TRAFFICANDREVENUEPROJECTIONS FORTRANSPORTCONCESSIONS

Luis Willumsen

WHY?

Motivation

Realmoneyisatstake Clearfocusonspecificoutcomes Modellingandforecastingareimmediately valued Someverybrightpeopleareinvolved Significantmodellingchallenges Shorttimescales,quickresults Usefullessonsforothermodellingand forecastingapplications

CONTENTS

Contents

Context RevenueRisk Modellingapproaches TollRoads RiskAnalysis Whatmakesagoodforecaster

CONTEXT

Context:theconcessionprocess

AGENTS

Agents Government,RegulatoryOffices Promoters,constructioncompanies FinancialInstitutions RatingAgencies Monolineinsurersandotherinsurancecompanies Operators Rollingstockmanufacturers Integrators Lawyers,OtherConsultants

PROJECT FINANCE

ProjectFinance

Risk

Costof finance

Priceof bid

Financial close

Risk CostofFinance Howtoreducerisk

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Betterconcessioncontracts Insurance(several) Guarantees(especiallyminimumrevenue) GoodRevenueProjections(internationallevel)

Financialcloseisparamount

RISK PROFILES

Risks Generalrisks
Country Currency Politicalrisks

Projectspecificrisks
Construction Operatingcosts ForceMajeure Revenue
Trafficvolume,compositionandabstraction Rampup Growth Futurecompetition Tollandfareadjustments(indexingandhow)

RISK PROFILE OF TOLL ROAD

Typicalriskprofileoftollroadovertime

1.00 0.90 0.80 0.70 Risk (nominal) 0.60 0.50 0.40 0.30 0.20 0.10 0.00 -2 0 Ope r ating cos ts 2 Ye ar 4 10 Cons tr uction cos ts

Ope ning

Traffic & Revenue

Ha ndove r

Pre com pletion

Post com pletion

TRAFFIC PROJECTIONS MAY BE UNRELIABLE

Pastperformanceofrevenueprojectionsispoor
JPMorganfoundin14CaseStudies(USA) 2underestimates(10to30%belowactual) 4moderateoverestimates(12to25%overactual) 8blueskyoverestimates(45to75%overactual) Why? Ignoredpriceandalternatives Ignoredwillingnesstopaytolls Overestimatedgrowthprospects

IMPROVE RELIABILITY AND REDUCE RISK

Improvereliabilityandreducerisk How? Weneedtoprovide Confidenceintheinputs,extensiveanduptodate Confidenceinthemethods Confidenceintheresults RiskAnalysisandtreatment CommunicatetodelivertrustintheTrafficandRevenue Advisors

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METHODOLOGIES

Methodologies EarlyRiskIdentificationandevaluation Reviewexistingdataandcollectnew,evenifjustto validate Specifymodelscarefully;classic4/5stageandABmodels arealmostneverappropriate Focusonwhatreallymatters!

Inscopetraffic Willingnesstopaytolls/fares Growth Competition Contractualobligations Understandingtheeconomicandsocialcontext

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USE OF MODELS

Specificationofmodels Clientsdonottrustblackboxes Excessivecomplexity highrisk Teammoreimportantthansoftware

Excelmaybeenough Avoidoverlargezoningsystemsandnetworks

Focusonwhatreallymattersanddemonstrateit Riskanalysisandmitigation Abilitytoexplainprocessfrominputtooutput

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MODELLING

Genericmodel

WILLINGNESS TO PAY

TRANSPORT MODEL

IN SCOPE TRIPS

CAPTURE

TRAFFIC AND REVENUE

BENEFITS OF NEW FACILITY

GROWTH

Trends

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Competition

WILLINGNESS TO PAY

Willingnesstopay Driverspaytosavetimeandcosts(comfort,security)
SubjectiveValueofTravelTime DependsonIncome,Purpose(group),qualityofthedrivingtask

Publictransporttravellersarealsowillingtopaymoneyfora betterjourney
Traveltime,reliability,seat,howcrowded,opportunityto read/work,comfort

StatedandRevealedPreferences Incomedistributionanalysis Segmentationofdemandiscritical

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Value of T ime by Country

UK USA Canada Argentina Chile

Value of Time $/hr

VA LU ES OF TI M E

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GDP per Capita $

10,000

20,000

30,000

40,000

50,000

60,000

Austria Belgium Denmark Finland France Germany Ireland Italy Netherlands Norway Portugal Spain Sweden

Country

"GDP per capita US$" VOT Business

VOT General

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14

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WILLINGNESS TO PAY,TRUCKS

Trucksandfreight Whochoosesroute/mode? Clients shipper haulier drivers ValueofTimeforFreight Dependsonthevalueofthecommodityandtypeof contract(JIT) VehicleOperatingCostsSavings(gradients,stops) StatedandRevealedPreferences Companymaturity
Largeandsmalloperators Largeandsmalltrucks

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SydneyOrbitalSystem:anexample
39kmlong 15junctions Toll25cents/km, allvehicles Tollcappedat$5 (20km) Twolaneseachway Tolledusingfree flowETC 30yearsconcession Completesorbital routearound Sydney Servesmainareaof expansionof Sydney

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Modellingcappedtolls

V2 20 5 V1 20 5 20 5 20 5 20 5 20

V=V1+V2 V

CUBEcandothisandmoregeneralpricingschemes
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VALUE OF TIME FOR FREIGHT

WillingnesstoPay,heavycommercialvehicles
WSO Heavy Veh VTTS 2001
0.30

0.25

0.20

Frequency

0.15

0.10

0.05

0.00
0-5 5.01-10 10.01-20 20.01-30 30.10-40 40.01-50 50.01-60 60.01-70 70.01-80 80.01-90 90.01100 100.01110 110.01120 120.01130 130.01140 140.01150

VTTS ($/hour)
Heavy vehicle Free Flow Heavy vehicle Slowed Down Total time

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MARKET SEGMENTATION

Valuesoftimeinmodel
Category Commuters Level Low Medium H igh Employer pays Average N on-Commuters Low Medium H igh Employer pays Average Light Commercial Low Medium-High Average Heavy Commercial Low Medium-high Average
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VTTS AUS$/hr 2.46 15.90 57.95 50.50 20.32 2.45 13.26 47.41 50.50 19.40 3.79 23.42 13.55 13.96 49.54 31.06

% of users in category 30% 48% 8% 14% 100% 36% 36% 12% 16% 100% 50% 50% 100% 52% 48% 100%

RAMPUP

Rampupforecasting

Thetransitionalperiodfromopeningtostable(modelled)flows,or rampup,isveryimportantasearlyrevenuesarecriticaltothefinancial successofaconcession(andbankslookverycloselytoearlyrevenues) Sadly,therampupperiodisalmostimpossibletomodelusing conventionaltools Itdependsonhowquicklycanpeoplebecomefamiliarwiththe advantages(andcosts)ofthenewfacility Thereforecommutertraffichasashorterrampupthanintercity Significantadvantagesresultinshorterrampups Complexpricingleadstolongerrampupperiods Informationandmarketingcanshortentherampup Thebestguidanceisothersimilarcasesandjudgement
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REVENUES

Revenuemodel Trafficisneverdirectlyconvertedintorevenue;therewill be:

Rampup Seasonalvariationsandtheneedforannualisation Exemptedvehicles Nonpayers,evasion Leakage Revenuesharing

Inthecaseofpublictransportconcessions
Sharingofrevenuewithintegratedfaresystemsiscomplex Therearemorediscountedfares,seasontickets

Usuallyaspreadsheetmodelstakecareoftheseissues

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LRT,BRTAND METRO

Publictransportconcessions Increasingparticipationofprivatesector Infrastructureusuallyneedspublicsectorcontribution Butrevenueriskisoftenallocatedtooperations(fraud, farecollectionandevasion,marketing,integration) Modetransferfromcarsisanissue(policyandrevenue) Assumptionsaboutwhatthecompetitionwilldoarekey ModeSpecificConstant,theinherentadvantageofthe newmode,isaproblem Benchmarkingisuseful

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KEY ISSUES

Riskanalysis
GDP, Population, Competitors, Prices Policies
Uncertainty aboutfuture inputs

Segmentation Behaviouralresponses SVT Trips/tours Zones&Networks

Errorsand imperfections inmodel Uncertainty about forecasts

Traffic Revenue streams

Confidencethatthemodelrepresentsthepresentandfuturewell Builddifferentscenariostocopewithachangingfuture Deconstructionofmodeloutputstoshowdependencies Stochasticriskanalysistoprovideenvelopeofuncertainty

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KEY ISSUES

Modelandfutureuncertainties
Updatethemodelandforecaststorecentdataandchanges Checkmodelproducessensibleanddefensibleresults Agreebasisforscenarioswithbidderandfinancialadvisors Produceatleastthreescenarios:stressed(downside),expected(base) andOptimistic(upside)forecasts Morescenariosmaybeneededifuncertaintyaboutcompetitors responsesorotherfactoriscritical Undertakesensitivitytests Willingnesstopay Revenuemix jointtickets Evasion Differentcustomergroups GrowthinpopulationandGDP Reorganisationofpublictransport,parkingpolicy
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OUTPUT MAKE UP

Deconstructthemodelinitscomponents Modelling

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DemandcapturedfromotherroadsorPT Demandgrowth Whatiscapturablefromothermodes Redistribution Puregeneratedtraffic Bytypeofvehicles Urbanandlongdistancetravel Weekdayandweekend ETCandconventionaltolls Seasonticketandsinglefareusers Discounts

Demandsegmentation

PUBLIC TRANSPORT DECONSTRUCTION

ConceptualLRTforecasts

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STOCHASTIC RISK ANALYSIS

Stochasticriskanalysis BelovedbyFinancialInstitutions GenerallybasedaroundBaseCase Take23keyvariables:GDP,SVT,etc ..andlookintotheirhistoricalvariability(standard deviation ) Themodelisusedtotrackvariabilityinrevenueresulting fromvariabilityinkeyinputs,usuallyviaasimplificationin Excel FutureRevenue =RevenueFactor *BaseCaseRevenue AvalueforRevenueFactor of1indicatesBaseCase Alsopresentedasthelevelofrevenuethatislikelytobe exceeded90or95%ofthetime(P90andP95)

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TYPICAL OUTPUT

Exampleofoutput

GDP variation : 0.5% SVT variation : 2.5%*mean VST

1.15 1.1 Revenue Factor 1.05 1 0.95 0.9 0.85 2003

2005

2007

2009 Year

2011

2013

2015

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CASE STUDY

AMexicotollroadtransaction ThemaindriveroffuturedemandwasGDPgrowth Itaffectsunderlying(inscopeviacarownership)demandand growthinwillingnesstopay ObservationsonpastvariationsofGDPgrowthsuggested:

Normaldistributionofvariations(onceoutlierswereremoved) StandardDeviationsaround1.5

UndertooktheP90analysisusing5000MonteCarloiterations withNormalDistributionandSD=1.5 P90isthelevelofdemandthatwillbeexceededinpractice withaprobabilityof90%(9outof10times)

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FORECASTS CASE 2

P90andP95fortollroad
'Four Roads- Case 2 WRe P90 sd 1.5

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Mx$ Billions
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2 2008 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030 2032 2034 2036

PRACTICAL ASPECTS

Somerecommendations Bearinmindtheneedtoreachfinancialcloseandstillhave aprojectthatgeneratesaprofittoinvestors Transparencyandtraceabilityareparamount Youwillbeauditedbyfinancialinstitutionssoonerorlater Ifproblemisverysimple,useExcel;otherwise,useawell establishedsoftwarepackage:CUBEisgood Useatleast6userclassesforcarsand4fortruckswith differentwillingnesstopay Collectuptodatedata,atleastcountsandODsurveys Confirmwillingnesstopay Alwaysmodeltollsastollsandnotastimepenalties Bewareofperverseincentives
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CLOSURE:THE TRANSPORT MODELLER PROFESSIONAL

Whatmakesagoodmodeller forecastingprofessional?

Curiosity:broadrangeofintereststoenableyouto understandtheunderlyingreasonsfordemandbeyond anymodelortheory Goodlisteningskills Communicationskills Analyticalability Questioningmind,inparticularofyourownresults Realism:allmodellingprojectstakelongerthanyou initiallyanticipate;planaccordingly Thefinaltest:wouldyouputyourretirementfundon thisproject?
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THANKYOU

Luis Willumsen Consultancy