Flexible-Term Contracts for Road Franchising

UCTC Paper No. 660

18 Pages Posted: 7 Feb 2005

See all articles by Gustavo Nombela

Gustavo Nombela

University of Las Palmas (Spain)

Gines de Rus

University of Las Palmas de Gran Canaria; University of Las Palmas de Gran Canaria

Date Written: Summer 2003

Abstract

Private participation in road projects is increasing around the world. The most popular franchising mechanism is a concession contract, which allows a private firm to charge tolls to road users during a pre-determined period in order to recover its investments. Concessionaires are usually selected through auctions at which candidates submit bids for tolls, payments to the government, or minimum term to hold the contract. This paper discusses, in the context of road franchising, how this mechanism does not generally yield optimal outcomes and it induces the frequent contract renegotiations observed in road projects. A new franchising mechanism is proposed, based on flexible-term contracts and auctions with bids for total net revenue and maintenance costs. This new mechanism improves outcomes compared to fixed-term concessions, by eliminating traffic risk and promoting the selection of efficient concessionaires.

Keywords: roads, highways, franchising, concessions, auctions

JEL Classification: D44, L91

Suggested Citation

Nombela, Gustavo and de Rus, Gines and de Rus, Gines, Flexible-Term Contracts for Road Franchising (Summer 2003). UCTC Paper No. 660, Available at SSRN: https://ssrn.com/abstract=655141 or http://dx.doi.org/10.2139/ssrn.655141

Gustavo Nombela (Contact Author)

University of Las Palmas (Spain) ( email )

Campus de Tafira
35017 Las Palmas, Las Palmas 35017
Spain

Gines De Rus

University of Las Palmas de Gran Canaria ( email )

Campus de Tafira
35017 Las Palmas, Las Palmas 35017
Spain

University of Las Palmas de Gran Canaria ( email )

Campus de Tafira
35017 Las Palmas, Las Palmas 35017
Spain

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