Africa Transport-_ Technical Notes y- Sub-Saharan Africa Transport Policy Program (SSATP) Road Maintenance Initiative (RMI) UNECA and The World Bank Note No. 3 December 1996 Privately Financed Road Infrastructure A Concession Company's Point of View frica faces a great challenge as it seeks to mobilize sufficient funds to 2 2 5 7 5 " build, improve and maintain a network of high capacity freeways to Sserve the needs of the region's rapidly growing road transport industry. Given the acute shortage of government revenues, many governments increasingly turn to the private sector for assistance. In most cases, this will entail permitting the private sector to build and operate these roads under concession agreements. This note is based on the Under such an arrangement, the state will grant a concession company SSATP Working Paper, No the right to finance, build, own, operate, and maintain public infrastructure for 26, by Michael J. Hamilton: a given period, and to charge users for that service. Privately Financed Road Infrastructure:A Concession These firms can be expected to consider as minimum conditions for Company's Point of View, their service: This series is intended to . whether traffic volumes exceed 3,500 vehicles per day. If so, revenues will share information about issues raised in various usually be sufficient to cover operating costs, and routine periodic SSATP reports. The views maintenance, although true concessions require much higher traffic expressed in the study and volumes; and in this series are those of the authors, and are not * the extent to which revenue leakage is a problem. intended to represent the opinions of the World Bank Traffic Group, UNECA or any of the RMI stakeholders. Traffic forecasts are very important, regarding the estimated road usage both For more information about with and without a toll. If surrounding roads are heavily used, the concession these notes, please contact company is more likely to absorb the risk, assuming that a sufficient number of Leita Jones in the World motorists will pay a toll in order to save time and avoid congestion. Bank. Internet: lLCNS~VODBAWO(a~ Tall Collection The efficiency of toll collection is determined mainly by the concession company. To the greatest extent possible, the concessionaire will automate toll collection and install efficient security systems. However, the concession company will pressure the government on some related policies, in particular that the government not impose onerous employment-related requirements on the concessionaire. ______________________________________________Africa Transport TYPICAL' C'ONCESSION' STRI-TT1JRT7 GOVERNMENT0 i "CONSO RTIUM -CONCESSION - AGREEMENT SHHOLR SHAREHOLDING CONCESSION - LOAN COMPANY, _ AGRM E j -~~~~~~~~~~~~~~~ CONSTRUCTION CONTRACT:: AGREEMENTE CONSTRUCCTION ' - '5s JONT VETURE Toll rates restraint on toll levels so as to protect the public interest. Three factors influence the amount of tolls collected: Because toll revenues are collected in local currency, * the toll rates; a foreign exchange risk exists for foreign-held * the amount of traffic; and concessions. Both parties must be clear as to who . the efficiency of collection. assumes the risks. Financing schemes for projects in the Far East have not been carried through, because none of The thorniest issue for concessionaires is the the parties involved were prepared to accept the risk. In problem of determining toll rates. In most cases the the 1960s and the 1970s, the Spanish government jurisdictional government is the final authoritv. It is accepted the foreign exchange risks of the concession essential that the concession company, partcompanies, but by the mid-1980s, found that the cost of essential that the concession company, particularly if It don so had become uacceptablv high. is privately owned, be assured by statute or by agreement that it can set tolls at sufficient levels and in a timely Finandal structure manner so that debt can be serviced and the acceptable return on equity obtained. Concession companies typically have a financial The concession company holding the structure consisting of modest amounts of equity and Birmingham Northern Relief Road has an unfettered substantial amounts of debt raised from domestic and right to set whatever toll level it chooses. The reasoning nternasional financal marketsh The period of the behind the government's agreement to these terms was concen of th on t that the competition arising from the existing M6 financing of the project. motorway (which has no toll) would provide sufficient Technical Notes 3 The duration of motorway concessions average about thirty years. In general, the concession Construction companies have traditionally been thought to be natural investors should run for a period of time long in road concessions since they would receive not only the construction contract, but also recover their equity investment from tolls charged. Experience has shown, enough to enable the company to however, that the conclusion is correct, but for different reasons than previously service all debt and earn the required understood. In both Europe and North America, the construction business has been return on equity. But there are no hard cyclical, and many construction companies were hard hit by the recession of the and fast rules. For example, the early 1990s. Now, many are interested in obtaining road or other infrastructure concessions to ensure non-cyclical earnings. Examples of such construction Birmingham Northern Relief Road companies include Trafalgar House, John Laing, Mowlem, Amec, and Wimpey in has a concession length of fifty-two the United Kingdom; GTM-Entrepose, Spie Batignolles, and Bouygues in France; years, and the duration of Dulles Philipp Holzmann and Hochtief in Germany; and Bechtel Group, Kieweit, and Greenway's concession expires ten Morrson-Knudsen in the United States. years beyond the final maturity of the longest-term debt used in the initial financing (making the concession forty-two years). In Mexico the initial concession period of one private roadwav was seven years, although this . 1>, . ' .,, ~~are not normally accepted as reliable enough on which relatively short period has proven to be nonviable, to base loan decisions. The debt is therefore principally initial serviced by revenue from tolls, which also covers Motorway concessions face high initial operating and maintenance costs. construction costs and slow growth in revenues. During their initial operating period, they almost always incur losses. These deficits must be covered, and both private promoters and the banks that loan to them usuallv promoterand governmnth subank es tath l themo uhisul I VWho invests in toll road concession companies? In France and Italy, governments have been the primary investors, Concession companies may be public or private preferring to contract the work to concession companies . . l ., , . ~~~~~rather than rely on the Ministry of Works to construct sector entities, or an hybrid of both. In France there are n p l ohighways. In Spain, banks, construction companies, seven publicly owned concession companies, or Soci6tes isrnecmais n elh niiul d'Economie Mixte (SEMs), and one private company, insurane companies,oand wealh individuls. Cofiroute. In Italy there are eighteen publicly owned concession companies, operating 97 percent of the toll roads, and one privately held concession, operating the Today, the character of the investors has road between Milan and Turin. Of the publicly owned broaene t Italian companies, Autostrade S.p.A. is the largest by far, broadener t tingcldlages construcion copanies, oeaigapproximately 55 percent of the toll roads in roadopertin copnis tol eqimn supies operating approximately percent of the toll roads in banks or other long-term financial institutions, newly the United Kingdom. The New Jersey and Pennsylvania formed infrastructure funds or emerging market funds, Turnpike Authorities are the best known public entities multilateral institutions such as the International Finance that have long operated toll roads in the United States. Carporation and new infrastructure campanies. Nevertheless, m the 1990s, state and federal governments are increasingly turning to the private sector to provide Concession company investors are primarily new roads and bridges. interested in the rate of return that they can earn from !Suurte cof Revenue their investment relative to what they might earn in other sectors or enterprises. They are interested in both the The major source of revenue for concession companies profit that they will earn from providing a service or good is the total of tolls collected. Revenue from other activities, (such as construction services or toll equipment), as well such as rent from motorway service areas, is another as the return on their equity investment. source of revenue, but gains from property development 4 _______________________________________________Africa Transport Where projects are not financially viable, the Spain embarked on its motorway program in government must determine the public-good value of the mid-1960s, a full decade after France and Italy. In the project, in view of the risks it must assume, and response to inadequate national budget resources for irrespective of the expected rate of return. One example extensive development of roads, the government turned of this is the Channel Tunnel High-Speed Rail Link, the to the notion of toll roads run by concession companies. cost of which was so great, that private investors would All of these Spanish motorway companies were private not undertake the project entities, albeit subject to a high without government support. degree of state monitoring and control. Government PaIic! The Road Maintenance Initiative (RMI) was launched in 1988 by the United Nations The energy crises of The decision to create a toll road Economic Commission for Africa (UNECA) the 1970s had a deleterious concession requires a firm and the World Bank under the auspices ogram impact on motorway government policy, with an (SSATP). The countries taking part in the development in France, Italy emphasis on the benefits of RMI are Cameroon, Kenya, Madagascar, and Spain. Construction costs private operation and the Rwanda, Tanzania, Uganda, Zambia, and rose dramatically, and only partnership that the government Zimbabwe. Others receiving assistance from short-term loans were is extendingto the private sector. Lesotho, Malawi, Mozambique, and Togo. available, at high interest Government support can be RMI is administered by the World Bank's rates. Traffic growth slowed, given in several ways, by creating Africa Region and is co-financed with the and revenues fell. In Italy, the appropriate legislative Governments of Denmark, France, Germany, state grants were given to structure so that the concession Switzerland, and the European Union. motorway companies in both can operate effectively, providing France, Japan, and Norway provide senior 1982 and again in 1985, an equitable regulatory staff members to work on the program. culminating in the state taking environment to set toll rates, and control of all three shortly protecting the concession thereafter. companies from competition during the early years of operation. Similar developments in Spain led to the collapse of three companies in 1983, representing about 15 percent Histor!r of Concessions of the motorway sector. Again, the public sector eventually took control of their assets, creating a state- Between 1789 and 1900 there were more than 2,000 owned holding company instead. private corporations operating turnpikes in the United States, mainly because local, state and federal By the late 1980s, the fortunes of the motorway governments were not able to perform this function. companies had revived due to improved economic conditions and unexpectedly high traffic growth. Today, Although motorwavs existed prior to the 1950s the concession companies in both Spain and Italy are in Europe, the first concession-type motorways in France profitable, and the shares of some are traded on local and Italy were constructed in the 1950s and 1960s. stock exchanges. Concessions were awarded to publicly owned motorway companies, and the idea of establishing a concession network to manage both the profitable and unprofitable sections of motorways germinated in Italy, where Autostrade S.p.A. was established for this purpose.