China's aviation industry has been growing at an annual average rate of 15-20 per cent since around 1980, both in terms of the number of passengers and amount of cargo carried. But growth has been patchy ?higher for airline fleets, for example, than for airport terminals and runways.
A shortage of adequate runways and modern passenger facilities is very apparent to travellers in China. Recognising that good air connections boost tour-ism income and facilitate inward investment, the government has decided to act. It also makes sense from the perspective of regional development ?bigger and better airports will go some way towards making the interior more attractive to investors.
In terms of investment growth, China's recent record of airport development has been impressive. Airport infrastructure is an important part of the current five-year plan. In 1997, US$2.2bn will go to-wards aviation infrastructure and technological renovation, comprising US$1.4bn from the central government and the remainder from local authorities and businesses. This total was nearly double the amount invested in 1996, which was in turn 57 per cent more than in the previous year.
However, investment in airports and air traffic control has failed to keep pace with investment and liberalisation in air-lines and aircraft fleet. The Civil Aviation Administration of China (CAAC) acknowledges this and is committed to devote more resources to improving ground and air traffic control facilities.
The scale of investment required is unlikely to be repaid on the basis of aeronautical and landing charges alone ?particularly given the strength of regional competition that exists between airports. Alternative revenue sources include selling assets to the private sec-tor, expanding airport retailing, and developing hotels, convention centres and airport free-trade zones. All provideopportunities in China ?the authorities must now decide how wide to open the door to private companies.
There have already been landmark events which have altered the traditional method of funding. Since 1994, the CAAC has permitted foreign funding of airports of up to 49 per cent. A spate of contracts have been awarded to foreign companies, but some problems have persisted in attracting international finance.
Domestic aviation companies were able to set up joint ventures with foreign enterprises to engage in the building of aviation facilities. Earlier this year the 32 aviation companies under the direct jurisdiction of the Civil Aviation General Administration also opened to foreign capital for the first time. Foreign enter-prises wishing to take part in these ventures must not exceed a maximum permitted stake of 35 per cent. In addition, the number of foreign senior staff members must not exceed 25 per cent of the total personnel of the same grade.
The management of an airport's main terminal may also take the form of a joint venture. Stock issuance and direct foreign investment are increasingly being used to fund airport projects. Many of China's state-run aviation companies are gradually being turned around into private enterprises.
Intensive building plans
The Ninth Five-year Plan covering the 1996-2000 period will be the most intense in China's aviation history. Work on eight airports will be completed during this time and the work on another six will start ?including Shanghai's Pudong International Airport, expansion of Shuangliu Airport in Chengdu, Zhongchuan Airport in Lanzhou, Wujiabei Airport in Kunming and the Beijing air control centre. Projects still under construction include the five air-ports in Nanchang, Haikou, Urumqi, Xiamen and Harbin.
By the turn of the century, China plans to have built or renovated 70 airports. Much of the focus will be on the big threeairports in Beijing, Guangzhou and Shanghai which handle up to 40 per cent of national traffic.
Construction work on the main projects covered in the five-year plan is already under way and major structures for the Beijing Capital airport's new terminal have been built. This is the second largest airport project in the plan after Pudong and will cost a total of US$1.1bn. Guiyang's Longdongbao air-port, Fuzhou's Changle, and Nanjing's Lukou have already started operation. The major parts of Xinzheng airport in Zhengzhou, Hedong airport in Yinchuan, Luogang airport in Hefei, and Wuyu airport in Nanning have been built, while the enlargement of Baita air-port in Hohhot has passed initial appraisal. Preparatory work on new air-port projects in Guangzhou and Hangzhou and the expansion of Huanghua Airport in Changsha will also begin this year.
Growing regional power
While the role of local authorities in financing airports has increased, change has been slow. Most of China's airports still depend on central government subsidies for tF it survival, including large airports such as the one in Shenyang, Liaoning province.
However some airports are reported to make big profits such as Beijing Capital airport, Gaoqi airport in Xiamen and Hongqiao airport in Shanghai. Beijing is China's most commercial airport and for 1995 declared after-tax income of US$60m, mostly from landing charges and passenger taxes. It has undergone four major expansions in its 40-year history.
The Capital Construction & Airport Regulation Department of CAAC, the agency in charge of airport construction and supervision, has become more pragmatic when it comes to diversifying in building and management. Until the end of 1992, almost all China's airports were constructed by the same process ?CAAC determined the master plan, including when and where to build the facility and how large it should be. The central government sourced the entire financing, while local governments were responsi-. ble for providing land and occasionally helping to organise construction projects. When the facilities were finished, they were CAAC's property ?the local government usually had no control or management authority. Overall, the CAAC and State Planning Commission decided which airports received funding, to be ad-ministered by the State Development Bank, a policy bank created in 1994.
The current, more open-minded policy adopted by CAAC allows some local governments to raise funds to build new airports or expand existing ones in their region. In return, the local authority is allowed greater flexibility to choose the location and size of the airport, and to share the management responsibility and profits. Realising the importance of airports to their economies, local governments are increasingly interested in putting up the capital. Examples include the Sanzao Airport in Zhuhai special economic zone, the Fenghuang Airport in Sanya, Hainan Island, and the second Guangzhou airport.
Lack of strategic planning
The nature of funding has affected the recent development of China's existing airports, many of which were built to meet current local needs, rather than the result of strategic planning for a region or entire country. The plethora of air-ports in the Pearl River delta reflects the dominance of city ambitions over regional co-operation. Hong Kong, Guangzhou and Macau will each have opened new airports in the space of a few years. Another airport within the same 150 sq km radius ?Zhuhai ?has ambitions to be upgraded to serve international routes, although neighbouring Macau is lobbying hard to prevent this from happening.
CAAC Planning Department now identifies five sources of airport financing in China:
the Civil Aviation InfrastructureConstruction Fund managed by CAAC
domestic bank loans from the State Development Bank and other state banks
foreign funds ?from firms, governments and export credits ?up to a maxi-mum of 49 per cent.
Airport decentralisation is an established policy, but the methods of decentralisation have been the subject of much debate in China. Local governments are divided over whether and how to assume the responsibility of managing the air-ports, which can be subject to extremely different physical and economic conditions. As a result, virtually all airports are still under the control and supervision of CAAC but this situation is changing. Another reason for the slow pace of air-port system reform is the fact that CAAC does not have a commercial policy for regulation of airport management.
Then there is the frustration of long planning horizons required in China, which can build overcapacity into air-ports and creates financing difficulties. Western airport consultants are more accustomed to building modularity and future expandability into new airports.
Leading foreign operators
For these reasons, foreign companies are realising that China represents a group of local aviation markets, all of which must be assessed individually. They are therefore more attuned to evaluating lo-cal rather than national transportation needs when considering investing in China.
Foreign consultants and airport operators can bring a great deal of expertise, in addition to finance in the form of soft loans. The main opportunities them in China include:
development ?financial feasibility studies, facility design and master planning management ?administration, con-cession and property management, systems and engineering services and training?airline services ?re-fuelling, ground handling and maintenance other consultancy ?marketing, finance and risk/return analysis.
Some of the larger airport operators ?such as Airport Consulting Vienna, Schiphol Management Services and Singapore Airlines' subsidiary Singapore Airport Terminal Services ?al-ready offer consultancy on everything from architecture to retail and aviation management. Aeroports de Paris is a leading provider of third-party services in engineering and construction. BAA of the UK has gone more down the route of exporting its retail expertise in the form of management contracts and recently Frankfurt's Airconsult has broadened into management and operations from its many construction consulting projects. Many of these companies are already active in China.
The commercialisation of airports is a world-wide phenomenon, but there has so far been limited progress in China. The early private contracts, such as Air-port Group International's joint buildand-manage venture with Haikou municipality and Aer Rianta International's retail consultancy contract in Beijing, will set the template. The Irish airport.