Residual Value Risks of Highway Pavements in Public-Private Partnerships

Residual value risk of an infrastructure asset under public-private partnerships (P3s) refers to the risk that on expiry or termination of the P3 contract, the asset does not have the value that the sponsoring public authority originally expected. A concern arises that significant residual value risk might present in long-term P3 projects. To address the concern, this paper presents a semiempirical method to quantify the residual value risk in P3 pavement assets relative to the public-sector comparators (PSCs). Based on a long-term pavement performance database maintained by a provincial ministry of transportation in Canada, the study shows that P3 pavement assets significantly outperform the PSCs in terms of service life, the probability and duration of deferred maintenance, and the residual life after the concession period. It was found that the average residual life of a P3 asset reaches 13.5years, more than double the average residual life of 6.3years of a PSC. Based on a modified depreciation method at zero discount rate, these residual lives were translated into mean residual values of 45.0 and 24.7% of capital expenditure for the P3 and PSC assets, respectively. The simulation study at different discount rates found that while the mean residual value risk is significantly greater than zero, suggesting obvious outperformance of P3s over traditional delivery methods, the probability that the residual value of a P3 asset is less than that of a PSC does not change with the discount rate and is stabilized at 20%. The outperformance of P3 assets over PSC assets was mainly attributed to the disciplined asset management and strict handback requirements under P3s. The study concludes that the P3 model, when the contract is strictly implemented, can effectively manage and mitigate the residual value risk in pavement assets.