Presentation for the International Transport Forum

1. Presentation for the International Transport Forum Jean Shaoul, Anne Stafford and Pam Stapleton

2. Who bears risks in practice? • Transport projects in the UK in rail, roads and air traffic control (and other sectors) examining the financial costs and rewards to various stakeholders. • Evidence base is financial statements of the partners, official reports, statistical sources research literature and the press. • Significant proportion of UK transport projects by capital value have collapsed / been terminated or been re-negotiated - £35bn of £91bn.

3. General assumption – commercial expertise will ensure viable projects Size – significant – expected to provide £30bn investment over 30 years Intention was 30% savings on costs Terminate subsidies Investment scaled back – slow and over budget Subsidies 5x previous Guarantees on debt Letter of comfort Contractual incentives limited impact Metronet companies bankrupt and TfL ownership Taxpayers / users bore the cost London Underground

4. Purpose of privatisation Competitive forces – 25 franchises to11 cos. Outcomes Reduction in competition Subsidies doubled Dividends paid out of subsidy Poor performance against targets that were no more challenging Renegotiation of franchises – several rounds History of over optimistic bids – assumptions of 10% growth without precedent Ability to hand back the keys with limited liability National Railways - Three rounds of franchises

5. Role of the regulator • RAB model • Deals with time-inconsistency problem • Guarantees return for investors if they operate efficiently • Metronet – suffered as the regulator found it had not been efficient • Rail – regulator has not ensured good outcomes for customers/ taxpayer

6. Are PPPs a new phenomena? • What is different about PPP? • Our focus is on • Use of the private sector as a financial intermediary – and the associated increase in the cost of finance • Complex and opaque organisational structures – designed to ring fence each individual project – reducing the senior debt lenders’ risk exposure • Increasing proportions of public money spent outside the direct control of government together with lack of transparency of financial reporting

7. Cost of finance debate 1 • Costs of public borrowing < private finance • Taxpayer as holder of equity risk • EIB Helm (2010) 3 elements to equity risk bankruptcy / CAPEX / political and regulatory risk. • Factoring in equity risk private finance is costlier. • Risks vary between private sector and taxpayer - contractor being ‘on time’ and the non-cash cost to taxpayers of a late bridge

8. Cost of finance debate 2 • Post financial crisis the gap is widening in countries like the UK but many of the risks of the specific projects are no greater than previously • Small differences in cost can represent very large absolute amounts

9. Efficiency, innovation and the ‘only game in town’ • Only game in town – reduces competition / provides perverse incentives to bias bids – PPP almost always better than PSC • Independent evidence on efficiency is mixed and on innovation is limited • Efficiency often equated with ‘on time and budget’ but without consideration of actual total time taken or cost incurred

10. Risk transfer • Risk transfer is absolutely central to the PPP rationale – argument is this off-sets the higher costs of finance. • IMF – warning about overpricing of risk adding cost to PPP • In practice: • Difficult to find optimal allocations of risk (a/c rules tend to > inappropriate risk transfer) • Demand risk very problematical • Evidence on RT in practice is mixed • Low penalties relative to total payment • Inability or reluctance to enforce penalties • Legally or practically difficult to terminate partnerships

11. Conclusions 1 • Experience of the UK’s transport PPPs: • Rail projects failed to deliver the outputs despite receiving more subsidy than under public ownership • Using the private sector as financial intermediary adds cost / complexity / bureaucracy and risk • Partnerships have a higher cost of finance than conventional public procurement • Risk transfer is supposedly from the state to the private sector but in practice is from the consortia to subcontractors and their work forces and to the public as users / tax payers.

12. Conclusions 2 • Internationally the capital intensive nature of transport means it is very difficult to achieve a return attractive to private sector – especially in a geographically comprehensive service • Higher cost of finance is especially important in capital intensive projects • Transport projects have wide ranging benefits that are greater than the benefits to users and investors – underinvestment by private sector classic case for public funding and financing – in the public interest.