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Public-Private Partnerships for Transport Infrastructure: Some Efficiency Risks

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
Date of revision:
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.
  2. Eduardo Engel & Ronald Fischer & Alexander Galetovic, 2013. "The Basic Public Finance Of Public–Private Partnerships," Journal of the European Economic Association, European Economic Association, vol. 11(1), pages 83-111, 02.
  3. Athias, Laure & Nuñez, Antonio, 2008. "Winner's curse in toll road concessions," Economics Letters, Elsevier, vol. 101(3), pages 172-174, December.
  4. Spulber, Daniel F, 1990. "Auctions and Contract Enforcement," Journal of Law, Economics and Organization, Oxford University Press, vol. 6(2), pages 325-44, Fall.
  5. J. Luis Guasch, 2004. "Granting and Renegotiating Infrastructure Concessions : Doing it Right," World Bank Publications, The World Bank, number 15024.
  6. Robert Bain, 2009. "Error and optimism bias in toll road traffic forecasts," Transportation, Springer, vol. 36(5), pages 469-482, September.
  7. Bénédicte Vidaillet & V. D'Estaintot & P. Abécassis, 2005. "Introduction," Post-Print hal-00287137, HAL.
  8. 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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