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Contract and Procurement Design for PPPs in Highways: the Road Ahead

We review international practice in concession-based public private partnerships (PPPs) for highways, in the light of the economic theory of incentives, procurement and regulation. In particular, we analyse alternative funding mechanisms to cover highway costs, and their impact on demand risk allocation, incentives, cost of capital, and likelihood of renegotiation. We note how real tolls must pursue a number of contrasting objectives, which may be best served by introducing tariff discrimination. We discuss alternative tariff regulations used in practice and warn against tariff mechanisms that transfer demand risk to users and depart from the principles of price cap regulation. We highlight that it is desirable to transfer some traffic risk to the concessionaire but the level of risk transfer should be lower at the beginning of the contract, especially for greenfield projects where little demand information is initially available. We discuss the procurement of highway PPPs, focusing on the choice of the bidding variables, and on the distortions that renegotiations introduce at bidding stage. We stress the importance of strong institutions and absence of political interference in regulatory matters, and we highlight the benefit of respecting and standardizing contract terms.

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Paper provided by Tor Vergata University, CEIS in its series CEIS Research Paper with number 345.

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Length: 39 pages
Date of creation: 11 Jun 2015
Date of revision: 11 Jun 2015
Handle: RePEc:rtv:ceisrp:345
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  1. János Kornai, 2014. "The soft budget constraint," Acta Oeconomica, Akadémiai Kiadó, Hungary, vol. 64(supplemen), pages 25-79, November.
  2. Gregory Lewis & Patrick Bajari, 2011. "Procurement Contracting With Time Incentives: Theory and Evidence," The Quarterly Journal of Economics, Oxford University Press, vol. 126(3), pages 1173-1211.
  3. Bennett, John & Iossa, Elisabetta, 2006. "Building and managing facilities for public services," Journal of Public Economics, Elsevier, vol. 90(10-11), pages 2143-2160, November.
  4. Guasch, J. Luis & Laffont, Jean-Jacques & Straub, Stéphane, 2008. "Renegotiation of concession contracts in Latin America: Evidence from the water and transport sectors," International Journal of Industrial Organization, Elsevier, vol. 26(2), pages 421-442, March.
  5. David Martimort & Flavio Menezes & Myrna Wooders & ELISABETTA IOSSA & DAVID MARTIMORT, 2015. "The Simple Microeconomics of Public-Private Partnerships," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 17(1), pages 4-48, 02.
  6. Luigi Benfratello & Alberto Iozzi & Paola Valbonesi, 2009. "Technology and incentive regulation in the Italian motorways industry," Journal of Regulatory Economics, Springer, vol. 35(2), pages 201-221, April.
  7. J. Luis Guasch & Stéphane Straub, 2006. "Renegotiation Of Infrastructure Concessions: An Overview," Annals of Public and Cooperative Economics, Wiley Blackwell, vol. 77(4), pages 479-493, December.
  8. Iossa, Elisabetta & Stroffolini, Francesca, 2002. "Price cap regulation and information acquisition," International Journal of Industrial Organization, Elsevier, vol. 20(7), pages 1013-1036, September.
  9. Athias, Laure & Nuñez, Antonio, 2008. "Winner's curse in toll road concessions," Economics Letters, Elsevier, vol. 101(3), pages 172-174, December.
  10. Engel,Eduardo & Fischer,Ronald D. & Galetovic,Alexander, 2014. "The Economics of Public-Private Partnerships," Cambridge Books, Cambridge University Press, number 9781107035911, October.
  11. Gajendra Haldea, 2013. "Public Private Partnership in National Highways: Indian Perspective," International Transport Forum Discussion Papers 2013/11, OECD Publishing.
  12. ., 2006. "Structure and Agency," Chapters,in: The Elgar Companion to Development Studies, chapter 121 Edward Elgar Publishing.
  13. Engel, Eduardo & Fischer, Ronald & Galetovic, Alexander, 1997. "Highway Franchising: Pitfalls and Opportunities," American Economic Review, American Economic Association, vol. 87(2), pages 68-72, May.
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