Home  Journals  Financial Analytics: Science and Experience  33(219) - 2014 September

Payment mechanism of concession agreements and its effect on net present value of infrastructure projects

Available online: 30 August 2014

Subject Heading: Investment policy

JEL Classification: 

Pages: 53-62

In the conditions of the limited budgetary possibilities, the infrastructure policy, which is carried out in Russia is characterized by an increasing emphasis on the extra budgetary sources of funding. Due to this trend, the long-term models of the public-private partnership (PPP), which are based at the project-based approach, gain the special importance in the construction and modernization of infrastructure. Currently, at the federal level, concession agreement is regulated at the legislation level as being the single form of private sector participation in the implementation of infrastructure projects under the terms and conditions of PPP. In practice, however, the scale of its distribution is relatively small. This fact is due to the low degree of protection of property interests of investors in connection with the transfer to the public side of the ownership of the object of an agreement. In these circumstances, operating income during the operational phase is the only source of compensation of invested assets and its unpredictability is one of the major risks for the concessionaire. Therefore, there are various approaches to the payment mechanism of concessions in international practice, which define the way of investment compensation and, as a consequence, the process of formation of the net present value of an infrastructure project. The paper integrates the main options of the payment mechanism of concessions and with the help of statistical modeling it makes comparative analysis of their potential impact on the formation and the probable distribution of the net present value of the delivery on project. The article comes to a conclusion that the mechanisms to reduce the risk of fluctuating operating income may serve as an alternative to budget subsidies for the financing of capital expenditures and may substantially increase the investment attractiveness of infrastructure projects on a concessional basis. The author emphasizes that the results of the analysis can be used by financial authorities, management companies and institutional investors.

Keywords: concession agreement, lifecycle contract, payment mechanism, net present value, statistical modeling

References:

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