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Appraising PPP Projects

46.5 Incorporating Revenues

The revenues represent all the inflows used by the Project Company to meet its costs.

The revenues from government payments, when they are included in the revenue regime, can be considered an output of the commercial feasibility exercise since they are determined by the affordability assessment (see section 8.3).

The revenues collected from user charges, however, should be estimated. The estimation of revenues from user charges generally involves a projection of demand throughout the length of the contract, the definition of a formula that indicates the elasticity of demand (how the demand is affected by price), and a choice of a price to be used as a reference in the model. In most contracts, the private partner cannot freely set the price during the operation of the contract, since the public authority usually regulates it during the contract (see chapter 5.4.). In other words, there is typically a price cap that effectively limits the choice of price that can be charged by the private partner.

Estimating demand can be a very difficult task, specifically in the implementation of non-existing assets (a new road that connects previously unconnected regions) and sectors highly sensitive to a specific economic activity (a railway mostly used to transport a single commodity). It is, in any case, a very technical activity that builds upon existing historic data and can generate very sophisticated econometric models that identify economic, demographic, and social drivers for demand and subsequently forecasts them in time.

Estimating demand elasticity to price is an even more challenging task. It depends on sound evaluations of users’ willingness to pay. Very often, this depends upon field research to achieve meaningful conclusions.

It is therefore often necessary to conduct detailed traffic and revenue studies (also referred to as “demand studies”) during the Appraisal Phase to estimate demand and demand elasticity, unless these studies have already been conducted (for example, as part of the cost-benefit analysis during project identification and screening).

Price setting is naturally the following activity. At this stage the price, for modelling purposes, is usually a flexible parameter, since the actual price to be charged will likely depend on contractual mechanisms and, possibly, it will be an outcome of the procurement process itself. The reference price can be set considering different criteria such as policy directives, financial sustainability, legal requirements, and so on.

In many projects, the key consideration is to set a price that will maximize revenues. Whatever the criteria used, the setting of price is a very important factor in the commercial feasibility assessment (discussed in section 8.2). Through the commercial feasibility assessment, the revenue generated at that price can be used to determine the floor for upfront payments or a ceiling for co-financing or any other public payment to meet commercial feasibility.

Some countries use the reference price set in the model, refined during the Structuring Phase, as the maximum possible bid (when the price is a bidding criteria) or the very price to be charged in the future (when other bidding criteria are considered). See details on the structuring the procurement process on chapter 5.

If the project will generate other third-party revenues or allow the private partner to develop collateral businesses (for example, service centres along a toll road), the revenue from these activities must also be estimated.


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