Imagine a tightrope walker, hundreds of feet in the air. Her balance bar has just the right amount of weight on each end and she’s pushing a wheelbarrow, it too with just the right amount of weight. Then the winds of COVID-19 begin to blow. The weight is no longer just right; it needs to be redistributed to avoid disaster. How much redistribution is just right? If there is too little weight taken off, too much weight left on, or any other imbalance created in the process, the whole venture fails.
Even tourism will see domestic visitors long before airports recover significant international traffic levels. Current air travel is at some 5–10% of normal levels, and has been for several months. Even after recovery, air transport is likely to suffer: 2021 is likely to be 30% lower than 2019, with growth at 2–3% rather than the 4–5% that we expected pre-crisis. The entire air transport business model is evolving, with the potential permanent or semi-permanent reduction of lucrative business passengers—one of the key sources of revenues for airlines and airports alike).
Most planned investments should be postponed if they don’t relate to safety for two reasons: to save money so the business can stay afloat and then to adapt to the lower traffic levels. This will mean amending PPP agreements to defer planned investment and agree to any implications like fees and revenue sharing.
Airports that invested in capacity levels anticipating future demand growth are unlikely to see those traffic levels, and may not be able to repay debt borrowed—much less interest to equity investors. Arrangements will need to be made with lenders and investors in the short term. In the long term, we’ll need to find a more sustainable solution for the loss of revenues and the change in operating context.
If the PPP contract does not include sharing of this risk, governments can choose to leave the tightrope walker to her own devices, hoping she finds a way to progress despite the strong wind. Given COVID-19’s massive effects, including the economic and debt maelstrom it’s driving, this is unlikely.
What would this look like?
Reduction of PPP costs. Government could reduce taxes. Colombia, for example, reduced VAT from 19 percent to 5 percent. Also, the scope of work and services to be delivered under the PPP can be reduced to keep down costs. Another idea is for government to replace some of the project debt by lending money to the project at lower interest rates, refinancing existing debt.
Increase of revenues. In order to replace lost revenues, government may wish to award an extension of the concession term (to the extent financially attractive for investors and legally permitted), allowing lenders and investors to receive high aggregate returns over a longer time. While tempting, airport fees cannot be increased—as airlines are even harder hit than airports and therefore fees are more likely to be reduced to be affordable. More practically, the government may agree to a reduction of the concession fees (often a percentage of revenues) to be paid by the PPP to the government.
This analysis will be done without enough data and based on the current situation, which changes daily. This means it must be revisited periodically as the airport reality adjusts. Equally, where airport traffic recovers in a manner better than anticipated, or airports are able to obtain new revenues from other sources, government should benefit from this recovery. An open book approach will be critical to finding and maintaining this balance.
These are challenging times. This is where the third “P” in this model, the “partnership” is truly tested. Renegotiation can be very tricky and government will need good advice. If we can find the right balance the marriage will survive the winds and emerge better and stronger.
Jeff Delmon and Andy Ricover are the authors of A Decision Makers Guide to PPP in Airports (Routledge 2020).
Disclaimer: The content of this blog does not necessarily reflect the views of the World Bank Group, its Board of Executive Directors, staff or the governments it represents. The World Bank Group does not guarantee the accuracy of the data, findings, or analysis in this post.
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