NOTE NUMBER 224 P U B L I C P O L I C Y F O R T H E privatesector DECEMBER 2000 Toll Roads Gisele F. Silva The Private Participation Recent Trends in Private Participation in Infrastructure (PPI) Project Database tracks D u r i n g t h e 1 9 9 0 s d eve l o p i n g c o u n t r i e s i n c re a s i n g l y t u r n e d t o t h e infrastructure projects p r i vat e s e c t o r f o r c o n s t r u c t i o n , m a n a g e m e n t , a n d m a i n t e n a n c e o f t o l l newly owned or managed by private companies that ro a d s . B e t we e n 1 9 9 0 a n d 1 9 9 9 , U S $ 6 1 b i l l i o n o f p r i vat e i nve s t m e n t T H E W O R L D B A N K G R O U P PRIVATE SECTOR AND INFRASTRUCTURE NETWORK reached financial closure wa s c o m m i t t e d t o 2 7 9 p ro j e c t s i n 2 6 d eve l o p i n g c o u n t r i e s , in 1990–99 in energy (electricity and natural c o m p r i s i n g 3 4 , 3 6 9 k i l o m e t e r s o f t o l l h i g h way s , b r i d g e s , a n d t u n n e l s . 1 gas transmission and T h i s N o t e a n a l y ze s t h e m a i n t re n d s i n p r i vat e p a r t i c i p at i o n i n t o l l distribution), telecommunications, ro a d s i n d eve l o p i n g c o u n t r i e s u s i n g f i g u re s f ro m t h e Wo r l d B a n k ’s transport, and water. In P r i vat e Pa r t i c i p at i o n i n I n f r a s t r u c t u re P ro j e c t D at a b a s e . the case of toll roads, the database covers only Private activity in the toll road sector has been Total investment in toll road projects with privately managed toll uneven over the last decade (figure 1). Activity Figure private participation, 1990–99 roads. Long-term 1 maintenance contracts of was high in 1990 as Argentina and Mexico con- Total investment non-tolled roadways or tinued implementing comprehensive private turnkey contracts are not toll road programs, but investment commit- Brazilian projects included (see box 1 for ments then fell substantially until 1993. In 1999 US$ billions 1994, various countries began introducing pri- 0 2 4 6 8 10 more information about the database). vate participation in toll roads, leading to 1990 another boom in the sector’s activity in the 1991 mid-1990s. 1992 The economic crisis that affected many 1993 developing countries in the late 1990s reduced 1994 private participation in the toll road sector sig- 1995 nificantly. The number of privately managed 1996 projects that reached financial closure fell from 56 in 1997 to 12 in 1999, with a drop in invest- 1997 ment commitments from a high of US$10 bil- 1998 lion to US$1.8 billion in 1999. Since 1997, 1999 private participation in the sector has decreased steadily in almost all countries. Brazil has been Source: PPI Project Database. T O L L R O A D S RECENT TRENDS IN PRIVATE PARTICIPATION Box PPI Project Database: project criteria and database terminology 1 Database coverage ▪ Projects that have reached financial closure and directly or indirectly serve the public. ▪ Divestiture. A private consortium buys an equity stake in a state-owned enterprise. The private stake may or may not imply private management of the company. ▪ Projects in electricity, natural gas (transmission and distribution), telecommunications, transport, and water, but Definition of financial closure. For greenfield projects, not movable assets, incinerators, stand-alone solid waste proj- and for operations and management contracts with major capi- ects, and small projects such as windmills. tal expenditure, financial closure is defined as the existence of a 2 ▪ Low- and middle-income developing countries in 1999, as legally binding commitment of equity holders or debt financiers defined and classified by the World Bank. to provide or mobilize funding for the project. The funding must account for a significant part of the project cost, securing Definition of private participation. The private the construction of the facility. For operations and management company must assume operating risk during the operating contracts, a lease agreement or a contract authorizing the com- period or assume development and operating risk during the mencement of management or lease service must exist. For contract period. A foreign state-owned company is considered divestitures, the equity holders must have a legally binding a private entity. commitment to acquire the assets of the facility. Definition of a project unit. A corporate entity cre- Recording investments. Investments, privatization rev- ated to operate infrastructure facilities is considered a project. enues, license fees, and canon commitments generally have been When two or more physical facilities are operated by the cor- recorded on a commitment basis in the year of financial closure porate entity, all are considered as one project. (for which data are typically readily available). Actual disburse- ments have not been tracked. Where privatizations and new Project types investments are phased and data were available at financial clo- ▪ Operations and management contract. A private entity takes sure, they are recorded in phases. When license fees and canon over the management of a state-owned enterprise for a given commitments were due over the concession period, their net period. This category includes management contracts and leases. present values were recorded in the year of financial closure. ▪ Operations and management contract with major capital expenditure. A private entity takes over the management of a Sources. World Wide Web, commercial databases, special- state-owned enterprise for a given period during which it also ized publications, developers, sponsors, and regulatory agencies. assumes significant investment risk. This category includes concession-type contracts such as build-transfer-operate, build- Web site. http://www.worldbank.org/html/fpd/privatesector/ lease-operate, and build-rehabilitate-operate-transfer contracts PPIDBweb/Intro.htm as applied to existing facilities. ▪ Greenfield project. A private entity or a public-private joint Contact. The database is maintained by the Private venture builds and operates a new facility. This category Provision of Public Services Group of the World Bank. For includes build-own-transfer and build-own-operate contracts as more information, contact Shokraneh Minovi at 202 473 0012 well as merchant power plants. or sminovi@worldbank.org. the main exception, with several projects under- referred to as concessions) accounted for about way at the state level in 1997 and 1998. four-fifths of the total investment in privately The worst effects of the downturn have been managed toll road projects (US$48.4 billion has felt in East Asia, where investment commitments been committed to 231 projects). Under a con- in toll road projects with private participation cession, the private investors build, expand, or were reduced from US$6.6 billion in 1996 to rehabilitate the facility, and operate the toll US$312 million in 1999. The fall in traffic levels road during the contract period, while the own- and the financial crisis led to stalling or contract ership of the assets remains with the govern- renegotiation of some projects in the region. ment. The average length of such contracts at the time they were awarded was 22 years, with Types of contracts investment commitments fully borne by the pri- In 1990–99 operations and management con- vate investors in almost two-thirds of the con- tracts with major capital expenditure (usually cession projects. About three-quarters of the investment com- Total investment in toll road projects with mitted to projects undertaken as concessions has private participation, by project type, Figure 1990–99 involved expansion or rehabilitation of existing roads, or “brownfield” projects. These projects entail lower construction costs per kilometer and allow more accurate traffic forecasting than proj- 2 Divestitures 0 2 New roads a 1999 US$ billions 4 6 Expansion or rehabilitation 8 10 ects for new roads. In addition, private investors 1990 are usually allowed to start charging tolls after 1991 some initial rehabilitation works are completed, 1992 3 which improves the projects’ financial viability. 1993 The construction of new roads has been less 1994 1995 common than brownfield projects, especially in 1996 recent years (figure 2). Successful new toll roads 1997 have usually been designed to connect, or relieve 1998 congestion in, big cities, where demand is less 1999 uncertain. For new development toll roads to be a. Concessions and greenfield projects. Source: PPI Project Database. successful, network planning must be well devel- oped, and regional investment is needed to stim- region, brownfield projects have predomi- ulate traffic. The toll road programs in Mexico nated, and governments have often provided and Hungary, for example, failed to address assistance to attract private capital, such as these issues, and most projects attracted less traf- minimum revenue guarantees in Chile, Colom- fic than predicted. In Mexico, flows were on aver- bia, and Mexico, and bundling of competing age 32 percent below the estimated level, while road sections in Colombia. Nevertheless many in Hungary traffic levels 45 percent lower than of these projects have suffered from traffic forecast have recently led the government to diversion, public dislike of tolls, or cost over- nationalize the M1-M15 toll road. runs, leading to contract renegotiations in Ar- Divestitures and operations and manage- gentina, Brazil, Colombia, Mexico, and other ment contracts have been rare. Operations and countries. management projects, which involve manage- In East Asia, new development accounts for ment contracts without private investment com- about two-thirds of the private participation in mitments, have mainly been limited to one toll road projects. Government agencies have project in Bangladesh and four in South Africa. had a strong presence through equity participa- Partial divestitures of toll facilities, in turn, have tion, loans, guarantees, and subsidies. occurred only in China, where nine state-owned In Sub-Saharan Africa, private participation toll road companies have raised US$2.2 billion in toll roads has been concentrated in South in capital by selling minority stakes through ini- Africa. Most projects have involved short-term tial public offerings and have used these funds operations and management contracts to to finance road construction. manage toll roads built or rehabilitated by the government. Regional spread As in other infrastructure sectors, Latin America Small share of the main road network and East Asia have accounted for most of the Toll road projects with private participation investment commitments in privately managed account for a small fraction of main national toll roads (figure 3). Private activity has also roads. Except for Argentina and Chile, the coun- been highly concentrated in a few countries: tries with the most active toll road programs have Argentina, Brazil, China, Malaysia, and Mexico transferred less than one-tenth of their main have attracted almost three-quarters of the total road network to the private sector. Latin investment commitments. American countries have had the highest share More than half of the private activity in toll of their national roadway operated by the private roads has taken place in Latin America. In this sector. For example, two-fifths of the main roads T O L L R O A D S RECENT TRENDS IN PRIVATE PARTICIPATION Total investment in toll road projects with ▪ Latin America and East Asia have been the Figure private participation, by region, 1990–99 lead regions in promoting private sector 3 involvement in the toll road sector. Sub-Saharan Africa South Asia US$1.4 billion US$0.3 billion ▪ Toll road projects have accounted for a small 2.0% 0.5% portion of most countries’ national road Europe and Central Asia network. viewpoint US$1.9 billion Although private activity in toll roads has 3.2% increased during the 1990s, some projects have is an open forum to had problems. Of the 279 projects awarded dur- encourage dissemination of ing the 1990s, 21 projects, in Hungary, public policy innovations for Indonesia, Mexico, and Thailand, accounting private sector – led and East Asia and Pacific Latin America for US$9.5 billion in total investment, were market-based solutions for US$25.0 billion and the Caribbean taken over by the government. Contract rene- development. The views 41.4% US$32.4 billion 52.9% gotiations have also been common. Among the published are those of the factors that have contributed to the poor per- authors and should not be Source: PPI Project Database. formance of these toll road projects have been attributed to the World overestimation of traffic, inflexible contracts Bank or any other affiliated in Chile, and about a third in Argentina, are toll that limit private investors’ ability to manage organizations. Nor do any of roads with private participation. market and construction risks, inadequate the conclusions represent So far, private participation in toll roads in strategic network planning, a greater interest by official policy of the World developing countries has been mainly in proj- private investors in construction than in opera- Bank or of its Executive ects connecting big cities, since the high traffic tion, and voters’ dislike of tolls. Governments Directors or the countries reduces financing constraints. However, inno- need to address these issues for toll road pro- they represent. vative schemes to engage private investors in grams to be successful. projects with greater commercial risk, but To order additional copies essential to promote economic integration, contact Suzanne Smith, have become more common. Cross-subsidiza- The author is grateful to Jenifer Wishart, Jeff Ruster, and managing editor, Room I9-017, tion and inclusion of existing roads in a con- Jose Luis Irigoyen for valuable comments. The World Bank, cession package have been used to improve 1818 H Street, NW, projects’ cash flow and to facilitate financing: Notes Washington, DC 20433. Malaysia and Thailand, for instance, have 1. All dollar amounts are in 1999 U.S. dollars. The adopted cross-subsidization schemes, while database records total investment commitments, both Telephone: Colombia has awarded projects which included public and private, in infrastructure projects awarded to 001 202 458 7281 existing tolled roads. Shadow tolling has facili- private investors. It does not record private investment Fax: tated private financing of road projects in some commitments alone, nor actual disbursements. Of the 001 202 522 3181 industrial countries, such as Greece, Portugal, US$61 billion in total investment mentioned, private Email: and the United Kingdom, but has not been investors have agreed to transfer US$1.2 billion to gov- ssmith7@worldbank.org tried in developing countries.2 Argentina has ernments as fees for the rights to concessions. implemented performance-based mainte- 2. Under shadow tolling, the government remu- nance contracts for low-traffic non-tolled road nerates the private investor according to the number and Printed on recycled paper projects. type of vehicles using the road (instead of the investor charging users directly). Conclusion Between 1990 and 1999, four main trends have Gisele F. Silva (gsilva@worldbank.org), Private Provision of emerged: Public Services Group. ▪ The economic crisis of the late 1990s has hit the toll road sector particularly hard. ▪ Operations and management contracts with major capital expenditures have been more common than other types of contracting. This Note is available online: www.worldbank.org/html/fpd/notes/