Project Summary
Problem Statement: The 2013 American Society of Civil Engineers (ASCE) infrastructure report card gave roads nationwide a “D”, and California roads a “C-”. Billions of dollars are needed to take care of deferred maintenance and billions more are necessary to improve the state of our road transportation infrastructure. Because the public is reluctant to increase tax revenues for transportation, it is important to revisit Public-Private Partnerships (PPP) for attracting capital and engineering expertise from the private sector. However, the impact of uncertainty on the structuring and management of major road infrastructure projects is still not well understood.
Proposal: This research will create a real-options framework for analyzing public-private partnerships to fund or renovate roads. This framework will include demand uncertainty, endogenous tolls, and endogenous road capacity. It will also account for the lag between the beginning of a project and its completion. The competition between new and existing roads will be modelled explicitly, and traffic congestion will be accounted for using a BPR function.
It is well known that applying a standard cost-benefit analysis (which is static and deterministic) to uncertain projects can be misleading because it ignores both uncertainty and irreversibility. This study will derive analytical and numerical results for the optimal timing and capacity of a highway project between two cities under three arrangements: 1) public funding, operation and maintenance; 2) private funding, operation, and maintenance; and 3) a Build- Operate-Transfer (BOT) framework.
The framework will be applied to California case studies.
Expected Impact and Benefits: This project is relevant to Caltrans, Metropolitan Planning Organizations, regional transportation planning agencies, local governments, and private firms interested in financing toll roads. It may also help inform a new version of AB 680, which allowed up to four private highway franchises in CA. Expected main findings of this research include: 1) A better understanding of the impact of demand uncertainty on the decision to invest in surface transportation projects; 2) Simple criteria for the viability of private and public-private partnerships; and 3) A review of experiences with BOT road projects.
