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A strategic model of public–private partnerships in transportation: Effect of taxes and cost structure on investment viability

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  • Zhang, Zitao (Arthur)
  • Durango-Cohen, Pablo L.

Abstract

We formulate a game-theoretic model of a concession agreement between a government and a private party, a concessionaire, who has to engage a set of service providers as part of the operating responsibilities. We use the model to examine the importance of a government's tax policy to induce private investments in transportation infrastructure. Our analysis brings to fore insights that are useful in the design of partnership agreements, such as the importance of early and binding government commitments to ensure stable partnerships, and thus, successful projects. Our analysis shows that these strong commitments are even more critical in situations where the success of the partnership requires participation of additional, self-interested parties, such as specialized service providers. Finally, we consider variations of the model where government preferences are explicitly captured, and where the returns from the fixed cost portion of the concessionaire's investment are exempt from taxes. We show that both variations can lead to outcomes where the concessionaire's tax burden is shifted to the service providers. This flexibility can be critical in the design of partnership agreements for (high-risk or highly specialized transportation) projects where additional incentives may be needed to induce private party participation.

Suggested Citation

  • Zhang, Zitao (Arthur) & Durango-Cohen, Pablo L., 2012. "A strategic model of public–private partnerships in transportation: Effect of taxes and cost structure on investment viability," Research in Transportation Economics, Elsevier, vol. 36(1), pages 9-18.
    • Handle: RePEc:eee:retrec:v:36:y:2012:i:1:p:9-18
    DOI: 10.1016/j.retrec.2012.03.003
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    References listed on IDEAS

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    Cited by:

    1. Juan David González-Ruiz & Sergio Botero-Botero & Eduardo Duque-Grisales, 2018. "Financial Eco-Innovation as a Mechanism for Fostering the Development of Sustainable Infrastructure Systems," Sustainability, MDPI, vol. 10(12), pages 1-19, November.
    2. Douglas Pivatto & Rodrigo Nobre Fernandez & Helton Saulo & Andre Carraro, 2017. "Estimating the Optimal Time for a Road Concession Contract in Brazil," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 9(12), pages 44-53, December.
    3. Shu, Hang & Durango-Cohen, Pablo L., 2021. "On the design of optimal auctions for road concessions: Firm selection, government payments, toll and capacity schedules with imperfect information," Transportation Research Part B: Methodological, Elsevier, vol. 146(C), pages 210-236.

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