Using bi-level programming to analyze the royalty for private–public partnership projects: the operational quantity-based model

Abstract

This paper develops a royalty negotiation model based on the operating quantity of Build, Operate, and Transfer (BOT) projects for both government and the private sector using a bi-level programming (BLP) approach. The royalty negotiation is one of many critical negotiation items of a concession contract. This study develops a royalty negotiation model to simulate the negotiation behavior of two parties, and derives the heuristic algorithm for the BLP problem. A number of factors are incorporated into this algorithm including the concession rate, the time value discount rate, the learning rate, and the number of negotiations. The paper includes a case study of the Taipei Port Container Logistic BOT Project. The results show that the two parties involved completed royalty negotiation at the sixth negotiation stage. The findings show that the government can receive a royalty from the concessionaire, calculated at 0.00386% of the operating quantity of this BOT project. Therefore, the royalty negotiation model developed here could be employed to explain negotiation behavior.     

Flexible-term contracts for road franchising

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 pre-determined 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.     

Optimal choice of capacity,toll and government guarantee for build-operate-transfer roads under asymmetric cost information

The private provision of public roads via the build-operate-transfer (BOT) mode has been increasingly used around the world. By viewing a BOT contract as a combination of road capacity, toll and government guarantee, this paper investigates optimal concession contract design under both symmetric and asymmetric information about the marginal maintenance cost of private investors. Under asymmetric information, the government guarantee serves as an instrument to induce a private investor to reveal his true cost information. Compared with the situation under symmetric information, the government will suffer a loss of social welfare; the private investor will charge a higher toll that increases in his reported marginal maintenance cost, and specify a lower capacity that decreases with the reported cost. The results also show that the private investor obtains extra information rent beyond the reservation level of return and the rent decreases with his reported cost. However, the resulting volume-capacity ratios of the BOT road under both information structures are the same.     

Subsidizing and pricing private toll roads with noncontractible service quality: A relational contract approach

In private toll roads, some elements of the private operator’s performance are noncontractible. As a result, the government cannot motivate the private operator to improve them through a formal contract but through a self-enforcing contract that both parties are unwilling to deviate unilaterally. In this paper, we use noncontractible service quality to capture these performance elements. By employing a relational contract approach, we aim to investigate the optimal subsidy plan to provide incentives for quality improvement. We show that government subsidy is feasible in quality improvement when the discount factor is sufficiently high and marginal cost of public funds is sufficiently small. Under feasible government subsidy, we have demonstrated the optimal subsidy plans in different scenarios. Moreover, some comparative statics are presented. Based on the derived subsidy plans, we further investigate the optimal toll price. We find that the optimal toll price generates zero surplus for the private operator and positive surplus for consumers. We then make two extensions of our model to re-investigate the government’s optimal decisions on subsidy plan and toll price when her decision sequence is changed and when government compensation is present upon termination of the relationship. Some implications for practice have been derived from our model results.     

The effect of contract renewal and competitive tendering on public transport costs,subsidies and ridership

In this paper, we aim to estimate the effect of contract renewal as well as competitive tendering on public transport costs, subsidies, and ridership. More specifically, we examine to what extent (multiple) contract renewals and introduction of competitive tendering for long-term public transport contracts affect ridership, operational costs and subsidies in concession areas governed by public transportation authorities from 2001 until 2013 in the Netherlands. Our identification strategy improves on the literature as we are able to control for all time-invariant unobserved factors, such as network and area characteristics by using panel data. We show that when renewing long-term contracts, operational costs are reduced by at least 10%, whereas subsidies fall even stronger. For contracts that are renewed at least twice, the reduction in costs is even more substantial and in the order of 16%. We find that the effect of competitive tendering is completely absent, suggesting that the threat of competitive tendering is sufficient in a market where the majority of concessions is competitive tendered. Contract renewal not only reduces costs and subsidies, but simultaneously increases public transport ridership by 7.7%. Furthermore the vehicle-hours elasticity of operational costs is 0.40, pointing to strong economies of density. The geographical scale elasticity of operational costs is around one, which indicates constant returns to scale with respect to the geographical size of the concession area. This suggest that the current size of the Dutch concession area is optimal with respect to costs.     

Modeling the impact of government guarantees on toll charge,road quality and capacity for Build-Operate-Transfer (BOT) road projects

Government guarantees are frequently used to attract private investors’ participation into Build-Operate-Transfer (BOT) road projects. In this paper, we investigate the impact of government guarantees on toll charge, road quality and road capacity by taking perspective of the private investor. The main results are: (1) Minimum traffic guarantee increases toll charge while decreasing road quality. Under a low guarantee level, minimum traffic guarantee has no impact on road capacity. However, it improves road capacity when a high guarantee level is performed. (2) Under minimum revenue guarantee, if the guarantee level is sufficiently high, the optimal toll charge will be sufficiently large, but road quality and road capacity will approach zero. (3) Price compensation guarantee decreases toll charge and increases both road quality and road capacity. This paper further investigates the impact of government guarantees when the contract is auctioned. We find that auction reduces the impact of government guarantees on toll charge while failing to affect the impact of government guarantees on road quality and capacity. Some policy implications are also derived from our model results.     

Contractual PPPs for Transport Infrastructure in Spain: Lessons from the Economic Recession

In this paper, we analyse the successes and failures of contractual public-private partnerships (PPPs) for delivering and operating transport infrastructure in Spain from the award of the first toll highway concession programme to the present. To that end, we show the risk allocation principles used in Spain and explore the evolution of the contracting approaches over the years. We found that the performance was reasonably good until the arrival of the economic crisis in 2008. Taking advantage of that, we make a review of contractual PPPs for different transport modes and assess the impact that the economic crisis has had on their business performance and the capacity of the central and regional governments to fulfil their commitments with the private sector. This analysis enabled us to identify measures that, if had been applied, would have improved the resilience of these contract during the economic crisis.     

Risk-Sharing in Seaport Terminal Concessions

Over the last two decades, infrastructure development has often been supported by public–private partnerships, particularly under concession arrangements. This paper addresses terminal concession contracts in the seaport sector, and especially the problem of risk-sharing. An effective allocation of risks is the base for the well functioning of the market, and for the success of the ‘landlord’ model. Under this model, the relationship between concessionaires and port authorities is fully dependent on a contract that should be in force for the period of the concession (20, 30 or more years). Based on several Portuguese concession contracts, this paper addresses the issue of risk-sharing agreements. Some policy implications are drawn, namely, alternative contract arrangements to decrease opportunistic behaviour by concessionaires, and to provide incentives to improve efficiency.     

Revenue sharing with multiple airlines and airports

This paper investigates the effects of concession revenue sharing between an airport and its airlines. It is found that the degree of revenue sharing will be affected by how airlines’ services are related to each other (complements, independent, or substitutes). In particular, when carriers provide strongly substitutable services to each other, the airport has incentive to charge airlines, rather than to pay airlines, a share of concession revenue. In these situations, while revenue sharing improves profit, it reduces social welfare. It is further found that airport competition results in a higher degree of revenue sharing than would be had in the case of single airports. The airport–airline chains may nevertheless derive lower profits through the revenue-sharing rivalry, and the situation is similar to a Prisoners’ Dilemma. As the chains move further away from their joint profit maximum, welfare rises beyond the level achievable by single airports. The (equilibrium) revenue-sharing proportion at an airport is also shown to decrease in the number of its carriers, and to increase in the number of carriers at competing airports. Finally, the effects of a ‘pure’ sharing contract are compared to those of the two-part sharing contract. It is found that whether an airport is subject to competition is critical to the welfare consequences of alternative revenue sharing arrangements.     

Cooperation in transit delivery in West German metropolitan areas

West Germany is densely populated, averaging 245 inhabitants/km², but varying widely between urban agglomerations and rural areas. Transport volume has increased by 40% since 1970, with virtually all growth due to private automobiles. Since 1981 public transit has been suffering from decreasing demand.A 1964 Expert's Report to the German federal government was the stimulus for initiating an effective funding mechanism for new public transit construction. In 1965 Germany's first federated transit authority was founded for the region of Hamburg.Principal among the goals of any cooperative agreement among transit companies are improvements for the passengers and improvement of revenues for the companies. To attain these ends, two distinct forms of transit aggrements have been developed in Germany: transit cooperative (Verkehrsgemeinschaft) and transit federation (Verkehrsverbund). The former is more suitable for smaller to medium-sized towns, while the latter is more suitable for larger cities. The two types are described in this article.German transit federations during the 1970s succeeded in significantly increasing ridership, while during the 1980s patronage has either remained steady or has declined. Yet transit federations showed much better perfomance than did public transit in general. In terms of costs and revenues, no public transit organization in Germany is able to break even; deficits vary between 42% and 55%. The author concludes, however, that hidden subsidies for automobile traffic are far higher, because of environmental damage and the high social cost of traffic accidents.     

Application of particle swarm optimization and robust net present value for BOT-type contracts

Major infrastructure construction projects contracted to private companies by governments are important for maximizing profitability. This paper extends an existing build–operate–transfer (BOT) concession model (BOTCcM) for identifying the reasonable concession period which would be profitable both to the government and to the private sector. There are some major limitations with BOTCcM – for example, the total investment cost is pre-given and the impact of uncertainty of parameters affecting the concession period were not considered. In this research, the total investment cost is assumed as variable which should be optimally determined and the uncertainty of net cash flows is considered. Further, the proposed model is implemented to calculate the robust concession period and required capital for the construction period, using the obtained values and particle swarm optimization method.     

Regulating concessions of toll motorways: An empirical study on fixed vs. variable term contracts

Recent theoretical developments on concession contracts for long term infrastructure projects under uncertain demand show the benefits of allowing for flexible term contracts rather than fixing a rigid term. This study presents a simulation to compare both alternatives by using real data from the oldest Spanish toll motorways. For this purpose, we analyze how well the flexible term would have performed instead of the fixed length actually established. Our results show a huge reduction of the term of concession that would have dramatically decreased the firm’s benefits and the user’s overpayment due to the internalization of an unexpected traffic increase.     

Distributional effects of road pricing: Assessment of nine scenarios for Paris

The starting point of this paper is to consider that there is no general answer to the question of the equity of urban road pricing. We therefore simulate and compare the distributional effects on commuters of nine toll scenarios for Paris, assuming that utility is nonlinear in income. We show that the distributional pattern across income groups depends crucially on the level of traffic reduction induced by tolling. Stringent tolls are more favourable to low-income motorists. Equity effects also vary with toll design. Compared to a reference scenario which uniformly charges all motorists driving within Paris, an inbound cordon toll is detrimental to low-incomes. Conversely, granting a rebate to low CO₂ emission cars slightly improves their situation while an exemption for Paris residents is neutral. Surprisingly, it matters little for social equity whether toll revenues are allocated to all commuters or solely to public transport users.     

Public sector comparators for UK PFI roads: inside the black box

A public sector comparator (PSC) represents the hypothetical, risk-adjusted cost of a project—such as a road scheme—when that project is financed, owned and implemented by government. A PSC is commonly used in public procurement decision-making as a yardstick against which private investment proposals are evaluated. Using original material released by the UK Highways Agency for the first time, the author recreated the PSCs used for the evaluation of the first eight road projects to be promoted under the UK’s private finance initiative (PFI). Alternative assumptions regarding project risks were modelled using different levels of optimism-bias uplift, and the impact on value-for-money of using different discount rates was evaluated. Public sector comparators have attracted considerable attention in the literature as they retain a pivotal role in the policy decision to use—or not use—private finance. However the fact that their detail is usually kept confidential by public sector procuring agencies—because of commercial sensitivities—has restricted informed discussion and open debate. Now the architecture of these comparators is laid bare for critical examination. It has generally been assumed that any reduction in the discount rate used in PSC calculations will favour conventional procurement over PFI-type contracting arrangements. The research reported in this paper demonstrates that the relationship between the discount rate and the attractiveness of using private finance is not as simple as has been assumed, and the outcome in terms of value-for-money is not as predictable as has previously been reported.     

Viability of new road infrastructure with heterogeneous users

This paper explores the importance of heterogeneity in value of time and route choice when assessing the viability of new road infrastructure to alleviate congestion problems. The model incorporates strategic interaction between road operators in a cost-benefit framework and several competitive regimes are considered. It is then employed to establish the financial and socio-economic viability of a congestion pricing demonstration entering Madrid city centre, where road users have to choose between a free but highly congested road and a priced free-flowing road (semi-private regime). A logit estimation is undertaken with information from a questionnaire among road users in the Eastern Madrid area to obtain users’ value of time and of congestion.The tolls obtained generate a traffic reallocation towards the new roadway such that revenues suffice to render the infrastructure socio-economically viable. The private and the low toll regimes generate similar welfare gains that are close to the first best. Yet the former supposes large losses to users. The low toll and the semi-private regimes do not raise such distributional concerns. However, the low toll regime requires a sufficiently high traffic growth rate to make it financially viable; this does not happen for the other competitive regimes.     

工程量清单计价模式下的合同管理研究

在招投标阶段，运用工程量清单计价办法确立的合同价款需要在施工过程中得到实施控制。而实现以项目为中心的施工合同协调管理，建立以合同管理为核心的项目管理体系，是提高项目管理水平的关键。文章基于施工合同管理中出现的风险分配和计价方式问题，提出工程量计价模式下的工程合同价款的约定事项、调整思路及效率优先的施工合同争议处理思路。     

实行计重收费后交通量变化的原因与对策

文章针对广西高速公路实行计重收费后交通量、通行费收入的变化情况,分析了高速公路通行费收入变化的特点与原因,提出了应对高速公路交通量流失的对策和方法。     

The influence of the operational environment on efficiency of international airports

Heterogeneity must be considered in the efficiency analysis of decision‐making units; otherwise, the results will be strongly biased. This is also valid for airport management where the operational environment heavily influences efficiency. In this paper, conditional efficiency measures are applied to airports to incorporate heterogeneity in non‐parametric frontier models which are robust for outlying observations. In particular, the influence of the operational environment on airport efficiency is examined in a sample of 141 international airports. The conclusions show that the operational environment indeed matters and that privatisation, regulation, traffic transfer and the dominant carrier have a positive effect on efficiency, whereas aeronautical revenues influence it negatively. Copyright © 2014 John Wiley & Sons, Ltd.     

Traffic forecasts under uncertainty and capacity constraints

Traffic forecasts provide essential input for the appraisal of transport investment projects. However, according to recent empirical evidence, long-term predictions are subject to high levels of uncertainty. This article quantifies uncertainty in traffic forecasts for the tolled motorway network in Spain. Uncertainty is quantified in the form of a confidence interval for the traffic forecast that includes both model uncertainty and input uncertainty. We apply a stochastic simulation process based on bootstrapping techniques. Furthermore, the article proposes a new methodology to account for capacity constraints in long-term traffic forecasts. Specifically, we suggest a dynamic model in which the speed of adjustment is related to the ratio between the actual traffic flow and the maximum capacity of the motorway. As an illustrative example, this methodology is applied to a specific public policy that consists of suppressing the toll on a certain motorway section before the concession expires.     

Controlling vehicular emissions in Beijing during the last decade

The vehicle population of Beijing is sharply increasing at an average annual rate of 14.5%, causing severe transportation and environmental problems. The Beijing municipal government and the public have worked hard to control vehicular emissions since 1995. Strategies and measures have been introduced to regulate land use and traffic planning, emission control of in-use vehicles and new vehicles, fuel quality improvement, introduction of clean fuel vehicle technology and fiscal incentives. New development plans for Beijing will change the transportation structure by encouraging public transportation. For in-use vehicles, the I/M program has employed ASM tests since early 2003 and the government has encouraged the retirement of high-emission vehicles. For new vehicles, Beijing introduced Euro 1 and Euro 2 emission standards in early 1999 and 2003, respectively. It is also confirmed that Euro 3 standards will be introduced in 2005. At the same time, the fuel quality in Beijing was improved significantly, by banning lead and reducing sulfur among other changes. CNG and LPG were introduced in 1999 and are used in buses and taxis. Today Beijing has the largest CNG bus fleet in the world with more than 2000 dedicated CNG buses. Beijing has also focused on fiscal incentives such as tax deductions for new vehicles meeting enhanced emission standards to encourage their sales. These strategies and measures have had an impact on the control of vehicular emissions. Despite the rapid increase of the vehicle population by 60% between 1998 and 2003, total vehicular emissions have not increased. With the enhancement of vehicular emission control, the air quality in Beijing is improving as the city strives to its goal for a “Green Olympics”.