Using bi-level programming to analyze the royalty for private–public partnership projects: the operational quantity-based model

Abstract

This paper develops a royalty negotiation model based on the operating quantity of Build, Operate, and Transfer (BOT) projects for both government and the private sector using a bi-level programming (BLP) approach. The royalty negotiation is one of many critical negotiation items of a concession contract. This study develops a royalty negotiation model to simulate the negotiation behavior of two parties, and derives the heuristic algorithm for the BLP problem. A number of factors are incorporated into this algorithm including the concession rate, the time value discount rate, the learning rate, and the number of negotiations. The paper includes a case study of the Taipei Port Container Logistic BOT Project. The results show that the two parties involved completed royalty negotiation at the sixth negotiation stage. The findings show that the government can receive a royalty from the concessionaire, calculated at 0.00386% of the operating quantity of this BOT project. Therefore, the royalty negotiation model developed here could be employed to explain negotiation behavior.     

Public sector comparators for UK PFI roads: inside the black box

A public sector comparator (PSC) represents the hypothetical, risk-adjusted cost of a project—such as a road scheme—when that project is financed, owned and implemented by government. A PSC is commonly used in public procurement decision-making as a yardstick against which private investment proposals are evaluated. Using original material released by the UK Highways Agency for the first time, the author recreated the PSCs used for the evaluation of the first eight road projects to be promoted under the UK’s private finance initiative (PFI). Alternative assumptions regarding project risks were modelled using different levels of optimism-bias uplift, and the impact on value-for-money of using different discount rates was evaluated. Public sector comparators have attracted considerable attention in the literature as they retain a pivotal role in the policy decision to use—or not use—private finance. However the fact that their detail is usually kept confidential by public sector procuring agencies—because of commercial sensitivities—has restricted informed discussion and open debate. Now the architecture of these comparators is laid bare for critical examination. It has generally been assumed that any reduction in the discount rate used in PSC calculations will favour conventional procurement over PFI-type contracting arrangements. The research reported in this paper demonstrates that the relationship between the discount rate and the attractiveness of using private finance is not as simple as has been assumed, and the outcome in terms of value-for-money is not as predictable as has previously been reported.     

Optimal choice of capacity,toll and government guarantee for build-operate-transfer roads under asymmetric cost information

The private provision of public roads via the build-operate-transfer (BOT) mode has been increasingly used around the world. By viewing a BOT contract as a combination of road capacity, toll and government guarantee, this paper investigates optimal concession contract design under both symmetric and asymmetric information about the marginal maintenance cost of private investors. Under asymmetric information, the government guarantee serves as an instrument to induce a private investor to reveal his true cost information. Compared with the situation under symmetric information, the government will suffer a loss of social welfare; the private investor will charge a higher toll that increases in his reported marginal maintenance cost, and specify a lower capacity that decreases with the reported cost. The results also show that the private investor obtains extra information rent beyond the reservation level of return and the rent decreases with his reported cost. However, the resulting volume-capacity ratios of the BOT road under both information structures are the same.     

Analysis of regulation and policy of private toll roads in a build-operate-transfer scheme under demand uncertainty

The build-operate-transfer (BOT) approach is one of the privatization mechanisms for promoting transportation infrastructure developments by using private funds to construct new infrastructure facilities. In a BOT scheme, it often involves three parties: the government, whose objective is to maximize the benefit defined in terms of social welfare added to the society; the private investors, whose objective is to maximize the profit generated from the investment; and the road users, whose objective is to minimize the inequality of benefit distribution among the road users traveling from different origin–destination pairs. Each of these parties has different objectives that often conflict with each other. In this paper, we develop various optimal road pricing models under demand uncertainty for analyzing the tradeoffs among the three objectives. In addition, a project evaluation framework is developed for assessing the effects of government policy and regulation on the BOT project. Seven cases of the BOT road pricing problem are analyzed: (1) BOT without regulation, (2) BOT with price control regulation, (3) BOT with equity regulation, (4) BOT with construction cost subsidy, (5) BOT with concession period extension, (6) BOT with construction cost subsidy and concession period extension, and (7) BOT with multiple objectives. Numerical results using a real case study of the Ban Pong–Kanchananburi Motorway (BMK) in Thailand are provided to examine the above seven cases.     

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.     

Modeling the impact of government guarantees on toll charge,road quality and capacity for Build-Operate-Transfer (BOT) road projects

Government guarantees are frequently used to attract private investors’ participation into Build-Operate-Transfer (BOT) road projects. In this paper, we investigate the impact of government guarantees on toll charge, road quality and road capacity by taking perspective of the private investor. The main results are: (1) Minimum traffic guarantee increases toll charge while decreasing road quality. Under a low guarantee level, minimum traffic guarantee has no impact on road capacity. However, it improves road capacity when a high guarantee level is performed. (2) Under minimum revenue guarantee, if the guarantee level is sufficiently high, the optimal toll charge will be sufficiently large, but road quality and road capacity will approach zero. (3) Price compensation guarantee decreases toll charge and increases both road quality and road capacity. This paper further investigates the impact of government guarantees when the contract is auctioned. We find that auction reduces the impact of government guarantees on toll charge while failing to affect the impact of government guarantees on road quality and capacity. Some policy implications are also derived from our model results.     

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.     

Private tollroads in urban areas

Governments of all persuasions are increasingly seeking the participation of the private sector in the supply of transport facilities and services. Private sector participation in the financing, construction, operation and maintenance of infrastructure is considered a serious option in a number of countries in the search for ways of providing much needed investment which would otherwise be deferred. This paper considers some economic and financial problems in the private sector provision of major road infrastructure within urban areas. The main issues are attaching prices (i.e. tolls) to the provision of the service, the value of government rights which are being given up either permanently or temporarily, and the identification required by the promoters of the cost of capital which is essential information in establishing the risk. Broader environmental and equity issues are not addressed. If the approach to establishing a private presence in a previously public supply context is handled properly from the outset, the benefits can be significant. Contrarily however, the prospects could be quite undesirable if badly managed, despite the presence of an extended public purse.requests for offprints     

Performance-based quality contracts in bus service provision

Institutional reform of the bus sector is a topical discussion item in a number of countries at present. A specific focus is on ensuring a value for money (VM) regime to identify the benefits to society associated with each dollar of subsidy support from government. This paper promotes the position that a performance-based contracting (PBC) regime offers the best prospects of achieving a system-wide VM outcome. It proposes a reward system for bus operators that combines payment for delivering a minimum level of service (MSL), that meets government community service obligations, plus an incentive regime that rewards operators for patronage increases (above MSL patronage levels). The patronage incentive is based on expected user and external benefits deriving from service improvements and patronage increases. Cost benchmarking at relevant best practice levels is proposed as essential to ensure remuneration is based on efficient cost levels. The paper argues that a PBC approach is consistent with maximising social surplus from public transport provision across a geographic area, for any given budget constraint and regulatory imposed minimum service levels. The main alternative, competitive tendering (CT), is argued to be less attractive than PBCs in terms of securing the maximum social surplus to the community, given the total amount of subsidy support available, although CT is an appropriate non-compliance condition. This paper is a companion to Hensher and Houghton [Hensher, D.A., Houghton, E., Performance-based contracts for the bus sector: delivering social and commercial value for money, Trans. Res. B, in press] that details the economic framework and an application of PBCs.     

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.     

On the financial viability of mass transit development: the case of Hong Kong

Mass transit projects are often a top contender of many cities to meet their increasing demand for travel. Despite the global trend of privatization, mass transit services, as public goods, remain largely being provided and operated by the public sector. Hong Kong is one of the few exceptions that all mass transit services are commercially operated. Both rail and bus services in Hong Kong are reputable for their quality and profitability, often serving as benchmarks for new projects. In this study, we investigate the factors contributing to this success. In particular, we ascertain the quality of transit service provision by the private sector over the past two decades. Then, we conduct an in-depth analysis of the account books of leading railway and bus operators in Hong Kong so as to shed light on their financial viability. Through this study, we hope to present crucial factors for providing financially viable private transit services.     

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.     

Transport bottlenecks and Tanzania's economic problems

Abstract

The paper discusses Tanzania's transport problems in the context of the prevailing acute economic crisis. It looks at the development of the transport system, especially the rail and road network, from the German days to the new Chinese‐built Tanzania‐Zambia Railway. The East‐West orientation of the major parallel rail lines and roads reflects the dependency of the economy on export‐import trade. A major challenge to the transport system is the haulage of agricultural products, mainly for export but also for the internal market, not to mention the haulage of imported commodities.

The provision and utilization of transport services is discussed in the context of the historical, and institutional setting of the road haulage industry, particularly its public and private sector configurations. Due to scarcity of foreign exchange, both sectors, especially the private, are starved of vehicles and spare parts.

The operation of ocean and lake shipping services and Air Tanzania are discussed. It is recommended that the latter should concentrate on essential domestic services plus some limited regional services. External financing of transport projects and its implications are also considered.

It is concluded that despite the break‐up of the East African transport system, the Tanzanian transport system, although shaky, has avoided major breakdowns and in some cases, especially in trade, has provided the foundation for at least medium‐term improvements. More attention is recommended to organizational problems of track use by freight and passenger carriers and to making the best use of existing facilities.     

Electronic road pricing: An idea whose time may never come

Hong Kong's experiment with electronic road pricing showed that the technology was completely feasible. However, the government was unable to implement the scheme due to strong opposition from a public that perceived it as an invasion of privacy and a tax increase. This outcome was partly a result of forces unique to Hong Kong's political culture as well as both strategic and tactical errors made by the Hong Kong government in presenting its proposal. However, the Hong Kong experience also raises serious questions about whether a sophisticated road pricing scheme will ever be acceptable in a democratic urban polity.     

New models for financing and managing highways: asset-based road corporations in China

The China International Engineering Consulting Corporation undertook, in 1997, the study of Viability of Asset Based Road Corporations in China as part of the World Bank's transport sector program review. The purpose was to investigate, in a case study format, road administration in China with two specific objectives: to compare (toll) road management in different provinces and to investigate the financial viability of China's toll roads.This paper shows that the three case projects studied, each having different management structures, are all financially viable given the present financing arrangements. However, should the projects be immediately subject to market interest rates and loan maturities prevailing in China today, their financial viability would be uncertain.In a broader context, the World Bank's lending program has enabled China to experiment with different kinds of toll road management structures. These models have both advantages and disadvantages and seem to fit that province's political economic environment in which they are employed. The toll roads and, especially, the impacts of the toll road management and financing arrangements on road administration present challenges to road administration rarely faced even in the developed countries. The challenges involve questions of the congruence of public good and private interest, as well as the role of planning and public accountability – all serious questions as China moves forward in development. These questions are raised in the context of the case studies.     

Delivering Value for Money to Government through Efficient and Effective Public Transit Service Continuity: Some Thoughts

Abstract

This paper documents some thoughts on the reform agenda in public transit that is occurring throughout the world. The specific focus is on a growing commitment to competitive regulation through competitive tendering, and the efforts by a few governments (notably in Australia) to take control of the tangible assets used by private operators as a mechanism to exercise the opportunity, if so taken, to put services out to competitive tender. The paper reviews the theoretical arguments and empirical evidence on contracting regimes and asset ownership, and the role that government and the operator might play in a setting in which building trusting and collaborative partnerships has merit in delivering services that are in the main funded from the public purse.     

Analysis of the efficiency of local government services delivery. An application to urban public transport

In recent years in the European Union (EU), we have witnessed an externalization process of the provision of local government services, in order to separate the political responsibility and the direct delivery of the service. The reasons that justify this process are focused on the belief that the private sector is more efficient in carrying out economic activities, the pressure to reduce the public deficit and the public debt, the search for management systems that bypass public administration procedures, and the increase of control on local governments in auditing and accountability issues.The objective of this paper is to compare the efficiency of public and private sectors in the provision of urban transportation services. This paper shows the results of an empirical study commissioned by the Regional Audit Office of Catalonia (Spain), in order to evaluate the efficiency with which urban transportation services are delivered in the most important cities of this region. This efficiency study has been carried out using the Data Envelopment Analysis (DEA) model, multiple linear regression and logit and cluster analysis. The results allow us to conclude that, in the cities studied, exogenous factors are not relevant and the private management of urban transport service is not more efficient than public management.     

Application of particle swarm optimization and robust net present value for BOT-type contracts

Major infrastructure construction projects contracted to private companies by governments are important for maximizing profitability. This paper extends an existing build–operate–transfer (BOT) concession model (BOTCcM) for identifying the reasonable concession period which would be profitable both to the government and to the private sector. There are some major limitations with BOTCcM – for example, the total investment cost is pre-given and the impact of uncertainty of parameters affecting the concession period were not considered. In this research, the total investment cost is assumed as variable which should be optimally determined and the uncertainty of net cash flows is considered. Further, the proposed model is implemented to calculate the robust concession period and required capital for the construction period, using the obtained values and particle swarm optimization method.     

Winter problems on mountain passes – Implications for cost-benefit analysis

Cost-benefit analysis is a tool in government decision-making for determining the consequences of alternative uses of society’s scarce resources. Such a systematic process of comparing benefits and costs was adopted in early years for transportation projects and it has been the subject of much refining over the years. There are still some flaws, however, in the application of the method. In this article we have studied the impact of weather conditions on traffic speed on low traffic roads often exposed to adverse weather. This is an issue not currently considered in the cost-benefit analysis of road projects. By using two analytical approaches—structural equation modelling and classification and regression tree analysis—the impact of the weather indicators temperature, wind speed, and precipitation on traffic speed has been quantified. The data relates to three winter months on the European Route 6 road over the mountain pass Saltfjellet in Norway. Increase in wind speed, increase in precipitation and temperatures around freezing point all caused significant decrease in traffic speed in the case studied. If actions were taken to reduce the impact of adverse weather on traffic (e.g. by building a tunnel through the mountain) this study indicates that the road users would gain a total benefit of approximately 2,348,000 NOK (282,000 EUR) each winter at Saltfjellet if all the weather related benefits were included. We argue that this is a significant number that is highly relevant to include in CBAs. This applies both to the CBAs of new transportation projects as well as when resources are allocated for operation, maintenance, and monitoring of the existing transport systems. Including the weather related benefits would improve the application of CBA as a decision-making tool for policy makers.     

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.