Demand risk

Airport Airport

Description (What is the Risk)

The availability by both volume and quality along with transportation of resource or inputs to a project or the demand for the product of service of a project by consumers/ users

Risk Allocation (Who typically bears the risk)

Allocation: Public Private Shared
Rationale

The default position for airport projects in developed markets is for the Private Partner to retain demand and traffic risk (risk of flight and passenger numbers and total revenue receipts).

Where the demand risk is allocated to the Private Partner, or the extent that aircraft movements and/or passengers and so revenue may be insufficient to cover the cost of constructing, financing and operating the project in question, as well as meeting the likely project contingencies, then some form of Contracting Authority support will be required, and the Contracting Authority may need to retain an element of demand risk.

Although the general position is that the Private Partner takes demand risk there is usually an exception to this for so-called 'shock events'. These are events or circumstances that may not occur within the country in which the airport is situated but which cause a significant fall in traffic within a certain period but which would not qualify as force majeure. For example, 9/11 would be a shock event as it had a significant effect for several years on air travel worldwide but the global financial crisis may not have been treated as a shock event. The effect of a shock event is to reduce significantly the revenues of the airport to such an extent that it is either not capable of paying its operating costs, servicing debt and meeting its banking ratios and paying the concession fee or it is forecast that it will not be able to do so. In this situation all or an amount of the variable concession fee may be deferred until things have stabilised and the full concession fee can once again be paid in full together with payment of deferred amounts.

Mitigation Measures (What can be done to minimize the risk)

As it will be absorbing this demand risk, the Private Partner should do a full assessment of demand risk and should ensure that the concession agreement appropriately addresses and allocates the risk for everything that will impact on demand.

The parties should also develop a comprehensive market strategy to deal with the implementation of the project.

Government Support Arrangements (What other government measures may be needed to be taken)

The Contracting Authority may agree to defer all or part of the concession fee if there is a shock event.

Comparison with Emerging Market

In developed markets, the Private Partner should have access to various data sources to develop realistic and attainable traffic and revenue forecasts (in the absence of shock events), such that the Private Partner is well placed to manage demand and traffic risk (although traffic forecasts are almost always too high).

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Description (What is the Risk)

The availability by both volume and quality along with transportation of resource or inputs to a project or the demand for the product of service of a project by consumers / users

Risk Allocation (Who typically bears the risk)

Allocation: Public Private Shared
Rationale

The default position for airport projects in emerging markets is for the Private Partner to retain demand and traffic risk (risk of passenger numbers and total revenue receipts).

To the extent that aircraft movements and/or passengers and so revenue may be insufficient to cover the cost of financing and operating the project in question, as well as meeting the likely project contingencies, then some form of Contracting Authority support within the payment structure will be required, and the Contracting Authority may need to retain an element of demand risk.

Although the general position is that the Private Partner takes demand there is usually an exception to this for so-called 'shock events'. These are events or circumstances that may not occur within the country in which the airport is situated but which cause a significant fall in traffic within a certain period but which would not qualify as force majeure. For example, 9/11 would be a shock event as it had a significant effect for several years on air travel worldwide but the global financial crisis may not have been treated as a shock event. The effect of a shock event is to reduce significantly the revenues of the airport to such an extent that it is either not capable of paying its operating costs, servicing debt and meeting its banking ratios and paying the concession fee or it is forecast it will not be able to do so. In this situation all or an amount of the variable concession fee may be deferred until things have stabilised and the full concession fee can once again be paid in full together with payment of deferred amounts.

Mitigation Measures (What can be done to minimize the risk)

Both the Contracting Authority and Private Partner should do a full assessment of demand risk and should ensure that the concession agreement appropriately addresses and allocates the risk for everything that will impact on demand.

The parties should also develop a comprehensive market strategy to deal with the implementation of the project.

Government Support Arrangements (What other government measures may be needed to be taken)

There may need to be an element of subsidy from the Contracting Authority if demand falls below a certain amount. If this is structured as a 'cap and collar' arrangement then the Contracting Authority should also start to benefit from economic upsides above the Private Partner's base case.

If there is high uncertainty over passenger projections and uncertainty over revenues (due to tariff limitations and/or currency volatility) then the project may need to be structured on the basis of an availability fee and this may be more appropriate in markets where access to aviation transport has been limited in the past.

Comparison with Developed Market

Most demand risk airport projects in the world have over- estimated passenger and traffic numbers and restructurings have been common. This creates a difficulty for Contracting Authorities in emerging markets, particularly in the case of market first projects, where there is likely to be a lack of relevant comparative market data to begin with.

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