Larnaka and Pafos airport development, Cyprus

We have been retained as lenders’ technical advisor for two airport terminals in Cyprus, a role that began with due diligence and continues with operational monitoring since the new facilities entered service at Larnaka and Pafos airports.

To give comfort to the lenders we contracted to make monthly site visits to review progress against the monthly payment milestones set up as part of the project.

The Republic of Cyprus is served by two major airports, Larnaka (opened in 1975) and Pafos (opened in 1983), situated at the eastern and western extents of the island respectively. After 20 years of operations of the original terminals it was recognised in 2002 that these were getting to the end of their useful lives and were fast running out of capacity. To address this issue the Cypriot Government began looking for a suitable concessionaire to design, build and operate two new terminals – one at each airport – as well as undertake the operation of the airports themselves.

Key facts

We were appointed by a consortium of lenders to undertake due diligence on the proposed development and operations at the two airports. Throughout the due diligence process we provided assistance and technical advice to the lenders in their consultations with the potential concessionaire, including reviews of the new terminal plans, opinions related to potential air traffic levels, and assistance with regard to the project contracts so as to best protect the interests of the lenders.

With the help of our inputs the project reached financial close in May 2006. Post financial close we continued in the lenders’ technical advisory (LTA) role throughout construction, this phase of our role culminating with the opening in November 2008 of the new terminal in Pafos, capable of serving an estimated 2.7M passengers annually, and a year later, the new 7.5M passenger Larnaka terminal.

Since the terminals became operational we've been retained as LTA, performing an ongoing operational monitoring role. Larnaka Airport has a throughput of around 5M passengers per annum, whilst Pafos serves 2mppa.

Challenges and solutions

In delivering a project of this kind the main challenge is inter-party relationships. During the due diligence process we act for the lenders in their negotiations with sponsors, with the aim of ensuring that the main risks of the potential investment are identified and assessed properly. Post financial close, in a project such as this, the relationship issue expands to include requiring a working relationship with the lenders, the concessionaire, the construction contractor, and the grantor.

With large construction projects the issue of project spend is paramount. If payments are made against a programmed schedule, rather than against work done, there is the opportunity for a construction contractor to attempt to drawdown more money than that to which they are actually entitled. This can be a risk to the lenders.

Throughout the process, particularly in the construction phase, we found it important to maintain good relationships with all the relevant stakeholders, while still fulfilling our obligations to our client, the lenders. Sometimes this meant assisting in resolving disagreements between parties in an attempt for the project to meet the common aim – an on-time and on-budget completion.

To provide comfort to the lenders with respect to the drawdown of funds, we contracted to undertake monthly visits to the site to review progress against schedule, and also against the monthly payment milestones set up as part of the project. It was important that the assessment as to completion of the milestones was in all cases undertaken fairly with regard to both the lenders and the concessionaire.

Value and benefits

Through our due diligence work we identified and advised the lenders of potential risks and the best way to mitigate against these without endangering the project as a whole.

Our assistance during the negotiation process we believe assisted in forming a reasonable agreement between the contracted parties which helped the project to reach successful financial close.

Post financial close we believe our work as LTA has been important in keeping the lenders appraised of progress, addressing their concerns, and allowing the concessionaire to progress with their developments and operations.