Public ‐​Private Partnerships and Demand Uncertainty

Peter Van Doren andDavid KempThis summer, a Washington Postarticle described the large reduction in toll ‐​road revenue caused by the coronavirus pandemic. As of July, less traffic had resulted in more than a $9 billion shortfall. Both public and private operators have lobbied for increased federal and state assistance to offset the reduction in revenue. But properly designed public‐​private pa rtnership (PPP) contracts offer an alternative to manage demand shocks.While PPPs have been relatively rare in the U.S., over the last three decades there has been €203 billion of PPP investment in Europe and $525 billion in developing countries. In thefall issue ofRegulation, Eduardo Engel, Ronald Fischer, and Alexander Galetovicrevisit the international experience with PPPs. They argue that although the overall experience with PPPs has been positive, “good governance and careful contract design are necessary to reap the benefits from PPPs.”A common problem with PPPs is that after contracts are awarded they are routinely renegotiated, often in ways that benefit concessionaires at the expense of taxpayers. These renegotiations arise because of the incentives embedded in the PPP contracts. Traditionally, PPP contracts are fixed term. The concessionaire is guaranteed the toll revenues collected over a pre ‐​established time period. If demand is less than anticipated, the concessionaire will receive less revenue. Concessionaires respond by requesting more favor...

Source: Cato-at-liberty - September 24, 2020 Category: American Health Authors: Peter Van Doren, David Kemp Source Type: blogs