The Increasing Role of Road Concessions
Increasing private sector involvement in transportation should be seen as a positive development. However, there are right ways to involve private firms, and then there are wrong ways. Many of the problems associated with transport public-private partnerships (P3s) have to do with concession projects—those where management and construction responsibilities, but not ownership, are held by private firms. These rights are then transferred back to the state after a fixed period of time. For the most part, the problems stem from the fact that merely transferring management fails to shift risk to the appropriate parties. Feasibility studies and traffic forecasts are often overly optimistic, and political factors—such as opposition to tolls out of principle, changing regulatory frameworks, and cronyism and a lack of competition in procurement and contracting—exacerbate the risk-sharing problems.
Unfortunately, concession projects remain the most popular form of P3 in the transportation sector. Certainly, government officials are more likely to agree to a P3 project if they are able to retain ownership in the long-run without taking on the financial and construction risks. This, however, is a serious problem. If government is going to engage in concession partnerships with private industry, it must accept that transferring all associated project risk—including inflation and exchange rate risk to financing—to private firms will likely increase the total cost of the project. Likewise, if government retains too much risk (particularly in the construction phase), the resulting moral hazard significantly diminishes the project’s chances of success and greatly increases the likelihood of cost overruns and construction delays.
Concession agreements do serve an important role as first-steps toward privatization. Concessionaires are in many ways better suited to promote the long-term interests of creating and maintaining an efficient transportation system: Concession agreements offer more certainty to future toll rates than public transportation authorities, firms are more aggressive in keeping costs low and in attracting motorists, firms can take capital depreciation tax write-offs, and concessionaires can tap into private capital in ways public agencies cannot.
In the United States–which has lagged behind much of the world in developing innovative P3s–concession agreements have become fairly popular thanks to government fiscal mismanagement. While divestitures should be preferred, concessions open the door for the private sector and likely increase the odds of outright privatization in the future.