Highway Infrastructure: Issues Concerning Private-Sector Participation

This paper examines the economic issues and evidence surrounding the role of the private sector in providing highway infrastructure. The focus is on public-private partnerships (PPPs) or long-term concession agreements between governments and private firms. PPP proponents have called for shifting infra- structure construction to the private sector to take advantage of more efficient provision of projects and the transfer of project risk from taxpayers to investors. Evidence from the United States and abroad does not consistently support this contention, although limitations in the research paradigms make a significant portion of the evidence of limited value. It is likely that idiosyncratic issues related to a particular project and the type of government involvement or over- sight come into play. Another issue associated with expanding the use of PPPs for public investment is the design of concession contracts. Some contracts are renegotiated, distorting incentives for bidding up front and for efficient production once the project moves forward. To get the incentives right, PPPs should involve competitive bidding, no contract renegotiation, and the potential for bankruptcy for participating private firms who overestimate the revenues that can be generated or underestimate the costs in their initial bids.