Overview of the MLIT Report on the Findings of the Advisory Committee on the Legal Regimes of Japanese Privatized Airports
On March 11, 2022, the Ministry of Land, Infrastructure, Transportation and Tourism (the “MLIT”) released the “Summary Report Regarding the Findings of the Advisory Committee on the Legal Regimes of Privatized Japanese Airports” (the “Report “). The report first reconfirms the objective of privatizing airports using some form of concession (this structure is referred to here as the “airport concession”), then examines airport concession structures in more detail in order to consider the ideal airport concession agreement, taking into account the current situation due to the COVID-19 pandemic. Specifically, given this situation, the report proposes a new approach to airport concessions in terms of (i) extending the concession period under airport concession agreements, (ii) payment structure for concession fees, (iii) introduction of new risks – the sharing clauses and (iv) the sharing of risks between the licensor and the beneficiary in the event of force majeure as applicable to Kongou-gata systems.
This bulletin will provide an overview of the contents of the report.
2. Background: Measures implemented by MLIT in response to the COVID-19 pandemic
As further described in our finance law newsletter published on March 4, 2021, titled “Japan Easing Airline Slot Utilization in Response to Pandemic”, MLIT has implemented various measures to support airlines, airports and other related companies in the airline industry amid continuing difficult business conditions caused by significant declines in air passenger demand. Among these measures, for privatized airports managed by MLIT as airport concession grantor (hereinafter referred to as “privatized airports”), MLIT may offer privatized airports interest-free loans for the development of airport facilities, grant an extension of the payment of the concession annual fees for a certain period, grant an extension of the concession period and/or grant relief from certain obligations under the airport concession contract.
However, the report states that MLIT has received information that (i) these support measures themselves are insufficient to compensate for the damage suffered by airport operators due to force majeure circumstances such as COVID-19, and (ii) insufficient consideration of measures in the event of force majeure situation, in particular with regard to Kongou-gata diets. Kongou-gata plans are being considered for adoption to promote airport concessions at state-run airports in the future.
A) Agreed extension of the concession period
Under Japanese airport concession agreements for privatized airports, in the event that, due to force majeure circumstances, the concessionaire suffers increased costs or other damages, or all or part of the business is suspended, the concessionaire may seek consultation with MLIT to extend the concession period only when it is necessary to recover the increased cost or damage caused by such force majeure circumstances. Through this consultation process, MLIT and the concessionaire may agree to an extension of the concession period.
Although the maximum limit for extension of the concession period is set at five years for privatized airports (except Kumamoto airport), the advisory committee recommended that, given the impact of force majeure circumstances such as COVID-19 in the future, it is desirable to consider a mechanism that allows for flexible changes to the concession period taking into account damages that may arise in the future, as well as to combine this extension with other support measures described in more detail in the following sections of this bulletin.
B) Concession fee payment structure
The Guidelines on the right to operate the public facility, etc. and public facility, etc., operating project (revised June 18, 2021; hereinafter referred to as the “Guidelines”) state that “when considering the purpose of PFIs, such as the use of private sector, it is not desirable for the public sector to bear the financial risks, and with a view to promoting the introduction of a mechanism by which the private sector will bear the financial risks (such as the holder of the exploitation right receiving a loan from a financial institution or similar), a lump sum payment should be considered for the payment of concession fees. Even if installment payments should be adopted, efforts should be made to incorporate a lump sum payment of a certain amount (for the initial part).” (Guidelines, page 35).
On the other hand, the report also notes views that it is desirable that payments to airport operators be made in instalments, and that the amount of each payment should not be fixed, but rather linked to the operators’ profits or the number of passengers in order to reduce the financial risk borne by operators in the event of a sudden deterioration in the business environment due to a force majeure circumstance such as COVID-19. Taking these views into account, the report also emphasizes that it is advisable to grant installment payment structures in a flexible manner depending on the context and circumstances of each project. The report also suggests that installment payment structures could also include the aforementioned methods such as linking installment payments to operator profits or passenger numbers. However, the report mentions that these figures also fluctuate depending on changes in the external environment and the management efforts of the airport operator.
C) Introduction of new risk-sharing clauses in airport concession contracts
As mentioned at the beginning of section 2. above, the MLIT can offer privatized airports interest-free loans for the development of airport facilities, grant an extension of the payment of annual concession fees for a certain period, grant an extension of the concession period, and/or to alleviate certain obligations under the airport concession contract. In the report, it was recommended that the introduction of (i) provisions on profit/loss sharing, which is also proposed in the guidelines, and (ii) provisions on interest-free loans by the MLIT, which is recognized in the Promotion of Private Finance Initiative Act (Act No. 117 of 1999; hereinafter referred to as the “PFI Act”), should be considered on a case-by-case basis as concrete measures to compensate operators for damages suffered when a force majeure Event.
The profit-sharing clause is described as “a clause under which the holder of the exploitation right pays a sum of money to the administrator if the profit of each financial year exceeds the norm foreseen in advance, in the corresponding amount” (page 23 of the guidelines).
D) Sharing of risk between the licensor and the beneficiary in force majeure Circumstances in Kongou-gata Diets
The report notes that some MLIT-operated airports, which are not currently privatized, are finding it difficult to operate on a stand-alone basis. The report indicates that Kongou-gata may be adopted when introducing an airport concession regime at these airports. However, the report identified that the measures that are currently adopted in the concession contract of the privatized airport to compensate operators for damages in the event of force majeure the circumstances may not be appropriate for Kongou-gata diets.
First, because MLIT’s maximum public load over the life of the project is determined at the time of the IPO of the Kongou-gata regime, this regime does not necessarily allow an additional public charge to be imposed for the extended concession period, even if the concession contract is extended. Specifically, at the time of the IPO, airport concession projects must be approved by the Diet as a budgetary measure with a limitation of the amount of government expenditure during the airport concession period, and there is also a limitation of the duration of this expenditure obligation authorized by article 68 of the PFI law. Royalty payments by MLIT to the concessionaire for services provided by the concessionaire under extended concession periods are not included in the budget measures approved by the Diet.
Accordingly, in order to bind the grantor to make royalty payments for the services provided by the grantee under the extended grant periods, an order by the Diet is additionally required. Thus, at the time of the execution of the airport concession contract, the payment obligations of the grantor are not necessarily guaranteed to apply during the extended concession periods due to the occurrence of future force majeure events.
Second, even if concessionaires are allowed to suspend their obligations to make certain investments in facilities under airport concession agreements, it is expected that the amount of related investments to be paid by concessionaires will be relatively low for airports where Kongou-gata system will be adopted, in relation to these investment amounts for autonomous airports. Accordingly, it is considered that the suspension of the investment obligations of the beneficiaries may ultimately be of limited effectiveness in improving the cash flows of the beneficiaries.
In order to address these concerns, the report recommends that, in order to ensure that beneficiaries are encouraged to resolve difficulties themselves through management efforts, it is advisable to first consider the introduction of clauses relating to profit/loss sharing and clauses relating to non-interest loans by the MLIT on a project-by-project basis, while taking into account the need to clarify risk sharing between the public and private sectors in the same way than for privatized airports managed independently.