Design of Availability Payment Mechanism for Public Private Partnerships

Abstract

Availability Payment Public Private Partnerships (PPPs) are long-term contracts where the private sector is allocated responsibilities of designing, building, financing, operating and maintaining the highway on a public project. In return to their services the private sector is reimbursed through a performance-based predetermined payment plan. As per this plan, the private sector is entitled to receive predetermined payments called Maximum Availability Payments (MAPs) throughout the concession term (operations and maintenance phase). Thus the MAP amount and the length of concession term would have a major influence on the overall project cost since any inappropriate increase or decrease to these terms will heavily influence the project outcomes. This mandates the public agencies to diligently design MAPs and concession term but review of practices shows that the public agencies have been relying on unwarranted traditional methods to finalize these terms. Furthermore, very few researchers have worked towards designing the concession term and all the previous works have considered the payments and concession term as independent variables. Last, the timing and cost of post-concession maintenance costs have never been considered before while designing payment structure and concession term.

This research work introduces a hybrid model developed by blending the stochastic dynamic programming model with multi-objective linear optimization principles that would allow the public sector to determine the upper limit of availability payments and concession term. This model ensures that public sector's cost saving objective and private sector's financial stability objective are satisfied simultaneously. The model also integrates post-concession maintenance cost structures and thus enables this model to include the effects of post-concession maintenance costs into the design. This model also allows inclusion of the effects of variation in private sector's financial condition and performance uncertainty in the design process. The research includes a case study focusing on Caltrans' Presidio Parkway Project and covers analyses that provide valuable insights about the design of Availability Payment PPPs. The analysis also quantifies and identifies the factors that affect payments and concession term in Availability Payment PPPs.