PPPs in Peru and Colombia

a-Contenido informativo propioPPPs in Peru and Colombia

Public-private partnerships (PPPs) are often viewed as the ideal solution for governments balancing limited budgets and growing infrastructure demands. The notion of the private sector raising finance to fund construction and improvements to highway infrastructure, to be recovered through future toll payments from road users, can be attractive to cash-strapped governments in both developed and developing countries.

However, as the failure of some high-profile toll-highway PPPs illustrates, implementing such projects is often not as straightforward as many governments envision. One of the most common factors contributing to these failures is traffic volume (and the resulting toll revenues) that turns out to be significantly different from what was originally forecast. This risk of actual traffic being lower (or higher) than forecast, and the inaccuracy of traffic forecasts, is referred to as traffic risk.

Traffic risk has manifested in many projects, leading to numerous financially distressed toll-road assets, which in turn have led to high-profile bankruptcies, renegotiations and government bailouts. More profoundly, due to these failures, private financiers are now significantly more cognitive of traffic (and revenue) risk and have become increasingly more risk averse towards highway PPP projects. Many financiers will now only support projects that provide them with significant shelter from the risk of lower traffic flows or that allocate these risks entirely to the government. In today’s project-finance market, financiers that are overly exposed to the risk will either add significant risk pricing to their financing or choose not to invest in the project at all (i.e., capital flight).

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