Variable term concessions for freeways: The case of Aragon

Abstract

Concessionary contracts for the construction, maintenance and operation of road infrastructure are subject to uncertainty about future demand levels. The conventional mechanisms commonly used in practice for awarding highway concession contracts induce a bias towards the selecction of concessionaires who are optimistic about demand, but are not necessarily cost-efficient In this article a new system is proposed based on flexible-term contracts. This is the system chosen by the Government of Aragón for the highway Cariñena-Gallur. This new auction mechanism reduces the probability of selection errors and contract renegotiation, allows cost saving, isolate the concessionaire from short-term political interests, and guarantee financial equilibrium without renegotiation.