The effects of interest rates on the valuation of highway infrastructure assets

Carles Vergara-Alert

Article ID: 524
Vol 6, Issue 1, 2023

VIEWS - 953 (Abstract) 396 (PDF)


The discounted value of cash flows of assets is negatively related to interest rates
(i.e., the discount rate effect). However, economic activity is positively related to
interest rates and positively related to the cash flows of assets with tariffs that can
be adjusted to manage demand such as adjustable-rate toll roads, but uncorrelated
to assets that do not bear demand risk such as non-toll roads (i.e., the cash flow
effect). This effect arises in some types of assets from: (i) the positive correlation
between economic activity and demand for the infrastructure assets; and (ii) the
positive correlation between economic activity and inflation. We find that the cash
flow effect dominates the discount rate effect for assets with tariffs that can be
adjusted to manage demand and, therefore, the value of these assets increases in
periods of economic expansion. Nevertheless, the opposite occurs for assets that do
not bear demand risk.


Transportation infrastructure; Highways; Valuation, Interest rates; Multivariate VAR analysis; Model parameterization

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