A payment mechanism that concentrates on achieving value for money. It has an internal shift mechanism that allows both toll based and annuity based forms to exist within the same mechanism, and is interchangeable. This imparts flexibility to governments. It has all the strengths of toll and annuity based mechanisms, but none of their weaknesses.

1. Reciprocal Relation (RR) based Payment
Mechanism for Highway PPPs – Introductory
ConceptsConcepts
by
Devayan Dey
Sept. 2010

2. Structure of Presentation
• Payment in Highway PPPs – The current issue
• The Need
• Part I – Reciprocal Relation based Payment Mechanism
• Part II – Real Income Linked Toll Pricing
• Payment Parameters
• Benefits: Certainty with flexibility

3. Payments in Highway PPPs – The Current Issue
• Toll Based:
• Ever-increasing toll prices even during economic downturns has been a major inconvenience
to user affordability.
• In principle, toll price regulation systems are non-existent till date. Although, change
mechanisms are available, the bargaining power of public bodies are relatively less.
• The incentives for the private sector to reduce toll prices are also non-existent.
“The Severn bridge tolls are expensive, inconvenient and inflexible….Every year on 1 January, the“The Severn bridge tolls are expensive, inconvenient and inflexible….Every year on 1 January, the
tolls go up in accordance with the Severn Bridges Act 1992…We are going through tough economic
times. Commuters' hours are being cut and there are pay freezes and high petrol prices, yet the tolls
still go up.” House of Common Hansard Debates,, 23rd June 2010
• Annuity Based or Performance Based:
• The relatively fixed payments to be made each year reduces flexibility of public expenditures.
This creates budgetary problems for government administrations, especially during
economic downturns and makes deficit control difficult.

4. The Need
• The need is to devise a mechanism to allow enough flexibility to public
bodies in deciding the payment mode from time to time.
• This must be done without compromising the benefits arising from either
performance based systems or toll based systems.performance based systems or toll based systems.
• The mechanism must be designed in a way that is acceptable to the private
sector, and there is proper sharing of risks.

5. PART I - Reciprocal Relation (RR) based
Payment MechanismPayment Mechanism

6. Structure of the Mechanism
• Is based on ‘Least Present Value of Revenue’ (LPVR) form of mechanism.
• Uses two threshold time limits for termination of concession period.
• The government pays only the difference between the Guaranteed Revenue
and the actual value of revenue collected as user tolls.
• Performance based payment adjustments/bonuses aid this mechanism.
• Introduces a unique reciprocal relationship making it possible to switch from
annuity to toll based.
• Creates a relation between toll prices and average earning of users, thereby
taking into consideration affordability of users.

7. The Core Mechanism
(a) (p) (q) (s)

8. The Core Mechanism - Explained
NET RECEIVABLE
REVENUE (NRR)
REVENUE
GENERATION
NET RECEIVABLE REVENUE (NRR): The performance based deductions doesNET RECEIVABLE REVENUE (NRR): The performance based deductions does
not affect the revenue stream that is generated every year through toll collection. Instead,
it just reduces the net LPVR to be collected from the project through entire contract
duration. Hence, in case of deductions, the overall period is reduced that is required to
collect the reduced revenue.
REVENUE GENERATION: If NRR is reached before ‘t0’, the concessionaire is
allowed to collect tolls up to ‘t0’ giving the concessionaire an upside. Similar will be the
treatment of second threshold period ‘t1’. However, between ‘t1’ and ‘T’, the concession
period ends as soon as the revenue reaches ‘I’, sat at time t2. If the target revenue is not
achieved even at ‘T’, the concession period ends mandatorily at ‘T’.

10. Revenue Generation
The concessionaire obtains whichever is greater of
(i) Real Tolls (Ri)
(ii) GMR (Gi).
The government only contributes GMR minus real tolls (Mi). Government is not
liable to pay anything, if the real toll collected exceeds Gi.

11. Determining the Yearly Subsidy
A base guaranteed minimum revenue (Gb,i) and base toll price (Pb,i) may be agreed at
the outset. Gb,i and Pb,i are subject to indexation each year to arrive at the nominal
value.
Pi is the toll price set by the private sector. It may be noted that at very low toll prices,
the mechanism almost transforms into annuity based mechanisms.
Gi is the guaranteed minimum revenue for the year ‘i’ that the private sector is eligible
for. It is decided on the basis of toll prices as set by the private sector for that
particular year. Higher the toll prices, lesser will be the Gi.

12. Reciprocal Relationship Between Toll Prices and Government
Subsidy

13. PART II – Real Income Linked Toll
PricingPricing

14. Real Income Linked Toll Pricing
• Optional.
• Automated toll price regulation based on the economic conditions.
• Supplements RR based payment mechanism.
• Uses a combination of CPI and nAEI in indexation. However, nAEI may be
replaced by any appropriate index if necessary.
• The essence lies in the Indexation Ratio I . Higher I means higher level of• The essence lies in the Indexation Ratio Ir . Higher Ir means higher level of
synchronization of the toll prices with the economic conditions.
• The private sector acceptability of this mechanism arises from the RR based
payment mechanism. This is because, lower toll prices assure higher
guaranteed minimum revenue to the private sector, which means more
revenue certainty.

15. Real Income Linked Toll Pricing
The toll prices may be regulated in tandem with the user’s affordability by using
Equivalent Index for indexation.

16. Payment Parameters
• Elements that may be predetermined by the public body
– Concession period and time thresholds: Considerable research has been
carried out in this area as the LPVR mechanism has been implemented in
several projects previously.
– Value of ‘a’ as in : needs to be decided based on the
financial capacity of the public body. Higher value will ensure higher
incentive for the private sector to maintain lower toll prices.incentive for the private sector to maintain lower toll prices.
– Indextion Ratio (Ir)
• Elements to be dealt in Tendering Process
– Gb,i (Base Guaranteed Minimum Revenue)
– Pb,i (Base Toll Prices)
– I (Least Present Value of Revenue to be generated from the project)

17. Benefits: Certainty with Flexibility
• Provides long-term flexibility to governments as it can be converted from
toll based to annuity based and vice versa with ease.
• The LPVR element allows cost certainty to the governments, while the
government subsidy in form of guaranteed minimum revenue ensures
revenue certainty to private sector.
• Real income linking synchronizes toll pricing to the affordability of users.
• Performance based adjustments / bonuses keep the incentives for the private• Performance based adjustments / bonuses keep the incentives for the private
sector for delivering better services intact.
• Guaranteed minimum revenue and two levels of time threshold allows
revenue certainty and upside for the private sector.
• True sharing of demand risk. This along with the element of government
subsidy is capable of reducing risk premiums substantially.
• Most importantly, this mechanism enjoys the properties of real tolls,
shadow tolls, and performance-based mechanisms all within one
mechanism.

18. Thank YouThank You