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4 Conclusions and Recommendations

The U.S. has a strong tradition of revenue risk transfer in toll P3s. Recently full revenue risk transfer has encountered financeability challenges.

There are a variety of potential mechanisms that have been applied in other countries that U.S. Agencies can consider to mitigate revenue risk in toll revenue P3s. These mechanisms, many of them including forms of minimum revenue guarantees, have evolved over time as Agencies have witnessed how some revenue risk P3s experienced severe financial difficulties. As summarized in Table 5, these mechanisms can create a range of benefits. All revenue risk sharing mechanisms discussed in this Discussion Paper will reduce the revenue risk for the Developer, which should generally lead to improved financeability.

Key: Most value or benefits = ●●●● Least value or benefits = ●

The Present Value of Revenues mechanism may be an attractive mechanism for Agencies, as it is relatively easy to implement, has few immediate fiscal impacts, and is likely to deliver VfM. Although the PVR mechanism transfers most of the revenue risk to the Agency, fiscal impacts are limited to the years of contract extension. Because the PVR mechanism provides downside revenue risk protection for Developers - and therefore minimizes excessive risk pricing by the Developer - this mechanism is also likely to provide more VfM than full revenue risk transfer to the Developer. The PVR mechanism is relatively easy to implement, although the uncertain contract term may present challenges for debt financing terms.

Although a Minimum Revenue Guarantee is relatively easy to implement and enhances financeability and VfM, it creates uncertain contingent liabilities for the Agency. A MRG is a transparent mechanism that is relatively easy to implement. Because a MRG reduces revenue risk for the Developer, it may enhance financeability and VfM. However, a MRG creates contingent liabilities for the Agency which are difficult to estimate. For Agencies that are not in a position to accept these, a combination of PVR and a lower MRG could also be an option. From a reciprocity perspective it would be appropriate to not only protect the downside, but also share in the upside, such as through revenue sharing bands.

Although a Contingent Finance Support mechanism improves financeability, it is sub-optimal from a VfM perspective and creates contingent liabilities for the Agency. A CFS not only protects against revenue shortfalls, but also against operating cost overruns. As a result, it is likely to improve financeability by providing significant protection to Lenders. However, a CFS mechanism is sub-optimal from a VfM perspective, as the Developer is no longer incentivized to minimize lifecycle costs. Like a MRG, a CFS mechanism creates uncertain contingent liabilities for the Agency.

Combining Availability Payments and Revenue Sharing may be attractive from a financeability and VfM perspective, although it may be relatively difficult to implement. Combining an AP with revenue sharing, in which 50% or more of the toll revenues are exchanged with an AP, is likely to enhance financeability compared to a full revenue risk transfer, as the Developer is partially protected from downside revenue risk. A mixed AP toll revenue structure could be confusing for Lenders (banks, bondholders, and credit rating agencies), however, since the Developer is compensated through two different payment approaches (AP and toll revenues). This could lead to sub-optimal debt pricing. Although this mechanism is likely to generate VfM, it creates fiscal liabilities for the Agency. In addition, it is relatively challenging to implement.

A Shadow Toll mechanism is likely to decrease financeability and VfM but could create positive economic externalities. Transferring the full traffic risk to the Developer may result in higher financing costs and lower VfM compared to other mechanisms. However, depending on the exact nature of the road and concession agreement, Shadow Toll mechanisms can be enhanced to increase public welfare by incentivizing the Developer to optimize the number of vehicles on managed toll lanes. Such considerations could provide an economic rationale for using this mechanism. Although a Shadow Toll mechanism requires reliable traffic counting and electronic tolling technology, implementation difficulties are expected to be relatively limited in the U.S. context.

A RRM may be relatively challenging to implement and the VfM and fiscal impacts will depend on the adjustment mechanism used to achieve the target IRR. If a contract extension is used to achieve the required IRR, the RRM will have the same impacts as the PVR mechanism. If a government subsidy is used to achieve the required IRR, the RRM will have direct fiscal impacts. The disadvantage of a RRM is that it may be complex to implement, particularly if the adjustment mechanism is based on net revenues, which will require re-optimizing the Developer's financial model to maintain the target equity IRR. If the Developer is compensated for higher-than-expected O&M costs, a RRM may have high monitoring costs, low VfM, and poor public perception.

Although Innovative Financing mechanisms may not directly address revenue risk, they may help improve financeability. Innovative Financing mechanisms such as the USDOT's Transportation Infrastructure Finance and Innovation Act (TIFIA) program or state infrastructure banks help ease short-term liquidity by providing low interest rates, long tenors, flexible backloaded repayment terms, and interest capitalization, thereby improving financeability. Although innovative financing mechanisms do not typically pose implementation challenges, they may contradict the P3 philosophy of efficient risk transfer and VfM if they provide protection for overall project risks as opposed to revenue risk specifically.

The Present Value of Revenues and Minimum Revenue Guarantee appear to be the most promising revenue risk sharing mechanisms for the U.S. context, due to their relatively positive impacts on VfM, fiscal impact, financeability, and ease of implementation. The MRG, however, is less attractive from a fiscal impact perspective than the PVR, as it creates significant contingent liabilities. For Agencies that are not able to accept such contingent liabilities, a combination of a PVR and a lower MRG could represent a viable alternative. The variables in both of these mechanisms - including the sizing of the MRG and minimum and maximum contract term - allow for considerable tailoring to Agency requirements and the needs of individual projects.

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