What future for motorway concessions?

September 21, 2022 Transport

For the past 70 years, France has relied heavily on private-sector investment to develop and maintain its motorway network. Should its concession contracts be renewed? If so, how can they be better designed to serve the common good? In a new TSE partnership with the French transport regulator (Autorité de Régulation des Transports, ART), researchers Marie-Françoise Calmette, Philippe Bontems and David Martimort study the economics of motorway concessions. Looking back on the partnership’s first year, Marie-Françoise and Philippe reflect on the future organization of the motorway sector.

Why are you interested in the economics of motorway concessions?

In France, most motorway concessions were signed in the 1960s. At that time, our German and Italian neighbors already had a motorway network, unlike France. Since the French government did not have the resources to carry out all the projects at once during the post-war reconstruction period, it decided to grant long-term concessions to operators who would build and then operate the motorways. Today, as amendments to original concession contracts are negotiated, and as the main existing contracts come to an end, the economics of motorway concessions may be at a turning point. And the questions still to be explored by economists are exciting!

How did this partnership take shape? 

The theory of contracts under imperfect information is one of the specialties of TSE researchers. Among others, Jean-Jacques Laffont and Jean Tirole have made significant contributions to this field. Today, there is a notable asymmetry of information between motorway concessionaires and public authorities. We were naturally interested in contacting the new ART department responsible for passenger road transport and motorways, with a view to discussing the issues involved regarding this information asymmetry. The ART teams were receptive to our approach and together we refined the outlines of a theoretical and applied research project. We were quickly joined in our work by David Martimort, an economist specializing in contract theory, particularly infrastructure (then a visiting professor at PSE and now a researcher at TSE).

At the end of the partnership’s first year, what are the lessons of contract theory?

We have devoted our initial research to the optimization of contractual amendments, with a concessionaire who is in a monopoly situation and who has better information than the concession grantor on the costs of the work. Amendment contracts are signed each time new works are to be carried out that were not foreseen in the original contracts (for example, the creation of a third lane, a new exit, or the installation of automatic toll booths). In this context, we tried to answer the following question: how to construct optimal amendment contracts that manage both the problems of asymmetric information and the incentive to reduce costs?

When negotiating amendments, the relationship between the public authority and the concessionaire is delicate since the latter does not really face any competition. It is important that the public authorities in charge of negotiating these amendments be equipped to reduce the temptation of certain firms to manipulate cost information to their advantage. It is the role of economists to suggest appropriate incentives to encourage firms to share the right cost information and to make efforts to reduce their costs. For example, rather than agreeing on fixed upfront totals, which can be costly for the public authority in many cases, the latter could opt for slightly more "sophisticated" contracts that allow concessionaires to choose between two options: receiving a fixed sum or being fully reimbursed for the final observed cost. To reduce the overall cost for the taxpayer, the public authority could steer some projects towards one type of amendment contract, and other projects towards another type.

What issues will you be working on next?

We will soon be working on issues related to the competitive bidding of companies, in view of the upcoming expiry of the current concessions. Having drawn on contract theory, we will mobilize auction theory. As the duration of concessions are likely to be shorter in the future (perhaps 15 years as opposed to 40 or 50 years in the past), auctions will be more frequent. This further reinforces the value of thinking about the right auction conditions and what might be the best auction procedure. This reflection also goes hand in hand with consideration of the sharing of risks between concession grantor and concessionaire. And it also ties in with the debate on free motorways. Today, a concessionaire earns nothing during the construction of a new motorway and is remunerated through the tolls paid by users. However, there are other models around the world in which the taxpayer pays for the construction and maintenance of the motorways (public subsidy), rather than the user.

Are there other countries that France could learn from?

We are interested in the evolution of motorway operating systems abroad. In Catalonia, for example, since September 1, 2021, more than 500km of motorways have become free of charge, after the Spanish government decided not to extend certain concessions. The management of motorways in Chile, a country that is rather advanced in this field in terms of competition between companies, offers a remarkable model. This country has set up special auction procedures, inspired by the recommendations of economists (see the report by Eduardo Engel, Ronald Fischer and Alexander Galetovic, 2000). It is also interesting to look at possible analogies with the management of other infrastructures beyond the transport sector (water, electricity, gas, for example) in France and abroad.

Interview published in TSE Reflect, September 2022