Private financing of roads and optimal pricing: Is it possible to get both?

Abstract

Road pricing has been defended by economists as a useful instrument to internalize the costs that road users impose upon other users and the rest of society, with the aim of allocating scarce space and to reduce congestion to an efficient level. More recently, private participation in the construction, maintenance and operation of road infrastructure has been growing all over the world to face the challenge of tight budget constraints and increasing demand for additional road capacity. Fixed term concessions have been the standard contract between the public sector and private operators. Demand uncertainty and fixed term contracts have made impossible to fulfill the concession agreement in many cases, and contract renegotiation has been used to restore financial equilibrium. This has some undesirable economic consequences: selecting the most efficient concessionaire is not longer guaranteed and prices lose their role as signals for allocative efficiency. This paper addresses the problem of giving that role back to pricing, analyzing the possibility of achieving efficient pricing and cost recovery without contract renegotiation.