A framework for organising and financing infrastructure provision Jan-Eric Nilsson, VTI

Purpose To establish prerequisites for Public Private Partnerships to be beneficial for society

Outsourcing and Delegation Models Direct public control and provision of all tasks by a government ministry Degrees of independence Public agency Publicly owned company Mixed company Not-for-profit company/ Road fund 100% private company CORPORATE FORM (OWNERSHIP) Degrees of Outsourcing Contracting out Design-Build Public–Private Partnerships (PPPs) Possible elements: Design (D) Build (B) Finance (F) Maintain (M) Own (O) Operate (O) Transfer (T) CONTRACTUAL RELATIONS

PPP, Financing and the Budget There are two main sources of financing infrastructure – users and taxpayers –In non-average situations changes in land values (land rents) can be used to pay for infrastructure. A PPP company can charge users, but so could also the government if it wishes Shifts from budget funding (debt or over the current budget) to PPP funding brings in no new money.

Efficiency The ultimate justification for any choice of model is that it contributes to efficiency in the use of scarce resources. There may be distributional restrictions on the efficiency objective. The Challenge is to finds organisational and contractual mechanisms that contribute to this target.

Defining efficiency 1.Allocative efficiency 1.Dynamic aspects: Build new infrastructure when social benefits exceed costs. NPV>0 2.Static aspects: Charge users according to marginal social costs. 2.Productive efficiency: Cost minimisation

Should users or tax payers foot the bill? New infrastructure – low marginal costs – low prices = no user charges/tolls But not charging users means that tax payers must pay. What is most efficient – a toll/high user charge or financing by way of distortive taxation. –Cf. Arlandabanan, Öresundsbron and the Hungarian motorway project.

How should a PPP project be designed in order to further efficiency? Both investment and maintenance in the contract. –Balancing (high/low) investment costs and (low/high) maintenance costs. –Facilitating innovations. –Makes it easier to shift risk to concessionaire. For how long period of time should the contract be signed? –Balancing competitive pressure (poor when long contract periods) and renegotiation costs (short contract periods). How shall quality in construction be controlled?

Contract design (cont.) - Minimizing Total Costs User and third party costs (N*c u +c 3 ) q* Costs Road standard Infrastructure cost (c)

Contract clauses linking payment to user effects Availability: Make payment contingent on infrastructure being available for use. Road surface quality: Reward/punish surface quality above/below a (monitored) target. Safety: Reward/punish performance better/worse than benchmark safety. End-of-period standard: Make the contract control for infrastructure standard at contract termination date. Focus on the product, not how things are done! Performance contracting.

Performance contracts… … also facilitate innovations during the construction phase. No need for the principal to detail how jobs are to be done.

Efficient design (cont.) Which is the appropriate way to split risk between the parties? –Which are the risky features (construction, price level, financial concerns, traffic etc)? Which is the technique to handle risk in contracts? –Fixed price contracts make the concessionaire carry risk. –Index clauses or exceptions from the fixed price otherwise. Long contracts makes it easier to let contractor carry construction risk, i.e. has to account for consequences of diligence in construction design and implementation.

Which are the arguments for and against the concessionaire raising funds? The cost for raising financing is typically higher for a private than for a public-sector loan taker. Efficient design (cont)

time Costs

Efficient design (cont.) Standard procurement of investment and maintenance separately vs. procurement of a life time contract with the concessionaire acting like a bank. Private financing is a means for committing the concessionaire to the contract.

time Costs

Efficient design (cont.) Private financing efficient if cost savings from higher efficiency (lower contruction costs) exceeds the interest rate differential. This again emphasises the significance of efficient design of the projects.

Summary PPP contracting from a social perspective is about designing efficiency enhancing contracts. There is no single design which is appropriate for all conditions. PPP contracts do not make a project better. Not true if it makes total costs lower.