Skanska is one of Sweden’s biggest construction and project development companies, a participant in both national and international infrastructure projects. By far one of its biggest projects so far is the modernisation of LaGuardia Airport in New York. CEO Johan Karlström sees public-private partnerships – PPPs – as a key to innovation and profitability for LaGuardia and a model well worth considering when Arlanda is expanded.
Skanska has operations in the US and in large parts of Europe. It’s extremely important for us to be able to get away and work. We have 38 offices in the US, which makes it impractical to fly only to New York from Sweden. US preclearance will make things easier when that’s in place. We don’t know which cities will get direct routes, but it could be cities that don’t have passport control and customs functions today since they are domestic airports. With preclearance, it will be like domestic air travel, although we’ll fly from Arlanda. It will open things up in an entirely different way and connect Sweden closer to the rest of the world.
“We’re not an export company. What we possibly export is competencies, since we set up shop again in every place we have a project. Our employees need to travel there to work for a few days, weeks or months. A digital meeting could well replace meetings in person if they’re quick, small meetings with people you know, but it doesn’t work to sit in a video conference for a month,” says Johan Karlström.
“The New Karolinska Solna University Hospital is a good example of the importance of air travel for us. We have many employees and between 20 and 30 different nationalities in the project. Some people move here, others commute long-distance or are involved in different phases. That’s what things look like when you work on big, complex projects such as hospitals, airports and industrial projects. We review our competencies when we start a project and, as a rule, they’re not available in the area. If there are poor transport links to the place, then people won’t want to work there. So direct air links are extremely important to our business.”
AIRPORT CITY STOCKHOLM
“A modern airport is not just a matter of flying in and out – it’s a gigantic workplace. And clusters of industries develop around it. Now construction has begun in earnest on Airport City Stockholm, and I think the entire area could be a genuine hub. This project has been on the backburner for an awfully long time, but it has an amazingly good location and is adjacent to the motorway. The Arlanda Line to the airport goes past it, and a new train station can be built. Then of course we have the airport, essentially half way between Uppsala and Stockholm. I think there has to be a certain critical mass, but once that mass is there, things will get moving on their own. Over time, I believe there will be an Airport City as planned.”
PPPs ARE DRIVING INNOVATION
PPPs in infrastructure projects have been discussed for many years in Sweden. They haven’t gained momentum, but Johan Karlström is convinced of the benefits of the model as an innovation driver, also from a Swedish perspective. He provides examples from Skanska’s work with LaGuardia.
“The Port Authority of New York and New Jersey needed a new terminal at LaGuardia Airport and at the same time wanted to increase the number of potential aircraft movements. The agreement was designed as a PPP project and consisted of a funding solution and the design and construction of the terminal. Also included in the project were a new entrance hall and nearby infrastructure as well as operation and maintenance, all in a lease running to 2050. The contractor would be paid via payment streams from the airport charges paid by airlines and to some extent from commercial sales at the airport.
“We saw that the project had to be optimised so that the customer gets what is maximally the best solution and we get good payment streams over time. We could show a more efficient movement pattern on the ground with our model and thus scope for more aircraft movements. This was of interest to airlines and especially to us since we will operate the terminal for many years going forward.”
“If the customer says, ‘This the way it should look,’ then the contractor should just say what it costs. But if the customer says, ‘We have to have this function. You should deliver this and then take responsibility for 30 years,’ then that’s an entirely different matter. We can’t minimise our investment. Instead we have to look at the life cycle cost, investments, maintenance and refurbishments and then connect that to income streams. This drives innovation and it’s incredibly important. Whoever thinks up good solutions based on the customer’s needs and conditions will be a winner.”
In Karlström’s view, it’s important to note that PPPs do not entail private players taking over LaGuardia, Arlanda or any other airport. The government authorities are involved, making decisions, giving approval, and at the same time get new input for a potentially smarter solution. The key to success lies in functional procurement and in the contractor’s incentive to do things as well as possible, since future income depends on this.
“Funding is what’s always difficult. The way it’s done in the US is that the government funds some of the project through a loan, which brings down the cost of capital. Perhaps ten per cent of the project cost consists of equity, with the remaining 90 per cent or part of it funded by government loans. We’re a little disappointed with Swedish discussions. We’ve talked a lot with political leaders who say, ‘The government lends money at a lower cost so we’re not going to use PPPs.’ It’s true that the government lends money more cheaply. But if you work using government funds in PPP solutions, as in most other developed economies, you get the best of both worlds – both innovation and lower funding costs.
“As for Arlanda, I think that people should study PPPs. We see this solution being used more and more at airports. Infrastructure projects are a natural fit here since user or traffic fees can potentially pay for funding. A motorway in northern Sweden wouldn’t work – not enough cars would use it. On the other hand, the planned eastern link of the Stockholm ring road is a good project. If traffic there pays a fee on the same level as the congestion charge, this would fund the entire link, without using a krona of tax money.”
“The city of Stockholm is growing faster than other cities in Europe. We have growing urbanisation, migration and a population that is living increasingly longer. All factors point in the same direction. If everything works, if things are done right, Arlanda will be a really big workplace. But it must be possible to get there and live there. Nowadays people won’t have residential areas near an airport, yet the question is not how far away the airport is but rather how long it takes to get there. Time, not geography, determines whether I want to commute.
“We have an enormous need for new housing, and Stockholm and Uppsala are an engine for all of Sweden. As a result, we can’t focus on Arlanda and expand and talk about capacity only there. These issues are much broader. We have to put investment into a larger perspective and include all social planning. This involves access, workplaces and showcases to the world, but also housing, commuter options, schools, integration, infrastructure, labour market policy and everything needed when you’re building a society. Only then, in a larger context, can Arlanda be a major draw and an engine for the whole country. This is extremely exciting. After all, we and politicians ultimately have the same end customer – society and the general public.
“A four-track rail solution between Stockholm and Uppsala could pave the way for 100,000 new homes. This expansion would not need to be paid for with taxes. The funding here can come from private stakeholders, who can stay on and run operations. Another more controversial source of revenue is to use the increase in land value that results when new stations are built to fund the track. Why should private property owners have the value of their land increase for free at the expense of others, including taxpayers? That’s not fair. Everyone should help pay for it – it’s a question of fairness.”
STABILITY AND COLLABORATION
Johan Karlström believes that politicians have the will but that the approach must be broader and more long-term. If there are agreements across party lines on different projects so that private stakeholders see that the political risk is eliminated and that it doesn’t matter if there is a change in government – and that there’s also a timetable – then it will start to grow. People won’t need to wait until the station is built and the railway is in place.
“I don’t see any wide-ranging collaboration between politics and business. Politicians have a fear of contact with the business community. The business community doesn’t have a fear but they do have a poor basic understanding of political conditions. It would be really healthy to be able to have serious, in-depth discussions between political decision-makers, businesses and academics. Companies like ours work internationally and have a global outlook. We can put forward suggestions. Then political leaders have to assess whether they can possibly be carried out. Today we work far too isolated from one another.
“The business community and companies like Skanska should participate and take responsibility for society, not just build a bridge or a hotel and then disappear. What we deliver is the answer to many political challenges. We can play a part and work on issues concerning how to involve groups that are excluded in society. Our industry is a major employer, and our jobs can’t be moved to China. Manufacturing can be moved, but our jobs will always be there. We can and want to take part and bear our responsibility.”
ARLANDA IN TEN YEARS
“Ten years is a rather short time. It’s a matter of building and investing in Arlanda so that we can get more non-stop flights and at the same time an Arlanda that can handle them. We should drive the matter so that Arlanda becomes a real hub for business. For instance, why is there no congress centre there? That’s something we see in other parts of the world. I really can’t predict what it will look like in a hundred years. Who thought there would be air travel a hundred years ago? But in a time horizon that we can grasp, I’m convinced air travel will be an incredibly important factor, although there could be other technological solutions.”
OCCUPATION: CEO of Skanska
CURRENTLY: Skanska’s modernisation of LaGuardia Airport and an advocate for PPPs
TRAVELS: to Yellowstone National Park
If I travel on my own
“If it’s long distance, then I fly, but that depends on where I’m going. I like all kinds of transport modes, and since I’m a boat person, I like the sea, but that’s more for pleasure. For me, it’s mostly a question of time and comfort.”
“I’ve travelled around the US many, many times but one place I want to return to even though it’s rather difficult or a bother to get to is Yellowstone National Park. I was incredibly captivated by the nature there. With direct flights to the US, it will be easier to get there.”
LaGuardia, NY, USA
LaGuardia Airport is the third largest airport in the New York metropolitan area and the busiest domestic airport in the US. In 2016, traffic increased more than 14 per cent to almost 30 million passengers. Together with JFK and Newark, LaGuardia forms the world’s second largest airport system in terms of passenger volume – 130 million in 2016 – and the largest in term of aircraft movements, with a total of 1,250,000 a year. In 2016, LaGuardia accounted for 370,000 aircraft movements.
Public private partnerships – PPPs
PPPs are a type of public procurement in which a private company or consortium is awarded the task of funding, building and operating a public utility for an extended period, usually a hospital, a motorway or another infrastructure investment. One might say that not just construction is outsourced to a private company but also funding and possibly operation.