Effects of Tariff Design in Risk Management of Privately Financed Infrastructure Projects

Abstract

The design of tariff is a key issue in the development of privately financed infrastructure projects. It involves the determination of tariff magnitude, the choice of tariff structure, and the design of adjustment mechanisms. Tariff structures can be an all-in tariff or a compound tariff. Tariff adjustment mechanisms can be used to address different risk factors such as inflation, exchange rate, demand, and fuel prices. An appropriate combination of tariff structure and adjustment mechanism can be effective to manage key risks of privately financed infrastructure projects. Simulation results show that a well-designed tariff can create a “win-win” solution for both project promoter and the host government.