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Public-private partnerships for transport infrastructure: Some efficiency risks

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  • Matthew Ryan
  • Fl�vio Menezes

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.

Suggested Citation

  • Matthew Ryan & Fl�vio Menezes, 2015. "Public-private partnerships for transport infrastructure: Some efficiency risks," New Zealand Economic Papers, Taylor & Francis Journals, vol. 49(3), pages 276-295, August.
    • Handle: RePEc:taf:nzecpp:v:49:y:2015:i:3:p:276-295
    DOI: 10.1080/00779954.2014.955625
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    References listed on IDEAS

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    Citations

    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 08:39:13
    2. Capital recycling plan good in theory, difficult in practice
      by Flavio Menezes, Professor of Economics at University of Queensland in The Conversation on 2014-05-06 01:35:55

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