HEDGING INFRASTRUCTURE PROJECTS AGAINST COVID-19 TYPE DISRUPTIVE EVENTS WITH TERM EXTENSION CLAUSE

Infrastructure concessions, especially for transport projects, are long-term investments subject to demand volatility. Disruptive events, such as the Covid-19 pandemic, may negatively affect demand for traffic infrastructure, thus impacting the cash flows of such projects and decreasing the return of investment got by the concessionaire. Historical demand series shows that these events are more frequent than it would appear, but their effects are usually transitory. In the analysis of passenger demand series in major airports in the United States, Europe, and Brazil, it is apparent how the Covid-19 pandemic affected demand for a period of time. Nonetheless, after the second year of the pandemic, demand resumed its historical levels with an observable time lag, but at a fast pace. During this time, the demand for traffic infrastructure was negatively affected, which hurt these projects' cash flows and made them lose income. We propose an innovative supporting mechanism called Minimum Revenue Guarantee with the Term Extension Clause (MRG-TEC) to hedge the effects of such disruptive events. It combines MRG with a concession time-term extension proportional to the observed reduction in the demand and the length of this reduction, modeling it as two European Call Options. Traffic demand is modeled as a mean reversion to which negative Poisson jumps are added to simulate such disturbances. Results are then compared to the case without real options.