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The joy of flying: Efficient airport PPP contracts

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  • Engel, Eduardo
  • Fischer, Ronald
  • Galetovic, Alexander

Abstract

We derive the optimal concession contract for an airport where the concessionaire’s effort impacts either non-aeronautical revenue (shops, restaurants, parking lots and hotels) or aeronautical revenues (passenger and airline fees). Our first model assumes that demand for the infrastructure is exogenous whereas demand for non-aeronautical services depends both on passenger flow and on the concessionaire’s effort and diligence. We show that the optimal principal-agent contract separates exogenous and endogenous risks. First, the term of the concession varies inversely with passenger flow, so that the concessionaire bears no exogenous demand risk. Second, the concessionaire bears part or all of non-aeronautical risk, which fosters effort. We also study a model where the concessionaire’s effort affects demand for aeronautical services and focus on the case where the contract includes a demand trigger for investment as an incentive. Both optimal contracts can be implemented with a Present-Value-of-Revenue (PVR) auction in which firms bid on the present value of aeronautical revenue and the concession ends when the bid is collected. PVR auctions have been used to auction airport PPP contracts in Chile, and demand triggers for investment have been used both in Brazil and Chile.

Suggested Citation

  • Engel, Eduardo & Fischer, Ronald & Galetovic, Alexander, 2018. "The joy of flying: Efficient airport PPP contracts," Transportation Research Part B: Methodological, Elsevier, vol. 114(C), pages 131-146.
    • Handle: RePEc:eee:transb:v:114:y:2018:i:c:p:131-146
    DOI: 10.1016/j.trb.2018.05.001
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    More about this item

    Keywords

    Airports; PPPs; Non-aeronautical revenues; Optimal contract;
    All these keywords.

    JEL classification:

    • H44 - Public Economics - - Publicly Provided Goods - - - Publicly Provided Goods: Mixed Markets
    • R42 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Transportation Economics - - - Government and Private Investment Analysis; Road Maintenance; Transportation Planning
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

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