Disincentivising overbidding for toll road concessions

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DISINCENTIVISING OVERBIDDING FOR TOLL ROAD CONCESSIONS Box 3.2 Portuguese SCUTs: a lesson in unaffordability The following case study considers the ‘SCUT’ programme of PPP road concessions in Portugal. Although the payment mechanism was based on the concept of shadow tolls (with deductions for non-availability), the salient feature is that, in common with pure availability-based constructs, state payments rather than user charges formed the basis of concessionaire reimbursement. SCUT, Sem Custos para os UTilizadores, means no cost to the users. The programme became unsustainable and the Portuguese PPP roads sector is currently being reformed as a result. In 1996/97 the Portuguese Government initiated a major programme of motorway construction to improve accessibility and promote regional development. A highway concession model was employed using the shadow toll-based payment mechanism. However, this placed future financial obligations on the Portuguese state which, because of the scale of the programme, became unsustainable in aggregate. In the early years, government payments to SCUT concessionaires represented 0.04% of GDP, but step-ups in the financing documents saw this increase tenfold, to 0.4% in 2008 (representing about €700m/year). This was a major commitment to one small part of the economy which the government, even before the recent economic crisis, simply could not afford. The government is currently engaged in the long and difficult process of converting a number of the SCUT highways to regular user-paid toll roads. 88 Was the Portuguese PPP road concession programme a success On one level ‘yes’. Today Portugal has a motorway network that, given the timescale involved, could not have been envisaged under traditional contracting arrangements. However, like some other countries, it found that overambitious PPP programmes with their not inconsiderable future financing obligations (mortgage payments) place severe constraints on future public sector budgets. This has also been the case in Spain, where the credit rating of the Autonomous Community of Madrid is currently on negative outlook because PPP debt now accounts for around two-thirds of all spending. It has also been the case in the UK to some extent. The Highways Agency’s shadow toll PPP roads programme represents 17% of the UK motorway network, yet PPP payments account for around 40% of the Agency’s budget—meaning that there will be no more shadow toll PPP roads procured by the UK Highways Agency. Several North American jurisdictions had encountered exactly this same issue. In some cases (eg, New Jersey), entire departmental budgets have become devoted to servicing the payment obligations of infrastructure projects procured under, effectively, hire purchase-type agreements. Most recently, the UK’s Department of Health has stepped in to provide financial support to seven NHS trusts facing ‘financial issues’ and ‘a £60 billion post-dated cheque to deal with’, 89 stemming from its long-term commitments to availability-based PPP hospitals. The lesson to be learned is that, even when individual PPPs look like offering good value for money, the issue of aggregate affordability, now and in the future, should remain a key concern for finance ministries and public sector policy-makers. 3.2 Pass-through tolls Under a pass-through tolling regime, user tolls are levied by the concessionaire, but the payments are forwarded directly to the concession grantor (they ‘pass through’ the concessionaire) and, separately, the concessionaire is reimbursed by the grantor based on asset availability or some other performance metric(s). 90 When users are paying for a service (using a toll road) for which a private operator requires payment (investment compensation), it may be easy to presume that the user charges should simply flow directly to that operator. Through history this has been the dominant operator-reimbursement model. However, there is no reason why this should be adhered to. Indeed, there are a number of reasons why de-linking user charges from operator compensation might be a preferable approach. 88 This is particularly challenging. Highways designed as toll-free facilities commonly promote access, whereas access control is a key element of toll road design. 89 The Guardian (2012), Andrew Lansley, UK Health Secretary, February 3rd. 90 Rather confusingly, in the USA ‘pass-through tolls’ typically refer to the type of shadow tolling arrangement described earlier. For this reason readers are advised to check the terminology applied and definitions used in any American toll road literature. 34
3 │ TOLL ROAD CASE STUDIES Toll tariff schedules are commonly the outputs from financial models. The aggregate financial requirement, divided by the cumulative number of trips, guides or determines the amount to be charged for each trip. However, all else being equal, in networks of facilities each with different demand characteristics, the heavier-trafficked (perhaps congested) sections will, somewhat perversely, enjoy lower tolls. The tariff is a demand-driven variable when, in actuality, concession grantors may wish to treat price as an exogenously determined policy input, not an endogenous financial output. The grantor may wish to override market-based pricing and present users with consistent or comparable tariffs across a toll network, irrespective of the density of use. Alternatively the grantor may wish to set appropriate price differentials between tolled and toll-free links to distribute demand more evenly and to make optimal use of available capacity. Sophisticated pricing based on time of day, levels of demand and other triggers is readily available to modern tolling operations employing electronic toll collection technologies. Furthermore, and possibly of even more importance going forward, a grantor may wish to retain the intervention option to be able to adjust or fine-tune road pricing to meet congestion-related or broader economic objectives as they evolve in the future—perhaps as part of a package of demand management measures. This policy flexibility is difficult to accommodate in the traditional toll road model, typically with contractually specified pricing formulae locked in for the next 25 or 30 years (‘set and forget’). In response, and in common with a number of other deployments around the world, the Auto-Estradas do Centro toll road concession employed a ‘pass-through tolling’ approach (see Box 3.3). Box 3.3 Pass-through tolling: Auto-Estradas do Baixo Tejo Auto-estradas do Baixo Tejo involved a 30-year DBFOM concession for a 73km network of motorways in Portugal. Engineering features included 19 interchanges and eight viaducts, three toll stations, a maintenance depot and two motorway service areas (MSAs). Only part of the network was to be tolled (21km), for which the concessionaire would be responsible for toll collection, passing revenues directly to the grantor, Estradas de Portugal (EP). In turn, the grantor would remunerate the concessionaire through availability payments and ‘service fees’ (shadow tolls). The concessionaire would receive additional income from the MSAs. In a departure from similar arrangements employed earlier in Portugal, receipt of the availability payments was to be deferred. These payments would be received from the fifth anniversary of contract commencement until the end of the concession. The total availability payment requirement was the point of competition for the financial evaluation of bids. Bidders were allowed to specify different availability payment requirements in each year, at their discretion. The availability payments would be reduced, on a pro-rata basis, if part of the network was non-operational. Similarly, sections of the network operating for only part of a year would be subject to pro-rata payment deductions. The availability payments were not subjected to any indexation regime. The service fee component was based on traffic volumes on each section of the network. As above, service fee payments would be deferred until Year 5. A flat rate (€ per vehicle per kilometre) was employed, indexed to the Portuguese consumer price index (CPI), with upside sharing: •• above an average annual daily traffic (AADT) of 35,000, the service fee would be reduced by 25%; •• above an AADT of 40,000, the service fee would be reduced by 50%. Estimates suggested that total revenue due to the concessionaire would be 55% availability payments and 45% service fees. The twin-component-based revenue stream used in this concession still exposes the private sector to traffic risk (through the service fee). This departs from other availability-only pass-through toll models described below. However, the service fee arrangement is supplemented by ‘rebalancing clauses’ in the concession contract, which specifically allow for concessionaire compensation should the grantor wish to introduce real tolls on the (currently) toll-free sections of the network during the concession term. 35
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Disincentivising overbidding for toll road concessions

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