Risk management in toll road concessions

Abstract

With a degrading road infrastructure and dwindling public funds, governments are turning towards the private sector to develop roads and finance them though toll revenues. However, these high stakes endeavors were not always successful; in other words, they were not able to provide a fair return to the sponsors and investors while guaranteeing the public welfare and satisfying the government interests. A review of the international experience of toll roads, with a focus on developing countries, suggests that if a thorough and pertinent risk management program is implemented by private concessionaires, with the support of the government, then many risks could be mitigated, thus reducing the exposure of both the private sponsor and the government. Thus, in this study, we suggest a three-step risk management process. This first step of this process consists of identifying and classifying the risks in toll roads, according to the milieu from which they stem (project, market, country); the second step is an investigation in an array of risk mitigation strategies that are relevant to one or more risk categories; finally, the third step is risk analysis which consists of accounting for risks when evaluating a project. In the last two chapters, we will embody major issues in risk management in two case studies: In the first case study, New Batinah Highway project, we focus on the value of flexibility in toll roads and in the second case study, Melbourne City Link project, we focus mainly on the role of project organization and financial structure in risk management. Finally, in the conclusion, we emphasize that the private sponsor cannot be the only player in the risk management process but government support and commitment are vital. Thus we redefine the role of the government and the role of the private concessionaire in the provision of toll roads.