Flexible-term contracts for road franchising

Abstract

Private participation in road projects is increasing around the world. The most popular form of franchising is a concession contract, which allows a private firm to charge tolls to road users during a predetermined period in order to recover investments. Concessionaires are usually selected through auctions at which candidates submit bids for tolls or payments to the government. This paper discusses how this mechanism does not generally yield optimal outcomes and it induces the frequent contract renegotiations observed in practice. A new franchising mechanism is proposed, based on a flexible-term contract and bi-dimensional 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. (C) 2003 Elsevier Ltd. All rights reserved.