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

IEFE ‐ The Center for Research on Energy and Environmental Economics and Policy at Bocconi University Working Paper n. 79

42 Pages Posted: 3 Feb 2015

See all articles by Elisabetta Iossa

Elisabetta Iossa

University of Rome Tor Vergata; IEFE Bocconi University; Centre for Economic Policy Research (CEPR)

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Date Written: February 2, 2015

Abstract

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.

Keywords: Contracting out, highways, incentives, procurement, regulation, transport.

JEL Classification: D21, L2, L33, L5, L9.

Suggested Citation

Iossa, Elisabetta, Contract and Procurement Design for PPPs in Highways: The Road Ahead (February 2, 2015). IEFE ‐ The Center for Research on Energy and Environmental Economics and Policy at Bocconi University Working Paper n. 79, Available at SSRN: https://ssrn.com/abstract=2559186 or http://dx.doi.org/10.2139/ssrn.2559186

Elisabetta Iossa (Contact Author)

University of Rome Tor Vergata ( email )

Via Columbia n.2
Rome, 00133
Italy

IEFE Bocconi University ( email )

Via Roentgen 1
Milan, Milan 20136
Italy

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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