Exchange and interest rate risk

Airport Airport

Description (What is the Risk)

The risk of currency fluctuations and or the interest rate over the life of a project

Risk Allocation (Who typically bears the risk)

Allocation: Public Private Shared
Rationale

There can be currency risk, not just in relation to the construction cost of the airport itself, but in a mismatch between the currency in which the concession fees are payable and the currencies in which the various revenue streams at the airport are received.

The Private Partner would look to mitigate this risk through hedging arrangements under the Finance Documents, to the extent possible or necessary in that market.

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

Exchange and interest rates risks are typically not accounted for beyond the Private Partner's own hedging arrangements.

However, if the revenues of the airport, such as for airline charges and retail, duty free and food and beverage are received in local currency, the concession fee to the Contracting Authority should not be payable in, for example, US Dollars or Euros (or vice versa).

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

The Contracting Authority is not expected to assist the Private Partner in mitigating such risks if there is not a currency mismatch between revenues and the concession fee.

Comparison with Emerging Market

In developed markets, the risk of currency fluctuations and interest rates is not substantial enough to require the Contracting Authority to provide support if there is not a currency mismatch between revenues and the concession fees.

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Description (What is the Risk)

The risk of currency fluctuations and or the interest rate over the life of a project

Risk Allocation (Who typically bears the risk)

Allocation: Public Private Shared
Rationale

There can be currency risk, not just in relation to the construction cost of the airport itself, but in a mismatch between the currency in which the concession fees are payable and the currencies in which the various revenue streams at the airport are received.

The Private Partner would look to mitigate this risk through hedging arrangements under the Finance Documents, to the extent possible in that market.

In certain countries this may not be possible due to exchange / interest rate volatility or currency convertibility problems or delays.

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

Some of the cost risk can be managed on demand-risk projects by passing the risk through to the user by way of adjustments in the amount of charges, but the ability to do this may be limited as airport projects tend to be demand elastic (i.e. charges go up and flights (and so passengers) go down).

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

As landside revenue will be collected in local currency (and possibly airport charges too in some cases) the Contracting Authority may need to retain the risk of devaluation of the local currency to the extent that such devaluation impacts on the economic viability of the project (due to the need to pay for foreign currency imports and service foreign currency debt).

Comparison with Developed Market

In emerging market airport projects, the devaluation of local currency beyond a certain threshold may be a trigger for non-default termination. Alternatively it could trigger a 'cap and collar' arrangement from the Contracting Authority with reductions in the concession fees payable. Issues of convertibility of currency and restrictions on repatriation of funds are also bankability issues upon termination in emerging markets.

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