4. Optimism Bias.

Several studies have found that during infrastructure procurements, public sector entities tend to be overly optimistic about a project's costs and time lines and about its potential to generate revenue. Separately, bidders' optimism is particularly pronounced when it comes to forecasting demand for a product or service, given the desire to provide the best bid possible. Governments use several approaches to mitigate demand optimism bias. These include setting a range of revenue returns in the contract terms; allowing for a renegotiation of the contract if the returns are below the set range and limiting the private partner's profits if returns are above the desired range; providing financial payments to the private partner if demand is below a certain level; and setting the duration of the total project concession to a targeted revenue amount (that is, once the private partner has hit the specified revenue ceiling, the concession ends).