Availability Payments

• The Bottom Line: Availability payments are a highly predictable, long-term revenue stream where a private company is paid by a government simply for keeping a critical asset—like a hospital or a highway—open, safe, and up to standard, regardless of how many people use it.
• Key Takeaways:
• What it is: A payment model, common in Public-Private Partnerships (PPPs), that compensates a company based on the availability and quality of an infrastructure asset, not its usage.
• Why it matters: For a value investor, this model creates bond-like, recession-resistant cash flows backed by a government contract, making it a powerful tool for building a defensive portfolio with predictable returns. It is the antithesis of speculative, demand-driven revenue.
• How to use it: Analyze companies that own and operate these assets by scrutinizing the credit quality of the government client, the terms of the long-term contract, and the company's operational efficiency.

Imagine you decide to lease a car instead of buying one. You sign a three-year contract with a leasing company. The deal is simple: you pay a fixed fee of $500 every month. In return, the company guarantees you have a fully functional, well-maintained car available to you 24/7. The monthly fee includes all maintenance, insurance, and repairs. Now, here's the crucial part: the $500 payment is not based on how much you drive. Whether you drive 3,000 miles a month on a cross-country road trip or leave the car parked in your garage for the entire month while you're on vacation, you still pay exactly $500. Your payment is for the car's availability, not its usage. The only way your payment might be reduced is if the car breaks down and the leasing company fails to provide a replacement promptly. Their entire business model hinges on keeping that car in perfect working order for you. Availability Payments are the grown-up, billion-dollar version of this car lease. In this scenario, the “driver” is a government (federal, state, or local), and the “car” is a massive, essential piece of public infrastructure—a bridge, a hospital wing, a university campus, a courthouse, or a stretch of highway. The “leasing company” is a private-sector firm or a consortium of companies that specializes in financing, building, and, most importantly, operating and maintaining these assets over a very long period, often 25 to 50 years. Under an availability payment model, the government pays the private company a regular, pre-agreed fee. This fee is not a toll paid by drivers or a fee paid by patients. It's a contractual payment from the government's budget. The payment's sole condition is that the asset is “available” and meets stringent performance standards laid out in the contract.

• If a highway lane has to be closed due to poor maintenance, the payment is reduced.
• If a hospital's air conditioning system fails and a wing becomes unusable, the payment is reduced.
• If a school is not cleaned to the specified standard, the payment is reduced.

The private company's profit is directly tied to its operational excellence. It is completely insulated from demand risk. A pandemic could empty the highway, a new hospital could open nearby, or a recession could reduce traffic—it doesn't matter. As long as the asset is open and in good shape, the checks from the government keep coming. This transforms a potentially volatile infrastructure project into a predictable, long-term, revenue-generating machine.

“The first rule of investing is not to lose money; the second rule is not to forget the first rule.” - Warren Buffett ¹⁾

For a value investor, who prizes predictability and durability over fleeting growth stories, the availability payment model is a thing of beauty. It aligns perfectly with the core tenets of value investing taught by Benjamin Graham and Warren Buffett. 1. Predictable, “Bond-Like” Cash Flows: Value investors love businesses with consistent, understandable earnings. Availability payments provide one of the most predictable revenue streams outside of government bonds. These are not “hoped-for” profits based on a new product launch or economic growth. They are contractually guaranteed cash flows, often indexed to inflation, stretching decades into the future. This allows an investor to calculate the intrinsic_value of the business with a much higher degree of certainty than, say, a tech startup. It's the business equivalent of a toll bridge with no traffic, where you still get paid just for keeping the bridge polished and safe. 2. A Powerful Economic_Moat: Warren Buffett's concept of an “economic moat” refers to a durable competitive advantage that protects a company's profits from competitors. The long-term, legally binding contract in an availability payment project is a formidable moat. For the life of the contract (e.g., 30 years), no other company can come in and manage that specific hospital or highway. The government is locked in. This provides immense protection for the company's future earnings, shielding it from the constant pressures of competition. 3. Built-in Margin_of_Safety: The margin_of_safety principle is about buying assets for significantly less than their intrinsic value to protect against errors in judgment or bad luck. The availability model has several built-in layers of safety:

• Counterparty Safety: The client is typically a government, which has taxing power and is the most creditworthy of all debtors. The risk of a stable government defaulting on its contractual payments is exceptionally low.
• Demand Insulation: The business is protected from the biggest unknown in most industries: customer demand. Recessions, changing consumer tastes, or new technologies don't affect the core revenue stream.
• Contractual Safety: The rights and obligations of all parties are explicitly defined in a detailed legal document, reducing ambiguity and future disputes.

4. Focus on Real Operations, Not Hype: Value investors are business analysts, not market speculators. They are drawn to companies that create value through operational excellence. The availability payment model rewards precisely that. A company succeeds by being a best-in-class operator—by managing costs effectively and maintaining assets to a high standard. Its stock price should, over the long term, reflect this operational reality, not market sentiment about future growth prospects that may never materialize.

Finding a company that benefits from availability payments is just the start. A true value investor must dig deeper. This is not a financial ratio to calculate, but a business model to analyze.

Here is a step-by-step method for analyzing an investment in a company with availability-payment projects:

1. Step 1: Assess the Counterparty's Creditworthiness.
   • Who is the government client? Is it a financially stable federal government like the U.S. or Canada? Or is it a small municipality with a shaky credit history? A contract is only as strong as the entity that signs it. Look for projects backed by governments with strong credit ratings (e.g., AA or AAA).
2. Step 2: Scrutinize the Concession Agreement.
   • What are the contract terms? This is the single most important document. You must understand its key provisions:
   • Duration: How many years are left on the contract? A 28-year remaining term is far more valuable than a 3-year term.
   • Performance Regime: What are the specific standards the company must meet? Are they reasonable? What are the financial penalties for failing to meet them?
   • Inflation Linkage: Are the payments indexed to inflation? Full inflation protection is the gold standard, protecting the real value of future cash flows.
   • Force Majeure: How does the contract handle unforeseen “acts of God” like earthquakes or pandemics? Does the risk lie with the company or the government?
3. Step 3: Analyze the Operator's Track Record.
   • Is the company good at its job? Look at the company's history. Does it have a track record of successfully managing projects without incurring significant penalties? Check its financial reports for any mention of “performance deductions.” A skilled operator will maximize revenue by consistently meeting or exceeding contractual standards. A poor operator will see its profits slowly eroded by penalties.
4. Step 4: Evaluate the Valuation.
   • Are you paying a fair price? Even the safest asset can be a terrible investment if you overpay. Because the cash flows are so predictable, a discounted_cash_flow (DCF) analysis is a particularly powerful tool here. You can project the contracted payments far into the future and discount them back to the present to estimate the project's intrinsic_value. Your goal is to buy the company's stock at a significant discount to your calculated value, creating a margin_of_safety.

A high-quality availability-payment investment looks like this:

• A portfolio of projects with a long average remaining contract life.
• Clients that are high-credit-quality government entities.
• Contracts with strong inflation protection.
• A management team with a proven history of operational excellence and minimal payment deductions.
• A stock price that offers a clear discount to the present value of its future, contracted cash flows.

Conversely, be wary of companies with projects concentrated with a single, lower-credit-quality government, short remaining contract lives, or a history of operational missteps.

Let's imagine it's early 2020. You are a value investor considering two publicly traded infrastructure companies: “Steady Infrastructure Partners” (SIP) and “Dynamic Tollways Inc.” (DTI). Both trade at a similar valuation.

• Steady Infrastructure Partners (SIP): SIP's primary assets are 15 hospitals and 20 schools across Canada and the UK, all operated under long-term (average 25 years remaining) availability payment contracts with federal and provincial governments. Their revenue is based on keeping the facilities clean, safe, and fully operational.
• Dynamic Tollways Inc. (DTI): DTI owns and operates several major toll roads connecting busy cities and airports in the United States. Its revenue is directly tied to the volume of traffic. The more cars that use the road, the more money DTI makes.

In a normal economic environment, both companies are profitable. DTI, in fact, has higher growth potential, as a booming economy means more traffic and more toll revenue. Then, the COVID-19 pandemic hits. Governments impose lockdowns.

• The Impact on DTI: DTI's business is decimated. With flights canceled, offices closed, and people staying home, traffic on its toll roads plummets by 80%. Its revenue collapses, its stock price crashes, and it is forced to suspend its dividend to conserve cash. Its revenue was entirely dependent on usage.
• The Impact on SIP: SIP's business remains remarkably stable. The hospitals it manages are more critical than ever, and even though the schools are closed to students, the contracts require SIP to maintain them in a state of readiness. The governments continue to make their full, contractually obligated availability payments every month. SIP's revenue stream is unaffected. Its stock price dips with the overall market but recovers much faster as investors recognize the resilience of its business model. It continues to pay its dividend without interruption.

This example starkly illustrates the power of the availability model from a value investor's perspective. SIP's business was insulated from a “black swan” event because its revenue was not tied to economic activity or public behavior. It was tied to a contract. This is the defensive characteristic that value investors seek: a business that can withstand storms and protect capital.

• Exceptional Revenue Visibility: The long-term contracts provide a clear and predictable roadmap of future revenues, making financial modeling and valuation more reliable.
• Recession Resistance: The revenue stream is uncorrelated with the business cycle, providing a defensive ballast to an investment portfolio during economic downturns.
• High Barriers to Entry: The long-term contracts act as a powerful economic_moat, preventing any competition for the life of the agreement.
• Inflation Protection: Many contracts include clauses that automatically adjust payments for inflation, preserving the real-terms value of the cash flows.

• Limited Upside: The predictability is a double-edged sword. A company with an availability payment contract won't experience explosive growth. Its revenue is capped by the contract. You are trading away massive upside potential for certainty.
• Operational Risk: The model is simple: perform well and you get paid. However, significant operational failures—like a bridge needing major, unexpected repairs—can lead to large penalties and cost overruns that can cripple profitability.
• Interest Rate Sensitivity: Because the cash flows are fixed and long-term, these assets behave somewhat like long-duration bonds. If general interest rates rise significantly, the present value of those future cash flows decreases, which could put downward pressure on the stock price.
• Political & Regulatory Risk: Although contracts are legally binding, they are not completely immune to political pressure. A populist government, facing a budget crisis, could theoretically try to renegotiate terms or impose new taxes, though this is a low-probability risk in stable democracies.

• public_private_partnership
• infrastructure_investing
• economic_moat
• discounted_cash_flow
• intrinsic_value
• margin_of_safety
• risk_management