A string of European airports have been privatised in recent year, most recently Aeroports de Paris. The debate over who should build Dublin's second terminal is over but the debate over how it should be funded certainly is not. In fact, it is only getting started. Is privatisation the answer to the problems at Dublin airport?

Back in 1999, the Aer Rianta board voted to go down the route of privatisation. Ultimately, after endless prevarication that was not to the Government's liking, a painful, and perhaps questionable, process of splitting up the State airports was started in tandem with a new system of regulation. Capital development came second place to political manoeuvring and hence the new DAA inherited an airport desperately needing expansion.

And yet, despite the fact that all of these problems remain, at least one stockbroker would love to get his hands on some DAA shares.

"I think investors would definitely be interested in DAA," says the analyst. "Would it be an easier sell than Aer Lingus? Everything is down to price but intuitively I would say yes because it would be an infrastructure/utility play. It is not as risky in the absolute sense as an airline so it would be attractive."

That may be the case in an ideal world but, as others point out, Aer Lingus has a track record operating and making money successfully in a very competitive environment. DAA leads a much more sheltered existence with its income largely dependent on the say so of a stubbornly independent regulator, the Commission for Aviation Regulation (CAR). Second guessing a regulator is a risky business for any potential investor. Just ask the Department of Transport.

Sources suggest the department is more than happy for passenger service charges at Dublin airport to rise to a maximum cap of €7.50, the level DAA insists it needs to pay for its capital expenditure programme. But in its determination on the matter last year, the regulator capped the maximum at €6.14 per passenger. DAA appealed the decision but no answer is expected for at least another six months. If the regulator does change its mind, then DAA can happily roll out the JCBs. But numerous informed sources, including from within the department, suggest there is every chance the regulator will not give DAA what it is asking.

While its own legislation means that it is largely hamstrung on this matter, the department is understood to be extremely concerned about the impasse. Minister Cullen knows that if the regulator does not relent, Terminal 2 could be on the scrap heap by the next election. Sources suggest that the department is exploring other solutions that might to some degree bypass the regulator if its decision does not facilitate the DAA. Indeed, in certain quarters, it has even been hinted that changing the legislation that governs the regulator is an option that has been explored.

Obviously, if Terminal 2 is definitely to be built, a "plan B" might be required. Could that be privatisation? Might this government or the next hope that, like Aer Lingus, DAA could generate the money it needs for expansion through a flotation? Or could some large European player such as Spain's Ferrovial (which recently bought BAA, which runs Heathrow and six other UK airports) swoop in and take the DAA under its wing?

"If you listen to what the government has said about the privatisation of DAA, and what Martin Cullen has said, it is that the Eircom experience shows that we should never sell State infrastructure," says a Government source. "The State should divest itself of assets where you can create a competitive market place but Dublin airport is our most critical piece of aviation infrastructure. Consequently, certainly this Government would not countenance the disposal of the DAA."

Indeed, so anxious was the Government to quell any such rumours when it was negotiating with the trade unions on privatising Aer Lingus that Martin Cullen is understood to have raised the topic unbidden. At a meeting with trade union officials, he went out of his way to assure them that there was no question of privatising DAA.

But as recent events have shown, even a week can be a long time in politics. The DAA plans to spend lots of money for the next 10 years at least and who knows what future governments will think about this issue, particularly if economic circumstances leave them short of cash?

Yet such speculation is largely irrelevant. If the DAA is to have any hope of meeting its ambitious 2009 deadline for Terminal 2, the project must clear planning and move into construction by May of next year. That means it must have clarity on financing by then. Realistically, privatisation cannot be the answer. So if the regulator refuses to grant €7.50 per passenger, then where does this leave the DAA and its plans for Dublin airport?

Jan Plantagie, a director and DAA analyst at credit rating agency Standards and Poor's, believes that such a decision will probably leave DAA with no choice but to cut back its capital expenditure programme.

"The company cannot fund that for which it cannot pay," he says. "Personally, I don't think it will get to that situation.

If the regulator refuses to grant €7.50 per passenger. where does this leave the DAA?

There are various mechanisms such as the arbitrations commission and other ways to go through this. But I don't think as a commercial company, which DAA is, that you have a choice. You either get enough funds in there to commit to your investments or, if you don't, you just have to scale them back."

Such a scenario is almost unthinkable for an airport that has been starved of proper investment for many years. Difficult choices may lie ahead. Could a future government be left with no alternative but to grab the hand of the aviation equivalent of Paddy the Plasterer?

There is no doubt that the situation at Dublin airport is spinning out of control on two separate but interrelated points. The first is the capacity constraints the airport faces and the second is the question of what it is going to cost to fix these capacity constraints. The airport managed to get through an extremely busy summer largely thanks to legions of pink-shirted customer service helpers and an ability for seat-of-the-pants management for which the DAA can only be commended.

That Herculean effort saw banks and bookshops banished to grab every available square inch of space to accommodate the hordes arriving to fly. One Department of Transport source compares the effort to the triumph of the RAF in the Battle of Britain. But the Battle of Britain only had to be won once and there is no doubt that by next summer the hum of even more Luftwaffe bombers will be heard in the Collinstown sky.

And it is in planning for this difficult future, as distinct from coping with a difficult present, that the DAA is showing its weaknesses. At a very basic level predicting how many customers are expected to walk through the doors of the airport - management has consistently got it badly wrong.

An Aer Rianta presentation in July 2003 predicted 19.7 million passengers for Dublin in 2006. In May 2005, the DAA made its own presentation to the regulator, also saying the 2006 figure would be 19.6 million. Yet, by the time it was launching its plans for Terminal 2 just over a year later, the DAA was admitting that over 21 million passengers would pass through the airport in 2006. That means the predictions are already out by 8% or, to put it another way, the year-old projections are already two years off-target and in the DAA's world we are already in 2008. DAA continues to use the same predictive forecasts for the next seven or eight years and is using them as the basis for its capital expenditure plan.

DAA predicted in May 2005 that passenger figures would rise to 26 million by 2012. Already two years off course, this begins to look completely ridiculous with Ryanair's announcement last month that it expects to bring an extra 900,000 passengers through Dublin next year. It is reasonable to presume that at least 31 million passengers will actually be flying through Dublin in 2012, just five years from now, meaning that a third terminal, never mind a second one, will then be required.

And the cost of building the second terminal alone is growing quickly. In a submission to the regulator in May 2005, DAA stated that the total cost would be €439m (this figure is comprised of €190m for Terminal 2, €70m for associated works, €79m for Pier E and €100m for an extension to the terminal). DAA stated in August that the cost of the terminal had risen to over €600m and blamed the rise largely on the addition of the extension, which was in fact already included in the May 2005 figure.

Informed sources say the entire €1.2bn capital investment programme is currently over budget by 25%, meaning the DAA now needs at least €1.5bn. Who knows what the regulator makes of such slippage?

The DAA will quite likely need to come up with at least €2bn over the next 10 years

But there is more. No allowance has been made for the capital expenditure programme that is urgently needed at Shannon, particularly with regard to the runways and aprons. That will cost, at the very least, €100m over the next 10 years.

The debt for the Cork terminal is believed to be about €220m. A stand-off exists between DAA and the independent board at Cork airport over who will pay this. A department source says this will be decided in the very short term and it will involve sharing the burden. On top of all that, if the bleak analysis of the Aer Lingus/DAA pension fund by pension experts Buck Heissmann (revealed in the last issue of Business & Finance) turns out to be correct, then the DAA could be forced to fork out another €200m just to plug its portion of the pension hole.

Combining the capital expenditure at Dublin, Cork and Shannon, as well as the pension (not to mention the damage that all of this will do to the company's debt rating and ability to raise funding), means that the DAA will quite likely need to come up with at least €2bn over the next 10 years. Considering that the regulator may be reluctant to sanction even a €1.2bn spend, the future does not look bright.

"If that scenario plays out, we will be left with financially a very sick patient and a congestion crisis at Dublin airport," says a well-informed source close to the company. "If they persist with the principle that they want to own everything over the next 10 years, including whatever extra terminal capacity must be put in place after the second terminal, well there is no two ways about it, they will go bust. They will be forced into a position of having to go cap in hand and that is when you will get a fire sale of the company. There is absolutely no need for privatisation as we speak, but if they continue the way they are going, ultimately they may be forced into it and it will be sold off as an even bigger bargain than Aer Lingus, probably in bits and pieces. With an airport, if you are not thinking 10 to 15 years ahead, you are in big trouble."

One man who is more than happy to hold out for the long term is Ulick McEvaddy. He may just prove to be the DAA's unlikely knight in shining armour. He fought hard to get the nod from Government to build Terminal 2 on his strategic 140-acre site west of the current airport. If the regulator does not give DAA the €7.50 it says it needs (McEvaddy says he can do it for €5.50 per passenger) and if the Government was forced into a hugely embarrassing U-turn, McEvaddy may still get his wish particularly if the Competition Authority backs him in his bid to gain access to the runways at Dublin airport.

A more likely scenario, however, is that he will be a prime candidate to build a third terminal in the not-too-distant future. Either way, McEvaddy continues to hold out an offer to the DAA that, on the face of it, it would seem ludicrous to refuse.

"McEvaddy wants to build a terminal on his land as a joint venture between himself and the DAA," says a source. "The DAA has been very blinkered on this because the benefits of it are embarrassingly obvious. It is a greenfield site, it means significantly less disruption during construction, it has massive potential for growth, it is away from all of the arteries that are currently blocked up and it is a win-win for every single shareholder - the public, the DAA, the Government and the workers. If they continue to ignore this, they are going to payout huge amounts of money all for the misguided principle of the DAA owning the whole lot."

McEvaddy says that he has had several meetings with the DAA but they have gone nowhere.

"We are saying to the DAA - why don't \we just pool our land resources, one acre for acre, build what we need from the terminal perspective and lease it out to the operator," says McEvaddy. "The operator could be DAA, BAA, Servisair or whoever but it would be put out to tender. My argument is why does the DAA want to be in the labour-intensive side of the business anyhow? They should be more of a property company than anything else."

And it is not just the DAA that has something to gain from McEvaddy's offer. These days, airport workers may be falling over themselves to swap their trade union badges for share certificates but they are still partial to organising themselves when they see fit. McEvaddy originally offered a slice of his proposed terminal to trade union members in return for their co-operation. Liberty Hall peaked beneath the bedclothes but was scared off by McEvaddy's naked capitalism.

Not so the ordinary trade union members. They are more than happy to hop into bed with McEvaddy and have quietly maintained contact with him through a company called Civil Aviation Terminal Limited. He has promised them 15% of his terminal at a rock-bottom price. Within three weeks, this company is to issue formal applications to 10,000 employees at Dublin airport for the chance to invest in McEvaddy's proposed terminal and business is expected to be brisk.

"We still have the same agreement in place with the workers - they can buy into up to 15% of the new terminal," says McEvaddy. "The members' funds will be leveraged by 90%. In other words, if the workers put in €10m it will be worth €100m to them once the terminal is operational. You are better off with them on your side then against you. I have actually worked with them and when you get down to it, they are after the same thing as everybody else - what is in it for me? I understand that language."

Elaine Breheny of Civil Aviation Terminal Limited says she has been very impressed with how McEvaddy has approached the project.

"He has been patient, he has offered a partnership arrangement that has never happened in an airport in the world, he has the acumen, he is in the business, he knows the players," she says. "McEvaddy is still committed to a memorandum of understanding regarding standards and procedures of employment. There is a huge opportunity for everybody out here."

How ironic it would be if Ulick McEvaddy were the one to save DAA from a fire-sale privatisation. On the other hand, if there ever is to be a fire sale at Dublin airport, expect him to be at the top of the queue looking for cheap shares.

Unlike some others, patience is a luxury he can afford.

Have we a plan B captain?

The Dublin Airport Authority (DAA) finds itself in the unenviable position of planning a brand new terminal with no definitive guarantee as to how it will be paid for. As of now, the maximum passenger service charges at Dublin airport will leave the authority well short and nobody is prepared to second guess what view the regulator will eventually take on this.

"The DAA has submitted a planning application for the airport infrastructure the customers at Dublin airport badly need," says a DAA spokesperson. "It has also stipulated the required passenger service charges needed to fund that. At this stage, it will focus all of its energies on persuading the regulator to provide that level of charges through a review of the airport charge determination."

But if the regulator refuses to play ball, what next? Is there a plan B?

A neat trimming

The DAA is well aware that if the regulator does not grant it the level of increase in passenger charges it says it needs - and if there is no other source of funding - then the only possible plan B is to trim back its plans. Congestion would very quickly become an extremely serious problem.

The winners would be Portmarnock residents opposed to a new runway and private developers interested in building' terminals.

Government bail-out

So could the Government step in? It didn't when Aer Lingus badly needed new airplanes and chose the privatisation route instead. But one analyst believes that DAA could be a different case.

"I would draw a distinction between giving equity funding to Dublin airport as against giving equity funding to Aer Lingus," he says. "In the case of Aer Lingus, the money was really needed to write cheques to airplane manufacturers in Toulouse or Seattle. In the case of DAA, it is about putting infrastructure down on the ground on the island of Ireland. There is an important distinction there in terms of the principle as to whether the Government should put equity into the company or not."

Whether the European Commission, with its strict rules on state aid, would agree is another question. Voters looking for new schools and hospitals may also have strong opinions.

Flog off overseas assets

DAA has significant overseas assets including large shares in Birmingham, Dusseldorf and Hamburg airports. Selling its foreign holdings would bring in hundreds of millions of euro. To some, owning these assets has no part in DAA's stated aim of running efficient airports in Ireland.

Yet selling them off would leave a huge hole in the company's accounts. Overseas operations contributed €17.4m in net profits last year (up from €9.4m in 2004). That is a significant chunk of the company's overall 2005 profit of €50m. What makes it even more valuable is that the regulator does not take the overseas business contributions into account when he sets airport charges, unlike commercial income the company earns in Ireland. Therefore, it is money available to DAA each year that does not curtail airport charge.

Being State-owned, DAA's assets belong to the taxpayer. A second argument against disposing of them to build a new terminal is that it would effectively involve the taxpayer subsidising the provision of facilities for private airlines such as Aer Lingus and Ryanair.

This would entirely go against the principle that is supposed to underpin the regulatory regime in this country that infrastructure is paid for by the users rather than the taxpayer.

Sources within the department say that the Government is opposed to any such sale.

Not least because if it gave the order to sell in order to pay for cash-starved development at Dublin airport the handful of major players who buy airports would be well aware that it was a fire sale.

Taxpayers' assets would be sold off as a bargain.

Dispose of Cork and Shannon

Outside of Dublin airport, Cork and Shannon are DAA's two major Irish assets.

Unlike its foreign holdings, DAA is very anxious to rid itself of what is actually a major financial burden and a massive hindrance to it paying for development at Dublin. Indeed, it is Government policy that it should do so.

According to sources, one possible solution that has been considered by the Government is that it would buy at book value Cork and Shannon from the DAA. Shannon and Cork would become independent State-owned companies, their significant debts would be paid and DAA would receive a windfall to put towards its plans in Dublin.

Well, at least that's the theory. Would Shannon and Cork be worth enough to provide a decent cash injection?

More importantly, this would involve the State, which is the sole shareholder in DAA, effectively buying something off itself.

Smacks of desperation, perhaps? .