Flexible-Term Highway Concessions

Abstract

Highway concessions are becoming popular around the world. One of the main issues in adequately designing concession contracts is how best to allocate traffic risk. Many concession contracts, therefore, are incorporating traffic risk mitigation mechanisms to limit the amount of traffic risk ultimately taken on by the concessionaire. One of the most interesting approaches in the mitigation of traffic risk is the design of flexible-term concessions (FTCs) that end automatically when a certain level of accumulated traffic or revenues is reached. The concession duration may be extended if real traffic becomes lower than expected and shortened when real traffic is higher than expected. The aim of this paper is to survey and assess the implementation of FTCs to explore why these mechanisms have so seldom been adopted. The author found that the main reason for the scarce implementation of these mechanisms lies in the strong opposition of the private sector to FTCs because of the asymmetric risk profile that FTCs present. This risk profile means that the potential gains for the concessionaire are substantially limited, while potential losses are not limited to nearly the same degree. The paper ends with some recommendations for improving the acceptability of FTCs.