The Cost of Capital for Road Concession Projects in Colombia: A Case Study Based on the Fourth Generation Concession Program (4G)

Abstract

This paper develops a methodology to calculate the appropriate discount rate for road concession projects under the public private partnership (PPP) model in Colombia. This methodology is applied to the government’s fourth generation concession program (4G) as a case study. The paper includes an analysis and description of the infrastructure sector in Colombia and explains an ambitious program for road development called 4G, which involves investments for more than US$20 billion in the next decade. Then, the discount rate is estimated using different scenarios and an expected value of the variable is constructed from a range with a confidence level of 95%. A theoretical and empirical analysis is performed in order to validate the appropriate discount rate according to industry standards. This value will be supported by different analysis and various experiments conducted throughout the paper. Finally, it is possible to compare this discount rate with the yield the government is currently offering to the investors, and the result will suggest that the government is underestimating the risks associated to the projects.