Unit Root Analysis of Traffic Time Series in Toll Highways

Concession contracts in highways often include some kind of clauses (for example, a minimum traffic guarantee) that allow for better management of the business risks. The value of these clauses may be important and should be added to the total value of the concession. However, in these cases, traditional valuation techniques, like the NPV (net present value) of the project, are insufficient. An alternative methodology for the valuation of highway concession is one based on the real options approach. This methodology is generally built on the assumption of the evolution of traffic volume as a GBM (geometric Brownian motion), which is the hypothesis analyzed in this paper. First, a description of the methodology used for the analysis of the existence of unit roots (i.e., the hypothesis of non-stationarity) is provided. The Dickey-Fuller approach has been used, which is the most common test for this kind of analysis. Then this methodology is applied to perform a statistical analysis of traffic series in Spanish toll highways. For this purpose, data on the AADT (annual average daily traffic) on a set of highways have been used. The period of analysis is around thirty years in most cases. The main outcome of the research is that the hypothesis that traffic volume follows a GBM process in Spanish toll highways cannot be rejected. This result is robust, and therefore it can be used as a starting point for the application of the real options theory to assess toll highway concessions

Public : private partnerships in Portuguese highways : a real options approach to the SCUTs case

The purpose of this paper is to propose an innovative model to evaluate the portfolio of “shadow toll” highways in Portugal, through the use of the Real Options model, at the time of the concession. During the valuation, some Monte Carlo simulations will be performed in order to analyze the impact of changes on the fundamentals to the value of the projects. Amongst the major results, this article concludes that the valuation of the Net Present Value of the projects of the SCUTs with Discounted Cash-Flows model underestimates, systematically, the true value of the ventures by ignoring the price of the flexibility of the fundamentals. Under the model proposed, it became clear that the value of the elasticity of the exogenous risky variables (cost of debt and demand) is significant, increasing substantially the worth of the projects

Broad roads in a thin country - infrastructure concessions in Chile

To increase investment in infrastructure, in the early 1990s Chile's government introduced private capital into the transport infrastructure sector, covering roads and highways, bridges, tunnels, and airports. The chosen mechanism: a concession scheme through which private firms would finance and build a given project and then operate the infrastructure for a set of number of years, recovering their investment by collecting tolls from users. Among the lessons learned from the experience: 1) As much as possible, avoid concessioning roads for which there are convenient alternative freeways nearby. 2) Choose the right variable for awarding a concession. Avoid mechanisms that (by promoting large payments to the state or short-term concession periods) encourage high tolls, and if you choose to award a concession to the firm charging the lowest tolls, place a floor and ceiling on possible bids. The floor is to guarantee the concession's financial viability; the ceiling is to prevent inefficient traffic diversions. Ties at either end should be resolved by a second variable, such as the level of transfers between the state and the firm. 3) Allow downward toll flexibility so that the concessionaire can react to unexpectedly low traffic flows, especially for certain types of vehicles. 4) Pay special attention to the tendering mechanism and to the general incentive structure. There are limits to the pure least-present-value-of-revenue (LPVR) auction, but income guarantees do enhance liquidity. In fact, a minimum-income guarantee through an LPVR auction is an instrument for credit enhancement, not income support. Alternatively, some form of financial innovation should be encouraged to make debt service commitments more flexible. 5) If concessions are tendered by traditional methods and income guarantees will be given, cover only a fraction of the concessionaire's expected income stream, to reduce the state's financial exposure and to improve the incentives to the concessionaire. 6) Make the contracts as complete as possible but allow for later modifications or renegotiations, and include a well-designed dispute resolution mechanism.Banks&Banking Reform,Roads&Highways,Decentralization,International Terrorism&Counterterrorism,Public Sector Economics&Finance,Public Sector Economics&Finance,Roads&Highways,Airports and Air Services,Banks&Banking Reform,Toll Roads

Private Roads, Public Costs: The Facts About Toll Road Privatization and How to Protect the Public

Provides an overview of trends in toll road privatization and discusses implications for the public, including loss of control, financial risk, and lack of transparency. Proposes principles that would protect the public interest in privatization deals

Privatization and the Public Interest: The Need for Transparency and Accountability in Chicago's Public Asset Lease Deals

Examines the appeal and risks of infrastructure privatization and Chicago's history with privatization deals. Recommends public interest principles for future deals, rules and processes for vetting proposals, and a commitment to government transparency

The Portuguese shadow toll concessions : analysis of allocation and valuation

As more countries are relying on the private sector for provision of public services, Public-Private Partnerships (PPPs) are at the center of this growing trend. Optimal risk allocation through risk transfer to the private sector is the critical issue for the success of these partnerships in achieving best value-for-money (VfM) for the public sector. Using the Portuguese shadow toll concessions (SCUT), this study aims to analyze and evaluate their allocation of risk between the public and private sectors. Accordingly, the first part of the paper examines how risks in the SCUT concessions were allocated. Our analysis indicates that for the most part, with the exception of demand risk, risks were well allocated. The second part of the paper identifies and evaluates the main risks transferred to the private sector. It also goes further in assessing gains before and after risk transfer, if any, to the private sector. We find that risks transferred to the private sector account for a very small share of public sector payments. This paper also concludes that the costs to the public sector, through the payment obligations, far outweigh those assumed by the private sector. Consequently, this paper examines whether the SCUT concessions were successful in regards to achieving VfM. The high gains to the private sector may suggest otherwise. However, given that there was no comparison of VfM between the PPP approach and an alternative procurement route, it is not possible to draw any concrete conclusions

The long and winding path to private financing and regulation of toll roads

Road transport has long been the dominant form of transport for freight and passenger movement throughout the world. Because most road projects require investments with long amortization periods and because many projects do not generate enough demand to become self-financing through some type of user fee or toll, the road sector remains in the hands of the public sector to a much greater extent than other transport activities. But governments throughout the world, including those of many poor African and South Asian countries, are commercializing their operations to cut costs, improve user orientation, and increase sector-specific revenue. There seems to be demand for toll roads in specific settings, but the problems met by many of this"first generation"of road concessions-from Mexico to Thailand-have given toll projects a bad reputation. Many mistakes were made, and tolling is obviously not the best solution for every road. Most of the alternatives aim at improving efficiency (lowering costs). But there are many ways of getting the private sector involved in toll roads, thus reducing public sector financing requirements for the sector. Understanding the context in which toll roads are viable is essential both for their initial success and for effective long-run regulation. The authors provide a broad overview of issues at stake from the viewpoint of both privatization teams and regulators responsible for supervising contractual commitments of private operators and the government, to each other and to users.Urban Services to the Poor,Roads&Highways,Public Sector Economics&Finance,Decentralization,Banks&Banking Reform,Roads&Highways,Toll Roads,Urban Transport,Public Sector Economics&Finance,Airports and Air Services

A real options model for the financial valuation of infrastructure systems under uncertainty

Build-Operate-Transfer (BOT) is a form of Public-Private Partnerships that is commonly used to close the growing gap between the cost of developing and modernizing transportation infrastructure systems and the financial resources available to governments. When assessing the feasibility of a BOT project, private investors consider revenue risk - which is stemmed from the uncertainty about future traffic demand - as a critical factor. A potential approach to mitigating the revenue risk is the offering of revenue risk sharing mechanisms such as Minimum Revenue Guarantee options by the government. In addition to Minimum Revenue Guarantee options, a mechanism known as Traffic Revenue Cap options may also be negotiated, which makes the government entitled to a share of revenue when it grows beyond a specified threshold. Financial valuation of investments in BOT projects should take into account uncertainty about future traffic demand, as well as Minimum Revenue Guarantee and Traffic Revenue Cap options. The conventional valuation methods including Net Present Value (NPV) analysis are not capable of integrating the uncertainty about future traffic demand in the valuation of BOT projects and properly pricing Minimum Revenue Guarantee and Traffic Revenue Cap options. Real options analysis can be used as an alternative approach to valuation of investments in transportation projects under uncertainties. However, the appropriate application of real options analysis to valuation of investments in transportation projects is conditioned upon overcoming specific theoretical challenges. Current real options models do not provide a systematic method for estimating the project volatility, which measures the variability of investment value. Existing models do not provide a method for calculating the market value of Minimum Revenue Guarantee and Traffic Revenue Cap options. Also, current models are not able to characterize the impact of Minimum Revenue Guarantee and Traffic Revenue Cap options on private investors' financial risk profile. The overarching objective of this research is to apply the real options theory in order to price Minimum Revenue Guarantee and Traffic Revenue Cap options under the uncertainty about future traffic demand. To achieve this objective, a real options model is created that characterizes the long-term traffic demand uncertainty in BOT projects and determines investors' financial risk profile under uncertainty about future traffic demand. This model presents a novel method for estimating the project volatility for real options analysis. This model devises a market-based option pricing approach to determine the correct value of Minimum Revenue Guarantee and Traffic Revenue Cap options. An appropriate procedure is created for characterizing the impact of Minimum Revenue Guarantee and Traffic Revenue Cap options on the investors' financial risk profile. The proposed real options model is applied to a BOT project to illustrate the valuation process. The limitations of the proposed real options model, as well as the barriers to its implementation, are identified and recommendations for future research are offered. This research contributes to the state of knowledge by presenting a new method for estimating the project volatility, which is required for the real options analysis of transportation investments. It also introduces a risk-neutral valuation method for pricing the market value of Minimum Revenue Guarantee and Traffic Revenue Cap options in BOT projects. The research also contributes to the state of practice by introducing a novel class of assessment tools for decision makers that characterize the investors' financial risk profile under uncertainty about future traffic demand. Proper methods for pricing of Minimum Revenue Guarantee and Traffic Revenue Cap options are useful to public and private investors, in order to avoid wasting capital in transportation projects.PhDCommittee Chair: Baabak Ashuri; Committee Member: Adjo A. Amekudzi; Committee Member: Daniel Castro-Lacouture; Committee Member: Darryl VanMeter; Committee Member: Kathy O. Roper; Committee Member: Keith R. Molenaa

Port capacity expansion under real options approach: a case study in Brazil

Investments in port container terminals are sensitive to uncertainties. Public investments in infrastructure have been significantly reduced in the last decade in developing countries. The Brazilian government infrastructure investment was only 1.85 % of GDP in 2019, representing the lowest level in the last fifty years. Nonetheless, the regulatory framework of the port sector in Brazil has undergone significant changes over time, increasing the number of private port container terminal leases. The expansion capacity of the private port facilities is strongly linked to the demand uncertainty, which impacts the financial return to the long run. In this scenario, the uncertainty of global cargo transportation can discourage infrastructure investments in this class of project in Brazil. To overcome these issues, the financial modelling applying real options approach is better suited than the traditional valuation methods based on Discounted Cash Flow (DCF) analysis. The present study aims to value flexibilities of anticipating, or postponing, or interrupting investments of an existing operational port terminal in Brazil with expansion capacity under the demand uncertainty. The financial decision to invest in a port expansion is modeled by an American option. The results demonstrate that the investor adds significant value to the project by having the possibility to postpone investments. The proposed model presents the contribution of optimizing the decision of sequential expansions of capacity in port terminals, at any time and according to scenarios' revelation. In addition, the model allows the government authorities to review lease contracts, considering the relevance of timing to invest in project expansion decisions. The proposed model can also be extended to other infrastructure projects in emerging economies