Performance/price risk

Airport Airport

Description (What is the Risk)

The risk that the project is able to achieve the output specification metrics and the price or cost of doing so.
Damage pollution accidents.
Meeting handback requirements.
Vandalism.
Equipment becoming prematurely obsolete.
Expansion.

Risk Allocation (Who typically bears the risk)

Allocation: Public Private Shared
Rationale

The Private Partner bears the risk of meeting the performance specification and for the other risks specified (see in relation to Expansion).

The Contracting Authority is responsible for enforcing the regime and for ensuring that the output specifications are properly tailored to what the Private Partner can deliver. Consideration needs to be given to the ability of the Private Partner to achieve the necessary performance levels, and the appropriateness of metrics given the nature of the project.

Often the Contracting Authority wishes to provide for expansion of the airport in order to provide for an increase in passengers and/or aircraft movements. This may involve an expansion of existing terminal(s), a new terminal or an additional runway. The Contracting Authority may require that the Private Partner is obliged to carry out the expansion. The Private Partner will only agree to carry out the expansion if it can be justified and the Private Partner will not lose money or not be able to service its existing debt (if the airport has been project financed) plus any additional debt to be taken on to finance the expansion.

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

The onus falls upon the Contracting Authority to draft attainable standards based on relevant market data and policy objectives. Performance based on passenger waiting times and throughput and quality of service can be measured against pre-determined schedules or standards.

The trigger for airport expansion should be forward looking and based on upward trends in passenger numbers over a number of years. The trigger should not just be one year (or a couple of years) if this is potentially unsustainable. The expansion will need to lead to a demonstrable increase in airport revenues that will be capable of paying operating costs, allowing debt service (with a margin above joint servicing debt in order to justify lenders' requirements for the Private Partner to meet ratio requirements) as a return on investment for the Private Partner.

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

Where certain performance indicators cannot be met due to actions by the Contracting Authority or unforeseen circumstances, the Private Partner may be eligible to seek relief or compensation. These would include insufficient resources provided for customs or border checks which leads to slower movement through the airport or air traffic controllers strikes (such as in France every summer). These cause flight cancellations not just at the affected airport but at other airports in other countries.

Comparison with Emerging Market

In developed markets, the Contracting Authority should have access to various data sources to develop realistic and attainable performance specifications and models.

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Description (What is the Risk)

The risk that the asset is able to achieve the output specification metrics and the price or cost of doing so.
Damage pollution accidents.
Meeting handback requirements.
Vandalism.
Equipment becoming prematurely obsolete.
Expansion.

Risk Allocation (Who typically bears the risk)

Allocation: Public Private Shared
Rationale

The Private Partner bears the risk of meeting the performance specification and the other risks specified (but see in relation to Expansion). The Contracting Authority bears the risk of enforcing the regime and for ensuring that the output specification is properly tailored to what the Private Partner can deliver.

Consideration needs to be given to the ability of the Private Partner to achieve the necessary performance levels given the nature of the project and the emerging market in which it will be based.

Often the Contracting Authority wishes to provide for expansion of the airport in order to provide for an increase in passengers and/or aircraft movements. This may involve an expansion of existing terminal(s), a new terminal or an additional runway. The Contracting Authority may require that the Private Partner is obliged to carry out the expansion. The Private Partner will only agree to carry out the expansion if it can be justified and the Private Partner will not lose money or not be able to service its existing debt (if the airport has been project financed) plus any additional debt to be taken on to finance the expansion.

In Colombian PPP projects, in cases of International Armed Conflicts, terrorist acts, civil war, coups d'etat, national or regional strikes there is shared risk (as for the archaeological risk), the Private Partner assumes the future loss of income earnings derived from those situations while the Public Partner assumes the direct loss (damnum emergens).

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

The Private Partner may need to require the Contracting Authority to reduce the performance requirements during the settling in period and possibly readjust the performance metrics once the performance of the project has settled down. This would mitigate the risk of long-term performance failure.

The onus falls upon the Contracting Authority to draft attainable standards based on relevant market data and policy objectives. Performance based on passenger waiting times and throughput and quality of service can be measured against pre-determined schedules or standards.

The trigger for airport expansion should be forward looking and based on upward trends in passenger numbers over a number of years. The trigger should not just be one year (or a couple of years) if this is potentially unsustainable. The expansion will need to lead to a demonstrable increase in airport revenues that will be capable of paying operating costs, allowing debt service (with a margin above joint servicing debt in order to justify lenders' requirements for the Private Partner to meet ratio requirements) as a return on investment for the Private Partner.

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

Where certain performance indicators cannot be met due to actions by the Contracting Authority or unforeseen circumstances, the Private Partner may be eligible to seek relief or compensation. These would include insufficient resources provided for customs or border checks which leads to slower movement through the airport or air traffic controllers strikes (such as in France every summer). These cause flight cancellations not just at the affected airport but at other airports in other countries.

Comparison with Developed Market

For emerging markets, particularly in the case of market first projects, the preparation of attainable standards by the Contracting Authority is complicated by the lack of relevant market data.

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