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Gains and considerations for airport concessionaires in economies like Nigeria

70 percent of airports across the world were said to have operated at a loss in 2017. Hence, most countries turned to concession as the most viable option to run the airports in a profitable and self-sustaining manner. The Singapore Changi Airport, which reportedly connects customers to over 200 destinations worldwide has profited from concession models to become not just an airport but now providing concession services and sundry consultancies for other airports across the world. Federal Government has opened bids for investors to prequalify for the airport concession of four international airport terminals and pegs worth of bidders at N30bn. From this, we wonder if the approach to be adopted will be a single concessionaire or a one master concessionaire that will be responsible for coordinating the several sub-concessionaires like the Delta State government did earlier this year.

One may now ask what concession is. Under the Infrastructure and Concession Regulatory Commission Act, 2018, section 36 defines “concession” as a contractual arrangement whereby the project contractor undertakes the construction, including financing of any infrastructure, facility, and the operation and maintenance thereof, and shall include the supply of any equipment and machinery for any infrastructure. For better understanding, an airport concession generally involves the transfer of the responsibility of management and development of the airport to a private operator, while the ultimate ownership remains with the government. It is worthy to know that concession can either allow the authority to keep actual ownership of the assets, turning over to the concessionaire and reverting the control and ownership back to authority once the duration of their concession ends or both the authority and concessionaire control and own the facilities.

Read Also: Aviation minister denies conflict with CCECC over airport concession

Airport concession

This paper shows how this concession will be beneficial to both Domestic and Foreign Investors looking to take advantage of this opportunity and also the underlining factors that must be considered.

Investors must determine whether duty-free and tax-free shops would be entertained in the pre-contract stage because this drives an increased number of visitors to the airport

The benefits include;

1. It offers non-aeronautical assets in the passenger and cargo terminals – These are assets that are necessary for the performance of non-aeronautical services at the airport. Retail concessions remain the leading source of non-aeronautical revenue for airports, representing 28 percent of non-aeronautical revenue. The airports will be afforded more avenues to local and foreign direct investment, as well as the ability to generate revenue through non-aeronautical activities. Companies operating out of the airports will also be subject to reduced taxes in the effort to create a more profitable trade environment in Nigeria.

2. It offers 20 to 30 years of concession tenure – According to the International Air Transport Association (IATA), there are predictions that developing countries will see a surge in air transport in the next 15 – 20 years. This situation perfectly describes Nigeria. National Bureau of Statistics figures had disclosed that in 2019, the passenger traffic in the first half of the year hit 8.48million compared to 7.56million in 2018. In 2018, Murtala Muhammed International Airport, Lagos was the 11th busiest airport in Africa. Yet, Nigeria arguably has the highest number of indigenous travellers on the continent. With passenger traffic growing at that pace, air transport will soon rebound and massive revenue will be made from this growing increase.

3. It offers only the already viable airports for concession – majority of interest will be on the Murtala Muhammed airport at Lagos being the biggest city by far in Nigeria, with almost 10 million people and an airport that is the fifth busiest in Africa in 2020. The last year for which ‘normal year’ statistics are available, Lagos International Airport handled 7.3 million passengers and had been in decline for the previous three years. Nnamdi Azikwe airport, Abuja acts more as a hub for Nigeria itself, and surrounding countries (Cameroon, Chad, Togo, Ghana, Côted’Ivoire). Port Harcourt with a population somewhere above 1.8 million is a port and the chief oil refining location in Nigeria. Passenger growth went downhill in three successive years, 2015 – 2017, before rallying with a 23 percent increase in 2018. Below are some factors for key consideration by potential concessionaires, they include;

1. Government’s commitment to Transparency – In a country like Nigeria, we can never overemphasize this because, for a concession agreement to be actualized, investors must ensure that there will not be any negative government interference, in the long run, examples are hostility of trade unions and politicians, pervasive threat of corruption, which is an image that Nigeria is still struggling to shake off, etc.

2. Mezzanine Clause – In 2013, the Chinese Nexim Bank had granted Nigeria a $500 million loan to build new airport terminals in form of a BOT. Mezzanine Finance is a business terminology where the debt is converted to equity after the timeline for the loan must have expired. With that, if the borrower cannot pay back the loan within the period specified, the lender gets a share of equity instead, which is used as security. With the clause, the Chinese could lay claim to the infrastructure should the host country default in payment in line with the Mezzanine Clause. Investors must ensure that there are no encumbrances whatsoever as due diligence must be thorough.

3. Whether it offers waivers/discounts – 78 percent of airport concessions are associated with the payment of concession fees. Airport operators are often required to pay a concession fee to governments irrespective of their ownership status. For instance, not-for-profit airports concession fees to governments aggregated at the global level amounted to 21 percent of their operating expenses for the financial year 2018. With that said, these figures mark a huge variance in airport concession fees paid by airport operators. In this context, waiving airport concession fees is a possible solution to relieve airport operators of financial stress. Such waivers could be a one-time waiver for a certain period of time. Well, it may interest you to know that ground handling companies remit to the coffers of the Federal Airports Authority of Nigeria (FAAN) a 5 percent concession fee annually.

4. Taxation – A recent leader in The Economist put some airports’ take from their retail tenants’ sales as high as 40 percent, a level that pushes concessionaires to drive a hard bargain with brands on margins, and in turn affecting prices, or choice of available products, for passengers. Now, investors must determine whether duty-free and tax-free shops would be entertained in the pre-contract stage because this drives an increased number of visitors to the airport.

In conclusion, I would like to reinstate that this is the right time to concession our airports and above all, this is an opportunity that investors, especially foreign investors must leverage because Nigeria is fast becoming a global aviation market and the build-up is immensely encouraged.

Oaikhena is a Lawyer, Aviation Transaction Adviser, Associate; Marcus-Okoko

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