PPP’s Options in Roads Sector - August, 2010


Published on

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.

  • Be the first to comment

  • Be the first to like this

No Downloads
Total views
On SlideShare
From Embeds
Number of Embeds
Embeds 0
No embeds

No notes for slide

PPP’s Options in Roads Sector - August, 2010

  1. 1. Notes on PPP’s Options - Roads Sector August, 2010 Loay Ghazaleh, Advisor – Ministry of Works, BahrainMBA 2000 (Thunderbird); B.Sc. Civil Eng 1986 (Texas A & M) 973 36 711547, loay.ghz@gmail.com; Loayg@works.gov.bhThe Concession Mechanisms 1The Shadow Toll Principle 4Commercial & Financial Risks 5PPP’s in Transport Telematics? 6 1 Notes on PPP Options – Roads Sector
  2. 2. The Concession MechanismsA concession can be defined as a system through which a public authoritygrants specific rights to an organization (private or semi-public) to build,rehabilitate, maintain and operate an infrastructure for a given period. Thecompany bears the technical risk (during the construction and themaintenance), the operation risk, most of the commercial risk and financialrisks. The infrastructure which is usually owned since the beginning by thepublic sector reverts to it at the end of the contract.The BOT model (Build-Operate-Transfer) is a type of concession and shouldnot be differentiated. In a BOT, a private company agrees to finance, build,and operate an infrastructure, to maintain it in proper condition for a givenperiod and then to transfer it to the government.Variations on the BOT include the BOOT (Build-Own-Operate-Transfer) andBOO (Build-Own-Operate). In the latter case, the contract grants the rightto build and operate the infrastructure, which is not however subsequentlytransferred to the public sector; there is an actual private ownership in thiscase.In a concession, unlike a simple management contract, the concessionairechosen by the Government will levy the funds for the investment,maintenance, and operation and will bear a large range of risksThe main components of a concession are:• Lot size. The Governments task is to define the "exact" size of thepackage to be contracted by the companies, e.g., a cross subsidizationbetween the different parts of the package.• Term (construction and operation). The term of an infrastructureconcession (construction and operation) is long (usually more than 30years).• Charges. A clear cut and stable provision in the concession agreement isneeded; each case is different, however, the rule it must be transparent. 2
  3. 3. • Bid Selection criterion (The price cannot be the only selection criterion).Whenever possible the choice criterion should be dearly established. Andwhen the contract is signed, a renegotiation between the Government andthe concessionaire should be planned so that environmental, political andtraffic-related constraints can be evaluated. The framework of such arenegotiation should be clearly established in the initial contract.• Potential for the development of new ideas. The contract between theGovernment and the concessionaire should be drawn up to enable theconcessionaire to build up a potential for innovative ideas.• Specifications of the service. There must be strict compliance on the partof the concessionaire with specifications of the service (the "State-of-the-art" is not necessarily recommended). The key advantage of using tolls isthe fact that they permit more investments on motorways than would havebeen possible simply by using taxes. But it is not always possible to coverthe costs of building and operating a motorway by tolls, when trafficvolumes are low or costs are unusually high. Considerable governmentsupport has initially been necessary to enable a toll motorway system toget started. It therefore took considerable cross-subsidizing to extend thenetwork to low-trafficked routes. 3
  4. 4. The Shadow Toll PrincipleThe shadow toll enables the public authority to entrust the concessionairewith the task of building and financing the infrastructure. Theconcessionaire does not collect a toll from the users, who thus use theinfrastructure free of charge. It is the public authority that remunerates theconcessionaire in relation to the use made of the infrastructure.This system is thus one of counting the number of users and paying theconcessionaire in proportion to this number based on a previouslydetermined scale. In fact, the public authoritys payment takes into accountnot only the recorded traffic but also the concessionaires performance.This performance level can be measured from the number of lanes closedto traffic, for example, (and the duration of the works), or from the stepstaken by the concessionaire to increase road safety.The advantages of shadow toll road financing over concession-based tollfinancing are firstly the fact that it does not keep users away from theinfrastructure and secondly there is no expenditure for toll collecting (it isestimated that about 10% of receipts relate to toll collecting if electronicsystems are not installed).The other two main advantages of the "classical" toll-based concessionsystem, which are their flexibility and the concessionaires financialcontribution, are retained in this other type of financing. However, theshadow toll system does not entirely solve the financing problem as thepublic authority must subsequently pay the shadow tolls to theconcessionaire. Therefore, a shadow toll system leads the public authorityto finance through budget after a certain period. In a countries wheretolling is not socially acceptable, such a system may be appropriate. Thisseems to be the case in the US. Also in Countries where there is a lack offree routes parallel to concessional highways, tolling roads has beenunaccepted by the public. 4
  5. 5. Commercial & Financial RisksIn a PPP scheme commercial & financial risks are of particular concern asfollows;Commercial RisksExperience shows that, particularly at the highway opening, these risks maybe too high to be taken only by the concessionaire. Traffic has to be verycarefully analyzed and traffic forecasts should be realistic. Moreover, thegeneral trend of unbundling infrastructure and services makes sense toconsider the allocation of commercial risks as an open question.Economic and Financial RisksThese risks are of particular importance as there is always the possibilitythat the private company may, either be tempted to exploit any monopolyit might enjoy, or benefit by an unreasonable return on investment.The solution is to strike a balance between protecting the public frompotential abuses of monopoly while insuring that the company has anopportunity to earn an adequate return on its investment. Therefore, theGovernment may consider it useful to keep an operator in the system sothat: i. An acceptable price is always at least available; ii. Benchmarking principle might be applied; andiii. The problem due to the asymmetrical information between operator and regulator may be partially overcome. 5
  6. 6. Public-Private Partnership in Transport Telematics?The public-private partnership system (PPP) can be a determining factornot only for road project financing but also in other areas such astelematics applied to transportation and the concept of risk-sharing, whichis essential for PPP.Transport telematics has a wide range of applications that already arousedimmense interest around the world. Following the investments of the USand Japan in these activities, the European Community has decided toactively consider the deployment of transport telematics throughoutEurope.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 alsoon its development stage, the role of the Government can be the one of alegislator, researcher, sponsor, regulator, monitor, or even disseminator.A new challenge is that of defining the "minimum service" with regards toroad information and inter-operability. This consists primarily in identifyingthe basic information that must be communicated free of charge to theuser (related to road safety: such as the detection of accidents, or themessage on road condition). Another type of information, more concernedwith user comfort (information on trip times, choice of route, etc.) could beprovided by the private sector (subject to a charge). Lastly, a number ofservices correspond to "customized" processing of information (forexample, fleet and freight management, optimized navigation) can beprovided to specific private sector users.The first type of information to be communicated to road users is part ofthe minimum service and should be provided at no extra fee (the deliveryby itself presents a plus for the society as a whole). It is more the role of theGovernment to ensure that this universal service will be delivered as such(which does not mean that it is up to the Government to operate thisuniversal service). The two other types of information are much morecustomer oriented and could be part of a commercial service. In this lattercase, the service will be launched in the market if it is financially viable. 6
  7. 7. One application of this in transport telematics could consist in gatheringpublic and private investments instead of splitting them as is generally thecase; for instance, the above identified universal service and commercialservice could be provided by the same private operator.In the case of a highway operated by a concessionaire company, this latterone may provide free of charge the universal service and charge the secondtype of service. This service provision may of course not only be carried outby a concessionaire company but also by specific operator such as telecomcompanies. These service providers can be contracted out by theGovernment or by the concessionaire companies or can even subcontract alarger range of functions (such as electronic fee collection) from themotorway concessionaire company.Transport telematics is an area where PPP should be favored. At least threeprivate business categories are likely to be interested in these roadtelematics applications: equipment suppliers (in charge of producingtransponders, maps, markers, etc.), vehicle producers, and service andcommunication companies. Faced with these new major stakeholders fromthe private sector, it seems essential for the public administrations toanticipate the emergence of these new applications to gauge their impacton the road sector.The increasing trend must be to design road infrastructure as a means toconvey transport systems and information which can reposition road incomparison with the other modes of transport and will improve the serviceto the user.The two current trends, one financial (strengthening the "user pays"principle), the other organizational (enhanced monitoring and integrationof user needs) give reason to expect that road telematics offer a majorchallenge that cannot be ignored or underestimated. 7