Contract and procurement design for PPPs in highways: the road ahead

Abstract

We review international practice in concession-based public private partnerships (PPPs) for highways, in the light of the economic theory of incentives, procurement and regulation. In particular, we analyse alternative funding mechanisms to cover highway costs, and their impact on demand risk allocation, incentives, cost of capital, and likelihood of renegotiation. We note how real tolls must pursue a number of contrasting objectives, which may be best served by introducing tariff discrimination. We discuss alternative tariff regulations used in practice and warn against tariff mechanisms that transfer demand risk to users and depart from the principles of price cap regulation. We highlight that it is desirable to transfer some traffic risk to the concessionaire but the level of risk transfer should be lower at the beginning of the contract, especially for greenfield projects where little demand information is initially available. We discuss the procurement of highway PPPs, focusing on the choice of the bidding variables, and on the distortions that renegotiations introduce at bidding stage. We stress the importance of strong institutions and absence of political interference in regulatory matters, and we highlight the benefit of respecting and standardizing contract terms.

On the efficiency of toll motorway companies in Spain

“…Before 2001, national legislation introduced a general rule providing for automatic, yearly price adjustments based on inflation, a widely employed regulation in this industry (Iossa, 2015).…”

“…These Public-Private Partnership (PPP) contracts are designed and awarded in the expectation of improving efficiency and, above all, of facilitating private financing. However, toll regulation has typically been shown to be unrelated to the degree of productivity or the efficiency of concessionaires (Albalate, Bel and Fageda, 2009), especially in the absence of price-cap regulation (Iossa, 2015), and satisfying uncertain demand in the long run is the main factor determining the outcome of the standard fixed-term concession contract (Engel, Fischer and Galetovic, 1997a;2001). 2 Even if motorway managers appear to 1 See Matas, Raymond and Roig (2015) for recent studies on the link between road investments and productivity;…”

Balancing Public and Private Interests Through Optimization of Concession Agreement Design for User-Pay PPP Projects

“…Iyer and Sagheer (2012) found that the grant sought from the government is the sole bidding variable for Indian buildoperate-transfer (BOT) highway projects. Iossa (2015) summarized that the key variables in PPP procurement generally include toll, shadow tolls, net present value, concession period, risk allocation and revenue share. In China, hosting governments are in charge of designing the initial concession agreement.…”

Dealing with Contract Variations in PPPs: Social Mechanisms and Contract Management in Infrastructure Projects

“…In a PPP project, a private party or consortium is granted a concession to finance, build, and operate a public project and to provide the corresponding product or service and collect ensuing revenues (Xiong and Zhang 2014). The PPP approach may increase the economic value of infrastructure outputs because management by a private entity can bring important efficiency gains to the public authority body in question (Liu et al 2014;Iossa 2015). However, in the case of unexpected events, a project can suffer high-profile failures.…”