Allocating Revenue Risk in Transport Infrastructure Public Private Partnership Projects: How it Matters

Abstract

Transport infrastructure public private partnership (PPP) projects are very diverse and complex in nature not only because of their mode-specific intricacies but also because of their inherent economic characteristics that relate to the scope of involvement of the private sector in the project, the large sunk costs incurred, and ultimately, the competition to which these projects are exposed. The allocation of revenue risk is of paramount importance for the successful implementation of such projects and a sub-optimal allocation may lead to project structuring that is unnecessarily expensive and vulnerable to failure. At the same time, the revenue risk depends critically on the remuneration model used (user-based versus budget-based) and may, in turn, take the form of demand risk, counterparty risk or combinations of the two. This review explores the issues related to revenue risk allocation for transport infrastructure PPP projects. Overarching principles for the allocation of revenue risk that transcend mode-specificity are identified and compared to case studies generated in the context of the COST Action TU1001. The results show that theory and practice are divergent, leading to suboptimal structuring and exposing projects to potential failure.

Support for and Behavioral Responses to Tolls

“…The introduction of tolled facilities has increased not just in the U.S., but across the world, due in part to greater reliance on publicprivate partnerships (PPPs) to deliver infrastructure (Gurgun & Touran, 2013;Liyanage & Villalba-Romero, 2015;Willems et al, 2017). Much of the literature on transportation PPPs and tolling has focused on lessons learned in terms of management and governance (Dyble, 2011;Hodge, Boulot, Duffield, & Greve, 2017;Puentes & Istrate, 2011;Rouhani, Gao, & Geddes, 2015), managing risk (Chung, Hensher, & Rose, 2010;Lemp & Kockelman, 2009;Roumboutsos & Pantelias, 2015;Shan, Garvin, & Kumar, 2010;Wang, 2015), pricing and rate setting (Gross & Garvin, 2011;Jang, Song, Choi, & Kim, 2014;Light et al, 2015;Roumboutsos & Pantelias, 2015), and success factors (Hwang, Zhao, & Gay, 2013;Liyanage & Villalba-Romero, 2015;Osei-Kyei & Chan, 2015;Shi, Chong, Liu, & Ye, 2016;Willems et al, 2017). Fewer have examined public support for and behavioral responses to tolls (Gomez, Papanikolaou, & Vassallo, 2016;Jagers, Matti, & Nilsson, 2017;Yusuf et al, 2014).…”

Reducing Risk in Public-Private Partnership Contracts

“…Moreover, the accountability challenge is multidimensional, especially when the contract extends over many years (Hodge 2004;Grimsey and Lewis 2001). Roumboutsos and Pantelias (2015) note that 3Ps "are not actual 'partnerships', but strict legal transactions where all parties are contractually bound into delivering their own part in the project under detailed specifications and requirements" (p. 186). As such, contracts for long-term 3Ps must address a variety of potential risks, among them engineering and design failures, poor construction, expensive delays, maintenance failures, revenue shortfalls, funding risks, environmental issues, changes in government policies, and possible project default (Grimsey and Lewis 2001).…”

“…3Ps are inherently risky, primarily because of the many and varied interests of stakeholders. As Roumboutsos and Pantelias (2015) aptly summarize, the contract is the nexus that merges the multiple interests, and "Paramount in the determination of this balance of interests is the management of risks and their subsequent allocation among the various stakeholders" (p. 186).…”

“…As with many 3P projects, the two HOV/HOT lane projects presented significant revenue-related risks to the private sector. These projects rely on user-based remuneration (i.e., tolls) which are subject to demand risk (Roumboutsos & Pantelias, 2015). Demand risk reflects the uncertainty in predicted demand, which in the two cases are associated with traffic volumes and free flow conditions.…”

“…Demand risk reflects the uncertainty in predicted demand, which in the two cases are associated with traffic volumes and free flow conditions. Addressing the revenue risk, such as by allowing the private sector flexibility in setting toll rates, is an important challenge to achieving optimal risk allocation, which is considered the cornerstone of any successful PPP arrangement (Roumboutsos & Pantelias, 2015). Table 3 lists some of the provisions in the contracts that reduce risks to stakeholders arising from private sector's right to set toll fees and other concerns.…”