2.2.4. Affermage/Lease

In the affermage/lease type of arrangement an operator (the leaseholder) is responsible for operating and maintaining the infrastructure facility (that already exists) and services, but generally the operator is not required to make any large investment. However, this model is often applied in combination with other models such as build-rehabilitate-operate-transfer (BROT). In such a case, the contract period is generally much longer, and the private sector is required to make a significant level of investment. The next figure shows the typical structure of an affermage/lease contract.


Figure 6: Affermage/lease contract

In the affermage/lease types of arrangements, the operator takes lease of both infrastructure and equipment from the government for an agreed period of time. Generally, the government maintains the responsibility for investment and thus bears investment risks. The operational risks are transferred to the operator. However, as part of lease, some assets may be transferred on a permanent basis for a period which extends over the economic life of assets. Fixed facilities and land are leased out for a longer period than for mobile assets. Land to be developed by the leaseholder is typically transferred for a period of 15-30 years.

It may be noted here that if the assets transferred to the private sector under a lease agreement are constrained in their use to a specific function or service, the value of assets is dependent upon the revenue potential of that function or service. If assets are transferred to the private sector without restrictions of use, the asset value is associated with the optimum use of the assets and the revenues that they can generate.

Examples of leasing in the transport sector include Rajiv Gandhi Container Terminal, India, Laem Chabang Port Terminals B2, B3 and B4 in Thailand, and Guangzhou Baiyan Airport in China.

The main pros and cons of the affermage/lease model include the following:

Pros:

  • Can be implemented in a short time
  • Significant private investment possible under longer term agreements
  • In some countries, legally and politically more acceptable for strategic projects like ports and airports

Cons:

  • Has little incentive for the private sector to invest
  • Almost all risks are borne by the public sector
  • Generally used for existing infrastructure assets
  • Considerable regulatory oversight may be required

 

 

IDevice Icon Difference between affermage and lease
The arrangements in an affermage and a lease are very similar. The difference between them is technical. Under a lease, the operator retains revenue collected from customers/users of the facility and makes a specified lease fee payment to the contracting authority. Under an affermage, the operator and the contracting authority share revenue from customers/users.

Copyright © 2008 by Transport Policy and Development Section, United Nations Economic and Social Commission for Asia and the Pacific (ESCAP).