Concession Renegotiation Models for Projects Developed through Public-Private Partnerships

Abstract

Contractual agreements between public agencies and private companies in the form of public-private partnerships (PPPs) have proven to be beneficial to both the public and private sectors. However, PPPs expose the concessionaire to a number of potential risks over the long concession period and the concessionaire may not be able to recover the large initial investment and obtain a reasonable rate of return if significant difficulties occur in the concession period. Hosting governments normally allow concession renegotiations when certain serious risk scenarios occur. International PPP practices have shown conflicting results from renegotiations, and many renegotiations have raised serious questions about the viability of the PPP approach. To facilitate renegotiations between the public and private sectors, this research has developed a concession renegotiation framework and compensation models for three common compensation measures, namely, toll adjustment, contract extension, and annual subsidy or unitary payment adjustment. The key issue in developing a quantitative compensation model is to estimate future cash flows, in which future traffic demand and operation and maintenance costs are important stochastic variables. Time-series models have been used to forecast these stochastic variables.