Looking at the second financial failure of the Pocahontas Parkway in a half-dozen years, Kyle Glazier reports in Bond Buyer on the continuing problem with inaccurate traffic and revenue (T&R) feasibility studies. The article notes that the Pochahontas failures--based on a Wilbur Smith & Associates T&R study (now CDM Smith)--are just the latest in a long line of bad forecasts leading to bad results. The article provides an excellent overview of the wide variety of causes for these forecasting and performance failures. Here are some excerpts:
As industry participants know all too well,
revenue forecasting, an inexact science at best, can either make or
break the toll road and public-private partnership projects that are
sprouting up all over the country.
One need look no further than
the 8.8- mile Pocahontas Parkway near Richmond, Va., to see how an
inaccurate feasibility study wreaked financial havoc upon two private
companies and raised questions about the viability of the toll road
project. . .
. . . The story of a traffic and revenue, or T&R, study seemingly
viewed through rose-colored glasses has become a familiar one to
industry leaders, financial advisors and public advocates keeping an eye
on infrastructure finance trends.
Neil Gray, director of
government affairs at the International Bridge, Tunnel and Turnpike
Association, said the issue is attracting more and more attention.
"A recurring theme over the last couple of years has been why are T&R studies always so wrong?" he said. . .
. . . The firms conducting the studies, toll industry members and credit
analysts are all aware of how frequently feasibility studies miss the
mark, but most of those projections still show potential issuers what
they were hoping to see.
"The problem is exacerbated by the
'confidential' or 'proprietary' nature of the forecasts and methods that
are developed for toll roads, and also by 'optimism bias' on the part
of the sponsor, local elected officials or other advocates of the
proposed toll road," the NCHR report states.
Gray agreed, saying, "Historically, you don't get a lot of negative answers." . . .
. . . "It is important for issuers and investors to understand among other
things that, at times, there are no published professional standards
applied by the experts and that the experts use assumptions given to
them by others without reaching their own professional judgments whether
the assumptions are reasonable." Doty said.
Mwalwanda said traffic and revenue estimates should be viewed as a range of possible outcomes and not a concrete forecast.
Meanwhile,
critics of toll roads fear that, for some forecasters, the desire to
produce favorable revenue estimates will outweigh the necessity to
produce accurate estimates.
Click here for the full Bond Buyer article.
Nice post, indeed feasibility studies are very vital when setting a business, because afford you the opportunity of knowing it going to be profitable or not.
ReplyDeletekeep it up