Ex Ante Construction Costs in the European Road Sector: A Comparison of Public-Private Partnerships and Traditional Public Procurement

EIB Economic and Finance Report No. 2006/1

49 Pages Posted: 19 Mar 2008

See all articles by Frederic Blanc-Brude

Frederic Blanc-Brude

EDHEC Infrastructure Institute; EDHEC Business School - Department of Economics & Finance

Hugh Goldsmith

EIB

Timo Valila

International Monetary Fund (IMF) - Policy Development and Review Department

Date Written: 2006

Abstract

Theoretical literature suggests a variety of reasons why a public-private partnership (PPP) should exhibit higher costs of construction than traditionally procured public infrastructure projects. The bundling of construction and operation contracts in a PPP give the private partner greater incentives to make investments in the construction phase to lower subsequent operation and maintenance costs. Also, the transfer of the construction risk to the private partner should be explicitly priced in a PPP. We use data on ex ante construction costs of road projects in Europe to test the existence and the magnitude of any such difference between PPPs and traditional procurement. We estimate the ex ante cost of a PPP road to be, on average, 24% more expensive than a traditionally procured road, all other things equal. This estimate corresponds by and large to reported ex post cost overruns in traditionally procured public roads. To the extent that the two measures are representative, this suggests that the largest part of the ex ante construction cost difference originates from the transfer of construction risk. This, in turn, implies that other possible sources of higher PPP construction costs, including bundling, seem to be of second-order importance in the road sector. The analysis does not allow drawing normative conclusions about the desirability of PPP as a procurement method as it focuses only on one cost component in isolation, without being able to quantify its impact on life-cycle costs and benefits.

Keywords: Public-Private Partnerships, Road, Unit Costs

JEL Classification: L33, H54, C51

Suggested Citation

Blanc-Brude, Frederic and Goldsmith, Hugh and Valila, Timo, Ex Ante Construction Costs in the European Road Sector: A Comparison of Public-Private Partnerships and Traditional Public Procurement (2006). EIB Economic and Finance Report No. 2006/1. Available at SSRN: https://ssrn.com/abstract=1104070 or http://dx.doi.org/10.2139/ssrn.1104070

Frederic Blanc-Brude (Contact Author)

EDHEC Infrastructure Institute ( email )

One George Street
07-02
Singapore
Singapore

HOME PAGE: http://edhec.infrastructure.institute

EDHEC Business School - Department of Economics & Finance ( email )

France

Hugh Goldsmith

EIB ( email )

98-100 Boulevard Konrad Adenauer
L-2950
Luxembourg

Timo Valila

International Monetary Fund (IMF) - Policy Development and Review Department ( email )

700 19th St. NW
Washington, DC 20431
United States

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