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Chapter 11 Civil Aviation Industry - African Development Bank

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Chapter 11 Civil Aviation Industry - African Development Bank Powered By Docstoc
					    CHAPTER 11:

    Civil Aviation Industry

11.1          AIR TRANSPORT                                        The main objective of the decision was
              IN AFRICA                                         the gradual liberalization of scheduled and
                                                                non-scheduled intra-African air services,
The poor state of land transport infrastructure                 abolishing limits on the capacity and
and freight and passenger services in much                      frequency of international air services within
of Africa appears to offer a promising                          Africa, liberalizing fares and universally
opportunity for the further development of air                  granting traffic rights up to the ”fifth freedom
transport services throughout the continent. At                 of the air.”2 Signatory states were obliged to
this stage, the key policy issues for Zimbabwe                  ensure the fair opportunity to compete on a
are the ways it can benefit from the ongoing                     nondiscriminatory basis. A monitoring body
liberalization of civil aviation within the                     was to supervise and implement the decision,
continent called for in the Yamoussoukro                        and an African air transport executing agency
Decision of 1999 and the actions it needs to                    was to ensure fair competition. Even though
take in the decade ahead to ensure that the                     the decision was a pan-African agreement
benefits of liberalization are realized.                         to which most African states are bound, the
                                                                parties decided that it should be implemented
11.1.1 The Yamoussoukro Decision                                by separate regional economic organizations.
                                                                The monitoring body has met only a few
Over the past three decades, much of the
                                                                times. Competition rules and arbitration
world has moved from a strictly regulated air
                                                                procedures are still pending. A recent World
transport industry to a more liberalized one.
                                                                Bank report has observed that although an
Civil aviation in Africa has also embarked on a
                                                                executing agency was finally created in 2007
process of deregulation.1 In October, 1988, the
                                                                by assigning the responsibilities and duties
ministers in charge of civil aviation in African
                                                                to the African Civil Aviation Commission,
states met in Yamoussoukro, Côte d’Ivoire, and
                                                                a specialized institution of the African
expounded a new African Air Transport Policy,
                                                                Union, the commission has yet to prove its
later called the Yamoussoukro Declaration.
                                                                effectiveness.3
The United Nations Economic Commission
for Africa initiated a further conference in                    11.1.2 Trends in the African Air
Yamoussoukro, which resulted in the historic                           Transport Market
agreement on pan-African liberalization of air
services, the so-called 1999 Yamoussoukro                       The number of carriers within Africa increased
Decision. Zimbabwe is a signatory to this                       steadily in the past decade and by 2007 stood
agreement and is therefore committed to the                     at about 160, compared with about 100 in
liberalization of the international civil aviation              1997 (Schlumberger 2010). Moreover, the
regime in Africa.                                               structure of the industry has evolved with



1     For a detailed review of the status of civil aviation liberalization in Africa, see Charles E. Schlumberger (2010),
      Open Skies for Africa: Implementing the Yamoussoukro Decision. World Bank, Washington DC, 2010.
2     The regulation of international air transport is guided by the so-called eight “freedoms of the air.” The first and
      second are technical freedoms to over-fly a foreign country or to land for refueling. The third and fourth are
      commercial freedoms to carry passengers from a carrier’s home country to another or vice versa. The fifth, sixth
      and seventh freedoms concern the rights to carry passengers between two foreign countries, either as an extension
      of a flight from the home country (fifth), through a stop in the home country (sixth), or without ongoing service
      to the home base (seventh). The eighth freedom, pure cabotage, is the right to carry traffic between two points in
      a foreign country.
3     World Bank (2010), Africa’s Infrastructure: A Time for Transformation. African Development Forum Series,
      World Bank, Washington DC, 2010.



Civil Aviation Industry                                                                       Zimbabwe Report 1
South Africa and Kenya gaining market               low volumes of domestic air traffic. A number
shares in their respective regions. One of the      of Zimbabwe airports are in this category.
important consequences of the liberalization
program over the past decade has been the
strengthening of a small number of African
carriers, such as Ethiopian Airlines and
Kenya Airways, relative to other carriers in
Africa. These airlines were helped by their
geographic location, financial, commercial,
and managerial strength, and access to
intercontinental markets (Schlumberger 2010).
As Figure 11.1 indicates, available seats of
Air Zimbabwe total less than 1 percent of the
comparable capacity of the airlines of Africa,
and this capacity is small in relation to that of
major countries such as South Africa, Nigeria,
Kenya, and Egypt.
   All segments of the air transport market
in Sub-Saharan Africa have been growing
steadily since 1997, with a notable acceleration
in growth since 2004 that includes domestic,
international, and intercontinental traffic
(Bofinger, 2009). The growth in traffic has
been accompanied by increased concentration,
with fewer routes being served. According to
the World Bank (2010), lack of competition
has kept costs high. The combined effect of
airline failures and regulatory restrictions on
competition has been to increase concentration
in the market as a whole, and on individual
routes. The big three airlines (Ethiopian
Airlines, Kenya Airways, and South African
Airways) account for almost 60 percent of
capacity serving the international market.
   Structural changes in the airline business
have been accompanied by changes in the roles
of airports in Africa. Addis Ababa, Nairobi,
and Johannesburg now act as gateways to the
continent for international traffic and as hubs
for its distribution. About 40 medium-size
airports, including several in Zimbabwe, are
connected to these hubs and primarily serve
international and domestic traffic. Africa also
has more than 200 small, and often nonviable,
airports that act as the distribution points for




2   Zimbabwe Report                                                       Civil Aviation Industry
11.2     OVERVIEW OF CIVIL                          • Air Services Development
         AVIATION IN ZIMBABWE                            Regulates and promotes the development
                                                         of air transport
11.2.1 Institutional Arrangements                        Negotiates air services agreements
       for Civil Aviation                           • Airport Management and Development
                                                         Plans and develops airport infrastructure
In 1999, the Government of Zimbabwe                      ahead of demand
established the Civil Aviation Authority of
Zimbabwe (CAAZ) through the Civil Aviation               Enforces high performance standards
Act of 1998. The CAAZ is the main provider of            for efficiency in airport operations
civil aviation services, serving as the regulator        Provides high quality aviation services
of the industry, managing the civil aviation             Promotes and facilitates the development
infrastructure, including the main airports, and         of air cargo
providing airspace management services. The              Provides the highest standard possible
goals and functions of CAAZ are detailed in              of airport emergency services
the Civil Aviation Act and include:                 • Air Traffic and Air Navigation Services
• Regulatory and Advisory Services                       Provides air traffic control services to
       Regulates the operations of all                   ensure a safe, orderly, and expeditious
       Zimbabwean registered aircraft                    flow of aircraft movements within the
       Regulates the aviation industry                   Zimbabwe Flight Information Region
       Licenses aircraft maintenance and flight           (ZFIR)
       personnel                                         Provides air space management
       Advises the Government of Zimbabwe                Provides air navigation equipment
       on all matters related to civil aviation.         Provides Search and Rescue (SAR)
       Ensure and enforce the maintenance of             service to aircraft in distress within the
       safety standards in relation to personnel,        Zimbabwe airspace (ZFIR).
       aerodromes, and aircraft


Civil Aviation Industry                                                     Zimbabwe Report 3
The Civil Aviation Authority has a Board of       covered by existing facilities, and what does
Directors that is appointed by the Minister of    exist is deficient. The airspace surveillance
Transport, Communications, and Infrastructural    equipment is not well maintained, and while
Development. The Board, in turn, appoints the     repairs have been carried out at Harare, work
Chief Executive Officer. CAAZ’s organization       on the system at Joshua Nkomo International
structure comprises seven units: Air Navigation   Airport     (Bulawayo)       is    incomplete.
and Technical Services, Airport Development       Shortcomings in surveillance also raise
and Operations, Flight Safety and Standards,      concerns about search and rescue operations.
Air Transport Development, Finance, Human         Weather installations are inadequate, and
Resources and Administration, Corporate           broadband infrastructure is not available at
Services, and Customer Services and Public        most airports. An ongoing program of CAAZ
Relations.                                        is making progress in addressing deficiencies
                                                  in the ground to air communication system,
11.2.2 Existing Aviation Infrastructure           but much remains to be done in this area.
There are over 200 airports and aerodromes        11.2.3 Air Transport Industry
spread across the country. The CAAZ owns
and manages eleven airports in Zimbabwe           As a result of the economic problems of the
(Table 11.1). The original design capacity of     past decade and sharp decline in tourism
the various terminals was sufficient for up to     activity in Zimbabwe, international and
3.8 million passengers a year. Harare is the      domestic aircraft movements have declined
main hub, but its operations and that of the      sharply. The former declined from about
other major airports have been affected by        31,000 in 1999 to about 16,000 in 2009
the poor performance of the economy. Civil        (Figure 11.2). The decline in domestic
aviation infrastructure in Zimbabwe is in need    movements was even greater, owing to the
of rehabilitation and regular maintenance.        decline in domestic travel by tourists and
A particular concern is air traffic control        the adverse effect of the domestic economic
and safety, as equipment is old and in need       difficulties.
of replacement. Closely related to traffic            The large contraction in demand for
surveillance is the capability for aircraft       air services to and from Zimbabwe has
communication to and from the ground. The         contributed to a sharp reduction in the number
entire airspace of Zimbabwe has not been          of international airlines that service the


4   Zimbabwe Report                                                      Civil Aviation Industry
Zimbabwe market. During 1997-2007 more                   aging Boeing fleet which requires frequent
than twenty scheduled airlines discontinued              maintenance.
services in Zimbabwe, including major carriers
such as Air France (1997), KLM (1998),
Lufthansa (2000), Swiss Air (2000), and
British Airways (2007). At present, 12 airlines
operate services to and from Zimbabwe. These
include Air Zimbabwe, which is the primary
domestic carrier owned by the Government,
Kenya Airways, Air Malawi, Botswana
Airline, South African Airways, South African
Airlink, Comair (which is a franchise partner
with British Airways), Air Namibia, Fly
Kumba, Zambezi Airline, Ethiopian Airlines,
and Angola Airlines.
                                                         The Air Zimbabwe passenger, cargo and
                                                         technical units incur operating losses, while the
                                                         other two units are self sustaining. As Figure
                                                         11.3 indicates, the airline had an operating loss
                                                         of $5 million in 2009. With operating losses
                                                         for most of the past decade, the airline incurred
                                                         substantial debt obligations. At end 2009, total
                                                         liabilities stood at $58 million, more than 90
                                                         percent of which were accounts payable.
                                                         A large drop in passenger traffic is the
                                                         main reason for the decline in the financial
                                                         fortunes of the company. From a record
                                                         700,000 passengers in 1996, the number of
                                                         Air Zimbabwe passengers declined to about
                                                         300,000 in 2009. It carried about 35 percent
Air Zimbabwe Holdings is a group of                      of the 846,000 international and domestic
companies made up of five business units,                 passengers in 2009. The Airline’s current
Air Zimbabwe Passenger Co, Air Zimbabwe                  forecast is for 210,000 passengers in 2010
Cargo, Air Zimbabwe Technical, National                  owing, in part, to stiff competition from the
Handling Services, and Galileo Zimbabwe.                 three main African airlines, Kenyan Airways,
Air Zimbabwe Passenger is the flagship of                 South African Airways, and Ethiopian Airlines.
the holding company. The airline provides                Air Zimbabwe now faces the following
services for domestic, regional, and                     challenges:.
international destinations.4 Its fleet is small by
                                                         • An aging fleet which is very uneconomical
international standards, with two B767-200
                                                            in terms of fuel consumption and often
ERs, three B737-200 ADVs, and three MA60
                                                            breaks down. Service delivery by the airline
airplanes. The average age of the Boeing fleet
                                                            is affected by regular down time of its fleet,
is 22 years. Service delivery by the airline is
                                                            which requires frequent maintenance and
acutely affected by regular down time of the
                                                            affects reliability of the service.

4   These include Harare, Bulawayo, Victoria Falls, Johannesburg, Lusaka, Lubumbashi, London, Singapore, Kuala
    Lumpur, and Beijing.



Civil Aviation Industry                                                              Zimbabwe Report 5
                         Map 11.1. Main Airports in Zimbabwe




• Poor load factors that are well below 75        about $2.4 million a month. On some routes,
  percent on most domestic and international      Harare/London for example, the economic
  routes, further eroding the financial position   sanctions applied by the United Kingdom
  of the company. In the first four months of      and European Union appear to have had a
  2010, the airline had an operating loss of      significant impact on passenger traffic.


6   Zimbabwe Report                                                   Civil Aviation Industry
• Under-capitalization and a debt overhang.                 11.3       GROWTH IN PASSENGER
  The airline owed CAAZ and other suppliers                            AND FREIGHT TRAFFIC
  almost $62 million at end May, 2010. It was
  suspended from the IATA clearing house
                                                            11.3.1 Decline in Passenger Traffic
  in March 2009 owing to its failure to pay
  $3.4 million for tickets and other services                      and Freight in the Past Decade
  supplied by companies that participate in                 The sharp decline in aircraft movements in
  the IATA clearing house. Many suppliers                   the past decade has been associated with an
  have put the airline on a cash basis, or have             equally sharp decline in passenger travel. At
  suspended services. Some have taken court                 its peak in 1997, total passenger traffic was
  action.                                                   2.6 million people. As Table 11.2 indicates, by
• An erratic supply of jet fuel.                            2009 passenger movements had declined to
                                                            about 846,000. The decline in domestic travel
• A pricing policy that has led to operation of             has been especially large. These large declines
  unprofitable routes.                                       reflect the major contraction in international
                                                            and domestic tourism activities in Zimbabwe
11.2.4 Transport Costs and Prices                           in the past decade and economic decline within
                                                            Zimbabwe that has had a significant impact on
Air travel within Africa generally is                       business and tourism travel. Zimbabwe’s loss
considerably more expensive per mile flown                   of its share in the international travel market
than intercontinental travel, especially on                 in the past decade has been substantial. Had
routes of fewer than 4,000 km.5 This differential           international travel through Zimbabwe airports
arises because intercontinental routes serve                in the past decade increased in line with the
larger markets than international or domestic               rest of Sub-Saharan Africa, total international
ones and thus have more competition among                   traffic by 2009 would have been in the range
carriers. In some countries, domestic fares                 of 1.8 million passengers, compared with the
are kept artificially low by subsidized or fixed              actual number of about 700,000 in 2009.6
pricing on some routes.




5   See Bofinger (2009).
6   According to Bofinger (2009), international traffic in Sub-Saharan Africa grew at about 3.35 percent a year during
    2001-07, and at 6.5 percent a year from 2004 through 2007.



Civil Aviation Industry                                                                  Zimbabwe Report 7
11.3.2 Projected Growth in Demand                     the 2010 Soccer World Cup. In the ensuing five
       for Aviation Services                          years, a further gradual recovery in passenger
                                                      traffic is foreseen, followed by an extended
Projected growth in traffic. CAAZ has                  period of sustained strong growth. By 2020,
prepared projections for the growth in                total passenger traffic is projected to be about
passenger and freight traffic for the decade           2.3 million, which would approach the 1997
ahead (Table 11.3). At the time the projections       peak level of travel. The average annual growth
were prepared, a recovery in passenger traffic         rate for 2011-20 is about 9 percent.
was expected during 2010 in connection with




The role of international tourism. Tourism            for both tourism and specific events like the
arrivals from Europe, the Americas, and Asia          2010 Soccer World Cup hosted in South
are expected to play a central role in the recovery   Africa. The region has already taken concrete
of the civil aviation sector in Zimbabwe in the       measures to utilize fully the “back to nature”
decade ahead. The Southern African region is          campaign by creating peace-parks, the biggest
seen as very appealing because of its excellent       one being the Great Limpopo Trans-Frontier
and diverse eco-tourism products, mainly the          Park.
game parks, historical and heritage sites, and           However, Zimbabwe faces major challenges
the world’s seventh wonder, the Victoria Falls.       in taking full advantage of the natural and
Tour operators, tourism products developers,          cultural heritages that the country has to offer.
and the World Tourism Organization have               Annex 7 includes a brief assessment of trends
predicted that pollution and lack of nature-          in tourism traffic to Zimbabwe and the 2009
based products in developed countries will            assessment of the domestic environment for
see many people coming to Africa on “back             tourism and travel recently reported by the
to nature” holiday packages. Long haul flights         World Economic Forum.
into Southern Africaare projected to increase




8   Zimbabwe Report                                                           Civil Aviation Industry
11.4    ACTION PLAN FOR                          the tourism industry. According to the World
        CIVIL AVIATION                           Travel and Tourism Council (2007), more
                                                 than 50 percent of tourism spending comes
                                                 from visitors traveling by air. If Zimbabwe is
11.4.1 Strategy for the Decade Ahead
                                                 to rebuild its tourism industry in competition
       and Related Policy Challenges             with other African states, sustained
The Civil Aviation Authority is emerging from    improvements in air safety and security and in
a long period of declining business volumes      airside and landside facilities are essential. For
that stemmed from the decline in passenger       the SADC region as a whole, Schlumberger
and aircraft movements. In the short term,       (2010) cites a 2006 study by Myburgh and
the strategy is aimed at steering the business   others that indicates that liberalizing air
out of the current economic challenges that      services within the SADC region would
the country is facing. For the longer term, it   result in a substantial increase in employment
is pursuing a strategy underpinned by market     and economic activity throughout the region
growth, new product development and limited      The study estimated that more than 500,000
diversification, and introduction of airport      additional foreign tourists would arrive by
concessions.                                     air and would spend more than $500 million.
                                                 Improved aviation services will be central
   Apart from these bilateral initiatives,
                                                 to efforts by Zimbabwe to build exports of a
the extent of liberalization of air transport
                                                 large range of perishable products and high
in the SADC region will likely have major
                                                 value manufactures that depend on efficient,
implications for Zimbabwe. Air transport has
                                                 on-time delivery.
become indispensable for the development of


Civil Aviation Industry                                                    Zimbabwe Report 9
   The marketing and growth strategy of                         International Civil Aviation Organization
CAAZ for the decade ahead will require                          (ICAO) by 2013 and have Zimbabwe reclassified
substantial additional resources to build a                     by the Federal Aviation Administration (FAA)
sustainable competitive advantage through                       and the European Aviation Safety Agency
the provision of world-class facilities and                     (EASA) from the current Category 2 rating to
customer service. The funding requirements                      Category 1.7
for the proposed program are discussed later
in this section. The Authority recognizes that                  11.4.2 Rehabilitation of Civil
Zimbabwe civil aviation operates in a global                           Aviation Infrastructure
industry, hence the airport and air navigation                         and New Facilities
systems have to be of international standard.
A seven-pronged approach is proposed for                        Earlier this decade, the Authority launched
the Civil Aviation Action Plan for the decade                   a substantial program of rehabilitation of
ahead:                                                          the civil aviation facilities in Zimbabwe,
                                                                funded in large part from its operating
• Complete the substantial rehabilitation and
                                                                surplus. Implementation of the program was
   upgrade of aviation infrastructure at the
                                                                compromised by the subsequent major decline
   airports controlled by CAAZ.
                                                                in international and domestic traffic and the
• Improve airspace management and airport                       erosion of the financial position of CAAZ.
  operations, especially with regard to safety                  Rehabilitation work has continued, albeit at
  and security.                                                 a much slower pace. The proposed program
                                                                for upgrading, modernizing, and rehabilitating
• Liberalize the air transport market and                       the airport terminal buildings, runways,
  decide what to do with the national flag                       and taxiways is estimated to be about $260
  carrier, Air Zimbabwe.                                        million at 2009 constant prices (Table 11.4).
• Implement institutional reforms that would                    The rehabilitation and upgrade of the Victoria
  separate the regulatory functions of CAAZ                     Falls and Buffalo Range International Airports
  from its commercial interest in airport                       account for $226 million of these expenditures.
  operations.                                                   As the analysis below indicates, the intention
                                                                is to develop and manage these two airports
• Develop and maintain the requisite skills                     under public-private partnerships.
  for the civil aviation industry.                                 Implementation of this program during
• Launch a privatization program to attract                     2011-15 would create capacity ahead of demand
  much needed private sector funding for                        and would improve substantially Zimbabwe’s
  rehabilitation and upgrade of airport                         competitiveness in the Sub-Saharan tourism
  facilities to accommodate the projected                       market. In the longer term however, as traffic
  growth in passenger and freight movements.                    builds up, there will be a need for further
                                                                enhancement of airport infrastructure capacity
A key objective of the proposed Action Plan                     at various locations in the country.
is to meet the minimum requirements of

7    A Category 2 rating means that the country’s civil aviation authority (CAA) does not provide safety oversight of
     its air carrier operators in accordance with the minimum safety oversight standards established by the ICAO. This
     rating is applied if one or more of the following deficiencies are identified: (i) the country lacks laws or regulations
     necessary to support the certification and oversight of air carriers in accordance with minimum international
     standards; (ii) the CAA lacks the technical expertise, resources, and organization to license or oversee air
     carrier operations;; (iii) the CAA does not provide adequate inspector guidance to ensure enforcement of, and
     compliance with, minimum international standards; and (iv) the CAA has insufficient documentation and records
     of certification and inadequate continuing oversight and surveillance of air carrier operations.



10    Zimbabwe Report                                                                        Civil Aviation Industry
    An ongoing concern of CAAZ relates to                has received varying degrees of maintenance
power supply at all of its airports. The electricity     and rehabilitation over the years and major
supply from the national grid is unreliable and          rehabilitation work commenced in 2002.
the airports are often run on locally generated          The project involved the reconstruction and
power. This is both expensive and subject                strengthening of the runway and taxiways
to other external factors such as mechanical             that were past their design life. Owing
failures and fuel supply. An early return to             to the economic environment in the past
reliable supply of electricity from the national         decade, available funds for the work were
grid will improve services at airports and reduce        insufficient. The rehabilitation contract was
the operating costs of CAAZ, thereby freeing             therefore suspended, with only 2,100 meters
funding for the rehabilitation program.                  of the runway having been completed (1,000
    Harare International Airport. Modernization          meter at each end). The contract included
work on the terminal building was completed              the taxiways, which were only partially
in 2001. Subsequently, it has been well                  completed, necessitating the use of the
maintained. The design capacity of the                   runway as a taxiway. About 2,600 meters
terminal was for 2.5 million passengers a year,          in the middle remains to be completed,
but at current levels of traffic it is operating          along with the taxiway. The total cost of the
well below this capacity. The proposed                   remaining work on the runway and taxiway
rehabilitation and improvement program for               is estimated at about $24.4 million.
the airport includes the following:                    • Rehabilitation of the water and sewerage
• The rehabilitation of the existing runway              facilities at Harare International Airport
    and taxiways serving Harare International            is also proposed.The rehabilitation
    Airport is a high priority. This will safeguard      program undertaken in 2002 excluded the
    the weakening structural integrity of the            construction of water and sewerage systems
    pavement, prevent further damage and pre-            commensurate with the size and demands
    empt an aviation catastrophe. The 4,725              of the modernized terminal capacity at
    meter runway was constructed in the 1950s. It        that time. Even though passenger traffic


Civil Aviation Industry                                                       Zimbabwe Report 11
     declined sharply after 2002, CAAZ still had                   The capacity of the terminal would then be
     to improvise by constructing soak pits to                     about one million passengers a year.
     cope with the demand. It is now necessary
     to augment the water supply, improve the                  Buffalo Range Airport. Buffalo Range Airport,
     efficiency of the sewer lines, and expand                  located in the south east, close to the South
     the capacity of sewer ponds.                              African and the Mozambican borders serves the
                                                               surrounding area and the Gonerezhou National
Airport Terminal in Bulawayo. CAAZ started                     Park, which is part of the tourist system that
on modernization work at Joshua Nkomo                          includes the Kruger National Park in South
International Airport some years ago. The                      Africa. The Buffalo Range Airport needs to
program included the rehabilitation of the                     be upgraded to make it the main gateway into
runway and construction of a new terminal                      the Great Limpopo Trans-Frontier Park. At the
building. The capacity of the existing terminal                present time, the terminal has capacity for about
is about 100,000 passengers a year. About 88                   200,000 passengers a year. CAAZ proposes to
percent of the work had been completed before                  carry out rehabilitation and expansion works
the economic collapse of the past decade                       at the Buffalo Range Airport similar to those
affected the cash flow of the Authority. The                    at Victoria Falls Airport. The proposed work
proposed project entails the expansion of the                  includes rehabilitation and extension of the
terminal building and the refurbishment of the                 existing runway and the extension of the terminal
existing structure. The car park and landside                  building. The designs for both the terminal
roads also have to be upgraded. The total cost                 building and the runway have been completed.
is estimated at $9.1 million. Completion of the
final work at the Joshua Nkomo International                    11.4.3 Air Space Management
Airport could follow after the Harare                                 and Improved Air Safety
International Airport upgrade is completed.
                                                               Safety is widely seen as the most notable
    Victoria Falls Airport. The current capacity               problem of the African air transport industry.
of the terminal is 500,000 passengers a year.                  Several articles of the Yamoussoukro Decision
The proposed program for the Victoria Falls                    address safety and security directly and
airport includes some $90 million for airside                  indirectly.8 Throughout Africa, the quality of
development and $35 million for the upgrade                    these services is uneven. South Africa and
of the terminal and other landside facilities:.                Kenya have several radar installations and
• Victoria Falls Airport has a 2,286 meter                     are among the few countries in Africa that are
    runway, which is not sufficient for wide-                   able to monitor traffic actively and have good
    bodied transcontinental flights into and                    oversight. However, as Map 11.2 suggests,
    out of this airport. CAAZ therefore plans                  many parts of Africa are not in full compliance
    to construct a new 4,000 meter runway                      with ICAO requirements for safety and security.
    parallel to the current one, which would                   In the view of Schlumberger (2010), probably
    then be converted into the taxiway. The land               the most significant element of concern is the
    earmarked for the runway has been cleared.                 prevalent poor safety and security record in
                                                               most African countries. High accident rates
• Expansion work on the terminal building had
                                                               and poor safety and security ratings throughout
  commenced earlier in this decade, but was
                                                               Africa may seriously hinder full application of
  discontinued because of funding shortfalls.
                                                               the Yamoussoukro Decision. The decision does
  The proposed project consists of upgrading
                                                               not directly establish the condition that all party
  the terminal building to cater for the
                                                               states must comply fully with all ICAO standards
  anticipated growth in passenger movements.

8    See, for example, Article 5.1 and Articles 6.9, 6.10, 6.11 and 6.12.



12     Zimbabwe Report                                                                  Civil Aviation Industry
and recommended practices (SARP) and that            example, a state entity may revoke, suspend, or
accident rates must remain at acceptable levels.     limit the operating authorization of a designated
The decision addresses safety and security by        airline of another state entity if the airline fails
setting down several conditions that, if not met,    to meet the criteria of eligibility, which include
mostly entail sanctions of a bilateral nature: for   maintenance standards set by ICAO.
                    Map 11.2. Quality of African Aviation Oversight




Civil Aviation Industry                                                        Zimbabwe Report 13
In the particular case of Zimbabwe, air traffic                operations in Zimbabwean airspace. The
control infrastructure, as in other parts of                  Authority has therefore drawn up a domestic
Africa, is deficient. Closely related to traffic                program of some $36 million that, when fully
surveillance is the capability for aircraft                   implemented, will contribute significantly
communication to and from the ground. The                     to improved safety for airline travel and air
lack of adequate surveillance raises questions                space management within Zimbabwe. The
about search and rescue operations. Weather                   main elements of the proposed program are set
installations are also deficit. In the past decade,            out in Figure 11.4. Annex Table 7.8 provides
Zimbabwe made progress towards ICAO                           the details of the program for each airport.
compliance in the areas of safety and security.               The program includes improved lighting for
Following the recommendations of an ICAO                      runways, surveillance radar located at the
Universal Aviation Security Audit in 2005,                    Harare Airport, enhanced security systems,
the Authority prepared and implemented a                      and improved communications capacities.10 It
Corrective Action Plan. The follow-up audit                   also includes $6.6 million for the rehabilitation
noted that Zimbabwe had made substantial                      and upgrade of meteorological equipment and
progress towards ICAO compliance. However,                    related systems necessary for safe over-flights
Zimbabwe continues to be classified by                         and take-off and landing at Zimbabwe airports.
the Federal Aviation Administration (FAA)                        Because of the interaction among national
and the European Aviation Safety Agency                       aviation systems in Africa, issues related to air
(EASA) as a Category 2 country. A Category                    safety also need to be addressed regionally. In
2 rating means that a country does not comply                 recognition of the regional nature of air safety
with ICAO aviation safety standards. A key                    and in response to the various deficiencies that
objective of the proposed Action Plan for Civil               have been exposed during ICAO Safety Audits,
Aviation is to meet these ICAO requirements                   the Cooperative Development of Operational
and thereby be reclassified by FAA and EASA                    Safety and Continuing Airworthiness
as a Category 1 country.9                                     Program (COSCAP) has initiated programs
   CAAZ recognizes that the projected strong                  for the SADC and Economic and Monetary
recovery in passenger traffic in the decade ahead              Community of Central Africa. The objectives
is closely linked to the adoption of measures                 of these programs include measures that
that ensure that air services in Zimbabwe meet                address deficiencies in oversight of safety
international standards for passenger safety                  in civil aviation, development of regional
security. In recognition of these concerns, the               capacities in personnel licensing, airworthiness
Authority has embarked on a modernization                     certification, surveillance, and harmonization
program for air navigation system. Some new                   of regulations, and training of personnel in
communications and navigation equipment has                   personnel licensing, airworthiness certification,
been installed, but more equipment is required                and surveillance.
to enhance safety and efficiency of aircraft



9 Countries in Africa classified as Category 1 include Cape Verde, Egypt, Ethiopia, Morocco, and South Africa.
10 There is need for further review of the case for new radar installations. According to the World Bank (2010),
   radar is now an obsolete technology. Newer, much more accurate, and much less costly technologies are now
   being installed, as in the United States. Similarly, navigational aids are being supplanted by technologies based on
   global positioning systems in modern aircraft. Bofinger (2009) makes the point that African airports may not need
   to invest in radio-based navigation and surveillance infrastructure, such as very high frequency omni-directional
   radio range (VOR) or radar technology. They now need to obtain less costly, satellite-based replacements such
   as the global navigation satellite system (GNSS) and the automatic dependent surveillance-broadcast (ADS-B)
   technologies.



14    Zimbabwe Report                                                                     Civil Aviation Industry
11.4.4 Liberalization of the Air                  reinvigorating the national tourism industry
       Transport Market                           and of providing the air cargo capacity for
                                                  the export of horticultural and other high
There has been progress in implementing           value export products. Attracting back some
aspects of the Yamoussoukro Decision by           of the international carriers that have ceased
various regional economic bodies, including       providing services to Zimbabwe will require
the two of which Zimbabwe is a member.            sustained progress on adoption of an ”open
The Common Market for Eastern and                 skies” policy for Zimbabwe.
Southern Africa (COMESA) has agreed
upon full liberalization of the Yamoussoukro      11.4.5 Role of the National
Decision, but implementation is pending until            Flag Carrier
a joint competition authority is established.
Liberalization of air services within COMESA      The main challenge facing Air Zimbabwe is
is also pending. When it is applied, operators    its inability to attract passengers and cargo.
will be able to serve any destination (all        The Airline currently carries a little over
freedoms), and tariffs and capacity and/or        200,000 passengers a year. The critical mass
frequency of services will be unregulated.        needed to eliminate the current operating
                                                  losses is estimated to be about 500,000 a year.
   The Southern African Development
                                                  In the short term, the Airline is taking steps
Community has set up the SADC Joint
                                                  to improve its financial viability by lowering
Competition       Authority      to     oversee
                                                  costs, restoring services that can generate
implementation of the Agreement, but there
                                                  revenue, and improving productivity. These
has been only very limited progress to date.
                                                  measures include the following:
According to the World Bank (2010), the
dominant position of South Africa remains an      • Mobilizing $8.5 million as quickly as
obstacle to implementing the Agreement.11             possible to meet critical obligations and
                                                      restore services disconnected or withdrawn
   Having a range of international and
                                                      for non-payment of accounts.
regional carriers is a vital component of

11 World Bank (2010), op cit.



Civil Aviation Industry                                                  Zimbabwe Report 15
• Rationalizing routes to reduce operating                    a partnership would give access to modern
  costs and replace aging, high cost planes                   aircraft, an expanded route network, and a larger
  used on domestic routes with smaller planes                 market.12 The objective of such a partnership
  that will operate with higher load factors.                 would be to attract and boost traffic by building
  One possible option may be to lease such                    connecting hubs, code sharing, joint loyalty
  equipment.                                                  and lounge programs, and joint branding. Air
                                                              Zimbabwe management is actively searching
• Subject to the availability of funding,                     for such a partner and has entered into
  retrenching approximately 400 employees,                    discussions with several international airlines,
  the estimated cost of which is $8.2 million,                including Malaysia Airlines, RAK Airways
  or $20,000 per employee. Agreement has                      of the United Arab Emirates, and Hainan
  already been reached on the retrenchment                    Airlines of China. There may be obstacles to
  of 58 employees. Air Zimbabwe reports                       the proposed privatization, given the small
  the estimated cost at about $35,000 per                     size of Air Zimbabwe, its under-capitalization,
  employee and therefore requires $2 million                  and poor financial performance. The options
  to meet these retrenchment costs.                           would then be to continue to operate a weak,
• Converting a substantial portion of accounts                subsidized state-owned carrier, or whether to
  payable to medium- or long-term debt                        withdraw from the market and leave it to other
  through refinancing. Such an arrangement                     private operators.
  would provide Air Zimbabwe with the
                                                              11.4.6 Institutional Reform and the
  funds required to meet all of its overdue
  obligations for accounts payable and
                                                                     Regulatory Environment
  restore services that can generate revenue.                 Three possible scenarios for the future
  However, given the parlous state of Air                     institutional arrangements for civil aviation
  Zimbabwe’s finances, access to such term                     have been considered by CAAZ (Table 11.5):
  financing may only be possible if the airline
                                                              • In Scenario A, the underlying assumption is
  can arrange for a guarantee from a credible
                                                                 that the current weak demand for aviation
  source.
                                                                 services would persist for an indefinite
The management of Air Zimbabwe has                               period. CAAZ would continue to face
recognized that as air transport routes in Africa                considerable financial strains as a result
are opened to increased competition under                        of weak demand for services. In this case,
the Yamoussoukro Decision, the airline will                      judgment of the CAAZ management is to
need to enter into some form of partnership                      leave the existing structure in place.
arrangement. It has therefore proposed that
                                                              • In Scenario B, the underlying assumption
a strategic investor be identified, citing the
                                                                is that there would be a steady recovery
example of Kenyan Airways, which teamed up
                                                                in international and domestic demand
with KLM to turn around its performance. Such


12 The Kenya Airways privatization involved both a trade sale and a public offering of shares. In the trade sale
   (in December 1995), KLM acquired 26 percent of the shares of the airline for US$26 million in cash and the
   provision of various services to the value of US$3 million. The trade sale followed a period of restructuring and
   rationalization under a management contract with Speedwing Consulting (then owned by British Airways). The
   public offering took place in March 1996 with a flotation of 34 percent of the company’s shares on the Nairobi
   stock exchange, as well as an international sale of a further 14 percent of shares and an allocation of 3 percent of
   the shares to employees. This left the Kenyan Government with a minority stake of 23 percent of the issued share
   capital, and limited foreign ownership to a maximum of 40 percent. For more details of the privatization, see
   Morrell, Peter S (1997), Airline Finance. Ashgate Publishing Ltd., Aldershot, England.



16    Zimbabwe Report                                                                     Civil Aviation Industry
   for services and in this environment,              by forming an independent regulatory
   CAAZ would be able to mobilize the                 agency for civil aviation. The remaining
   funding required for a resumption of the           aviation sector services would remain with
   rehabilitation programs that were begun            the reconstituted CAAZ.
   some years ago using its own resources,
   and through the use of PPP arrangements,        • In Scenario C, the arrangements in Scenario
   additional funding would be available for         B would be further modified by creating a
   creation of new capacity at the Victoria          separate entity for air traffic and navigation
   Falls and Buffalo International Airports.         services. The assumptions for growth in
   In this Scenario, steps would be taken to         passenger and freight services would be the
   separate the regulatory functions of CAAZ         same as for Scenario B.




For the purposes of this Report, the base case     commercial aspects of airport operations and
for the civil aviation sector is Scenario B,       services then opens the possibility of bringing
under which a separate civil aviation authority    private investment into the airport operations
would be created by 2012. The regulatory           in partnership with ASCZ under some form of
functions of the current CAAZ would be             PPP arrangement.
moved to the proposed new regulatory agency
for the entire transport sector, as suggested in   11.4.7 Skills Development
Chapter 4. The commercial activities of the               for Civil Aviation
current CAAZ would be grouped together in
                                                   The CAAZ has a staff of about 650 and
a new entity. For the purposes of this Report,
                                                   authorized positions for about 890 staff—a
this new entity is referred to as the Airport
                                                   fill ratio of about 73 percent. It embarked on
Services Company of Zimbabwe (ASCZ). At
                                                   a program of staff training and development
the time of the separation of regulatory and
                                                   to keep staff abreast with latest trends and
commercial functions, ASCZ would begin as
                                                   developments in the world of civil aviation.
a government-owned enterprise with some
                                                   The Authority is also developing a program
private equity participation if interested
                                                   of succession planning. The objective is to
investors are available. As the civil aviation
                                                   expand training to cover the full range of skills
market recovers, ASCZ could then be fully
                                                   needed by the authority. These include air
privatized. The creation of such an entity
                                                   traffic controllers, flight operations inspectors,
in 2012 that is divorced from regulatory
                                                   air worthiness inspectors, airport engineering
functions and is responsible only for the


Civil Aviation Industry                                                    Zimbabwe Report 17
and design, aeronautical information services,      resources development. Implementation of
air navigation systems installation and             these programs is currently constrained by a
maintenance, aviation security, fire and rescue      lack of funding.
services, finance and marketing, and human




11.4.8 Implementation of                                Subject to the availability of funding from
       the Action Plan                              CAAZ, an early start would be made of the high
                                                    priority rehabilitation and upgrade programs
Table 11.6 sets out an indicative set of            for airport infrastructure. These would include
timelines for implementation of the proposed        implementation of the proposed $35 million
Civil Aviation Action Plan. The program             of improvements in air space management,
proposes an early start on expanded programs        communications, and safety.
of training and on the preparation of a master          With the bulk of the preparatory work
plan for the development of the civil aviation      completed in 2010 and 2011, the proposed
sector in the decade ahead. The completion          institutional and policy reforms could be
of the master plan would then lead into the         launched in 2012. Negotiations with potential
preparation of a business plan designed to          private sector partners could be completed in
attract potential private investors interested in   2012 as well, thereby laying the foundations for
managing, financing, and developing airport          the launch of the rehabilitation and upgrade of the
infrastructure. Completion of the master plan       Victoria Falls and Buffalo Range International
would also lead to a review of the future role      Airports in 2013. With increased emphasis on
of Air Zimbabwe.                                    training, creation of an independent regulatory


18   Zimbabwe Report                                                         Civil Aviation Industry
authority, and completion of rehabilitation and    Zimbabwe would then seek reclassification to
upgrade of air safety and security facilities,     Category 1 in 2013.




11.5     EXPENDITURE PROGRAM                       about $300 million at this time (Table 11.7).
         FOR CIVIL AVIATION                        The bulk of the new capital outlays would be
                                                   for the upgrade and expansion of the Victoria
                                                   Falls and Buffalo Falls International Airports,
11.5.1 Capital Expenditure Programs
                                                   the combined cost of which is estimated at about
As the foregoing discussion indicates, the         $226 million. If international investors can be
future development of airport infrastructure and   mobilized for these two projects, the remaining
services in Zimbabwe will require a large amount   capital spending that would need to be met by
of new capital spending, roughly estimated at      CAAZ amounts to about $72 million.




Civil Aviation Industry                                                    Zimbabwe Report 19
The Action Plan calls for a high priority to be   rehabilitation of the civil aviation infrastructure
given to the $35.7 million required to upgrade    is not a priority for the donor community at
air safety and communications equipment in        this time, or in the foreseeable future. In 2011-
order to facilitate early compliance with the     12, CAAZ would need to mobilize about $56
requirements of the ICAO and an upgrade by        million to cover capital expenditures proposed
the FAA and EASA to Category 1. As Table          for this period, the bulk of which relates to the
11.7 indicates, these high priority programs      urgently needed actions to improve air safety
would be implemented in 2011-12. The key          and communications. The financing plan does
issue related to their early implementation is    include $1 million of funding by donors in
the mobilization of the funding required for      support of the preparation of business plans
the program, which is discussed below.            and related proposals for the creation of the
                                                  regulatory authority in 2013, and the award of
11.5.2 Funding for Development                    concessions to the private sector.
       Expenditure Programs                           In these circumstances, some form of
As noted above, the total development             private participation in airport operations
expenditures for the proposed program amount      will be required to mobilize the necessary
to about $300 million. The projected cash flow     funding for the airport rehabilitation and
of CAAZ and of the proposed Airport Services      upgrading program. A likely option would be
Company of Zimbabwe (ASCZ) will not be            a concession arrangement, the details of which
sufficient to cover the total capital investment   are described below. The proposed separation
requirements of the proposed Action Plan.         of the regulatory function for civil aviation and
Given the very large competing claims on the      creation of ASCZ that would be responsible for
National Government, it is very unlikely that     the commercial aspects of airport operations
the required amounts will be available from the   will enhance prospects for attracting potential
national budget. Furthermore, the support for     investors.




The company, or companies, formed for the         million for new capital investment. Assuming
Victoria Falls and Buffalo Range International    that the PPP used for these two airports is a
Airports would have to mobilize a total of $226   concession arrangement, the project company


20   Zimbabwe Report                                                       Civil Aviation Industry
would finance and build the required airport           entire transport sector. New legislation would
facilities, and would then operate a service          be required to establish the proposed authority.
that would be delivered direct to customers           This new authority, referred to as the Transport
from airside (airlines) and landside operations.      Regulatory Authority of Zimbabwe (TRAZ),
The proposed project or projects would                would be responsible for the regulation of
involve some combination of equity and debt           road, rail, and civil aviation services. In the
financing. For the purposes of this Report, it is      case of the latter, it would be responsible for
assumed that the debt ratio of the concessions        promoting, regulating, and enforcing civil
would be 60 percent.                                  aviation and security standards consistent
                                                      with the requirements of the International
11.5.3 Maintenance Programs                           Civil Aviation Organization (ICAO). The
       for Civil Aviation                             authority would be mandated to generate some
                                                      of its funding requirements from user fees, a
The CAAZ projects total spending on
                                                      charge on departing scheduled passengers,
maintenance to be about $3.13 million in 2010
                                                      and a fuel levy payable by the general aviation
. This is equivalent to about 2 percent of the
                                                      industry. Other sources of revenue would
current value of airport infrastructure. For the
                                                      include charges for various services, for
purposes of this Report it is assumed that future
                                                      example, aircraft registration, examination
outlays on maintenance would gradually rise
                                                      and registration of pilots, and various licensing
to a level equivalent to 5 percent of the value
                                                      activities. The new regulatory authority would
of infrastructure assets in aviation. Given the
                                                      likely perform its civil aviation oversight
projected capital expenditure program, the
                                                      duties through four technical units, namely,
value of aviation sector assets will be about
                                                      Air Safety Operations, Aircraft Safety, Air
$450 million in 2020 (at 2009 constant prices).
                                                      Safety Infrastructure, and Aviation Security.
On this basis, maintenance outlays would
                                                      The new entity would also have a number of
increase to about $22.4 million a year (at 2009
                                                      support units, including finance, legal, human
constant prices). An annual program of this
                                                      resources, and communications:.
magnitude would create opportunities for a
substantial domestic industry geared to airport       • Air Safety Operations (ASO). The ASO
construction and maintenance.                            would perform oversight on scheduled
                                                         fixed wing aircraft, helicopters, and flight
11.6     RESTRUCTURING THE                               schools. The unit would also establish
         CIVIL AVIATION SECTOR                           testing standards and administer pilot exams.
                                                         Another important function of ASO would
The proposed program for civil aviation calls for        be the flight inspection unit (FIU). This unit
action on creation of an independent regulatory          would calibrate navigation equipment. It
authority with responsibilities for civil aviation,      would also regulate the medical aspects of
the details of which are considered in Chapter           airline operations;
4, a restructuring of CAAZ into the Airport
                                                      • Aircraft Safety (AS). The major role of the AS
Services Company of Zimbabwe (ASCZ), and
                                                        unit would be to license aircraft and perform
concession agreements for the operation of
                                                        oversight activities on aircraft maintenance
airport facilities at Victoria Falls and Buffalo
                                                        organizations or similar institutions.
Range.
                                                        Other activities of the unit would include
11.6.1 Regulation of Civil Aviation                     certification, management, and standards
                                                        development and certification engineering.
As Chapter 4 indicates, the Report proposes the         The unit would also be responsible for
creation of a single regulatory authority for the       aviation environment protection;



Civil Aviation Industry                                                       Zimbabwe Report 21
Aviation Security (AVSEC). The AVSEC unit
  would provide security oversight in various
  areas. One of the important functions
  would be to ensure safe transportation of
  dangerous goods. Other important functions
  would be the direct oversight of airlines and
  airports in order to prevent unlawful acts of
  interference, the training and certification
  of personnel, and the approval and or
  accreditation of training organizations.;
Air Safety Infrastructure (ASI). The ASI unit
   would perform various safety oversight
   functions in the aviation infrastructure.
   One of the main duties would be to license
   aerodromes. In addition, the unit would issue
   annual licenses to commercial airports after
   having successfully concluded oversight
   duties. Communications, navigations and
   surveillance oversight would be performed
   on designated airports of the country.

11.6.2 Transformation of CAAZ to
       an Airport Services Company
The creation of the regulatory authority in
2012 would be accompanied by a restructuring
of the existing Civil Aviation Authority into
the Airport Services Company of Zimbabwe
(ASCZ), which would come into existence in
2013, following the launch of the regulatory
authority. One of the major challenges
associated with the restructuring of CAAZ           At end 2009, the bulk of the assets held by
stems from the need to strengthen its financial      CAAZ were airside and landside infrastructure
position.                                           whose historical cost is estimated at about $454
   Current financial position of CAAZ. The           million, and much of which is fully depreciated.
financial position of the authority deteriorated     The Authority had liabilities of $150 million,
during the past decade. Contributing factors were   including $147.4 million associated with eight
the impact on revenues and costs of the sharply     foreign loans, and about $7 million of equity
declining passenger and aircraft movements,         at end 2009. As a result of the economic
hyper-inflationary conditions within Zimbabwe        problems of the past decade, CAAZ has not
and the decline in the value of the Zimbabwe        been able to service these loans. TAshe loans
dollar against major currencies. There was          (with and original value of $110 million) are
growth in CAAZ revenues and a net surplus           all in arrears, the amount of which now stands
up to 2005, but it has had operating losses each    at $90 million. With these substantial arrears
year since 2006. As Table 11.9 indicates, the       and a debt ratio of 96 percent of assets, the
operating loss in 2009 was $45 million, with a      financial position of CAAZ is weak as is its
loss of $37 million projected for 2010.             ability to mobilize additional funding required


22   Zimbabwe Report                                                        Civil Aviation Industry
for the rehabilitation and upgrade of aviation                Given these financial circumstances, the
infrastructure. As the consideration in Chapter            management of CAAZ is pursuing the route
5 indicates, this Report attaches a high                   of public-private partnerships to expedite
priority to early action by the Government to              completion of the capital development program
remove all loans that are in arrears from the              for the Victoria Falls and Buffalo Range
books of infrastructure state enterprises such             International Airports. The expectation is that
as CAAZ and put these in a separate Special                such arrangements will attract private capital
Purpose Account to be created by the National              for rehabilitation as well as increases in the
Government,13 and to launch an arrears                     capacity of facilities. Under this arrangement,
clearance process with the international donor             the proposed Airport Services Company of
community in 2011.                                         Zimbabwe would enter into a concession
   Removal of these loans from the CAAZ                    agreement with one or two concessionaires
balance sheet would address a portion of                   for the operation of the Victoria Falls and
the current financial problems of CAAZ.                     Buffalo Range International Airports. The
The other challenge relates to its continued               ASCZ would continue to operate the other
large operating losses. The Authority’s major              nine airports currently under the jurisdiction
yardstick for measuring performance is through             of CAAZ. The ASCZ may consider making an
passenger and aircraft movements. Revenues                 equity investment in the company or companies
are projected to be about $25 million in 2010.             formed by the successful concessionaire(s).
The striking feature of the CAAZ income
                                                           11.6.3 Private Sector Participation
statement is that fees for aeronautical services
account for the bulk of revenues. In 2009, they
                                                                  in Airport Operations
accounted for more than 90 percent of revenues             Options for private sector participation.14
and in 2010 they are projected to account for              Decisions will be required regarding the
85 percent. Income from concessions and rents              desired type of private sector participation
in terminals and other sources are projected               in airport management and expansion in the
at less than $5 million for 2010. One of the               Victoria Falls and Buffalo Range International
major challenges for CAAZ and its successor,               Airports. There is no universal agreement
ASCZ, is to build revenues from concessions                on the most appropriate approach to the role
and other non-aeronautical services as quickly             of PPPs in civil aviation. The analysis must
as possible. The reason is that the International          be done on a project-by-project basis. The
Civil Aviation Organization (ICAO) requires                options to be considered include concessions,
member states to charge aeronautical fees on               management and lease contracts, and outright
a cost recovery and not profit-making basis.                divestitures:.
Given this requirement, the profitability
                                                           • Concessions in which the Government
of airport operations therefore turns on the
                                                              retains ownership of assets have been the
amount of income that can be generated from
                                                              most common form of private participation
airport concessions and other services such as
                                                              in airport infrastructure in developing
car rentals and parking services.


13 CAAZ inherited the eight long-term loans from the Government of Zimbabwe in 2003, the original amount
   of which was $110.4 million, some $41million of which is due to KfW of Germany. The loans had been used
   to finance capital works, including construction of the new international passenger terminal at Harare Airport,
   navigational and surveillance equipment, and fire and rescue vehicles and equipment.
14 This section draws on a number of sources, including: Delmon, Jeffrey (2010), “Understanding Options for
   Public-Private Partnerships in Infrastructure.” World Bank, Washington DC, Policy Research Working Paper
   5173, January 2010; and Silva, Gisele, F.(1999), “Private Participation in the Airport Sector—Recent Trends.”
   World Bank Group, Public Policy for the Private Sector Series, Note 202, November, 1999.



Civil Aviation Industry                                                               Zimbabwe Report 23
     countries. They accounted for more than 40                    stake in the concession holder. The Indian
     percent of airport contracts and 60 percent                   transactions followed a similar approach. A
     of investment commitments in 1990–2005.                       minority stake of this size is usually viewed
     Developed in Latin America and Sub-                           as giving veto rights over strategic decisions
     Saharan Africa in the 1990s, the conces-                      affecting the business and changes to the
     sion model is increasingly used in Eastern                    corporate constitution. But any benefit to
     Europe and Central Asia and in South Asia.                    the government from these rights needs to
     Some of the recently awarded concessions                      be weighed against the resulting risks and
     involve a greater role for the government.                    obligations of ownership and any adverse
     Under the Budapest airport concession, for                    implications for the government’s policy
     example, the government took a 25 percent                     and regulatory roles (Box 11.1).

              Box 11.1: International Experience with the Private Sector in Airport Operations

The private sector has played a growing role in airport infrastructure over the past two decades. The United Kingdom
launched the trend with the privatization of the British Airports Authority in 1987. Australia, Austria (Vienna),
Denmark (Copenhagen), Germany (Frankfurt, Hamburg), Italy (Naples, Rome), and New Zealand followed.

    Private participation in managing and developing airport infrastructure in developing countries has expanded
since 1990, with the growth accelerating in the past few years. During 1990–2005, 38 low- and middle-income
developing countries entered into more than 100 airport contracts ranging from short-term management contracts
to long-term build-operate-transfer (BOT) arrangements, concessions, and divestitures. These transactions attracted
investment commitments of more than US$18 billion. Private participation in airports has generated significant
funds for governments. Of the US$18 billion in investment commitments in 1990–2005, half reflected the price
paid for the value of the existing business (or a share of it) through purchases of government equity or through
concession and lease fees; commitments for modernizing and expanding airport infrastructure accounted for the
other half.

   Most of the private sector management and financing of airports in Sub-Saharan Africa occurred in the 1990s,
mainly through concessions. Since 2002 only one transaction (a concession for a terminal in Nigeria) has taken
place.

    Long-term concessions for airports are the predominant model today, with governments often taking a minority
shareholding in the venture. Experience from these activities shows that careful attention to policy design, regulatory
issues, and management of concessions is important in ensuring that private participation delivers efficient and
effective airport infrastructure services. Because concessions can be complex, governments should be clear about
their policy objectives and structure the contracts accordingly. They then need to manage their ownership rights and
obligations over the life of the contract so that the incentives of the private participants are effectively aligned with
government objectives. Governments can also achieve their objectives through airport divesture, a simpler option.
But to do so, they need to design and implement a regulatory regime that assures efficient investors a return on, and
the return of, their investment.


• Management and lease contracts have                              2002–05. Among divestitures, the sale of
  become more common, increasing from                              airport assets (as in the privatization of
  7 percent of transactions in 1990–2001 to                        the British Airport Authority) has played
  more than 20 percent in 2002–05. Countries                       a minor role. Most airport divestitures in
  as diverse as Bangladesh, China, Djibouti,                       developing countries have been structured
  and Egypt have awarded management                                as the sale of minority, non-controlling
  contracts for airports since 2002.                               stakes, aimed at raising capital rather than
                                                                   transferring control.
• Divestitures have become less frequent,
  declining from 17 percent of transactions                    The airport sector has seen less contract
  in 1990–2001 to less than 10 percent in                      cancellation and distress (international


24     Zimbabwe Report                                                                      Civil Aviation Industry
arbitration or formal request for cancellation)              Two high-profile examples are the Lima
than other infrastructure sectors. Of the 104                airport concession in Peru and the 33-airport
airport contracts granted in 1990–2005, only                 concession in Argentina, both renegotiated
four—representing 4 percent of investment                    almost immediately after start-up. In both
commitments—had been canceled or were in                     cases the winning bids were perceived as
distress by 2005. Some other airport contracts               fiscally attractive but raised questions about
have been affected by major renegotiations,                  fundamental financial soundness.15
though only anecdotal information exists.




Contract arrangements. Given the importance                     Table 11.10 sets out an indicative financial
of mobilizing the capital required for upgrade               plan for the concession. Annex 7 provides an
and expansion of the two international airports,             explanation of the key assumptions used to
the working assumption used in this Report is                construct this indicative financial plan. The
that the Government will adopt a concession                  number of passengers, primarily international
arrangement in which the concessionaire will                 tourists, is assumed to grow to about 1.15
assume responsibility for both airside and                   million by 2020, equivalent to 51 percent of the
landside development.                                        total passenger traffic projected for Zimbabwe


15 In Peru, for an airport with US$54 million in annual sales in 2000, the winning bidder offered an annual payment
   to the government of 47 percent of annual gross revenues and a commit¬ment to invest more than US$1 billion,
   including construction of a second runway by the ninth year of the 30-year concession. In 2003, after two years of
   renegotiations, the concessionaire and the govern¬ment agreed to adjust the payments and delay the investment
   obligations (Guasch 2004). In Argentina the concessionaire offered to invest US$2 billion and pay annual
   concession fees of US$171 million during the 30-year concession granted in 1998. But once the peso crisis hit
   in 2000, these terms were under continual dispute. By mid-2006 the concessionaire and the govern¬ment finally
   agreed to lower concession fees and investment commitments. Both this case and the Peruvian one show that it is
   in the interest of governments to assess carefully the underlying financial and economic viability of proposed bids.



Civil Aviation Industry                                                                   Zimbabwe Report 25
in 2020. The concession has modest losses in                  over airport businesses through transactions
the first few years of operations, but with the                usually financed with large debt relative to the
capital development program completed in                      value of the airport’s assets. What these highly
2015, net income improves steadily to about                   geared financial structures will mean for the
$12 million a year by 2020.                                   performance and development of airport
    A number of key policy issues will need to                infrastructure remains unclear. But if adverse
be addressed prior to issuing invitations for                 shocks occur, such structures may increase
bids from potential concessionaires. These                    the challenges facing not only the airport
include, for example, a decision on whether                   businesses but also governments, regulators,
the Government would take an equity stake in                  or both. This underlines the importance of a
the concession, arrangements for meeting the                  clear, coherent, and robust policy framework
cost of possible labor force redundancies, the                for introducing private participation.
duration of the concession. A key design issue is                 Indicative financial accounts for the
whether the project company would be subject                  Airport Services Company of Zimbabwe.
to public control, for example, through a joint               An indicative financial plan for the CAAZ
stock company. An issue typically associated                  (for 2010-12) and the ASCZ (for 2013-20)
with government shareholding in the project                   is set out in Figure 11.5. With the creation
company is a possible conflict of interest                     of the independent regulatory authority in
between the government as shareholder and                     2012, the working assumption in this Report
the government as the public initiator of the                 is that CAAZ is then restructured to become
project.16                                                    the Airport Services Company of Zimbabwe
    Choice of concessionaires. Most airport                   in 2013, with responsibilities for the nine
contracts have been awarded to consortia of                   airports that remained under the jurisdiction
local companies and foreign construction                      of CAAZ following the proposed concession
and airport companies. The top five sponsors,                  arrangements for the Victoria Falls and Buffalo
ranked by number of projects, accounted                       Range airports. The assumptions that underpin
for less than 20 percent of transactions in                   this projection are discussed at greater length
1990–2005. These top sponsors were Spain’s                    in Annex 7.
ACS Group and Aeropuertos Españoles y                             As noted earlier, a key element in the
Navegación Aérea, France’s Aeroports de                       restructuring of CAAZ will be to remove the
Paris, Germany’s Fraport, and Argentina’s                     $147 million of long-term liabilities from the
Corporación America. Recently, new sponsors                   balance sheet of CAAZ prior to its transition to
have emerged. Hochtief AirPort has played a                   the Airport Services Company of Zimbabwe.
key role in concessions of Albania’s Tirana                   Without debt restructuring prior to serious
airport. The state-owned Malaysia Airport                     negotiations with potential investors, CAAZ
Holdings has taken equity positions in the                    would very likely appear to be unattractive as a
Delhi and Hyderabad airport contracts. Grupo                  private sector partner. For the purposes of this
Ferrovial and Macquarie Airports have been                    Report, it is assumed that after the financial
active in airports in developed and, to a lesser              restructuring, the newly created ASCZ is
degree, developing countries. Also noteworthy                 able to attract private equity. More work is
is the emergence of specialized infrastructure                needed on the precise form of the privatization
consortia, led by firms like Macquarie, that take              strategy. Options to be considered include:



16 An example of potential conflict of interest would be difficulties for the government as shareholder to agree for the
   project company to sue the government as the public initiator of the project (sometimes referred to as the grantor).



26    Zimbabwe Report                                                                     Civil Aviation Industry
• A trade sale of say, 30 percent of total        revenue mix is 55 percent non-aeronautical
  shares to a private investor, and following     and 45 percent aeronautical. Major sources
  further restructuring, flotation of 40 percent   of non-aeronautical revenue are real estate
  of ASCZ shares on the Zimbabwe stock            developments, car parking, concessions,
  market, thus leaving the Government with        and other types of airport service activities.
  30 percent of the shares. The Government        In the scenario set out in Figure 11.5, non-
  may then dispose of these remaining shares      aeronautical income is projected to increase
  to the existing private owners or to new        from the current 15 percent of total revenues
  investors.                                      to about 25 percent by 2020. Tight control of
                                                  personnel expenses is assumed for the decade
• Outright sale of ASCZ to a private              ahead, but even with these controls, a recovery
  investment group.                               in spending on routine maintenance of airport
• The ASCZ remains as a fully commercialized      assets from less than 1 percent of the capital
  public company with Government holding          stock at present to 5 percent by 2020 results
  all the equity.                                 in an increase in routine maintenance to about
                                                  $22 million by 2020. The large increase in
In the illustrative income statement set out      maintenance expenses constrains the ability of
in Figure 11.5, revenues rise steadily to         ASCZ to generate a positive cash flow until the
almost $60 million by 2020, with revenues         latter part of the decade.
from commercial activities accounting for
                                                      In this illustrative financial plan for ASCZ,
an increasingly large share of total earnings.
                                                  Earnings Before Interest Payments, Taxes,
As noted earlier, it is important for ASCZ to
                                                  Depreciation, and Amortization (EBITDA) for
change the revenue mix so that the bulk of the
                                                  the company is negative for the first two years
revenue comes from non-aeronautical sources.
                                                  of operation, but by 2015 the EBITDA records
The worldwide minimal benchmark for the
                                                  a small surplus. As commercial revenues rise,


Civil Aviation Industry                                                   Zimbabwe Report 27
there is an increasingly large EBITDA surplus.     to be considered for restructuring. A number
The improved cash position of the company          of options for such restructuring are set out
would allow the start of dividend payments to      elsewhere in this chapter and in Chapter 5.
shareholders during the 2015-20.                   Early decisions are needed on the specifics
                                                   of the proposed restructuring to enhance the
11.7      RISK AND UNCERTAINTY                     capacity of CAAZ to mobilize funding for the
          IN THE CIVIL AVIATION                    urgently needed upgrade of air traffic control
          PROGRAM                                  and safety facilities and to lay the foundations
                                                   for attracting potential private investors to the
For the purposes of this Report, the main          proposed concession arrangements for the
risks and uncertainties to be considered are:      Victoria Falls and Buffalo Range Airports.
(i) the extent to which CAAZ can implement         Until there is clarity on these issues potential
needed improvements in air traffic control          investors will be deterred by the uncertainty
and safety to ensure compliance with ICAO          surrounding the nature and timing of the
requirements;, (ii) prospects for a recovery       restructuring.
in tourism and passenger traffic; (iii) whether        Management of CAAZ liabilities and
measures needed to clean the balance sheet         financial restructuring. The financial forecast
of CAAZ can be taken prior to staring              for 2010 is that the EBITDA of CAAZ will be
negotiations with potential concessionaires;,      about $1 million and its level of debt is about the
and (iv) what form of restructuring and            same as the value of its assets and it is in arrears
privatization will be decided upon for CAAZ.       with its service obligations on this debt. Hence
All of these concerns are directly linked to the   there is no capacity to borrow the required
way in which potential private investors will      funds. A key issue is early action on removal of
view investment opportunities in civil aviation    the long-term liabilities on the books of CAAZ
in Zimbabwe.                                       that are currently in arrears. If that action is
    Improvement in air traffic control and          not taken, it is very unlikely that the financial
safety. Continued lack of compliance with          position of CAAZ can be strengthened in the
ICAO requirements is a major concern. The          short- and medium-term. In the short-term,
Authority and industry as a whole faces the        this will undermine efforts to mobilize funding
risk of having major airports and aircraft         for the urgently needed improvements to air
maintenance entities closed owing to failure       traffic control and security and thereby be in
to meet international regulatory requirements.     compliance with ICAO requirements. In the
Such action would undermine efforts to rebuild     medium term, lack of progress on these issues
the tourism trade and to attract potential         will inhibit efforts to attract potential investors
private investors. The proposed rehabilitation     for the proposed concession arrangements.
program calls for outlays of about $36 million     Formation of a successful partnership with
(at 2009 constant prices) for urgently needed      one or more concessionaires will require a
improvements in air traffic control and safety.     financially sound CAAZ.
The problem is that CAAZ has no obvious               Shortages of critical aviation sector skills.
source of funding to upgrade and modernize         As noted elsewhere in this chapter, there has
these facilities. Financial restructuring of       been a serious erosion of critical aviation sectors
CAAZ is urgently needed to provide the             skills required for air traffic control and safety
financial space needed to mobilize the funding      and other critical airside services, as well as
required.                                          erosion of skills required for effective landside
    Restructuring of CAAZ. In the mid-term         services. This loss of skills has stemmed from
budget review of the Government, CAAZ              the deterioration in the domestic economy and
was identified as one of the state enterprises      the inability of CAAZ to provide remuneration


28     Zimbabwe Report                                                       Civil Aviation Industry
packages for skilled staff competitive with         3 million a year by 2020, a level that would
those of similar organizations elsewhere in         exceed current airport capacities, but one that
Sub-Saharan Africa. A continuation of the           would very likely be attractive to potential
current financial difficulties will exacerbate the    concessionaires. On the other hand, at a growth
current problems faced by CAAZ in retaining         rate of only 5 percent per year, passenger
skilled staff and recruiting new staff with the     traffic would be 1.6 million by 2020, well
required skills.                                    below existing airport capacities. At low levels
   Forecast of passenger traffic. There are          of market development, the attractiveness of
two plausible alternatives to the projection of     investment in airport concessions in Zimbabwe
passenger traffic given in Table 11.3. One is        would decline sharply. In this latter scenario,
that the recovery in passenger traffic is much       it is unlikely that the financial position of
stronger than the average growth rate of a little   CAAZ would improve, perhaps giving rise to
less than 9 percent a year assumed in Table         pressures for retrenchment, low staff morale,
11.3. An average growth rate of 12 percent a        and loss of shareholder value. 
year, for example, implies passenger traffic of




Civil Aviation Industry                                                     Zimbabwe Report 29

				
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