As explained in section 4.2, one reason for co-financing may be simply to fill the viability gap in a user-pays PPP, but there are other approaches.
A market-oriented or revenue maker project (based on user payments) may not be completely feasible on the basis of those commercial revenues (that is, the revenues net of O&M costs are not enough to amortize the funds invested).
This is common, especially in rail infrastructure, and primarily in the context of passenger transportation. No heavy metro or high-speed infrastructure is financeable on the basis of its commercial margin.
The fact that a rail project is not commercially feasible does not imply a lack of economic sense; there may be significant externalities and strong socio-economic benefits which may justify the procurement decision.
Although less common, a road infrastructure project (tolled roads) may also be non-feasible unless the public sector complements the inadequate revenue or supplements the lack of funds. This is usually the case for road infrastructure projects with very significant structures (bridges and especially tunnels) or PPP projects that are specifically for such structures (a specific bridge or tunnel). The same principle of care regarding economic feasibility or sense should be applied.
In these projects, a pure co-financing (construction grants) or a soft loan scheme may be an appropriate solution to fill the feasibility gap.
However, the government also has the option to complement revenues instead of complementing the initial funding (creating a hybrid payment mechanism), or it can proceed with a combination of the two support mechanisms.
When providing complementary revenues through public budgetary payments, it is preferable to structure these as service-type payments. For example, rather than being irrevocable or unconditional, they should be conditional on the performance of service (availability payments) or the volume served (shadow tolls). This is especially true if the public funding support represents a significant portion of the revenue mix (for example, more than 40 percent of the revenues).
A PPP program that illustrates different routes to fill the viability gap is the toll road PPP program in Colombia – see box 5.9 below. Box 5.10 also presents more examples of viability gap financing and similar funding from around the globe.
Road and highway construction in Colombia is very costly compared to typical costs in other countries, mainly due to the geography of the country. Most of the roads include a significant number of bridges and tunnels, which make the construction costs very high. As such, many of the projects are not financially feasible bearing in mind the projected toll revenues. Therefore, significant public financial support has to be included in order to make such projects commercially feasible.
The need to develop roads and highways quickly and reliably led the government of President Santos to create the Fourth Generation (4G) Highway program. The 4G program covers the construction and/or replacement, operation, and maintenance of 27 corridors with an investment of $50 billion over a horizon of 10 years.
The approach taken by the government of Colombia, to solve the viability gap is a combination of deferred support by means of availability payments and a traffic income guarantee.
The government contributions in the form of availability payments are subject to deductions for unavailability, poor quality, or service capped at 10 percent of total payments. These payments are received for each “Functional Unit” or section of the road finished and opened to traffic.
The government also provides a guarantee of minimum traffic income payable every five years if the present value of traffic income does not reach a certain value previously determined within the contract.
Zaragoza LRT PPP is an interesting example of co-financing, with the government of the region providing a deferred grant to finance a portion of the project. It also provides a service payment based on actual patronage (a shadow fare as quoted/bid by the successful bidder) with a system of bands to temper down the volume risk and to share any potential upside. The fare box is retained by the private partner and deducted from the shadow fare earned every year.