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Roads

Roads have the potential to be a significant asset to any country—both in terms of the physical investment and the social and economic benefits. A well-maintained and managed road network unlocks the region’s productive capacity by linking agricultural areas to national or regional markets, and encourages economic growth and social integration by bringing cities and villages closer together. With this in mind, governments are eager to develop and manage their road networks to meet their economic, political and social needs. In some jurisdictions this means building brand new roads, while in others it requires refurbishing, widening and extending existing road networks.

While the public sector is ultimately responsible for roads, the private sector has a potential role to play in the project lifecycle, whether it be in road construction, operation, financing or maintenance. Partnerships between the public and private sector in roads are by no means a new phenomenon and, when done right in the appropriate circumstances, can improve project quality and increase efficiencies.

The nature of road public-private partnerships (PPPs) varies considerably from project to project and is driven by the local, national and even international factors that make the project a necessity in the first place. Historically, the most common road PPPs have been brownfield concessions. However, since 2000 greenfield projects have become increasingly more popular.

Issues

  • Revenues and traffic forecasts

    The principal issue in relation to road projects is a viable off-take purchase. Whereas demand for power is relatively calculable, the off-take purchases in a road project are generally individuals and, as a result, demand risk is more difficult...

    The principal issue in relation to road projects is a viable off-take purchase. Whereas demand for power is relatively calculable, the off-take purchases in a road project are generally individuals and, as a result, demand risk is more difficult to quantify and harder to allocate. In some cases, local populations are asked to pay a toll for a road they have previously used for free. Instead of paying, they seek alternate routes and as a result of the diminished traffic, the project company will never be able to satisfy debt servicing, much less obtain a sufficient return on its investment.

    It is essential that the toll regime for a transportation project be based on reliable economic, technical and financial assumptions. The applicable calculations for shifts in the underlying assumptions should be flexible. However, it should be noted that renegotiation of the tariff regime after commencement of the project may be very difficult. Therefore, lenders will generally undertake their own traffic forecasting exercises to verify those provided by the grantor and the project company. Unfortunately, many traffic forecasts suffer from political orientation, where they are undertaken with the intent to show the need of the local economy for state investment in infrastructure rather than to provide an objective analysis of demand.

    The complexities of traffic forecasts and the cost of risk allocation associated with toll revenues has led to the increasing popularity of availability payment based toll road projects. Availability payments from the grantor compensate the project company for making the road available to users. A performance penalty regime will deduct amounts from such payments for defects in the road or the services provided by the project company, such as major maintenance, signage, safety, and aesthetics. The penalty regime and the key performance indicators (KPI) are even more important in an availability payment regime than under a user-fee based system since the commercial incentives associated with increasing traffic to earn more profit is lost and will need to be replicated through KPIs.

  • Permitting and existing facilities

    Road projects are vulnerable to permitting risks associated with the regulatory regimes like noise mitigation, reduction in property value, acquisition of land, resettlement and environmental impact. The construction of toll roads can often...

    Road projects are vulnerable to permitting risks associated with the regulatory regimes like noise mitigation, reduction in property value, acquisition of land, resettlement and environmental impact. The construction of toll roads can often interrupt the operation of existing transportation routes, either by roadway or maritime. For this reason, the program of works executed by the project company will have to correspond with the need for uninterrupted access routes and any additional requirements from the host government. For example, the host government will want work to be completed to co-ordinate with existing transportation systems during off-peak hours or seasons. Further, where the existing route will need to be closed for other reasons, such as maintenance, then the project company’s work should be carried out in parallel with such scheduled closures.

  • Land

    The construction of roads requires a significant amount of land. For this reason, the government will generally be involved in expropriation or procurement of that land and its provision to the project company for construction and use of the...

    The construction of roads requires a significant amount of land. For this reason, the government will generally be involved in expropriation or procurement of that land and its provision to the project company for construction and use of the road. The time required to complete the procurement of the land necessary for a road project will depend largely on the local legal system and the extent of consultation and legal challenge available to the public in relation to the location of the proposed road and the procurement of the land. This public procurement of land also has a knock-on effect on the willingness of the private sector to bear ground condition risk, as the project company may not have an opportunity to do a proper subsurface analysis or geological survey.

  • Subsurface risks

    Road projects, in particular tunnels, are vulnerable to subsurface risks, where subsurface conditions encountered differ to those anticipated, requiring changes in construction methodologies and subsequent increases in cost and delays. Often,...

    Road projects, in particular tunnels, are vulnerable to subsurface risks, where subsurface conditions encountered differ to those anticipated, requiring changes in construction methodologies and subsequent increases in cost and delays. Often, the grantor will bear the risk of unforeseeable subsurface conditions. Another common approach is to establish a baseline for anticipated ground conditions, sharing costs and delays to the extent that baseline proves inaccurate.

  • Environmental risks

    A risk that arises frequently in toll road and bridge projects is environmental impact and, in particular, the knock-on sensitivities in the political arena. Roads elicit a large amount of media attention and public anguish because of their...

    A risk that arises frequently in toll road and bridge projects is environmental impact and, in particular, the knock-on sensitivities in the political arena. Roads elicit a large amount of media attention and public anguish because of their visibility and their impact on a multitude of people. The project company will not want to take the risk of protestor action (direct or indirect) or any political interference, public opinion moves the government or local politicians to act against the project. However, the grantor will want the project company’s assistance in managing the political image of the project and avoiding any aggravation of public sentiment.

  • Brownfield risks

    Brownfield road projects can pose a number of unique challenges, perhaps the most obvious being how the road was built in the first place. It’s often hard to ask a concessionaire to take risks relating to work done by someone else, which they...

    Brownfield road projects can pose a number of unique challenges, perhaps the most obvious being how the road was built in the first place. It’s often hard to ask a concessionaire to take risks relating to work done by someone else, which they might not be able to see or adequately assess prior to beginning the project. In response to this, governments are more aggressively structuring the arrangements to reduce the risks for private partners. In toll road projects, for example, governments are reducing investment risk by providing capital grants or financing guarantees, and reducing demand risk by using shadow tolls or guaranteeing part of the revenue through minimum traffic assurances. The key challenge in using these contracting arrangements is to find ways of maintaining performance incentives for the private partners.

    Another concern for brownfield projects is the continued employment of existing employees, including their wages, benefits, pensions, working conditions and collective bargaining rights. To address this, some PPP contracts have included workforce protections.

  • Road safety

    With rapidly increasing motorization rates and changing socioeconomic patterns in low and middle-income countries, road safety has become an international public health crisis. Thanks to steadily growing annual incomes, the pace of vehicle...

    With rapidly increasing motorization rates and changing socioeconomic patterns in low and middle-income countries, road safety has become an international public health crisis. Thanks to steadily growing annual incomes, the pace of vehicle ownership in low and middle-income countries has increased and along with it the frequency of road traffic injuries (RTIs). To face this growing issues, the private sector is partnering with governments and civil society to reduce the burden of RTIs.   

    Harnessing the private sector’s unique ability to influence driver behavior is not a new practice. In countries with stable vehicle ownership rates, insurance companies and concession operators have long been in the vanguard delivering education, research, incentives, and infrastructure, as RTIs directly affect their bottom line. More recently concession contracts have begun including explicit incentives tied to the achievement of pre-agreed road safety outcomes.

     

Models

  • Toll concession

    In a road concession the government grants the private sector the right to exploit a right-of-way for a fixed period. Typically, in a classic concession approach, the traffic and toll collection risks are with the private sector and it is a...

    In a road concession the government grants the private sector the right to exploit a right-of-way for a fixed period. Typically, in a classic concession approach, the traffic and toll collection risks are with the private sector and it is a purely private endeavor, with minimal to no government stake. There have been some cases, as with the M6 Toll Road in the United Kingdom, where the concessionaire has even been permitted the freedom to set tolls and apply time-of-day adjustments. More frequently, however, the government will regulate the toll, linking them to an index or composite index of some form. In this scenario, the concession ends either when a contractually agreed amount has been recovered or a fixed expiry date occurs. 

    In many cases, projects also end prematurely when the concessionaire becomes illiquid and insolvent due to overestimated demand.  These experiences have influenced current thinking on whether it is realistic to transfer demand risk.   

  • Toll and traffic guarantee concession

    In a toll concession that includes traffic guarantees the private sector takes some but not all of the demand risk of the road. Under this agreement, the concessionaire will get a minimum usage guarantee from the government. Traffic guarantees...

    In a toll concession that includes traffic guarantees the private sector takes some but not all of the demand risk of the road. Under this agreement, the concessionaire will get a minimum usage guarantee from the government. Traffic guarantees have been used around the world to mitigate inaccuracies in traffic forecasting and poor due diligence by banks that tend to be overly optimistic. One variant of the traffic guarantee is the so-called “cap and collar” whereby a cash payment is made to the private operator if usage falls below a stated level and the public sector takes all (or a share) of the excess revenue over a stated percentage. 

  • Direct payment models: shadow tolls and availability payments

    In direct payment models, the remuneration for the private partner does not take the form of charges paid by the users of the works or of the service, but of regular payments by the public partner. The two most popular direct payment models are...

    In direct payment models, the remuneration for the private partner does not take the form of charges paid by the users of the works or of the service, but of regular payments by the public partner. The two most popular direct payment models are shadow tolls and availability payments. The former is a demand based model, wherein the government pays the fees for the users. Availability payment models are based on output standards rather than demand. The contractor has to meet certain output standards set out in detail in the PPP agreement and, so long as the terms are met, the contractor receives payment of a pre-agree sum. If it fails to do so, then pre-agreed deductions are made on an accumulated points basis. 

  • Output- and Performance-based contracts

    Output- and performance- based road contracts (OPRCs), which became popular in the 1980s with Argentina’s widely known CREMA (Performance-based Road Rehabilitation and Maintenance) contracts, have evolved further in recent years from focusing...

    Output- and performance- based road contracts (OPRCs), which became popular in the 1980s with Argentina’s widely known CREMA (Performance-based Road Rehabilitation and Maintenance) contracts, have evolved further in recent years from focusing mostly on routine and periodic maintenance tasks, to include rehabilitation and improvement tasks as performance-based activities. OPRC contracts may cover either individual assets, like traffic signs or bridges, or all road assets within a road corridor or network.

    OPRC projects today often follow the design-build-operate-maintain-transfer methodology, where the contractor designs and completes the required rehabilitation and/or improvements to deliver a certain level of service and thereafter operates and maintains the road for several years.

    As the name stipulates, OPRC projects are based on output as opposed to input. Under a traditional input-based contract the private contractor gets paid for each repaired pothole, whereas under an OPRC the contractor gets paid for each length of road it maintains at the required condition. In return for achieving this standard, the government will periodically pay a fixed amount to the contractor or allow the firm to collect user fees (e.g., toll fees). 

Tools & Guidance

    • 2014
    • Matt Bull and Anita Mauchan
    • PPIAF

    Tolling Principles

    Highway tolls can provide a new, stable and dedicated source of funding of highway infrastructure. By applying the ‘user pays’ principle, governments can direct scarce budget resources elsewhere and the highway user pays for the service offered by the highway in the same way that railways, pipelines, power grids, water, broadcasting and broadband networks are paid for. This short brief highlights the benefits, challenges and consequences of  highway tolling programs.

    • 2013
    • PPIAF, World Bank Group (WBG), International Finance Corporation (IFC)

    PPP Insights: Road PPPs and Payment Mechanisms for Road PPPs

    A well-constructed and maintained road system is important to both developed and emerging economies but they are expensive to build and properly maintain. In most countries, the majority of the road systems are designed, built, maintained and financed by government. Private sector contractors have been used by governments to carry out construction work but problems of bad design and construction, together with the tendency by governments to neglect maintenance, have led governments to look at alternative solutions and longer term contracts with the private sector. This PPP Insight looks at the different ways that the private sector has been engaged in the road sector around the world and the extensive variety of payment mechanisms that...

    • 2009
    • PPIAF
    • PPIAF

    Toolkit for Public-Private Partnerships in Roads and Highways

    The Toolkit is a reference guide for public authorities in developing countries for the development of PPP (public-private partnership) programs in the highways sector, particularly in assisting in PPP policy development, project preparation and the sourcing and monitoring of external expertise. It provides guidance in the definition of strategy and policy for PPP, the characteristics of PPP projects and the stages for their preparation. Module 4, "Laws & Contracts" https://ppiaf.org/sites/ppiaf.org/files/documents/toolkits/highwaystoolkit/4/index.html examines the legal framework and regulatory environment for PPPs.  It provides a framework for diagnosis and reform and provides the basis for preparation of PPP contracts. Module 5,...

    • 2012
    • International Finance Corporation (IFC)

    Handshake Issue #7: Road & Rail PPPs

    This issue of Handshake deals with public-private partnerships (PPPs) in the road and rail sector and explores how well-developed and efficient road and rail transport can contribute to economic growth and development. Authors and interviewees explain how PPP approaches have changed the direction of their countries' highway systems and the future of freight rail.

Projects & Case Studies

    • 2013
    • International Finance Corporation (IFC)

    Philippines: NAIA Expressway

    Brief on IFC's PPP advisory support to the government of Philippines on a 30-year concession to design, finance, construct, and operate the NAIA Expressway.

    • 2011
    • World Bank Group (WBG)

    Colombia: Ruta del Sol

    PPP Brief

    Good highway infrastructure is essential to economic development. The Colombian government backed this concept in July 2010 when it awarded the concession of the third and final section for the construction and expansion of the $2.6 billion Ruta del Sol highway. This 1,071 kilometer road connects the capital, Bogotá, with other large urban areas of the country’s interior and Caribbean coast. Ruta del Sol was initially conceived by the government as a single project. It was later divided into three concessions to adapt to market conditions, to ease its construction and financing, and to mitigate single-operator risk. 

    • 2014
    • Mathieu Verougstraete and Hyo Jin Kang
    • United Nations Economic and Social Commission for Asia and the Pacific (ESCAP)

    Mobilizing Private Funding

    The Case of the National Highways of India

    This case study reviews the development of highways in India and shows the possible shift in infrastructure financing from traditional public procurement to a Public-Private Partnership (PPP) model within a relatively short period, as well as the challenges encountered. 

Lessons & Analysis

    • 2014
    • Matt Bull, Ruben Brekelmans, and Lauren Wilson
    • PPIAF

    Lessons Learned In Output and Performance-Based Road Maintenance Contracts

    This issue brief discusses five key lessons learned from PPIAF and the World Bank Group’s experiences in using output-based road maintenance contracts. By delivering efficient, cost-effective and innovative maintenance services, well-designed output and performance-based road maintenance contracts can help maintain road assets and achieve value-for-money. Output-based contracts can also help governments build experience in undertaking Public-Private Partnerships (PPPs). Several factors need to be considered when designing and implementing these contracts to achieve their full benefits.

    • 2014
    • Peter Brocklebank
    • African Development Bank (AfDB)

    Private Sector Involvement in Road Financing

    In response to a request from SSATP (Africa Transport Policy Program) member countries for informed policy advice on private sector involvement in road financing, provision and management, with a focus on public-private partnerships (PPPs), SSATP launched a study in 2013 to review good practices, learn lessons from case studies, and provide guidance on private sector involvement in road financing, provision and management relevant to African countries. The study involved field visits in Senegal, Ghana and Nigeria and consultations with stakeholders to underscore the need for wider understanding of benefits, success factors and challenges for road PPPs, and to create a solid platform for advocacy. This publication is based on the...

    • 2012
    • PPIAF

    Lessons Learned from PPIAF Activities: Highways Maintenance PPPs

    This short summary gives a high-level view of the benefits and challenges of highway maintenance PPPs. The lessons learned include affordability, funding, contract structure, risk allocation, market sounding, baseline and latent defects, financing, and contractor capacity.  

    • 2014
    • International Road Federation

    World Road Statistics

    Since 51 years, the IRF World Road Statistics (WRS) continue to be the only comprehensive, universal source of statistical data on road networks, traffic and inland transport. Over the past years, the WRS have proved to be an invaluable and internationally accepted reference tool for governments, NGOs, investments banks, research institutes and anyone analyzing and reporting trends in key subject areas like traffic volumes and vehicle usage, road expenditure, road safety, energy consumption and emissions. Last year, in the celebrations leading up to the WRS 50th Anniversary (data 2000-2011), the IRF was able to release a comprehensive publication that included for the first time twelve years of updated data. This year, the WRS 2014...

    • 2008
    • PPIAF, World Bank Group (WBG)

    Short-Form Generic Risk Allocation Table for Toll Roads

    This short-form risk allocation table for toll roads divides risks into categories and provides a brief description, potential causes and mitigation options for each risk.

    • 2008
    • Robert Phillips
    • PPIAF, World Bank Group (WBG)

    Matrix of Risks Distribution - Roads

    This risk matrix looks at generic risk allocation in projects rather than on a specific or a quantitative basis. The allocation of risk is based upon a review of a number of road projects which review considered issues on a country specific basis taking into account the law, practice, customs and economics associated with the project and the country. The risks are common to many of the projects reviewed (and many others) but the solutions adopted will be case specific. The purpose of the analysis is to inform users of the World Bank Infrastructure and Law Web-Site of the key risks associated with Road Projects and to form the basis of addressing those risks in the Concession Agreement. The groupings of risk have been synthesized from...

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