Transaction Costs in Transport Public–Private Partnerships: Comparing Procurement Procedures

Abstract

In recent years, concern has grown over good practices in the procurement process in public–private partnerships (PPPs). The consensus view is that PPPs are prone to higher transaction costs than traditional public provision. In this paper, we contrast the hypothesis that transaction costs in transport PPPs depend, to a large extent, on the procurement mechanism used in each case, comparing the Negotiated and the Open procedures. Given that PPPs may offer considerable benefits and significant savings over the entire life cycle of the project, it is essential for PPPs to minimize those costs that undermine efficiency gains and that deter private involvement. The quantitative analysis undertaken in this paper highlights that there is room for important savings in the tendering of PPP transport infrastructure projects, using an Open procedure.     

Allocating Revenue Risk in Transport Infrastructure Public Private Partnership Projects: How it Matters

Abstract

Transport infrastructure public private partnership (PPP) projects are very diverse and complex in nature not only because of their mode-specific intricacies but also because of their inherent economic characteristics that relate to the scope of involvement of the private sector in the project, the large sunk costs incurred, and ultimately, the competition to which these projects are exposed. The allocation of revenue risk is of paramount importance for the successful implementation of such projects and a sub-optimal allocation may lead to project structuring that is unnecessarily expensive and vulnerable to failure. At the same time, the revenue risk depends critically on the remuneration model used (user-based versus budget-based) and may, in turn, take the form of demand risk, counterparty risk or combinations of the two. This review explores the issues related to revenue risk allocation for transport infrastructure PPP projects. Overarching principles for the allocation of revenue risk that transcend mode-specificity are identified and compared to case studies generated in the context of the COST Action TU1001. The results show that theory and practice are divergent, leading to sub-optimal structuring and exposing projects to potential failure.     

Risk Management in Motorway PPP Projects: Empirical-based Guidelines

Abstract

This paper deals with the topic of risk management in Public Private Partnership (PPP). The analysis of the related literature reveals that risks must be analyzed and managed on a context-specific approach, and that there is a lack of a comprehensive study on the appropriate risk mitigation strategies for each risk embedded in PPP projects. Focusing on the transport sector, based on the results of a Delphi survey, the paper provides guidelines for both public and private parties in defining a list of significant risks in PPP motorway projects, and identifying for them both the effective allocation and the suitable mitigation strategies. Results of the Delphi survey have been compared with the common practices on risk management applied in eight real motorway PPP projects.     

Public financing of private freight rail infrastructure to reduce highway congestion: A case study of public policy and decision making in the United States

As goods movement continues to increase it is expected to outpace infrastructure capacity in the United States. Moving a larger share of goods by rail rather than truck is a potentially cost effective part of a solution. Freight rail not only offers a substitute for truck trips but is a cleaner, more energy efficient, and safer alternative. Recently a number of private freight rail projects have received public funding. The public funds are aimed at increasing freight rail capacity with the goal of diverting some goods currently moved by truck to rail. While the benefits of moving goods by rail are relatively clear, it is unclear if public decision makers can effectively identify strategic rail investments that will achieve their policy goals. This study critically examines the analytical methods, models, and data that are commonly used to support decisions to provide public funds for private freight rail projects. This is accomplished through a case study of California’s Trade Corridors Improvement Fund program which provided $680 million for 11 freight rail projects. The study’s contributions include identifying critical analytical flaws and challenges affecting the benefit estimates that public funding decisions rely on. Improvements to current evaluation methods are also identified as are regulatory reforms and policy interventions that may offer more effective and reliable outcomes.     

Commercialising the management and maintenance of trunk roads in the United Kingdom

Public funding of new infrastructure from money raised through taxes or borrowing has been questioned globally in recent years. One alternative solution has been to finance major capital projects through Build, Operate & Transfer (BOT) schemes. In the United Kingdom, the Private Finance Initiative (PFI) has become established as the procurement method of choice for many projects and services in central and local government. It is a natural development of other changes in government administration which have been introduced over the past few years. Projects delivered in this way enable government to become a buyer of services on behalf of the public rather than a direct provider of those services to the public, taking advantage of private sector management skills and resources in their delivery. The PFI has demonstrated its ability to deliver value for money solutions in projects across a range of capital-intensive public services, but the greatest success in delivering projects has been in the transport sector. This paper outlines how the British Government's Highways Agency has restructured and commercialised the management and maintenance of the strategic road network for which it is responsible, and how it has been at the forefront of developing successful privately financed projects. The paper explains the Agency's particular version of BOT – Design, Build, Finance and Operate (DBFO) projects. These projects are delivering new and improved road construction and maintenance, providing better services to users of the country's strategic road network and achieving significant value for money savings for taxpayers.     

Role of transport in rural development in Africa

Rural Africa is starved of transport services. The transport routes run towards the export enclaves and the coast.

The political, social and developmental rural transport benefits are discussed. Rural transport will help (i) integrate the country and ease its governance; (ii) widen markets; (iii) induce increased agricultural output, through new technologies, reduced transport costs, etc. The transport cost savings should be passed on to rural firms and producers. The paper warns against their accruing only to middlemen — agricultural parastatals inclusive, thereby stifling the benefits to production. This could happen under some forms of pan‐territorial pricing. Negative aspects of road development, e.g. the substitution of local goods by imports, increased migration and noise, are noted.

The place and role of project appraisal in rural road planning is acknowledged. The broad‐based development packages approach associated with Integrated Rural Development Projects has, despite its attractions, some pitfalls. It favours well established villages and ignores distribution benefits within villages.

Project appraisal can be used to justify socially uneconomic transport developments. However, rural road investment projects with immediate negative returns are unlikely to be funded. Given clear priorities, short of elaborate cost/benefit analysis, obvious road investments choices can be made by the local community. Greater public accountability of transport planners and peoples’ participation in determining rural transport needs and priorities is emphasized. Increased rural road maintenance especially through self‐help schemes and increased use of traditional modes of transport, e.g. walking, animal and water transport, is recommended.     

The estimation of transport cost functions: a methodological review

Abstract

The ex‐post facto cost of using private finance in roads is examined using a case study approach. The paper focuses on the first eight design, build, finance and operate (DBFO) roads commissioned by the UK Government’s Highways Agency and paid for through a system of shadow tolls. It carries out a financial analysis of the publicly available accounting information from the Highways Agency and its private sector partners for the first 6 years since the start of the 30‐year schemes in 1997. Publicly available financial information about the schemes was found to be limited and opaque. In 3 years, the Highways Agency had paid more than the construction cost. It was unclear whether the payments were higher than expected at financial close. Its private sector partners reported a post‐tax return on capital of 29% and an effective cost of capital of 11% in 2002, twice the cost of public finance. However, operating through a complex web of subcontracting creates additional, undisclosed sources of profit for their parent companies that make it difficult to establish the total cost of using private finance. The paper questions the wisdom of using private finance by providing evidence about the cost, including the cost of risk transfer.     

Rail Infrastructure: Challenges for Cost–Benefit Analysis and Other ex ante Evaluations

Abstract

Cost–benefit analysis (CBA) plays a major role in the ex ante evaluation of rail projects in many western countries. At first sight carrying out a CBA for rail projects seems straightforward, since cost estimates are almost always available, and the most dominant benefits are generally known, being the travel time saved and the increase in consumer surplus due to induced demand. However, the practice is much more complex: the quality of current estimates for costs and benefits is often poor and several benefits-related aspects are ignored. This article gives an overview of the challenges in improving the quality of CBAs for rail projects.     

Contract Design,Financing Arrangements and Public Ownership—An Assessment of the US Airport Governance Model

Abstract

US airports negotiate legally binding contracts with airlines and finance large investment projects with revenue bonds. Applying insights from transaction cost economics, we argue that the observed variation in contractual and financing arrangements at US airports corresponds to the parties' needs for safeguarding and coordination. The case evidence presented reveals that public owners set the framework for private investments and contracting. We suggest that airline contracts and capital market control result in comparative efficient investments and act as a check on the cost inefficiency typically linked to public ownership.     

A segregated urban busway system

A transport system has been proposed using buses operating over ordinary roads and over special reserved tracks (busways) on which they might be automatically guided. Using cost and performance data resulting from an earlier technical study (not reported here), a hypothetical network of routes and services in the West Midlands conurbation is studied. Estimates of patronage diverted from public and private transport enable the profitability of the system and its costs and benefits to be assessed. It is concluded that the system could be attractive both in commercial and in cost/benefit terms, providing acceptable means could be found for handling the buses around and through the inner central areas of cities. The net environmental changes, which would result from additional fixed plant permitting more efficient use of mobile plant, have not been quantified.     

Private Provision of Highways: Economic Issues

Abstract

This paper reviews issues raised by the use of private firms to finance, build, and/or operate highways—issues including cost of capital, level and structure of tolls, and adaptability to unforeseen changes. The public sector’s apparent advantage in cost of capital is at least partly illusory due to differences in tax liability and constraints on the supply of public capital. The evidence for lower costs of construction or operation by private firms is slim. Private firms are likely to promote more efficient pricing. Effective private road provision depends on well‐structured franchise agreements that allow pricing flexibility, restrain market power, enforce a sound debt structure, promote transparency, and foster other social goals.     

Cost-effectiveness of reductions in greenhouse gas emissions from High-Speed Rail and urban transportation projects in California

A rising trend in state and federal transportation finance is to invest capital dollars into projects which reduce greenhouse gas (GHG) emissions. However, a key metric for comparing projects, the cost-effectiveness of GHG emissions reductions, is highly dependent on the cost-benefit methodology employed in the analysis. Our analysis comparing California High-Speed Rail and three urban transportation projects shows how four different accounting framings bring wide variations in cost per metric tonne of GHG emissions reduced. In our analysis, life-cycle GHG emissions are joined with full cost accounting to better understand the benefits of cap-and-trade investments. Considering only public subsidy for capital, none of the projects appear to be a cost-effective means to reduce GHG emissions (i.e., relative to the current price of GHG emissions in California’s cap-and-trade program at $12.21 per tonne). However, after adjusting for the change in private costs users incur when switching from the counterfactual mode (automobile or aircraft) to the mode enabled by the project, all investments appear to reduce GHG emissions at a net savings to the public. Policy and decision-makers who consider only the capital cost of new transportation projects can be expected to incorrectly assess alternatives and indirect benefits (i.e., how travelers adapt to the new mass transit alternative) should be included in decision-making processes.     

Developing metro-based accessibility: Three aspects of China’s Rail+Property practice

Populous Chinese cities have invested heavily in metro systems and planned proactively for transit-oriented development. Rail plus property (R+P) programs, where metro corporations engage in, and even orchestrate real estate development in or around rail station areas, have been recurrently reported among these cities. However, careful assessment of these programs is still rare in the existing literature. Built upon multiple R+P programs led by Shenzhen Metro Cooperation and/or Hong Kong Mass Transit Railway Cooperation, this article fathoms the rationale for R+P programs in Mainland China, the obstacles for oversea private investors’ participation and the balance between profit making and social goods supply. It finds that R+P programs serve as alternative funding sources for expensive metro projects. It decreases municipal governments’ cash flow contribution to those projects, which is mandated by the central government. In addition, local business environment for R+P projects has disadvantaged private sector participation, especially those private investors from overseas. Furthermore, public subsidy to local metro corporations is likely to persist as R+P programs have not been designed for economic value maximization; rather, they are in place because (1) they reduce the cash flow burden of the municipal government; (2) they are tasked by the municipal government to produce a considerable number of affordable public housing.     

Book Review: Airline Marketing and Management

Abstract

Public transport policy in the Madrid Metropolitan Area is often deemed as a success. In 1985, an important reform was carried out in order to create a new administrative authority to coordinate all public transport modes and establish a single fare for all of them. This reform prompted a huge growth in public transport usage, even though it reduced the funding coverage ratio of the transport system. Since then, Madrid’s public transport system has been undergoing an increasing level of subsidization, which might jeopardize the financial viability of the city public transport system in the future. In this paper, we present a detailed analysis of the evolution of the public transport funding policy in Madrid in recent years. We found that the increasing level of subsidy can hardly be explained on the basis of equity issues. Moreover, we claim that there is still room for a funding policy that makes the efficiency of the system compatible with its financial sustainability.     

Resolving the property right of transportation emissions through public–private partnerships

The application of public–private partnerships (P3’s) in the transportation sector has grown in popularity worldwide. Despite this important shift in the provision of transportation service, there are clear gaps in knowledge about the impacts of P3 projects, especially on emissions from transportation systems as a whole. Not only should policy makers evaluate the emissions impacts from P3 projects, but they should also think about innovative models that address or charge for emissions into P3 contracts. This addition to P3 contracts could provide a new solution to the long-existing property right paradox: who owns (is responsible for) emissions from transportation systems? This study attempts to fill the research gap by analyzing these innovative models. Using the road network of Fresno, California, as our case study, we offer a number of interesting insights for policy makers. First, average peak emissions costs range from 1.37 cents per mile (the do-nothing case) to 1.20 cents per mile (profit-maximizing cases) per vehicle. Although emissions costs from the P3 projects are lowest for the profit-maximizing cases, the system-wide emissions costs of these cases are highest because of spillover effects. Second, charging project owners for the emissions costs of P3 projects is not an effective way to reduce emissions or the total costs of travel, especially on a VMT basis. Instead, the public sector should implement emissions-included social cost-based price ceilings. When employing these limits, project owners could still be charged for the emissions costs. Finally, using total travel time as the only objective function for evaluating P3 projects can be misleading. Several P3 projects have shown better outcomes using total travel cost with the inclusion of emissions and fuel consumption costs, instead of using total travel time as the only objective function.     

Are Longer and Heavier Vehicles (LHVs) Beneficial for Society? A Cost Benefit Analysis to Evaluate their Potential Implementation in Spain

Abstract

In this paper we carry out a thorough review of the current research related to the benefits and costs arising from the implementation of longer and heavier vehicles (LHVs). From this review we concluded that despite the many studies available, little has been said about the sensitivity of the benefits and costs to the ultimate performance of the key variables related to the evolution of the economy, road transport performance, safety, and so on. In order to fill this gap, we have designed a sensitivity approach based on a cost benefit analysis tool to determine which variables demonstrate the greatest influence on the benefits and costs stemming from the implementation of LHVs. In order to test the methodology, we have used it in an analysis of the Spanish trunk network. The results show that the benefits of LHVs for society are significant. Even in the least favorable scenario, the economic benefits are greater than €3500 million over 15 years, and the environment enhanced as well, for CO₂ emissions are reduced by 2 Million tonnes. Overall we noted how the results are not very sensitive to the evolution of key variables in determining the final outcome. However, we found that the variables that have the greatest affect on the final benefit, such as traffic growth and social discount rate, depend basically on the performance of the overall economy. Moreover, the private cost for haulers seems to be more important in determining the final benefit than externality costs.     

Financing public transport systems in Kuala Lumpur,Malaysia: challenges and prospects

Most major cities across the world today are facing an intractable challenge of financing public transport. In Kuala Lumpur for example, public transport services are somewhat poor in part because of the failure of major operators to secure ample funding. Previous funding programs implemented in the city have failed to produce a replicable model for financing public transport. Due to numerous financial problems and the dismal performance of privately owned transport firms, the State has in the recent past emerged as a key source of funding for the public transport sector in Kuala Lumpur. This article argues that, despite the insuperable challenges, prospects for the future funding of public transport in Kuala Lumpur appears to be good. The article also draws lessons from both Tokyo and Hong Kong. In order to address the funding deficit facing the public transport industry in the city it is crucial that more viable strategies and policies such as value capture and public–private sector partnerships are adopted by the urban authorities.

Hubris or humility? Accuracy issues for the next 50 years of travel demand modeling

This study reviews the 50-year history of travel demand forecasting models, concentrating on their accuracy and relevance for public decision-making. Only a few studies of model accuracy have been performed, but they find that the likely inaccuracy in the 20-year forecast of major road projects is ±30 % at minimum, with some estimates as high as ±40–50 % over even shorter time horizons. There is a significant tendency to over-estimate traffic and underestimate costs, particularly for toll roads. Forecasts of transit costs and ridership are even more uncertain and also significantly optimistic. The greatest knowledge gap in US travel demand modeling is the unknown accuracy of US urban road traffic forecasts. Modeling weaknesses leading to these problems (non-behavioral content, inaccuracy of inputs and key assumptions, policy insensitivity, and excessive complexity) are identified. In addition, the institutional and political environments that encourage optimism bias and low risk assessment in forecasts are also reviewed. Major institutional factors, particularly low local funding matches and competitive grants, confound scenario modeling efforts and dampen the hope that technical modeling improvements alone can improve forecasting accuracy. The fundamental problems are not technical but institutional: high non-local funding shares for large projects warp local perceptions of project benefit versus costs, leading to both input errors and political pressure to fund projects. To deal with these issues, the paper outlines two different approaches. The first, termed ‘hubris’, proposes a multi-decade effort to substantially improve model forecasting accuracy over time by monitoring performance and improving data, methods and understanding of travel, but also by deliberately modifying the institutional arrangements that lead to optimism bias. The second, termed ‘humility’, proposes to openly quantify and recognize the inherent uncertainty in travel demand forecasts and deliberately reduce their influence on project decision-making. However to be successful either approach would require monitoring and reporting accuracy, standards for modeling and forecasting, greater model transparency, educational initiatives, coordinated research, strengthened ethics and reduction of non-local funding ratios so that localities have more at stake.     

Costs and benefits of US aviation noise land-use policies

Aircraft noise affects human health and welfare. One method US airports use to mitigate the impact of noise on nearby residents is through sound insulation and residential land acquisition projects. Costs of residential insulation and acquisition projects are taken from federal grant summaries while the benefits of noise reduction are calculated as the combined willingness-to-pay for abatement and direct and indirect costs of illness from hypertension, myocardial infarction, and stroke. We show that the average cost of sound insulation projects is $15,600 per person affected while that of land acquisition is $48,900 per person affected. We find that for only in 15% of projects do the benefits to residents from willingness-to-pay for reduction and reduced risk of mortality and morbidity exceed the costs of sound insulation for residences exposed to 65 dB Day Night Level (DNL) of noise. Our estimates suggest that noise insulation projects are more cost-effective than fleet wide mandatory aircraft retirement.