsourcing of the country’s three major international airports.

The IFC is the transaction adviser on outsourcing of Pakis­tan’s three international airports — Islam­abad, Lahore and Karachi — and has been studying the transaction structure and preparing for outsourcing since April.

However, the previous coalition government recently asked the corporation to put on hold the outsourcing of Lahore and Karachi airports, and focus on Islamabad airport.

In its inception report to the Pakistan Civil Aviation Authority (PCAA) — the owner and operator of public sector airports — the IFC highlighted several issues that “could hamper the smooth execution of the outsourcing initiative” if they remained unresolved before bidding and thus required immediate interventions and policy actions.

Uncertain economy, PIA’s liabilities, airports’ existing contracts can hamper outsourcing, says IFC

The key issues centred upon long-outstanding receivables and liabilities of Pakistan International Airlines, the uncertain macroeconomic conditions of the country, concession fee and tariff/user charges escalation/regulation mechanisms of the PCAA, the fate of its employees affected by outsourcing and existing contractual arrangements at the airports. PIA’s losses surpassed Rs630 billion as of September last year.

The IFC also recommended permission for the concessionaire and the PCAA to maintain a foreign currency account with the State Bank of Pakistan (SBP) to ensure that the government could fulfil its obligations to “ensure availability, convertibility and transferability of foreign currency and mitigate against the potential loss of revenue for the concessionaire due to foreign exchange volatility”.

The transaction adviser also pointed out that improving service quality at the airports largely depended on the performance of government agencies working at the airports.

For this, it proposed a service-level agreement between all these entities performing “reserve functions” and the PCAA so that the aviation authority might not be held responsible for any breach of the agreed performance indicators. In fact, the PCAA shall oversee the performance of these reserve functions and report any breach, the adviser suggested.

Any financial liability accruing from a breach of any performance indicator by an entity performing a ‘reserve function’ shall be undertaken by the government of Pakistan under a state support agreement (SSA).

Moreover, the IFC also recommended that the government would backstop PCAA’s payment obligations in the case of termination payments under all scenarios through the SSA.

Moreover, the concessionaire would be allowed to set off any non-payment by PIA against PCAA revenue share under the concession agreement to be signed before the transfer of an airport.

However, under the state support agreement, the federal government would compensate the PCAA for revenue loss on account of PIA under a separate agreement to be entered into later. Given the urgency of the matter and since advertisements for inviting bids had already been issued, the previous coalition government already got approved a draft SSA from the federal cabinet during the last leg of its tenure last week.

The remaining challenges would have to be addressed by the caretaker government as the transaction process progressed. The PCAA also assured the former cabinet that the SSA, in principle, addressed the objections of various stakeholders while some of the concerns which were of an operational nature shall also be addressed before formally signing the SSA.

The government of Pakistan has been examining various options for more than a decade to improve airport services, including outsourcing the operation of major airports in Pakistan to improve passenger services and optimise the revenue potential of airports.

Accordingly, the PCAA after a bidding process signed a transaction advisory services agreement with the IFC in April with the approval of the relevant forums, including the federal cabinet. Under the agreement, the IFC was given the task of outsourcing three major airports, namely Islamabad International Airport; Jinnah International Airport, Karachi; and Allama Iqbal International Airport, Lahore.

To push through the outsourcing at a fast pace without any hindrance and raise foreign exchange inflows, the outgoing prime minister also formed a steering committee headed by the finance minister to oversee the outsourcing of airports.

Following a series of meetings with the IFC and other stakeholders, the steering committee then decided that in the first instance, only Islamabad airport should be considered for outsourcing, whereas the two remaining airports could be outsourced considering the experiences and insights gained from that outsourcing.About a dozen internationally renowned firms, including the one operating London’s Heathrow Airport, had reported to have shown interest in airport service contracts, although they are yet to come up with formal requests for proposals.

Published in Dawn, August 14th, 2023