PPPs should be well-defined projects that are awarded in competitive auctions and not through bilateral negotiations. The transparency and efficiency of competitive auctions can allay the suspicions of those who oppose tolls and private sector involvement in infrastructure provision. New infrastructure projects financed with user fees generally are awarded to the firm that charges the lowest fee schedule for a contractually-specified number of years. We propose, as an alternative, to award the project to the firm that asks for the smallest accumulated user fee revenue in discounted value, or what we call the Present-Value-of-Revenue (PVR). This type of contract would compensate for the risk-and risk premium-by tying the length of the concession to demand for the project. If there is high demand, user fee revenue would accrue quickly and the duration of the PPP would be shorter than if demand is lower. This reduces the risk of the project and the required risk premium. Having the firm face less risk also reduces opportunistic renegotiations, which have been a major problem with PPPs in many countries.
There are other advantages to PVR contracts: it is easier to buy back the project if it becomes necessary to do so, because the uncollected revenue (minus reasonable expenses for operations and maintenance) defines a fair compensation. Other award options do not have such a straightforward compensation mechanism for a possible buyback. In addition, it is easy to adjust user fees to respond to congested demand conditions, since the only effect is to shorten the concession; doing so would not be unfair to users. The main disadvantage of using revenue's present value is that it provides fewer incentives to increase demand for the project. Therefore, it is appropriate for passive investments, such as water reservoirs, airport landing fields, and highways.