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Public-Private Partnerships for Transport Infrastructure: Some Efficiency Risks

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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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  • Matthew Ryan & Flavio Menezes, 2014. "Public-Private Partnerships for Transport Infrastructure: Some Efficiency Risks," Discussion Papers Series 499, School of Economics, University of Queensland, Australia.
    • Handle: RePEc:qld:uq2004:499
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    1. Eduardo M. R. A. Engel & Ronald D. Fischer & Alexander Galetovic, 2001. "Least-Present-Value-of-Revenue Auctions and Highway Franchising," Journal of Political Economy, University of Chicago Press, vol. 109(5), pages 993-1020, October.
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    4. Matthew Ryan & Flávio Menezes, 2013. "Default and Renegotiation in PPP Auctions," Discussion Papers Series 484, School of Economics, University of Queensland, Australia.
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    6. Menezes, Flavio M., 2008. "An Introduction to Auction Theory," OUP Catalogue, Oxford University Press, number 9780199275991.
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    8. Robert Bain, 2009. "Error and optimism bias in toll road traffic forecasts," Transportation, Springer, vol. 36(5), pages 469-482, September.
    9. Kagel, John H. & Levin, Dan, 1986. "The Winner's Curse and Public Information in Common Value Auctions," American Economic Review, American Economic Association, vol. 76(5), pages 894-920, December.
    10. Athias, Laure & Nuñez, Antonio, 2008. "Winner's curse in toll road concessions," Economics Letters, Elsevier, vol. 101(3), pages 172-174, December.
    11. Antonio Estache, 2006. "PPI Partnerships vs. PPI Divorces in LDCs," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 29(1), pages 3-26, 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 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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