SYDNEY -- The clock is ticking on Australia's next big infrastructure project, a multi-billion dollar international and domestic airport about 50 km west of Sydney that the federal government wants to launch by 2026.
The Liberal-National coalition government has given Sydney Airport Group, owner-operator of Sydney's Kingsford Smith Airport -- the nation's main international gateway -- just four months to decide if it wants to build, own and operate the Western Sydney Airport on a greenfield site known as Badgerys Creek.
Under the terms of a 2002 privatization deal, Sydney Airport Group has first right of refusal to build any new airport within 100 km of the Sydney central business district. If it chooses to walk away from that option, the federal government can develop the project itself or invite other private sector groups to be involved. In the 2002 deal, a consortium led by Australia's Macquarie Bank paid 5.6 billion Australian dollars ($4.09 billion) to the government for a 99-year lease of Kingsford Smith Airport.
The project is shaping up as a test of financial willpower between the government and Sydney Airport Group, which has made many millions of dollars for its investors since the privatization of Kingsford Smith Airport. The group, which has spent about A$3 billion on subsequent upgrades to Kingsford Smith, says that while the Western Sydney project is an "exciting opportunity for the region," it needs more time to evaluate the risks involved. It also wants concessional funding, but so far the government is playing hardball on any subsidies.
The estimated cost of the new airport's first stage, covering earthworks, a terminal and the first of two planned runways, is A$5 billion to A$6 billion, excluding the cost of proposed rail links.
The existing Kingsford Smith Airport at Mascot, just 8 km from Sydney's central business district, handled more than 40 million passengers in 2016, but is expected to reach maximum capacity of about 75 million passengers by 2035 as more airlines from China and the Middle East expand their Australian services and domestic tourism demand grows. A flight curfew between 11 p.m. and 6 a.m. limits Sydney Airport's ability to provide more arrival and departure slots.
According to the federal government, demand for aviation services in the Sydney region will double over the next 20 years. Greater Sydney is home to 7.5 million people (32% of Australia's total population of 23.5 million), and with much of the population growth taking place in the Western Sydney area, the airport is viewed as a once-in-a-lifetime opportunity to create high-tech industries and jobs.
An analysis by Deloitte for the New South Wales state business chamber in 2014 found the Western Sydney Airport project would add at least A$16 billion to economic output between 2020 and 2050, and would add at least 20,000 jobs to the greater Sydney region.
Even so, the project has already drawn criticism, with conservation groups arguing that its environmental impact is not clear and that a no-curfew operation will generate too much noise over the World Heritage-listed Blue Mountains. Blacktown City Council, the local government area among those most affected by potential flight paths, has slammed the project, with council mayor Stephen Bali likening the federal government to a "shonky developer."
"How can the federal government approve an environmental impact statement that does not even include where and how the planes will fly?," Bali said after the EIS was released in November. In contrast, Liverpool City Council, which takes in the Badgerys Creek area, generally supports the airport and sees it as a potential catalyst for employment growth, while noting the possibility of negative noise and air quality impacts.
The council is pressing for a functioning rail link to the airport from the day it opens. However, there has been no decision on a direct rail link to serve the new airport, although its design incorporates a station within the terminal. A number of other rail options are on the table, including linking the airport to the existing Sydney rail network at various points to the north, east and south of the Badgerys Creek site.
At the national level, the two main political parties, Liberal and Labor, support the Badgerys Creek project, but the Australian Greens party is opposed. It argues that a new airport should be built entirely outside the Sydney basin, linked by high-speed rail to the city center and other urban centers, allowing for the complete closure of the existing Kingsford Smith airport.
On Dec. 12, Liberal Prime Minister Malcolm Turnbull and Urban Infrastructure Minister Paul Fletcher jointly announced the blueprint for the project. The first runway is due to open in 2026, with a second, parallel runway by 2050. Initial capacity will be 5 to 10 million passengers a year, rising to 37 million by 2050 and ultimately to 82 million passengers a year by around 2063.
On Dec. 20, the federal government issued Sydney Airport Group with a notice of intention, which sets out the formal contractual terms for it to develop and operate the proposed facility. The government has given the group four months to decide, on the basis that an extensive consultation period over the last two years meant it was familiar with the terms of the notice.
"All the costs of building and operating the airport would be met by Sydney Airport Group in return for all the economic benefits of ownership of the airport over 99 years," Fletcher said.
But while Sydney Airport welcomed the announcement, chief executive officer Kerrie Mather said the challenges involved in developing a greenfield airport "cannot be underestimated."
These included procurement and construction risks over the 10-year period before the airport opened, and operational, traffic, financing and political risks, "which are at their peak in the initial years of the airport lease." Mather said the group would rigorously evaluate the investment prospects before deciding whether or not to exercise the option. The group believed it was entitled to a nine-month consideration period, and was "continuing to discuss this" with the government, she said. The length of the consideration period would have no impact on the opening date, she added.
The biggest shareholder in the Australian Stock Exchange-listed Sydney Airport Group is the Australian superannuation (or pension) fund UniSuper, with 16.36%. Its Chief Investment Officer John Pearce said on Dec. 22 there was no way Sydney Airport should get involved in building Badgerys Creek, as the terms offered by the federal government did not stack up.
Rod Sims, chairman of the Australian Competition and Consumer Commission, wrote recently that "it would be terrific for air travellers and the economy if Badgerys Creek were owned by an independent party." He said Sydney Airport was a monopoly, and "monopolies do not perform as well as firms facing competition." The government's "no subsidy" approach, backed by a willingness to build the airport itself, at least allowed the opportunity for competition, "so we can undo the poor public policy of 2002," he added.
While Australia's main aviation group Qantas supports the project, Qantas CEO Alan Joyce has warned in the past against "gold-plating" the new airport, saying too much investment early on would hinder an operator's ability to turn a profit. He said Qantas usage of the new facility would probably begin with its low-cost carrier, Jetstar Airways.
If Sydney Airport walks away from the deal, the government can opt to develop the project itself or open it up to fresh private sector companies that are likely to include investment banks, pension funds, construction and transport companies and private equity groups.
The government's priorities over the next two years included burying the high-voltage power line that runs through the Badgerys Creek site, and relocating part of the Northern Road away from the site, Fletcher said. The road relocation, to begin in 2017, would be part of the A$3.6 billion Western Sydney infrastructure road plan. This plan is jointly funded by the federal and New South Wales state governments.
Assuming no time extension is forthcoming, Sydney Airport Group has until this April 20 to decide if it will take up its option to build and operate the facility.
Sydney Airport is owned by more than 90,000 investors. Many of them are Macquarie Bank shareholders, beneficiaries of the bank's decision in November 2013 to distribute its 18.6% stake to its shareholders. At the end of September 2016, foreign ownership was 30.4%.