Nick Crawley, Principal at Corality, presented ‘A financier’s perspective of toll road analysis’ at the Major Road Projects conference in Sydney on the 11th of March. The presentation highlighted critical aspects of the borrowing process and the complications that surround toll road projects, despite being seen as reasonably unequivocal by bankers.
“There are many challenges introduced to a project by forecasting something as complex as toll road usage modelling. On the other hand, bankers treat the construction of toll roads in a fairly straight-forward manner,” said Nick.
The session resulted in an animated question and answer session around patronage modelling, as well as the effect of macroeconomic factors on project success.
A financier’s perspective of toll road analysis
The key learnings of Nick's presentation were:
Tolled roads attract an average 23% less traffic than planned
Financial models should focus on the flexibility of different patronage scenarios
The way forward – aside from availability based regimes – is more innovative mechanisms with different levels of government guarantee and phased risk
“Demand modelling for toll roads is statistically significantly overestimated, compared to un-tolled roads where the methods are materially correct. This is due to the bias being introduced by political and economic factors surrounding the process, and the pressure of a competitive bid,” said Nick.
Nick’s presentation also covered important forecast analysis principles: Choosing a methodology that favours transparency, flexibility and presentation; working with a model auditor; and having a financial model that works in line with project submissions and documentation.
The question and answer session focused on big picture macroeconomic factors such as CPI and borrowing rates, and how they affect the success of a project. CPI is generally built into the tolling mechanism (e.g., up to a cap of four percent), and interest rates are heavily hedged – this is also where the banks make the real returns. Other questions focused predominantly around the modelling process itself and the way in which banks run scenarios on outputs provided by patronage modelling consultants.
The presentation was well received and offered a good opportunity to network and exchange opinions on major road projects. We are looking forward to the next one!