Ex Post Risk Management in Public-Private Partnership Infrastructure Projects
Appendix: An illustrative case.
In order to illustrate the application of the ex post risk management, this study presents a toll highway concession comprising
a two-year construction phase and 35-year operation phase. The assumptions made, as shown in Table 2, refer to the case
in Shan, Garvin, and Kumar (2010). The government offers a guarantee of a minimum rate of return for equity ( 7.5%), which
is slightly higher than the interest rate (7%), but is much lower than the expected rate of return for equity (72%). The capital
investment comprises 80% debt and 20% equity. Since the minimum rate of return has been guaranteed at the outset, any
breach can be defined as a serious risk scenario.
Operating Variables Capital Variables
Initial traffic volume per day 15,000 Capital cost US$110,000,000
Annual traffic growth rate (year 1–10) 6.00% D/A 80%
Annual traffic growth rate (year 11–20) 3.50% Debt US$88,000,000
Annual traffic growth rate (year 21–35) 2.00% Equity US$22,000,000
Initial toll US$1.30 Interest rate 7.00%
Annual toll growth rate (year 1–5) 5.00% Risk-free rate 5.00%
Annual toll growth rate (year 6–10) 3.00% Tax rate 30%
Annual toll growth rate (year 11–35) 2.00% Minimum rate of return for equity 7.5%
Initial O&M cost US$6,500,000 Debt service coverage period (year) 15
Annual growth rate of O&M cost 3.00% Expected rate of return for equity 72%
Initial subsidy US$1,000,000
Annual growth rate of subsidy 3.00%
Table 2: Project information for case illustration.
Since most of the renegotiations occur in the first two years of operation (Guasch, 2004), this study assumes that the contractor
claims for renegotiation after the project has been operated for two years (year four) because of certain serious risk scenarios.
The serious risk scenarios could be caused by the following driving risks: demand shortfall, construction cost overrun, O&M
cost overrun, and public rejection of toll rate (Cruz & Marques, 2013a). As shown in Table 3, the serious risk scenario is “Yes”
if the rate of return for equity is lower than 7.5%; otherwise, it is “No.”
Risk Impact Assessment
The risk impact is evaluated by the shortfall of the actual profit from the guaranteed profit. The severity of driving risks is represented by “M.” The severity of demand shortfall, O&M cost overrun, and public rejection of toll rate is defined as the variance
between the actual and planed initial traffic volume, initial O&M cost, and initial toll rate, respectively. It should be noted that
the annual growth rate of traffic volume, O&M cost, and toll rate is assumed to be unchanged. That’s because it is impossible
to predict the long-term growth rate trend while the project only has historical data for two years. The severity of construction
cost overrun is defined as the variance between the actual and planed capital investment. Sensitivity analysis is also conducted
using different risk severities, as shown in Table 3.
Rate of Return
(M 5 10%)
Rate of Return
(M 5 20%)
Demand risk 55% Y 240% Y
Construction cost overrun 14% N 15% Y
O&M cost overrun 8% N 57% Y
Public rejection of toll rate 55% Y 240% Y
*M 5 the severity of driving risks
Table 3: Risk impact evaluation.