In the wake of globalisation, improving airports and associated infrastructure undoubtedly provides strong economic benefits to both established and developing nations. The increasing prominence of PPP financing in this sector has placed a spotlight on how time, risk and cost benefits can be optimised both now and in the future.
We have seen considerable change to the structure of PPPs through the influences of market demand, experience and a broader range of applications. Equally, we have seen how new technology can drive improved performance and expect it to take a more prominent role in airport PPPs in the future.
Each project has a unique context and specific challenges. PPPs provide procuring authorities, developers and investors with mutually attractive prospects and a desire to achieve their collective aims. The industry has overcome a wide range of issues and we expect the two most important of them to remain constant in the medium term; namely, how to create political stability and revenue certainty. Whilst there are proven routes to overcome these, the more sophisticated players in the market are exploring more innovative approaches to unlock greater project potential.
PPPs are often used in emerging markets where infrastructure is required in the absence of available public funding or development expertise. Such projects are inherently difficult to procure particularly at the onset of a PPP programme, as investors can be wary of political change which may undermine the procurement, construction or operational phases, as shown by Kuwait’s halting of PPP projects in certain sectors in 2012 following parliamentary elections and a change of the Communications Minister. There are a number of proven methods for overcoming these concerns, including:
Providing a legal framework which has a clear and logical path for a project to be approved at an early stage and gives potential investors the confidence that unforeseen issues are less likely to arise. In Bangladesh, we are currently advising the PPP Office on the country's PPP programme. Our advice has been focused on developing a robust legal framework to underpin PPPs, which will be critical to the successful procurement of PPP projects including its new air traffic management and control centre at Hazrat Shahjalal International Airport.
Gaining the support of external organisations such as development finance institutions (DFIs) can assist in developing a proven approach to project procurement and deliver enhanced credibility for a project's business case and deliverability. We have advised a number of DFIs such as the IFC, EBRD and AfDB on both advisory and finance mandates and expect an increase in projects which seek their involvement or operate in accordance with their principles to ultimately attract greater market interest.
We expect these approaches will continue where appropriate, but also know that lenders are increasingly willing to mitigate concerns through innovative contractual avenues and risk allocation. In other sectors, we have advised DFIs to create compensation on termination provisions that provide a more favourable position for PPP investors if a procuring authority terminates at will. Deploying this approach with an appropriate security package is likely to result in a material reduction in finance rates.
The ability to raise non-recourse project finance can present a steep challenge where funders are expected to lend based on projected performance alone. Without confidence in revenue streams, investors and funders might be reluctant to invest unless higher charges are imposed or greater protection is in place. The Ciudad Real Central Airport in Spain demonstrated how flawed revenue assumptions caused drastic issues when links to the Madrid-Seville high speed rail line were not subsequently developed. There are a number of proven options available to minimise this risk:
- Diversified revenue
Given airports depend on a wide range of supporting infrastructure, the resilience of a project’s revenue stream can be improved by diversifying its sources. This was apparent when we advised Manchester Airport Group on its five million square foot redevelopment, comprising a mix of offices, hotels, advanced manufacturing, logistics and warehousing to create a globally connected business destination. The success of projects of this nature will generate a wealth of performance data and allow other projects to follow similar paths on an informed basis.
- Reduced uncertainty
Rectifying known issues before launch of a project will help mitigate concerns over projected revenues that investors may have. By way of example, members of our team advised the winning consortium on the rehabilitation, expansion and operation of the Queen Alia International Airport, which was implemented shortly after Jordan entered a number of bilateral open skies agreements to improve revenue forecasts. Conversely, the 1999 Yamoussoukro Decision pledged to open up air transport markets for 44 countries across Africa but has not been ratified in many nations and continues to be a significant block to passenger numbers and associated investment on the African continent. We expect significant efforts will be made over the next five years to improve the environment in which investors will lend.
Where the demand for an airport is far from certain, a procuring authority may wish to retain some of the demand risk itself. It could consider retaining the whole of this risk (in return for a more favourable lending rate) or a specified proportion, through retention accounts or similar for targeted uncertainties. These devices are only suitable where the sponsor's risk is contingent on the developer and investors' performance of their own obligations. In any event, we expect procuring authorities will want closer collaboration with developers in the future; for instance, having an operator's input on the setting of airport taxes can ensure demand remains in line with projected forecasts, with gain/share arrangements used to incentivise correct behaviours from all concerned.
A procuring authority should consider whether offering exclusivity for certain flight paths would boost certainty of revenue. Alongside this, the procuring authority should consider whether it can provide exclusivity over alternative transport routes, to ensure that road and rail does not divert income from those routes. Looking ahead, we expect to see more holistic approaches to project investment, where sponsors offer exclusivity for entire transport links. For example, we advised ING Bank on the proposed US$150 million financing of a direct train service and related terminal for Sheremetyevo Airport and expect to see projects of this type form part of integrated airport redevelopment plans in the future.
Aviation has pioneered bespoke technology which is renowned and sought after by other industries due to the investment and refinement that has taken place over a prolonged period. The next five years will see aviation deploy more commercially available software to optimise the output from PPPs more efficiently than was previously thought possible. By way of example, having adequate safety and security arrangements in place is a key priority for airport PPPs, with tight controls imposed particularly on airside staff. We advised Birmingham Airport on its new runway extension and placed particular emphasis on securing robust security arrangements. Technology has an important role to facilitate these controls with many off-the-shelf permit systems now able to help achieve this at a reduced cost. Equally, technology is now available to coordinate works being performed alongside airport operations through a structured approach to safety and security risks, ensuring reduced disruption to the operation of the airport. Our advice to the Bangladesh PPP Office has examined compatibility with international technology standards, security protocols and data integrity requirements to allow the latest technology to be used to its full potential. With technology now advancing at a rapid pace, projects are being structured to optimise benefits from technology throughout.