CONCESSIONS
The risks of a concession contract, whose duration can vary from a few years to several decades, are carefully evaluated before bid submission during the design phase, which is generally much longer than it is in the Energy and Construction businesses.
The main risks on the operation of concession assets relate to changes in traffic or passenger numbers, the level of toll charges and collection, as well as the operating, maintenance and repair costs set in the concession contract. Traffic levels on motorway concessions are correlated to economic activity and are generally affected by changing fuel prices. Toll increases are determined by set formulas, the main aim of which is to offset the risk of inflation. For airport concessions, passenger numbers may be impacted by a variety of events, including natural events or harsh weather conditions as well as terrorist attacks or threats. Rates are set in accordance with the regulation applicable to the contract, which may or may not make reference to a return on invested capital.
Experience has shown that social incidents can disrupt concession operation and lead to acts of vandalism, as was the case at the end of 2018 and in 2019 with the “yellow vests” movement in France. A health crisis such as Covid-19 can also have a very significant impact on traffic levels and passenger numbers due to travel restrictions.
For all concession infrastructure under operation, provisions are taken to cover the cost of renovating installations – particularly motorway road surfaces and airport runways – as well as the cost of building maintenance, based on maintenance expense plans (see Note H.19.3 to the consolidated financial statements, pages 313 to 314).
| Risk identification |
Risk management procedures |
|
Design phase
- – Erroneous business plan
- – Poor estimate of required investment
- – Difficulties in finalising the financial structure
- – Constraints relating to the applicable regulation
- – Lack of robustness of the contractual environment
- – Poor estimate of the project’s environmental and social impacts
- – Legal or tax uncertainties
Possible consequences:
- – Cost overruns and delays
- – Late delivery, project deterioration
- – Unprofitable project
- – Challenges to contract by the concession grantor
- – Damage to the Group’s reputation
|
Design phase
- – Erroneous business plan
- – Poor estimate of required investment
- – Difficulties in finalising the financial structure
- – Constraints relating to the applicable regulation
- – Lack of robustness of the contractual environment
- – Poor estimate of the project’s environmental and social impacts
- – Legal or tax uncertainties
Possible consequences:
- – Cost overruns and delays
- – Late delivery, project deterioration
- – Unprofitable project
- – Challenges to contract by the concession grantor
- – Damage to the Group’s reputation
Risk management procedures
- – Presentation to the Risk Committee before a bid is submitted
- – Transaction structured as a special purpose vehicle (SPV): to limit the Group’s commitments and the amount it invests in the SPV, share capital and control may be shared with one or more partners. In this case, a majority of the financing is comprised of debt with no recourse or only limited recourse to shareholders.
- – Some risks may remain with the concession-granting authority, in particular in relation to making land available.
- – Recourse to the expertise of the Group’s Energy and Construction businesses
- – Involvement of lenders from the preliminary phase
- – Use of outside consultants
- – Analysis of the project’s environmental and social impacts
|
|
Construction phase
- – Poor choice of contractor and other companies
- – Difficulties or unexpected events during construction
- – Disturbances caused by project opponents
- - Adverse legal or political developments
Possible consequences:
- – Cost overruns and delays
- – Penalties
- – Late delivery, project deterioration
- – Unprofitable project
|
Construction phase
- – Poor choice of contractor and other companies
- – Difficulties or unexpected events during construction
- – Disturbances caused by project opponents
- - Adverse legal or political developments
Possible consequences:
- – Cost overruns and delays
- – Penalties
- – Late delivery, project deterioration
- – Unprofitable project
Risk management procedures
- – Special attention paid to the preparation phase and the management of relations with stakeholders, including the implementation of best practices in line with the Cooperate initiative
- – Fixed-price construction contracts based on a back-to-back principle
|
|
Operating phase
- – Lower-than-expected traffic levels or passenger numbers
- – Difficulties in concession management with the concession-granting authority, regulatory authorities and/or end users
- – Legislative or tax changes
- – International sanction(s) against a partner or a country in which the Group operates
- – Damage to infrastructure
- – Significant deterioration in financial markets
- – Climate change, extreme climate events
- – Strikes or toll disputes
Possible consequences:
- – Unprofitable project
- – Difficulty in refinancing the project at favourable terms
- – Unilateral decision by the concession-granting authority to challenge the terms of the contract
- – Financial difficulties at airlines
- – Infrastructure unavailability that could cause loss of revenue and contractual penalties
- – Damage to the Group’s reputation
|
Operating phase
- – Lower-than-expected traffic levels or passenger numbers
- – Difficulties in concession management with the concession-granting authority, regulatory authorities and/or end users
- – Legislative or tax changes
- – International sanction(s) against a partner or a country in which the Group operates
- – Damage to infrastructure
- – Significant deterioration in financial markets
- – Climate change, extreme climate events
- – Strikes or toll disputes
Possible consequences:
- – Unprofitable project
- – Difficulty in refinancing the project at favourable terms
- – Unilateral decision by the concession-granting authority to challenge the terms of the contract
- – Financial difficulties at airlines
- – Infrastructure unavailability that could cause loss of revenue and contractual penalties
- – Damage to the Group’s reputation
Risk management procedures
- – In-depth review of the wording of the initial contract and the periodic economic regulation contracts
- – Quality of service to end users
- – Strict application of surveillance and maintenance procedures (in France, this relates to the review and implementation of the rules laid down in the set of official documents comprising the technical instructions for the monitoring and maintenance of civil engineering structures, known by its French acronym ITSEOA)
- – Analysis of airline credit risk
|
PROPERTY DEVELOPMENT
The Group’s property development activities are exposed to numerous administrative, technical, commercial, tax and economic uncertainties as well as to the potential business failure of partners or subcontractors (builders). The Group’s property development operations are carried out essentially in France by VINCI Immobilier. Some VINCI Construction subsidiaries may also participate in property transactions or property development programmes, with a limited assumption of risk. Any commitment exceeding defined thresholds must be authorised in advance by the VINCI Risk Committee. The Group’s policy is to undertake a new project only after it has reached a minimum pre-sale rate.
