Australia: The What And Why Of Road Availability Charges

Key Points:
Although common in social infrastructure projects, the availability charge model is yet to be used here for roads. The model has some important advantages over patronage risk, especially when the credit markets are tight.

In the recent history (ie. within the last 10 to 15 years) of privately financed road projects in Australia, the Project Company raising the finance for the construction of the road has been granted a concession which, amongst other things, permitted the Project Company to collect and retain tolls from motorists.

Typically, the Project Company has applied those tolls to:

  • pay its operating and maintenance costs;
  • repay its financiers (be they lenders or bond holders); and
  • make distributions to its equity holders.

The Project Company has also borne the risk that sufficient motorists will use the tolled road on a daily basis at a given (agreed maximum) toll level to enable the Project Company to do each of those three things in the manner in which the Project Company has forecast in its financial model. This risk has been variously described as "market risk", "revenue risk", "demand risk" and "patronage risk".

In the market conditions of recent years financiers and equity investors have been prepared to invest capital in concession holders of privately financed roads projects on the basis of revenue forecast models. This has been based on traffic projections and accepting that these forecasts contain within them the patronage risk, but anecdotal evidence from the finance markets suggests that this will not be the case in the immediate future.

What Are The Alternatives?

One alternative to having the private sector provide finance for new roads on a "patronage risk" basis is for the construction of new roads to be directly funded by federal, state and/or local governments. This is, of course, the manner in which most road projects are delivered. While there are many proponents of the merits of using this as the exclusive method of funding new road projects, there is necessarily a limit to the amount of new development that can be delivered by government funding within short timeframes.

Availability charges are being considered as an alternative by a number of governments for the delivery of roads projects using term finance provided by the private sector. This provides a revenue stream that is:

  • paid and/or guaranteed by government to the privately financed Project Company (rather than collected from motorists);
  • agreed up-front in the contract between government and the Project Company (rather than dependant on changing levels of patronage); and
  • "abatable" (or subject to reduction) in circumstances where the Project Company has failed to maintain and operate the road so as to meet agreed performance standards.

The Project Company will receive the agreed revenue stream provided that the road is available (ie. meeting the agreed standards, such as availability of all lanes at all required times) for use by motorists.

What Is The Impact On Risk Allocation?

It is tempting to focus on the shift in the allocation of patronage risk as the key impact of moving towards an availability charge model. However, the consequences from a risk allocation perspective are more complex than this. The example below illustrates how the two models give rise to inherently different drivers of behaviour to achieve a similar outcome (such as an maintaining an agreed performance standard for pavements).

Under a "patronage risk" model, the behaviour drivers to achieve an agreed performance standard tend to be linked to the right to enforce undertakings, typically set out in operating and maintenance specifications and plans, to carry out certain types of maintenance at certain times to a certain standard. Effectively the drivers of behaviour are the risks that:

  • if a motorist observes that a road is being poorly maintained then that motorist is unlikely to pay a premium to use that road; and
  • the concessionaire will be in breach of contract (with associated 'threat' of the exercise by government of legal and contractual remedies for that breach).

In contrast, the concept of "availability" of a road which includes the meeting of performance standards focuses more acutely on the identification, measurement and reporting of performance of the road against the agreed performance standard rather than the implementation of detailed plans. When this concept of availability is linked to abatements which government may make to the agreed revenue stream when the performance standards are not met, the maximising the return from the revenue stream (as against maintenance and refurbishment costs) becomes a driver of concessionaire behaviour. The risk/reward analysis for failure to meet the required performance standards in this case is more nuanced and requires emphasis (on the part of the concessionaire) on efficient and effective forward maintenance and refurbishment programs which maximise return. Of course, the risk of being in breach of contract for failure to maintain the road remains a driver.

Are Availability Charges A New Thing?

The answer is "yes" and "no".

The use of the availability charge model is not new to Australian privately financed projects; it is the norm in privately financed social infrastructure such as hospitals. There are detailed and substantially standardised approaches to availability charges set out in the National PPP Policy Framework, in particular, the "Commercial Principles for Social Infrastructure" in Volume 3 to the Framework.

The use of the availability charge model is not new to the funding of major new road projects; it has been most recently utilised in the United Kingdom on the M25 upgrade "Design, Build, Finance, and Operate" project.

However, the availability charge model has not yet been used on an Australian road project, although the Victorian State Government has recently called for expressions of interest for the financing, design, construction, operation and maintenance of a major freeway to service the southeast of Melbourne (known as "Peninsula Link") on the basis of an availability charge model.

Why Now?

When credit markets are tight, as they are now, prospective lenders to infrastructure projects are likely to be attracted to projects to which the risk of revenues being less than forecast is:

  • lower than for other projects competing for finance; and
  • more clearly within the control of the person who bears that risk.

An availability charge model will generally meet those criteria; a "patronage risk" model may not. An availability charge generally also has the added advantage, from the lender's perspective, of being backed by a government which will have a credit rating higher than that which could be attributed to the underlying toll road business (at least in the foreseeable future in Australia).

Even if there are potential equity investors in today's market with an appetite for bearing the impact of patronage risk on potential returns (and, consequently, the higher potential rewards for accepting that risk) patronage risk projects will not be attractive to these investors if they are unable to raise sufficient debt or bond finance to fund the investment required for a new road project.

Even as debt becomes available for projects with an element of patronage risk, it seems likely that governments, as the procurers of road projects, will find the cost of debt funds more favourable for projects in which a known availability payment revenue stream exists to repay debt.

Does This Mean The End Of User-Pays Tolling?

Not necessarily. Governments which procure new roads projects on an availability charge basis will still need to make decisions about how they budget for the long term payment of the agreed revenue stream.

Whether or not user tolls are used to provide governments with the funds necessary to make those payments will be a policy issue for governments.

Tolls, like any other charge for government services, can serve as a policy tool as well as a mechanism for funding roads and other infrastructure. Arguably, the use of an availability charge model can give governments a freer hand to use tolling to provide price signals as a driver of motorist behaviour (such as congestion charging and time-of-day tolling) and otherwise manage road networks than a patronage risk model.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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