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They forgot a small detail...
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One of my fauvorites… A toll road PPP. Beautiful business model. Traffic studies. Economic growth projections. Sophisticated demand modelling. Consultants everywhere. Like queuing for free ice-cream… The road opened in 2007. The project was the South Bay Expressway SR‑125 toll road. Everything looked perfect on paper. Except for one small detail. Drivers. They didn’t show up. The financial model predicted tens of thousands of vehicles per day. Reality? Sometimes traffic was 70–80% lower than forecast. Which is a polite way of saying: The road was empty. Very empty. And the consultants “la j0dieron”… The investors were led by Macquarie Infrastructure Group, one of the most sophisticated infrastructure investors in the world. If anyone knew how to forecast traffic… It should have been them. But toll road forecasting has a nasty habit. It looks scientific. Spreadsheets. Elasticity curves. GDP projections. Population growth. But at the end of the day… It’s still a prediction about human behaviour. And humans are stubborn creatures. They will happily sit in traffic for 40 minutes… Just to avoid paying $4 in tolls. Three years after opening… The project filed for bankruptcy. Billions invested. Years of work. All because the most important assumption in the model was wrong: That people would actually use the road. Which is why experienced PPP investors always say the same thing. Construction risk? Manageable. Financing risk? Manageable. Political risk? Annoying, but manageable. Demand risk? Terrifying. Now, you know why availability payments is the “new big thing”… Because when traffic is 90% below forecast… There is no clever refinancing that can save you. Only a very expensive lesson. Cheaper lessons, but also full of knowledge, below: ​The 100 Q&A You Must Know about PPPs​ 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 👇
Still in the UK. Now, a hospital PPP. Large. Modern. Shiny. Hundreds of millions invested. Years of planning. Procurement. Financial close. Construction. Finally… The building was delivered. Or so everyone thought. The project was the Royal Liverpool University Hospital PFI project. New hospital. Supposed to open in 2017. There was only one small problem. The building could not be used. Fire safety defects. Structural issues. Incomplete works. Entire sections of the hospital had to be torn...
Everyone relaxes after the contract is signed. Lawyers celebrate. Sponsors shake hands. The press release goes out. “Landmark infrastructure project.” “World-class partnership.” “Long-term value for taxpayers.” Champagne. Photos. LinkedIn posts. Etc. In 2018 one of the largest PPP contractors in the UK, Carillion, collapsed overnight. Not struggling. Not restructuring. Collapsed. Gone. A tomar por cul0. The company was involved in dozens of PPP projects across the UK and beyond. Hospitals....
I hope you had not been in one of those… A meeting with a Power Point. Around 130 slides… Yes. One. Hundred. Thirty. Graphs. Tables. Appendices explaining the appendices. The speaker? Monotone. Boring. Like a GPS giving directions in the desert. A funeral seemed a fiesta in Ibiza. Slide 14… Slide 38… Slide 79… Around slide 92 something magical happened. One of the client directors fell asleep. Not metaphorically. Actually asleep. Head tilted. Eyes closed. The kind of sleep that says: “I’ve...