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Tariff adjustment frameworks for privately financed infrastructure projects

Author

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  • Sudong Ye
  • Robert Tiong

Abstract

Since privately financed infrastructure (PFI) projects are usually natural monopolies, their tariffs should be regulated to ensure socially desirable outcomes. In reality, the regulation is usually realized through tariff adjustment mechanisms. There are four basic tariff adjustment frameworks for PFI projects - adjustment based on sale price, revenue, operating income and profit after tax. They have different risk exposures and incentives. The adjustment based on the sale price provides the project company with the highest potential to increase profit but exposes it to the highest risk, while the adjustment based on the guaranteed ROR exposes the project company to the lowest risk but provides the least potential for increasing profit. Adjustments based on the revenue or the operating income are somewhere in between. In practice, a hybrid of two or more adjustment frameworks may be adopted to adapt to specific project environments. A well-designed tariff adjustment framework can create a 'win-win' solution for both the public and private sectors.

Suggested Citation

  • Sudong Ye & Robert Tiong, 2003. "Tariff adjustment frameworks for privately financed infrastructure projects," Construction Management and Economics, Taylor & Francis Journals, vol. 21(4), pages 409-419.
    • Handle: RePEc:taf:conmgt:v:21:y:2003:i:4:p:409-419
    DOI: 10.1080/0144619032000073550
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    References listed on IDEAS

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    Cited by:

    1. Abraham Park & Chen Yu Chang, 2013. "Impacts of Construction Events on the Project Equity Value of the Channel Tunnel Project," ERES eres2013_97, European Real Estate Society (ERES).
    2. Maziotis, Alexandros & Saal, David S. & Thanassoulis, Emmanuel & Molinos-Senante, María, 2016. "Price-cap regulation in the English and Welsh water industry: A proposal for measuring productivity performance," Utilities Policy, Elsevier, vol. 41(C), pages 22-30.

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