Auctioning concessions for private roads

• Published in: Transportation research. Part A, Policy and practice Vol. 42; no. 1; pp. 155 - 172
• Main Authors: Ubbels, Barry, Verhoef, Erik T.
• Format: Journal Article
• Language: English
• Published: Kidlington Elsevier Ltd 2008; Elsevier
• Series: Transportation Research Part A: Policy and Practice
• Subjects: Applied sciences; Auctions; Building economics. Cost; Buildings. Public works; Exact sciences and technology; Private investors; Road infrastructure; Road types (roads, freeways, express ways, etc.); Transportation infrastructure; Welfare; Auctions; Private investors; Welfare; Road infrastructure; Private investment; Bidding; Pricing; Numerical simulation; Modeling; Toll road; Legal settlement
• ISSN: 0965-8564; 1879-2375
• DOI: 10.1016/j.tra.2007.08.001

Private toll roads are now seriously considered as an alternative to public (free-access) road infrastructure. Nevertheless, complete private provision without governmental control is only rarely considered. A main consideration against private roads would be that operators would be primarily interested in maximizing profits, which – given the market power they will have – will typically not lead to welfare-maximizing tolls and capacities. An important question is whether these discrepancies can be mitigated by a proper design of auctions for concessions of private roads. This paper therefore analyses capacity choice and toll setting by private investors in a competitive bidding framework organized by the government. We develop a two-link network simulation model with an untolled alternative to determine relative efficiency effects, and analyze rules for the government to organize the bidding process such that a more desired (welfare optimal) outcome is achieved. Our results show that, depending on the design of the auction, its outcomes may vary strongly, and may approach the maximum possible (second-best) welfare gains.