Optimal safety incentives in road concession contracts

Changes in the roles of the government and the private sector in the provision of public services along with budget constraints are resulting in an increasing use of the concession approach for financing and managing roads. In the last few years, many of these contracts set up incentives linked to bonuses to encourage the concessionaire to render a better service to the users. Road safety is one the aspects on the basis of which concessionaires can be rewarded according to their performance. The goal of this paper is to evaluate whether road safety incentives are being defined in the right way nowadays in different European countries and also identify what incentives would need to be implemented to achieve a socially optimal road safety level. To that end, we develop a specific incentive for road concession contracts that encourages companies to achieve the optimal level. We apply this methodology to three case studies of concessions recently awarded in order to determine to what extend the incentives they set up are closer or farther to the optimum.

Analysis of the Optimal Sharing of Construction Risk in Public Procurement Contracts

This paper discusses a model based on the agency theory to analyze the optimal transfer of construction risk in public works contracts. The base assumption is that of a contract between a principal (public authority) and an agent (firm), where the payment mechanism is linear and contains an incentive mechanism to enhance the effort of the agent to reduce construction costs. A theoretical model is proposed starting from a cost function with a random component and assuming that both the public authority and the firm are risk averse. The main outcome of the paper is that the optimal transfer of construction risk will be lower when the variance of errors in cost forecast, the risk aversion of the firm and the marginal cost of public funds are larger, while the optimal transfer of construction risk will grow when the variance of errors in cost monitoring and the risk aversion of the public authority are larger