Assessing the financial feasibility of road concessions involving tolling and availability payments

Abstract

In a road concession, the sources of revenue to the private partner (or concessionaire) may include (i) the road users (e.g., tolling), (ii) the government (e.g. through availability payments), and (iii) both road users and government, which might be called a hybrid concession. An example of the latter is a road concession where the concessionaire is allowed to charge tolls to the road users but, because of relatively low traffic volumes and/or toll rates, the government agency (e.g. roads department) would have to complement the toll revenue, for example through annual payments, which are usually called availability payments (or annuities, as in South Asia). This paper summarizes the cases where it may be justified for the government to complement toll revenues and describes a model developed for the financial assessment of road concessions involving both tolling and availability payments. A practical application of the model is demonstrated in the paper. For example, given traffic volumes and maximum acceptable toll rates for a particular road project, the model can be used to estimate the minimum availability payment that would be required for the project to attract private sector interest, that is, potential bidders in a competitive bidding scenario. The model can also be used to carry out sensitivity analyses of the impact of key input parameters (e.g. capital cost, concession life, loan terms) on outputs such as the investors return on equity and annual debt service cover ratio.