Sydney Airport will be hit with the full $5 billion-$6 billion price tag of developing a second airport in western Sydney if it opts to build it after the federal government refused to contribute additional funds arguing the company would reap financial benefits from a 99-year lease.
The Commonwealth has told Sydney Airport it has until mid-May to respond to a 1000-page "notice of intention" outlining the exact terms for developing the new airport at Badgerys Creek in return for a long-term lease to operate it following two years of consultation. It also sets out firm deadlines, with construction scheduled to start in late 2018 and the airport to be operational by 2026.
"Now the clock starts ticking," Urban Infrastructure Minister Paul Fletcher said.
Sydney Airport chief executive Kerrie Mather said that while the company – which has reaped healthy profits from the privatisation of Kingsford Smith Airport in 2002 and benefited from rising numbers of domestic and international travellers – was "best placed" to develop the new airport, the government's decision not to provide any funding would make it a "challenging investment".
The government had previously indicated that it would pay for some development works and give Sydney Airport a long-term loan to cover some development costs, the airport said.
Minister Fletcher acknowledged that "a range of different models" were considered during the consultation process but said the Commonwealth did not believe there was a case for additional financial support.
Project risks
Ms Mather said the challenges of developing a new airport could not be underestimated.
"Project risks include procurement and construction risks over the approximately 10-year period before the airport opens, and operational, traffic, financing and political risks, which are at their peak in the initial years of the airport lease," she said.
Sydney Airport has also disputed the four-month period it has been given to assess the notice of intention (NOI), arguing it is actually entitled to nine months under the terms of its 2002 privatisation agreement, which gives it right of first refusal to develop and operate any airport within 100 kilometres of Sydney's CBD.
Sydney Airport said it was in discussions with the government over extending the assessment period.
But the government believes it is entitled to a shorter time frame because the privatisation agreement says only four months' assessment is necessary if Sydney Airport is already "substantially familiar" with the NOI.
The government claims it has engaged Sydney Airport in an "extensive consultation process" since September 2014 with several drafts of the NOI already provided to the company
Sydney Airport said the privatisation agreement outlined a process for "resolving any issue associated with the consideration period".
If Sydney Airport does not respond to the NOI within the required time frame, the government will call for expressions of interest from other companies to build the second airport on similar terms or build the airport itself.
The government has already had informal discussions with other private-sector companies potentially interested in building the second airport if Sydney Airport rejects the option.
Analysts said the government's decision not to provide any funding was a surprise, given how long it would take to develop the airport and the fact that initial airline traffic was likely to consist only of domestic flights, which are less profitable than international flights.
Nathan Lead, analyst at Morgans CIMB, said that Sydney Airport would have to weigh up the risk of losing its current monopoly in Sydney against the costs of developing a second airport.
"It depends on whether it's a necessary defensive play," Mr Lead said.
Analysts believe Sydney Airport, which had $7.6 billion in net debt at the end of June, will be able to raise debt against Kingsford Smith airport to pay for the development of the second airport if it accepts the NOI. Sydney Airport carries BBB/Baa2 credit ratings from Standard & Poor's and Moody's Investors Service.
Competition increasing
But RBC Capital Markets analyst Paul Johnston cautioned that recent tenders for new infrastructure developments showed competition for new investments was increasing.
"While Sydney Airport is in the best position to assess the merits of the Western Sydney Airport investment opportunity, it may be that the government or an alternative developer is prepared to take on significantly more risk," Mr Johnston said.
Sydney Airport said it would start meeting with contractors to assess how much it would cost to build the new airport and evaluate whether it was in the "best interests" of its investors to accept the NOI.
It has already given the government suggestions for the new airport's design as well as long-term forecasts of how many travellers are likely to use it.
The first stage of the airport will include a single 3700-metre runway and facilities for 10 million passengers annually. A second runway is expected to be required by around 2050.
The government will require the new airport to leave space for a rail link and a railway station and is undertaking a scoping study to assess how much a rail link would cost, where it should be located and how it should be funded.
The government said the disagreement over Sydney's Airport's assessment period would not lead to any delays in construction.
Sydney Airport's international traffic rose 9.1 per cent in the year to November to 13.5 million passengers, while domestic traffic rose 4.1 per cent over the same period to 24.6 million passengers.
