Rebalancing airport PPPs, even as the COVID-19 winds still blow

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Airport during thunderstorm | © NIKON D1X, pxhere.com

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.

No sector is worse hit by coronavirus than air transport.  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).

Airport PPPs raise additional challenges, with contractual structures designed to respond to the air transport reality before Covid-19 hit.  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. Air travel is, and will continue to be, important to the economic growth and recovery the world will so sorely need. Government needs to step in to help carry the burden. 

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.


 

Related Posts

Mythbusters: Getting airport PPPs off the ground

COVID-19 and infrastructure: A very tricky opportunity

COVID-19 & infrastructure: Why governments must act to protect projects

How will coronavirus affect public-private partnerships?

 


This blog is managed by the Infrastructure Finance, PPPs & Guarantees Group of the World Bank. Learn more about our work here.


 

Authors

Jeff Delmon

Senior PPP Specialist

Andy Ricover

Senior Air Transport Specialist

Join the Conversation

Craig Sugden
June 05, 2020

Well done Jeff and Andy on your capture of an important topic for PPP programs world-wide. Your suggestion of an open book approach to re-balancing PPPs for the impact of COVID-19 is a very useful and practical one. Other sectors can use the same approach. Settling up-front on a methodology for compensating for the impacts of COVID-19 as they emerge (e.g., an agreed financial model) could save a lot of time and give precision while minimizing disagreements down the track. If this can be done in an open and transparent manner that informs and builds the confidence of internal and external stakeholders, all the better.

Shuriye wasuge
June 11, 2020

I am somali and i live in mogadishu covid 19 is affected somali people and all passed except few people when i talk my self i felt ,hergab , nasaqka oo igu xirma , and sanka oo urintiii katagay

Kumar V Pratap
June 05, 2020

Infrastructure, by its very nature, is long-term business. It is expected that the direct impact of COVID on airport PPP projects would be mitigated by the end of this calendar year, while the indirect impact would persist till mid-2021. Many Force Majeure events like COVID 19 are bound to occur during the concession period. There are force majeure clauses in the concession agreement, which should be upheld when a force majeure event occurs. Talking of renegotiations every time a force majeure event occurs will lead to more aggressive behavior on the part of the private sector. Sanctity of contracts should be upheld during good times and bad.

Cesar Queiroz
June 08, 2020

Dear Jeff and Andy,

Congratulations on this well-thought and very helpful article. Your tightrope metaphor depicts well the issues now faced by concessionaires not only in airports, but also in roads and other sectors.

It is likely that the new normal will include more uncertainties resulting from health issues (e.g., pandemics), climate change (e.g., floods), and other natural or man-made events. The need for renegotiations may then become more frequent.

Consequently, I would like to suggest that government agencies consider including, in their Request for Bids, a somewhat simplified financial model, with parameters reflecting the base scenario, but leaving blank parameters to be filled by each bidder based on their financial proposals. This would facilitate holding eventual renegotiations to rebalance concession contracts.

Best regards, Cesar