The University of the West Indies, Mona

The following is a commentary on regulation ahead of the Organisation of Caribbean Utility Regulators 14th annual conference set for Montego Bay, St James, between October 26 and 28 at the Secrets Resorts and Spa. 

Many countries, including Jamaica, have utilised the private sector in the construction and operation of vital infrastructure. In many instances, the concessionary agreement utilises a BOOT agreement. This agreement allows a private entity to build, own and operate some infrastructure and then to transfer those infrastructure to the Government after a prescribed period of time.

Governments usually find this model attractive because they are unable to finance all infrastructure development on their own. The Government of Jamaica was not in a financial position to build Highway 2000 on its own. It sought private-sector participation, whereby private money was used in the execution of the project. Many countries follow this model in building out their highway systems. The concessionaire owns the highway, operates it, and collects toll as a way of recouping its investment. After a certain period of time, the ownership and operation of the highway are transferred to the governments. The people of these countries get access to modern roads before their governments are able to provide them. In spite of the highways being built, owned and operated by private-sector companies, they are regulated by regulatory bodies appointed by governments.

Different countries have different rules concerning the operation of a toll road. In some countries, an alternative to the toll road must exist. In others, this requirement is necessary if, and only if, a road which was previously a free access road is incorporated into a toll system. If a new facility is opened, for example, if a tunnel is dug through a mountain opening up a new transportation corridor where none existed before, there is no requirement to provide an alternative to this toll facility.

The regulators, in setting the initial toll, take account of the capital cost of constructing the road, the cost of maintaining it, projected traffic flows and the length of time for which the concession will be in force. Some targeted rate of return is often a part of the calculation. Other factors taken into account include the distance travelled; the type of vehicle, for example, passenger cars, commercial trucks; buses, etc (and, in some cases, the number of axles). Varying the toll rate according to the type (and weight) of vehicle is an attempt to have users of the toll road pay proportionally to the wear and tear caused by their usage.

Periodically, the toll regulator will adjust the amount of the toll. The frequency and the magnitude of these adjustments are primarily driven by changes in the value of the currency, normally measured by movements in the inflation rates. Companies which operate toll roads in foreign countries also use adjustments in the exchange rates as a basis for adjusting toll rates. In Jamaica, much of the money used in the construction and maintenance of highways originate outside the country in foreign currency. The financing arrangements require repayments in foreign currency. A change in the exchange rate between the Jamaican dollar and the foreign currency changes the ability of the existing toll to meet the financial obligations of the concessionaire.

TIME-BOUND CONCESSION

Many persons have argued that the operator of the toll roads should lower the toll, thereby encouraging more users of the toll road. More users of the road certainly increases the maintenance cost of the road. More users, however, do not necessarily mean more revenue. The maximum amount of use would occur at a zero toll, but that is also the toll level which would result in the minimum amount of revenue and the maximum loss. Hoteliers could increase their occupancy by lowering their rates; this would not necessarily increase their profits. Private-sector entities that invest in infrastructure projects are driven by the profit motive like any other private company investing in any business.

Whenever there is to be an increase in toll rates in Jamaica, the chorus goes up to postpone the increase, followed by the reasoning that the company can recoup its investment over a longer period of time. These voices seem to forget that the concession is time bound, which means that the investor must recoup his investment within that time. Also, there is a financing obligation. Loans used to finance the project must be serviced. The regulator failing to arrive at the appropriate toll, whether by incompetence or as a result of political pressure, jeopardises the viability of the project and the ability of the country to access modern facilities which are beyond the capability of the Government to provide.

Published:Thursday | September 22, 2016 | 12:00 AM

Dr. Peter John Gordon