Carlos Oliveira Cruz

Endogenous Determinants for Renegotiating Concessions: Evidence from Local Infrastructure

The engagement of local government in public–private partnerships (PPPs) for the provision of infrastructure and public services is a global trend. Light rail services, water systems, waste management systems, schools, sport centres and social housing are simply a few examples of sectors in which the private sector is becoming more actively involved with local authorities. Most of these engagements are conducted through the use of mixed companies and contractual concessions. However, both of these uses suffer from a major shortcoming – renegotiations. Contracts are often renegotiated within a few years of being signed, and some evidence reveals that the results might not protect the public interest. This article aims to understand how and why renegotiations of local concessions occur by examining the specific characteristics of contracts (endogenous determinants). To illustrate the discussion, a case study of a light rail system is analysed, exemplifying the effect of a contractual renegotiation. The authors argue that contractual renegotiation can be useful in decreasing contract incompleteness, but a poorly designed contractual clause can allow for opportunistic concessionaire behaviour.

Risk-Sharing in Seaport Terminal Concessions

Over the last two decades, infrastructure development has often been supported by public–private partnerships, particularly under concession arrangements. This paper addresses terminal concession contracts in the seaport sector, and especially the problem of risk-sharing. An effective allocation of risks is the base for the well functioning of the market, and for the success of the ‘landlord’ model. Under this model, the relationship between concessionaires and port authorities is fully dependent on a contract that should be in force for the period of the concession (20, 30 or more years). Based on several Portuguese concession contracts, this paper addresses the issue of risk-sharing agreements. Some policy implications are drawn, namely, alternative contract arrangements to decrease opportunistic behaviour by concessionaires, and to provide incentives to improve efficiency.

Exogenous Determinants for Renegotiating Public Infrastructure Concessions: Evidence from Portugal

AbstractRenegotiations are frequently perceived as the Achilles’ heel of concessions. After two decades of concessions development, empirical evidence suggests a recurrent need to renegotiate contracts. What drives renegotiation? Why does it occur? What are the results? The literature still lacks data on renegotiation patterns and on its main causes and results, thus not answering these questions. This paper intends to fulfill this gap by identifying some of the key determinants of renegotiations and presenting the main results. Using an econometric analysis on a real database of 87 Portuguese concessions, the research identified some variables that help explaining the high probability of renegotiation, such as the concession duration and investment, or the existence of a regulator when the contract was signed. The research also found empirical evidence of the high costs involved in renegotiations, as well as of poor control and poor management of concessions by the government.

Real Options in Infrastructure: Revisiting the Literature

Infrastructure networks are essential to support the world’s economic development. Governments around the world, in both developed and developing economies, have dedicated significant shares of the public budget to infrastructure development and refurbishment. Nevertheless, there has been an increasing concern about the selection of economically more interesting projects. The large sunk investments, as well as the uncertainty surrounding these projects, require new and more sophisticated investment analysis techniques. Simultaneously, there has been a recent trend towards increasing the flexibility in these projects to allow a more progressive adaptation to changing market conditions, thus decreasing the overall risk affecting these investments. The flexibility is introduced through real options that include the possibility of change that one develops in the planning and design stage, allowing the infrastructure (and service) to cope with future uncertainty. This paper intends to provide an overview of the current literature on real options, thereby fulfilling a gap in current academic literature. It addresses the main types of options and valuation mechanisms and provides an extensive overview of their application to the infrastructure sector.

Ability to Recover Full Costs through Price Discrimination in Deregulated Scheduled Air Transport Markets

Abstract The regulatory reforms of domestic airline markets and regional markets such as the Europe Economic Area and the increased number of Open Skies agreements have led to a move away from the administrative structure of fare setting to one dominated by market forces. Within this latter framework the initial market power and price leadership exercised by former flag carriers and charter airlines is gradually being eroded by the emergence of low‐cost carriers among other factors. A major problem encountered in supplying pre‐committed scheduled services in a competitive market is that of full cost recovery. It has been argued, mainly from studies using aggregate data, that the ability of major carriers to recover fixed costs has deteriorated in deregulated markets as barometric price leadership is replacing that of dominant firm price leadership. This paper uses disaggregate data to examine the pattern of fares set by airlines as they sell seats up to the time of departure of a service. In particular, it analyses the impact of the entrance of low‐cost carriers into a small country—Portugal—focusing on the changes that are occurring in Lisbon and Porto airports. As such it looks at the way the price of a particular product—an airline service—varies in different market environments and whether price discrimination (yield‐management) is any longer a viable approach to full cost recovery.

Theoretical Considerations on Quantitative PPP Viability Analysis

AbstractPublic-private partnerships (PPPs) are an innovative procurement model that appeared as an alternative to traditional methods such as public work contracts. The public sector comparator (PSC) allows decision-makers to decide whether the project should be developed along one of two different paths: PPP or traditional procurement. This paper provides a theoretical base for PSC calculation and sheds some light on the main critical issues, particularly the choice of the discount rate through a real case—a hospital PPP. Alternative methodologies for calculating the discount rate and different assumptions can lead to completely different results, biasing the final decision.

Risk-Sharing in Highway Concessions: Contractual Diversity in Portugal

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.

Integrating Infrastructure and Clinical Management in PPPs for Health Care

AbstractThe worldwide development of health care infrastructures and services has been increasingly founded on public-private partnerships (PPPs). Led by the benefits of this procurement model, governments felt tempted to engage themselves in long-term contracts for the provision and management of health care facilities, under distinct configuration schemes. Several arrangements have been tried: partnerships concerning just the infrastructure on a stand-alone basis, or bundling infrastructure and clinical services management, among other more unusual models. Experience has demonstrated benefits and pitfalls in each model. This paper tries to overcome the gap in the literature regarding the review of PPP arrangements in a cross-country perspective. Using case studies from 16 countries (10 European Union, Canada, Australia, Chile, Mexico, South Africa, and Lesotho), it provides a reflection on international experiences with health care PPPs and draws some recommendations for further development. To support ...

Bibliometric Analysis of PPP and PFI Literature: Overview of 25 Years of Research

AbstractAcademics have been devoting a growing attention to different matters involving public-private partnerships (PPPs), and, as the use of PPPs for delivering infrastructure evolves worldwide, so does the number and type of papers addressing this procurement model. The objective of this paper is to undertake a comprehensive literature review of papers relating to PPPs and private finance initiatives (PFIs), using a bibliometric analysis. More than 600 papers published between 1990 and 2014 were examined. None of the previously existing studies analyzed such a large sample of papers. The research found that PPP studies appear to have a steady momentum toward growth. Engineering journals (and engineering as a research area) have been particularly active in this field. Authors based in Europe and Asia had written almost two-thirds of the papers, with transportation and health sectors at the top of sector-based papers. Most of the existing work is focused on aspects of contract design, risk sharing, and a...

Problems of cost recovery by European airlines since market liberalization

Abstract The institutional background against which air transport is supplied has been changing rapidly. The initiation of market forces has led to lower fares, additional services, and more efficient airline companies as competitive pressures have grown. A major concern, however, is whether the resultant airline market is sustainable in the long-term. There have been periodic short-term shocks to the market, the most recent being the rapid rise in kerosene prices, but there are more fundamental issues concerning the possibility of excess competition being a generic feature of providing scheduled services in a competitive environment. Market stability is not easily tested, but some indicators can be explored to get better insights. Here we examine the fares offered in selected Portuguese air transport markets for 2005–2006 to assess the ability of carriers to recover their full costs – a necessary condition for stability. In particular, the paper is concerned with the pressures of competition on the ability of airlines to increase the fares that they offer as the scheduled date of departure approaches; such fares contribute significantly to an airlines recovery of full costs. The evidence suggests that in many cases airlines cannot, when confronted by competition, extract additional revenues from last minute, low-price elasticity passengers and that this could reduce the economic sustainability of some services in Europe.