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1.2.3 Revenue Risks – Fraud and Collection Risks (only in user-pays)

Fraud may be considered a subset of volume risk in user-pays PPPs when considering volume as the level of demand that effectively pays for the service. Fraud is commonly used to refer to willingly avoiding payment, whereas collection risks include non-payment when the payment may be or become unaffordable for the user.

Fraud risk is very relevant in public transportation projects. When a transport PPP includes transit operations, the private party should bear the risk to some extent, as it is the party that is best positioned to manage it. In this context, it can mitigate the risk by access and ticketing controls. The private partner will have a natural incentive in those projects to diminish fraud when it is receiving the user-revenue. However, many Metro and LRT projects are structured around availability and/or quality payments. In these cases, the government should include in the availability criteria, one related to fraud management, so as to explicitly incentivize the private partner to control fraud.

When the nature of the risk is more significant because the design of the vehicles (if the basic design or full design is prescribed – for example, open vehicles), it is not uncommon to limit the risk so as to share it against a fraud benchmark (for example, fraud above 5 percent will be shared at a 50 percent level, whereas fraud above 10 percent will be considered extraordinary and provide full compensation above that threshold).

In toll road projects, fraudulent use of the road (not paying for the use) is rarer. However, this has recently become more of an issue with electronic tolling technologies where the payment is made ex post. In this case, users may refuse to pay, claiming insolvency or simply deciding not to pay.

In these contexts, and also in general for any user-payment scheme, there should be clear instruments in place to apply fines to the defrauding user or other methods of enforcement (withdrawing the driving license, cancelling the water supply service, and so on). These are very sensitive matters, and there may be limited political willingness to enact certain measures. When those are not practical, the general statement of transferring fraud risk to the private partner should be carefully revisited.

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