Design Build Finance Operate - Private DBFO Shadow Toll Concessions
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Shadow tolling is an adaptation of the traditional real toll DBFO model, where public sector project sponsors pay “tolls” rather than motorists. With shadow tolling models, a concession is awarded to a private contractor who has then the responsibility to design, build, finance and operate a designated road section for an agreed period of time. The term "shadow tolling" is used, as there are no tolling points and users pay no fees. Instead, the sponsoring public agencies make payments to the concessionaire based on traffic volumes and service levels.
Most, but not all, shadow toll projects involved upgrades of existing roads. This is an important attraction for private contractors: historic traffic data reduce traffic risk and the need to depend on possibly inaccurate forecasts for revenue projections. With shadow toll arrangements, the private partner arranges independent financing by leveraging its own equity and the future shadow toll revenues pledged by the sponsoring agency. The private partner operates and maintains the shadow toll road for a pre-determined concession period, during which time it recovers costs and earns a reasonable return on its investment. At the end of that term, the shadow toll payments end and responsibility for maintaining the road would revert to the owner.
Background
As PPPs have become more common, many governments have become eager to capitalize on the increased efficiencies of the private sector and have found that private developers deliver greater value for money. This has precipitated the "shadow toll" approach initially adopted in the United Kingdom (UK), where governments award concessions to build-operate-maintain toll-free highways and then compensate the investors based on roadway usage and/or availability of those facilities. Shadow toll roads are currently operating in the UK, Finland, Spain and Portugal.
Payment Structure
Payments are made using a banding structure based on roadway usage, where the amount of the per-vehicle payment is different for each band. For example, a concessionaire might receive $2.00 per vehicle for the first 10,000 vehicles using the shadow toll facility, $1.00 per vehicle for the second 10,000 vehicles, and $0.50 for the third 10,000 vehicles, and then no additional compensation for any additional vehicles that might use the facility. At the same time, the sponsor may include further incentives, either in the form of penalties or bonus payments based on the concessionaire's performance. Typical areas for incentives include safety/accident occurrence and roadway availability.
Bidders for shadow toll projects must define their own banding structure, where they receive pre-specified compensation levels from the government for different traffic increments. Precedents in the UK for financing road projects in this way suggest that bidders use each band to cover different elements of the project's cost profile. Band 1 has typically been used to cover fixed operating and maintenance costs and senior debt service. Band 2 covers variable operating and maintenance costs and subordinated debt service. Band 3 tends to be used to pay dividends and for quasi-equity debt service. Any traffic above an agreed level (Band 4) receives no toll, thereby capping toll payments and the concessionaire's potential returns.
Benefits of Shadow Tolling
While shadow tolling does not generate new revenue for governments, it can capture some benefits of toll projects. These include efficiencies gained by transferring risks and responsibilities to a private partner that has profit incentives to meet these challenges. Additional benefits include:
- Minimizing traffic risks, making it easier for private investment partners to find more advantageous financing
- Accelerating construction and implementation of capital projects
- Capturing the profit-seeking motives of the private sector, often resulting in capital construction costs savings
- Capitalizing on cost efficiencies of asset management analysis life-cycle costing for maintenance needs
- Transferring operating and maintenance risk to the concessionaire
- Capping the public sector's exposure, thereby eliminating the risk of super-profitability by the concessionaire
- Reducing public equity and debt requirements
- Avoiding the need for toll plazas
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