Treatment of Traffic risk in PPP projects

b. Treatment of Traffic Risk in the Design of Road PPPs (Raymond Bourdeaux, World Bank) Treatment of Traffic risk in PPP projects Raymond Bourdeaux April 13, 2009 Why is traffic risk relevant in PPPs? • What is the track record in measuring traffic in a specific country and the quality of traffic projections? What is the past experience with tolling? Who can predict the timing of a crisis in the next 30 years? There are precedent for toll projects getting traffic wrong (M1 Hungary). Is traffic revenue forecast a science or an art? Do PPP participants have the same risk profile? • • • • • 34 | P a g e Why is traffic risk relevant in PPPs? • What is the track record in measuring traffic in a specific country and the quality of traffic projections? What is the past experience with tolling? Who can predict the timing of a crisis in the next 30 years? There are precedent for toll projects getting traffic wrong (M1 Hungary). Is traffic revenue forecast a science or an art? Do PPP participants have the same risk profile? • • • • • Constraints from investors and banks on financial viability • • • • • Earn a reasonable return. Ability to enhance returns if performing well ( e.g. lower return if not performing well). Banks do not get more money if traffic is higher than forecast. Risk is commensurate with the level of margin the banks can lend at. Sufficiently robust traffic base to account for uncertainty of forecasting process. Uses of Availability Payments, Periodic basis, in Million Rubles. 2,000 1,500 1,000 500 (500) (1,000) GoSt Grant Interest Repayment Taxes Dividends Principal Repayment Op costs Reserve (transfer and release) 35 | P a g e Establishing a base case and the accuracy of the financial model results • • • • Is technical solution leading to a single price? What is the degree of accuracy of capital costs / operation and maintenance costs? What would be the impact of changes in debt financing terms Is the project likely to be impacted by foreign exchange consideration? Some unavoidable uncertainties will reduce the accuracy of financial model results at the design stage So risk perception might differ Revenues from traffic may not be sufficient to make a project bankable/ financially viable Debt payments and Toll Revenues net of operating costs, in million rubles 800 700 600 500 400 300 200 100 1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 55 58 61 Revenues net of operating costs Total debt payments • Toll revenues are not sufficient to cover debt repayments. • Project experiences a negative cash flow during the debt repayment years. • No dividends are paid to equity holders. Project is not viable for private sector investors based only on revenues from traffic, Some form of government support is required during the operation period to make project bankable. 36 | P a g e Some principles for traffic mitigation design • • • The requirement for risk sharing will change over time, based on (i) traffic ramp up, (ii) debt service requirement and (iii) flexibility on tariff. Risk sharing can either be a set design in the documentation, or be integrated as part of the bidding criteria. If the criteria is not made of fixed amounts but based on a % or other elements, then one single traffic forecast will be required to have a fair and transparent evaluation basis . Road project cash flows tend to have ramp ups and growth: early support is often required, extra cash generation in later years generates extra profit leading to revenue sharing opportunities. Design should be based on clarity, simplicity, transparency and limiting gaming possibilities • • Link with tariffs: • • Precedent in the country and political acceptability? Maximum level of tariffs given as part of the concession and winning bidder has ability to set tariffs at level lower or equal to maximum level? – Allow to fulfill Government social objectives. – Leaves ability for investors to maximize revenues if starting levels are not abnormally low. • Tariffs are part of the bidding criteria? – Are these the right incentives for the bidder? – Is this the only criteria and how should different bidding criteria be integrated? • Tariffs will evolve year on year based on formula ? If tariffs are subject to regulatory interference, then would compensation be provided to concessionaire? • Should tarrifs be partially linked to a foreign exchange rate? 37 | P a g e Different forms of revenue mitigation Traffic risk / reward mitigation • • • • • • • • • Performance based contract: Government take all traffic risk Shadow tolling : Transfer of significant risk to Government, but with no revenues from users: impact on Government liability Revenue guarantee linked to debt service Minimum traffic volume guarantee Minimum revenue guarantee Operating Grant Equity or debt support from Government Revenue sharing Availability payment 38 | P a g e Guarantee linked to debt service Guarantee kicks in only if debt service is not covered: – Difficult to design and manage (lack of debt service could be for other reasons than traffic), if linked to revenue level, this is a revenue guarantee. – Difficult to evaluate as bidders are unlikely to fix their debt services at bid evaluation. – Might not provide incentive to reach optimum revenue generation. – If fixed in advance (e.g. not linked to actual debt service, then equivalent to operating grant). Uses of Availability Payments, Periodic basis, in Million Rubles. 2,000 1,500 1,000 500 (500) (1,000) GoSt Grant Interest Repayment Taxes Dividends Principal Repayment Op costs Reserve (transfer and release) Traffic volume guarantees • If minimum traffic volume is not reached, then Government pays the Concessionaire a certain amount per unit of traffic missing. Difficult to design so that it sends the right signals for concessionaire to reach the optimum tariff / volume equilibrium: if volume is guaranteed, It might be in th3e concessionaire interest to put tariff at the maximum level to maximize bottom line. Could be used as a way of extracting cash from Government: Bidding a low volume over which Guarantee kicks in is equivalent to bidding for a definite amount of money. Might be difficult to evaluate transparently as it requires a traffic forecast as reference point. Can be a way of getting around foreign exchange consideration if tariffs are linked to exchange rate. • • • • 39 | P a g e Structure of Minimum Revenue Guarantee (MRG) Debt Coverage by Revenues net of operating costs • Rbl m illion Minimum Revenue Guarantees is paid only in the years when revenue is too low. 1,800.0 1,600.0 1,400.0 1,200.0 1,000.0 800.0 600.0 • MRG could be set by bidder to achieve a minimum DSCR in any period. 400.0 200.0 J un-07 J un-09 J un-11 J un-13 J un-15 J un-17 J un-19 J un-21 J un-23 J un-25 J un-27 J un-29 J un-31 J un-33 J un-35 J un-37 J un-39 Jun-39 Revenues net of operating costs Total debt payments Debt Coverage by Revenues net of operating costs 2,500.0 2,000.0 Rbl m illion 1,500.0 1,000.0 500.0 Jun-07 Jun-09 Jun-11 Jun-13 Jun-15 Jun-17 Jun-19 Jun-21 Jun-23 Jun-25 Jun-27 Jun-29 Jun-31 Jun-33 Jun-35 Jun-37 Jun-41 Revenues net of operating costs Total debt payments Operating grant • • • • Bidder, as part of its bid, indicates (i) if it requires an operating grant in any given year, (ii) for what amount and (iii) what are the conditions for revenue sharing . If an Operating grant has been bid, It becomes due as long as the operating conditions are satisfied . It can be easily bid out and evaluated (standard form for conditions to operating grant availability), the cost to the Government is the NPV of the operating grant over time It can perform a double function: – – Traffic risk mitigation Additional Government support if necessary • • • It commita the Government regardless of the actual traffic but only if investors requires it. As long as it can be linked to revenue sharing, an operating grant allows to shape the traffic risk profile of the transaction to match investors and lenders requirements. It can be designed to send the right signals in relation to the operation of the road (e.g. not good operator, no grant). J un-41 40 | P a g e Additional debt or equity support • Some similarities, with other mitigation measures: a grant is equivalent to an equity stake with no return or a perpetual debt at 0% interest. • Intercreditor issues arise, especially in relation to priority of repayment. • It is not linked to traffic risk so could be a drain on the project if traffic volumes are much lower than anticipated. • Investors might not like the perceived Government interference in the project. Revenue sharing mechanism • Assume that tariffs methodology has been fixed ( e.g. not a variable). • Can be structured as Fixed amounts and bid % of revenues. – Can be compared without reference to traffic • Can be based on a fixed % and a bid out revenues level below which no share is happening. • Can also be structured as specified bands where bidders are bidding the % sharing for bands: – Advantages of bands? – Requirements for evaluation of traffic forecasts? – Need to look at traffic classes or not ? 41 | P a g e Revenue guarantee vs. Availability Payment: similar mechanisms can create similar exposure Availability Payment Government Account Availability Payment > Toll Revenues => Gvt pays the difference Availability Payment Availability Payment < Toll Revenues => Gvt keeps 100% of the difference Availability Payment Toll Revenues Concessiona ire Account Toll Revenues < Revenue Guarantee => Gvt pays the difference Rev Guarantee Revenue Guarantee Toll Revenues > Revenue Guarantee =>Concessionaire shares the difference Rev Guarantee Availability Payment vs. revenue guarantee An availability payment (vs. a guaranteed revenue) will: – Be more attractive to the private sector in view of the limited traffic potential and uncertainty. – Will have a shorter tendering period than a revenue guarantee. – Be cheaper in the long run to the City as it will reduce the weighted cost of capital of the project. – Will leave the City with the freedom to fix tariff as it sees fit. 42 | P a g e Constraints on availability payments • Predictable ? • Same amounts of maximum liability every year for budget’s purpose ? • Need to allow equity returns in a reasonable timeframe. • Need to avoid gaming. • Need to be easily evaluated. • Need to allow project to be bankable. What are the options for “sculpting” the availability payment ? • Let bidder decide. • Artificially “push back” equity return toward the end of the concession life. • A proposed amount, but subject to adjustment as project develops , a close look “ inside the box” based on formula. • Same amount each year (one value). • Same base amount each year, subject to some indexation. 43 | P a g e How to push back equity returns? Would this have the desired impact on return levels? Operating Costs and Equity Returns Availability Payment Debt Availability Payment Debt Conclusions • There might be good reason why traffic risks might not be fully acceptable to private sector. • There are a number of ways to deal with such risk sharing. • These must be integrated with tariffs and bidding issues. • Solutions have to be flexible and correspond to the specifics of the situation, there is no “one fit all” solution. • The impact of the crisis is leading to a rebalancing of the risks as lenders and investors shy away from more risky projects. 44 | P a g e For further discussion: Raymond Bourdeaux, Lead infrastructure Specialist, Guarantee and PPP team, FEU Global Expert Team PPP World Bank raymond.bourdeaux@worldbank.org +1 202 458 9551 45 | P a g e