Revenue from Users

Revenue from users is the financial engine of most concession contracts. When a concessionaire earns its income from the people who actually use the road, car park, leisure centre, or ferry service, rather than from a fixed payment by the contracting authority, it takes on commercial exposure to user behaviour. That exposure is the essence of the demand risk that makes a concession legally distinct from a standard public contract.

What is Revenue from Users?

Under Directive 2014/23/EU, the consideration received by the concessionaire may consist either solely of the right to exploit the works or services, or of that right together with a payment from the contracting authority. In both cases, operating risk transfer requires that a substantial part of the financial return depends on actual usage or performance. Revenue from users is the most direct mechanism for achieving this.

User revenue takes many forms across European concession markets. Tolls are the classic example: motorway, bridge, and tunnel concessionaires collect tolls from drivers, and their income rises and falls with traffic volumes. Car parking charges, ferry fares, leisure centre admission fees, and utility tariffs (for water treatment or waste-to-energy plants serving industrial or residential customers) are all variants of the same principle: the concessionaire prices and collects directly from end users.

The authority may contribute alongside user revenues. A mixed revenue model, common in transport concessions, combines user fares with a public subsidy or availability payment. The subsidy tops up user revenues to make the project financially viable when fares alone are insufficient. Provided the subsidy does not eliminate the concessionaire's exposure to usage variation, the arrangement may still qualify as a concession. If the subsidy is so large that user revenue variability is immaterial to the financial outcome, the operating risk has migrated back to the authority.

In some concessions, particularly social infrastructure, there are no direct user charges at all. Hospitals, schools, and prisons do not charge patients, pupils, or inmates. In these cases, the "revenue" is an availability payment from the authority, and operating risk is delivered through availability risk rather than demand variability. These are still concessions under EU law, but the user revenue element is absent.

Why revenue from users matters for bidders

Revenue from users defines the commercial risk of the concession. Bidders in markets with direct user charging must model how usage will evolve over the concession duration under base, downside, and severe stress scenarios. They must set tariff structures that are commercially sustainable and acceptable to the contracting authority (which may regulate maximum charges to protect users). They must manage the interaction between tariff levels and demand volumes, because raising charges to compensate for lower usage can suppress demand further.

The tariff setting and adjustment mechanism in the concession contract is critical. Most European concession contracts include a formula for adjusting user charges over time, typically linked to inflation indices (CPI, construction cost indices) or to traffic benchmarks. Understanding whether the adjustment formula adequately compensates for cost inflation is essential to long-term financial viability.

Bidders must also consider VAT treatment of user charges across different European jurisdictions, since the VAT classification of tolls, admission fees, and utility tariffs varies and affects the effective revenue received by the concessionaire.

Example

An Austrian consortium wins a 30-year concession to build and operate a 12-kilometre road tunnel. It charges a toll of EUR 8 per passenger vehicle passage and EUR 22 per heavy goods vehicle. In year one, 4.2 million vehicle passages generate EUR 42 million of revenue against EUR 30 million of operating and financing costs. In year seven, a parallel free route opens and traffic falls by 20 percent, reducing revenue by EUR 8.4 million and creating an operating shortfall. The consortium absorbs this loss: genuine demand risk, genuine revenue from users, genuine concession.

Frequently Asked Questions

Can the contracting authority set a cap on what the concessionaire charges users?

Yes. Concession contracts commonly include provisions allowing the authority to regulate maximum user charges to protect public interest in affordability and accessibility. The cap does not eliminate the concession classification provided the cap is set at a level that still exposes the concessionaire to meaningful demand variability. A cap set so low that cost recovery is impossible in realistic scenarios would create a different problem: the concession would be financially unviable.

Does revenue from users need to be the majority of the concessionaire's income?

EU case law and Directive 2014/23/EU do not prescribe a percentage split between user revenue and authority payments. The test is whether operating risk transfer is genuine and substantial. A concession where 70 percent of revenue comes from availability payments and 30 percent from user charges may still qualify if the 30 percent exposure creates meaningful financial risk. A contract where user charges are 5 percent of income and the availability payment is guaranteed regardless of performance almost certainly does not.

How does VAT affect user revenue calculations?

VAT treatment of concession revenues varies by jurisdiction and service type across Europe. In some EU member states, toll revenues are VAT-exempt; in others, they carry standard VAT. The VAT treatment affects both the headline tariff the concessionaire can charge and the cash flow available to service debt. Bidders preparing concession financial models for cross-border or first-entry market submissions should seek jurisdiction-specific tax advice before finalising revenue projections.