A framework for organising and financing infrastructure provision

2. A framework for organising and financing infrastructure provision Jan-Eric Nilsson, VTI

3. Purpose • To establish prerequisites for Public Private Partnerships to be beneficial for society

4. Public–Private Partnerships (PPPs) • Possible elements: • Design (D) • Build (B) • Finance (F) • Maintain (M) • Own (O) • Operate (O) • Transfer (T) 100% private company Not-for-profit company/ Road fund Mixed company CORPORATE FORM (OWNERSHIP) CONTRACTUAL RELATIONS Publicly owned company Degrees of Outsourcing Design-Build Public agency Contracting out Outsourcing and Delegation Models Degrees of independence Direct public control and provision of all tasks by a government ministry

5. PPP, Financing and the Budget • There are two main sources of financing infrastructure – users and taxpayers • In non-average situations changes in land values (land rents) can be used to pay for infrastructure. • A PPP company can charge users, but so could also the government if it wishes • Shifts from budget funding (debt or over the current budget) to PPP funding brings in no new money.

6. Efficiency • The ultimate justification for any choice of model is that it contributes to efficiency in the use of scarce resources. • There may be distributional restrictions on the efficiency objective. • The Challenge is to finds organisational and contractual mechanisms that contribute to this target.

7. Defining efficiency • Allocative efficiency • Dynamic aspects: Build new infrastructure when social benefits exceed costs. NPV>0 • Static aspects: Charge users according to marginal social costs. • Productive efficiency: Cost minimisation

8. Should users or tax payers foot the bill? • New infrastructure – low marginal costs – low prices = no user charges/tolls • But not charging users means that tax payers must pay. • What is most efficient – a toll/high user charge or financing by way of distortive taxation. • Cf. Arlandabanan, Öresundsbron and the Hungarian motorway project.

9. How should a PPP project be designed in order to further efficiency? • Both investment and maintenance in the contract. • Balancing (high/low) investment costs and (low/high) maintenance costs. • Facilitating innovations. • Makes it easier to shift risk to concessionaire. • For how long period of time should the contract be signed? • Balancing competitive pressure (poor when long contract periods) and renegotiation costs (short contract periods). • How shall quality in construction be controlled?

10. Contract design (cont.)- Minimizing Total Costs Costs Infrastructure cost (c) User and third party costs (N*cu+c3) Road standard q*

11. Contract clauses linking payment to user effects • Availability: Make payment contingent on infrastructure being available for use. • Road surface quality: Reward/punish surface quality above/below a (monitored) target. • Safety: Reward/punish performance better/worse than benchmark safety. • End-of-period standard: Make the contract control for infrastructure standard at contract termination date. • Focus on the product, not how things are done! • Performance contracting.

12. Performance contracts… • … also facilitate innovations during the construction phase. • No need for the principal to detail how jobs are to be done.

13. Efficient design (cont.) • Which is the appropriate way to split risk between the parties? • Which are the risky features (construction, price level, financial concerns, traffic etc)? • Which is the technique to handle risk in contracts? • Fixed price contracts make the concessionaire carry risk. • Index clauses or exceptions from the fixed price otherwise. • Long contracts makes it easier to let contractor carry construction risk, i.e. has to account for consequences of diligence in construction design and implementation.

14. Efficient design (cont) • Which are the arguments for and against the concessionaire raising funds? • The cost for raising financing is typically higher for a private than for a public-sector loan taker.

15. Costs time

16. Efficient design (cont.) • Standard procurement of investment and maintenance separately vs. procurement of a life time contract with the concessionaire acting like a bank. • Private financing is a means for committing the concessionaire to the contract.

17. Costs time

18. Efficient design (cont.) • Private financing efficient if cost savings from higher efficiency (lower contruction costs) exceeds the interest rate differential. • This again emphasises the significance of efficient design of the projects.

19. Summary PPP contracting from a social perspective is about designing efficiency enhancing contracts. There is no single design which is appropriate for all conditions. “PPP contracts do not make a project better.” Not true if it makes total costs lower.