Availability Payment or Revenue-Risk Public-Private Partnership Concessions? Pros and Cons for Highway Infrastructure

Policy Study

Availability Payment or Revenue-Risk Public-Private Partnership Concessions? Pros and Cons for Highway Infrastructure

While revenue-risk concessions are more advantageous and transfer more risk, a U.S. role for highway availability payment concession remains.

Over the past two decades, the U.S. highway sector has seen the introduction and use of a new method of procurement: the long-term public-private partnership. Under this approach, the relevant government agency seeks competitive proposals from teams that will design, build, finance, operate, and maintain (DBFOM) a bridge, highway, or tunnel project, for terms ranging from 30 to 70 years. The detailed long-term agreement that covers each project is called a concession, following terminology in Europe, where the concept originated in the 1960s. Today the concession approach is widely used in Europe, Latin America, Asia, and Australia, though it is still the exception rather than the rule in the United States.

U.S. highway concession projects began with toll revenues as the funding source that permits long-term financing at the outset of a project. Within the past decade, a second type of concession has emerged in the highway sector: availability-payment concessions. In these cases, the usual funding source is the government’s commitment of annual payments to the winning team over the life of the long-term agreement, subject to the project continuing to meet various performance requirements (i.e., to be available for use, in good shape). In recent years, AP concessions have slightly outnumbered toll-financed concessions in the U.S. highway sector, for several reasons. Construction companies generally prefer AP concessions, and some state DOTs see only limited opportunities to use tolling for new or reconstructed highway infrastructure.

The two types of highway concession—which we term revenue-risk (RR) concessions and availability payment (AP) concessions—have similarities and differences that may not be well understood. Both offer several advantages over traditional procurement methods such as design-bid-build (DBB) and design-build (DB). These include (1) strong incentives to minimize not the initial construction cost but instead the life-cycle cost of the project, (2) competing design approaches that may result in greater value-for-money, and (3) guaranteed maintenance for the entire term of the long-term agreement. Those are important benefits that produce more bang for the buck in large highway projects.

There are also important differences, and these are less well understood. First, projects funded by a new stream of toll revenues help address the widely acknowledged gap between static or declining revenues from traditional per-gallon fuel taxes and the amount needed to improve the conditions and performance of the highway sector. Second, some AP concession projects do include tolls but those tolls are charged by and paid to the state. Hence, there is no customer-provider relationship between the highway users and the concession company in this type of structure—and that has important implications for (a) project selection, and (b) project design, in which the company seeks to attract as many users as possible to the project. In addition, AP concessions create new liabilities for governments in the form of long-term funding commitments to the project. As state treasurers and other financial officials become familiar with this point, a growing number of states are enacting limits on the amount of AP liabilities they are willing to accept.

This study explores these issues in depth, drawing on recent experiences with both revenue-risk and availability payment concession projects in the highway sector. It includes a discussion of where AP concessions can be a good fit for highway projects, as well as the limitations of this approach. The study is intended as a guide for policymakers interested in making wise use of DBFOM concessions of both types.

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Robert Poole is director of transportation policy and Searle Freedom Trust Transportation Fellow at Reason Foundation.