Case Studies: Larnaca and Paphos International Airports

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Project Overview
Larnaca1.jpg
Figure 1: Larnaca Airport
Paphos1.jpg
Figure 2: Paphos Airport
Larnaca and Paphos (Cyprus) International Airports
Project Type: Both
Contract duration: 25 Years
Budget: EUR 640M (Development of the new Larnaca and Paphos Airports)
Project Time Line
Project conceived: 1988;
Tender: 2001;
Contract Award: May 8, 2005;
Financial Close: May 12, 2006;
Paphos Airport inauguration Ceremony: Nov. 8, 2008;
Operation of the new Paphos Airport: Nov. 17, 2008;
Larnaka Airport Inauguration Ceremony: 7 Nov. 2009;
Operation of the new Larnaka Airport: Nov. 17, 2009.

Introduction

The ‘‘Best Transport Project in Europe’’ in the competition for ‘‘PPP Awards 2013’’ was awarded to the Concession Agreement for the development and operation of the international airports of Larnaca and Paphos by ‘‘World Finance’’ (visit http://www.worldfinance.com/awards/ppp-awards-2013). This reflects the success of the project on various levels assessed in the competition: using best practices, innovation, bringing socio-economic benefits to the end users, and becoming a template in various aspects. In fact, the new modern airports, through the PPP contract, offer significant changes and innovative solutions in respect of passenger handling (e.g. boarding bridges), especially when these solutions are compared with the old airports.

Larnaca Airport is the largest commercial airport of Cyprus and is located in the southern part of the island, 4 km southwest from the city of Larnaca. Paphos Airport is the second largest airport of Cyprus, located in the southwestern part of the island, 6.5 km southeast from the city of Paphos.

Hermes Airports Ltd (the Concessionaire) completed the construction of the new facilities at Larnaca and Paphos in accordance with the agreed timetable at a total cost of EUR 642,7 M. According to the specifications of the International Air Transport Association (IATA), the size of the Larnaca and Paphos terminals provides levels of service B and C, respectively. Both airports can be reached by car, taxi and the public transport system.

Larnaca Airport opened in November 2009 and the first phase is capable of handling 7,5M passengers annually. The new 100.000 m2 terminal includes 16 boarding bridges, 67 check-in counters, 5 baggage carousels, VIP and business lounges, duty-free shops as well as comfortable and functional areas offering a wide range of shops and cafeterias. The new terminal was built some 500–700 m west of the old terminal, adjacent to the new control tower and it is supported by an extension in the runway, new facilities for aircraft and 2.450 car parking spaces. The runway has a total length of 3.000 m. The old terminal building is planned to be partially demolished and refurbished as a cargo centre, and is currently used as a private terminal for visiting heads of state, VIPs, and private aircraft operators. In 2012, Larnaca Airport served 5.166.224 passengers. There is the possibility of further expansion and construction of a second parallel runway when necessary and further development of the terminal in order to be able to accommodate 9M passengers per year.

The new Paphos Airport has been operational since November 2008 and the new 18.000 m2 terminal can serve 2,7M passengers annually. The new airport provides 28 check-in counters, 3 baggage carousels and 800 parking places, shops etc. The total investment for Paphos Airport reached EUR126M. The runway has a total length of 2.700 m. In 2012 Paphos Airport served 2.242.797 passengers.

The concessionaire investigated many options including the development of an entertainment, culture, tourist, leisure and commercial centre, coupled with an airport hotel, casino etc. In addition, there were proposals for the development of a huge exhibition/ transshipment center serving the promotion of Chinese products in the region of south-eastern Europe, Middle East and North Africa. To date there has been no final decision on this.

The Contracting Authority (Public Party)

Central government is responsible for all levels of the development, design, tendering, negotiation procedure and regulation of the contract. These procurement activities were conducted under the jurisdiction of the Ministry of Communications and Works (Public Works Department, Department of Civil Aviation) and the Ministry of Finance. However, the local authorities were, also supportive of the project.

The procurement process for this project was based on the UK Treasury Taskforce (TTF) (1999) A Step-by-Step Guide to the PFI Procurement Process. London: HM Treasury, the EU regulations on the procurement process for such a project, and the Cyprus procurement law. The decision to use EU laws for the procurement process was due to the fact that, at the time, Cyprus was in the process of joining the EU and because it was considered that familiarity with the process would attract international companies (Solomou, 2003).

The Concessionaire (Private Party)

Hermes Airports Ltd, a French and Cypriot-led consortium was established. The majority of companies that created the Hermes Airports consortium are business developers mainly in the construction field (Bouygues Batiment International, Egis Projects, Iacovou Brothers, Hellenic Mining, Charilaos Apostolides) with a total share control of 64,6%. In addition the foreign companies Bouygues Batiment International and Egis Projects have extensive experience in PPPs. The consortium of project sponsors included:

  • Bouygues Batiment International (French construction group- 22%);
  • Egis Projects (French infrastructure group- 20%);
  • Cyprus Trading Corporation (a local retail group, 11.34%);
  • Hellenic Mining (11.33%, a local business developer),
  • Vantage Airport Group (11%);
  • Aer Rianta International (Irish airport operator, 11%);
  • Iacovou Brothers (a local contractor- 5,665%);
  • Charilaos Apostolides (a local contractor- 5,665%);
  • Aéroport Nice Côte d' Azur Chambre de Commerce et d'Industrie (French airport operator- 2%).

Key subcontractors for construction and maintenance included:

  • Main contractor: Bouygues Batiment International and subcontractors: Iacovou Brothers Ltd and Charilaos Apostolides Ltd;
  • Ground handling subcontractors (aircraft servicing, luggage handling etc): Swissport and LGS;
  • Retail/ Food & beverage subcontractors: Cyprus Trading Corporation (CTC) and Aer Rianta International;
  • Cleaning subcontractor: Hellenic Mining.

In order to raise funding Hermes Airports Ltd issued 10.000 shares (€1,71 per share) reflecting the share capital of the company. Hermes Airports Ltd. then borrowed €569.7M as follows: Term Loan €449.2M; Mezzanine Loan, €60.25 M; Shareholders’ Loan Stock, €60.25M. The Term and Mezzanine Loans came from 16 international banks (Koutsoulis, 2013) .

Other subcontractors included:

Construction and Maintenance: Main contractor: Bouygues Batiment International

Subcontractors:

  • Iacovou Brothers Ltd
  • Charilaos Apostolides Ltd

Ground handling (airplane servicing, luggage handling etc) subcontractors:

  • Swissport
  • LGS

Retail/ Food & beverage subcontractors:

  • Cyprus Trading Corporation (CTC)
  • Aer Rianta International

Cleaning subcontractor:

  • Hellenic Mining


As a SPV (Special Purpose Vehicle), the Hermes Airports Ltd issued 10.000 shares (€1,71 per share) reflecting the share capital of the company. See above the list of sponsors & respective shares. The Hermes Airports Ltd borrowed €569.7 million as follows:

  • Term Loan: € 449.2 mil.
  • Mezzanine Loan: € 60.25 mil.
  • Shareholders’ Loan Stock: € 60.25 mil.

Term and Mezzanine Loans came from 16 international banks.

Users

Cyprus, being an island, is isolated from Continental Europe. Larnaca and Paphos International Airports are Cyprus’ main international passenger gateways. No year- round ferry/ sea port connections with neighboring countries exist.

Larnaca Airport handles on average over 5 million passengers per year, approximately 50.000 passenger flights and over 30.000 tons of cargo. Paphos Airport, principally used by tourists, handles approximately 2 million passengers per year, over 12.000 passenger flights and some 400 tons of cargo. It is noteworthy that in 2011, 77% of air traffic at Larnaca Airport came from the European Union, while this figure is 85% for Paphos Airport. The charter percentage is 25% and 49% for Larnaca and Paphos, respectively (year 2011). The UK market share is 37,26% of total passenger traffic to Cyprus, followed by Greece with 15,71%, Russia with 9,45% and Germany with 5,34% (Government of Cyprus, Civil Aviation Department).

Key Purpose for PPP Model Selection

The revised TEN-T Guidelines Regulation sets out a more binding planning framework in a dual layer format for the European transport network. It comprises the Comprehensive Network (to be completed by 2050) and the Core Network (to be completed by 2030). Base on the timetable set in a European level priority will be given to the Core Network (European financial support). The Larnaca Airport belongs to the Core TEN-T Network and the Paphos Airport belongs to the Comprehensive TEN-T Network.

Currently, the development of the transport infrastructure of Cyprus through PPP projects is considered to be unattractive, particularly for road infrastructure. Small peripheral EU Member States have difficulties in attracting private investors for TEN-T projects because the cost of the investment is usually equivalent to that of a similar project in a central, inter-connected Member State, while the rate of return for the investment is significantly reduced due to the lower usage of the infrastructure project. This is taken into consideration when authorities investigate the possibility of developing projects in Cyprus through a Public- Private Partnership (PPP).

Value for money, technical efficiency, postponing costs, acceleration of works, short-term decrease of governmental debt and risk transfer are the main political motivations for PPPs as a contract choice, both officially/formally and unofficially/informally in Cyprus. The decrease of governmental debt is considered to be the main reason, and the secondary one the acceleration of works.

The revised TEN-T Guidelines Regulation sets out a more binding planning framework in a dual layer format for the European transport network. It is composed by the Comprehensive Network (to be completed by 2050) and the Core Network (to be completed by 2030). The Larnaca Airport belongs to the Core TEN-T Network and the Paphos Airport belongs to the Comprehensive TEN-T Network. It is obvious that priority will be given to the Core Network (European financial support).

Project Timing

After the Turkish invasion of 1974, Lefkosia (Nicosia) Airport, the only international airport in Cyprus those days, ceased its operation and the airport premises came under United Nations administration. Under these circumstances, the Republic of Cyprus decided in late 1974 to convert an abandoned RAF airport and landing strip into the new international airport of Cyprus, Larnaca Airport. Larnaca International Airport opened on 8 February 1975, with only limited infrastructure facilities and a prefabricated set of buildings comprising separate halls for departures and arrivals. Cyprus since the early 1980s was becoming a major tourism center. The Cyprus Government steadily improved the facilities of the Larnaca Airport, but the passenger terminal was unable to cope with demand. The growing tourism industry of the island led to the decision to develop a second airport in Cyprus. Paphos International Airport opened for operations in November 1983 to serve primarily the tourism industry of the region of Paphos.

The rise of tourism in Cyprus unfortunately was not matched by simultaneous development of airport infrastructure. The two airports of Cyprus were substandard and they could not match demand (especially at Larnaca Airport). Often problems arising during peak hours created a negative image for the passengers, mainly tourists. It was deemed necessary to further develop the airports. The development of the two airports was expected to assist significantly the tourist industry of Cyprus and support the viability of the economy.

The further development of Larnaca and Paphos International Airports was decided in the late 1980s. The new elected government (left wing, 1988-1993) was preparing the project having in mind the development and operation of the two airports through traditional methods. The right-central wing government (1993-2003) followed the steps of the former government. By the late 1990s, when the master plan and construction drawings were ready, the financial issue of developing the two airports arose. In those days desalination plants were being developed in Cyprus as PPP’s, introducing this as a sustainable method for project development. The right-central wing government decided to follow the PPP path. Cyprus in the early 2000s was struggling to access the European Union and decrease governmental debt. The decrease of governmental debt and the acceleration of works were the main reasoning for the PPP choice. The new central-left government (2003-2008) followed the steps of the previous government and concluded the negotiations with the preferred bidder (2005). In 2004, Cyprus entered the European Union and the new government set as a new goal access to the eurozone.

Project Locality and Market Geography

Currently air transport is the only mode of passenger transport to/from Cyprus because there are no ferry services (passenger ships) that connect Cyprus with the Continental Europe or other neighboring Countries. Cyprus as a tourist and insular country is highly dependent on air transport. There is a wide network of air-routes connecting Cyprus with Europe, Africa and Asia. Air transport policy objectives in Cyprus include the growing of air transport in a controlled way, the development of sufficient airport capacity, and the adoption appropriate air traffic management measures. The liberalisation of air transport, in combination with the development of the new airports, is expected to create the potential for Cyprus to become a regional transit hub between Europe and the Middle East.

The Larnaca and Paphos Airports support almost exclusively the passenger transport needs of Cyprus with the rest of the world. The two airports attract passengers from all over Cyprus. Transit movements are relatively low and the two airports cannot be considered as hubs for the area. The two airports are located in the outer urban areas of the cities of Larnaca and Paphos respectively

Procurement & Contractual Structure

The further development of Larnaca and Paphos Airports was decided in 1988, under a single contract. A Master Plan was prepared for the construction of new terminals in the two airports, extension of the runaways and taxiways, and other airport facilities. In May 1991, after a tendering process, the French consulting firm SOFREAVIA prepared the master plan for the airports. In those days it was expected that the two airports would have been traditionally procured and constructed. In February 1993, the French consortium AEROPORTS DE PARIS/SOFREAVIA prepared detailed designs and tender documents for the new airports. The designs for Larnaca and Paphos Airports were completed in September 1999 (Solomou, 2003).

In the late 1990s, there was a discussion of what procurement method should be used for the development of the airports. The government decided that the best method was the BOT (Build, Operate, Transfer) approach because it was believed that this would result in the easiest development of the airports without the “slow-moving” processes a State project has to face. In addition, burdening the national budget with a huge investment was not an option for the Government in those days since the primary goal was accession to the European Union.

After the selection of a team of consultants in October 2000 there was a check on the viability of the project, and discussions on project requirements and how to make the project more attractive to international companies.

Tendering

In March 2001 there was an advertisement for Expressions of Interest. Sixteen consortia expressed their interest in the project and received the necessary documentation. From those sixteen only ten returned the completed documents. These bidders were evaluated and five of them were short-listed in July 2001, and invited to submit detailed proposals in October 2001. The short-list of tenderers was based on answers to the Pre-Qualification Questionnaire (PQQ) and on the criteria for the pre-qualification evaluation. From these five consortia only the following three accepted the Invitation to Tender (ITT) and submitted proposals for the project: Alterra Consortium; Hermes Airports and Cyprus Airports Group (Solomou, 2003).

The Master Plan was made available to all bidders in order to prepare their proposals. The bidders were expected to follow the basic idea of the Master Plan, but could propose small, ‘unimportant’ changes in order to make an efficient design for the airports which would help achieve the best operation of the airports and meet the standards of the output specification. The concession contract was for a period of 25 years.

After the pre-qualification stage, a detailed bid document ITT, with all the needed information for the preparation of their proposals was sent to the short-listed bidders. The selection criteria were based on the following broad categories: - Technical and Operational (e.g. design, innovation and technical, capacity, performance, capital spend). - Business Plan (e.g. marketing strategy, pricing policies, organizational structure). - Legal (e.g. assessment of amendments to draft Contract). - Financial (i) (e.g. financial robustness, deliverability) - Financial (ii) (e.g. bid price).

Negotiations took place with the selected preferred bidder and according to the tender rules if the two parties did not reach an agreement, negotiations with the second selected bidder were to follow. In 2003 Alterra Consortium was announced as the preferred bidder. The negotiations failed and the Cyprus Government started negotiations with the second best bidder, Hermes Airports. This had legal implications since Cyprus Airports Group could legally challenge the decision, adding further delays to a much needed project. The negotiations with Hermes Airports were successfully completed and on 12 May 2006 the private consortium signed the BOT contract for the management and development of Larnaca and Paphos Airports. Until completion of the new terminals, the consortium took over the management of the existing facilities where minor improvements were made prior to the construction of the new facilities.

Contract Structure

An output specification was created that includes the way the airport is going to be operated. The Concessionaire is responsible for the Soft Facility Management (SFM) and Hard Facility Management (HFM). In the contract there is a specification of the requirements: how to manage and operate the terminals, the runway and taxiways, and car parking for staff, passengers and visitors. The Concessionaire is also responsible for the maintenance and upkeep of the airport in general, as well as for the delivery of some of the core services. It is responsible for the check-in facilities and the loading of the baggage as well as the services provided in the waiting area. The Cyprus Government before the PPP tender procedure prepared the Master Plan and the detailed designs for the two airports. Moreover, the government is responsible for the delivery of other core services (e.g. security, air traffic control, and fire brigade services).

Based on the contract clauses the aeronautical fees are regulated. Other fees and revenues (retail, car parking etc) are not regulated.

Termination clauses are included in the contract and are divided into three categories (concessionaire default, contracting authority default and force majeure). In each case there are guarantees that the Concessionaire is compensated as follows (Government of Cyprus, 2005):

Concessionaire default- compensation based on 95% of the Concession Agreement revised debt termination amount;

Force majeure- compensation based on the Concession Agreement base debt termination amount, redundancy costs, subcontractor break-of-contract costs and equity.

Contracting Authority default- compensation on the Concession Agreement base debt termination amount, redundancy costs, subcontractor break-of-contract costs, equity and equity return.

A Liaison Committee exists, formed by three representatives of the Contracting Authority and three representatives of the Concessionaire. This committee is responsible for the day-by-day review of the Contract. The Committee also provides a forum for strategic discussions on variations in market conditions as well as the efficient operation of the two airports. The Liaison Committee can be the forum for contract renegotiation.

The private sector collects all of the revenues. The Concessionaire pays the Cyprus Government an annual fee of €3,5M as well as 33% of the annual gross revenues of the two airports. In addition, the Cyprus Government participates in a profit-sharing arrangement if the actual equity IRR exceeds 12% in real terms.

Risk Allocation

The risks are allocated in a balanced way between the concessionaire and the contracting authority (government). The allocation is based on the principal that the risk is allocated to whom can best deal with it (Solomou, 2003).

Design and construction risks are allocated to the private sector. If there is a problem the concessionaire will face certain penalties. The government has developed some tools to measure performance. These risks however are thought to be the most easily regulated and measured. Maintenance risks are allocated to the private sector. If problems arise the concessionaire will face certain penalties.

Operating risks are allocated mostly to the private sector (poor operating performance, increase of operating/ maintenance costs etc). Some risks are allocated to the public sector (failure of governmental operations, due to government approved suppliers). The demand risk will be shared by both parties but the risk is greater for the private sector. The concessionaire has to pay the government a “rent” for the exploitation of the government’s assets. The “rent” is divided into two parts. The first is a fixed payment and the second a percentage (33%) of the operating revenues. This percentage shows the sharing of the demand risk between the private and the public sector. If there is a significant reduction in revenues the government receives less income.

The financial risks during construction and operation are allocated mostly to the private sector. Some risks are allocated to the public sector in the case of a decision to expand the infrastructure of the two airports.

The regulatory risks are shared between both parties. There are certain clauses that will protect the operator from negative regulatory changes enforced by the government. If, for example, tourism taxation is raised then fewer visitors will come to Cyprus, so the airports’ revenues will be reduced. In such a situation, the government should take this risk. On the other, hand if the regulation affects all Cyprus citizens, for example inflation, the concessionaire will have to bear this risk.

The force majeure risk will be shared by both parties (war, disaster, hijacking etc) but the risk is greater for the public sector, as the concessionaire is compensated by the Contracting Authority.

Paphosrisk.png

Figure 3: Risk allocation

Another possible risk that is allocated to the public sector is the possibility of having a third airport in Cyprus, either by building a new one or in the case that a comprehensive settlement is reached in respect of the Cyprus issue, when the existing airport in the occupied area may recognized as an international airport again. The bidders prepared their proposals on the assumption that there are only two airports in Cyprus. If there is in the future a new airport in Cyprus, there will be a reduction in demand for Larnaca and Paphos Airports so the contract has certain clauses to protect the concessionaire from such risks.

Performance

The contract defines a performance measurement system that incentivizes the Concessionaire to perform the designated airport services to the performance standards specified in the contract, and specifies the deductions to be made when performance does not attain the relevant standards. The concession contract establishes procedures for the measurement of performance of the designated airport services. If the Concessionaire fails to achieve the performance standards, then deficiency points apply. The deficiency points are aggregated for a certain performance review period and if they exceed a certain level (10 points) penalties apply (a percentage of the gross revenue less the concession fee). If the Concessionaire achieves or exceeds 95% performance in all the concessionaire- controlled standards, then an amount equal to 1% of the gross revenue less the concession fee for that performance review period shall be deducted from the next concession fee payment made to the Government (Government of Cyprus, 2005).

Nevertheless, the contract does not include deficiency points or penalties for non-concessionaire controlled performance standards (baggage handling and airline counter check-in process). The Concessionaire shall employ independent third parties to carry out customer satisfaction surveys of passengers and customers. No deficiency points or penalties are linked to the survey results.

The Contracting Authority may audit any aspect of the Concessionaire’s performance. If the Concessionaire achieves less than 60% for all of the concessionaire-controlled standards, the Contracting Authority may issue a Warning Notice which may lead even to termination of the contract. The performance standards may be reviewed by the Liaison Committee in good faith.

Two categories of performance indicators exist, as follows:

  • Concessionaire-controlled performance indicators: Check-In Counters; Security Check Equipment; Luggage Trolleys; Immigration/ Customs; Baggage Reclaim; Flight Information Display; Lifts/ Escalators/ Moving Walkways; Cleanliness;
  • Third party-controlled standards (non concessionaire-controlled performance indicators): Check-In for Scheduled Flights; Check-In for Charter Flights; Baggage Delivery of first bag to reach carousel; Baggage Delivery of last bag to reach carousel.

The contract includes deficiency points and penalties for the concessionaire- controlled performance standards/ indicators. Each indicator has five deficiency levels which lead to 1-5 deficiency points, respectively. The deficiency points are aggregated for a certain performance review period and if they exceed a certain level, a penalty applies. The following performance indicators are mentioned in the contract:

  • Check- In Counters for processing passengers

Concessionaire controlled performance indicator- Check- In Counters for processing passengers are fully functional 90% of the time.

  • Security Check Equipment functionality

Concessionaire controlled performance indicator- Security Check Equipment fully functional 90% of the time.

  • Luggage Trolleys availability

Concessionaire controlled performance indicator- Luggage Trolleys available 85% of the time in Peak Week for passengers in the check in hall and the arrival hall/ baggage reclaim area. -Immigration/ Customs booths functionality Concessionaire controlled performance indicator- 90% of Immigration/ Customs booths for processing passengers are fully functional.

  • Baggage reclaim equipment functionality

Concessionaire controlled performance indicator- Baggages reclaim equipment 90% of the time fully functional.

  • Flight Information Display equipment functionality

Concessionaire controlled performance indicator- Flight Information Display equipment 90% of the time fully functional.

  • Lifts/ Escalators/ Moving Walkways equipment functionality

Concessionaire controlled performance indicator- Lifts/ Escalators/ Moving Walkways equipment 90% of the time fully functional.

  • Cleanliness of the project area

Concessionaire controlled performance indicator- 90% of the time cleanliness maintained according to the specifications determined by the Concessionaire.

  • Target Maximum/ Optimal processing time

Third party controlled standards- Target Maximum/ Optimal: 50%/80% respectively passengers served within 12 minutes of joining the Check- In queue for Scheduled Flights.

  • Target Maximum/ Optimal processing time

Third party controlled standards- Target Maximum/ Optimal: 50%/80% respectively passengers served within 20 minutes of joining the Check- In queue for Charter Flights.

  • Target Maximum/ Optimal delivery time

Third party controlled standards- Baggage Delivery of first bag to reach carousel Target Maximum/ Optimal: 20/15 minutes respectively after on-block time.

  • Target Maximum/ Optimal delivery time

Third party controlled standards- Baggage Delivery of last bag to reach carousel Target Maximum/ Optimal: 35/30 minutes respectively after on-block time.

The Department of Civil Aviation expects that the passenger traffic in the coming years will increase annually by 2 -3%. The development depends on competition for tourism, the international economy and other external factors such as political stability in the region. The passenger forecasts for a 2-3% annual increase have not been confirmed (at least not for every year).

It is noteworthy that in 2011, 77% of air traffic at Larnaca Airport came from the European Union, while this figure is 85% for Paphos Airport. The charter rate is 25% and 49% for Larnaca and Paphos respectively (year 2011). The UK market shares 37,26% of total passenger traffic to Cyprus, followed by the markets of Greece with 15,71%, Russia with 9,45% and Germany with 5,34%.

Three forecast scenarios exist in the contract (low case growth, base case growth and high case growth). None of these scenarios have been confirmed by the actual passenger traffic: Larnaca & Paphos Airports actual traffic in 2012 was 7,5M passengers versus 8,5M, 9,0M and 9,5M passengers in the 2012 Low, Base and High case scenarios, respectively.

Larnaca Airport

  • Passengers

2007: 5.387.724

2008: 5.482.567

2009: 5.258.716

2010: 5.475.905

2011: 5.507.552

2012: 5.166.224

2013: 4.863.577

  • Air Traffic (airplanes)

2007: 47.755

2008: 50.483

2009: 46.416

2010: 49.022

2011: 50.329

Paphos Airport

  • Passengers

2007: 1.819.182

2008: 1.764.660

2009: 1.640.562

2010: 1.646.937

2011: 1.778.898

2012: 2.242.797

2013: 2.175.114

Project Outcomes

The key scope of the project was to deliver a modern, safe and secure National Airport for Cyprus and support tourism.Traffic has not been the anticipated. Reasons are considered to be:

  • internal (there have been discussions with respect to the high rates required by Hermes Airports ltd (concessioner). At the end of 2014, the concessioner has initiated a campaign to attract new airlines. Emphasis is placed on low-cost carriers, which are used to serve the Tourism industry. Paphos is to be the cultural capital of Europe in 2017 and a rise in visitors is expected in the range of 15-25%.
  • 2013 was a difficult year for Cyprus with great political and economic stability. This had an impact on tourism and business travel.

The following critical success factors could be considered:

  • The two new airports improved dramatically the quality of services provided. Although the two airports do not face significant competition, it is crucial for the tourist industry of Cyprus to provide long lasting- sustainable high quality services.
  • Air transport as a whole should provide high health and safety standards. Even small events can ruin the good image of an airport. It is important that the Concessionaire, the Cyprus Government with the relevant Agencies and the Contracting Authority maintain excellent cooperation. The airline operators are significant partners too.
  • Air transport as a whole should provide high security standards. Terrorism and other relevant issues have a global effect. Even small events can ruin the good image of an airport. It is important that the Concessionaire, the Cyprus Government with the relevant Agencies and the Contracting Authority maintain excellent cooperation.
  • An investment programme will increase the revenues benefiting the Concessionaire and the Cyprus Government (Contracting Authority). The diversity of the revenues will increase the viability of the project and it may allow the decrease of other fees (e.g. aeronautical fees). The Cyprus Government should support the Concessionaire to explore possible investment choices. The fact that the contract concludes in 2031 should not be a negative factor. Other incentives should be identified.
  • Maintenance needs will increase by the time and the Concessionaire should dedicate sufficient resources. The maintenance should be kept in high levels in order to provide the predefined performance standards.
  • Cooperation between the Concessionaire and the Contracting Authority should be in the highest possible level. PPPs succeed when the partnership becomes a reality. The cooperation was identified in other factors too, but it should stand alone too. The liaison committee is expected to support continuous cooperation.

For an insular country the existence of a high quality , safe and secure airport(s) is of paramount importance. It is also very important for business and tourism development. The old airport was insufficient and not capable to handle with safety and security air traffic. This is especially important following the developments in the wider geographical area.The concessionaire - to date - has not used the full potential of the airport services. Additional revenues are still rather low. The upside is that there is space for improvements on revenue.

The airports have also received (right from the start) high acceptability. The upgrading of the existing airport facilities was long required.

The following critical failure factors could be considered:

  • The viability of the entire project depends on the growth of the airlines passenger traffic. The actual passenger traffic so far did not match the forecast scenarios included in the contract.
  • Basically, the growth of revenues is interconnected with the passenger traffic. Both these factors are significant for the viability of the whole project. Nevertheless, the Concessionaire seeks out other forms of revenues and the Cyprus Government assists the Hermes Airport towards this direction
  • Aeronautical fees are regulated by the Concession Contract. It is important to be maintain in reasonable levels. It is important for the viability of Cyprus economy and especially for tourism industry to offer competitive tourist packages. The aeronautical fees play significant role on the later. On the other if the tourism industry fails to attract tourists in Cyprus, the airports would have significant loses. In this case the chicken and egg situation exists. This show the importance of cooperation of all the tourism industry stakeholders and Hermes Airports should be a main stakeholder.
  • In 2012, Cyprus was affected by the Eurozone financial and banking crisis. In June 2012, the Cypriot Government applied for economic assistance (bail out) from the European Union and the International Monetary Fund (IMF). In April 2013 the Cypriot Government reached to an agreement with its lenders. The status of Cyprus economy and the sustain recession that is expected are factors that could create increase uncertainty for the project.

The rates applied by the concessionaire seem to be limiting the full potential of the airports. In 2014, new campaigns were launched to attract airlines. The mix of shareholders in the concessionaire may also be playing a pivotal role in the business development.

Economic Impact

It is difficult to assess the full economic impact as the operation of the new airports coincide with the economic crisis and the developments in the wider area. Definitely, access to the island-country has been significantly improved.

Social Impact

Apart from offering new employment opportunities, the new airport has sustained the tourism industry and therefore jobs in that sector. It also improves the mobility of the inhabitants.

Environmental Impact

The construction of the new airports comes with design to protect the environment from noise and emissions (appropriate runways etc.).

References

  • C. Christodoulou, C. Efstathiades, 2013, Larnaca and Paphos International Airports In Roumboutsos, A., Farrell, S., Liyanage, C. L. and Macário, R, COST Action TU1001 Public Private Partnerships in Transport: Trends & Theory P3T3, 2013 Discussion Papers Part II Case Studies, ΙSBN 978-88-97781-61-5, COST Office, Brussels available at http://www.ppptransport.eu
  • Solomou C. (2003). BOT and Economic Efficiency: The case of Larnaca Airport. Thesis for the degree of Master of Science in Built Environment for the University of London. University College London, Bartlett School of Graduate Studies.
  • Government of Cyprus. 2005. Concession Agreement for the Development and Operation of International Airports at Larnaca and Pafos. Ministry of Communications and Works. Lefkosia: Government of Cyprus
  • Government of Cyprus. 2012. Transport Statistics 2011, Statistical Service. Lefkosia: Government of Cyprus
  • Government of Cyprus. 2009. Public Works Department: One Hundred thirty years of history and service, 1878-2008. Lefkosia: Government of Cyprus.
  • Antonis Koutsoulis, Head of the Unit for regulating the Larnaca and Paphos Airport BOT Contract. 2013. Personal Interview. Lefkosia
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