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Least Present Value of Net Revenue: a new auction-mechanism for highway concessions

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  • de Rus, Gines
  • Nombela, Gustavo

Abstract

This paper presents a new mechanism for awarding tolled-highways, based on the variable-term concept proposed by Engel et al (1997). These authors claim that a mechanism based on bids for least-present-value of revenue (LPVR) eliminates the risk of demand and simplifies renegotiations. However, if maintenance and operation costs are non-negligible, it is proven that, under LPVR, bidders need to estimate future traffic to make their offers, so the risk of demand is still present. Moreover, LPVR does not guarantee the selection of the best concessionaire. An alternative mechanism (least-present-value of net revenue, LPVNR) is proposed. The idea is to use bids that do not force firms to estimate future traffic. Under LPVNR, firms must make offers on: (i) total amount of revenue, net of maintenance costs; (ii) annual operation and routine-maintenance costs; and (iii) cost of road re-pavement. The concession is awarded to the firm with the lowest total expected cost, and the selection rule is adapted to the information available. The new mechanism is simple, does not impose additional efforts from firms, and eliminates the risk of demand more effectively. Although initially conceived for the road sector, the idea of LPVNR could easily be extended to other infrastructure sectors.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 12203.

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Date of creation: 2000
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Handle: RePEc:pra:mprapa:12203

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Related research

Keywords: Highways; roads; concessions; auctions;

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References

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  1. Milgrom, Paul, 1989. "Auctions and Bidding: A Primer," Journal of Economic Perspectives, American Economic Association, vol. 3(3), pages 3-22, Summer.
  2. Eduardo Engel & Ronald Fischer & Alexander Galetovic, 1997. "Highway Franchising: Pitfalls and Opportunities," Documentos de Trabajo 15, Centro de Economía Aplicada, Universidad de Chile.
  3. McAfee, R Preston & McMillan, John, 1987. "Auctions and Bidding," Journal of Economic Literature, American Economic Association, vol. 25(2), pages 699-738, June.
  4. Hinojosa, Sergio & Gomez-Lobo, Andres, 2000. "Broad roads in a thin country - infrastructure concessions in Chile," Policy Research Working Paper Series 2279, The World Bank.
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Citations

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Cited by:
  1. Beckers, Thorsten & Miksch, Jan, 2002. "Die Allokation des Verkehrsmengenrisikos bei Betreibermodellen für Straßeninfrastruktur: Theoretische Grundlagen und Anwendung auf das A-Modell," Discussion Papers 2002/10, Technische Universität Berlin, School of Economics and Management.
  2. de Rus, Gines & Trujillo, Lourdes & Romero, Manuel, 2000. "Participacion privada en la construccion y explotacion de carreteras de peaje
    [Private sector funding for the construction and operation of toll roads]
    ," MPRA Paper 12204, University Library of Munich, Germany.

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