33:3 - Roco, Build, Operate, Transfer Contracts

Abstract: This paper presents a simple method of assessing the viability of privately-financed transportation facilities pursued under concession agreements with public sponsors. Often, the award of a franchise for a toll road or passenger rail project is based on a developer’s own analysis of project economics, only to find much later, whether through a lack of outside investor interest, a collapse in stock price, or actual default, that the original assumptions were overly optimistic. The developer’s perspective on project viability is examined in order to understand why privatized transportation projects with large financial risks are proposed to public agencies, and how these financial risks can be passed along to investors equipped with the least information. Given the Federal Highway Administration’s recent comparison of the Channel Tunnel project to the emerging trend toward privately-financed projects in the U.S., the performance of Eurotunnel Corporation is reviewed in order to demonstrate the need for new up-front methods of predicting project viability. The assessment method presented in this paper can be used by transportation agencies, potential bondholders, and financial institutions – those who lack access to the same proprietary information as the developer – to avoid unsound investments and devote their resources to the pursuit of viable public-private partnerships. Applications of the assessment method are presented, including risk and policy formulation strategies, using some past and potential transportation projects in Texas. Finally, this paper calls for the review of risk mitigation measures that government agencies concede to developers, and offers the proposed assessment method as a means to identify the apparent need for such measures at an early stage of project development.