A Tariff project involves greater exposure of the project company to market risk. When collecting tariffs from consumers, the project company will need to manage risks associated with:
• Demand for output and services, including changes in demographics, technology and usage patterns
• Tariff levels, in particular where a regulator sets or adjusts or approves adjustment of tariffs
• Billing, including identifying consumers, keeping track of consumption/metering, and delivering billing statements
• Collection of debts due, including the physical process of collecting bills, the credit risk of consumers, and the design and implementation of penalty mechanisms for those who fail or refuse to pay.
The demand profile is often very difficult to assess. For example, demand for transportation infrastructure is influenced by competing modes of transportation, demographic shifts, economic conditions, the cost of the facilities to end-users, convenience, individual preference, speed and a number of other, often interrelated factors that make accurate demand forecasting difficult at best. The inherent vulnerability of traffic forecasts to optimism bias was demonstrated in a Standard & Poors study from 2002 of traffic forecasts in user-fee based toll road schemes, in particular out of 32 different projects, actual traffic was on average only 70% of that forecast, with a large majority of projects not reaching even 90% or the forecast traffic. Lenders achieved the greatest accuracy in their forecasts, but still only achieved an 82% performance ratio, while sponsors and investors were down at 66%.