The cost of second best pricing and the value of risk premium

Private provision of public infrastructure (PPP) is meant to give incentives to increased efficiency in construction as well in operation and maintenance of the infrastructure e.g. within the transport sector. Efficiency is not only (private) economic efficiency, but also social efficiency e.g. social marginal cost pricing of use of the infrastructure.Is it possible to design contracts concerning payment mechanisms and financial instruments for transport infrastructure that will stimulate social efficiency and optimal allocation of risks between parties? The paper discusses whether different targets can be met and whether compromises may lead to acceptable second best solutions.PPP implies an opportunity to let the user-payment give desired incentives in the form of Social Marginal Cost Pricing (SMCP). A PPP project is a set of contracts and agreements between several parties, including the Government, the private contractor, subcontractors, banks and infrastructure users. These contracts should be designed to give the right incentives to the parties to achieve optimal risk allocation and utilising of resources.Long contract-periods are a common feature of PPPs. The paper examines the way that financial solutions should be designed to achieve the goals for the PPP-projects concerning economic and social efficiency. The expected size and variation of the income stream from the project will influence the loan conditions offered by banks concerning interest rates, guarantees and repayment and also the ability to attract investors. The balance between equity and loans again influences the conditions of the loans. An additional problem is asymmetric information between parties. The private contractor usually knows more about the task than the Government (hidden knowledge), and the Government cannot have full knowledge of the efforts of the contractor (hidden actions).     

The regulatory function in public-private partnerships for the provision of transport infrastructure

A wide range of contractual arrangements are increasingly being used by the public sector to materialise the delegation of transport infrastructure provision tasks to the private sector, over long periods of time. This paper addresses the issue of transport infrastructure regulation in the specific context of public-private settings. Starting by the discussion on the concept of Public-Private Partnership (PPP) it is stressed that, despite the different meanings that can be found in the literature, it is possible to define a PPP by using a core group of characteristics, such as the bundling of services and the transference of a relevant part of the risks to the private sector on a long term basis. Regarding the action of the regulator, we look at three dimensions of efficiency that are expected to be pursued at the strategic level of regulatory action. However, it is acknowledged that the regulatory function is in practice rather complex since it requires balancing a multiplicity of other objectives or goals, which may vary according to specific economic conditions. In the domain of pricing, the review carried out suggests that since “first best” assumptions are not met in the “real world” it hardly seems possible that the short run marginal cost pricing “canon” could be directly used to shape pricing policies. Consequently, when considering the application of the standard neoclassical marginal cost pricing approach it is pertinent to ask whether the second best solutions can lead to efficient outcomes that might be accepted by the stakeholders. Bundling construction and maintenance tasks into a single long term contract, which is a typical characteristic of “standard” PPPs, could theoretically bring cost benefits since it allows for the possible internalization of any positive externalities that may be generated during the whole project life cycle. The economic rationale for the bundling of construction/maintenance with financing services is that it enhances the likelihood of submission of realistic bids at the procurement stage. In addition, the chances of the contractor sticking to the agreed contractual terms, after contract award, are potentially increased given the higher exposure to financial risk.     

Tips and Pitfalls in PPP design

The Public-Private-Partnership (PPP) procedure is a very appealing model, but as it becomes more and more used in practice, problems and failures have been observed in the management of many projects. Many of these unfortunate experiences are consequences of errors in the implementation of the procedure, but in other cases, clear errors of conception were the cause.Indeed, there are many ways to structure a PPP and PPP is not the only way to manage an infrastructure scheme. It is thus an important task to provide guidelines on whether to use PPP or other types of procurement and, in case a PPP is preferred, on how to design it. The aim of this chapter is to contribute to this task, trying to combine theoretical knowledge and practical experience.After a review of the variety of economic characteristics of transport infrastructure and their procurement conditions, we recall the reasons that may justify this association of public and private management which is the characteristic of PPP, outlining the limits of using pure private or pure public procurement. Then an analytic process is proposed, screening the parameters which matter most for choosing the PPP procedure among many possible ones, depending on the specificities of the various transport modes. This process gives also indications on key elements for implementing a PPP.Finally, the analytic process proposed is used for a generic analysis of, respectively, the motorways and port sectors, so as to test its practicability and customizing capability for the use of public authorities.     

A simulation approach for estimating value at risk in transportation infrastructure investment decisions

Traditional economic analysis techniques used in the assessment of Public Private Partnership (PPP) projects are based upon the assumption that future cash flows are fully deterministic in nature and are not designed to account for risks involved in the assessment of future returns. In reality, many of these infrastructure projects are associated with significant risks stemming from the lack of knowledge about future cost and benefit streams. The fundamental premise of the PPP concept is to efficiently allocate risks between the public and the private partner. The return based on deterministic analysis may not depict a true picture of future economic outcomes of a PPP project for the multiple agencies involved. This deficiency underscores the importance of risk-based economic analysis for such projects. In this paper, the authors present the concept of Value-at-Risk (VaR) as a measure of effectiveness (MOE) to assess the risk share for the public and private entity in a PPP project. Bootstrap simulation is used to generate the risk profile savings in vehicle operating cost, and in travel time resulting from demand-responsive traffic. The VaR for Internal Rate of Return (IRR) is determined for public and private entity. The methodology is applied to a case study involving such a joint venture in India, the Mumbai Pune Expressway/National Highway 4 (MPEW/NH4), and fiscal implications from the perspective of the public and the private entities are examined. A comparison between deterministic and risk based economic analysis for MPEW/NH4 is presented. Risk analysis provides insightful results on the economic and financial implications from each participant's viewpoint.     

Alternative financing for Bus Rapid Transit (BRT): The case of Porto Alegre, Brazil

In the 1970s, Brazil was leading the implementation of high-flow bus priority schemes, but now cities are less capable of financing public infrastructures. This paper explores the private sector participation in the provision of transit infrastructure based on Public-Private Partnerships (PPP) for Bus Rapid Transit (BRT). The Porto Alegre BRT contemplates interchange terminals planned to accommodate retail and service activities. It is expected that these areas shall generate enough revenues to remunerate private investors, under a PPP scheme, for the construction of terminals and part of the infrastructure required to upgrade some sections of the existing busways to BRT standards.     

How much can public private partnership really do for urban transport in developing countries?

A few cities in some of the larger developing countries in Latin America and Asia have made increasing use of multi-year concessions or franchises, competitively awarded to private companies, for construction and operation of urban transport infrastructure and for provision of public transport services. In view of the strong prospective growth of developing-country cities with large transport needs, and the rise in the emerging economies of potential new sources of private capital, it is important to see how effective PPP has so far been in this area. The experience is analyzed principally by thorough comparative review of what has actually happened for some of the main users to date: Bogotá, Santiago, São Paulo, Seoul, and several cities in both China and India. Despite delays and mistakes that have been made in development of most of the projects, the overall results, already delivered and in prospect, are very positive and urban public transport is benefiting substantially, with significant side effects on poorer people's access to work and to services, air pollution levels and road accident rates. The widest and most important advantage of the PPP arrangements, as compared with more conventional short-term contracting, is found to be the innovations, technical and managerial, developed, and, in particular, the mutual capacity building of the countries' private and public sectors and their more effective interaction. The experience in the six countries covered suggests that other developing-country cities may be best assisted to develop sound urban transport PPPs more rapidly through provision of help on chosen items among 7 elements that have proved particularly crucial but sometimes weak in the projects reviewed: Civic consultation systems, Land-use/Transport strategic planning, Land/property market management, Monitoring systems, Progressive policies, Economic regulation, and Public institutional framework for PPPs.     

Does the political and economic context influence the success of a transport project? An analysis of transport public-private partnerships

The construction and provision of infrastructure services such as transport nowadays is often based on a partnership between three main actors: public sector, private sector and multilateral lenders, under a framework of Public-Private Partnerships (PPPs). This type of partnership has been employed in a wide range of projects in the transport sector and in various contexts in developing and developed countries. Given this observation, the objective of this paper is to examine how countries’ economic and political characteristics contribute to the success of PPPs in transport investments. Special focus in the analysis is given to how the perception of corruption and democratic accountability may influence the success of a PPP project in different transport sectors. We examine a database with 856 transport PPP projects using a generalized linear model in the form of a logit model in order to evaluate the transport database covering data from 72 countries, classified in six regions. The study highlights the importance of national experience. Not only does national macroeconomic experience appear to have a relevant role, but so also does its past experience (either positive or negative) of transport PPP projects. An interesting finding from the analysis is the importance of the rest of the world’s perception of a country’s level of corruption and democratic accountability for the final outcome of a PPP project.     

European rail reform and passenger services - the next steps

Whilst the emphasis of European Union rail legislation to date has been on freight, measures such as separation of infrastructure from operations, infrastructure charging regimes and regulation have major implications for the passenger sector. But implementation of these measures in many countries has been inadequate. Crucial to overcoming these problems is the establishment of strong independent regulators in all member states. There is currently no requirement for competition in the passenger sector except for international services, but there is experience both of open access for commercial services and of competitive franchising. However, even where permitted open access competition has been very limited and there is evidence that undesirable cream skimming may be a problem. Experience of franchising has generally been positive, but in some cases it has failed to drive down costs. It is concluded that a combination of more sensible risk sharing, a determination not to renegotiate, longer franchises and limited open access competition where justified by benefits is likely to be the best way forward.     

Equality of bargaining power in contracts for international liner shipping

Mandatory rules exist in contracts for international liner shipping primarily because of imbalances and non-equity in the allocation of contract responsibilities. The superior bargaining position owned by the carriers depends largely upon liner market monopoly levels, the supply and demand balance between the shipper and carrier, and the cargo volume size of the shippers. With the development of shipping technologies, mode of transport, and shipping competition policy, the unequal comparison of bargaining forces between shippers and carriers changes. When the existing mandatory rule was deemed no longer necessary due to changing circumstances, legislation requirements to restore freedom to contract became apparent. When both sides have equal bargaining power, adoption of the principle of freedom of contract for their business relationships is suitable. The Rotterdam Rules concerning freedom of volume contract construction is based on equal bargaining powers between both sides and responds to the evolving situation of the industry. The Rules represent the development trend of today’s theory of contracts for international liner shipping and the demand for legal and institutional changes.     

Evaluation of progress in contractual terms: Two case studies of recent DBFO PPP projects in North America

With continuous demand for transportation infrastructure and chronic funding shortfalls, public-private partnerships (PPPs) for infrastructure provision have garnered attention in recent years in the U.S. and abroad. High profile concession deals in Chicago and Indiana have raised concerns about the protection of public interests in PPPs. Such concerns have ignited heated debates, partly driven by ideology and vested interests, but also by questionable decisions made previously. While public agencies at all levels are interested in identifying successful PPP arrangements, the variety and complexity of PPP deals, combined with local factors unique to each project, make the development of a universal evaluation framework practically infeasible.     

Regulation,trust and contractual incentives around transport contracts – Is there anything bus operators can learn from public air service contracts?

This paper compares recent experiences in contract negotiation and subsequent commitment in public air services with the bus industry. The heart of the paper is a survey of European and Australian regional airlines, which we mirror with revealed experiences of bus operators. We aim to identify a number of elements in the contracting regimes that have exposed ambiguity and significant gaps in what the principal (e.g., transport department) expected, and what the agent (airline or bus operator) believed they were obliged to deliver. Ultimately airline and bus services are similar in that public authorities procure transport services that are desirable for the society but would be unprofitable without government involvement. In both sectors (theoretically fairly similar) public transport contracts are used, and those usually include obligations and performance measurements. In terms of similarities, one of the surveyed contract details that had a perceived high clarity in both industries was “payment procedures” and amongst those with rather poor clarity was also in both industries “incentives to improve performance and grow patronage”. We also show differences between regional air services and bus operations with regard to performance measurement and pre-specified obligations. Because of the strong safety culture around air services we find that regulation and trusting partnerships are even more important to aviation than to the bus sector. Because of the high level of trust but also because of simpler and more complete contracts in aviation, there is much less (re-)negotiation going on compared to the bus operations.     

Future challenges for transport infrastructure pricing in PPP arrangements

In this paper we report the conclusion of a research project dedicated to pricing regimes in public-private partnership contracts for the provision of transport infrastructure (Macário et al., 2009). Several elements have been brought to the bulk of knowledge that supports the design and implementation of public-private partnership in the transport sector. These developments have been achieved in the following domain:

•

Understand difficulties of price setting within the PPP environment, given the potential conflict of interest among the different parties engaged, go beyond the discussion of first best versus second-best price setting mechanisms.

•

Understand the role of government and regulators in the performance of a PPP.

•

Translate the issue of asymmetries of information between parties into a risk taking language.

•

Devise alternative contractual designs that will enable competitive price setting.

•

Understand that a structural element is missing to conciliate the views of the different stakeholders over a PPP: a bridge between infrastructure costs and charges.

The objective of this paper is to overview the main challenges ahead of transport infrastructure pricing, considering the current and likely future policies as well as the field constraints. Moreover, a proposal is formulated to overcome some of the current pitfalls associated to transport infrastructure pricing.     

Towards a simplified performance-linked value for money model as a reference point for bus contract payments

The burgeoning commitment to contracting the delivery of bus services through competitive tendering or negotiated performance-based contracts has been accompanied by as many contract payments schemes as there are contracts. We are now well placed to design a simplified performance-linked payment (SPLP) model that can be used as a reference point to ensure value for money, given the accumulation of experiences throughout the world which have revealed substantive common elements in contracts. Whether the payment to the operator is framed as a payment per passenger or as a payment per service kilometre, the SPLP identifies efficient subsidy outcomes that are linked to a proxy indicator of net social benefit per dollar of subsidy. We illustrate how the SPLP model can be applied to obtain the gross (subsidy) cost per passenger (or per passenger km) from measures of gross cost efficiency and network effectiveness. This model can then be used as part of a benchmarking activity to identify reference value of money prospects in respect of passengers per $ subsidy outlay by adjusting for influences not under the control of the service provider. A single framework to identify contract payments to operators, and to assess (i.e., benchmark) operator performance on critical KPIs, is provided by internalising critical key performance indicators (KPIs) in the design of the SPLP. The proposed SPLP model is sufficiently general to be independent of the procurement method (competitive tendered or negotiated, for example) and of the treatment of revenue allocation (net or gross based contracts), with the additional advantage of being able to assess value for money for government.     

Private sector responses to port privatization in India

Indian ports offer good opportunities for investors prepared to take a long-term view, and some successful small-scale private contracts are already in place. But strategic direction from the centre is required to accelerate and broaden the privatization process, and ensure that private interest in the ports sector is maintained.     

Workshop 4: Designing contracts/concessions: What has worked and what has not and why?: 12th International Conference Series on Competition and Ownership in Land Passenger Transport

A contract establishes a mutual relationship between an authority and an operator. From the point of view of the authority, it is a tactical level mechanism to achieve the strategic objectives of government. Management of contractors translate the requirements of contracts into operational practices to guide the day-to-day work of staff for the delivery of services. Much can go wrong with contracts for the provision of public transport services. Workshop participants identified and ranked 25 potential risk factors. The five most important factors, which relate to objectives, tender assessment, allocation of risks, financial viability and dispute management, were examined drawing on the 11 papers presented to the workshop. Matters that work, that do not and would make the most difference to the success of contracts were identified.     

Port reform in Australia: issues in the ownership debate

Australia port reform initiatives have taken on a variety of forms — from out-right sale and transfer of ownership, to the sale of particular assets of infrastructure or services, or to long-term lease arrangements; or in some cases state governments, unable to relinquish control, have opted for corporatization or commercialization strategies. Reform is driven by the belief that ownership impacts on efficiency and efficiency is perceived to suffer if governments either retain ownership or direct control. As a result a major aim of reform is to either remove or distance governments from day to day port operations. The sale of ports removes government control outright and privatized ports are subject to identical regulatory constraints as any company in the private sector. But corporatization strategies are such that government ownership is retained and ports have been transformed into statutory state owned corporations. Effectiveness of this strategy requires legislation to be such that port corporations are free to operate like their private sector counterparts. To date this has not occurred and some serious impediments are emerging which are embedded in legislation and which, rather than reduce, have indeed, increased government control.     

Optimal concession contracts for landlord port authorities with different pursuing goals

This paper investigates how landlord port authorities should offer concession contracts to their terminal operators under two different goals, by building a two-stage game for each goal. If maximizing the weighted sum of fee revenues and throughout benefits is port authorities’ goal, then the optimal concession contract can be any of the two-part tariff, the unit-fee, and the fixed-fee contracts. Accordingly, our special cases include previous works assuming that port authorities maximize either fee revenues or throughput benefits. By contrast, if maximizing the social welfare is the goal, then we find that subsidizing terminal operators, instead of charging them, is port authorities’ best choice. This result is not yet discovered in the literature.     

BT项目下工程施工合同的风险管理

在BT项目下,施工合同作为合同体系中的一个重要单元,承载着建设者和承包商的双重责任。如何维护建设者 和承包商的权益,有效归避各类履约风险,最大限度地降低负面影响,成为合同风险管理的重要内容。结合某BT项目的合同 案例,辩识、分析其合同风险源及实际应对措施,让更多的合同管理人员重视风险管理,积累和分享风险管理的成功经验。     

The potential role of public–private partnerships in the upgrade of port infrastructure: normative and positive considerations

There is a broad consensus on the need for the major expansion of many ports. Traditionally, ports and related facilities have involved significant levels of direct or indirect government ownership or some degree of government financing. Most governments, however, are reluctant to either borrow money to fund the needed additional capital infrastructure or to fund it directly. Public–private partnerships (P3s) are thus an attractive potential option. But are they the answer? This article examines the normative rationales for P3s and presents a positive theory perspective that focuses on the conflicting goals of public and private partners. It argues that the major government impetus for P3s is likely to be for physical port infrastructure with moderate levels of market failure, such as small to medium sized ports, and not for intangible port activities. Furthermore, small to medium sized port P3s are likely to be successful in terms of having relatively low transaction costs and lower total social costs than alternative provision mechanisms. Nonetheless, even in this situation, the different goals of public and private partners may give rise to conflict. Drawing on the global empirical evidence on P3s, this article proposes some institutional design features that will help to ensure P3 success.     

To competitively tender or to negotiate - Weighing up the choices in a mature market

A key attribute of competitive tendering for the periodic selection of operators of subsidised public transport services is to secure the provision of specified services at efficient cost levels. This has proved particularly effective where services were previously provided by an inefficient monopoly operator. The arguments for the adoption of competitive tendering in preference to negotiation with the incumbent operator may be less clear-cut in other cases.Consideration is given to both theoretical and practical insights into the relative merits of competitive tendering and negotiation approaches in such situations. The limited literature on the topic is reviewed and insights and lessons identified. Influencing issues include prior conditions, the nature of the supplier market, features of contracts, negotiating and competitive tendering strategies and practice, accountability and transparency, and long-term market implications. The evidence suggests that ‘one size does not fit all’, and the choice will depend on specific circumstances.The relative merits of the two approaches for renewal of bus contracts are considered with regard to Adelaide, for contracts which have previously been awarded through competitive tendering. The paper draws out the main factors that could influence the authority’s choice between the options, and discusses the relevance of the findings to other situations.