ࡱ>  @ bjbj5*5* 3W@W@95[  LLL82MDvMT 32OOOOOOOOjllllll$eR] OOOOO " OOWWWO O OjWOjWWZ OO pxLrRb>(03fQTQP Q OOWOOOOO D0<T <EUROROADS 2007 Understanding the nature of PPPs E.R. Yescombe Yescombe Consulting Ltd., London [www.yescombe.com] What are the main PPP models? Let me begin by defining what I mean by a PPP, since public-private partnership is one of these expressions which can mean whatever the speaker wants it to mean. In my opinion, a PPP involves: Private-sector investment in public infrastructure; plus: long-term service provision by the private sector; plus: transfer of investment and operating risks from the public sector to the private sector; with ultimate ownership normally retained by the public sectori.e. this is not privatisation. These arrangements can be called partnerships, but this is really only a political slogan: they are not partnerships in the legal senses, but long-term contracts between the public and private sectors. The commonest form of PPP in the road sector is the concession, i.e. construction of a road by private-sector investors, for which users pay tolls. Although, as I will discuss shortly, concessions have become more popular in recent years, the concept is of course an old one. The French would probably claim to be the inventors of concessions, first used to finance the construction of a canal in the 17th century. Closely related to concessions in the road sector, but not actually a PPP as defined above, is the franchise (or affermage). In this case the road has already been built by the public sector, and users are paying tolls; private sector investors then buy the right to operate the road and collect tolls for a period of years. There is an overlap between concessions and franchises, since in the latter case investors may have to inject additional investment to upgrade the road. From a risk point of view the main differences between the two models are that in the case of a franchise there is no initial construction risk, and the traffic flow will already be established. Of course outsourcing of road maintenance contracts is also commonplacethe key difference between this and franchises is that the contractor does not have a significant investment at risk in the contract, a point discussed further below. A far more recent variant of PPPs is what I would call the PFI Model, because its modern development originates from the British PFIPrivate Finance Initiativeprogramme, which began in the early 1990s. (In the PPP road sector, the term DBFOdesign-build-finance-operateis generally used to refer to the PFI Model, but sometimes to Concessions as well.) In the PFI Model payment for use of the road is made by a public-sector authority, not by the actual users. Such payment may be based on: usage by vehiclesi.e. so-called shadow tolls; or payment of fixed sums provided pre-agreed maintenance and service standards are maintained; or performance measures such as speed of traffic or, e.g. a combination of the latter two systems. A PFI-Model project may involve the public authority charging tolls to users, and using these to pay the PPP contractor. In some countries state-owned motorways raise private-sector financing for new projects rather than rely on government funding. This would not be a PPP as defined above, but from a financing point of view it may share similar characteristics. -oOo- Overview of the worldwide PPP road market It is difficult to produce complete, consistent and coherent statistics for the worldwide PPP market. In 2006 private-sector project-finance debt financing raised for infrastructure projects was probably in the range $65-80 billion. Road (and bridge / tunnel) projects made up a significant share of thisperhaps 40-50%. The volume of financing in this sector has increased considerably over recent years. Notable road PPP transactions in 2006 included franchise sales of the Indiana Toll Road (U.S.), and motorway operators in France, large new concessions in Australia and Greece, and significant concession activity in both the well-established Spanish market and the very new Indian market. New markets for PFI-Model projects included Austria and Malaysia, and major projects were also concluded in Canada. From a pure financing point of view (i.e. without new investment) there were also some notable refinancings of existing debt, notably for the U.K.s only major toll road, the M6, as well as the Hungarian M6. Major transactions in 2006 are set out in the table below: PPP Road Projects, 2006Region / CountryProjectAmountTypeEurope- AustriaOstregion 1-Ypsilon 800mDBFO (shadow tolls + availability fees)- FinlandE18 300mDBFO- FranceA19  618mDBFOA41 840mConcessionAutoroutes Paris-Rhin-Rhne [APRR]$2.2bnFranchise saleEiffarie$7.0bnAcquisition finance for APRRLa Socit des Autoroutes du Nord et de l'Est de la France [SANEF] $4.3bnFranchise sale- GreeceIonia Odos 1,150mConcessionThessaloniki Tunnel 460mConcession- HungaryM6 Motorway 412mRefinancing- IrelandLimerick Tunnel 268mConcessionWayerford Bypass 360mConcession- ItalyMestre Ring Road 750m- PolandAutostrada Wielkopolska SAA1 Gdansk-Torun 660m- PortugalAzores SCUT Shadow Toll Road 325mDBFO (shadow tolls)- SpainAutovi Santiago-Bron 115mConcessionAutopista de Alicante 383mConcessionAutopista de Mediterraneo 532mConcessionM-407 93mDBFO (shadow tolls)Valladolid-Segovia (2 tranches) 196mDBFO (shadow tolls)Pamplona-Logroo MotorwayUS$410mRefinancing- U.K.M6 Toll Road1.0bnRefinancingAmericas- United StatesIndiana Toll RoadUS$4.1bnFranchise salePocahontas ParkwayUS$420mTransfer of franchise and upgrading- CanadaAccess Roads EdmontonC$365mDBFOGolden Ears BridgeC$1.1bnDBFO (with tolls paid by users)- MexicoToluca Toll RoadUS$722mRefinancing- Dominican Rep.Santo Domingo Toll RoadUS$162mToll road (with minimum revenue guarantee)- PeruConcessionaria IIRSA NorteUS$213mAsia-Pacific- AustraliaBrisbane North-South Bypass Tunnel A$1.8bnMelbourne EastLinkA$2.1bn- IndiaBalaji TollwaysUS$24mConcessionIndu Navayuga Infra ProjectsUS$59mConcessionJallandhar to Amritsar Toll RoadUS$36mConcessionJas Toll RoadUS$41mConcessionKrishnagiri Toll RoadUS$101mConcessionL&T Vadodara Bharuch TollwayUS$268mConcessionKumarapalyam TollwayUS$75mConcessionL&T Western Andhra TollwayUS$60mConcessionLucknow - Sitapur ExpresswayUS$47mConcessionMumbai Nasik ExpresswayUS$148mConcessionRaipur-Aurang RoadUS$44mConcessionSalem TollwayUS$54mConcessionSwarna TollwayUS$80mConcessionTamil Nadu (DK) ExpresswaysUS$50mConcessionTrichy Thanjavur ExpresswaysUS$57mConcessionTrichy Tollway US$120mConcessionWestern U.P. TollwayUS$85mConcession- MalaysiaPenang Bridge ExtensionUS$96m- PhilippinesManila North TollwayUS$166m -oOo- Assessing the advantages and disadvantages of PPPs There has been an enormous expansion in the PPP road sector over the last few years, in line with the expansion in PPPs on other sectors such as social infrastructure (schools, hospitals, social housing, student housing, etc.), rail and other transportation, defence, government accommodation, and so on. What are the reasons for this rapid growth in the use of PPPs? It is clear that one major reason for this growth is that the initial investment in PPP roads falls outside the public-sector budget, and so avoids budgetary constraints (such as those under the Maastricht Treaty) which would otherwise prevent such investment. Some time ago I carried out an evaluation of the European Investment Banks lending to the PPP sector, and as part of this process I visited a cross-section of projects in various different countries. The first question I always asked the relevant public-sector authority was why they had used a PPP for the project, and the answer was the same in all casesWe didnt have a budget, so it was the only way to get it done. Having said this, there are other potential arguments for using PPPs, albeit secondary to the budgetary motive. The most important general case for procurement through PPPs is that the private sector can provide such facilities more efficiently, and therefore more cost-effectively, and that the rle of the state should be limited to facilitation and regulation of this provision. The cost (or value-for-money) argument in favour of PPPs is, however, difficult to prove, even if it is theoretically reasonable. Opponents of PPPs naturally point to the obvious fact that a public-sector project can be financed more cheaply than a private-sector PPP project. This is of course correctbut it ignores the fact that people lend to the government at a lower rate because they have no risk. Nonetheless, if the government undertakes a project risks such as the projects costs overrunning, or the project not performing properly, do not disappear but are spread amongst taxpayers generally. The response from PPP proponents is therefore that these risks retained by the public sector have to be valued, and added to the cost of borrowing, to enable a true comparison to be made with a PPP. (This is known as a public-sector comparator.) But this theoretical case is difficult to prove in practice. One comment often made is that PPP projects come in on time and on budget, unlike other public-sector procurement. This is generally true, but reason for it is that most public-sector procurement takes place on a design-bid-build basisi.e. the public sector designs the project and then asks for bids to build it based on this design. This process easily results in cost overruns. In PPPs, on the other hand, construction is generally on a design and build basis by the PPP contractor (or rather its construction sub-contractor), so such cost overruns should not, and generally do not occur. Moreover transferring risk to the construction sub-contractor has a corresponding cost, as illustrated by an interesting study published by the European Investment Bank. The study agrees that the ex-post cost overrun for publicly-procured roads is around 22% on average in Europe. However the study finds that the average ex-ante cost of road PPPs is about 24% greater than that of public procurement and hence the final result is similar whatever method of procurement is used. This is not a surprising resultone would expect the market to price for risk in this way. Therefore arguments about cost-effectiveness do not appear to carry much weight in relation to initial capital costs. There is a much stronger case in relation to transfer of long-term maintenance risks. Both the running maintenance costs for a road and its long-term surface-renewal and similar lifecycle costs cannot easily be predicted many years into the future. These costs are therefore a significant risk (albeit one difficult to value), and are initially passed to the private sector under a PPP. But again care needs to be taken in considering this risk transfer: the PPP contractor will not have funding to cover maintenance or lifecycle costs whose outturn is much higher than originally anticipated. If these costs are not fully underwritten by a maintenance sub-contractor (and usually such sub-contractors put caps on this liability), then the lenders to and investors in the PPP contractor should step in to protect their investmentand this capital at risk is another argument for brining private finance into long-term projects. (It is also an argument for franchises rather than outsourcing road maintenance.) But there may still come a point where maintenance and lifecycle costs are so much higher than expected that investors walk away (or threaten to) and this risk ends up de facto falling back to the public sector. Another argument in favour of PPPs relating to maintenance / lifecycle costs, is that the public sector has a habit of deferring this expenditure where there are budgetary constraints, which means that they snowball in size, become unaffordable, and so public infrastructure deteriorates. PPPs ensure that maintenance is kept up to date. But even though PPPs do not appear immediately in the public budget, there are long-term effects. Payment of tolls under a concession is just an alternative to raising taxes. And payments from the public budget under the PFI Model are just deferred in time, which can of course create budgetary problems in future (as I understand has been the case in Portugal as a result of its very large-scale shadow-toll road-building programme). PPPs may also distort choice, or other decisions by the public sectorfor example non-compete provisions in a toll-road concession may limit flexibility to construct other parallel roads to respond to traffic growth; or a road may be built because it is viable as a toll road, not necessarily because it is the road which will bring the best overall economic benefit. Political opposition to PPP roads is commonplace. Often the arguments are misconceivede.g. the suggestion that private companies are making unfair profits from what should be a public service, whereas of course private companies also make profits from the state constructing roads. However a PPP programme can run into political difficulty, e.g.: where the procurement process for a PPP is not carefully planned and fully transparent, with a proper competitionas may happen in countries which are not used to this highly-sophisticated form of procurement; if willingness to pay is not properly taken into accounti.e. users feel that the tolls are too high, however much these may be necessary to make the project financially viable; where private investors appear to be making large windfall profits, e.g. from refinancing of debt or sale of their equity investment a few years into the PPP contract. There is also an argumentwhich applies especially to road PPPsthat it is very difficult to get the traffic-risk transfer right between the public and private sector. Either too much risk is transferred and the project gets into trouble, which usually rebounds in one way or another onto the public sector; or too little risk is transferred and windfall revenues are made by private investors from traffic growth which has little to do with the project itself, but is the result of general economic growth. This brief summary does not do justice to the debate for and against PPPs, which is highly complex, but perhaps may illustrate that there is no black and white answer to the question whether PPPs are a suitable method of procuring public infrastructure. The reality is, however, that governments seem to have little choice, and we can therefore expect a continuing expansion of PPPs in the road sector. Notes Euroroads 2007E R YescombePPPs  PAGE 5  Based on statistics published by Dealogic Project Finance Review and Project Finance International. 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The Bibliography to the bookalso available online at www.yescombe.comincludes information on recent academic papers on the arguments for and against PPPs. gdgh41 0&P 1h:pg@BP. 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