**5 Uncertainty, opportunistic behaviour and government guarantees22**

Uncertainty is an important issue in any concession contract, especially if it lasts for decades. In the case of roads and tunnels, the biggest source of uncertainty is future traffic levels. In turn, these traffic variations directly impact the revenue stream of the concessionaire.

As noted in EFG (1996, 1997a), traffic levels are notoriously difficult to predict. They cite the case of some public Chilean toll roads where yearly traffic growth rates varied from as high as 21.5% to as low as 2.9% between the 1987 and 1995. Furthermore, these variations occurred in a period of relative political and economic stability, and where the highways in question had been tolled for decades. With this volatility in the best of times, predicting traffic flows far into the future, or in more unstable settings, is clearly an imprecise endeavour.

There are many experiences where initial traffic projections turned out to be optimistic. In Mexico for example, _ex-post_ traffic levels were on average only 68% of the level initially estimated (and guaranteed) by the government.23 Only in 5 of 32 concessions were traffic levels above the initial projections, and in 16 they were below 50% of these estimates. In the case of the Ml project in Hungary, traffic levels were below 50% of initial projections, and in the case of the Dulles Greenway project in Virginia, USA, initial traffic levels were about a third of expected levels (Fishbein and Babbar (1996)). _Ex-post_ traffic levels above original estimates are also common. Besides the usual difficulties encountered in estimating traffic growth trends, when tolls are first introduced there is the added difficulty of gauging the reaction to the toll among users or, in more technical jargon, the price elasticity of demand. Traffic engineers have developed very sophisticated tools for estimating these elasticities, even when users have never confronted real tolls for the use of the infrastructure. However, these estimates may not be very reliable, not just because of data problems or the inference difficulties encountered with such estimates. There may be some cases where a toll road presents a strategic opportunity for some organised groups.<sup>24</sup> In Chile, of the projects currently in full service, the one that has faced the most difficulties is the El Melon Tunnel, partly because in this particular case there is a very good substitute. The tunnel has to compete with the old route that goes over the mountain, and which increases travel time by about thirty to ninety minutes depending on the vehicle's size and weight. Due to the tendering 22 In the case of Chile, EFG were the first to recognise the importance of uncertainty-especially traffic risk-for private toll roads. Some of their ideas are presented in this and the next sections. However, readers are encouraged to consult their articles (see also Tirole (1997)) for a fuller account of some of these topics.

23 This summary and data from the Mexican experience are taken from G6mez-Ibafiez (1999). See also G6mezIbafiez y Meyer (1993) for an analysis of other world experiences, including the early Mexican experience.

24 Whereas a bus or trucking lobby may have reacted passively to an increase in fuel prices in the past-perhaps because it was perceived that they had no power to influence that decision-they may have more negotiating power to pressure a concessionaire to lower the toll of a newly constructed road. Their power resides in their ability to boycott the road if there are good free alternative routes.

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