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Revenue-Risk or Availability Payment for Highway P3 Concessions?

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It’s pretty clear that since 2009, there has been a trend toward greater use of the availability-payment model for long-term P3 concessions in the highway sector.

Nine such projects have been financed since 2009, including the Port of Miami Tunnel, the Goethals Bridge, and the East End Bridge. During this same period, eight highway projects have been financed as revenue-risk P3 concessions, including the LBJ in Dallas, the North Tarrant Express in Fort Worth, and the Midtown Tunnel in Virginia—and just this month the $3.5 billion revenue-risk I-66 project in Virginia, making nine such projects. Prior to 2009, all such projects were done as revenue-risk concessions.

There has been debate about the relative pros and cons of the AP and RR models at transportation conferences in recent years. Some state DOTs (e.g., Florida) have done only AP concessions for tolled P3 projects, preferring for the state to keep control of toll rates and revenue, despite thereby retaining traffic and revenue risk. Several other states, including Texas and Virginia, do not permit AP concessions. For highway projects where tolling is not an option, AP concessions—based on a dedicated stream of existing transportation tax revenue—are the best choice, to obtain the benefits that long-term P3 concessions can bring.

Because many governors and legislators are not yet familiar with P3 concessions, a new Reason policy study aims to explain the overall benefits of procuring highway projects as long-term P3 concessions and to then explain the differences between the RR and AP models. As the author of this peer-reviewed study, I’m writing this article to provide an overview of it.

Both forms of concession encompass design/build/finance/operate/maintain (DBFOM), which offers many benefits compared with traditional design/bid/build and design/build procurement models. These include:

  1. Financing the project, via debt and equity, so that needed infrastructure gets built or rebuilt now, rather than many years or decades from now;
  2. Better project selection, due to the need to demonstrate a return on the investment made;
  3. Reducing cost overruns and late completion, due to the incentives facing the concessionaire to get the project finished and generating revenues;
  4. Minimizing total life-cycle cost, rather than only initial construction cost; and,
  5. Guaranteeing maintenance over the entire long term of the agreement.

These are powerful reasons for embracing the long-term P3 concession model for large projects.
Revenue risk (RR) concessions offer several additional benefits. First, because they create a customer/provider relationship with highway users paying tolls directly to the concessionaire, the latter has a strong incentive to design the project to maximize easy access and to keep its lanes uncongested over the long term of the agreement. Second, because RR concessions often lead to tolls where they would otherwise not be used, this model increases total highway investment, compared with AP concessions that are financed based on allocating a stream of existing transportation revenues. And third, the bonds that partially finance RR concessions are not state debt. They are examples of pure “project finance,” in which only the concessionaire is responsible for the debt, not the taxpayers.

By contrast, while AP concessions do lead to designs that minimize life-cycle cost, there are no incentives for the concessionaire to design for increased traffic and revenue. And in cases where the state sets and collects tolls on an AP project, the concessionaire has no direct relationship with highway users: they are customers of the state, not the concessionaire. And in those cases, the state (i.e., taxpayers) carries the traffic and revenue risk. Both models shift the risks of construction cost overruns, late completion, and ongoing highway quality to private investors, but only the RR model shifts traffic and revenue risk to investors.

The study identifies six situations where the AP concession model is likely the better alternative than RR concessions—including cases like the Port of Miami Tunnel where tolling would have been counterproductive to the goal of diverting heavy trucks to use the new tunnel rather than city streets. Another section explains the emerging law and policy at the state level that recognizes AP obligations as a form of state debt that may be subject to existing limits on debt issuance.

Overall, my conclusion is that for highway projects where either model could work, RR concessions are the wiser choice, due to their greater likelihood of increasing total highway investment, better serving their paying customers, shifting more risk from taxpayers to investors, and not being subject to state debt limitations. For a more detailed explanation, I urge you to download and read the study.
(This article first ran in the November 2017 issue of Surface Transportation Innovations)

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