Use of PPP transaction structure by civil airports in China


The rapid development of civil aviation in China has presented the development of civil airports with unprecedented opportunities. As of 2015, China is to construct 82 new airports, relocate another 15 and renovate or expand another 101, for a total investment of RMB425 billion (US$67.5 billion). China’s civil aviation industry will continue its rapid growth, leading the world in the coming 20 years.

The current source of funds for the construction of airports in China is resolved jointly from local finances, civil aviation development funds and credit, and enterprise investment. Normally, one-third will be allocated by the Civil Aviation Administration of China (CAAC), one-third will take the form of a capital contribution by the local government and the remaining one-third will be raised by the airport itself. Within this is included both direct investment from the finances of governments at various levels and platform company loans/enterprise investment.

But given that total local government debt has currently reached RMB1.6 trillion, the previous model that essentially relied on government investment in airport construction has hit hard times. How to comprehensively resolve financing has become the most pressing issue for the new or expanding airports. It is now a rare opportunity for private capital to enter the airport construction financing sector, provided that the appropriate transaction structure is selected.

Policy support. As early as 2005, the Provisions for Domestic Investment in the Civil Aviation Industry (for Trial Implementation) encouraged and supported investment in the civil aviation industry by domestic investment entities with various types of ownership systems. Pursuant to the provisions, domestic investment entities include both state-owned investment entities and private investment entities; and the term “private investment entities” refers to collective enterprises, private enterprises and other private economic organizations and individuals.

In 2014, the Guiding Opinions of the State Council on Innovative Mechanisms for Investing and Financing in Key Sectors and Encouraging Private Investment further provide as follows: “Participation of private capital in water transport, construction of civil aviation infrastructure … is encouraged. Private capital is to be actively attracted to participate in the investment in and construction of relatively profitable hub airports, trunk line airports and ancillary airport service facilities so as to expand the funding sources for airport construction”. The use of the PPP model in civil airport construction thus has solid support in state policy.

Domestic and foreign practice. In international practice, in 1998 Australia turned the construction and operation of three airports over to different international finance and management groups for terms of 50 years. In 1999, the port authorities of the states of New York and New Jersey in the US entered into a 99-year concession agreement for the construction and operation of a new terminal building at Kennedy Airport with Amsterdam’s Schiphol Airport and New York real estate developer LCOP. Japan’s Kansai Airport, Sweden’s Sparta Airport, Seoul’s Incheon Airport, Cambodia’s Phnom Penh Airport, Manila Airport, Frankfurt Airport, etc. have all essentially adopted the build–operate–transfer (BOT) model.

In domestic practice, the raising of funds by private entrepreneurs to construct Suifenhe Airport, the investment of RMB5 million in the startup stage by Fanhua Shengda to secure the right to operate Lushan Airport for 20 years, etc. are active attempts by airports to bring in private capital. The Hong Kong International Airport Authority has made a capital contribution of RMB1.99 billion to hold a stake in Hangzhou Xiaoshan International Airport.

In 2006, the Zhuhai municipal government, through Zhuhai Huichang Communication Investment, a wholly owned subsidiary of Zhuhai Communication Group, jointly established Hong Kong Zhuhai Airport Management with Hong Kong International Airport (China) to carry out equity cooperation with a concession term of 20 years and utilize Hong Kong Airport’s management strengths, extensive international route network and organizational capabilities with respect to passenger and cargo sources so as to comprehensively optimize the business and management of Zhuhai Airport.

Project division. In the division of the construction of an airport, the author has found the following: the airfield (part A), e.g. the runways, taxiways, aprons, etc. are public projects that require a large investment, have a long payback period and low profitability; the airport terminal area (part B), e.g. terminal buildings, parking lots, shipping centres, etc. have characteristics of a business nature; and airport extension areas (part C), the aircraft maintenance centres, fuel supply stations, guest houses, hotels, shopping areas, catering and leisure centres are projects of a pure business nature.

Accordingly, when the PPP model is used for the financing and construction of an airport, the PPP project can be divided into parts A, B and C, with the government’s wholly state-owned enterprises responsible for construction of part A, and the PPP project company established between the wholly state-owned enterprises and private capital responsible for the construction of parts B and C. Upon final acceptance of the airport, the right to use the assets of part A is leased to the PPP project company, which then takes on the responsibility for operation and management, the maintenance of all the facilities (including parts A, B and C) and the updating of the assets, other than those in part A, as well as commercial operations in the terminal areas and extension areas. The investment is recovered and reasonable investment returns secured by way of the revenues derived from the cooperation with the air transport companies and the commercial operations.

Once the concession term expires, the project company transfers the project facilities of part B and C intact and without consideration to the authority designated by the government and returns the project facilities of part A to the government’s wholly state-owned enterprise. Of course, the issue of whether part B is to be contracted out to the project company will depend on financial considerations. If the investment costs have yet to be covered, it may even be necessary to consider contracting land development and other commercial development projects adjacent to the airport to the project company as resource compensation.

We can foresee that construction of airports in China will be unable to do without the presence of private capital, and PPP is the best method of welcoming private capital to the construction, operation and management of airports. As for the specific transaction structure, it can only be determined after sufficient study and analysis based on the specific circumstances of airports in different regions and of different scales.

Cao Shan is a senior partner of City Development Law Firm in Shanghai. She can be contacted on +86 21 5239 3626 or by email at