Sharing the big risk: Assessment framework for revenue risk sharing mechanisms in transportation public-private partnerships

The allocation and management of revenue risk is a critical issue in the development of public-private partnership (PPP) concessions for new roadways. In order to attract financing, governments often provide fiscal support ranging from availability payments (APs) to minimum revenue guarantees (MRGs) to flexible-term contracts when demand and thus the financial viability of a project are uncertain. However, a government's inability to evaluate these alternatives can lead to either surplus fiscal support ex ante or unexpected liabilities ex post. The authors propose a quantitative methodology to guide governments' decisions when choosing among the fiscal support mechanisms. Based on a comprehensive literature review, we establish a two-dimensional framework to evaluate fiscal support alternatives by comparing their effects on the financing costs of a project and the risk retained by a procuring government. We use a stochastic revenue projection model to quantify the revenue risk and the framework's measurable indicators. We apply our framework using a hypothetical case study. The case results demonstrate that flexible-term contracts do little to increase project leverage, MRGs are most applicable to projects with significant revenue volatility, and APs are more appropriate in projects with lower revenue volatility. The framework allows governments to make more informed decisions about revenue risk sharing mechanisms to improve public budgeting and deficit control.