Stochastic Model for the Assessment of Acceptable Toll Rates

Private participation in the delivery of toll road projects has been used worldwide. It is a\nmodel which incorporates private sector knowledge and experience in the management\nof highway projects and mobilizes private capital through Public-Private Partnerships\n(PPP). One of the most prevailing characteristics of PPP projects is risk sharing between\nthe public and private partners. Assessment of a project’s financial soundness, a crucial\nfactor for private sector involvement, is the basic underlying process throughout the\nproject’s development until the project reaches financial closure.\nThe traditional cash flow analysis of the financial feasibility of a project has shown\nweaknesses in many cases. From the pool of delivered projects which have experienced\ndifficulties in their operations, it can be learned that advanced probabilistic models need\nto be introduced due to their feature of representing uncertainties more realistically. It is\nimportant to capture a project’s uncertainties even in early phases of financial analysis\nsince this information helps in the identification of potential financial risks and assists\nall sides to structure the deal properly. Parameters commonly used for the evaluation of\na project’s financial feasibility are the annual debt service cover ratio (ADSCR), the\ninternal rate of return (IRR), and the return on equity (ROE). Although some existing\nmodels for analysis of a project may seem difficult for decision makers and stakeholders\nto interpret and understand, there are prospective ways of describing and representing\nthe problem in more understandable and meaningful ways.\nThis research presents a methodological framework for an early assessment of\nacceptable toll rates for PPP toll road projects taking into account multiple uncertainties.\nA toll rate is considered acceptable if it is acceptable for all stakeholders. This approach\ntakes into account predefined financial constraints ADSCR, IRR and ROE on one side,\nand the project’s uncertainties, such as volatility of traffic volumes, construction costs\nvariation, and operation and maintenance costs variation on the other side. Selected\nfinancial parameters represent the preferences or requirements of potential investors that\nmust be fulfilled in order for them to invest in a PPP project. These preferences and\nfinancial requirements are based on investors' assessments of a project's risk profile and\nalso depend on activities on capital markets...