Applying SMC pricing in PPPs for the maritime sector

This paper investigates whether Short-run Marginal Cost (SMC) pricing is feasible to implement in seaports and with what type of consequences, e.g. concerning cost coverage. Answering these questions requires an analysis of the cost structure of seaports and especially of seaport calls, as well as of how the division of these costs over the different actors runs. As from the moment that this information becomes available, it can be analysed to what extent SMC pricing can be applied in Public-Private Partnerships (PPPs) within the seaport sector. Till now, mainly seaport infrastructure is involved, including the seaport entry from the open sea.     

Applying social marginal costs pricing to the road sector

This chapter, following the results of the case studies analyzed in the Enact project, will identify and analyze the implications of the possible application of SMCP in PPP’s in the road sector. The main issues analyzed include SMCP revenue formation and its ability to finance the PPP. The paper will focus on market and competition issues like: 1) the problems due to mispriced substitutes; 2) the interdependencies between the tolls and the capacity of different road infrastructures when these are competing for the same demand; 3) since short run social marginal costs do not repay for the investments costs (except in special cases), in the case tolls should cover also the investment costs this will lead to totally different pricing schemes between roads in a same area, with problem of demand shift toward cheaper existing infrastructures, therefore increasing the problem of cost recovery. The incentives caused by the introduction of prices based on SMC’s are also investigated.     

Transport pricing and Public-Private Partnerships in theory: Issues and Suggestions

This chapter offers a theoretical examination of the following questions: what are the issues that arise when Social Marginal Cost Pricing is to be incorporated in Public-Private Partnerships (PPPs); and how may these issues be dealt with?We first briefly discuss Public-Private Partnerships in transport: what are the defining characteristics and what are the main types that exist in the different modes of transport? Next we consider the economics of Public-Private Partnerships, in particular from the viewpoint of incentives. Subsequently we identify and examine the issues that arise when Social Marginal Cost Pricing is to be incorporated in PPPs as a regulation with regard to pricing in the transport sector. Lastly, we investigate the possibilities of resolving these issues.     

The cost of second best pricing and the value of risk premium

Private provision of public infrastructure (PPP) is meant to give incentives to increased efficiency in construction as well in operation and maintenance of the infrastructure e.g. within the transport sector. Efficiency is not only (private) economic efficiency, but also social efficiency e.g. social marginal cost pricing of use of the infrastructure.Is it possible to design contracts concerning payment mechanisms and financial instruments for transport infrastructure that will stimulate social efficiency and optimal allocation of risks between parties? The paper discusses whether different targets can be met and whether compromises may lead to acceptable second best solutions.PPP implies an opportunity to let the user-payment give desired incentives in the form of Social Marginal Cost Pricing (SMCP). A PPP project is a set of contracts and agreements between several parties, including the Government, the private contractor, subcontractors, banks and infrastructure users. These contracts should be designed to give the right incentives to the parties to achieve optimal risk allocation and utilising of resources.Long contract-periods are a common feature of PPPs. The paper examines the way that financial solutions should be designed to achieve the goals for the PPP-projects concerning economic and social efficiency. The expected size and variation of the income stream from the project will influence the loan conditions offered by banks concerning interest rates, guarantees and repayment and also the ability to attract investors. The balance between equity and loans again influences the conditions of the loans. An additional problem is asymmetric information between parties. The private contractor usually knows more about the task than the Government (hidden knowledge), and the Government cannot have full knowledge of the efforts of the contractor (hidden actions).     

Social marginal cost pricing and second best alternatives in partnerships for transport infrastructures

According to the economic theory, if all the first-best conditions are met, social optimality involves the prices to be set equal to social marginal costs. When it is not possible to set prices equal to social marginal costs, due to the presence of constraints within the transport sector or distortions elsewhere in the economy, the theory suggests corrections to the SMC principle (second-best alternatives). But the implementation of second best alternatives can give rise to serious problems when transferred from theory to practice. This chapter will discuss in particular the problems that might rise when investment cost are included (totally or partially) in the social marginal costs rules, and in particular when private operators are involved.