Valuing Government Guarantees in Toll Road Projects

1. Valuing Government Guarantees in Toll Road Projects Luiz Brandão (PUC-Rio) Eduardo Saraiva (BNDES) Jun 2007

2. Private Infrastructure Projects • Characteristics: • Large volume of Capital required • Irreversible Investment • Long time to maturity • Essential services to society • Usually offered monopolistically • Consequences • Affected by political considerations • Subject to government regulation • Increased risk to the private partner • Government and investor incentives diverge once the project is completed • Due to this, the private investor may require some form of guarantee

3. Risks Involved • Construction Risk • Interest Rate Risk • Exchange Rate Risk • Political Risk • Environmental Risk • Traffic Risk

4. Expected Traffic Stochastic Modeling of Traffic Traffic Demand Concession Period

5. Types of Government Guarantees High Equity Guarantee e i r a Debt Guarantee n o i s Exchange Rate Guarantee s e c Grant n o C Subordinate Loan Minimum Traffic Guarantee on Shadow Toll t c a p Revenue Enhancement m I Concession Extension High Low Cost to Government

6. Government Participation (PPP) • Chile – Santiago – San Antonio Highway (1995) • $140 million dollar investment with Minimum Traffic Guarantee (MTG) • Mexico - CM-Toluca Highway (1992) • $313 million dollar investment with MTG • Colombia –El Cortijo-El Vino (1996) • MTG of 90% • Chile - Costanera Norte, Santiago (2005) • $400 million dollar investment • $80 million provided by governemnt, MTG of 80%

7. Traffic Guarantees Government receives excess revenues Ceiling Expected Traffic Demand Floor Government pays subsidy Concession Period

8. Level of Guarantees Government retains revenues generates by traffic above the ceiling Traffic Demand Concessionaire receives a subsidy proportional to traffic below the floor Concession Period

9. Level of Guarantees Government retains revenues generates by traffic above the ceiling Traffic Demand Concessionaire receives a subsidy proportional to traffic below the floor Concession Period

10. Level of Guarantees Government retains revenues generates by traffic above the ceiling Traffic Demand Concessionaire receives a subsidy proportional to traffic below the floor Concession Period

11. Level of Guarantees Government retains revenues generates by traffic above the ceiling Traffic Demand Concessionaire receives a subsidy proportional to traffic below the floor Concession Period

12. The BR-163 Project

20. DCF Analysis • Traffic Demand • Government Projections: www.tranportes.gov.br • Initial Traffic Volume: 106.894 vehicles/year • Model Parameters • Cost of Equity Capital: 16% /year • Cost of Debt Capital: 9% /year • Debt ratio: 60% • Risk free rate: 7% /year • Discounted Cash Flow – Expected Traffic Levels • NPV = R$ 139.8 million

23. NPV Distribution – no guarantees

24. NPV Distribution with 30% Guarantee

25. NPV Distribution with 40% Guarantee

26. NPV Distribution with 50% Guarantee

27. NPV Distribution with 60% Guarantee

28. NPV Distribution with 65% Guarantee

29. NPV Distribution with 70% Guarantee

30. NPV Distribution with 75% Guarantee

31. NPV Distribution with 80% Guarantee

32. NPV Distribution with 85% Guarantee

33. NPV Distribution with 90% Guarantee

34. Effect of Guarantee on Project

35. Effect of a Traffic Ceiling

36. Expected Value of Governm. Payments

37. NPV with Guarantee Caps

38. Expected Value of Payments w/ Caps

39. Conclusions • Valuation of government guarantees require the use of option pricing methods. • The effect of different levels of support on the value and the risk of the project can be measured. • The expected cost and its probability distribution can also be estimated through real option analysis. • Setting caps to outlays from guarantees can be an effective way to limit government liability • Other forms of supports can also be modeled with this approach.

40. Valuing Government Guarantees in Toll Road Projects Luiz Brandão (PUC-Rio) Eduardo Saraiva (BNDES) Jun 2007