Preliminary Analysis

Airport Development in Zanzibar

Preliminary PPP Analysis

1Airport Development in Zanzibar

Contents

Purpose & Scope

Background

Current Situation

Terminal 2 Development

Analysis

Traffic Projections

Revenue Projections

Options Under Consideration

1.Development of Terminal 2, Operated by ZAA

2.Development of Terminal 2, Operated by Private Company

3.Development, Financing, Maintenance & Operations of Zanzibar International Airport

Preliminary Conclusions

Preliminary Recommendation

Figures

Figure 1 Aerial Photo of Existing Airport Facilities

Figure 2 Aerial photos of existing terminal and new terminal under construction at ZIA

Figure 3 Projected Growth in Passenger Traffic ZIA – 3 Growth Scenarios

Figure 4 Historical & Projected Revenue, Expenses and EBITDA – High-Growth Scenario – 2000-2040

Figure 5 Projected Revenue, Expenses and EBITDA – Medium-Growth Scenario – 2000-2040

Figure 6 Projected Revenue, Expenses and EBITDA – Low-Growth Scenario – 2000-2040

Tables

Table 1 Passenger Service and Security Charges, Domestic & International

Table 2 15 & 25-year present value of Revenues, Expenses & EBITDA 2016-2040 High-Growth

Table 3 15 & 25-year present value of Revenues, Expenses & EBITDA 2016-2040 Medium-Growth

Table 4 15 & 25-year present value of Revenues, Expenses & EBITDA 2016-2040 Low-Growth

1Airport Development in Zanzibar

Purpose & Scope

This preliminary PPP analysis for the Abeid Amani Karume International Airport (Zanzibar International Airport, or ZIA), has been developed as part of the activities under a contract with the World Bank for development of a PPP Policy and Guidelines and preliminary assessment of potential PPP projects for the Government of Zanzibar. Below we provide details on the current state of ZIA, the Government of Zanzibar’s plans for development of the airport and air transport sector, and recommendations for PPP structures to promote those developments.

Background

Current Situation

The Zanzibar International Airport has undergone significant development over the last several years to upgrade its capacity in terms of the size of aircraft it can accommodate as well as an increase in the number of passengers processed at the airport. The runway and aprons have recently been expanded, and a new 25,000 square meter terminal building with a capacity of 1.6 million passengersp.a. is currently under construction. The two airports at Zanzibar and Pemba together handled close to800,000 passengers (estimated) in 2013 and growth is expected to increase as more airlines provide regular service to the island, and as the tourism sector on both islands continues to develop.

The Government’s vision for Zanzibar is to become a regional hub for East Africa, although there is stiff competition from Nairobi, Addis Ababa, Kilimanjaro, and Dar es Salaam for this position. Several additions, once the new terminal building is operational, are under consideration for Zanzibar Airport including development of a new cargo terminal and fuel farm, as well as potential development of a maintenance hangar for large Boeing aircraft and other supporting infrastructure. Development of a heliport, aviation school, and airport hotel are also under consideration. The government is open to the idea of bringing in a private company to operate and maintain the airport, which would most likely include a requirement to further develop the Pemba island airport.

This analysis will focus only on Zanzibar International Airport given its importance as the main airport receiving passenger traffic for both Unguja and Pemba islands. Currently approximately 50% of the arriving passengers come from Dar es Salaam while the remaining 50% come from other domestic and international origins. Having recently completed extension of the runway and with ongoing taxiway and apron rehabilitation, the airport can now handle up to Boeing 777 aircraft (Class E). All passengers must deplane on the apron and walk to the terminal building – there are currently no boarding bridges.

As can be seen in the figure below, the airport area is quite large with room for development, however enforcement of property lines has been lax over the last several years and housing developments have encroached on airportproperty significantly. The airport area is a designated free zone by ZIPA, however development of a free zone area has not yet taken place and relocation is under consideration.

Figure 1
Aerial Photo of Existing Airport Facilities

Source: Consultant using photo from Google Maps

Terminal 2 Development

As mentioned above, the new Terminal 2 building, located adjacent to the existing terminal (as seen in the figure below), will include construction of a 25,000 square meter facility with capacity to handle up to 1.6 million passengers to accommodate growth through the project period. The new terminal will have 3 Class E boarding bridges and 2 bridges for Class D aircraft. There is hope of doubling the number of international flights arriving directly to Zanzibar (from 10 to 20 flights per week) with the addition of the new terminal building and accompanying facilities.

The terminal is being built by Beijing Construction Engineering Group Ltd. and supervised by ADPI through contracts with the Ministry of Infrastructure and Communication. The total cost for the new terminal is estimatedat US $130 million through what we understand to be a turnkey construction contract with a loan from the Chinese Ex-Im Bank. Construction began in 2011, was halted in 2012 pending disputes over aspects of the airport that did not meet ICAO standards, and is expected to be completed in the third quarter of 2015. Exact details of the financing are unknown.

The main issue affecting the project has been the location of the new terminal, which was constructed too close to the taxiway limiting the size of aircraft that can park at the gates facing the taxiway and runway. Redesign of the terminal will include expansion of the apron to the south side of the terminal building where larger aircraft will be able to park. This will significantly limit the number of aircraft that can board at one time, however it has been determined that this redesign will be able to accommodate expected growth in both the number of passengers and size of aircraft that will be using the new terminal.

Figure 2
Aerial photos of existing terminal and new terminal under construction at ZIA

Source: Consultant using photo from Google Maps

As shown in the photo above, the current terminal is too small to accommodate boarding bridges and the apron limits the number of aircraft that can park at the airport. Additionally, both large and small aircraft must compete for space in the same area. The photo above also shows the new terminal construction, located quite close to the extended taxiway on the East side and to housing developments which have encroached on airport property on the West side.

Analysis

Traffic Projections

Below we present a preliminary analysis of both projected traffic and projected revenue for the Zanzibar International Airport based on historical traffic data and tariff rates provided by the Zanzibar Airport Authority. For the 25-year traffic projections,we estimate high, medium and low-growth scenarios based on historical GDP growthin Zanzibar. These growth scenarios are depicted in the graph below.

Figure 3
Projected Growth in Passenger Traffic ZIA – 3 Growth Scenarios

Source: Consultant analysis based on historical traffic data provided by ZAA

As the graph indicates, according to the high-growth scenario, total passenger traffic is projected to increase to almost 4 million passengers in the year 2040 showing growth of 6.11% CAGR between 2016-2040, while in the medium and low-growth scenarios passenger traffic is expected to increase to approximately3 million and 2 million passengers respectively (representing 5.19% and 3.89% CAGR between 2016 and 2040). Planned capacity for the new Terminal 2 is 1.6 million p.a. meaning that in all three scenarios, projected traffic will surpass total capacity prior to the end of the 25-year projection period requiring expansion of the Terminal 2 facility or construction of a third terminal facility. In allthree cases, terminal expansion or construction of a new terminal would need to begin prior to 2040 in order to accommodate growth.These scenarios are “unrestricted” scenarios assuming that the relevant infrastructure (hotels, restaurants, access roads, energy production, water, solid waste, housing, etc.) is developed with enough anticipation to cater to projected passenger growth, either by the government or under PPP arrangements.

Revenue Projections

The revenue analysis provides a projection of estimated total revenues, operating costs and EBITDA for the ZIA based on historical and projected traffic for the high, medium and low-growth scenarios. It is important to note that this revenue analysis is based on projections and estimated operating costs based on similar airport operations and does not include information from the ZAA’s audited financial statements. The analysis estimates a split of 50% international passengers and 50% domestic passengers with tariff rates as follows:

Table 1
Passenger Service and Security Charges, Domestic & International

Category / Rate
Domestic Passenger Service Charge / Tzs 10,000
Domestic Safety Fee / Tzs 1,000 (Increasing to 3,000 in 2015)
International Passenger Service Charge / US $40.00
International Safety Fee / US $8.00

Source: ZAA

The revenue analysis also takes into consideration the following additional assumptions:

Using historical and projected financial statements for the Tanzania Airports Authority (TAA) as a comparison, passenger service charges are assumed to make up approximately 60% of total revenues, and the remaining 40 percent includes landing and parking fees as well as adequate development of commercial activities;
Using historical and projected financial statements for TAA as a comparison, total operating expenses are assumed to make up approximately 80% of total revenues through the first 3 years of project operations 2016-2018, decreasing by 5% every 3 years starting in 2019 based on an assumption of more efficient, modern facilities and increasing operating efficiency under management of a private operator. Operating costs reduce to 60% of operating revenues in 2030 remaining constant through 2040;
The safety fee charged to domestic departing passengers is assumed to increase from Tzs 1,000 to Tzs 3,000 in the year 2015;
The terminal construction period is assumed to end in 2015, with 2016 as the first year of operations;
Passenger service charge and security feesare assumed to grow at the rate of U.S. inflation for international passengers and Tanzanian inflation for domestic passengers, based on IMF inflation projections through 2019 (held constant thereafter);
Present value of revenues, costs and EBITDA are calculated for the projected asset life (2016-2040) at discount rates of 12% (Tanzania), 6% (China) and 3% (low-rate comparison);
Revenues and costs were projected based on high, medium and low-growth scenarios based on projected GDP growth, projected tourism growth, and projected population growth, as described in the section on traffic analysis above.

The simple revenue analysis performed based on the assumptions above provided an estimate of the ZAA’s or future airport operator’s ability to repay debt and fund additional development activities. Below we present the results of the revenue analysis for the high, medium and low-growth scenarios, as well as the 15 and 25-year sums and present values of revenue, expenses and EBITDA (earnings before interest, taxes, depreciation and amortization) at the benchmark discount rates of 12%, 6%, and 3%.

Under the high-growth scenario, total estimated revenues from the beginning of operations in 2016 to the end of the project period in 2040 grow from US $20.8 million to US $87.5 million while operating expenses increase from US $16.6 to US $52.5 and EBITDA increases from US $4.2 million to US $35 million representing a growth in EBITDA margin from 20% to 40%.The graph below illustrates this high-growth trend.

Figure 4
Historical & Projected Revenue, Expenses and EBITDA – High-Growth Scenario – 2000-2040