Capturing Uncertainties in Estimating Toll Rates

Abstract

Private participation in the delivery of toll road projects has been used worldwide. It is a model which incorporates private sector knowledge and experience in the management of highway projects as well as the mobilization of private capital through public-private partnerships (PPP). One of the most prevailing characteristics of PPP projects is risk sharing between the public and the private partner. Assessment of project's financial soundness, a crucial factor for the private sector involvement, represents the basic underlying process during the project's development until the project reaches financial closure. It is important to capture project's uncertainties even in early phases of financial analysis since this information helps in the identification of potential financial risks and assists all sides to properly structure the deal. Parameters commonly used for the evaluation of project's financial feasibility are annual debt service cover ratio (ADSCR), internal rate of return (IRR), and return on equity (ROE). This paper presents a methodological framework for an early assessment of toll rates for PPP toll road projects. This approach takes into account predefined financial constraints ADSCR, IRR, and ROE on one side, and project's uncertainties such as traffic volumes, construction costs, and operation and maintenance costs on the other side. Results provide the range of toll rates covering possible risks scenarios. These results can serve as a basis for a comparative analysis of the socially acceptable toll rate, assuming it is known, and the financially required toll rate. It is anticipated that the early identification of the possible gap between these two values represents valuable information for all parties involved in the project. This gap helps in the identification of the need for additional financial instruments such as guarantees or subsidies in order to implement a project that is acceptable for the private and the public partners, equity investors, lenders, and users.