Liability Cost of Government Guarantees in Highway Concession Projects: Case of the Salvador–Itaparica Bridge

Abstract

Public-private partnerships (PPPs) are adopted worldwide to provide public infrastructure yet may present problems due to the multiple uncertainties embedded in this class of projects. Therefore, in order to attract private investment, some form of mitigation of risks may be required. These risk mitigation mechanisms may take many forms and place contingent liabilities and financial burdens on the government budget that must be adequately priced. This article analyzes the case of the Salvador–Itaparica Bridge system concession project under the real options approach and compares the results with publicly available government reports on the project. Our results indicate that the expected cost of the State of Bahia government’s contingent liabilities is undervalued by a factor of five and that the guarantees provided were excessive as they resulted in the total elimination of demand risk to the concessionaire. This article contributes to a better understanding of the effects of risk-mitigating mechanisms for private investment in infrastructure projects and the importance of adequately calibrating and pricing these contingent government liabilities.