A concession can be defined as a system through which a public authority grants specific rights to an organization (private or semi-public) to build, rehabilitate, maintain and operate an infrastructure for a given period. The BOT model (Build-Operate-Transfer) is a type of concession and should not be differentiated. Variations on the BOT include the BOOT (Build-Own-Operate-Transfer) and BOO (Build-Own-Operate). This brief addresses issues like the various concession mechanisms, the shadow toll principle and commercial & financial risks ppp’s involved in the transport sector. A section is also provided on emerging PPP telematics in transport sector.

1. Notes on PPP’s Options -
Roads Sector
August, 2010
Loay Ghazaleh, Advisor – Ministry of Works, Bahrain
MBA 2000 (Thunderbird); B.Sc. Civil Eng 1986 (Texas A & M)
973 36 711547,
loay.ghz@gmail.com; Loayg@works.gov.bh
The Concession Mechanisms 1
The Shadow Toll Principle 4
Commercial & Financial Risks 5
PPP’s in Transport Telematics? 6
1 Notes on PPP Options – Roads Sector

2. The Concession Mechanisms
A concession can be defined as a system through which a public authority
grants specific rights to an organization (private or semi-public) to build,
rehabilitate, maintain and operate an infrastructure for a given period. The
company bears the technical risk (during the construction and the
maintenance), the operation risk, most of the commercial risk and financial
risks. The infrastructure which is usually owned since the beginning by the
public sector reverts to it at the end of the contract.
The BOT model (Build-Operate-Transfer) is a type of concession and should
not be differentiated. In a BOT, a private company agrees to finance, build,
and operate an infrastructure, to maintain it in proper condition for a given
period and then to transfer it to the government.
Variations on the BOT include the BOOT (Build-Own-Operate-Transfer) and
BOO (Build-Own-Operate). In the latter case, the contract grants the right
to build and operate the infrastructure, which is not however subsequently
transferred to the public sector; there is an actual private ownership in this
case.
In a concession, unlike a simple management contract, the concessionaire
chosen by the Government will levy the funds for the investment,
maintenance, and operation and will bear a large range of risks
The main components of a concession are:
• Lot size. The Government's task is to define the "exact" size of the
package to be contracted by the companies, e.g., a cross subsidization
between the different parts of the package.
• Term (construction and operation). The term of an infrastructure
concession (construction and operation) is long (usually more than 30
years).
• Charges. A clear cut and stable provision in the concession agreement is
needed; each case is different, however, the rule it must be transparent.
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3. • Bid Selection criterion (The price cannot be the only selection criterion).
Whenever possible the choice criterion should be dearly established. And
when the contract is signed, a renegotiation between the Government and
the concessionaire should be planned so that environmental, political and
traffic-related constraints can be evaluated. The framework of such a
renegotiation should be clearly established in the initial contract.
• Potential for the development of new ideas. The contract between the
Government and the concessionaire should be drawn up to enable the
concessionaire to build up a potential for innovative ideas.
• Specifications of the service. There must be strict compliance on the part
of the concessionaire with specifications of the service (the "State-of-the-
art" is not necessarily recommended). The key advantage of using tolls is
the fact that they permit more investments on motorways than would have
been possible simply by using taxes. But it is not always possible to cover
the costs of building and operating a motorway by tolls, when traffic
volumes are low or costs are unusually high. Considerable government
support has initially been necessary to enable a toll motorway system to
get started. It therefore took considerable cross-subsidizing to extend the
network to low-trafficked routes.
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4. The Shadow Toll Principle
The shadow toll enables the public authority to entrust the concessionaire
with the task of building and financing the infrastructure. The
concessionaire does not collect a toll from the users, who thus use the
infrastructure free of charge. It is the public authority that remunerates the
concessionaire in relation to the use made of the infrastructure.
This system is thus one of counting the number of users and paying the
concessionaire in proportion to this number based on a previously
determined scale. In fact, the public authority's payment takes into account
not only the recorded traffic but also the concessionaire's performance.
This performance level can be measured from the number of lanes closed
to traffic, for example, (and the duration of the works), or from the steps
taken by the concessionaire to increase road safety.
The advantages of shadow toll road financing over concession-based toll
financing are firstly the fact that it does not keep users away from the
infrastructure and secondly there is no expenditure for toll collecting (it is
estimated that about 10% of receipts relate to toll collecting if electronic
systems are not installed).
The other two main advantages of the "classical" toll-based concession
system, which are their flexibility and the concessionaire's financial
contribution, are retained in this other type of financing. However, the
shadow toll system does not entirely solve the financing problem as the
public authority must subsequently pay the shadow tolls to the
concessionaire. Therefore, a shadow toll system leads the public authority
to finance through budget after a certain period. In a countries where
tolling is not socially acceptable, such a system may be appropriate. This
seems to be the case in the US. Also in Countries where there is a lack of
free routes parallel to concessional highways, tolling roads has been
unaccepted by the public.
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5. Commercial & Financial Risks
In a PPP scheme commercial & financial risks are of particular concern as
follows;
Commercial Risks
Experience shows that, particularly at the highway opening, these risks may
be too high to be taken only by the concessionaire. Traffic has to be very
carefully analyzed and traffic forecasts should be realistic. Moreover, the
general trend of unbundling infrastructure and services makes sense to
consider the allocation of commercial risks as an open question.
Economic and Financial Risks
These risks are of particular importance as there is always the possibility
that the private company may, either be tempted to exploit any monopoly
it might enjoy, or benefit by an unreasonable return on investment.
The solution is to strike a balance between protecting the public from
potential abuses of monopoly while insuring that the company has an
opportunity to earn an adequate return on its investment. Therefore, the
Government may consider it useful to keep an operator in the system so
that:
i. An acceptable price is always at least available;
ii. Benchmarking principle might be applied; and
iii. The problem due to the asymmetrical information between operator
and regulator may be partially overcome.
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6. Public-Private Partnership in Transport Telematics?
The public-private partnership system (PPP) can be a determining factor
not only for road project financing but also in other areas such as
telematics applied to transportation and 'the concept of risk-sharing, which
is essential for PPP.
Transport telematics has a wide range of applications that already aroused
immense interest around the world. Following the investments of the US
and Japan in these activities, the European Community has decided to
actively consider the deployment of transport telematics throughout
Europe.
Road telematics, through electronic pricing and road services to the user
(private and commercial), corresponds to a field in which a real public-
private partnership seems essential. Depending on the application and also
on its development stage, the role of the Government can be the one of a
legislator, researcher, sponsor, regulator, monitor, or even disseminator.
A new challenge is that of defining the "minimum service" with regards to
road information and inter-operability. This consists primarily in identifying
the basic information that must be communicated free of charge to the
user (related to road safety: such as the detection of accidents, or the
message on road condition). Another type of information, more concerned
with user comfort (information on trip times, choice of route, etc.) could be
provided by the private sector (subject to a charge). Lastly, a number of
services correspond to "customized" processing of information (for
example, fleet and freight management, optimized navigation) can be
provided to specific private sector users.
The first type of information to be communicated to road users is part of
the minimum service and should be provided at no extra fee (the delivery
by itself presents a plus for the society as a whole). It is more the role of the
Government to ensure that this universal service will be delivered as such
(which does not mean that it is up to the Government to operate this
universal service). The two other types of information are much more
customer oriented and could be part of a commercial service. In this latter
case, the service will be launched in the market if it is financially viable.
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7. One application of this in transport telematics could consist in gathering
public and private investments instead of splitting them as is generally the
case; for instance, the above identified universal service and commercial
service could be provided by the same private operator.
In the case of a highway operated by a concessionaire company, this latter
one may provide free of charge the universal service and charge the second
type of service. This service provision may of course not only be carried out
by a concessionaire company but also by specific operator such as telecom
companies. These service providers can be contracted out by the
Government or by the concessionaire companies or can even subcontract a
larger range of functions (such as electronic fee collection) from the
motorway concessionaire company.
Transport telematics is an area where PPP should be favored. At least three
private business categories are likely to be interested in these road
telematics applications: equipment suppliers (in charge of producing
transponders, maps, markers, etc.), vehicle producers, and service and
communication companies. Faced with these new major stakeholders from
the private sector, it seems essential for the public administrations to
anticipate the emergence of these new applications to gauge their impact
on the road sector.
The increasing trend must be to design road infrastructure as a means to
convey transport systems and information which can reposition road in
comparison with the other modes of transport and will improve the service
to the user.
The two current trends, one financial (strengthening the "user pays"
principle), the other organizational (enhanced monitoring and integration
of user needs) give reason to expect that road telematics offer a major
challenge that cannot be ignored or underestimated.
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