You are here

Share:

1.2.2 Revenue Risk – Tariff Levels (only in user-pays PPPs)

In the context of user-pays projects (for example, a toll road, a rail project including service operations, or a water PPP including water supply to the public), revenue risk includes the risk of the charges to users not being at the anticipated level in each particular year. This may cause either a lower or higher than expected income.

When assessing the risk, it should be noted that price volatility will also affect volume risk, so lower levels of tariff may not necessarily result in lower revenues or vice versa.

The tariff or price of the user charge in user-pays projects may be unilaterally fixed by the authority or set by the private partner, usually under certain caps and predetermined rules for indexation.

In the first case, the risk of price variations different from those expected should, in all cases, be assumed by the government. One common approach is to define a baseline for tariff levels in the contract, including a defined profile of the tariff with an indexation method “in the shadow” (for example, the consumer price index – CPI). This is done to calculate the loss or the extra profit by comparing the baseline curve and the actual tariff. This has the complexity (especially in transportation projects) of considering elasticity of demand, as a lower than expected actualization of tariff will produce a loss in revenues. However, this may be partially corrected by a potential increase in use/demand due to the lower price.

The principle is that regardless of the actual tariff settled on each year for the user-payment, the private partner receives the same amount per user. This is done through a settlement mechanism whereby the government pays the difference between the actual revenue and the deemed revenue (calculated by applying the shadow tariff). Conversely, it can receive a payment from the private partner when the actual tariff is above the baseline tariff curve.

This mechanisms works well in projects where the demand is highly or totally captive, especially when the fare levels are subsidized or clearly below the maximizing revenue level (for example, for public transport or water supply).

When the private partner has the ability to set the tariff, even if this is capped (for example, usually in road projects and always in rail projects), the certainty of the tariff level is high, and the private party should bear the risk of different tariff levels impacting on the revenue as projected.

The fundamental point in these cases is to make clear in the contract the methodology for increasing/reviewing the tariff during the course of the contract, which refers to the indexation issues described below.

Add new comment

By submitting this form, you accept the Mollom privacy policy.