Road Concession Research Articles

Ex post evaluation of PPP government-led renegotiations: Impacts on the financing of road infrastructure

Renegotiations are often claimed to be the major pitfall in public–private partnership projects. In fact, the literature and empirical evidence suggest a bias toward favoring concessionaires, although there are well-known examples of harmful unilateral decisions by governments. This article establishes a distinction between structural renegotiations (with changes in the risk-sharing agreement) and nonstructural renegotiations (without shifting risk) and analyzes the implications of structural renegotiations in a road concession by comparing the ex ante and ex post financial implications for government, concessionaire, and users. The selected project is one that started as a shadow toll and was later changed to real toll. The analysis shows that the renegotiation essentially transferred costs to the users. The financial burden for the government decreased and the internal rate of return (IRR) of the concessionaire increased slightly although the overall risk profile of the concession decreased. The users supported a 40% higher cost, and the system gained an additional cost component (the electronic tolling system). Overall the global financial costs increased 40% when compared with the initial regime. The article also sets out some discussions and implications for policymakers.

Minimum revenue guarantees valuation in PPP projects under a mean reverting process

Minimum revenue guarantees, where the government assumes a portion of the traffic risk to guarantee a minimum level of revenue and profitability to the investors, is a standard risk mitigation mechanism for Public-Private Partnership contracts. Typically, valuation models for these guarantees assume that traffic volume follows a geometric Brownian motion under the Real Options Approach. However, this is often done without testing whether this assumption is reasonable or not. In this article, statistical tests are applied to check the validity of this assumption and show how toll road traffic can be modelled under alternate models, such as Mean Reverting processes, if the geometric Brownian motion assumption is rejected. In that sense, this approach is applied to the case of a toll road concession in Colombia where a Mean Reverting process is used to model the traffic. Finally, it is showed that this model is a valid tool for defining the fair value of the minimum amount of revenue secured by the government.

Road Infrastructure in Brazil and regulatory economic incentives

This article assesses the regulatory economic incentives established for the road concession sector in Brazil. Incentives are linked to the scope for “renegotiation” of tariffs and duties to which the company subject to regulation committed, mainly the investment schedule. In Brazil, all renegotiations are based on the maintenance of the economic and financial balance of the concession contract (EFECC). The Brazilian legislation has some basic principles for the EFECC, but most of the main guidelines are currently described in the concession contracts. In the case of road concessions, there have been remarkable advances in the design of the EFECC in the contracts between 2009 and 2013, making renegotiations more transparent than before. Road contracts are becoming more “complete” than they used to be because there is an attempt to describe all risk allocation of the concession. This reduces the scope for opportunistic behavior and bad renegotiations from both parties, the concessionary and the regulator/public sector.

Project Financing Models for Toll Road Investments: A State-of-the-Art Literature Review

In greenfield toll-road projects, financial sustainability has been a major issue. Many toll roads cannot be operated. Although most of Indonesia's 24 toll road concessions have already been signed by the Toll Road Authority, most of them were caused by financing problems. Three problems have been identified as potential sources of this unsustainability, such as the uncertainty of long-term project revenues, budget constraints provided by the government, and inadequate government support for land acquisitions. This paper aims to investigate the state-of-the-art innovative financing models recently introduced to address financial problems by using a desk study and meta-analysis. The findings are an earmarked tax revenue system, deep discount bonds, take-out financing, tax increment financing, land leases, deferred debts, and private donations.

Risk in Government’s Estimate for Toll Road: Based on Investors’ Perspective

The government’s estimate for toll road concession award, as a comparator for investors’ bids, has been criticized by investors, as it does not fully include the proper cost of risks. Thus, there is a need to develop a more equitable estimate that considers the risks, both at the project and at the business/corporate level. The study was mainly supported by qualitative data on the probability of occurrences and impact assessment of risks, acquired through interviews with major investors. Probability Impact Matrices were used to identify risks categorized as “high risks.” Findings have indicated that the high and dominant risks are: i) Route/traffic management (lower traffic volume due to changing routes); ii) Overloading (poorly imposing the limitations of heavy vehicles); and iii) Inadequate/inaccurate data in feasibility study documents. Recommendation on the mitigation plan for these risks has been corroborated by both parties, the government, and the investors. Parts of the risk are proposed to be incorporated into the government’s estimate, while other risks should be adequately addressed in specific contract clauses for Indonesia’s PPP scheme.

Are public private partnerships that rigid? And why? Evidence from price provisions in French toll road concession contracts

Transport concession contracts are commonly said to be standardized and too rigid. They would not allow public authorities to adapt them to evolving context and circumstances. This paper aims at challenging this view and, more particularly, the view that contractual rigidity for transport concessions is exogenous. Using a transaction cost framework, we disentangle between three main determinants of contractual rigidity: traffic uncertainty; connivance between contracting parties; quality of the institutional environment. Using an original and unique database of mostly French toll road concession contracts, we observe a great variety of provisions for toll adjustment. While our results point out a positive impact of future traffic uncertainty on the propensity to resort to flexible contracts, they also highlight that higher trust between the contracting parties and more reliable institutional environments foster contractual flexibility. These results and the associated policy implications can be helpful in implementing the conditions under which the public and private partners are able to cope with the intrinsic incompleteness of these contracts.

Valuation of the option of early reversion in road concessions

In recent years there has been an increase in the interest in contractual flexibility in infrastructure investments, especially in Public-Private Partnership agreements, characterized by the uncertainty derived from the long duration of contracts. This has led to the extension of the theory of real options to the field of infrastructures, as an appropriate methodology for analyzing flexibility in contracts. Within this line of research, this paper focuses on the analysis of the option of early reversion of road concessions, as a right held by the Public Administration and whose value depends on the evolution of a random variable, the volume of traffic. The real option approach is applied to the case study of a road concession in Spain, consequently obtaining significant values for the probability of exercising the option. More generally, this paper contributes to characterizing the early reversion option as a practical tool that can be used by the Administration for the implementation of the infrastructure policy.

Probabilistic Approach to Evaluate Acceptable Toll Rates in Road Concessions

Countries worldwide make substantial efforts to keep the condition of their road infrastructure at an acceptable level under budgetary constraints. One possible model that enables the delivery of road projects under limited budgets is a public–private partnership (PPP). Because of several technical, financial, legal, and economic issues that need to be addressed, PPP agreements are relatively complex. In addition, defining long-term rights and obligations between the public sector and the private concessionaire requires an in-depth risk analysis because of the considerable number of risks usually encountered in PPP projects, such as a toll road concession. The objective of this paper is to present a method for an ex ante assessment of the acceptable toll rate for different stakeholders based on a probabilistic analysis of construction costs, operations and maintenance costs, and traffic volumes. The financial constraints included in the analysis are the debt service coverage ratio and return on equity. The resulting toll rates are determined from the simulated probability distributions of the input parameters. Such rates are then compared with the socially acceptable toll rate. The application of the proposed method to a case study of a toll road concession in Greece for which publicly available data were obtained indicates that the method presented is able to capture some uncertainties and improve the project’s risk quantification process. It is recommended that the proposed method be tested on other projects for further validation and eventual upgrading of the model for use as a tool in risk management in toll road concessions.

Economic valuation of a toll road concession with traffic guarantees and the abandonment option

Governments worldwide have been encouraging private participation in transportation infrastructure. To increase the feasibility of a project, public-private partnership (PPP) may include guarantees or other support to reduce the risks for private investors. It is necessary to value these opportunities under a real options framework and thereby analyze the project's economic feasibility and risk allocation. However, within this structure, sponsors have an implicit option to abandon the project that should be simultaneously valued. Thus, this article proposes a hypothetical toll road concession in Brazil with a minimum traffic guarantee, a maximum traffic ceiling, and an implicit abandonment option. Different combinations of the minimum and maximum levels are presented, resulting in very high or even negative value added to the net present value (NPV). The abandonment option impacts the level of guarantee to be given. Governments should calibrate an optimal level of guarantees to avoid unnecessarily high costs, protect the returns of the sponsor, and lower the probability of abandonment.

Infrastructure Sovereign Bonds in Sub-Saharan Africa Dissecting the Road Governance Challenge of the New Financing Instrument

It is estimated that transport investment in Sub-Saharan Africa is less than one third of what is required to meet economic growth targets underlying the Millennium Development Goals. To boost investment in the transport sector, the region cannot but resort to private finance wherever possible. To this end, at least five countries have considered issuing infrastructure sovereign bonds. Most of the proceeds of these bonds would be used by the roads sector. This paper explores the challenges of governance that the sector must tackle to efficiently use the funds. The paper starts with a description of the economic challenges associated with the gap in road financing. Private finance is then presented as a major relief to the current fiscal stress; the mechanics of private finance is discussed. It is noted that the continent is considered a high risk area. However, project ratings could be improved by leveraging private finance. Such funds could be raised by issuing sovereign bonds. The sovereign bond route however exposes the public sector to inflation and exchange rate risks, and value erosion through interest payment. This means the funds should be used expeditiously, which poses a major challenge to road governance. Weaknesses in the existing governance frameworks are exposed and a deep appreciation of institutional change presented as a tool in the management of the existing weaknesses in road governance; a model of institutional change is discussed. In conclusion, the paper remarks that most countries in SSA should consider area-wide management contracts as a step towards road concession contracts. This approach would allow road authorities to adapt to the challenges of public-private partnerships.

Developing Transport Infrastructure in Sub-Saharan Africa through Public–Private Partnerships: Policy Practice and Implications

In contemporary times, Public–Private Partnership (PPP) in transport infrastructure has gained considerable attention in developing regions following its success in the developed countries. However, Sub-Saharan Africa (SSA) is among the developing regions with few transport PPP projects and among the regions with high number of failed projects. Meanwhile the region's transport infrastructure need far exceeds it current provision. This paper therefore aims to examine the project experiences (success and failure factors) of three highly profiled transport PPP projects, namely the Lekki toll road concession project (Nigeria), N4 toll road (South Africa/Mozambique) and Port of Maputo (Mozambique) in order to develop policy measures for effective future implementation. The experiences of the three projects show that transport PPP policy is indeed feasible in SSA. However, to realise its full applicability, proper policy actions and measures must be carefully observed and these include effective and efficient stakeholder management, transparent and competitive tendering process, high participation of local investors, stable macro-economic conditions and strong government commitment and regulatory framework. The projects experiences and policy actions developed are impactful in accelerating transport infrastructure development through PPP approach in SSA. Hence it is hoped that policy-makers and practitioners would be informed on the key strategies to employ in implementing future projects.

Aquaplaning risk assessment in Portuguese road design guide

For a long time, the aquaplaning phenomenon has been acknowledged to cause serious road accidents, during heavy rainfall, given specific vehicle and road conditions. Accident statistics confirm that during adverse weather conditions the rate of crashes increases. Portuguese road concession contracts require accident rates to be monitored and define payment adjustment factors in relation to accident rate variation in comparison with data from previous years. However, there are no defined guidelines to assess the risk of aquaplaning and how to deal with it. A discussion of the definition of guidelines to assess aquaplaning risk at project level in Portugal, and the recommended countermeasures, considering other world administrations' analysis methodologies and published research results of the past 50 years are presented herein. The critical analysis highlights the conditions contributing to failure and the share of responsibility between the road administration and the driver.

Risk Management in Public–Private Partnerships

This study investigates the risk management in long‐term concession contracts known as public–private partnerships (PPPs). The M4 is the first Australian PPP road concession to reach the end of its concession cycle. It provides a unique and timely opportunity to examine the risk management process over its contract term and the efficacy of PPP contractual structures in managing uncertainties. Our specific research interests focus on two questions. First, what risk management approach was implemented? Second, has the risk‐allocation strategy defined in the contract facilitated or hindered the risk management process? The findings of the study suggest that under the incomplete contract approach, the risk management practices rooted in a strong contractual framework, allied with good relationship skills, has contributed to a positive outcome for the M4 PPP. The study provides generalisable insights into risk management in inter‐organisational long‐term contracts.

Federal Toll Road Concession Program in Brazil: Is It Moving in the Right Direction?

This paper assesses the toll road concession program started by the federal government of Brazil, from its beginning in 1996 until 2012. Brazil has one of the longest road networks, under private concessions, in the entire world. The authors use the case study approach, based on the available information, to analyze the evolution of the program over the course of its history. Specifically, a detailed analysis is conducted from three perspectives: those of the competitiveness of the tender, the impact of toll modifications caused by the rebalancing of the economics of the contract, and the actual evolution of the traffic flows as compared to their estimates, respectively. It is found that the most recent auctions have been very competitive. Moreover, with the original toll roads, bidders relied on early traffic forecasts that turned out to be overly optimistic, and over the years, contract rebalancing has led to large increases in toll rates. Overall, and even though Brazil’s program can be considered successful in many ways, there is still considerable room for improvement.

Risk Inclusion in the Reserve Price Estimation for Toll Road Concession Award

 Abstract—Investors’ risks in toll road concession award are related mainly to land acquisition; toll tariff, and tender process. Although the first of two are dominant risks, this study is focused on the risks associated with tender process. The reserve price, as a comparator for investors, bids has been criticized by investors, as it does not include proper cost of risks. There is a need to develop a more equitable reserve price that considers the risks, both at the project and at the business/corporate level. These risks have been identified based on existing regulations, and rom the point of views of both parties, i.e., the investors and the government were identified through semi-structured interviews. The findings indicated that while investors understand the need to estimate the cost of risks, this cost is not fully included because it is not fairly considered the reserve price. There are twelve significant risks identified including: the risk associated with overloading (poorly imposing the limition of heavy vehicles) and the risk related to route/traffic management (lower traffic volume due to changing routes). In theory, these risks can be mitigated by strict regulation and enforcement. However, lack of policy coordination among different parties within the government have been problematic and aggravating risks to the investors.

Optimal safety incentives in road concession contracts

Changes in the roles of the government and the private sector in the provision of public services along with budget constraints are resulting in an increasing use of the concession approach for financing and managing roads. In the last few years, many of these contracts set up incentives linked to bonuses to encourage the concessionaire to render a better service to the users. Road safety is one the aspects on the basis of which concessionaires can be rewarded according to their performance. The goal of this paper is to evaluate whether road safety incentives are being defined in the right way nowadays in different European countries and also identify what incentives would need to be implemented to achieve a socially optimal road safety level. To that end, we develop a specific incentive for road concession contracts that encourages companies to achieve the optimal level. We apply this methodology to three case studies of concessions recently awarded in order to determine to what extend the incentives they set up are closer or farther to the optimum.

La precaria viabilidad de determinadas concesiones de autopistas de peaje en España. Lecciones estructurales para el modelo de colaboración público-privada y una propuesta de solución coyuntural

El fracaso de la viabilidad económica de las autopistas radiales de Madrid y algunas de las otras concesiones de autopistas de peaje adjudicadas a partir de 1998 ha creado un serio reto para la Administración del Estado, que debe encontrar una solución en el marco de una severa restricción del déficit público y, a la vez, preservar la confianza futura de los inversores en este tipo de proyectos en España y garantizar la continuidad de la prestación del servicio público que ofrecen las infraestructuras subyacentes. Un análisis de las causas reales que han llevado a la quiebra a estas concesiones permite dibujar con claridad algunas de las deficiencias estructurales del sistema concesional en España. Sobre estos dos aspectos, la solución concreta y la reforma estructural, el artículo formula algunas propuestas específicas.

A PPP renegotiation framework: a road concession in Greece

Purpose – The purpose of this paper is to present a framework approach to guide the identification of potential public private partnership (PPP) renegotiation outcomes is presented. The framework is applied to a road concession project under renegotiation in Greece. Design/methodology/approach – The framework combines the estimation of stakeholder payoffs with respect to the various strategic options available. Their potential acceptance is evaluated with respect to the power distribution within the stakeholder network. The contextual environment determines the respective power position of each stakeholder in the network. Findings – The proposed framework is applied to a road concession case in Greece, under renegotiation as a result of the economic crisis. The analysis highlights the importance of the contextual environment and the limitations of solutions that seem “satisfying” for all stakeholders involved. Social implications – The framework is designed to guide both public and private parties involved in the renegotiation processes in identifying potential solutions or the inability to reach outcomes under specific contextual environments. Assessments are made based on expert knowledge rather than data collection, which is impossible during the renegotiation phase. The application proposed process limit renegotiation transaction costs. Originality/value – The renegotiation framework based on stakeholder payoffs and power theory, is an approach especially useful for complex contract renegotiations, where multiple stakeholders influence the final outcome. The importance of the contextual environment is highlighted. In addition, the paper contributes to the empirical renegotiation literature.

Dealing with Traffic Risk in Latin American Toll Roads

This paper presents a cross-country analysis of traffic risk allocation in road concessions of Latin America. It shows that some countries such as Chile, Colombia, and Peru have been greatly concerned with mitigating traffic risk, either by putting into practice public guarantees, implementing flexible term concessions, or through availability payment concessions; whereas other countries such as Mexico and Brazil have assigned traffic risk to the private concessionaire by using fixed-term concession contracts without any traffic guarantees. Based on an analysis of data from 1990 to 2010, the paper finds that shifting traffic risk from the concessionaire to the government or users was not confined to the riskiest projects, as one might expect. The analysis also suggests that the implementation of traffic risk mitigation mechanisms in Latin American toll roads has not been very successful in reducing renegotiation rates or in increasing the number of bidders in the tenders.

Risk-Sharing in Highway Concessions: Contractual Diversity in Portugal

Private sector involvement in road concessions has been one of the main options for governments to engage in large-scale road development plans. Political interference, optimism bias in demand forecasts and the absence of active regulators lead to frequent renegotiations of road contracts and large public remunerations to concessionaires. Because they are unable to deal with the increasing uncertainty in forecasts, governments are using availability payment schemes, which appear to be robust solutions that limit public losses. This paper evaluates the allocations of risk in four Portuguese road concessions under a contractual regulatory regime, discusses the types of incentive mechanisms used in each instance, and draws lessons from these case studies. This investigation reveals evidence indicating that although contracts are becoming increasingly complex over time, the public sector is assuming more production and commercial risks in the highway development process.