Profit Allocation and Subsidy Mechanism for Public–Private Partnership Toll Road Projects

Abstract

Public–private partnership (PPP) toll road projects are widespread around the world. However, it is difficult to predict traffic demand and cost accurately, which may lead to high profit risks for the private sector or increase the fiscal burden for the government. This paper proposes an effective methodological framework for the probabilistic evaluation of the excess profit allocation between the government and the private investor, as well as the corresponding subsidy mechanism. First, an annual profit function is introduced, taking particular care to include factors associated with uncertainties. Then, by applying Monte Carlo simulation to a proposed dynamic quantitative model, the excess profit allocation ratio and subsidy ratio are determined. The model was verified using SH 130, a PPP toll road in Texas, for which a sensitivity analysis was conducted to illustrate the impact of different risk factors. This paper provides a knowledge base so that decision makers can recognize the importance of accurately forecasting profit risks in order to provide a reasonable and fair profit redistribution mechanism to facilitate PPP contract design.