Inflation risk

Airport Airport

Description (What is the Risk)

The risk that the costs of the project increase more than expected.

Risk Allocation (Who typically bears the risk)

Allocation: Public Private Shared

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

The Contracting Authority may provide flexibility to increase charges to airport users (possibly up to limits) or allow additional increase in high inflation scenarios.

Back to Airport

Description (What is the Risk)

The risk that the costs of the project increase more than expected.

Risk Allocation (Who typically bears the risk)

Allocation: Public Private Shared
Rationale

Inflation risk is typically primarily borne by the Private Partner.

Demand risk projects such as airports need the ability to increase the airport charges and prices for food and beverages, etc., but this ability may often be restricted (as raising charges and prices is likely to be a sensitive political issue), and so the Private Partner may need additional Contracting Authority support.

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

The Contracting Authority may provide flexibility to increase charges to airport users (possibly up to limits) or allow additional increase in high inflation scenarios.

An additional comment on this regard is that one of the main concerns for financial institutions in Colombian PPP projects has been the risk of inflation associated to additional costs of the works. This risk has been addressed through closed priced EPC contracts with the inflationary risk allocated to the Private Partner or the EPC contractor, depending on each case. Hedges are also typical for addressing this risk, and usually additional securities from the Private Partner are demanded by the financial institutions. The inflationary risk as a macroeconomic effect is usually not covered by the Public Partner in airport concessions.

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

The Contracting Authority may need to provide a subsidy to the Private Partner if the user cannot bear the cost increase.

Comparison with Developed Market

The fluctuation of inflationary costs is a greater risk in emerging markets than it is in developed markets and the Private Partner's expectation will be that this risk is borne and managed by the Contracting Authority during the concession term beyond the point at which the increases in costs can be passed on to the airport users either because of price increase restrictions or because it will reduce usage and so revenue.

Back to Airport