Friday, June 30, 2006

Spain: Leader in Infrastructure Development

Continued from Page 2

The Workings of a Toll Road Concession

In theory, building and operating a toll road may seem like a rather straightforward venture: build a road, then operate a toll to recuperate the investment. In practice, however, these types of projects are significantly more complicated.

From a financial perspective, when a private company submits a bid for the construction and/or management of a new road, or the improvement and management of an existing road, predicting the future is a crucial component of determining the bidding price. The company must be able to ascertain what improvements are needed and how to provide the types of amenities, such as increased signage and road condition information, that will attract new users. Bidders also have created models to attempt to predict what the usage of the road will be and how long it will take to reach peak usage.

“These are incredibly complex algorithms to try to predict travel behavior,” says William Reinhardt, publisher of Public Works Financing. “Each company uses fundamentally the same information, but I think it’s much more refined for those with on-the-ground ownership and operating experience. If you own a toll road, you understand in incredible detail travel behavior and pavement life and all other various variables.”

Managers have to negotiate the toll and toll increase potential with the local public authority. The private company expects a return on its investment while taking care not to raise the tolls so high as to push users to find alternative routes, while elected officials look to keep their constituency satisfied.

This relationship with the local authorities is crucial in terms of enforcement of nonpayment as well. Technological innovations allow companies to determine which drivers have paid and which haven’t,  but the regional authorities retain authority over fines for noncompliance.

Finally, the company must convince potential financial partners that an investment that will see no return for as much as a decade, and which may even register losses, makes good fiscal sense. “This is one of the most difficult elements to convey to potential partners,” says Cintra’s Rubio. “I think the innovation on our side has been to develop a way of proving to the market that it’s a very good business, that entering into businesses that first generate accounting losses is a huge opportunity.” Their unusual approach, according to Rubio, involves creating worth through continually growing their business, adding new roads and projects, and holding on to the roads
during the lean years with an eye to the long-term value and decreasing risk of the investment.

Spanish companies have thus far led in this sector because their years of experience have allowed them to develop successful models for predicting road improvements and usage, and to find creative ways to develop these complicated financial models.

According to Gutierrez, another reason the Spanish companies have been successful in the international market of road concessions, as opposed to straightforward construction, is that the main business of most of these large companies is difficult to export. On the other hand, the knowledge, skills, and financing experience are easily transferable when foreign markets open up tenders for concessions.

As it takes years, if not decades, to recoup the investment and begin seeing a significant return, the fact that Spanish companies are already seeing the maturation of some of the original investments places them in a strong financial position. Further, backing the concessions business are large construction companies with plenty of capital for investment.