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CFA Level I · CFA Level I Exam · Real Estate and Infrastructure

A concession agreement gives a private operator the right to run a toll road for 30 years before transferring it to the government. The investor's cash flows are most exposed to which risk that is specific to this type of arrangement?

Traffic volume risk is the most significant exposure. A toll-road concessionaire earns revenue from usage, so lower traffic directly reduces cash flows. Regulatory risk is not eliminated by a contract, and because the asset reverts to the government at the end, residual value risk is minor.

  1. ATraffic volume (demand) risk borne by the operatorCorrect
  2. BZero exposure to regulatory change because of the contract
  3. CResidual asset value risk after the concession ends

Explanation

Under a toll-road concession the operator typically earns revenue from usage, so traffic volumes drive cash flows. Regulation and tariff policy still matter, so regulatory risk is not eliminated. Because the asset reverts to the government at the end, residual value risk is limited rather than the key exposure.

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