Consider a road tunnel procured by BOOT (build, own, operate, transfer) or PPP (public private partnership) delivery.

Private sector company appraisal. The private sector company involved gets to own and operate the tunnel for a period of 45 years, during which time they are able to collect tolls. At the end of the 45 years, the tunnel is handed back to the local government. The company has a large upfront cost (of the order of $2B) and maintenance and operational costs. The agreed toll amount is established in the BOOT contract and, for a car, the toll is set at $3.00 (excluding consumption taxes). Allowance is made in the contract to increase the toll according to the CPI (consumer price index), New Toll = CPI(current year)/CPI (year contract signed) × Old Toll Interestingly, the contract states that the toll cannot decrease even in periods of deflation.

Local government appraisal. The main costs and benefits/disbenefits associated with the tunnel are as follows:

• The toll over a 45-year period

• Some construction and maintenance/operational costs

• Disruption to the road network during construction

• Business and employment opportunities created during construction and maintenance/operation

• Additional capacity in the road network, which reduces congestion and therefore lowers travel costs and times

• Reduction in air and noise emissions to the natural environment For the purposes of the tunnel’s present worth assessment, the selected discount rate is 9.6% per annum, which incorporates a risk premium of 4.1% per annum.

The appraisal in this road tunnel example uses a discount rate of 9.6% per annum, or approximately 10% per annum. That is, benefits and costs occurring beyond about 25 years are negligible in present-day terms. How then can the private sector company justify, or the local government offer, a 45-year concession period?

(The discussion here is in terms of financial justification. Do not confuse this with any benefits or not, including intangible ones, BOOT or PPP delivery may offer in terms of the private sector providing infrastructure for public use. Do not confuse this also with the fact that future costs and benefits are uncertain.)