Demand and traffic determine the financial viability and bankability of projects where direct user fees are the main source of revenue for the project company. Thus demand risks, which derive from the discrepancies between the actual and forecasted demand, affect the ability to honour the debt service, pay dividends and ultimately the project’s financial viability.
The most effective mechanisms to mitigate demand risks are to ensure availability payment, revenue guarantee.
Typical demand risk mitigation instruments includes:
- Minimum Revenue Guarantee : compensate the project company if revenue or traffic falls below a defined minimum threshold.
- Availability Payments : transfers the demand risk to the off-taker (government or state-owned enterprise).
- Economic Balance Contract