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Economia e Politica Industriale

, Volume 42, Issue 3, pp 245–276 | Cite as

Contract and procurement design for PPPs in highways: the road ahead

  • Elisabetta Iossa
Article

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 

Notes

Acknowledgments

Forthcoming in the Journal of Industrial and Business Economics. The author wishes to thank Alberto Iozzi and Michele Polo for very insightful discussions, and Autostrade per l’Italia for useful comments on the paper. Special thanks go to Paolo Biedanelli for his helpful research assistantship. The paper has benefited from the comments of two anonymous referees. The author gratefully acknowledges financial support from Bocconi University, Laboratorio ASPI Autostrade per l’Italia, CERTeT

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Copyright information

© Associazione Amici di Economia e Politica Industriale 2015

Authors and Affiliations

  1. 1.University of Rome Tor Vergata, Proxenter, CEPR and IEFE-BocconiRomeItaly

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