Spread valuation and risk on transport infrastructure loans

Abstract

For some time now, public administrations in many countries have been subject to strict budgetary constraints to control the public deficit. The Public Private Partnership (PPP) model in this context is a useful vehicle to develop public infrastructures. Despite its attractiveness and potential, there is an accumulation of evidence that questions this model with different experiences showing that PPPs are relatively risky projects for all participants. This is especially true for financial creditors, who usually lend up to 85% of the funds needed for financing the project.

The main objective of this research is to develop a methodology for valuing the financial cost of loans in PPP projects for transportation infrastructure, depending on demand risk. This paper proposes the use of option pricing approach to determine the loan spread in PPP transport projects.

To mitigate the risk faced by project financiers, it would be necessary to guarantee the repayment of the debt service. Given that the project's cash flows are uncertain due to demand risk, the cost associated with this guaranty reflects the risk premium that financiers bear as well as the overall cost of financing.

This guarantee may be determined as a derivative (an option) of the project traffic.

To test this methodology, a real regional toll motorway in Spain has been used, comparing the contractual risk premium of the bank loans obtained with the risk premium calculated by the proposed model.

This research indicates that the spread on concessional loans significantly decreases over time, paralleling the reduction in traffic risk, and is notably higher during the initial years of the project. Furthermore, discrepancies between the projected and actual initial traffic have a substantial impact on the risk assumed by lenders. As limitation of this study, it is important to note that in practice the risk premium incorporates other relevant variables for the project and the industry that are not considered in this study.