Democratic Socialist Republic of Sri Lanka Statement of Corporate Intent for Airport and Aviation Services (Sri Lanka) Ltd. Agreement between Ministry of Transport and Civil Aviation, Ministry of Finance and Airport and Aviation Services (Sri Lanka) Ltd. 15" March 2017 Ministry of Finance Colombo 01.Statement of Corporate Intent (Performance Agreement) Between Government of Sri Lanka And Airport and Aviation Services (Sri Lanka) Limited 2017-2019 The Statement of Corporate Intent is agreed between the Government of Sri Lanka (hereinafter referred to as ‘GOSL’) through its Ministry of Transport and Civil Aviation, and the Ministry of Finance of the one part, and the Board of Directors of the Airport and Aviation Services (Sri Lanka) Limited (hereinafter referred to as the ‘the Board’), a Commercial Public Enterprise established under the Air Navigations Special Provisions Act of 1982. WHERE AS ‘The GOSL is committed to clearly defining the working relationship between itself and the State Owned Business Enterprise; ‘The parties recognize the need for adequate and reasonable managerial and operational autonomy to facilitate achievement by the Board and Management of the Commercial Public Enterprise of the agreed and freely negotiated performance targets set out in this contract; The parties are desirous of enhancing transparency in the management of public resources and accountability for results; ‘The Board has indicated its capacity and competence to perform duties and undertake functions specified under this Statement. This agreement is subjected to review after 6 months from the implementation date, if necessary. Aor Loitoein 03) 22 127- Chairman, Airport and Aviation (Sri Lanka) Ltd Date’ wage v 15 ]03 | 201% Senet {oat Ministry of Transport and Civil Aviation Date wenrs 50 }o0 1 Secretary to the Ministry of Finance Date DR. R.H. S. SAMARATUNGA 3 Secretary Mast of Finance lombo 01 Lanka10. " Table of Contents Page Number Executive Summary Introduction ‘Scope and Nature of Activities Corporate Objectives. Factors Affecting 2017-2019 SCI... Assumptions Underlying the 2017 SCI... Major Risks to delivering 2017 SCI Outcomes. Non-Commercial Obligations imposed by GOSL. Identified Ancillary Support provided by GOS! Key Performance Indicators (KPIs). Appendix ~ A. Financial projections and Statements... Appendix -B ...... Capital Investment Plan Appendix — C.. 410 10 " 10 12 10 13Executive Summary The Airport and Aviation Services (Sri Lanka) limited, the statutory service provider of the GOSL shoulders the challenge of developing and managing all civil aerodromes in Sri Lanka. Therefore, the three airports namely Bandaranaike International Airport (BIA), Mattala Rajapakse International Airport (MRIA) and Rathmalana Airport (RMA) fall within the purview of AASL in executing the statutory responsibilities stipulated in the Civil Aviation Act of 2010 which repealed the Air Navigations Special Provisions Act of 1982. While BIA and MRIA operate as international airports, RMA is strategically focused to operate international charter flights and private jet operations. BIA as the main international Gateway in Sti Lanka possessing a network of 28 scheduled airlines and connects with 47 cities around the globe facilitating cargo and passenger movements. The present annual passenger handling capacity of BIA is 6.0 million passengers and ASL expects to increase its passenger capacity to 15 million by 2020 with its mega project to construct the second terminal (T2) with associated infrastructure and facility enhancements. In 2017, a major rehabilitation project in the BIA’s runway will take place and traffic movements are expected to restrict during the construction period MRIA - the second international airport which commenced its commercial operations in March, 2013; is undergoing an under capacity situation at present, as its original plans were not materialized due to absence and failure of many operational and strategic moves which are vital for running the airport successfully. Therefore, the GOSL has decided to minimize its payback period while attempting to maximize its return by going for the next best alternative investment plans. Hence, the proposals were called for Expression of Interest (EOI) for investments and commercial operations at MRIA in June 2016 and the proposals are currently being evaluated by a TEC. AASL will continue to engage in carrying out its core business activities in the areas of Air Navigational Services, Fire and Rescue operations, terminal Management in required standards to be met as an international airport4. Introduction Airport & Aviation Services (Sri Lanka) Ltd (hereinafter referred to as ‘AASL’) was incorporated in 1983 and was appointed as the Agent of the Government in the discharge of duties as a member of International Civil Aviation Organization (ICAO). The Civil Aviation Act which was passed in Parliament in October 2010, has empowered AASL to act as the statutory service provider of all the above mentioned functions in all civil airports in Sri Lanka, AASL’s main activity is to manage the country's 2 international airports; Bandaranalke International Airport (BIA) and Mattala Rajapakse International Airport (MRIA). In addition, ASL administers local operations at the Ratmalana Airport while also providing services such as air navigation, fire and rescue services, aviation security and civil aviation training, 2. Scope and Nature of Activities The main activities of AASL could be specified as provision of Air Navigational services, including Fire services and Security which ensure safety of aircraft and passengers in the air within the Sri Lankan FIR as well as on ground and the provision and maintenance of terminal and associated passenger facilities. This statement sets out - The extemal factors that will impact on Performance - The assumptions used in preparing the financial projections and the sensitivity of financial performance to these external factors ~The key risks faces by the Organization and the strategies being used to mitigate risks - The Key Performance Indicators; and - Financial projections over the SCI period. 3. Corporate Objectives of AASL for the period of 2017-2019 1. Make BIA a passenger transit hub of Asia Region by increasing the transit passengers to total passengers ratio to 1: 6 by 2019 from existing ratio of 1:8 2. Toestablish infrastructure capacity to cater for 15 million passenger handling by 2020. 3. To reduce the cost of service provision to landing aircraft of BIA by 10% by 2019 from the same of 2015. 4, Improve facilities and introducing new procedures to accommodate 12 million by 2019 5, To achieve a 20% of Transshipment cargo out of total Aviation cargo by 2019. 6 Civil Aviation Training Centre (CATC) to be reasonably self-sustaining by earning at least USS 0.5 Million by year 2019 end 7. To improve the airport performance in the regional rankings in terms of air traffic statistics. 8. To maintain within the tolerance levels for aircraft incidents as mentioned in the Organizational Results Framework shown in ‘Appendix ~A’ of this report 9. To ensure the Security of Intemational Civil Aviation as specified in ICAO document 8973. 10. Pursue Service, Value and Operational Excellence in corporation with all airport partners by maintaining a minimum score of 20% for the Customer Perspective as well as for Financial Perspective measures in the Corporate Dashboard4. Factors Affecting the 2017-2019 SCI The key factors that will impact on performance are as follows. 4.1 Revenues 4.4.1 Parity Fluctuations 30% of our total operational revenue is generated out of foreign currencies which is vulnerable to parity fluctuations. 4.1.2 Determination of Embarkation Levy The changes as well as distribution of embarkation levy is gazette by the Government and out of $50 per embarkation levy per air ticket collected by the airlines, $35 is remitted to the Treasury while $5 is remitted to the Tourism Fund After further remitting of a service charge of $0.25 to the Civil Aviation Authority, remainder of $9.75 is accounted as AASL’s revenue. 4.4.3. Closure of Runway for Overlay The long over-due major rehabilitation works of BIA’s runway is scheduled to take place in the first quarter of 2017. As the runway will be closed for operations for 8 hours a day, itis expected that, a drop of 8% in actual fight movements resulting revenue drop. 4.1.4 Imposition of taxes by the Government Impose on tax on airline tickets would affect passenger numbers. Over 25% of total revenue of ASL is earned from airline tickets by way of Embarkation levy and the increase of embarkation levy from $30 to $50 will impact adversely on the demand for air travel to the country, as this levy has made Sri Lanka the highest in the region in terms of embarkation tax. 4.2 Expenditure 4.2.1 Personnel Costs Personnel cost is the largest component of our expenditure structure with a 47% contribution to the total expenditure. However, in order to ensure that the remuneration received by employees are commensurate to the responsibilities they undertake, a salary revision was done in 2015. This has impacted to our bottom line along with other factors like increase in the cadre and Cost of Living allowance as there was a 21% and 7% year on year increase in Personnel costs in 2015 and 2016 respectively. Further, Personnel costs get increased due to inflation, as the Cost of Living (COL) allowance is paid to employees, as per the COL index. 422 Electricity Cost This is the second largest component of our expenditure structure which accountable for 7% of the total expenditure. There is a direct relationship between passenger throughput and the electricity costs, and there was a 10% sorta423 424 425 annual increase in electricity over the last 3 years period. When there are tariff increases imposed by Government, it will result in further increase of the electricity costs. Under capacity operations of MRIA Presently the second international airport - MRIA runs with a significantly low passenger and aircraft throughput. The operations of MRIA were impacted with GOSL's decision of curtailment of operations of the national carrier to/from MRIA in the first quarter of 2015. Therefore, the expected turnover for the SCI period is highly unlikely to achieve. Further, the depreciation of MRIA has become a profit eroding factor at present and in 2016 draft financial statements, itwas stood at Rs 1.5Bn. Parity Fluctuations The high volatility of SLR against foreign currencies has brought pressure on our profits while increasing uncertainty. The SLR depreciation against US$ and other main currencies resulted in a huge hit on our profits in 2015 and 2016, as the ‘exchange loss on loan conversion was reported as Rs 3.56n and Rs 1.88n in 2015 and 2016 respectively. Removal of exemptions on taxes and duties on mega airport infrastructure development projects funded by foreign aids This removal of exemption on taxes and duties by the Government in 2016 will result in a reduction of profits of AASL. 43 Service Standards 434 ide range of facility providers ‘When we provide services in the terminal and associated facilities, we have to cater to a wide range of Customers including passengers, airlines, concessionaires and other service providers of the terminal. At the same time, above mentioned certain Customer groups of AASL become the service providers to other certain categories of Customers. For an example; Immigration, Customs, Animal and Plant Quarantine Departments as well as Ground Handler located at the BIA premises provide key functions to passengers and airlines in their clearances. Orchestration of Goals of these different agencies have become a huge challenge to be reckoned, when providing a seamless and enjoyable travel experience to the passengers who use the airport43.2 The Handling capacity constraints BIA is still carrying out its operations with its one and only passenger terminal which has a handling capacity of 6Mn passengers per annum, although the actual passenger throughput has surpassed this handling capacity from 2011. In 2016, it was stood at 9.4 Mn and it was an over saturation by 56%. Since the project of construction of the second terminal (T2) is scheduled to be complete by 2020, it won't be possible to increase the handling capacity of BIA dramatically, except certain restructuring and remodeling which are being carried out to increase passenger circulation space in the current terminal. This situation obviously creates congestion in the terminal area and consequent bottlenecks in crucial passenger clearance points as well as other facilites like wash rooms. 5 Assumptions Underlying the 2017 SCI The key assumptions used to prepare the financial projections included in the Corporate Plan financials are shown below as a sensitivity analysis. The change on the profitfurnover as a result of change in the variable is tabulated below Underlying Performance Factor ‘Assumed value ity(provide an impact on 2017 results of change in the underlying assumption) Exchange rate 154Rs JUSS 5% depreciation of SLR against US$ (Bank's selling Rate) will impact adversely on PAT with a Rs.2,460 Mn decrease in PAT (61% decrease) when the exchange gain/loss on debtor conversion is disregarded. Total number of Passengers (Pax) 70.5Mn 5% decrease of total number of Passenger will result in a decrease of PAT by Rs.503Mn ( ie. impact of 12% on PAT) and vice versa No. of Overfiying movements 36,763 5% increase of total no. of overflying movements will result in 1.3% increase of PAT (ie. Favorable impact of Rs. 54Min) and vice versa. ‘Aerobridge movements 64% of total movements of BIA 14% increase of usage rate of Aerobridge of BIA will result in 2% increase of PAT (ie. positive impact of Rs.79 Mn) and vice versa Rate of Inflation 39% 2% decline of infiation rate from the applied inflation rate of 3.9% which | applied in inflating certain expenditure components (as extracted from ‘EU’ forecast for 2017), will result in an incline of profit by Rs.45Mn which is 1.09% impact to the PAT.Major Risks to delivering SCI Outcomes Risk 1 Risk Explanation Panty Fluctuations Exposure or uncertainty inherent in dealing with more than one currency that does not have fixed parity, values which are uncontrollable in the present context will result in exchange losses/gains. In 2015 and 2016 the Rupee depreciation against US$ resulted in over Rs 3Bn and Rs 1.88n Exchange loss on loan conversion respectively and eroded the profit by the same value. Therefore, Adverse impact on profitability and liquidity on translation of foreign currency transactions to base reporting currency is a huge possibility and a major risk in achieving 2016 SCI Outcome. Risk 2 Risk Explanation ] (Market development Risks for MRIA A key challenge is to develop a client base for MRIA, to minimize the losses of MRIA, until the best investment pian is finalized and sign of agreement to go ahead with their proposed plan as submitted for Expression of Interest (Eo!) Risk 3 [Risk Explanation (Project implementation Risks ‘A major obstacle/risk in achieving AASL's SCI’ outcome is the delays take place in procurement | formalities in respect of implementation of Capital Projects. This may create cost increases, while the | expected operational efficiencies are also pulled back. | Further, loss of revenue during implementation of airport development project, land acquisition and funding restrictions are the other major bottlenecks.Risk 4 Risk Explanation Risk of Default by the Debtors Loss of profit & higher working capital requirement will arise with the debtor default. When major portion of our operating income is earned from National Carriers, the payment default risk is at a high level Risk 5 Risk Explanation Increase of Personnel cost ‘An annual increase of 4% is expected in personnel cost and it's the highest cost component of our cost structure with a 47% share. Personnel costs get increased due to inflation, as the Cost of Living (COL) allowance is paid to employees, as per the COL index Risk 6 Risk Explanation increase in energy cost ‘An annual increase of 4% is expected in electricity cost and its the second highest cost component of our, cost structure with a 7% share. Unanticipated changes in the cost of electricity will have a substantial impact on the financial performance of AASL. Risk 7 Risk Explanation (Cash Flow Management With the current debt servicing, dividend policy as well as the mega projects and replacement of major equipment (Eg: Air Navigational), maintenance of a stable or improving cash position becomes a huge challenge ions imposed on AASL by GOSL i) Provision of services in the VVIP & VIP Lounges to the VVIPs and VIPs of the Government li) Provision of free parking facilities at Ratmalana airport (RMA) for Air Force aircraft, GE9 OFS8 Identified Ancillary support provided by the GOSL 1). The following loans were obtained through General Treasury at the market rate for the development of BIA and MRIA under Sovereign Guarantees, BIA Phase ii Stage ii Major Development Project - US$ 700 Mn BIA Phase ii Stage | Major Development Project - USS 75Mn Runway Overlay Project of BIA - US$ 46Mn MRIA Major Development Project Loan - US$ 190 Mn. 2) A Tax exemption of approximately US$ 40Mn was granted for the MRIA Development Project 3) Taxes and Duties reimbursement of approximately US$ 11Mn was granted for the BIA Phase ii Stage | Major Development Project, 9 Key Performance Indicators (KPIs) KPls and targets are set out in the ‘Appendix — A’ which will be attained cohesively by ASL and external stakeholders. The performance targets are shown as annual projections over the SCI period, and have projected using the baseline measurement for 2016. The targets will be revised annually, when the strategic plans are revised on roll-over basis. 10 Financial Projections and Statements The financial projections for 2017-2019 with comparative figures for 2016 with audited financial statements are shown in ‘Appendix - B 10 Capital Investment Plan The Capital Investment Plan of AASL for 2016 and the projection for 2017-2019 is shown in “Appendix -C’Appendix - A Priority Thrust area Key Performance Baseline for 2016 Target Level 2017 T 2018 2019 Passenger satisfaction Passenger Processing time (in mins.)- Arrival Passenger Processing time (in mins.)- Departure 24 24 30 30 30 30 30 30 Safety Air Traffic volumes! Statistics No of ATM related aircraft incidents in the Colombo FIR per 100,000 movements No of passengers (in millions) - BIA No of passengers (in 000) - MRIA No of aircraft Movements - BIA No of aircraft movements - MRIA " 10 94 10.5 116 | 127 60,700 900 10 67,354 2,000 15 74,859 2,800 | 20 81,413 3,400Appendix B INCOME STATEMENT OF ASL FOR THE PERIOD OF 2017 TO 2019 Rs Draft 2016 Forecasted 2017 Forecasted 2018 Forecasted 2019 ace SASHOBIONGL 5.147.252.3458 _5,660,541,336 __6,152,683,070, Nencesroumticel Reva ISCO} IN9SES 17,286,673,320__18,792,293,083__20,063,442,070, Shs nom aaa 69,228,324 15,259,626 80,351,625 Non Operating Income 2,081, 706,852 pane . a ‘Total Airport Revenue 20,211,392,828 22,903,559,117 _24,528,094,015 _26,296,476,766 Operational Expen pores SOR23HOTIS 6.258.983,082 __6.475,464354 __ 6,731,388,363 eoetomien BEES eee 651,086,500 678,390.453 704,169,290 ee ore 1134775705 1,179,031,958 __1,228,551,300__1,275,236,250 ae 2,681,768875 _.252.068,587__2,203,.254.489 2,683,296 509 La) eel 306,301,399) 319,166,057 331,204,367 Exchange Loss on Creditor Conversion pase 190,254,485 190,254,485 190,254,485 Exchange Loss on Loan Conversion 1.777.079830___ 2,020,079.948 358,203,215 693,162,128, keeles poesia 732,880,472 695,567.56 659,034,362 Total Expenditure [839350679 13,590,606,301 __12,148,851,919 __13,227,835,754 [Net Profit Before Tax 6,819,041,849 Se teri eee Provision for Taxation (584119) (2,605,106,763) _(3,466,187,787) __(3,659.219.484) [Net Profit After Tax 6,809,457,735 6,098.845963__8,913,054.309_9.409.421,529 AGE 12 OF 13AASL Capital Investment Plan Appendix —C Rs -Mn Projection Poa 2016 2017 2018 2019 Uses of Capital Runway Overiay & Associated Works: 4200 6,500 850 8.550 MRIA Construction - Price | Variation & aditional works 5.935 z 5,935 Refurbishment & Modification to Terminal Building 500 300 300 1.100 Upgrading & Replacement of ANS equipment 00 400 1200| 00 3,300 MRIA Capital Projects 200 700 950| 1,200 3,050 Taxes and Duties of Runway Overiay & BIA Phase 2 300 2,200 5,300 8,500 16,300 | BIA Capital Projects 2,300 3.200 3,700 4500 13,700 BIA Phase Il Stage 2 525 5,000 35,000 50.000| 90,525 Total commitments 114,760 18,300 47,300 65,100 142,460 Sources of Capital Borrowings (Foreign) 525 11,500 35,000 50,000 97,025 Equity / Domestic Borrowings 11,235 6,800 42,300 45.100 45,435 14,760 18,300 65,100 | 142,460