Transport - Airports
ANI (Agencia Nacional de Infraestructura)
Grupo Aeroportuario del Caribe SAS
Design, Build, Finance, Operate and Maintain
September 2015 (credit agreement signed in March 2016)
COP $345 billion (USD $144 million, - 2015 exchange rate)
15 years (can be extended up to 20 years to reach contractual Net Present Value (NPV))
Concentration of construction activities during a relatively short initial period, challenges with KPIs during construction
The Barranquilla Airport PPP consists of the expansion and operation of the airport in one of the major cities on the Atlantic coast of Colombia. It involved substantial construction works, including remodelling of the terminal and rehabilitating the runway while the existing airport was still in operation. As this project was the first airport PPP following the passing of the PPP law in 2011, the Procuring Authority adopted lessons learned from this project to inform future procurement. The project has been successful, with the first and most important phase of construction due to finish by the end of 2018. There have been a number of challenges relating to KPIs and their application during the operations phase while construction has been ongoing; and the parties have been able to overcome the challenges by working together.
Barranquilla is a major economic centre on the Atlantic coast of Colombia, with a major port and links to other regional centres. It has experienced substantial growth in recent years, and it was recognised that the transport infrastructure needed to improve to meet growing demand. As the largest airport in the Atlantico department of Colombia, with traffic of 2.6 million passengers a year, it was also recognised that the quality of Barranquilla Airport needed to improve to reach international standards and better serve the region. Barranquilla Airport serves domestic and international travellers with direct routes to Miami and Panama. For this reason, the decision was made to redevelop the airport using a PPP contract, with construction and operations to take place concurrently for the first three years.
The construction work to be delivered includes the improvement of the domestic and international terminal, as well as the construction of a corporate terminal. The runway was fully rehabilitated and repaved as part of the PPP scope.
The Colombian economy has been expanding since the early 2000s, with exports including petroleum, coffee and flowers becoming a major component of economic growth. Colombia has a long history of private sector involvement in infrastructure, and the Procuring Authority, ANI, was created in 2011 as part of the central government’s goal of improving infrastructure provision in the country.
The PPP law was passed in 2011, while the history of concessions in Colombia has been longer and was based on the existing concessions law which predates 2011.
This PPP law sets the guidelines that should be used by any governmental agency when contracting under a PPP scheme. This law was based on international best practices, as well as on lessons learned from Colombia’s long experience of managing concession contracts. The new legal and institutional framework enabled Colombia to structure and procure an important number of PPP projects in the past few years with the ambition to close its transportation infrastructure gap and improve its competitiveness.
Achieving financial close was challenging for the Project Company, partly due to the fact that it was the first airport PPP contract signed by ANI according to the 2011 PPP law. From the Procuring Authority’s point of view, a first financial close was reached in September 2015, however the contract did not stipulate the requirement to have a signed credit agreement between the project company and its lenders. To achieve this contractual milestone, the Project Company was not required to have committed financing in place; instead, it needed a letter of credit from its selected lenders to show their willingness to finance the project, which was not binding. In this case, the main lender is CAF, the Latin American development bank, who took some time to complete its due diligence, in particular on the project’s social and environmental impact. Financing was finally agreed in March 2016, and in the meantime, the Project Company had to fund the project’s operations using solely equity.
There were a number of challenges which arose during the construction phase of this project. The most significant of these was related to the airport master plan. Normally this would be made available to bidders during the procurement phase, to allow them to develop an understanding of the state of the airport at that point in time. On this project, an up-to-date master plan was not available, and therefore had to be developed during the pre-construction phase. The master plan was necessary in order to finalise the design and its completion led to, among other changes, a change of the cargo terminal location, the terminal expansion size and the location of the Maintenance, Repair and Overhaul area (MRO). Those changes did not have construction time or cost implications. The delay in developing and approving the master plan is currently the subject of a claim by the Project Company seeking a time extension, and at the time of writing, this claim was being assessed by the Procuring Authority. The time extension would allow the construction to be completed without breach of contract by December 2018.
At the time of writing the case study, construction is ongoing, and is due to finish at the end of 2018. There have been some delays, with certain elements which had been due to be completed in June 2018 but are now due to finish in December 2018; however, this has not extended the final completion date of the contract.
The other challenge during construction was related to the large amount of construction work which needed to be completed in a relatively short period of time, and which had to take place while the airport was fully operational. The capital expenditure for the project was divided into eight periods, the first of which covered the three years between financial close and June 2018. 60% of the capital works (by value) were to be completed in this period, which covers only 20% of the overall project timeframe. This also required the development and installation of important provisional facilities, which was costly.
As this was the first airport PPP project in Colombia that was based on the PPP law passed in 2011, KPIs linked to revenue were introduced for the first time. Previous concessions did not have similar KPIs, which consequently created some challenges for the Project Company in terms of its ability to adapt to the new performance standards. For example, the same KPI measurements were applied during both the full, steady-state operations and the construction period. The Procuring Authority considers that in future PPP contracts, the KPI measurement methodology should be differentiated between construction and operation in order to take into account the challenges of operating and expanding the airport at the same time. This is explained further under the heading “Performance Monitoring and KPIs”.
The Project Company’s performance on the Barranquilla Airport is monitored in such a way that it only receives full operational revenue when it meets the relevant KPIs. The Procuring Authority developed these KPIs by investigating best practice around the world before developing the PPP contract, however there have been some challenges relating to the measurement of KPIs during construction. The performance measures are the same for the entire contract duration, even though for the first three years there are construction works occurring at the same time as operations of the airport.
A second challenge with the performance monitoring of this project was related to the KPI assessing client satisfaction. As the measure for satisfaction was based on customer surveys, the parties felt that it was not appropriate to link revenue to this kind of qualitative measure and that the KPI should be based solely on factors that the Project Company can control. The Procuring Authority and Project Company worked together to find solutions to these challenges that were acceptable to both parties.
The contract allowed for a revision of the methodology used to measure the KPI in order to adapt to the reality of the project. The review involved the Procuring Authority, the Project Company and the monitoring party (see more details below). An agreement was reached between the three parties.
To carry out its monitoring of the project, the Procuring Authority appointed an independent project monitoring party to be “its eyes and ears on the ground” in terms of checking that the contract is executed and complied with. The project monitoring party measures KPIs, reviews documentation submitted by the Project Company and submits monthly reports to the Procuring Authority. A risk register was created during the procurement phase, and the project monitoring party assists by reviewing it as part of its regular updating. The Procuring Authority is based in Bogota, and visits the project on a regular basis, however the project monitoring party is on site every day. The appointment of the project monitoring party is only with the Procuring Authority, and not with the Project Company.
The primary form of income for the Project Company is revenue from the operations of the airport, and there are no subsidies from the Procuring Authority or government. The Project Company income includes regulated revenues, such as airport-related taxes, as well as non-regulated income from airport operations. At the time of writing, the Project Company’s revenue is roughly in line with expectations.
The payment mechanism during construction is such that the Project Company only receives half of the revenue it earns during the construction phase, with the other half being held in an escrow account until construction is complete. The Procuring Authority sees this as a key to success, as it provides a strong incentive for the Project Company to complete construction on time. In previous brownfield projects, the Procuring Authority realised that operational revenue was being used to finance construction, and this was delaying progress. Incentivising prompt financing and construction was particularly important for the Barranquilla Airport, given the fact that a lot of construction work was due to be completed in a relatively short period of time. As this can result in significant financing costs for the Project Company, following a new law passed in 2018, future contracts will allow for more regular milestones permitting a more progressive release of revenue as the construction advances.
The PPP contract has a defined mechanism for the Procuring Authority to allow for an extension of time. The Project Company can request, and pay for, an additional three months to complete the construction. Once this period has expired, the Project Company can present its case for an additional 60 days to complete any remaining, non-essential works. In the case of certain one-off events, the Project Company can also request a time relief in case of delays. There is no provision in the PPP contract for economic rebalancing; if any changes regarding the economics of the project are needed, they will have to be effected through contract renegotiation.
ANI, as the Procuring Authority representing the interests of the government, played a leading role during the pre-feasibility of the project, procurement and ongoing contract management. Created in 2011, the agency supervises “the end to end” project process, from planning and structuring to contract awarding, contract management and handback. This extended scope of work has allowed for greater accountability and continuity and an efficient process of continuous improvement. The Procuring Authority made efforts to learn from international best practice and is continuously evaluating the procurement process and contract management, implementing improvements based on lessons learned from projects in execution.
Even though many pre-construction activities are the Project Company’s responsibility under the current contract, the Procuring Authority supports the Project Company in certain pre-construction activities such as environmental licensing and land acquisition. This has allowed for smooth execution and has helped to avoid delays.
The contract management team consists of three people with technical backgrounds (i.e. contract manager, relationship manager and performance manager) who oversee two PPP projects. These people manage the relationship between the project monitoring party and the Project Company and review all reports and claims that are submitted to the Procuring Authority. They come from a technical background and have a good understanding of airport operations, as well as PPP contracts. The Procuring Authority also has central support teams which provide advice and assistance to all contract management teams within ANI on specific matters, which require legal, social, environmental, financial and risk expertise.
The three contract managers who work on this project all joined at contract award. To assist with knowledge transfer, workshops were carried out with these employees, representatives from the ANI central knowledge teams and the people who structured the PPP contract (the ANI structuring team and an external consultant appointed to advise on contract structuring). This assisted in passing on knowledge from those who knew the background and intricacies of the contract to those who were going to be in charge of managing it. The external consultants involved in the structuring worked hand-in-hand with the Procuring Authority for six months after contract signing; those advisors also provide ad-hoc support now, as and when necessary.
Given the challenges associated with knowledge transfer, the Procuring Authority is contemplating extending the support from the external consultant beyond the typical six months which is current practice.
In addition to training and participation in local and international workshops, the ANI team in charge of airport contract management is attending cross training sessions with Aerocivil agency’s personnel to transfer knowledge and share experiences.
There is a management committee that meets every 15 days to discuss issues that arise and to help develop solutions. The parties represented in these discussions are the Procuring Authority, Project Company and the project monitoring party, as well as the airport authority when relevant. The Procuring Authority representatives are the contract managers, as well as others from support teams when required based on the topic of discussion. The Procuring Authority sees this process as useful, as it is agile and every party is present.
In an attempt to complete construction works promptly within an operational airport, construction was concentrated in the first three years of the contract period, in terms of both the intensity and quantum of works as well as the capital value. This uneven distribution of capital works created challenges for both parties in terms of managing and monitoring the works.
The parties agreed that the KPIs adopted from international leading practice should have been differentiated during construction and operations. A solution to this issue was adopted through an agreement to review the methodology to measure KPIs in order to reflect the reality of construction and operations being carried out at the same time. For example, the measurement of customer satisfaction was adjusted during construction.
The parties have worked together to overcome the challenges and have agreed on a solution that meets their respective objectives.
It is challenging for the Project Company to meet operational KPIs while carrying out construction works concurrently. For this reason, it is preferable for the KPI measurement methodology during the construction phase to be adapted to the challenge that this period presents for the project.
As outlined above, the contract allowed for a revision of the methodology used to measure the KPIs in order to adapt to the situation faced when operating the project. The review and agreement reached involved the Procuring Authority and the Project Company, as well as the appointed monitoring party.
To assist with knowledge transfer, workshops were carried out with new staff joining after contract award, representatives from the ANI central knowledge teams, and the ANI team and consultants that structured the contract. The external consultants involved in the structuring, also worked hand-in-hand with the Procuring Authority for six months after contract signing and provide continued support, as and when necessary.
The Procuring Authority learned lessons from previous projects where the Project Company failed to carry out construction at the required rate of progress. For the Barranquilla Airport project, the Project Company does not receive its full revenue until construction is complete, and the Procuring Authority sees this incentive mechanism as an important factor in ensuring that construction progresses in accordance with the programme agreed in the contract.
Carrying out construction activities on an operational asset is always a challenge due to the constraints of the working environment, disruptions created by construction activities and all associated impacts on health and safety, the environment, the level of service, etc. The objective is therefore to advance the majority of the construction works as much as possible, which then leads to uneven distribution of capital works. In this case, 60% of the value of the capital works was scheduled to be completed in period one, out of the total eight periods. This created particular challenges in terms of managing and monitoring the progress of construction works. To manage this situation, ANI increased the typical meeting frequency of the management committee from once a month to every two weeks. While the pressure to complete construction works as soon as possible will still lead to a heavy concentration of works during the first period, even in future contracts, the contracts are now structured to allow for tailored KPI methodologies for construction and operations and for a mechanism to adjust the contract if necessary to overcome the challenges emerging from unevenly distributed construction works.
Lessons learned from PPP contract management should form a virtuous cycle with the project initiation and procurement where one phase is informing the other. The Procuring Authority in this case evaluated its future PPP procurement on the basis of lessons learned on KPIs and construction activities from this project. This becomes particularly important when a PPP project is the first of its type to be launched following a particular law. Although in this case the Procuring Authority adopted international leading practices, it became evident that it is important to adapt the KPI methodology to the local environment and carefully consider local practices, as practices which work well in some regions may not be successful everywhere and adaptations may be necessary.