A new road does not open at its mature traffic. Pricing the ramp-up is a small adjustment to value and a large one to the first years of debt cover, unless the ramp never closes.
Price the ramp-up as a revenue factor on the first years of the forecast and rerun value and debt. On an illustrative 25-year toll road whose traffic opens at 70 per cent of the mature forecast and closes the gap by year 5, the value at 8 per cent falls from $596.7m to $565.1m, a 5.3 per cent haircut. The value is not where the damage shows: debt sized on mature traffic covers only 0.81x in year 1. And if traffic stalls at 90 per cent, the haircut is 16.4 per cent.
Worked in full in The Infrastructure Investment Analyst by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
Traffic and revenue consultants forecast a mature traffic level and then a ramp-up towards it: drivers take time to change routes, freight operators renegotiate their logistics, and some traffic only arrives once connecting roads are finished. Greenfield toll roads have a long record of opening below forecast. The question for an analyst buying or lending into a new road is how much the ramp-up costs, and whether it is the ramp-up or the level that matters.
| Input | Value |
|---|---|
| Toll revenue in year 1 at mature (forecast) traffic | $60.0m |
| Operating and routine maintenance costs, year 1 | $15.0m |
| Growth of revenue and costs, a year | 2.5% |
| Remaining concession | 25 years |
| Discount rate for value | 8% |
| Senior debt: rate, tenor, minimum DSCR | 6%, 18 years, 1.35x |
| Ramp-up, share of forecast traffic, years 1 to 4 | 70%, 82%, 92%, 97% |
Revenuet = mature revenuet × ramp factort
CFADSt = revenuet − operating costst, with costs unchanged by the ramp
In Excel, with the factors in a row: =Mature_Rev*Ramp_Factor-Opex, and =NPV(8%,CFADS_row) for value.
| Year | Ramp | Revenue, mature | Revenue, ramp-up | CFADS, mature | CFADS, ramp-up | CFADS lost |
|---|---|---|---|---|---|---|
| 1 | 70% | 60.00 | 42.00 | 45.00 | 27.00 | 18.00 |
| 2 | 82% | 61.50 | 50.43 | 46.12 | 35.05 | 11.07 |
| 3 | 92% | 63.04 | 57.99 | 47.28 | 42.24 | 5.04 |
| 4 | 97% | 64.61 | 62.68 | 48.46 | 46.52 | 1.94 |
| 1 to 4 | 36.05 |
The point of applying the factor to revenue is operating leverage. Costs are 25 per cent of mature revenue and do not fall with traffic, so a 30 per cent revenue shortfall in year 1 becomes a 40.0 per cent shortfall in CFADS. Applying a 70 per cent factor to CFADS directly, a shortcut seen in screening models, understates the year-1 loss by a quarter.
The ramp-up removes $36.05m of cash over four years, about 0.60 of a year of mature revenue. Discounted at 8 per cent, that is $31.59m, which is the whole difference between the two valuations:
For a 25-year asset, four weak years near the start are a modest price adjustment. A buyer who ignores them overpays by about one twentieth; a buyer who over-reacts to them, by treating a year-1 traffic count as the new normal, underbids by much more.
Debt is where the ramp-up bites, because it is tested year by year. Two ways of sizing give two very different answers.
Sculpted to the ramp-up case. Debt service in each year is CFADS divided by 1.35, so the early years carry less. Debt capacity, the present value at 6 per cent of 18 years of sculpted service, falls from $432.0m on mature traffic to $407.8m with the ramp-up: $24.2m, or 5.6 per cent. Lenders who see the ramp-up in the base case simply lend a little less. The mechanics are worked in how much more debt sculpting raises than an annuity.
Annuity sized on mature traffic. Level debt service of $33.33m a year (year-1 mature CFADS of $45.00m divided by 1.35) supports $360.9m at an annuity factor of 10.8276. Now let the ramp-up happen:
| Year | DSCR, mature traffic | DSCR, ramp-up | Shortfall to debt service, $m |
|---|---|---|---|
| 1 | 1.35x | 0.81x | 6.33 |
| 2 | 1.38x | 1.05x | 0.00 |
| 3 | 1.42x | 1.27x | 0.00 |
| 4 | 1.45x | 1.40x | 0.00 |
| 5 | 1.49x | 1.49x | 0.00 |
Year 1 does not cover its debt service: the $6.33m gap must come from the debt service reserve account or from sponsors. Year 2 covers it but sits below a typical 1.20x lock-up, so nothing reaches equity for two years. A six-month DSRA of about $16.7m absorbs the shortfall, which is why reserves exist; how to size one is in how to size a DSRA.
| Traffic profile | Value, $m | Value haircut | Sculpted debt, $m | Debt haircut | Year-1 DSCR on mature annuity |
|---|---|---|---|---|---|
| No ramp-up | 596.7 | 0.0% | 432.0 | 0.0% | 1.35x |
| Shallow: 85%, 95% | 585.7 | 1.8% | 423.7 | 1.9% | 1.08x |
| Base: 70%, 82%, 92%, 97% | 565.1 | 5.3% | 407.8 | 5.6% | 0.81x |
| Deep: 55%, 70%, 82%, 90%, 95% | 539.9 | 9.5% | 388.3 | 10.1% | 0.54x |
| Flat 90% for the whole concession | 517.1 | 13.3% | 374.4 | 13.3% | 1.17x |
| Ramp stalls: 70%, 80%, 86%, then 90% for ever | 498.7 | 16.4% | 360.4 | 16.6% | 0.81x |
The table separates two risks that are often discussed as one. The depth of the ramp-up decides the year-1 DSCR and the liquidity the project needs. The level traffic finally reaches decides the value. A road that stays 10 per cent below forecast for good loses more than two and a half times as much value as one that opens 30 per cent short and catches up, because a 10 per cent revenue miss is a 13.3 per cent CFADS miss repeated for 25 years.
The common error is to read a ramp-up as a timing issue only and to stress it by delaying the forecast a year or two, leaving the mature level untouched. That treats the profile as certain to close. The evidence analysts worry about on greenfield roads is the forecast level, not the speed: a ramp-up stress should always be run alongside a case where the ramp closes below 100 per cent. The second error, mentioned above, is to apply the ramp factor to CFADS instead of revenue, which hides the operating leverage.
In diligence: ask the traffic consultant for the ramp-up separately from the mature forecast, and for the evidence behind each. A ramp-up justified by comparable roads is a timing assumption; a mature level justified only by a model of time savings is the number that can cost a sixth of the value.
A ramp-up that closes costs about 5 per cent of value and should be priced, not feared; its real cost is in the first two years of debt cover, which sculpting and a DSRA are designed to absorb. The risk worth paying for in diligence is a ramp that never closes. To rebuild the toll road case with your own traffic profile, start from the free workbook for this case, and see how toll road revenue is calculated from traffic for the revenue line itself.
It is the period after opening during which traffic builds towards the forecast level as drivers change routes and habits. In the illustrative case traffic starts at 70 per cent of forecast and reaches 100 per cent in year 5. Because operating costs are largely fixed, a 30 per cent revenue shortfall in year 1 becomes a 40.0 per cent shortfall in cash flow available for debt service.
They size debt on a lenders' case that includes the ramp-up and often a further traffic haircut, sculpt repayments so the early years carry less debt service, and require a debt service reserve. In the illustrative case an annuity sized on mature traffic leaves a $6.33m shortfall in year 1, which a six-month reserve on $33.33m of annual debt service would cover.
Much worse. A ramp-up that closes by year 5 costs 5.3 per cent of value in the illustrative case. Traffic that stays 10 per cent below forecast for the whole concession costs 13.3 per cent, and a ramp that stalls at 90 per cent costs 16.4 per cent, because the shortfall is repeated for 25 years instead of four.
This article is one calculation from The Infrastructure Investment Analyst. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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