Project revenues for P3s can come from various sources. A common source of revenue for a P3 project is project tolls. Toll-based P3 projects may be undertaken with minimal financial contributions from the public sector. The private sector may agree to design, build, finance, operate and maintain a project in exchange for the future revenues derived exclusively from the project. The public sector effectively transfers demand risk - the risk that use of the facility will be less than expected - to the private sector. If expected demand for a facility does not materialize private investors stand to lose some or all of their investment.
Public agency contributions to a P3 project can also be derived from various non-toll revenue sources. Typical revenue sources include State and local gas and sales taxes, as well as Federal-aid funds. P3s may also be structured to take advantage of non-conventional revenue sources such as local option taxes, parking and other fees, value capture strategies and ancillary revenues. However, non-conventional revenues may be viewed by potential investors as less stable sources of revenue and, as a result, may be more difficult to use as a source of repayment. Generally, the broader the base from which a revenue source is derived, the more stable the revenue source. For example, statewide sales taxes and gas taxes are generally considered more stable than local property taxes.
Table 3-1 presents a discussion of the advantages and disadvantages of typical revenue sources from a project finance perspective. The list in Table 3-1 represents some of the revenue sources available today. Their relevance may change over time. For example, fuel taxes are the main revenue source for highway and transportation investments, but their yield is declining due to the introduction of more fuel efficient vehicles and alternative fuels. Mileage-based user fees are being explored to replace fuel taxes over the long term.
Value capture is an innovative revenue generation tool that may be either project-specific or programmatic in nature. Project-specific tools include those that are typically applied to specific development projects, such as:
| Revenue Source | Advantages | Disadvantages |
|---|---|---|
| Tolls | Direct user fee, may create stronger performance incentives for a facility operator. Revenue risk can be transferred to the private sector. Tolling structure may include market pricing mechanisms that create economic benefits. |
Traffic and revenue forecasts can fall short of actual revenues. Costs of collection may be higher than other revenue sources. Limitation: Few facilities can be fully financed using toll revenues alone; most projects will require a combination of revenue sources to work. |
| State fuel taxes | Revenues are not directly associated with the use of a specific project, but related
to general use of highway network, therefore they may be relatively stable. Low cost of collection. |
Yield declining over time since they typically do not increase to compensate for inflation and improved fuel efficiency. |
| Federal-aid highway funds | Derived from federal fuel taxes - a relatively stable revenue source and an indirect user fee. | Yield declining over time, as discussed above. Federal funds are generally linked to regulations and contracting requirements (e.g., NEPA, Davis-Bacon, etc.) that may be more demanding than the requirements imposed by other revenue sources. |
| Sales taxes | Relatively stable revenue source, though subject to influence of economic growth and recession. | May create market distortions because it is not aligned with the "user pays"
concept. Local option taxes or those dedicated for specific uses may have a "sunset" date that may or may not be aligned with the term of the P3 agreement. |
| Value capture* | May capture economic value created through infrastructure improvements that is not
captured by other sources. Specific value capture tool can be chosen based on regional or local conditions and project needs. |
Subject to the volatility of the real estate market; rated low by bond rating agencies. Yield may be low, requiring other revenue sources. For joint development, there can be concerns about the public sector being a "landlord," and issues related to land taken by eminent domain (if any) being turned over to the private sector for profit. |
| Ancillary revenues | Encourage private sector to optimize potential revenue options, reducing the need for limited public resources | Yield is relatively low; cannot be considered as stand-alone funding sources, but as part of the "revenue portfolio." |
| *Has not generally been used with highway P3 projects | ||
Detailed description of Table 3-1
Typical project finance revenue sources. This table describes the advantages and disadvantages of various project revenue sources. There are six revenue sources listed: tolls, state fuel taxes, Federal-aid highway funds, sales taxes, value capture (which has not generally been used with highway public-private partnership (P3) projects), and ancillary revenues. There are three advantages to tolls: (1) they are a direct user fee, which may create stronger performance incentives for a facility operator; (2) revenue risk can be transferred to the private sector; and, (3) tolling structure may include market pricing mechanisms that create economic benefits; the disadvantages are (1) traffic and revenue forecasts can fall short of actual revenues; (2) costs of collection may be higher than other revenue sources; and, (3) few facilities can be fully financed by using toll revenues alone; most projects will require a combination of revenue sources to work. The advantages of the next revenue source (state fuel taxes) are (1) revenues are not directly associated with the use of a specific project but related to general use of the highway network; therefore they may be relatively stable, and (2) the low cost of collection; the disadvantage is yield declining over time because state fuel taxes typically do not increase to compensate for inflation and improved fuel efficiency. The advantage of Federal-aid highway funds is that they are derived from Federal fuel taxes - a relatively stable revenue source and an indirect user fee; the disadvantages are (1) yield declining over time, as discussed above, and (2) Federal funds are generally linked to regulations and contracting requirements (e.g., National Environmental Policy Act (NEPA), Davis-Bacon, etc.) that may be more demanding than the requirements imposed by other revenue sources. Sales taxes have the advantage of being a relatively stable revenue source, although they are subject to the influence of economic growth and recession; the disadvantages are that (1) they may create market distortions, because they are not aligned with the "user pays" concept, and (2) local option taxes or those dedicated for specific uses may have a "sunset" date that may not be aligned with the term of the P3 agreement. The advantages of value capture are (1) it may capture economic value created through infrastructure improvements that is not captured by other sources, and (2) a specific value capture tool can be chosen based on regional or local conditions and project needs; the disadvantages are (1) they are subject to the volatility of the real estate market; rated low by bond rating agencies; (2) yield may be low, requiring other revenue sources; and, (3) for joint development, there can be concerns about the public sector being a "landlord," and issues related to land taken by eminent domain (if any) being turned over to the private sector for profit. Finally, the advantage of ancillary revenues is that they encourage the private sector to optimize potential revenue options, reducing the need for limited public resources; the disadvantage is that yield is relatively low; they cannot be considered as stand-alone funding sources but as part of the "revenue portfolio."
Programmatic value capture tools include those that can be applied system-wide within a whole jurisdiction to account for multiple development projects, such as:
Revenue sources must be stable and generate an adequate yield over the long term to repay P3 debt and equity. Tolls and taxes are usually stable revenue sources, and debt backed by tolls and taxes tends to be rated higher by credit rating agencies. Ancillary revenues, such as revenue generated from right-of-way leases, rest stop concessions or the sale of advertising or air rights tend to have relatively low yields. Value capture revenues are typically volatile. These revenue sources are best used in combination with other revenue sources as part of the overall plan for compensation of the P3 concessionaire.
Some revenue sources have a shelf-life. Grants and discretionary funds may have time limitations, and some State and local revenue sources (such as sales taxes) may expire after a certain date, requiring voter approval to be extended beyond that period. For a P3 project using availability payments, the revenues dedicated to make the annual payments must have a life span that extends through the entire concession period. Revenue sources with a shorter shelf-life can be used to make payments in the early stages, e.g., during construction and the "ramp-up" period for toll roads (i.e., the early period when traffic has yet to rise to forecasted levels). In most cases, several revenue sources are bundled to repay debt and equity in a P3.
