Risk of Private Toll Road Projects

In: Business and Management

Submitted By liweitang
Words 570
Pages 3
The main risks facing private toll road projects include pre-construction, construction, traffic and revenue, currency, force majeure, tort liability, political, and financial. (Table 7).

Pre-construction
None (roads already in existence)
Construction
None (toll roads already in existence)
Traffic/Revenue
These are defined as risks associated with insufficient traffic levels and toll rates too low to generate expected revenues. Toll road are not exclusive routes. There are mainly used by commercial entities and tourists (sensitive to economic factors)

Mitigation: Risk must be shared between private and public sector. A quality traffic forecast must be done by an expert hired by financiers (sponsor’s forecast could be biased to get the deal done). Relying on well documented operation history if roads already exist

Currency
Currency risk is a major issue for toll roads financed with foreign capital because a project may be unable to pay a return on foreign currency-denominated capital if local earnings are not convertible at the expected exchange rate.

At the time of the negotiations Mexico country risk score was 36 with an S&P rating of BBB-. Its annual inflation rate was 9.7% (Much greater than the US and dollar) and 2.8% Annual GDP growth.
The revenues were in Pesos and the debt was to be repaid in $US.
The Mexican peso was devaluated two years after the international bond was issued.

Mitigation:
The exchange rate risk is often mitigated by indexing the toll rates to local inflation or the exchange rate of the foreign currency-denominated capital.
Large foreign currency debt service reserves can also be used (as in Mexico) to protect against the risk of exchange rate fluctuations and inconvertibility although tying up capital in reserve funds is expensive.
Projects can avoid this risk by tapping local capital for funding.…...

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