As the operator of Chek Lap Kok, one of the world's busiest airports, the Airport Authority is acknowledged as having an extremely capable management team. It has successfully bounced back from two crises - the September 11 terror attacks in 2001 and last year's Sars outbreak. The government, intent on capitalising on the group's skill, is pushing forward with a partial privatisation of the airport operator by early 2006 - most likely through a sale of shares on the stock exchange, similar to that of the MTR Corporation's initial public offering in 2000. Last week, it unveiled a long-awaited public consultation document, with which it will approach the local community and stakeholders - including airlines, commercial users, debt-holders and future shareholders in the airport - for the next three months. For potential investors in the privatisation, the biggest issues will be valuation and its prospects for growth. The document includes a proposal for the authority to set down charges for airlines for the three- to five-year period following the privatisation and the creation of an independent arbitration body in case airlines disagree with the airport's user-pricing decisions. The paper also states that the airport's profitability has been poor over the past few years and there is a danger an IPO would be a disappointment, based on investor demands for better returns in the near term. These points have angered airlines using Chek Lap Kok, who argue it would be counter-productive for the community if higher charges led to a slowdown in the airport's growth. However, the government is justifying the IPO on the grounds that privatisation will return public funds for reuse in other projects, and will provide more transparency for stakeholders and better regulatory oversight. Authority chief executive David Pang Ding-jung said: 'The goal before and after privatisation does not change. We are here to make Hong Kong International Airport the regional centre of aviation.' So how will a valuation be determined to give a decent return for the government and IPO investors in the airport? Legislators and industry experts say they do not know and the government has not publicly committed itself to a figure. Raymond Woo, corporate and infrastructure ratings director at Standard & Poor's, said current landing and terminal charges for the airports were 'pretty stable ... but not transparent'. 'When we look at the authority, it's hard to factor in changes to charges. There is a strong growth profile, so we would expect that to continue. [Still,] there is an issue of needing to balance the interests of all parties involved,' he said. Legislator Fred Li Wah-ming said: 'What figure exactly does the government consider is a reasonable return? They have to tell us that.' Airport returns have been spotty. In 2002-2003, the impact of Sars derailed the authority's profit growth trend, dropping its return on equity to less than 2 per cent. Had Sars not occurred, that figure would have been closer to 5 per cent, the authority said. But this year, the authority's return on equity should handily exceed 5 per cent to 6 per cent, given the strong rebound in air traffic to better than pre-Sars levels and continued high demand for air freight. At the present rate of growth, average returns of about 10 per cent should be attainable within five to 10 years, industry analysts said. A Singapore-based consultant who advises airlines on airport charges said 'that there is already profit at Chek Lap Kok is an amazing feat in itself'. 'Returns are a matter of time ... you need mature investors who understand that in five to 10 years, there will be good returns, but not three to five years,' he said. The principal assistant secretary for economic development and labour, Howard Lee Tat-chi, said financial advisers had told the government it would have to provide a framework outlining growth in its rate of return for the next three to five years. 'We have done some sensitivity analysis on the airport charges and its financial situation, to determine the return on equity needed to attract investors.' The conclusion was that IPO investors needed a promise of good returns within five years, rather than beyond, Mr Lee said. 'The government can say that 20 years is a fair time frame [but] the period for return is not something that we alone can dictate. If we decide to go for an IPO, it's for the market to decide,' he said. Tourism sector legislator and Cathay Pacific Airways general manager for government affairs Howard Young said that airlines were keeping a close eye on the proceedings, 'although up to now, none have openly opposed' the privatisation proposal. That may change soon, he said. 'If the authority concentrated on getting more volume through Chek Lap Kok, rather than raising charges, then everyone wins.'