Risk-Sharing in Highway Concessions: Contractual Diversity in Portugal

Abstract

Private sector involvement in road concessions has been one of the main options for governments to engage in large-scale road development plans. Political interference, optimism bias in demand forecasts and the absence of active regulators lead to frequent renegotiations of road contracts and large public remunerations to concessionaires. Because they are unable to deal with the increasing uncertainty in forecasts, governments are using availability payment schemes, which appear to be robust solutions that limit public losses. This paper evaluates the allocations of risk in four Portuguese road concessions under a contractual regulatory regime, discusses the types of incentive mechanisms used in each instance, and draws lessons from these case studies. This investigation reveals evidence indicating that although contracts are becoming increasingly complex over time, the public sector is assuming more production and commercial risks in the highway development process.