THE ABIDJAN AIRPORT CONCESSION FACING REGIONAL AVIATION LIBERATION

1. INTRODUCTION The Abidjan Airport, usually called the Abidjan Houphouet-Boigny Airport, is the largest airport in Cote DIvoire and one of the most active in the West African sub-region. It handles over 95% of all passenger and freight traffic, generating around 98% of revenue from airport charges. It is also a principal international passenger hub airport in West Africa. In 1990s, West and Central African region embarked on a bold initiative to liberalize civil aviation. This initiative allows for more designation of airlines and increased traffic routes; fares and traffic frequencies decisions to be taken by airlines based on market condition. While it is expected that Liberalization will maximize benefits through a competitive environment, liberalization could also be a potential threat to some air operators within the region. For sustainability in the wake of this challenge, juxtaposed with the increasing demand for services from this airport, there was need to expand the service capacity and develop the infrastructural facilities of the Abidjan airport. July 1996, the responsibility to develop and manage the Abidjan H-B Airport was transferred through a 15year concession agreement from government to AERIA (a French consortium). The project was to be carried out on a Public-Private Partnership (PPP) based on a Build Operate and Transfer (BOT) model. AERIA, a Special Purpose Vehicle (SPV) controlled by Societe dExploitation et de Gestion Aeroportuaire (SEGAP), was selected through a bidding process, to be the concessionaire. While SEGAP remains the project sponsor,

AERIA is saddled with the responsibility to upgrade, operate and maintain the airport assets over the 15years concession period. The project is to cover the construction of a new 23,000m2 International Terminal, development of 21 new gates and Jet ways; an expansion of auto-parking for ground access, improvement of domestic and international freight terminal and runway extension and strengthening program. However, the runway extension was suspended due to unexpected increase in investment expenditure on the international terminal and aircraft gates, including other anticipated components of the investment program.

The main features of the concession agreement include: The concession is for a 15year period Undertake and finance a specified program of investment for the first 4years of the concession. Pay 20% of total turnover to the concession authority as concession fees. Labour redundancy. AERIA has been obliged to transfer 140 workers from ANAM (former Abidjan H-B airport operator) to AERIA at pre-existing terms of employment; it was also expected that the concessionaire pays the host government 1billion CFA francs as indemnity for workers layoff. In addition, priority is to be given to laid-off workers when the need to employ labour arises. The investment cost is to be covered from air tariff charges. The concessionaire is free to adjust tariff price. However, there are principles for such adjustment. The concession authority approves tariffs subject to a break-even financial position for the concessionaire.

The project was financed with 70% debt and the remaining 30% was equity. The funds were raised largely from AFD (Agence Franaise de Dveloppement) 35%, BOAD (Banque Ouest Africaine de Dveloppement) 18%, BEI 17% and AERIA equity, 30%. Finally, the concession agreement allows the concessionaire to propose an extension to the concession period. However, any such proposal can only be considered within the last two years of the concession, and renewal can only be formally approved by the concessioning authority in the final year of the concession.

2.

CLASSIFIED POSSIBLE RISKS THAT EXIST DURING THE TIME PROJECT IS COMPLETED AND POST COMPLETION

The risk from the Abidjan airport concession can be classified into 2 stages; the pre-completion stage (construction phase), and the post-completion stage (operation phase).

Pre-Completion Risk This refers to the uncertainty related to timely completion of the project within the budgeted costs. This may be due to technical, labour and/or other construction difficulties. The pre-completion risks involved in this case are:

Funding Risk- There could be difficulty in raising funds as planned. It may be a syndication flaw, where the lenders delay or fail to provide funds after terms and conditions have been negotiated.

Investment Cost Overrun Factor- Projects viability depends on the realization of projected cost of critical input. If cost of inputs increase more than projected, it may affect the timely completion of the project. Usually, this factor comes from surprises in inflation, exchange rates increases and delay in project construction.

Supply Risk (Raw Material) - In the course of building the airport, supply of some vital raw materials may be impaired by factors which are not within the control of the concessionaire. This could be as result of suppliers inefficiency in raw material delivery

Technological Risk: since the airport was to be built with advanced technology, there is a risk that the technology employed may not perform optimally as planned or may become prematurely obsolete. This is a major risk in the completion of the airport infrastructure.

Post-Completion Risk (Operational Phase/ Force Majeure) This category relays the risk that some discrete events might occur which could alter the projected cashflow from operations after the project might have been completed. For instance, a low traffic turnout relative to AERIAs anticipated frequency of traffic may vitiate the profitability and debt service capacity of the project. The post-completion risks for the Abidjan airport project are;

Market/ Off-take Risk: The main market risk for the airport project relates to demand risk. Liberalization of civil aviation in the region calls for stiff competition in the industry. If the Abidjan airport fails to provide outstanding service as compared to other service provider in the region, customers might shift to other airports (as was the case in 1997 4

when freighters operated through the Accra airport). This has a sounding implication for the deal.

Socio-Political Risk: The risk that an investment's returns could suffer as a result of social changes or political instability in a country. Politically motivated violence has affected the operation of the airport to a large extent. For instance, the politically motivated civil crisis in November 2002 led to the closure of the airport during the period of crisis. It affects cash streaming and could affect debt repayment reschedules for non-recourse financing

Environmental Risk: Large infrastructure projects often carry significant environmental risks that may not be immediately visible to the financiers. Environmental risks may have a direct bearing on project returns when, for instance, the life-expectancy of the airport is shortened by unexpected ecological processes like earthquake and other natural disaster.

Regulatory Risk: In most projects, the level and continuity of cashflow is prone to the influence of regulatory authorities. For the Abidjan project, there is a risk of high taxation in addition to the 20% concession fees. Also, expropriation is a common thing in most developing countries. This is also a risk for the lenders because, too much cutaway from cashflow may hinder debt servicing of the project.

3.

THE MAIN RISK ASSOCIATED WITH THE PROJECT The main risks associated with the project include:

a. Tariff Charge 5

The financial success of the project is fully reliant on the revenue from the tariff charges. For instance, a change in tariff is expected to have significant impact on cashflows and other financial indicators such as debt service ratios, LLCR, etc. b. Traffic Volume The demand forecast is an important factor in any transport sector concession. When the forecast is too much based on the past traffic volume, imposition of some new conditions on facility usage may move beyond the forecast limit. For this, it is better to be pessimistic in drafting plans related to traffic rate rather than being so reliant on the past events. In other words, the worst traffic situation of the past may not come as the best case for the project. c. Capital Cost Overrun Changes in cost overrun have a negative impact on net cashflows from the project. Basically, net cashflow is benefit minus cost. If Capital expenditure cost overrun increase, cost of building and operating the airport increases and the net returns reduce. d. Capital Structure for Financing (Debt Proportion) The debt proportion in financing is a risk factor associated with the project. As the debt proportion increases, the financial NPV of the project also increase. However, increased debt proportions all other things being equal, debt service ratios decrease. This is because the debt repayment schedule for the airport will increase. In a situation where the debt ratios are low, the project is not attractive to lenders. This may result in financial failure and abandonment of the project. e. Domestic and Foreign Inflation rate

Increase in domestic inflation rate for instance would cause the value of the CFA franc to depreciate against other currencies, especially the dollar which forms a major part of the liability used by AERIA in financing the project. f. Exchange Rate From the financial perspective, exchange rate has strong impact on the financial success of the project. Incremental changes in exchange rate have resulted in declining financial indices for the airport. Though, most of AERIAs assets are denominated in local currency (CFA francs), major part of its liabilities are in US$. This poses an exchange risk for the project. g. Interest Rate Interest rate has an enormous impact on the viability of the project. There is a risk of interest rate changes in the financial market. In a case where interest rate increases, the cost of capital also increases. This would result in reduced NPV for the project. Debt service ratios will also decrease because debt repayment is expected to increases. h. GDP Growth Rate/Income Level This affects the demand and revenue for airport services. If GDP growth rate increase, income level also increases, therefore the demand for airport services has a like hood of upward movement which transfers to improved financial NPV from the project.

4.

SECURITY ARRANGEMENTS The Security arrangements include: 7

Supply Contract: Cost overrun is usually due to unanticipated level of inflation, exchange rate changes and delay in supply. Though, AERIA cannot control the movement of these rates, the organization can mitigate against such risk. This could be achieved with supply contracts such as future contracts and supply or pay contracts. This also reduces the risk of raw material supply. Guarantees: Also, guarantees can be used to mitigate airport completion risk like funding risk. Government can provide a guarantee for cover up of back logs and deficits in the event of insufficient funds in financing the project. Source of Fund: Juxtaposing the cost effect of regulatory policies and the financial goal of the concessionaire, it is important to ameliorate this regulatory risk involved in the operation. The project can be carried out by sourcing for finance (liabilities) within the domestic market. For instance, funds were borrowed from local banks and ADB with guarantees from World Bank. This spells limitation in regulatory recklessness. Insurance: Although, this is an additional cost for project sponsors; lenders usually insist on this mostly because of force majeure risk. The risk of natural disaster and unforeseen circumstances that may disrupt the viability sense of the project is covered. Clawback Agreement: This is an agreement by project sponsors to contribute cash to the project in return for project-issued securities. The commitment by the Ivorien government to be part of the financing is a shared risk that can assure a plain field for concessionaire to operate.

5.

CONTINGENT LIABILITY

Tariff adjustment; the contingent liability in this instance is from the cost of service regulation. The conceding authority is required to authorize any adjustments proposed by the concessionaire as being necessary to secure the concessionaires financial equilibrium. In a situation where authority to vary charges is unduly not approved, SODEXAM (concession authority representing government) would become liable to compensate AERIA. This is an instance of explicit-contingent liability. Unamortized investment cost; part of the contingent liability in the Abidjan airport concession is the cost that results from unanticipated investment which would be stranded if concession was terminated after 15years. On the basis of recommendation from an independent expert(s) valuation, concession authority is to compensate the AERIA for this cost.

6. IMPLEMENTATION OF THE PROJECT In June 1996, the project was successfully contracted to AERIA a SPV for SEGAP. The concession is still in its operating stage and is expected to terminate this year. However, the structural synopsis tells that it has not been business as planned for the project sponsor. Even though at the time it was

set up it appeared to be a very sound project, there have been frequent political violence in the region, issues of insecurity, airline service inefficiency, regulatory complexity and traffic growth rate mismatch.

7.

CHALLENGES, RECOMMENDATION AND CONCLUSION 9

Even though the project was a good volition for excellence in air services and private participation in the economic restructuring, the concessioning and implementation had some defects. The ex-ante factor was low; just 2 bidders couldnt have reflected the full essence of competitive bidding. The low turnout of bidders may have been due to the complexity of the concession contract or, probably the project is not financially viable to most potential bidders. Other defects of the concession are: No off-take feature in the contract to guarantee minimum return on investment. Although, the contract recognized a financial equilibrium position for the sponsor, the main source of contingent liability to the government was in respect of unamortized investment which was not explicitly stated. 15year period is relatively short compared to the concession period for typical projects in other countries like Lima airport (Peru), 30years; Carrasco airport (Uruguay) 20years. There was no provision for force majeure. Factors such as political risk and environmental factors got paved with minimal attention. The political crises that have eroded the region in recent times have created the most pronounced challenges for the project. Following the violence, the Abidjan airport had to shutdown the operation site for several weeks. The attacks also created a strain on the sponsors budget, steering up itches in the operation strategy and financial cross position of the project. Moreover, theft has been concern in the passenger terminal. Airport officials are known to be corrupt due to their low salaries. In January 2003, several hundred young Ivoirians stormed the international airport early in the morning as groups of French citizens were seeking to leave the country. In 2001 more than one million

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passengers used this airport but in 2003 that number had fallen to less than 775,000 passengers. To recreate a substantive evidence of private participation in public service provision as we have in the Abidjan airport case, there is need for a congruent public policy process that will encourage private sector participation in public infrastructure business. The AERIA/SEGAP experience is not a good one and it tells on future PPP plan of the Ivorian government.

Although, such violent risks are enormous in the region, making it difficult for Insurance to cover, a special contract which spells out such liability on the government may be reasonable. Government should be ready to bear part of the risk. Also, a special body could be set to look into the operations of airlines as regards efficiency in service delivery. Furthermore, in subsequent PPP, government should try and ensure a fair bidding process to avoid the ex-ante factor. This would help in effective pricing of the project.

Conclusively, even though the Abidjan project sponsors have been able to adjust to new realities in the project implementation, the project has cost the contractors more than they forecast. A brace up of the challenges and incorporation of new strategies as suggested above can get good results for both the government and the private parties. Government should place more emphasis on attracting investors in the airport sector and encourage private participation in economic reform programs rather than just focusing on getting the job done.

Reference Strong J.S (2002), The Abidjan Airport Concession: Facing Regional Aviation11

Liberalization, The Journal of Structured Finance Issue No.3, Vol.8; pp. 52-66. Asian Development Bank (2005), Examples of Private Sector Participation at Commercial Airports Worldwide, APPENDIX 2; pp. 9-12. Website:
http://www.adb.org/documents/books/developing_best_practices/airports/appendixes.pdf

Asian Development Bank (2004), Airport and Air Traffic Control Report, ADB Article; pp. 28, 29, 36, 42-49. Website:
http://www.adb.org/Documents/Books/Developing_Best_Practices/Airports/Part2_Airport.pdf

Mayer Brown (2003), Special Challenges in Financing Airport Concessions in Emerging Markets. Website:
http://www.mayerbrown.com/publications/article.asp?id=7451&nid=6

Ashok K.N (2008), Risk in Infrastructure Project Financing. Website: http://www.riskraft.com/8.pdf Finnerty J.D (1996), Project Financing: Asset Based Financial Engineering, New York John Wiley & Sons; Chapter 3, pp 1-15.

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