Forecasting traffic demand is crucial in all TEN-T PPPs since traffic influences both project costs - through capital and maintenance expenditures - and project revenues, especially if direct user charges, such as tolls, are the main source of cash flow for the PPP company. An accurate estimation of the future level and composition of traffic volumes is, however, a difficult task:

□ Traffic forecasts tend to overestimate actual traffic levels ("optimism bias"); <1>

□ Inflated traffic forecasts may be linked to traffic modelling flaws but also to strategic decisions of PPP contractors when they bid. Traffic forecasts commissioned by the lending banks, for example, are less prone to traffic optimism bias.

Given such uncertainty, the allocation of traffic revenue risk is a key decision in the design of the TEN-T PPP contract and it is linked to the choice of payment mechanism (see Box 4 Payment Mechanism ). There are several options for allocating traffic revenue risk <2> Consider motorway PPPs:

□ At one end is the conventional toll road where revenues derive from toll payments and, thus, the PPP company (and its lenders) are exposed to full traffic revenue risk.

□ At the other end lies the "availability"-based option where the PPP company receives fixed periodic payments from the public budget as long as the road is available for use; in this case, the PPP company bears little or no traffic revenue risk.

□ In between there are several options designed to share the traffic revenue risk, such as:

a) Revenue sharing bands: lower and upper thresholds to share traffic revenue risk between the PPP company and the government if traffic is outside the thresholds;

b) Flexible-term contracts: the PPP contract will end when the concessionaire has received a certain amount of revenues from users (e.g. the "Least Present Value of Revenue" approach, implemented mostly in Chile); <3>

c) Financial re-balancing: provisions to change the economic balance of the contract if traffic is much lower or much higher than planned.

Recent practice in transport projects has seen the use of a mixed payment mechanism consisting of availability payment - intended to cover operating expenses and debt service - and a direct user charge (e.g. toll) that provides the equity return <4>