Region: Global
Country: Global / Non-Specific
Keywords: Age of Disruption, Financing
Document Link(s):
Document Summary:
This paper analyzed the experience with PVR contracts in Chile. The first PVR contract was auctioned in 1998. After 2006 PVR became the contract of choice for roads and airport PPPs. By 2017, 29 of the 63 PPPs in the these sectors awarded since 1993 were PVR contracts, which accounted for 44 percent of total investment.
Document Details:
Risk allocation is an essential component of a successful public-private partnership contract. For many of these projects, demand risk is large and mostly exogenous, which motivates considering contract designs that do not force the concessionaire to bear risk it cannot manage. In this paper we study present-valueof-revenue (PVR) contracts, which achieve this objective. Under a PVR contract, the regulator sets the discount rate and tariff schedule and frms compete on the present value of tariff revenue. The lowest bid wins and the contract lasts until revenue collected by the winning firm is equal to its bid. We provide a theoretical analysis comparing debt fnancing under a fixed term concession and PVR and show that, other things equal, debt fnancing is less risky under PVR and therefore debt-to-capital ratios can be higher. We also show that the often held view that PVR does not mesh well with fixed maturity debt financing is wrong, essentially because this view does not consider the fact that demand realizations are independent of contractual forms. Finally, we analyze the experience with PVR, considering two early examples from the UK that were fnanced entirely with debt and close to thirty PVR contracts in Chile, mainly for highways and airports. We conclude that PVR contracts have been at least as attractive for debt-financiers than their fixed term counterparts, and that PVR has helped materialize the efficiency gains that are possible when PPPs are financed with user fees
Updated: December 28, 2023