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From €1.15/m² to ~€42.84/m²
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The more cases I review from my advisor’s position, the more amazed I’m about people repeating the same mistakes over and over. One of the most astonishing, under-focused risks in infrastructure PPPs is land availability and land cost escalation. Too often, governments assume or implicitly transfer the risk of land value increases to the private concessionaire. Please, don’t. I come from Spain and one of my first babies were the R5 and R3 radial roads, at the time ACS’s concessions. And living in Madrid at the time, I used the R5 quite often. ​ Well… When the radial toll roads were planned and built, the concessionaire contracts assumed modest expropriation costs. The normal thing. The standard cost paid by government before (blindly) you accept that risk as private. But the moment the roads (or their access points) were announced, the value of the surrounding land jumped significantly. Until here… all normal. But… Courts ruled that expropriated land had to be valued at rates far higher than the “rural” values initially assumed. Overruns of nearly six times the original estimate occurred. To give you an idea… The originally estimated cost of expropriations was ~€ 387 million for those roads; actual judicial liabilities plus payments escalated to ~€ 2,210 million… or €2.2 billion. ​ When a private company signs a 50-year concession, builds the road and also assumed land-availability risk, they did so under the implicit (and ultimately false) assumption that land risk was minimal or manageable. ​ But you can imagine now the outcome… Enormous extra costs, financial failure and ultimately the rescues of several radials. ​ The lesson is brutal but essential. Land risk (availability and cost) belongs to the procuring authority. Period. If you push that risk onto the private side, you will either pay a huge premium for it, the project will break, or you’ll have to bail out later (or all three). ​ For more mistakes you can prevent easily, you can click below. ​My Mentorship​ ​ PD 1: If you liked this email, don't keep it in secret and forward it to a friend. They will thank you enormously one day. PD 2: If somebody has sent you this email and you want to receive emails like this yourself, visit vicentevalencia.com PD 3: If you want unsubscribe, click the link below. ​ ​ |
Vicente Valencia
I talk about Personal Growth, Management, Infrastructure and More | 👇JOIN +2k readers 👇
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