Improving the Payment Mechanism in Transport Public–Private Partnerships

Abstract

Based on agency theory, this paper shows that the payment mechanism in a transport public–private partnership (PPP) should generally combine a fixed payment to the contractor, a payment based on service quality and a payment relating to the number of users. The transfer of demand risk can be totally excluded only if the public authority can define and verify a series of indicators that cover all the performance dimensions of the service. The payment mechanism in transport PPPs is a key element of the contracts, since it defines the system of incentives and risks transferred to the contractor. Starting from the idea that incentives and risks are closely related to each other, this paper addresses the problem of transfering demand and performance risks. The authors assume that the public authority sets the parameters of the payment mechanism included in the contract in order to maximize social benefit. As a result, this paper establishes the general principles for an optimal payment mechanism in PPP contracts.