Concession Model
Executive Summary
Key Takeaways
- ✓ A concession model is a financial model developed for a concession-based PPP transaction.
- ✓ Concession models are built around one of two primary revenue structures, or a hybrid of both.
- ✓ - Construction period: drawdown schedule, capitalised interest, construction milestones - Operating period: revenue, operating and maintenance costs, lifecycle capex - Debt schedule: senior debt drawdown, repayment profile, DSCR calculation - Cash waterfall: payment priority sequence from revenue through to equity distributions - Equity IRR: the return to equity investors over the concession period
- ✓ In auditing a concession model, key checks include: the revenue calculation (correct implementation of the availability payment formula or traffic model), the lifecycle capex schedule (timing and quantum of major maintenance expenditure), the debt repayment profile (correct sculpting and DSCR compliance), and the equity return calculation (correct treatment of cash flows and terminal value at concession end).
Definition¶
A concession model is a financial model developed for a concession-based PPP transaction. In a concession, the contracting authority grants a private entity (the concessionaire) the right to develop, operate, and benefit from the revenues of a public infrastructure asset for a defined period (the concession period), typically ranging from 15 to 35 years. At the end of the concession period, the asset is returned to public ownership.
The concession model projects all financial flows over the concession period: construction expenditure, operating and maintenance costs, revenue (from availability payments, user charges, or both), financing costs, and equity returns.
Revenue Structures in Concession Models¶
Concession models are built around one of two primary revenue structures, or a hybrid of both.
Availability payment concessions. The public authority pays the concessionaire based on asset availability at defined performance standards, regardless of usage. Revenue risk is retained by the public sector. The concession model's revenue line is driven by the availability payment formula and deduction mechanism. See Availability Payment Model.
Demand risk concessions. The concessionaire's revenue is derived from user charges (tolls, fares, fees) paid directly by users of the asset. Revenue risk is borne by the private sector. The concession model's revenue line is driven by traffic forecasts, price assumptions, and ramp-up profiles. See Demand Risk Model.
Key Financial Model Components¶
- Construction period: drawdown schedule, capitalised interest, construction milestones
- Operating period: revenue, operating and maintenance costs, lifecycle capex
- Debt schedule: senior debt drawdown, repayment profile, DSCR calculation
- Cash waterfall: payment priority sequence from revenue through to equity distributions
- Equity IRR: the return to equity investors over the concession period
Audit Focus Areas¶
In auditing a concession model, key checks include: the revenue calculation (correct implementation of the availability payment formula or traffic model), the lifecycle capex schedule (timing and quantum of major maintenance expenditure), the debt repayment profile (correct sculpting and DSCR compliance), and the equity return calculation (correct treatment of cash flows and terminal value at concession end).
Continue Reading¶
Prerequisites¶
- Project Finance Model Audit — the parent pillar
Related Glossary¶
- Availability Payment Model — the revenue structure based on asset availability
- Demand Risk Model — the revenue structure based on user charges
- PPP Model — the related glossary term for the broader PPP financial model category
- DSCR — the primary debt service coverage metric
- Cash Waterfall — the payment priority structure
Related Products¶
- Financial Model Audit Engine (FMAE) — deterministic structural auditing referenced throughout this guide
How OXXON tests thisRun a free structural check with FMAE
Related Articles
Availability Payment Model
An availability payment model is a project finance structure in which the public authority (the contracting authority) pays the private concessionaire a periodic payment contingent on the asset being available for use according to defined performance and availability standards, regardless of actual usage levels. The payment is not linked to traffic volumes, passenger numbers, or other demand metrics. Revenue risk remains with the public sector; the private sector takes construction risk, availability risk, and performance risk. Availability payment models are common in hospitals, schools, prisons, roads, and rail infrastructure where the contracting authority wishes to retain demand risk while transferring construction and maintenance risk.
Demand Risk Model
A demand risk model is a financial model for a project finance concession in which the concessionaire's revenue is derived from user charges (tolls, fares, or fees) paid by users of the asset. The concessionaire's revenue therefore depends directly on actual demand for the asset's services, rather than on contractual availability payments from the public authority. Demand risk models are used for toll roads, airports, ports, urban transit systems, and other infrastructure assets where users pay directly for the service. The key risk in a demand risk model is that actual usage may be materially lower than projected, reducing revenue below debt service requirements.
Cash Waterfall
A cash waterfall is the contractually defined priority sequence in which cash generated by a project is allocated to successive payment obligations. In a project finance structure, the cash waterfall determines the order in which operating costs, debt service (interest and principal), reserve contributions, and equity distributions are paid from the project's revenue. Senior obligations are paid first; junior obligations and distributions are paid only after senior obligations are fully satisfied. The DSCR and other coverage covenants are calculated at specific points within the waterfall to determine whether cash can flow to the next level.