Highway privatisations around the world have been completed using concession contracts, often in the form of Build, Operate, Transfer (BOT) projects (2003). Successful BOT projects require the proper allocation of risks among the project’s stakeholders. Whereas some risks — such as construction, operational or legal risk — are clearly controllable by some stakeholders, traffic risk can not be controlled by any of them. As a result, allocating traffic risk is one of the greatest challenges in designing highway concession contracts.
Traffic risk mitigation remains a challenging aspect of highway concessions. This paper evaluates three mechanisms applied in Chile to mitigate traffic risk: the ‘Minimum Income Guarantee’ (MIG); the ‘Least Present Value of the Revenues’ (LPVR); and the ‘Revenue Distribution Mechanism’ (RDM). Specifically, the paper focuses on the performance of LPVR and MIG during the economic recession that took place between 1998 and 2002. In the context of this recession, the paper explains the reasons that led the government to implement the RDM mechanism. The paper gives some guidelines about the applicability of these mechanisms in other countries, highlights the beneficial features of LPVR in reducing traffic risk and avoiding concession contract renegotiations, and finally provides some recommendations as to how to make LPVR more attractive to private promoters.
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