We examine optimal contracts for PPPs which receive revenue from user fees as well as ancillary commercial revenue, for example from commercial space in the case of airports. We assume that demand for the project is exogenous. Ancillary revenue is observable and requires effort by the concessionaire. If this additional revenue is proportional to demand for the underlying PPP project, we show that the optimal contract of the concessionaire eliminates all exogenous risk but retains a fraction of the endogenous risk. The contract can be implemented via a standard Present-Value-of-Revenue (PVR) auction (Engel et al., 2001).
JEL: H440, R420, L51.