Forecasting traffic demand is crucial in transport PPPs since traffic influences both project costs (through capital and maintenance expenditures) and project revenues, especially if direct user charges, such as tolls, are the main source of cash flow for the PPP Company. An accurate estimation of the future level and composition of traffic volumes is, however, a difficult task as:

• traffic forecasts tend to overestimate actual traffic levels (the so-called “optimism bias”) Guidance 1; and

• inflated traffic forecasts may be linked to traffic modelling flaws but also to strategic decisions of PPP consortia when they bid. Traffic forecasts commissioned by the lending banks, for example, are less prone to traffic optimism bias.

Given such uncertainty, the allocation of traffic revenue risk is a key decision in the design of a transport PPP contract and the payment mechanism (see Payment mechanism for more information). There are several options for allocating traffic revenue risk. Guidance 2 For example, for motorway PPPs:

• at one end is the conventional toll road, where revenues derive from toll payments and, thus, the PPP Company (and its lenders) are exposed to full traffic revenue risk;

• at the other end lies the “availability-based” option, where the PPP Company receives fixed periodic payments from the Authority as long as the road is available for use. In this case, the PPP Company bears little or no traffic revenue risk; and

• in between, there are several options designed to share the traffic revenue risk, such as:

  • revenue-sharing bands: lower and upper thresholds for sharing traffic revenue risk between the PPP Company and the Authority if traffic is outside the thresholds;
  • flexible-term contracts: the PPP contract will end when the PPP Company has received a certain amount of revenue from users (e.g. the “least present value of revenue” approach implemented in Chile) Guidance 3;
  • contracts based on shadow tolls: usage of the infrastructure is free for the users and the Authority remunerates the PPP company on the basis of the observed traffic levels; and
  • financial re-balancing: provisions to change the financial elements of the PPP contract if traffic is much lower/higher than planned or at set regular intervals.

Recent practice in transport projects has seen the use of a mixed payment mechanism consisting of an availability payment (intended to cover operating expenses and debt service) and a direct user charge (e.g. toll) that provides the equity return. Guidance 4