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Role of bidding method and risk allocation in the performance of public private partnership (PPP) projects

Chandan Kumar

Indira Gandhi Institute of Development Research, Mumbai Working Papers from Indira Gandhi Institute of Development Research, Mumbai, India

Abstract: The Public Private Partnership (PPP) model has recently gained a lot of attention in the infrastructure creation literature. Selection of the right private partner in PPP is important for the success of this model. The bidding method along with appropriate risk allocation plays a critical role in this regard. This paper analyses the Indian PPP framework, including its bidding process and the standard concession agreement. The paper argues that the existing bidding method (i.e. premium/grant based method) can result in overvaluation of the projects due to optimism bias. When optimism about high traffic volumes do not materialize in the long run, projects could come under stress or fail, which is quite visible for Indian PPP road projects. This paper discusses an alternative bidding method called least present value of revenue (LPVR) and compares this method for the Indian PPP set-up with the help of Monte Carlo simulations by creating various real-life kind of scenarios. Results show that both methods have their own advantages depending on what was expected and what is actually realized. If expectations are low, then both methods gives more or less competitive results, but as expectations increase the LPVR method starts giving better results with a reasonably high certainty.

Keywords: Public Private Partnership; Road Sector; Bidding Method; Contract Design; Monte Carlo Simulation; Sensitivity Analysis (search for similar items in EconPapers)
JEL-codes: D44 H54 C15 (search for similar items in EconPapers)
Date: 2018-03
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