1. Valuing Government Guarantees in Toll Road Projects Luiz Brandão (PUC-Rio) Eduardo Saraiva (BNDES) Jun 2007

2. 11th Real Option Conference Berkeley, June 2007 2 Private Infrastructure Projects  Characteristics: Large volume of Capital required Irreversible Investment Long time to maturity Essential services to society Usually offered monopolistically  Consequences Affected by political considerations Subject to government regulation Increased risk to the private partner Government and investor incentives diverge once the project is completed Due to this, the private investor may require some form of guarantee

3. 3 Risks Involved  Construction Risk  Interest Rate Risk  Exchange Rate Risk  Political Risk  Environmental Risk  Traffic Risk

4. 11th Real Option Conference Berkeley, June 2007 4 Stochastic Modeling of Traffic Concession Period Traffic Demand Expected Traffic

5. 11th Real Option Conference Berkeley, June 2007 5 Types of Government Guarantees Grant Concession Extension Revenue Enhancement Minimum Traffic Guarantee Shadow Toll Subordinate Loan Exchange Rate Guarantee Equity Guarantee Debt Guarantee Cost to Government I m p a c t on C o n c e s s i o n a r i e Low High

6. 6 Government Participation (PPP)  Chile – Santiago – San Antonio Highway (1995) $140 million dollar investment with Minimum Traffic Guarantee (MTG)  Mexico - CM-Toluca Highway (1992) $313 million dollar investment with MTG  Colombia –El Cortijo-El Vino (1996) MTG of 90%  Chile - Costanera Norte, Santiago (2005) $400 million dollar investment $80 million provided by governemnt, MTG of 80%

7. 11th Real Option Conference Berkeley, June 2007 7 Traffic Guarantees Concession Period Traffic Demand Expected Floor Government pays subsidy Ceiling Government receives excess revenues

8. 11th Real Option Conference Berkeley, June 2007 8 Level of Guarantees Government retains revenues generates by traffic above the ceiling Concessionaire receives a subsidy proportional to traffic below the floor Concession Period Traffic Demand

9. 11th Real Option Conference Berkeley, June 2007 9 Level of Guarantees Concession Period Traffic Demand Concessionaire receives a subsidy proportional to traffic below the floor Government retains revenues generates by traffic above the ceiling

10. 11th Real Option Conference Berkeley, June 2007 10 Level of Guarantees Traffic Demand Government retains revenues generates by traffic above the ceiling Concessionaire receives a subsidy proportional to traffic below the floor Concession Period

11. 11th Real Option Conference Berkeley, June 2007 11 Level of Guarantees Concession Period Concessionaire receives a subsidy proportional to traffic below the floor Government retains revenues generates by traffic above the ceiling Traffic Demand

12. The BR-163 Project

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20. 11th Real Option Conference Berkeley, June 2007 20 DCF Analysis  Traffic Demand Government Projections: www.tranportes.gov.br Initial Traffic Volume: 106.894 vehicles/year  Model Parameters Cost of Equity Capital: 16% /year Cost of Debt Capital: 9% /year Debt ratio: 60% Risk free rate: 7% /year  Discounted Cash Flow – Expected Traffic Levels  NPV = R$ 139.8 million

23. 11th Real Option Conference Berkeley, June 2007 23 NPV Distribution – no guarantees

24. 11th Real Option Conference Berkeley, June 2007 24 NPV Distribution with 30% Guarantee

25. 11th Real Option Conference Berkeley, June 2007 25 NPV Distribution with 40% Guarantee

26. 11th Real Option Conference Berkeley, June 2007 26 NPV Distribution with 50% Guarantee

27. 11th Real Option Conference Berkeley, June 2007 27 NPV Distribution with 60% Guarantee

28. 11th Real Option Conference Berkeley, June 2007 28 NPV Distribution with 65% Guarantee

29. 11th Real Option Conference Berkeley, June 2007 29 NPV Distribution with 70% Guarantee

30. 11th Real Option Conference Berkeley, June 2007 30 NPV Distribution with 75% Guarantee

31. 11th Real Option Conference Berkeley, June 2007 31 NPV Distribution with 80% Guarantee

32. 11th Real Option Conference Berkeley, June 2007 32 NPV Distribution with 85% Guarantee

33. 11th Real Option Conference Berkeley, June 2007 33 NPV Distribution with 90% Guarantee

34. 11th Real Option Conference Berkeley, June 2007 34 Effect of Guarantee on Project

35. 11th Real Option Conference Berkeley, June 2007 35 Effect of a Traffic Ceiling

36. 11th Real Option Conference Berkeley, June 2007 36 Expected Value of Governm. Payments

37. 11th Real Option Conference Berkeley, June 2007 37 NPV with Guarantee Caps

38. 11th Real Option Conference Berkeley, June 2007 38 Expected Value of Payments w/ Caps

39. 11th Real Option Conference Berkeley, June 2007 39 Conclusions  Valuation of government guarantees require the use of option pricing methods.  The effect of different levels of support on the value and the risk of the project can be measured.  The expected cost and its probability distribution can also be estimated through real option analysis.  Setting caps to outlays from guarantees can be an effective way to limit government liability  Other forms of supports can also be modeled with this approach.

40. Valuing Government Guarantees in Toll Road Projects Luiz Brandão (PUC-Rio) Eduardo Saraiva (BNDES) Jun 2007