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.     

The analysis of regulation on private highway investment under a build-operate-transfer scheme

The build-operate-transfer (BOT) approach has become an attractive instrument for public facility provision, especially for a project that faces difficulty with public finance. This study analyzes the regulation alternatives on private highway investment under a BOT scheme and their impacts on traffic flows, travel costs, toll, capacity, and social welfare (total user-benefit in the traffic system including congestion). For comparison, five cases are analyzed: (1) No BOT with maximizing welfare, (2) No BOT with breaking even on finance, (3) BOT without regulation, (4) BOT with a minimum flow constraint (the total users will not be less than those in Case 1), and (5) BOT with a maximum travel cost constraint (the travel cost for users on a non-tolled road will not exceed the maximum tolerance). After each case is modeled and simulated on some functional forms, we find that the case of BOT with regulations performs between the cases of maximizing welfare and that of maximizing profit. From the perspective of the government, regulation has less power in a project with low elastic demand. Furthermore, even when the regulation is strict, a high cost-efficient firm with BOT could result in a higher level of social welfare than that without a BOT scheme.     

Highway pricing and capacity choice in a road network under a build–operate–transfer scheme

It is often argued lately that the private sector should be allowed to build and operate roads in a transportation network at its own expense, in return it should receive the revenue from road toll charge within some years, and then these roads will be transferred to the government. This type of build–operate–transfer (B–O–T) projects is currently fashionable worldwide, especially for developing countries short of funds for road construction. One of the important issues concerning a highway B–O–T project is the selection of the capacity and toll charge of the new road and the evaluation of the relevant benefits to the private investor, the road users and the whole society under various market conditions. This paper deals with the selection and evaluation of a highway project under such a B–O–T scheme. For a given road network with elastic demand, mathematical models are proposed to investigate the feasibility of a candidate project and ascertain the optimal capacity and level of toll charge of the new highway. The response of road users to the new B–O–T project is explicitly considered. The characteristic of the problem is illustrated graphically with a numerical example.     

Private road competition and equilibrium with traffic equilibrium constraints

Toll road competition is one of the important issues under a build-operate-transfer (BOT) scheme, which is being encountered nowadays in many cities. When there are two or more competing firms and each firm operates a competitive toll road, their profits are interrelated due to the competitors' choices and demand inter-dependence in the network. In this paper we develop game-theoretic approaches to the study of the road network, on which multiple toll roads are operated by competitive private firms. The strategic interactions and market equilibria among the private firms are analyzed both in determining their supply (road capacity) and price (toll level) over the network. The toll road competition problems in general traffic equilibrium networks are formulated as an equilibrium program with equilibrium constraints or bi-level variational inequalities. Heuristic solution methods are proposed and their convergences are demonstrated with simple network examples. It is shown that private pricing and competition can be both profitable and welfare-improving.     

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.     

Analysis of regulation and policy of private toll roads in a build-operate-transfer scheme under demand uncertainty

The build-operate-transfer (BOT) approach is one of the privatization mechanisms for promoting transportation infrastructure developments by using private funds to construct new infrastructure facilities. In a BOT scheme, it often involves three parties: the government, whose objective is to maximize the benefit defined in terms of social welfare added to the society; the private investors, whose objective is to maximize the profit generated from the investment; and the road users, whose objective is to minimize the inequality of benefit distribution among the road users traveling from different origin–destination pairs. Each of these parties has different objectives that often conflict with each other. In this paper, we develop various optimal road pricing models under demand uncertainty for analyzing the tradeoffs among the three objectives. In addition, a project evaluation framework is developed for assessing the effects of government policy and regulation on the BOT project. Seven cases of the BOT road pricing problem are analyzed: (1) BOT without regulation, (2) BOT with price control regulation, (3) BOT with equity regulation, (4) BOT with construction cost subsidy, (5) BOT with concession period extension, (6) BOT with construction cost subsidy and concession period extension, and (7) BOT with multiple objectives. Numerical results using a real case study of the Ban Pong–Kanchananburi Motorway (BMK) in Thailand are provided to examine the above seven cases.     

The independence of volume-capacity ratio of private toll roads in general networks

In a general traffic network under some widely used assumptions, this paper proves that the level of service, represented by the volume-capacity (v/c) ratio, offered by a profit-maximizing private firm on a private toll road is independent of another competitor’s choice of capacity and toll rate for another private toll road. The v/c ratio will be the same as the one provided by a centralized welfare-maximizing traffic authority. Moreover, the ratio remains the same even in a regulated market where the authority imposes a cap for the generalized travel cost on the private toll road.     

Joint road toll pricing and capacity development in discrete transport network design problem

The paper demonstrates a method to determine road network improvements that also involve the use of a road toll charge, taking the perspective of the government or authority. A general discrete network design problem with a road toll pricing scheme, to minimize the total travel time under a budget constraint, is proposed. This approach is taken in order to determine the appropriate level of road toll pricing whilst simultaneously addressing the need for capacity. The proposed approach is formulated as a bi-level programming problem. The optimal road capacity improvement and toll level scheme is investigated with respect to the available budget levels and toll revenues.     

Road Pricing models with maintenance cost

According to the Federal Highway Administration of the United States, maintenance expenditure takes up more than 25% of road revenue disbursement and this percentage has been increasing gradually. The reason for the increment in maintenance cost is that there lacks incentives for road users to take this cost component into their driving behavior. That is, different classes of vehicles should be levied different levels of congestion tax due to the different degrees of damage on the highway if a road pricing policy is implemented. This paper intends to incorporate this concept into road pricing literature by introducing two types of vehicles. After the analysis of the problem, we find that different types of vehicles should be charged different tolls. The toll includes not only the travel delay cost of one's own vehicle and the other types of vehicles, but also the marginal maintenance cost that is dependent on the traffic flow. A set of numerical examples is provided to demonstrate the theoretical analyses. The result shows that both the welfare and cost coverage rate will increase when the road pricing mechanism takes the maintenance cost factor into account.     

Pareto-improving transportation network design and ownership regimes

Private provision of public roads signifies co-existence of free, public-tolled and private-tolled roads. This paper investigates the Pareto-improving transportation network design problem under various ownership regimes by allowing joint choice of road pricing and capacity enhancement on free links. The problem of interest is formulated as a bi-objective mathematical programming model that considers the travel cost of road users in each origin-destination pair and the investment return of the whole network. The non-dominated Pareto-improving solutions of toll and/or capacity enhancement schemes are sought for achieving a win-win situation. A sufficient condition is provided for the existence of the non-dominated Pareto-improving schemes and then the properties of those schemes are analyzed. It is found that, under some mild assumptions, the optimal capacity enhancement is uniquely determined by the link flow under any non-dominated Pareto-improving scheme. As a result, the joint road pricing and capacity enhancement problem reduces to a bi-objective second-best road pricing problem. A revenue distribution mechanism with return rate guarantee is proposed to implement the non-dominated Pareto-improving schemes.     

Commercialising the management and maintenance of trunk roads in the United Kingdom

Public funding of new infrastructure from money raised through taxes or borrowing has been questioned globally in recent years. One alternative solution has been to finance major capital projects through Build, Operate & Transfer (BOT) schemes. In the United Kingdom, the Private Finance Initiative (PFI) has become established as the procurement method of choice for many projects and services in central and local government. It is a natural development of other changes in government administration which have been introduced over the past few years. Projects delivered in this way enable government to become a buyer of services on behalf of the public rather than a direct provider of those services to the public, taking advantage of private sector management skills and resources in their delivery. The PFI has demonstrated its ability to deliver value for money solutions in projects across a range of capital-intensive public services, but the greatest success in delivering projects has been in the transport sector. This paper outlines how the British Government's Highways Agency has restructured and commercialised the management and maintenance of the strategic road network for which it is responsible, and how it has been at the forefront of developing successful privately financed projects. The paper explains the Agency's particular version of BOT – Design, Build, Finance and Operate (DBFO) projects. These projects are delivering new and improved road construction and maintenance, providing better services to users of the country's strategic road network and achieving significant value for money savings for taxpayers.     

Electronic toll collection

Electronic toll collection (ETC) offers the opportunity for toll facility operators to supply a substantially greater amount of traffic capacity than any other currently available form of toll collection. The current interest in ETC derives from the proposals in a number of countries to introduce urban tollways, using the net toll receipts to recover the cost of the capital investment plus an acceptable profit margin for those taking the financial risk. This paper outlines the main economic, technical, and administrative features of ETC in the context of toll charges that are determined by the rules of capital cost recovery. Electronic road pricing (ERP) as a mechanism for implementing full road user charging (in line with economic principles of efficient use of road space) is not the topic of this paper, given the predominantly financial basis of setting tolls for private roads. The underlying rationale for toolroads in the political climate of most nations is not suggestive of any plan to revise the pricing regime in line with ERP upon reversion of the infrastructure to the public sector when the capital costs are repaid. It is assumed that the tollroads will revert to free roads in line with the existing road system, and that road users will continue to contribute towards the costs of maintaining the road system by the traditional pricing mechanisms (i.e. fuel taxes, vehicle registration, fees, etc.).     

Bottleneck congestion pricing and modal split: Redistribution of toll revenue

The paper examines the question of the redistribution of toll revenue as seen in a bottleneck congestion model. Our objective is to analyse the impact of this redistribution on total cost and on modal split between railroad and road. Following Tabuchi’s two-mode model (Tabuchi, T., 1993. Bottleneck congestion and modal split. Journal of Urban Economics 34, 414-431.), we integrate a redistribution of toll revenue towards public transport into our study. In this context, we investigate two kinds of road toll regimes: a fine toll and a uniform toll. We will consider two types of railroad fare: when it is set equal to the marginal cost and when it is set equal to average cost. These models allow us to show that toll policy to be more efficient as long as toll revenue is directed towards public transport when the railroad fare is equal to average cost.     

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.     

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.     

Toll pricing framework under logit‐based stochastic user equilibrium constraints

This paper addresses the toll pricing framework for the first‐best pricing with logit‐based stochastic user equilibrium (SUE) constraints. The first‐best pricing is usually known as marginal‐cost toll, which can be obtained by solving a traffic assignment problem based on the marginal cost functions. The marginal‐cost toll, however, has rarely been implemented in practice, because it requires every specific link on the network to be charged. Thus, it is necessary to search for a substitute of the marginal cost pricing scheme, which can reduce the toll locations but still minimize the total travel time. The toll pricing framework is the set of all the substitute toll patterns of the marginal cost pricing. Assuming the users' route choice behavior following the logit‐based SUE principle, this paper has first derived a mathematical expression for the toll pricing framework. Then, by proposing an origin‐based variational inequality model for the logit‐based SUE problem, another toll pricing framework is built, which avoids path enumeration/storage. Finally, the numerical test shows that many alternative pricing patterns can inherently reduce the charging locations and total toll collected, while achieving the same equilibrium link flow pattern. Copyright © 2013 John Wiley & Sons, Ltd.     

Modeling intermodal equilibrium for bimodal transportation system design problems in a linear monocentric city

This paper investigates the intermodal equilibrium, road toll pricing, and bus system design issues in a congested highway corridor with two alternative modes - auto and bus - which share the same roadway along this corridor. On the basis of an in-depth analysis of the demand and supply sides of the bimodal transportation system, the mode choice equilibrium of travelers along the continuum corridor is first presented and formulated as an equivalent variational inequality problem. The solution properties of the bimodal continuum equilibrium formulation are analytically explored. Two models, which account for different infrastructure/system regulatory regimes (public and private), are then proposed. In the public regulatory model, the road toll location and charge level are simultaneously optimized together with the bus service fare and frequency. In the private regulatory model, the fare and frequency of bus services, which are operated by a profit-driven private operator, are optimized for exogenously given toll pricing schemes. Finally, an illustrative example is given to demonstrate the application of the proposed models. Sensitivity analysis of residential/household distribution along the corridor is carried out together with a comparison of four different toll pricing schemes (no toll, first best, distance based, and location based). Insightful findings are reported on the interrelationships among modal competition, market regulatory regimes, toll pricing schemes, and urban configurations as well as their implications in practice.     

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.     

Profit maximization by a private toll road with cars and trucks

This paper examines the profit maximizing behavior of a private firm which operates a toll road competing against a free alternative in presence of cars and trucks. Trucks differ from cars in value of time (VOT), congestion externality, pavement damage, and link travel time function. We find that the firm takes either a car-strategy or a truck-strategy for profit maximization. For a traffic mix with relatively large car volume and small truck volume, the car-strategy results in no trucks using the toll road, while the truck-strategy results in all trucks using the toll road. We derive the equilibrium flow pattern under any combination of car-toll and truck-toll, based on which we identify a profit-maximizing frontier and a strategy-switching frontier in the car-toll and truck-toll two-dimensional space. By geometrically comparing the two frontiers, we establish general conditions under which each strategy will be taken, which suggest that the truck-to-car VOT ratio, the total traffic demand, and the difference in travel distance between the two roads are critical in shaping the firm's strategy.     

Optimal toll locations and toll levels in congestion pricing schemes: a case study of Stockholm

As congestion pricing has moved from theoretical ideas in the literature to real-world implementation, the need for decision support when designing pricing schemes has become evident. This paper deals with the problem of finding optimal toll levels and locations in a road traffic network and presents a case study of Stockholm. The optimisation problem of finding optimal toll levels, given a predetermined cordon, and the problem of finding both optimal toll locations and levels are presented, and previously developed heuristics are used for solving these problems. For the Stockholm case study, the possible welfare gains of optimising toll levels in the current cordon and optimising both toll locations and their corresponding toll levels are evaluated. It is shown that by tuning the toll levels in the current congestion pricing cordon used in Stockholm, the welfare gain can be increased significantly, and furthermore improved by allowing a toll on a major bypass highway. It is also shown that, by optimising both toll locations and levels, a congestion pricing scheme with welfare gain close to what can be achieved by marginal social cost pricing can be designed with tolls being located on only a quarter of the tollable links.