ROLE OF INNOVATIVE FUNDING IN INFRASTRUCTURE Alain FAYARD

1. Joint OECD/ECMT transport research center Working group on transport infrastructure investment ROLE OF INNOVATIVE FUNDING IN INFRASTRUCTURE Alain FAYARD French Directorate general for roads April 2006 The views expressed in this presentation are those of the author and not necessarily those of the organizations which the author belongs to.

2. SPECIAL FEATURES OF INFRASTRUCTURE • Important initial investment • Duration (construction, operation) • External effects (positive and negative) economic profitability ≠ financial profitability how “ polluter pays?” • Pricing at marginal cost/budget balance • Long-term financial return and strong need of cash, in particular at the beginning • Multiple users / one - few buyers

3. Public private partnership : the usual situation Back to the future : a centuries old story The key issue : co-operation / competition A CONTINUUM OF ALTERNATIVES Works & Services Contracts General Contracts Labels used in PPP jargon such as Turnkey contracts, BOT, DBFO or performance-based maintenance contract have no single and clear definition. Each PPP solution is too complex and too unique to be characterized in one word or acronym. Adapted from World BankToolkit Turnkey Contracts Concession B.O.T. Full Privatisation low high Extent of Private Sector Participation

4. A MATRIX APPROACH OF THE TOLL AND THE PPP A THIRD DIMENSION : A COMPREHENSIVE VIEW FROM INVESTMENT TO SERVICES TO USERS THROUGH MAINTENANCE

5. PPP : RATIONALE (1/2) • THREE CORE ISSUES : • Partnership  “ CORPORATIZATION ” • Autonomous public or quasi public body • Delegated management  More efficient organization of service Earmarking of resources Benchmarking Management Discipline with/without privatization Public private-partnership / public-public partnership • A COMPREHENSIVE & LONG RANGE APPROACH • Performance criteria / means obligations • A set of tasks including services

6. PPP : RATIONALE (2/2) • RISKS reasonably and a priori shared • Political and legal risks • Economical and financial risks • Technical risks : construction and operation • Commercial risks (tariff x traffic) (?) One indicator : balance of profits and losses account (commercial risk is only a part of it) • Risk for the Gvt in case of default of the private partner • A POSSIBILITY : TOLL • Userpays • Supplementary resource • Leverage effect by borrowing mutualization (competition issue to be addressed) • Diversion of traffic (lower economic profitability) shadow toll (to avoid traffic diversion) + toll (for resources) PPP : an organisation process a financing mechanism

7. PPP EQUALIZER Scope of work : tasks assigned to the private sector Autonomy : initiative left to the private actors Pooling : number and type of projects concerned by the agreement Risks : how to share them among actors Cost recovery : how to pay back, mainly users/tax payers Finance: project/corporate finance ; Gvt involvement World bank Toolkit : http://rru.worldbank.org/toolkits/highways

8. KEY ELEMENTS OF A CONCESSION MECHANISM Package size - Risk of monopoly - Backing by collateral alleviating risks Choice criteria - Not a contract with a contractor - What place for contractors ? - Openness/so called objective award • Duration • - Risk of "overprofit" • - Financial safety

9. PRICING: CORE QUESTIONS • THREEFOLD PRICE ROLE : • cost recovery • demand orientation • financing are these roles compatible? • High demand=low price (cost recovery) high price (offer and demand) • Marginal eco. (or social) cost? what about financial balance constraint? what about “external effects” charges? • CROSS-SUBSIDIZATION ? • MAY PRICING BE FREE? • natural monopoly & non disputable market • competitiveness, spatial planning, equity…. • Tariff elasticity of traffic  lower social utility

10. ORGANIZATIONAL CHANGES • Breakdown of road network between central government and local authorities • Focus on core network (E, F, I, Ö…..) • Clarification of responsibilities (CH : NFA….) • No link with political organization (central./fed.) • Delegated management • Private concessions (E, F, I….) • Institutionalized PPPs (IPPPs) ≠ only toll operators (D, N) • State-owned companies(Ö, SF, SK…) • Executive agencies(England, EU comm.’s proposal) • In-house contracts ≠Road funds(CH, CZ, SF…) only for earmarking resources

11. A STRENGTHENED GOVERNANCE • Different roles for different bodies Strategic plan, programming, resources allocation, project design, project management, political and adm. process management…. • Contractualization • Global contract • Medium term contracts (embedded) for fine tuning  / ≠ renegotiation • Regulations & best practices • Audits and users’ surveys How to reconcile competition and partnership?

12. “COMMERCIALIZATION” & PARTNERSHIP • Procurement • Less direct labor (even in maintenance) • Performance-based contracts • Design & build • Purchase of infra. services and not infra. asset but asset-based financial securities and ESA? • Life-cycle cost savings by bundling const.& op. • “competitive dialogue” • Quest for new resources • “fiscal” toll (D, N, S, UK….) “concession” toll • Time spreading of financial burden • PPP as a management process a financial process

13. THANK YOU Alain.fayard@equipement.gouv.fr