Chile’s Ministry of public works has developed an interesting bidding mechanism- Least Present Value of Revenues (LPVR). LPVR Bidders submit their proposals with their future revenues discounted to present value. The lowest bidder wins a flexible-term PPP concession. This model allows for risk transferring mechanisms that reduce overall insolvency risk.
Usually the final term date of the average PPP contract is definitive. But on LPVR PPP contracts the term is always variable. This flexibility mitigates and diversifies potential demand, insolvency and financing risks for PPP’s. By providing the Least Present Value of Revenues, investors commit to recover only a certain amount for the concession. After they have done it, the concession reverts to the government.
This allows concessionaires to sell debt to investors fully aware, that the principal repayment is not tied to a certain date, but to an expected cash-flow that might not materialize at promised time in the future. To this cash-flow estimates, lender (herein financers) take this risk and charge a premium to the concessionaire. Premium materializes through higher spread on the loans.
Insolvency Risk
As the PPP concession term is flexible, if the project does not beat earnings estimates, the risk of insolvency is partially mitigated. Contracts do not need to go through lengthy renegotiations, as the risk of overextending the time to re-pay principal amount of debt is already priced on the original lending agreement. The concessionaire can concentrate on operational risk and transfer renegotiation risk. This strategy weighs down on insolvency risk of the whole operation.
Hence, public sector wins a more stable and trustworthy structure of PPP concessionaire contract. It reduces the chances of producing chaotic situations seen during Privatizations in the 80’s and 90’s.
Easier Enforcement
Once the concession starts, the only contractual enforcement burden for the government is to examine the concessionaire’s operational cash-flow revenue. Of course, there is still a need to verify solvency and overall performance and maintenance. Nevertheless, these burdens are mitigated, as the risk of contract renegotiation and overextending the concession has been shared with lenders, who already charged a premium. In regular projects, concessionaires are pressed to meet lending deadlines; otherwise the whole structure runs the risk of default.
So, if a contract comes close to the end, and if revenue has not repaid concessionaire, there is a risk that maintenance will lag, or cost cutting measures will be taken to be able to recover investments in a timely manner, and repay investors. In this model, lenders are aware that toll flow might take a few more months or a couple years to allow for a sustainable repayment of both equity and debt.
In this example: If the concessionaire runs a toll road, government needs to examine number of vehicles passing through the toll. The number of vehicles multiplied by the value of the tariff is equal to the concessionaire’s operational revenue flow. This revenue flow should accumulate until it reaches the final total value of the PPP bidding price. At that moment, the PPP concession is over, and it reverts to the government again.
Here are some examples from Chile:
Road: Santiago Viña del Mar-CH 68
In the year 1998, the concessionaire Rutas Del Pacífico offered to the Chilean government US$381 million from toll roads and was awarded the concession over Securitas (US$389 million), Autopistas de Peaje (US$442 million) and Cicasa Chile (US$452 million). The concession has a referential period of 25 years unless the concessionaire gets the LPVR before the date. Conversely, if at the year 25 the concessionaire has a gap, the period of the contract is extended automatically until it gets the total amount of LPVR, in this case US$381 million. The Chilean government also offered to the bidders a Minimum Revenue Guarantee with a price of 0.75% of the value of the guarantees outstanding, but in the case of the winner it did not take this option.
This provides an interesting scenario, as the government suggests a limit to banks charging more than certain level of Basis Points for their volatility risk or delay in debt payments.
Airports: Iquique and Puerto Montt
Recently in 2008, two Chilean airports received new bids under the LPVR mechanism: Iquique airport in the North of the country and Puerto Montt in the south. Both of these airports were bid through the LPVR mechanism. These have a main distinctive feature with regard to roads. Roads depend on tolls, whereas airports depend on tariffs per air passenger. In the case of Iquique the maximum LPVR established by the government was around US$19.426.000 and the winner (Arrigoni-Sifon-Tecas) offered US$12.737.000 under strong competition (5 bidders). In the case of Puerto Montt the ceiling was US$23.700.000 and the winner was ACC-Icafal-Vecta with US$15.337.000 (6 bidders).
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About the Authors:
Bernardo Weaver, Consultant at World Bank Institute, Financial Sector on PPPI and a Wharton MBA in finance candidate.
Patricio Mansilla, Consultant at Chemonics International, and a Duke MBA graduate.
Both authors are based in Washington, DC.
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After reading your post, I wonder how the government knows the number of vehicles using the toll road. Should the government assign people to check at the toll gate or what? in country of high level of corruption, secret arrangement between the private company and government's officer assigned to check revenue can render this kind of bidding inefficient. Am I right?
ReplyDeleteI would be glad if you could share some detailed case studies regarding use of LPVR mechansim being implemented in Chile for roads or highways sector.
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