Demand Risk in Transport Infrastructure Projects

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  • Topic: Risk management, Concession, Concession stand
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  • Published : February 22, 2013
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2.0 Demand Risk in Transport Infrastructure Projects
2.1Introduction

The Demand risk of a PPP Rail Transport Infrastructure Project refers to the risk with regards to the number of passengers that is required in order to ensure adequate revenue generation to cover the project’s operational and maintenance costs. Merna and Owen ( Merna & Owen. 1998) noted that “demand risk is the greatest risk to the concessionaire under the payment mechanism”. The demand risk is key for a market-led service where revenue generation is critical to the ultimate success of the project. Brocklebank, Burnett, Ras & Walt(Brocklebank, Burnett, Ras & Walt . 2001) describes the demand forecasts or revenue generation as “vital to the development of a business case”. Mackie, Nellthrop and Laird (Mackie, Nellthrop and Laird. 2005) note that “demand forecasts are fundamental to an economic appraisal” for rail transport infrastructure projects.

2.2The Concept of Demand Risk
Burger (Burger, P. 2006) noted that when a need for a service exist, with externality characteristics (demand side risk), the type of contract through which the infrastructure is constructed, managed and operated, depends on the ability of the government to transfer the demand risk to the concessionaire as well as the level of the competition in the open market. Grimsley and Lewis (Grimsley and Lewis, 2005) note that risk transfer and the level of competition during the tender process, is critical to ensure the concessionaire focuses on being “technically and X-efficient”. X-efficiency refers to the ability of the concessionaire to operate the service without wasteful inputs (Burger, P. 2006). Fourie and Burger (2000) conclude that the main drivers of efficiency and value for money in elastic demand based PPP Infrastructure projects is demand risk transfer. The demand risk associated with infrastructure projects are inherently higher than projects that deliver a product as the infrastructure projects are fixed...
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