Flexible-Term Contracts for Road Franchising

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