Reviewing the Efficacy of Flexible Contracts: A Reassessment of the Least Present Value of Revenue Model for Public–Private Partnerships
Publication: Journal of Management in Engineering
Volume 40, Issue 1
Abstract
Many public–private partnership (PPP) projects around the world suffer from poor risk allocation, questionable technical studies, cost underestimation, and inaccurate demand forecasts. To address these issues, some scholars have suggested public authorities adopt more flexible contracts. However, given their limited use to date, questions about the overall efficacy of flexible contracts persist. To test their suitability for PPPs, this article reassessed the least present value of revenue (LPVR) model—a flexible-term contract that dynamically changes based on project revenues. The capacity of the LPVR model to address variations in both demand and project costs was tested under different scenarios by modeling historical financial data from an operating highway PPP in Peru. The results suggest the LPVR model can effectively mitigate demand risk but cannot adequately address unexpected cost variations commonly found in greenfield projects. This means the LPVR model may be better suited for brownfield projects in emerging markets that have consolidated demand and limited construction risk.
Get full access to this article
View all available purchase options and get full access to this article.
Data Availability Statement
Some or all data, models, or code generated or used during the study are proprietary or confidential in nature and may only be provided with restrictions.
References
Angeles Baeza, M. A., and J. M. Vasallo. 2010. “Private concession contracts for toll roads in Spain: Analysis and recommendations.” Public Money Manage. 30 (5): 299–304.
Apoyo & Asociados. 2019. “Norvial S.A.–Bonos corporativos.” In Informe intermedio. Lima, Perú: Apoyo & Asociados Internacionales S.A.C.
Bull, M., A. Mauchan, and L. Wilson. 2014. “Toll-road PPPs: Identifying, mitigating, and managing traffic risk.” In Public–private infrastructure advisory facility (PPIAF). Washington, DC: World Bank Group.
Casady, C. B. 2021. “Examining the institutional drivers of public-private partnership (PPP) market performance: A fuzzy set qualitative comparative analysis (fsQCA).” Public Manage. Rev. 23 (7): 981–1005. https://doi.org/10.1080/14719037.2019.1708439.
Casady, C. B. 2023. “A time differencing qualitative comparative analysis (QCA) of public-private partnership (PPP) market maturity.” Public Manage. Rev. 2023 (Mar): 1–23. https://doi.org/10.1080/14719037.2023.2177328.
Casady, C. B., and D. Baxter. 2020. “Pandemics, public-private partnerships (PPPs), and force majeure | COVID-19 expectations and implications.” Construct. Manage. Econ. 38 (12): 1077–1085. https://doi.org/10.1080/01446193.2020.1817516.
Casady, C. B., and D. Baxter. 2022. “Procuring healthcare public-private partnerships (PPPs) through unsolicited proposals during the Coronavirus COVID-19 pandemic.” J. Public Procure. 22 (1): 6–16. https://doi.org/10.1108/JOPP-07-2020-0061.
Casady, C. B., K. Eriksson, R. E. Levitt, and W. R. Scott. 2020. “Redefining public-private partnerships (PPPs) in the new public governance (NPG) paradigm: An institutional maturity perspective.” Public Manage. Rev. 22 (2): 161–183. https://doi.org/10.1080/14719037.2019.1577909.
Casady, C. B., S. Verweij, and I. van Meerkerk. 2022. “Conclusions about the performance advantage of PPP.” In Assessing the performance advantage of public-private partnerships: A comparative perspective, edited by S. Verweij, I. van Meerkerk, and C. B. Casady, 206–228. Cheltenham, UK: Edward Elgar.
Damodaran, A. 2014. Applied corporate finance. 4th ed. New York: Wiley.
De Palma, A., L. Leruth, and G. Prunier. 2009. Towards a principal-agent based typology of risks in public-private partnerships. Washington, DC: International Monetary Fund.
De Rus, G., and G. Nombela. 2000. Least present value of net revenue: A new auction-mechanism for highway concessions. München, Germany: University Library of Munich.
Dewatripont, M., and P. Legros. 2005. “Public-private partnerships: Contract design and risk transfer.” EIB Papers 10 (1): 120–145.
Eichengreen, B. 1995. “Financing infrastructure in developing countries: Lessons from the railway age.” World Bank Res. Obs. 10 (1): 75–91. https://doi.org/10.1093/wbro/10.1.75.
Engel, E., R. Fischer, and A. Galetovic. 1996. Licitación de Carreteras en Chile. Santiago de Chile, Chile: Centro de Estudios Públicos.
Engel, E., R. Fischer, and A. Galetovic. 2001. “Least present value of revenue auctions and highway franchise.” J. Political Econ. 109 (5): 993–1020. https://doi.org/10.1086/322832.
Engel, E., R. Fischer, and A. Galetovic. 2013. “The basic public finance of public-private partnerships.” J. Eur. Econ. Assoc. 11 (1): 83–111. https://doi.org/10.1111/j.1542-4774.2012.01105.x.
Engel, E., R. Fischer, and A. Galetovic. 2020. When and how to use public-private partnerships in infrastructure from the international experience. Cambridge, MA: National Bureau of Economic Research.
Engel, E., R. Fischer, A. Galetovic, and J. Soto. 2019. Financing PPP projects with PVR contracts: Theory and evidence from the UK and Chile. Santiago de Chile, Chile: Universidad de Chile Centro de Economía Aplicada.
Flyvbjerg, B. 2007. Truth and lies about megaprojects. Inaugural Speech. Delft, Netherlands: Delft Univ. of Technology.
Flyvbjerg, B. 2008. “Curbing optimism bias and strategic misrepresentation in planning: Reference class forecasting in practice.” Eur. Plann. Stud. 16 (1): 3–21. https://doi.org/10.1080/09654310701747936.
Flyvbjerg, B., M. K. Skamris Holm, and S. L. Buhl. 2005. “How (In)accurate are demand forecast in public works projects? Megaprojects planning and management: Essential readings.” J. Am. Plann. Assoc. 71 (2): 199–214. https://doi.org/10.1080/01944360508976688.
García-Ferrer, A., M. Bujosa, D. Juan, M. Aránzazu, and P. Poncela. 2006. “Demand forecast and elasticities estimation of public transportation.” J. Transp. Econ. Policy 40 (1): 45–67.
Gifford, J. L., L. A. Bolaños, N. Daito, and C. B. Casady. 2023. “What triggers public-private partnership (PPP) renegotiations in the United States?” Public Manag. Rev. 2023 (Apr): 1–27.
Goodwin, P. 2019. “Forecasting road traffic and its significance for transport policy.” In Part II Transport matters. Bristol, UK: Bristol University Press.
Guasch, J. L. 2004. Granting and renegotiating infrastructure concessions: Doing it right. Washington, DC: World Bank Institute.
Guasch, J. L., J. J. Laffont, and S. Straub. 2008. “Renegotiation of concession contracts in Latin America: Evidence from water and transport sectors.” Int. J. Ind. Organ. 26 (Apr): 421–442. https://doi.org/10.1016/j.ijindorg.2007.05.003.
Hart, O. 2003. “Incomplete contracts and public ownership: Remarks, and an application to public-private partnerships.” Econ. J. 113 (486): 69–76. https://doi.org/10.1111/1468-0297.00119.
Huamaní, S. 2010. “Una estimación del costo de capital para concesiones en carreteras del Perú.” In Cuadernos de infraestructura e inclusión social. Lima, Peru: Ministerio de Transportes y Comunicaciones del Perú.
IBRD (International Bank for Reconstruction and Development). 2017. Public private partnerships reference guide. Washington, DC: World Bank Group.
Jin, H., S. Liu, J. Sun, and C. Liu. 2021. “Determining concession periods and minimum revenue guarantees in public-private-partnership agreements.” Eur. J. Oper. Res. 291 (Jun): 512–524. https://doi.org/10.1016/j.ejor.2019.12.013.
Klein, M. 2015. “Public private partnerships: Promise and hype.” In Global practices vice-presidency PPP Cross-cutting solutions area. Washington, DC: World Bank Group.
Laffont, J. J., and D. Martimort. 2002. “Mixed models.” In The theory of incentives. Princeton, NJ: Princeton University Press.
Martimort, D., and S. Straub. 2016. “How to design infrastructure contracts in a warming world: A critical appraisal of public-private partnerships.” Int. Econ. Rev. 57 (1): 61–88. https://doi.org/10.1111/iere.12148.
Maskin, E., and J. Tirole. 1999. “Unforeseen contingencies and incomplete contracts.” Rev. Econ. Stud. 66 (1): 83–114. https://doi.org/10.1111/1467-937X.00079.
Mendiola, A., F. Alvarado, Z. C. A. Cotrado, L. García, and C. Aguirre. 2011. Factores críticos de éxito en concesiones ials en el Perú. Lima, Peru: Universidad ESAN.
Milgrom, P. 1989. “Auctions and bidding: A primer.” J. Econ. Perspect. 3 (3): 3–22. https://doi.org/10.1257/jep.3.3.3.
Nicolaisen, M. S., and P. A. Driscoll. 2014. “Ex-post evaluations of demand forecast accuracy: A literature review.” Transp. Rev. 34 (4): 540–557. https://doi.org/10.1080/01441647.2014.926428.
Nombela, G., and G. De Rus. 2004. “Flexible-term contracts for road franchising.” Transp. Res. Part A 38 (Aug): 163–179.
OSITRAN (Organismo Supervisor de la Inversión en Infraestructura de Transporte de Uso Público). 2020. “INFORME DE DESEMPEÑO 2020 Concesión de la Red Vial N° 5: Tramo Ancón–Huacho–Pativilca.” Accessed October 2, 2023. https://cdn.www.gob.pe/uploads/document/file/1987873/id-2020-red-vial-5.pdf?v=1625180211.
P3 Bulletin. 2023. “Brazil preps major highway reconcession.” Accessed March 6, 2023. https://www.partnershipsbulletin.com/article/1814761/brazil-preps-major-highway-reconcession?bulletin=p3_daily&utm_medium=EMAIL&utm_campaign=eNews%20Bulletin&utm_source=20230228&utm_content=P3%20Bulletin%20Daily%20(28-2-23)::www_partnershipsbulletin__6&email_hash=.
Parker, D., C. Kirkpatrick, and C. Figueira-Theodorakopoulou. 2008. “Infrastructure regulation and poverty reduction in developing countries: A review of the evidence and research agenda.” Q. Rev. Econ. Finance 48 (8): 177–188. https://doi.org/10.1016/j.qref.2006.12.005.
PPIAF (Public-Private Infrastructure Advisory Facility). 2014. Unsolicited proposals–An exception to public initiation of infrastructure PPPs: An analysis of global trends and lessons learned. Washington, DC: World Bank Group.
Priemus, H. 2010. “Megaprojects: Dealing with pitfalls.” Eur. Plann. Stud. 18 (7): 1023–1039. https://doi.org/10.1080/09654311003744159.
Quiñones, M., and J. Aliaga. 2019. The renegotiation of concession contracts in Peru. A theoretical and empirical approach to their causes and consequences. San Miguel, Peru: Pontifical Catholic Univ. of Peru.
Schupack, M. B. 1962. “The predictive accuracy of empirical demand analysis.” Econ. J. 72 (287): 550–575. https://doi.org/10.2307/2228438.
Tan, Z., and H. Yang. 2012. “Flexible build-operate-transfer contracts for road franchising under demand uncertainty.” Transp. Res. Part B 46 (Jun): 1419–1439.
Themsen, T. N. 2019. “The processes of public megaproject cost estimation: The inaccuracy of reference class forecasting.” Financ. Account. Manage. 35 (4): 337–352. https://doi.org/10.1111/faam.12210.
Tirole, J. 1999. “Incomplete contracts: Where do we stand?” Econometrica 67 (4): 741–781. https://doi.org/10.1111/1468-0262.00052.
Vasallo, J. M. 2006. “Traffic risk mitigation in highway concession projects: The experience of Chile.” J. Transp. Econ. Policy 40 (3): 359–381.
Vasallo, J. M. 2010. “The role of the discount rate in tendering highway concessions under the LPVR approach.” Transp. Res. Part A. 44 (Sep): 806–814.
Vasallo, J. M., and J. Gallego. 2005. “Risk sharing in the new public works concession law in Spain.” J. Transp. Res. Board 1932 (1): 1–8.
Vecchi, V., N. Cusumano, C. B. Casady, S. Gatti, and E. Borgonovo. 2022. “Addressing adverse selection in public-private partnership (PPP) procurement: An agent-based approach.” Public Works Manage. Policy 27 (4): 371–395. https://doi.org/10.1177/1087724X221112930.
Verdouw, W. 2015. Sharing risk and revenue from PPPs. Perspectives from current practice in the road sector. Winnipeg, MB, Canada: International Institute for Sustainable Development.
Verweij, S. 2022. Assessing the performance advantage of public private partnerships: A comparative perspective, edited by I. C. B. van Meerkerk and C. B. Casady. Cheltenham, UK: Edward Elgar.
Wang, H., W. Xiong, G. Wu, and D. Zhu. 2018. “Public–private partnership in public Administration discipline: A literature review.” Public Manage. Rev. 20 (2): 293–316. https://doi.org/10.1080/14719037.2017.1313445.
Welde, M., and J. Odeck. 2011. “Do planners get it right? The accuracy of travel demand forecasting in Norway.” Eur. Transp. Infrastruct. Res. 11 (1): 80–95.
Xiong, W., H. Wang, C. B. Casady, and Y. Han. 2022. “The impact of renegotiations on public values in public–private partnerships: A Delphi survey in China.” J. Manage. Eng. 38 (5): 04022040. https://doi.org/10.1061/(ASCE)ME.1943-5479.0001075.
Yescombe, E. R., and E. Farquharson. 2018. “Public private partnerships for infrastructure.” In What are public private partnerships. New York: Elsevier.
Information & Authors
Information
Published In
Journal of Management in Engineering
Volume 40 • Issue 1 • January 2024
Copyright
© 2023 American Society of Civil Engineers.
History
Received: Mar 6, 2023
Accepted: Aug 30, 2023
Published online: Nov 6, 2023
Published in print: Jan 1, 2024
Discussion open until: Apr 6, 2024
ASCE Technical Topics:
Authors
Metrics & Citations
Metrics
Citations
Download citation
If you have the appropriate software installed, you can download article citation data to the citation manager of your choice. Simply select your manager software from the list below and click Download.