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.     

Risk pricing inefficiency in public–private partnerships*

There is a drive towards delivering and operating public infrastructure through public–private partnership (PPP) rather than traditional public procurement. The assessment of the value for money achieved by the two alternative approaches rests in the cost of financing and their efficiency in delivery and operation. This paper focuses on the cost of financing, in particular the cost associated with transferring risk from the public to private sphere. If capital markets were efficient and complete, the cost of public (government) and private financing should be the same, with the relative delivery and operational efficiency remaining as the primary determinant of value-for-money. Evidence suggests, however, that the risk transfer to a PPP entails an inefficient risk pricing premium which goes beyond the direct cost of financing. We argue that a high price for PPPs results from large risk transfers, risk treatment within the private sector, and uncertainty around the past and future performance of public–private consortia. The corollary is that the efficiency gains from a PPP must be much higher than commonly expected to deliver a greater value for the money than under a traditional approach.     

Optimal transport strategies for European cities

A new procedure for generating optimal transport strategies has been applied in nine European cities. A public sector objective function which reflects concerns over efficiency, environmental impact, finance and sustainability is specified and a set of policy measures with acceptable ranges on each, identified. Optimal strategies based on combinations of these policy measures which generate the optimal value of the objective function, are identified, and compared between cities. Resulting policy recommendations are presented. The results demonstrate the importance of an integrated approach to transport strategy formulation. They emphasise the role of changes in public transport service levels and of fares, and of charges for car use. By contrast, new infrastructure projects are less frequently justified. In the majority of cities the revenues from car use charges are sufficient to finance other elements in the strategy. However, private sector involvement either in initial financing or in operation may be desirable. Revised objective functions to reflect private sector involvement are specified, and optimal strategies with private sector operation of public transport are also identified. The requirement to meet private sector rates of return for public transport operation typically results in lower frequencies and higher fares; charges for car use then need to be raised to satisfy public policy objectives, but system performance is reduced. This revised version was published online in June 2006 with corrections to the Cover Date.     

Social welfare analysis of investment public–private partnership approaches for transportation projects

This paper has two objectives: (i) to introduce a new approach in order to gain widespread support for road pricing; and (ii) to develop a detailed social welfare analysis for road pricing schemes. We first describe our novel approach that stimulates public support for road pricing, which we refer to as an investment public–private partnership, or IP3. This approach returns a significant portion of the economic value created by road pricing back to the citizens who own the newly priced facility. We then present a social welfare framework that estimates the benefits and costs of using the IP3 approach on an urban transportation network. A P3 project’s impact on overall social welfare provides a more comprehensive evaluation criterion than the often-used Value for Money (VfM) analysis. Apart from several theoretical studies, a detailed social welfare analysis that includes all major P3 project stakeholders is absent from the literature. We use Fresno, California as our case study in order to conduct a welfare analysis on IP3s. Our results show that system-optimal tolling favors average users, but that government—and consequently taxpayers—should pay for costly tolling systems (negative profits). In contrast, unlimited profit-maximizing tolls raise substantial profits for government, for the infrastructure’s citizen-owners, and for the private sector, but the average user is worse off. From a social-welfare perspective, one should search for a Pareto improvement under which all major stakeholders are better off. Our estimates indicate that a mixed public and private tolling scheme offers such an improvement.     

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.     

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.     

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.     

Error and optimism bias in toll road traffic forecasts

Traffic forecasts are employed in the toll road sector, inter alia, by private sector investors to gauge the bankability of candidate investment projects. Although much is written in the literature about the theory and practice of traffic forecasting, surprisingly little attention has been paid to the predictive accuracy of traffic forecasting models. This paper addresses that shortcoming by reporting the results from the largest study of toll road forecasting performance ever conducted. The author had access to commercial-in-confidence documentation released to project financiers and, over a 4-year period, compiled a database of predicted and actual traffic usage for over 100 international, privately financed toll road projects. The findings suggest that toll road traffic forecasts are characterised by large errors and considerable optimism bias. As a result, financial engineers need to ensure that transaction structuring remains flexible and retains liquidity such that material departures from traffic expectations can be accommodated.

Road project appraisal in Tanzania: A review of the working figures

This paper examines the project appraisal methodology and working figures of road studies in Tanzania. The latter are geared at establishing some broad “standard” guides in road project selection and evaluation. The commonly used appraisal tools such as rates of discount, the time horizon, the multipliers and shadow prices of foreign exchange and labour are examined, as well as the rationale of practitioner's rules of thumb in this regard. Cost-benefit analysis could, it is argued, be supplemented by people's participation and public accountability of road planners in setting road priorities. This could check parochialism in road provision and ensure the most “cost-effective” road provision and use.     

Data Review of Transportation Infrastructure Public–Private Partnership: A Meta-Analysis

The limited understanding of public–private partnerships (P3s) for transportation infrastructure finance has been generally attributed to a lack of data. The more fundamental question of how P3 data are utilized in the literature is more relevant and critical, but remains unclear. This study investigates this question by examining the linkages between research objectives and data characteristics through a meta-analysis of infrastructure P3 studies using multinomial regressions. It analyzes 95 empirical studies that adopt actual data, selected from a P3 research database that includes over 345 studies and are classified into five categories including performance, contract, risk, value for money, and institutional factors. Results show that the case studies are less frequently utilized to understand P3s' institutional issues compared to those that focus on P3s' performance or VFM. Survey data are more frequently used to study P3 contracts rather than issues related to P3 project risk. We highlight the need for policy-makers to require continuing disclosure of P3 performance for validating the effectiveness of the procurement model and to improve the practice.     

Remuneration models and revenue risk mitigation in road public–private partnership projects – a case study from Serbia

As a consequence of renewed interest in attracting private financing for infrastructure investments, public–private partnership (PPP) arrangements are mostly seen as a suitable mechanism for ensuring sound and quicker delivery of transport infrastructure projects. However, a general concern is that expectations of mobilizing private-sector funds have been overestimated in a number of cases. The purpose of this paper is to contribute to the risk analysis of transport PPP projects with substantial exogenous demand risk which could serve as a rationale for choosing the appropriate PPP model. The objective of this paper is to construct an analytical cash flow-based project model to facilitate the choice of the remuneration mechanism suitable for both private investors and public sector. The model provides an indication whether the project should be implemented as a ‘users pay’, a hybrid or an ‘annuity’ PPP model. The proposed methodology is illustrated using a case study from Serbia.     

Managing with declining resources

Urban public transport has had broad political appeal and escalating financial support since the late 1960s. The preference has been for public ownership and operation of services with only limited private sector involvement in the provision of services in a highly regulated environment. The financial standing of public transport coupled with the likelihood of a sustained period of fiscal restraint, perhaps even a decline in available resources, has created an imperative for change. This paper argues that broad‐based acknowledgment of the financial realities, clear definition of quantifiable objectives and increased authority and control for public transport management is required if public transport agencies are to meet the challenge. A new balance between service, ridership and revenue is required. Managing with declining resources will require a financial planning approach, separation of policy and planning from operations, removal of restrictions on user choice and operator competition and increased involvement of the private sector. Substantial changes in internal organization, procedures and structures and a cost‐effectiveness orientation will be necessary.     

Commercially managed road funds: managing roads like a business,not like a bureaucracy

Nearly all countries are seriously short of revenues for investment and maintenance of roads. Improving utilization of the existing road budget has helped to narrow, but not eliminate, this financing gap. Requests for additional resources from the government's budget have fallen on deaf ears, because the road sector has grown too large to be fully-financed through general tax revenues. Government tax systems were not designed to finance major economic sectors like roads. Faced with an acute shortage of funds, many road agencies have introduced tolls on high-volume roads and have invited the private sector to build and operate such roads under concession agreements. Although this has narrowed the financing gap, tolling is only economic on a small part of the road network. Tolls have thus had a relatively small impact on the financing gap. Against this background, and mindful of the fact that roads are now 'big business' on the scale of the Fortune Global 500, a growing number of countries have started to 'bring roads into the market place, put them on a fee-for-service basis and manage them like a business.' The fee-for-service concept, though superficially like the user-pay principle and the associated road funds which became popular during the 1950s, differs from user-pay in a number of important respects. The key differences are that: (i) only road user charges go into the road fund (i.e., there are no earmarked taxes); (ii) the fund is managed by a representative board with half or more members representing road users and the business community; (iii) members are nominated by the constituencies they represent and there is an independent chairperson; (iv) financing arrangements are designed to ensure that money is not diverted from other sectors; (v) funds are managed pro-actively by a small secretariat; (vi) there are published financial regulations governing the way funds are managed; (vii) charges are adjusted regularly to meet agreed expenditure targets; and (viii) there are regular technical and financial audits. Other important characteristics are that most commercially managed road funds are managed through a separate road fund administration, funds are channeled to all roads (sometimes even to unclassified roads) and they are introduced as part of a wider agenda to commercialize road management. Some of these road funds have been set up as road public utilities under a board with powers to set their own tariffs.     

The analysis of regulation on private highway investment under a build-operate-transfer scheme

The build-operate-transfer (BOT) approach has become an attractive instrument for public facility provision, especially for a project that faces difficulty with public finance. This study analyzes the regulation alternatives on private highway investment under a BOT scheme and their impacts on traffic flows, travel costs, toll, capacity, and social welfare (total user-benefit in the traffic system including congestion). For comparison, five cases are analyzed: (1) No BOT with maximizing welfare, (2) No BOT with breaking even on finance, (3) BOT without regulation, (4) BOT with a minimum flow constraint (the total users will not be less than those in Case 1), and (5) BOT with a maximum travel cost constraint (the travel cost for users on a non-tolled road will not exceed the maximum tolerance). After each case is modeled and simulated on some functional forms, we find that the case of BOT with regulations performs between the cases of maximizing welfare and that of maximizing profit. From the perspective of the government, regulation has less power in a project with low elastic demand. Furthermore, even when the regulation is strict, a high cost-efficient firm with BOT could result in a higher level of social welfare than that without a BOT scheme.     

Electronic toll collection

Electronic toll collection (ETC) offers the opportunity for toll facility operators to supply a substantially greater amount of traffic capacity than any other currently available form of toll collection. The current interest in ETC derives from the proposals in a number of countries to introduce urban tollways, using the net toll receipts to recover the cost of the capital investment plus an acceptable profit margin for those taking the financial risk. This paper outlines the main economic, technical, and administrative features of ETC in the context of toll charges that are determined by the rules of capital cost recovery. Electronic road pricing (ERP) as a mechanism for implementing full road user charging (in line with economic principles of efficient use of road space) is not the topic of this paper, given the predominantly financial basis of setting tolls for private roads. The underlying rationale for toolroads in the political climate of most nations is not suggestive of any plan to revise the pricing regime in line with ERP upon reversion of the infrastructure to the public sector when the capital costs are repaid. It is assumed that the tollroads will revert to free roads in line with the existing road system, and that road users will continue to contribute towards the costs of maintaining the road system by the traditional pricing mechanisms (i.e. fuel taxes, vehicle registration, fees, etc.).     

Effectiveness of safety-based incentives in Public Private Partnerships: Evidence from the case of Spain

Many countries around the world are implementing Public–Private–Partnership (PPP) contacts to manage road infrastructure. In some of these contracts the public sector introduces economic incentives to the private operator to foster the accomplishment of social goals. One of the incentives that have been introduced in some PPP contracts is related to safety in such a way that the better the safety outcome the greater will be the economic reward to the contractor. The aim of this paper is at identify whether the incentives to improve road safety in highway PPPs are ultimately effective in improving safety ratios. To this end Poisson and negative binomial regression models have been applied using information from highway sections in Spain. The findings indicate that even though road safety is highly influenced by variables that are not much controllable by the contractor such as the Average Annual Daily Traffic and the percentage of heavy vehicles, the implementation of safety incentives in PPPs has a positive influence in the reduction of fatalities, injuries and accidents.     

Simulation-based dynamic adjustments of prices and subsidies for transportation PPP projects based on stakeholders’ satisfaction

Transportation - Public–private partnership (PPP) has been well acknowledged by many as an innovative approach to the procurement of public projects. In their long-term concession periods,...     

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.     

Highway pricing and capacity choice in a road network under a build–operate–transfer scheme

It is often argued lately that the private sector should be allowed to build and operate roads in a transportation network at its own expense, in return it should receive the revenue from road toll charge within some years, and then these roads will be transferred to the government. This type of build–operate–transfer (B–O–T) projects is currently fashionable worldwide, especially for developing countries short of funds for road construction. One of the important issues concerning a highway B–O–T project is the selection of the capacity and toll charge of the new road and the evaluation of the relevant benefits to the private investor, the road users and the whole society under various market conditions. This paper deals with the selection and evaluation of a highway project under such a B–O–T scheme. For a given road network with elastic demand, mathematical models are proposed to investigate the feasibility of a candidate project and ascertain the optimal capacity and level of toll charge of the new highway. The response of road users to the new B–O–T project is explicitly considered. The characteristic of the problem is illustrated graphically with a numerical example.     

The strategic transportation research study — Its origins and purposes

The highway industry in the United States spends about $35 to $40 billion annually. Management of the industry is almost wholly decentralized. This decentralization plus diminishing fuel tax revenues used to finance road improvements have caused road research efforts to decline to a very low level. Comparisons between funds for highway research and those spent by private firms in similar industries show that private firms spend from 5 to 12 times the rate of highway agencies. The problem of how much to spend on research is difficult both for private-sector and for public-sector enterprises. The level of research spending is shown to correlate well with both profitability and growth in U.S. firms. Four methods used for making research decisions in the private sector are discussed. The goals of the Strategic Transportation Research Study (STRS), which is being conducted by the Transportation Research Board to examine highway and transportation needs, are described.