Risk Analysis for Privately Funded Transport Schemes

Risk Analysis for Privately Funded Transport Schemes


BOYCE A M, Oscar Faber Transportation, UK


Risk analysis is concerned with describing the possible outcomes fiom a strategy and assessing the likelihood of each outcome.


Risk analysis is concerned with describing the possible outcomes fiom a strategy and assessing the likelihood of each outcome.

Any organisation making an investment wants to know that the investment is worthwhile. For private companies this will mean obtaining a financial return, ie the revenue stream is sufficient to outweigh the initial cost. Government departments and public companies may also have other objectives. All organisations will base their investment decision on their view of what is happening now and what they think will happen in the future. This holds true for transport investments. This paper actually concentrates on road schemes though many of the principles will also apply to other modes. It also concentrates on the revenue side though there is some evidence that the estimation of costs can display similar variability (Knight et al, 1996).

One of the fundamental questions with a road scheme is how much traffic will use it. Forecasts of the amount of traffic expected to use a road are sometimes inaccurate. Some roads have more traffic than forecast while others have considerably less. As traffic volumes can affect revenue, this paper explores the causes of uncertainty in traffic forecasts and their significance.

Until recent years most new trunk road schemes in the UK were funded directly by central government. Though the government did not usually receive payment for the use the road, it still had to demonstrate value for money. This was partly for prioritisation and partly for justification. The value for money of these schemes was assessed using either COBA (Highways Agency, 1997) or URECA (Department of Transport, 1996) which depended on quasi-economic benefits in terms of reduced accidents, savings in travel time and reduced operating costs.

There were a number of consequences of maccurate forecasts. Firstly, there was the possibility that the standard of road design was not appropriate. Provision could have been inadequate meaning that the facility failed to fulfil its purpose, for example the M25. The resulting situation is still likely to be considerably better than doing nothing and the economic performance is likely to be very good. If the standard of provision is too high, the economic performance will be poorer but the scheme will fulfil its objectives.

Central government has two major advantages in road provision. Firstly, it does not receive payment related to the amount of use. Hence, traffic forecasts only need to be accurate enough to ensure appropriate design. An important point here is that one standard is appropriate for quite a wide range of traffic flows. Secondly, it has a portfolio of schemes. Economic performance will be better than expected on some but less good on others. However, over the whole portfolio the performance is likely to be close to the expected performance.

Privately funded schemes have neither of these advantages. The operating company is highly dependent on traffic flow. This dependence is direct in the case of toll roads; and via a usage formula in the case of shadow tolls. Operating companies usually only have one or a small number of schemes so they cannot offset losses on one project against profits on another. Hence, it could be argued that the accuracy of forecasts for the private sector must be better than it is for the public sector.


Association for European Transport