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Public-Private Partnerships for Transport Infrastructure: Some Efficiency Risks

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Abstract

This paper models a Public-Private Partnership (PPP) to construct a highway. It captures some of the key features of the Transmission Gully PPP. The winner of the tender recovers its costs (including capital costs) via an availability payment rather than toll revenue. While the availability payment eliminates demand risk, the winner of the tender faces cost risk: maintenance costs are only learned after construction is complete. The winning firm can make investments during the construction phase that reduce subsequent maintenance costs. As the government faces transaction costs to replace the successful bidder, firms use debt strategically to pass on some of the cost risk to the government. This distorts incentives to invest in maintenance cost reduction. Private financing therefore undermines some of the benefits from bundling construction and maintenance, which is often mentioned as an important advantage of PPPs.

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Paper provided by School of Economics, University of Queensland, Australia in its series Discussion Papers Series with number 499.

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Date of creation: 05 Feb 2014
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Handle: RePEc:qld:uq2004:499

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  1. Eduardo Engel & Ronald Fischer & Alexander Galetovic, 2007. "The Basic Public Finance of Public-Private Partnerships," NBER Working Papers 13284, National Bureau of Economic Research, Inc.
  2. Athias, Laure & Nuñez, Antonio, 2008. "Winner's curse in toll road concessions," Economics Letters, Elsevier, vol. 101(3), pages 172-174, December.
  3. J. Luis Guasch, 2004. "Granting and Renegotiating Infrastructure Concessions : Doing it Right," World Bank Publications, The World Bank, number 15024, August.
  4. Eduardo Engel & Ronald Fischer & Alexander Galetovic, 1998. "Least-Present-Value-of-Revenue Auctions and Highway Franchising," Documentos de Trabajo 37, Centro de Economía Aplicada, Universidad de Chile.
  5. Spulber, Daniel F, 1990. "Auctions and Contract Enforcement," Journal of Law, Economics and Organization, Oxford University Press, vol. 6(2), pages 325-44, Fall.
  6. Matthew Ryan & Flávio Menezes, 2013. "Default and Renegotiation in PPP Auctions," Discussion Papers Series 484, School of Economics, University of Queensland, Australia.
  7. Robert Bain, 2009. "Error and optimism bias in toll road traffic forecasts," Transportation, Springer, vol. 36(5), pages 469-482, September.
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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Political costs trash public-private infrastructure benefits
    by Flavio Menezes, Professor of Economics at University of Queensland in The Conversation on 2014-03-20 03:39:13
  2. Capital recycling plan good in theory, difficult in practice
    by Flavio Menezes, Professor of Economics at University of Queensland in The Conversation on 2014-05-05 20:35:55

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