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Falling toll revenues
The impact of the widespread recession has certainly been observed on the traffic carried (and revenues generated) on road concessions across Europe, but what lessons can we learn?
We have looked at roads across Europe from Ireland to Poland and from Germany to southern Spain, and traffic levels have indeed fallen behind the anticipated levels. However, as my colleague Serbjeet Kohli discussed in a paper he presented at a major conference in Glasgow, the actual reductions in traffic levels have not always been as significant as we might have anticipated.
We hear news from Spain and elsewhere of concessions which are falling into bankruptcy. However, our analysis suggests that, rather than this being the result of falls in traffic levels because of the economic climate, this often reflects poor management of the concession contract, over-ambitious financial structuring and hopelessly overoptimistic traffic forecasts. The concessions could never have succeeded even if the domestic economy had managed to maintain the overheated growth levels seen in earlier years!
Steer Davies Gleave is working in Greece as part of the advisory team helping the Hellenic Republic Asset Development Fund take forward the herculean task of ‘resetting’ the five road concessions which the government let to international developers in 2005. With a fall in GDP of more than 25 percent, traffic on each of these concessions has fallen well below what had been hoped for. Even this could have been sustainable, but the real problems result from the failure of both the concessionaires and of the government counter-party to develop the projects in line with the concession contract. On none of the projects has the construction work been completed on time – while on two of them (offering important new routes in the northwest of the country) construction work is effectively yet to start.
What should we learn from this? Here in North America as elsewhere, the success of a P3 concession — especially in difficult economic times — relies emphatically on two key factors. First, the development at the outset of a concession business case that is genuinely robust – which relies on well-constructed traffic forecasts and a funding strategy that will not be blown off course by even relatively minor ups-and-downs in the revenue generated. Second, the willingness of all parties to put in place and observe a robust concession contract.
On how many of the concessions that we have seen fail has this not been the case?
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