Syndicate content

Traffic Risk in Highway PPPs, Part I: Traffic Forecasting — It’s ok to be wrong, just try to be less wrong

Matt Bull's picture


Photo: Jorge Franganillo | Flickr Creative Commons

This is the first of a three-part series on traffic risk in PPPs

"Prediction is very difficult, especially about the future."
– Professor Nils Bohr, Nobel Laureate

Professor Bohr was right: prediction is hard work. As a species, we don’t have difficulty making predictions. I, for one, frequently make doom-laden predictions on a diverse range of subjects ranging from politics to the fortunes of my beloved football team, Liverpool Football Club.

No, the problem is that humans, as a rule, are not very good at predictions. Sadly, that illusive ‘crystal ball’ still has not been invented. And the sheer complexity of living on an ever-changing and evolving planet alongside 7 billion equally complex individuals—all making unique but increasingly interdependent decisions—makes even the most straightforward predictions difficult. 

As World Bank Vice President for Sustainable Development Laura Tuck explained in a recent blog post, predictions about the future are becoming particularly difficult for decision-makers and investors in infrastructure projects, especially in developing economies.

Infrastructure projects are planned, built, operated and financed over time-horizons sometimes stretching decades into the future. And it is a future where unprecedented shifts in demography, technology, socio-economic and environmental changes are occurring. This ‘deep uncertainty,’ if not addressed, can make infrastructure less sustainable in many ways, whether it be under- or oversizing the design and capacity of the project; the ability of the project to withstand sudden or dramatic climactic or technological changes, or sudden political changes that create fragility and conflict that can affect the infrastructure itself and the population that uses it.

This deep uncertainty particularly manifests itself in infrastructure PPP projects, which are often financed against user revenues forecast to accrue many years into this uncertain future. Financiers need confidence that these long-range forecasts are accurate to prove the creditworthiness of their projects and avoid suffering financial losses. Likewise, governments want to avoid costly renegotiations and bailouts.

Toll road PPPs are the enfant terrible in this respect in the PPP world. Many toll road PPPs have ended in high-profile bankruptcies, renegotiations and government bailouts because of inaccurate forecasts whereby actual traffic flows (and associated toll revenues) have turned out to be much lower than forecast. The crystallization of this traffic risk has led to many project failures. Financiers, now significantly more cognitive of the risk, have a reduced appetite for such projects or are aggressively pricing the risk in their cost of finance.

So what do we do about traffic risk? Well we need to embrace it. Unless by some very strange coincidence, a forecast of how many cars or trucks is going to use a road each day for every year for 30 years is always going to be wrong. Inaccuracy in forecasting, and therefore traffic risk, is just a fact. And for the reasons mentioned earlier, these risks are likely to become even more prevalent. But let’s be clear: this should never mean that we should not make forecasts. Without them, governments and financiers cannot make informed, vital decisions about their projects. No; instead, it means that we have to make better forecasts; to be able to interrogate them more and test their boundaries.

For this reason, the Public-Private Infrastructure Advisory Facility (PPIAF) and the Global Infrastructure Facility (GIF) have developed a major new guidance document on the issue of traffic risk: Toll Road PPPs: Identifying, Mitigating and Managing Traffic Risk. This document will help guide governments and other project parties to gain a better understanding of this key risk and how to address it in the preparation and structuring of their projects.

In recognition that this is a relatively wide subject matter, we have also authored three PPIAF Issue Briefs that address, in summary terms, some of the core issues around the subject. In the first of these, Understanding Traffic Risk and Traffic Forecasting, we delve into the process of traffic forecasting and the importance of developing a high-quality traffic study as part of the government’s preparation of a PPP project.

In a nutshell, what we are trying to do with these briefs and the subsequent guide is to encourage project parties that it’s ok to be wrong but we all have to try to be less wrong! We hope you enjoy them and find them useful.

Read these next:


Report

Toll-Roads PPPs: Identifying, Mitigating and Managing Traffic Risk


Related Posts

Traffic Risk in PPPs, Part II: Bias in traffic forecasts—dealing with the darker side of PPPs

Traffic Risk in PPPs, Part III - Allocating Traffic Risk: Prophet & Loss


 

Comments

Submitted by Dr. Mohamed Taher Abdelrazik Hamada,Ph.D on

Prediction is a very hard process specially in social phenomenas , it may look easier in science , but it is still hard , specially for the long term phenomena span of time .
Of course prediction in developing countries is more less accurate than prediction in developed countries , the lack of social , economic and scientific tools in these developing countries makes it difficult to get accuracy in prediction.
As a result of these dangerous situations in the developing countries infrastructure projects are dangerously affected which is negatively refelected on investment whether in the private or the public sectos (PPP)
These dangerous phases of uncertanities should be embraced and studied very carefully by teams of advanced scientific labs and scientific institutions to be able to forecast all the possibilities that may affect the flow the investors to these developing countries
Scientific research institutions along with all other institutions for
development in developing countries should be enabled financially and socially to do their role on a clear transparent ways from all agencies of the state.
Yours Very Respectfully,
Dr. Mohamed Taher Abdelrazik Hamada, Ph.D
Retired Professor at Strayer University, USA
Address
[redacted]

Submitted by Philip Bates on

I would suggest the title should be "Traffic Forecasting — It’s ok to be wrong, just make sure you are transparent". As you say - as an industry we need to embrace uncertainty and acknowledge it - rather than hide it behind pages of technical jargon. Good look with this initiative - it is a topic that needs open and frank discussion.

Submitted by Hanna, Mohsen on

No one can denied without prediction risk will be more percentage in every sectors . prediction is the light lamp in the dark area even its light slightly weak but it is better than complete darkness in the future road .
My be we need movable prediction for every sectors but through short times for correcting the data according the real date comparing it with the predicting data about every sectors .

About the accuracy of predicting data in the developed countries more than in the developing countries , what about preparing accurate international system support both of developed and developing countries for more accurate predicting in every sectors . that system will be more beneficiary for the all because as it is more accuracy prediction data as it is less risking cost for every project everywhere.

Submitted by Hanna, Mohsen on

1- What about ??? the movable prediction through short period of time comparing it with the real data and from the result can improve the next prediction too. that will be much beneficiary than neglecting the process of prediction completely in future

2- What about international prediction system attracting up the developing countries to the stander level of developed countries in the subject of future prediction in every sectors.

3- Raising up the accuracy and quality control of every sectors in the developing countries will decrease the cost of international responsibility of the developed countries toward the developing countries .

Submitted by Hanna, Mohsen on

No one can denied without prediction risk will be more percentage in every sectors . prediction is the light lamp in the dark area even its light slightly weak but it is better than complete darkness in the future road .
My be we need movable prediction for every sectors but through short times for correcting the data according the real date comparing it with the predicting data about every sectors .

About the accuracy of predicting data in the developed countries more than in the developing countries , what about preparing accurate international system support both of developed and developing countries for more accurate predicting in every sectors . that system will be more beneficiary for the all because as it is more accuracy prediction data as it is less risking cost for every project everywhere.

Submitted by Violet M on

PPP's are the best way to go in provision of public infrastructure in many countries! it is working here in Kenya with Chinese government! http://estates.uonbi.ac.ke/

Add new comment