Two mechanisms for a public agency to compensate a private entity for their project responsibilities (design, construction, finance, operations and/or maintenance) under a concession arrangement are availability payments and shadow tolls.
Availability payments are made to a private concessionaire by a public project sponsor based on project milestones or facility performance standards in exchange for particular services.
Availability payments are a means of compensating a private concessionaire for its responsibility to design, construct, operate, and/or maintain a tolled or non-tolled roadway for a set period of time. These payments are made by a public project sponsor (a state DOT or authority, for example) based on particular project milestones or facility performance standards. Project milestones can refer to the completion of the facility itself by a certain deadline, while performance standards can be measured operationally. Examples include lane closures for maintenance purposes, incident management, or snow removal. Level-of-service performance could also be used as the primary payment metric for availability payment concessions involving the implementation of HOT/express toll lanes.
Availability payments are often used for toll facilities that are not expected to generate adequate revenues to pay for their own construction and operation. In this case the project sponsor retains the underlying revenue risk associated with the toll facility rather than the private partner. Availability payments can also be used for projects without tolls, as the mechanism still presents an attractive means to engage a private sector partner who will take on project risk, such as construction, operations, and upfront financing, and then compensate the concessionaire on an established, performance-based schedule. The desire to avoid encouraging traffic to use non-toll alternative routes may also make an availability payment project without tolls a preferred option. The Port of Miami Tunnel is an example of this type of project.
A project financed with availability payments also presents less overall risk to the private entity than with a full concession. Rather than relying on achieving certain levels of traffic and revenue, the concessionaire receives a predictable, fixed set of payments over the life of the agreement. The concessionaire also can rely on the public agency’s credit to secure financing rather than unpredictable toll revenue. Private financings involving availability payment concessions could include private equity, taxable debt, federal credit assistance such as TIFIA, and private activity bonds. The question of who sets the toll rates is also eliminated under an availability payment arrangement, making concessions with private companies more politically palatable.
Availability payments may be structured in a variety of ways. In certain cases, no payments may be made until after construction is complete. Alternatively they may be predicated on particular construction milestones. Project sponsors may also define how the periodic payments are to be made, and may also set a maximum payment cap based on agreed-to operating and maintenance performance standards.
Design Build Finance Operate Maintain Availability Payment Projects
The FHWA Center for Innovative Finance Support P3 website defines availability payment design-build-finance-operate-maintain concessions and provides profiles of all U.S. projects using this model.
Federal-aid Funding and Availability Payments (pdf)
This factsheet from the FHWA Center for Innovative Finance Support discusses FHWA policy on the use of Federal-aid funds to make availability payments.
Introduction to Public-Private Partnerships with Availability Payments (pdf)
This paper provides a brief overview of availability payments within the context of deciding to utilize a public-private partnership for project delivery.
Shadow tolls are per-vehicle or per-vehicle-mile fees paid by a state or local agency or authority to a private concessionaire as reimbursement for particular services.
Shadow tolls are a set payment by a public agency or authority for each vehicle that uses the facility, levied on a per-vehicle or per-vehicle-mile basis. Payments are made either to a private concessionaire or another public entity as reimbursement for particular services. Shadow tolls may be adjusted based on safety, congestion, or pre-established floors and ceilings. One advantage over real tolls is that traffic diversion to non-tolled facilities is avoided, because motorists themselves do not pay tolls.
Shadow toll concessions have been extensively used in the United Kingdom. In the United States, they have been used in public-public agreements in Texas under the term pass-through financing to repay local agencies for their upfront investments in a project.
Under the shadow toll concession model, payment is made in exchange for the concessionaire’s responsibility to design, build, maintain, and/or operate a roadway for an agreed period of time. Shadow toll payments are dependent upon the volume of traffic using the road and provide an incentive for the concessionaire to optimize the facility’s construction and/or operation. One disadvantage when used in a concession is that revenue to repay the concessionaire’s investment must come from other public sources, which may be constrained.
Most, but not all, U.K. shadow toll projects have involved upgrades of existing roads. This has been an important attraction for private investors as historic traffic data reduces traffic risk and the need to depend on forecasts for revenue projections. In certain cases, it can also provide opportunities for generating cash flows during construction. As with conventional tolling, shadow tolls can amortize capital costs over the useful life of the investment and can create early completion and other incentives by sharing traffic forecasting and other risks with the private partners. Additional advantages include:
- Minimizing traffic risks, making it easier for private investment partners to find more advantageous financing
- Capturing the profit-seeking motives of the private sector, often resulting in capital construction costs savings
- Capitalizing on the cost efficiencies of lifecycle costing
- If structured properly, reducing the effect of lower than expected traffic volumes
- Transferring of operating and maintenance risk to the concessionaire
- Capping the public sector’s exposure, thereby eliminating the risk of super-profitability by the concessionaire
- Reduced public equity requirements
- Avoiding the need for toll collection equipment
In 1999, FHWA prepared a report titled The Selective Use of Shadow Tolls in the United States on the UK’s experience with shadow tolls, analyzing shadow toll-related financial and capital market issues, and exploring the potential applicability of this technique in the U.S.