The world has changed since John Howard sold Sydney Airport for $5.6 billion in 2002. Under that privatisation plan, the operators of Sydney Airport were offered first right of refusal over a second airport for the city as an economic safety net for the new owners who wanted to protect its monopoly position.
Fast forward to 2016 and Sydney Airport is one of the most stable investments around thanks to a surge in the number of passengers passing through its terminals. The flood of international carriers now flying into Australia and record low airfares means Sydney Airport is in a sweet spot as the monopoly operator of the city's only airport.
This was highlighted in the airport's latest traffic statistics out on Tuesday, which showed its international growth rate for the year to date was 9.1 per cent. International passenger growth was 7.5 per cent in November alone.
The Turnbull government's decision to play hardball over the second airport planned for western Sydney sends a clear message to the airport operator that if it wants to retain its monopoly and the economic returns that come with it, then Sydney Airport is going to have to pay for the privilege.
Minister for Urban Infrastructure Paul Fletcher handed down the ultimatum on Tuesday in the long-awaited 1000-page Notice of Intention (NoI) to Sydney Airport which outlines the formal contractual terms for the company to build and operate the new site in western Sydney.
While the terms had never been set in stone, there was previously an expectation that Sydney Airport would stump up about $1 billion of the construction costs with the government funding the remaining $4 billion to $5 billion either directly or through a long-term loan. But under the formal proposal, Sydney Airport will now be required to spend between $5 billion and $6 billion building and operating the airport. This includes a 3700-metre runway and a terminal with capacity for 10 million passengers.
Fletcher also warns the government is willing to build the massive project itself if Sydney Airport does not play ball over costs. Under that scenario, the government could also tender the project out to other companies.
"Should Sydney Airport Group choose to decline the opportunity to build and operate Western Sydney Airport, the government will be free to develop and operate the airport itself, or to offer the opportunity to other private sector companies on substantially the same terms as those offered to Sydney Airport Group today," Fletcher says.
It is unclear when the government's position shifted or what triggered it but its case will be easy to sell to the public in the current anti-business environment. Why should it pay for the airport when it has already provided 1800 hectares of land, transport links and the various regulatory approvals if Sydney Airport takes home all the profits?
The airlines also like the idea of another operator providing some pricing tension in Sydney. A second operator increases the likelihood of Badgerys Creek becoming a hub for low-cost operators like Jetstar and Tiger, who will be able to compensate for the longer travelling times for passengers to and from the city with lower airfares.
The downside is that the squabbling between Sydney Airport and the government over how long it has to respond to the NoI could result in more delays to the politically sensitive project. It is also a riskier proposition if Sydney Airport walks away and the government builds the project itself. Government and major infrastructure projects do not go well together which everyone knows from the national broadband network (NBN) experience. There would no doubt be interested parties if the government tendered the project out but one leading infrastructure investor notes that secondary airports are not that attractive for large infrastructure funds as the returns are lower.
The government wants the new airport open by 2026 when it is expected to cater to 3 million to 5 million passengers before increasing to 10 million by 2030.
Sydney Airport chief executive Kerrie Mather is not happy. While it is no secret the government and Sydney Airport did not see eye to eye on funding, the NoI formalises the government's position and appears to have come as a surprise. Mather argues the last 24 months of consultations went ahead on the basis that the government would partly fund the project.
Both sides have now descended into what looks like petty squabbling over how long Sydney Airport has to respond to the NoI. The government says it has four months but Sydney Airport cites a clause in the documentation allowing it more time to respond to the NoI if it is not "substantially familiar" with the terms now on the table.
Mather wants nine months to respond, warning the proposal is now a "challenging investment proposition".
But Fletcher is determined not to let the consultation process drag on any longer and is not budging on a a May deadline for it to respond. The government wants to send a message to Sydney Airport that the clock is ticking.
Mather correctly argues that the company has a duty to shareholders to rigorously assess the proposal but at the end of the day both the government and Sydney Airport are playing games which threaten to the delay the project further.
Mather is quite rightly seeking to extract maximum value for her shareholders while the government has a duty to taxpayers to minimise the financial burden of the project. This is a delicate balancing act, though, and many fear it will only lead to more delays.
michael.smith@fairfaxmedia.com.au
