Project Havermore — Availability-Payment Concession
A 2-hour Infrastructure / Concession Financing case study with a complete model answer
The Situation
2-mile light rail link with 11 stations, under a 30-year availability-payment concession. The Authority will design nothing, build nothing and operate nothing.
Havermore Regional Connector Partners
- Sector
- Public-sector infrastructure — a light rail concession procured under an availability-payment structure, where the concessionaire is paid for making the asset available rather than for carrying passengers
- Size
- Geography
- United States. A regional transit authority is the grantor and the payment obligation is its own
- Ownership
- Situation
The Prompt
You are financial advisor to the sponsor consortium bidding for the Havermore Regional Connector.
Supporting Materials
What you are handed at the start of the case, in the format a real process would use.
What You Have to Produce
The deliverables, in the order the committee will read them. The exercise runs 120 minutes.
PART 1
The unitary charge, and which half of it moves
PART 2
Size the debt on coverage, and sculpt it
PART 3
The counterfactual: what a level repayment schedule would support
PART 4
Construction funding, and the interest you capitalize into it
PART 5
Three reserve accounts, and what is actually released
PART 6
Both rates of return, and what each of them answers
PART 7
The two hurdles, in closed form
PART 8
The Authority's side, and what the sponsor is being asked to bear
How to Approach It
The order a strong candidate works in, and why. This is the shape of the answer — the finished answer deck, Excel model and memo are in the solution set below.
- 01
Say which risk regime you are in before you touch anything
- 02
Work out which cash flows are indexed and which are not
- 03
Build the cash flow available for debt service first, and define it
- 04
Rearrange the coverage identity instead of solving it
- 05
Prove the sculpt rather than asserting it
- 06
Run the level schedule before you decide anything about the bid
- 07
Get capitalized interest out of its own circularity
- 08
Treat every reserve as cash the sponsor cannot have
- 09
Solve both rates against a check row, and label what each answers
- 10
Compute the floor as a derivative, then answer the real question
Key Concepts
The ideas this case is built on. Know these cold and the case becomes a question of execution rather than knowledge.
An availability-payment concession
A contract under which a private party designs, builds, finances, operates and maintains a public asset for a fixed term, and is paid a unitary charge for making it available rather than for how much it is used. Volume risk stays with the grantor for the whole term. What the concessionaire bears is delivery, cost, performance and the grantor's credit — and the asset reverts to the grantor at the end.
The unitary charge, and why it is split
The single payment is usually built from a capital element that services the financing of construction and a service element that funds operations and maintenance. Splitting them lets the grantor index the part that tracks costs while leaving the part that services fixed-rate debt in nominal terms. The split is also the concessionaire's inflation position, and it is rarely neutral.
A regulated asset base is not this
A regulated asset base is a rolling investment on which a regulator allows a return, re-based at every price control, with volumes and costs passed through under a defined mechanism and no end date. An availability concession is a fixed payment for a fixed term under a contract that never re-opens. There is no re-basing, no allowed return, no regulatory asset and no terminal value, and reading one as the other gets the risk allocation and the horizon wrong at once.
Cash flow available for debt service
The measure every coverage ratio in project finance divides by. It is contracted revenue less operating cost and — under the usual convention — less major maintenance actually incurred, struck before any movement on a reserve account and before debt service itself. The definition varies between deals, which is why it is stated rather than assumed: two correct ratios computed off two definitions are not comparable.
Debt sculpting to a target coverage ratio
Rather than repaying on a level or straight-line schedule, each period's debt service is set at that period's cash flow divided by a target coverage ratio, so coverage is constant by construction. The facility the stream supports is its present value at the debt rate. Because a level schedule has to be sized on the worst year, sculpting reaches capacity a level profile cannot.
Loan life and project life coverage
The annual debt service coverage ratio tests one year. The loan life coverage ratio tests the whole remaining facility — the present value of cash flow between here and final maturity, usually plus the debt service reserve, over the balance outstanding. The project life ratio asks the same question to the end of the concession, so the difference between the two is the tail the lenders have left themselves.
The tail
The gap between final maturity of the senior debt and expiry of the concession. It exists so that a project which underperforms has periods left in which to catch up before the contract that generates its cash flow ends. On a reverting asset it is the only cushion there is, because after expiry there is no residual to sell.
The distribution lock-up
A test, usually on backward- and forward-looking coverage, below which cash stops being released to the sponsors and is trapped in the structure. It is not a default and nothing accelerates. It is the mechanism that makes equity the first loss in an operating downturn while the lenders keep being paid on schedule, and it sits above the level at which an event of default is triggered.
Reserve accounts
Cash held in the concessionaire's name and charged to the lenders. A debt service reserve holds a stated number of months of forward-looking service; a maintenance reserve pre-funds scheduled renewals so a lumpy program does not produce a lumpy distribution; a handback reserve accumulates the cost of putting the asset into the condition the contract requires at expiry. All three are real money the sponsor cannot distribute, and a return computed before them overstates what the sponsor receives.
Interest during construction
Interest accruing on drawings before the asset earns anything. It is capitalized into the facility rather than paid in cash, and it is itself funded by further drawings — so the balance at completion exceeds the cash the facility ever paid out. It also creates a circularity, because the drawings have to fund the interest and the interest depends on the drawings, which is why the drawdown schedule is a modeling decision and not a presentational one.
Project IRR versus equity IRR
The project rate is struck on the unlevered cash flow: what the asset earns on the whole of the money put into it, before any financing. The equity rate is struck on what the sponsors contribute and what is distributed to them after debt service and after the reserves. Where the debt is cheaper than the asset and the structure is highly geared, the two are hundreds of basis points apart, and the gap is the financing rather than the railway.
The public sector comparator
The risk-adjusted whole-life cost to the grantor of delivering the same asset conventionally, discounted at the grantor's own borrowing cost and adjusted for the optimism bias historically observed in public capital programs, for the cost of the risks the grantor would retain, and for competitive neutrality. It is the benchmark a concession has to beat, and it is where the argument about value for money actually happens — not in the discount rate.
Handback
The condition in which the asset must be returned at expiry, usually expressed as a residual design life on every major system, verified by joint survey, and backed by a funded reserve and a retention against the final payments. It is a cost, never a proceed, and it lands in the years when the debt is gone and the distributions would otherwise be at their largest.
Optimism bias
The systematic tendency of public capital programs to cost more and take longer than appraised, measured across historical programs and applied as an uplift to the comparator's capital cost. It is the single largest adjustment in most value-for-money assessments, and a comparator built without it — and without a retained risk column — produces the opposite answer every time.
What Makes It Hard
The specific traps in this case — the places candidates lose the assessment without noticing.
Check Your Answer
Type the figures you produced and find out how many are right before you open the worked answer. You get a verdict and, where you are off, a pointer to the part of the build to re-check — never the number itself. Everything you type stays on this device.
How to type a figure. Digits, with an optional unit: 1,234.5, $1,234.5, 2.6x, 21.4%. For a negative use (20.0) or -20.0. Enter as many decimals as you carried — precision is never penalised.
What the Case Asked For
The arithmetic is only half of it. Tick off what you actually produced — this half is yours to score, because nothing can grade a written recommendation from a checkbox.
The Model Answer
The worked answer in full: answer deck, Excel model and memo, built the way a banker would actually build them. It is a reference, not a submission — a strong answer under the clock is far shorter.
What the Solution Covers
- —Regulated asset base and availability payments
- —Project IRR versus equity IRR
- —Debt sculpting to a target DSCR
- —Concession term and handback conditions
- —Construction risk allocation
- —Public sector comparator
Answer Deck
Full model answer, banker-formatted
Memo
The written recommendation and how it was reached
Upgrade to Diamond
Sign up and upgrade to Diamond to unlock the answer deck, the Excel model, the memo and the audio walkthrough.
Get StartedThe Excel Model
The model is linked and tied out end to end — every schedule, every formula and every check, in the file itself.
Downloads are available to Diamond members
Excel Model and PowerPoint Deck and Memo (PDF) and Answer Deck (PDF) — yours to open, edit and rebuild
Walkthrough
A conversational walkthrough of how to approach the case under time pressure — where to start, what to cut, and how the recommendation gets defended.
Audio Walkthrough
How to approach Project Havermore — Availability-Payment Concession
60-second preview — upgrade to Diamond for the full walkthrough
Frequently Asked Questions
What is an availability-payment concession, in one paragraph?
A public authority contracts with a private party to design, build, finance, operate and maintain an asset for a fixed term — typically twenty-five to thirty-five years — and pays it a single unitary charge for keeping that asset available to a defined standard. The payment does not depend on how many people use the asset; it depends on whether the asset is there and working. Deductions are made against defined unavailability and performance events under a mechanism written into the contract. At the end of the term the asset is handed back in a specified condition and the concession simply ends.
Why is there no terminal value?
Because there is nothing to own at the end. The concession is a contract with a stated expiry date, and on that date the asset reverts to the grantor for no consideration. There is no sale, no refinancing of a residual, no renewal option and no continuing business. So the value of the equity is the discounted distributions inside the term and nothing after it — which also means the model has a defined, finite horizon and never needs a perpetuity growth rate or an exit multiple. Putting a terminal value on a reverting asset is the defining error of this archetype, and it usually arrives by cloning a buyout model rather than by anybody deciding to do it.
What does it mean to sculpt debt to a target DSCR?
It means setting each period's debt service so that the coverage ratio is the same in every period, instead of fixing the repayment profile and letting coverage move. Take the projected cash flow available for debt service in each year, divide by the target ratio, and that is the debt service the lenders will accept in that year. The facility that stream of payments will exactly retire is its present value at the debt rate, so the sizing is a closed form rather than a goal seek. The amortization then falls out: interest on the beginning balance, and principal as the residual.
Why does sculpting support more debt than a level schedule?
Because a level schedule has to be sized on the worst year. If debt service is the same amount every year, the year with the lowest cash flow sets the maximum that amount can be — and every year with higher cash flow is then covered far above the requirement, which is capacity the structure never uses. A sculpted schedule takes the required coverage in every year, including the good ones. The size of the advantage depends entirely on how uneven the cash flow is, which is why a lumpy renewal program is not merely an operating fact in this archetype; it is a financing one.
What is the difference between a DSCR, an LLCR and a PLCR?
The debt service coverage ratio is a single-period test: cash flow available for debt service in that period, over debt service in that period. The loan life coverage ratio is a whole-of-facility test: the present value of the cash flow between now and final maturity, discounted at the debt rate and usually with the debt service reserve added, over the balance outstanding. The project life coverage ratio asks the same question but runs the cash flow to the end of the concession rather than to final maturity — so the gap between the two is exactly the tail. Lenders set covenants on all three, and on a well-sculpted structure the annual ratio is the binding one.
Why is the inflation exposure not neutral?
Because the two sides are indexed differently by design. The capital element of the charge services fixed-rate debt and a fixed equity return, so grantors normally leave it in nominal terms and index only the service element. The concessionaire's cost base, though, is essentially all indexed — the operations contract, insurance, staff and the renewal program. Whenever the indexed cost exceeds the indexed revenue, the concessionaire is short inflation: higher inflation reduces the equity return and lower inflation improves it. That is the opposite of the reflex most people bring from infrastructure marketing material, and pricing it is part of the bid.
What does the lock-up actually do, and is it a default?
It stops distributions and traps the cash inside the structure. It is not an event of default, nothing accelerates, and the lenders keep being paid on schedule; typically the trapped cash is released once coverage recovers, and in many structures it is applied to principal first. The point of the mechanism is that equity takes the timing pain of an operating downturn well before the lenders take any pain at all. That is also why a downside case has to be run through the whole waterfall rather than stopped at the coverage ratio — the ratio tells you whether cash is trapped, and only the waterfall tells you what that costs.
How should construction risk be thought about here?
Start from what the design and build contract actually transfers, which is usually most of it: a fixed price, a certain date, liquidated damages for delay that should at least cover a day of debt service plus fixed costs, a performance bond and retention behind that. Then write down what it does not transfer, because that list is the sponsor's own position — typically a band of ground conditions between a contractor deductible and a grantor threshold, the grantor's own relief events, and contractor insolvency above the bond. Size that residual at an expected value and at a high percentile, and set both against the equity rather than against the capital cost. On a highly geared concession the equity is thin, and a risk that is small against the project can be very large against the sponsors.
Why is value for money not just an argument about the discount rate?
Because both sides of the comparison are discounted at the same rate — the grantor's own borrowing cost — so the discount rate cannot create the difference. On the payment stream alone a concession is very often the more expensive route, because private capital costs more than public borrowing. What pays for it is the risk the grantor stops carrying and the whole-life cost it stops absorbing: the optimism bias historically observed on public capital programs, the cost of the delivery and performance risks retained under conventional procurement, and the maintenance a public budget defers and a concession contract cannot. Those are the lines to argue about, and a comparator built without them answers the question backwards.
Why does the case say the financing structure and the bid price are one decision?
Because the chain runs in one direction and closes on itself. The repayment profile sets the debt capacity; the debt capacity sets how much equity has to be contributed; the equity contribution and the distributions set the return; and the charge is what has to move to make that return equal the sponsors' hurdle. Change the profile and every link moves. That is why a bid team cannot send the model to the banks after the price is set, and why a commitment letter that reserves the right to re-profile at credit approval has taken the bid away rather than qualified it.
How should you allocate 120 minutes across three deliverables?
With a plan, because the clock is what usually decides the grade. A working budget: about 18 minutes reading the pack and settling the four judgment cells before you type anything; about seventy minutes in the workbook, front-loaded onto the cash flow and the debt sizing because everything else depends on them; and the balance — a little over half an hour — on the presentation and the memorandum. Inside the workbook, finish every tab roughly before you perfect any tab. The bid committee cannot act on one beautiful amortization schedule, and the two written deliverables are where the recommendation actually lives.
What separates a strong answer from a merely correct one?
Four things, and none of them is arithmetic. Naming the risk regime out loud and choosing the coverage ratio from it, rather than importing one. Showing that the repayment profile is a pricing decision by running the counterfactual, rather than asserting that sculpting is better. Striking the equity return on what the waterfall actually releases, with the reserve accounts visible rather than netted. And saying, in the memorandum, what the sponsor is being asked to bear — the residual construction band, the indexation position, the reserve obligations that bite in the years the lenders have already gone — rather than reporting a return and stopping.
About This Infrastructure / Concession Financing Case Study
Infrastructure / Concession Financing case study for investment banking interviews. 120-minute format covering regulated asset base and availability payments, project irr versus equity irr, debt sculpting to a target dscr. Includes the full prompt, a model answer deck, a tied-out Excel model, a written memo and an audio walkthrough.
This case study sits in Investment Banking, under Real Assets & Infrastructure. Every case ships with the full prompt, the supporting materials, a complete model answer and an audio walkthrough of the judgment behind the recommendation.
120-Minute Format
The time limit a real assessment would give you
Answer Deck
Included in the model answer
Excel Model
Included in the model answer
Memo
Included in the model answer
Audio Walkthrough
How to approach the case under time pressure
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