Success and Failure in Public–Private Partnerships
Chapter 10: An evaluation of private participation in the motorway industry
One of the critical tasks in any motorway project is the prediction of costs and demand. Though the former are well controlled by private building firms, the uncertainty about future demand remains a great challenge for private investors especially given the long-term duration of the contract. While it is commonly held to be difficult to predict demand during the first operating year, it is deemed almost impossible to predict demand in the long term. The future is uncertain and so it is not feasible to include all potential events and shocks in a forecasting model. Indeed, experience shows that demand forecasts are inaccurate even in the short term (the case of the first year of operation), which says little for the value of prediction models and demand forecasts. The importance of demand forecasts has already been stressed for a firm's break-even point, for the bidding process as a whole, and for the overall result of the privatisation decision. The minimum toll and minimum duration bids depend basically on the cash flow of the project's life-cycle, which comprises cost and revenue flows, the latter directly linked to traffic volume for toll motorways, as well as for shadow tolls. Good forecasts, moreover, are particularly important if we take into account that the motorway manager has few tools at his disposal to implement a commercial policy that can offset forecast errors.
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