1. Helsinki Summer School in Transportation
Rethinking the Transportation Planning Process – Executive Course
Financing Alternatives: Budget, Road Funds, Public Private Partnerships
Cesar Queiroz, Ph.D.
Consultant, former World Bank Highways Adviser
Aalto University, Espoo, Finland
August 8-12, 2011

2. Presentation Outline Alternative road financing methods
Sources of financing
How to charge road users
Private financing
World Bank/PPIAF Toolkit for PPP in Roads and Highways
Financial assessment of PPP projects 2

3. Alternative Road Finance Methods

4. Ultimate sources of financing
Charge the users
Charge the tax payers

5. Why User Charging Systems?
Generate revenue
Reduce congestion
Increase investment in transport infrastructure
Apply the “users pay” principle
Provide “value for money” (VfM) to paying users

7. Ideally road user charges (or any other tax or fee) should be
Economically efficient
Equitable
Collected at little cost
Not easily evaded

8. Methods of Charging for Roads
Fuel taxes (do not reflect the higher damage done to roads by heavy vehicles)
Vehicle licences (not use related)
Charges for non-standard and overweighted vehicles (hard to control, relatively easy to evade)
Charges on the purchase of new vehicles (not use related)

9. Methods of Charging for Roads
Sales taxes (not use related)
Vignettes (do not reflect usage, relatively easy to evade)
Direct user fees
Vehicle-distance traveled fees (require substantial initial outlay, sophisticated administration)
Tolls (require substantial capital and operating costs)

10. Fuel Taxes
A fuel tax (or fuel duty) is an excise tax imposed on the sale of fuel intended for transportation
Home heating oil and fuels used to power agricultural vehicles are taxed at (usually) lower rates
In some countries part of the fuel tax is dedicated to transport projects (e.g., Road Funds); in others, fuel tax is a source of general revenue

11. More on road user charges: World Bank Transport Paper TP-23
“Road User Charges: Current Practice and Perspectives in Central and Eastern Europe,” by Cesar Queiroz, Barbara Rdzanowska, Robert Garbarczyk and Michel Audige
Available on the World Bank website at: 11

12. Private financing is not new
Toll road at Wadesmill in Hertfordshire, UK, established in 1663 by Act of Parliament
19th century concessions: toll roads, bridges, tunnels in US; railways in France; subway in London
Suez (1860) and Panama (1880) canals
Decline around 1930 (great depression)
Resurgence in the 1980s: worldwide

13. Private financing in Finland
In the 19th century, private finance and expertise provided Helsinki with novelties such as
gas (1860)
piped water supply (1876)
electricity (1884)

14. The Maysville Turnpike, USA, 1830

15. A toll house at the approach to a bridge
U.S. 1 in South Carolina, 1921
A toll house at the approach to a bridge

16. Toll Backup Chesapeake Bay Bridge toll booths, beach-bound traffic
August 1999
Source: The Washington Post

17. Riverside Freeway, SR 91, CA
First fully automated toll road (free-flow system), 16-km long, opened on December 27, 1995
Serves commuters on Riverside Freeway (SR 91), Orange County, south of Los Angeles
Original developer and operator: California Private Transportation Company
Achieved cash flow break-even in mid-1998 (can pay operating and debt expenses from revenues)

18. SR 91: Toll lane information

19. SR 91: Toll rate information

20. SR 91: Two express toll lanes in each direction

21. SR 91 Express Toll Lanes Typical afternon peak

22. Private Finance Initiative (PFI) in the United Kingdom
“In Britain, the private finance initiative has been used to build everything, from roads to hospitals. So far, projects worth GBP 53 bn have been signed.”
Source: “Building debts for the future,” Financial Times Editorial Comment, August 8, 2011 (page 8), 22

23. Private Finance Initiative (PFI) in the United Kingdom (cont´d)
Central claim made for PFI: It adds value for tax payers by transferring risks to the private sector, including the risks of construction and of running projects, while achieving greater efficiencies than possible under conventional procurement
However, the Financial Times estimates an extra cost of GBP 20 bn above the government borrowing cost, which would require a very substantial amount of efficiency gain to make PFI worthwhile 23

24. Private Finance Initiative (PFI) in the United Kingdom (cont´d)
A possible alternative to long term public debt: Charge the users (e.g., tolling)
First tolled motorway in the UK: M6 near Birmingham, operated by Midland Expressway Limited
Typical toll rates: cars, GBP 5.30; HGV, GBP
More info: 24

25. Toolkit for PPP in Roads and Highways
Assists in each stage of PPP preparation (e.g., TOR)
Describes the PPP framework necessary to develop private sector interest
Presents “most applicable practices”
Helps practitioners to understand PPP
Helps teaching PPPs in roads and highways 25

26. In summary, the Toolkit helps answer the question
Where and under what conditions can a PPP be appropriate?
Available on a CD-ROM and Internet: 26

27. The Six Modules of the Toolkit
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
The Six Modules of the Toolkit
Additional Tools: Glossary, Site Map
Link to Toolkit Toolkit 27

28. The Six Modules of the Toolkit
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
The Six Modules of the Toolkit
“Dance,” Henri Matisse, 1909, Oil on canvas, MOMA, N. York 28

29. English and Russian Versions
English original available since 2009, including upgraded and audited financial models
Russian translation available since April 2011 (to be posted soon on the PPIAF/World Bank website) 29

30. Continuum of PPP Options
The Toolkit presents a broad definition of PPP including performance-based contracts 1/1-13.html 30

31. Toolkit Financial Models
Purpose
Familiarization of non-financial specialists with the basics of project finance and financial simulations for a (highway) PPP project
Better understanding of key parameters which affect the financial viability of a PPP project
Preliminary scrutiny of PPP projects
Limits
Simplified financial models: graphical and numerical versions
Specific project assessment requires detailed financial models prepared by experienced financial practitioners 31

32. Graphical Model
The model represents the main financial features of a project company in graphic form and their sensitivity to a range of 14 key assumptions
The graphs change according to the key project assumptions
Cash Flow graph
Debt graph
Dividends graph
Link to financial models Toolkit > Tools > Financial models 32

33. Numerical Model
The model provides financial statements by a potential concessionaire to analyze the construction and operation of a highway concession under a Build-Operate-Transfer (BOT) scheme
The Assumptions sheet of the model contains key parameters and data input as determined by the user
The financial model is not a banking model and is not intended to provide project-specific financial modeling 33

34. Main Stages to Launch a PPP Project
Stage 1: Identification, Prioritization and Selection of the PPP Project
Stage 2: Due Diligence and Feasibility Studies: includes activities and studies to ensure the selected project is well designed and can be successfully tendered and implemented
Stage 3: Procurement: includes prequalification of bidders and the bidding and bid evaluation processes, and a section on Unsolicited Bids

35. Main Stages to Launch a PPP Project (cont’d)
Stage 4: Contract Award: gives advice on dealing with the preferred bidder(s)
Stage 5: Contract Management: deals with the construction and operation periods of a project including transfer back if relevant – BOT, but not BOO
Reference: Toolkit Module 5

36. PPP Project Development

37. Open competitive bidding selection of concessionaires
Wide advertisement – press, road show, data room
Prequalification of potential bidders – helps ensure quality bidders
Bidding documents well prepared -- clear and non-discriminatory
Clear procedures for bid submission
Public bid opening
Transparent bid evaluation criteria, which are well defined in the bidding documents 37

38. Open competitive bidding selection of concessionaires (cont’d)
Negotiation of the final contract, if required, should be done only within the parameters defined in the bidding document
Selection of the successful bidder based on the most economically advantageous offer
Clear and effective complaint and appeal handling mechanisms in place 38

39. Toolkit Case Studies
Brazil – country case Chile – concessions in Santiago Croatia – A6 motorway France – country case Hungary - M1/M15 motorway India – country case
Korea – country case
Serbia – country case
South Africa/Mozambique N4 toll road
UK – M6 toll road
US – country case
Zambia – PBC contracts
Indonesia – country 39 39

40. Traditional Procurement vs PPP Arrangements
Project life: usually less than 5 years vs more than 20 years
Completion and delivery of the facility vs long term service provision
Input vs output orientation
Contract signed with the contractor vs with a “special purpose vehicle” (SPV)
Public financed vs user fees or tariffs (or some other arrangements)
Better sharing of risks in PPP 40

41. Decreasing Public Risks, Increasing Private Risks
Allocation of Risks
High
Force Account
Traditional Outsourcing
Performance-based Contracts
Availability Payments
Shadow Tolls
RISK TO
PUBLIC SECTOR
Toll Road BOT
BOO
Decreasing Public Risks, Increasing Private Risks
Low
High
RISK TO PRIVATE SECTOR

43. Cesar Queiroz Roads and transport infrastructure consultant, former World Bank Highways Adviser Tel Washington, DC, USA

44. Appendix Financial Modeling Exercise

45. Objectives of the Exercise
This practical session will provide participants with an opportunity to learn how to use the graphical and numerical financial simulation models of the Toolkit for PPP in Roads and Highways
Following completion of the exercise, the participants should be able to work on several PPP issues, such as the main factors defining the minimum tariff (e.g., toll rate), or minimum availability payment required for a PPP project to attract private investors

46. Instructions to Participants
Please form teams with a few members each
Teams will be numbered 1 to n
Each team will be given basic data (or assumptions) for a proposed PPP project and will be asked questions on the financial assessment of the project
Please choose the team member who will make a brief presentation of your team’s results, after deliberations
Please assume that previous studies have shown that the project is economically justified, and socially and environmentally sound

47. Basic data to be used by each team
Concession term: 30 years
Construction Cost: US$210 million
Road length: 40 km
Four-year construction, with progress rates:
Year 1: 15%; Year 2: 30%; Year 3: 30%; Year 4: 25%
Operating expenses: $10 million per year (at opening year); no variable operating expenses
Capital structure: Equity, 30%; Subsidies, 0%
Nominal interest rate: 9% per year
Loan grace period: 4 years
Loan repayment period: 15 years
Discount rate (real terms): 8%

48. Basic data to be used (cont’d)
Initial daily traffic (opening year), vehicles/day:
Team x: AADT = 7, ,500x, where x is the team number
Traffic composition: cars, 70%; trucks, 25%; and buses, 5%
Traffic growth: 3% per year
Inflation: 4% per year
Tax rate, VAT: 10%; Corporate tax: 11%
Link to the Financial Model Link

49. Financial Indicator Targets Please assume that the following targets (or constraints) will have to be met for the project to attract private sponsors:
Project Financial Internal Rate of Return: FIRR ≥ 12%
Equity Internal Rate of Return (or Return on Equity): ROE ≥ 14%
Annual Debt Service Cover Ratio: ADSCR ≥ 1.2

50. Main financial analysis indicators
Project Internal Rate of Return (or Project IRR)
Financial return or yield of the project regardless of the financing structure
Project is considered to be financially viable when Project IRR is above a benchmark rate of return with respect to the country, sector and project characteristics (7% or more in real terms, depending upon countries and financial markets)
OCFBF = Operating Cash-Flows Before Financing

51. Equity Internal Rate of Return (or Equity IRR)
Yield of the project for the shareholders through the remuneration of their investment with dividends
The project is profitable for the shareholders when Equity IRR is high. Generally, a minimum expected return rate (real return) is 10% (Shadow Toll) or 17% (Toll Roads). This Equity IRR minimum is called Hurdle Rate.

52. Annual Debt Service Cover Ratio (ADSCR)
Represents the ability for the project company to cover/repay the debt
Project estimated viable for the lenders when the ADSCR is greater than 1 for every year of the project life. Generally, the minimum ADSCR should be greater than 1.2.
CAFDS = Cash Available For Debt Service
(Debt Service)i,n = Principali,n + Interesti,n

53. Questions to each team
Please estimate the minimum toll rate per average vehicle, in (a) $/veh, and (b) $/veh-km, for the project to be able to attract private investors.
Note: The minimum toll rate ($/veh) can be obtained by trial and error using the “Cash Flow” sheet of the graphical financial simulation model (or the “Assumptions” sheet of the numerical model) of the Toolkit. After you have entered all the data applicable to your specific project, you can vary the toll rate so the financial indicators calculated by the model are just above the minimum required threshold. 53

54. Questions to each team (cont’d)
2. Please estimate the minimum car, truck and bus toll rates, in (a) $/veh, and (b) $/veh-km, for the project to be able to attract private sponsors. Please assume the following relationships between toll rates for different type of vehicles:
Average truck toll rate = 3 x car toll rate
Average bus toll rate = 2 x car toll rate
The toll rate in the graphical model (WATR) is: WATR = (%C x TRc + %T x TRt + %B x TRb) / 100
where WATR is the weighted average toll rate per vehicle; %C, %T, and %B are the percentages of cars, trucks, and buses in the traffic flow; TRc, TRt, and TRb are the toll rates for cars, trucks, and buses

55. Toll rates for trucks and buses
The example of Brazil:
TRt = Number of axles x TRc; TRb = Number of axles x TRc

56. Questions to each team (cont’d)
3. Closing the affordability gap with government subsidies. If the toll rates estimated under Question 2 are above road users’ affordability (or willingness to pay), you may want to consider using government subsidies to reduce the toll rate required to attract private investors. Assuming that the Government is willing to contribute up to 25% of the construction cost (i.e., subsidies), please estimate the minimum required toll rate per average vehicle (in $/veh-km) that would be sufficient to attract private sponsors.

57. Notes regarding the solution to Question 3
(a) Changing the amount of Subsidies does not change the project’s financial Internal Rate of Return (IRR), which is independent of the project’s capital structure. Please disregard the minimum IRR requirement in this case.
(b) A minimum amount of equity is usually specified to make sure the private sponsors have “their skin in the game.” Equity, in this example, is required to be not less than 30% (see slide no. 4). The sum of Equity, Loans and Subsidies is 100 percent. Consequently, the maximum amount of Subsidies that could be considered in this case is 70%.

58. Questions to each team (cont’d)
4. Using the toll rate computed under Question 1, what is the amount of subsidy that the government could provide for the project to be fiscally neutral to the government?
5. How does the project financial internal rate of return (IRR) vary with the amount of subsidies? Is IRR independent from the capital structure (i.e., proportion of subsidies, equity, and credit)?
6. Is the return on equity (ROE) directly influenced by subsidies? Ceteris paribus, what would be the impact on ROE of an increase in subsidies from 0 to 10%?

59. Questions to each team (cont’d)
7. In case there is no political support to charge actual tolls to road users, alternative approaches could include shadow tolls or availability fees. Assuming that there will be no capital grants (i.e., no subsidies during construction), please estimate the minimum annual required payment by the government (availability fee, or availability payment, or annuity) during the first year of operation. Please use the result from Question 1a in your calculations.
Note: Availability payment = 365 * AADT * WATR
8. What financial criterion (or criteria) would you include in the bidding documents, so as to allow for an objective evaluation of financial proposals under a competitive selection of concessionaires?

60. Questions to each team (cont’d)
9. Bridging the affordability gap with shadow tolls. In case the toll rates estimated under Question 2 are higher than the affordable toll rates in your country (or in your province/state), the Government may want to consider providing a shadow toll payment to the concessionaire, so the actual toll rates can be kept within the road users’ affordability. Assuming that the maximum affordable toll rate is $0.04/car-km, and that there will be no capital grants (i.e., zero subsidies), please estimate the shadow toll payment by the government during the first year of operation, so as to complement the affordable toll rates.

61. Notes regarding Question 9
(a) Please use the information and results from Questions 1 and 2, as appropriate.
(b) Affordable weighted average toll rate per vehicle (WATRa):
WATRa = (%C x TRca + %T x TRta + %B x TRba) / 100
where %C, %T, and %B are the percentages of cars, trucks and buses in the traffic flow; TRca, TRta, and TRba are the affordable toll rates for cars, trucks, and buses, respectively Note: TRca = 40 x 0.04 = $1.60/car
(c) Annual shadow toll payment (ASTP):
ASTP = 365 * AADT * (WATRr – WATRa)
where WATRr is the required weighted average toll rate per vehicle as computed under Question 1a. The units of WATRr and WATRa should be $/veh.
(d) Payment of an ASTP by the government is somewhat similar to a minimum revenue guarantee.

62. Questions to each team (cont’d)
10.Time permitting, please work with the numerical financial simulation model to answer the above questions. In your view, what are the pros and cons of the two models?
11. Module 5 of the Toolkit for PPP in Roads and Highways describes the five key stages to launch a PPP project. In which one (or ones) of these stages do you think it may be necessary to carry out a financial assessment of the project?

63. Questions to each team (cont’d)
12.Several assumptions have been made to run this numerical application of the Toolkit financial simulation models. Please describe the changes in assumptions that you would suggest to make this exercise more realistic for your country (or your province/state).
13.Toll rates (or availability fees) are a complex issue. The toll rate that will actually be charged to road users depends on many factors, such as the degree of competition, expected and actual traffic volume and composition, loan terms, government support (if any). Please discuss.

64. Elasticity – Toll rates and traffic volumes
Inelastic
Elastic D D
TR2
TR2 Q2
TR1 Q2 Q1 D
TR1
So, lets look at some further examples of elasticity of demand.
The chart on the left shows a section of demand curve showing inelastic demand. What does that mean - inelastic demand means that for large changes in price there is only a small change in quantities demanded - typical examples of this are food, fuel and household durables - if the price of food goes up what are you going to do - cut back on unnecessary bits but more importantly, eat out less, one less cinema trip...
On the right we have the opposite case - elastic demand. A small change in prices of foreign holidays might be enough to tip the balance in favour of holidaying abroad and so the price change brings a big change in quantities. Q Q1 Q
[e.g., some types of commuting]
[e.g., leisure travel] 64

65. Questions to each team (cont’d)
14. Please make a brief presentation summarizing your team’s results and discussions. Please focus your presentation on the non-numerical questions.
Good luck!

66. Making Predictions
“It's hard to make predictions - especially about the future.” Attributed to many people, including Yogi Berra, Niels Bohr, Samuel Goldwyn, Robert Storm Petersen, and Mark Twain “Heavier-than-air flying machines are impossible.” Lord Kelvin, British mathematician and physicist, president of the British Royal Society, 1895