Engel E., Fischer R., Galetovic A. (2020)
Dealing with the obsolescence of transport infrastructure in public-private partnerships. International Transport Forum Working Group Papers, 2020
This paper examines who should bear the capital loss incurred by the obsolescence of infrastructure. It looks at ways to structure public-private partnership (PPP) contracts to ensure that the public authority retains flexibility to deal with the effects of obsolescence. The focus of the analysis is on road infrastructure.
Over the coming decades, much existing transport infrastructure may be rendered obsolete, for instance by the introduction of autonomous vehicles or by climate change. This will force governments to revamp or replace infrastructure and to do so, governments may be forced to terminate existing PPP contracts early. Early termination implies that the concession will not generate the cash flows promised to the concessionaire in the original contract. This we call “obsolescence risk”.
The amount that the concessionaire should receive in the event of an early termination may not be predetermined in the contract. Early termination may then lead to a protracted legal dispute between the concessionaire and the public authority. This may result in delays to the improvement or the replacement of existing infrastructure.