1. Presentation for the International Transport Forum Jean Shaoul, Anne Stafford and Pam Stapleton

2. Who bears risks in practice? Transport projects in the UK in rail, roads and air traffic control (and other sectors) examining the financial costs and rewards to various stakeholders. Evidence base is financial statements of the partners, official reports, statistical sources research literature and the press. Significant proportion of UK transport projects by capital value have collapsed / been terminated or been re-negotiated - £35bn of £91bn.

3. London Underground General assumption – commercial expertise will ensure viable projects Size – significant – expected to provide £30bn investment over 30 years Intention was 30% savings on costs Terminate subsidies Investment scaled back – slow and over budget Subsidies 5x previous Guarantees on debt Letter of comfort Contractual incentives limited impact Metronet companies bankrupt and TfL ownership Taxpayers / users bore the cost

4. National Railways - Three rounds of franchises Purpose of privatisation Competitive forces – 25 franchises to11 cos. Outcomes – Reduction in competition – Subsidies doubled – Dividends paid out of subsidy – Poor performance against targets that were no more challenging Renegotiation of franchises – several rounds History of over optimistic bids – assumptions of 10% growth without precedent Ability to hand back the keys with limited liability

5. Role of the regulator RAB model – Deals with time- inconsistency problem – Guarantees return for investors if they operate efficiently Metronet – suffered as the regulator found it had not been efficient Rail – regulator has not ensured good outcomes for customers/ taxpayer

6. Are PPPs a new phenomena? What is different about PPP? Our focus is on – Use of the private sector as a financial intermediary – and the associated increase in the cost of finance – Complex and opaque organisational structures – designed to ring fence each individual project – reducing the senior debt lenders’ risk exposure – Increasing proportions of public money spent outside the direct control of government together with lack of transparency of financial reporting

7. Cost of finance debate 1 Costs of public borrowing < private finance Taxpayer as holder of equity risk – EIB Helm (2010) 3 elements to equity risk bankruptcy / CAPEX / political and regulatory risk. – Factoring in equity risk private finance is costlier. – Risks vary between private sector and taxpayer - contractor being ‘on time’ and the non-cash cost to taxpayers of a late bridge

8. Cost of finance debate 2 Post financial crisis the gap is widening in countries like the UK but many of the risks of the specific projects are no greater than previously Small differences in cost can represent very large absolute amounts

9. Efficiency, innovation and the ‘only game in town’ Only game in town – reduces competition / provides perverse incentives to bias bids – PPP almost always better than PSC Independent evidence on efficiency is mixed and on innovation is limited Efficiency often equated with ‘on time and budget’ but without consideration of actual total time taken or cost incurred

10. Risk transfer Risk transfer is absolutely central to the PPP rationale – argument is this off-sets the higher costs of finance. IMF – warning about overpricing of risk adding cost to PPP In practice: – Difficult to find optimal allocations of risk (a/c rules tend to > inappropriate risk transfer) – Demand risk very problematical – Evidence on RT in practice is mixed – Low penalties relative to total payment – Inability or reluctance to enforce penalties – Legally or practically difficult to terminate partnerships

11. Conclusions 1 Experience of the UK’s transport PPPs: – Rail projects failed to deliver the outputs despite receiving more subsidy than under public ownership – Using the private sector as financial intermediary adds cost / complexity / bureaucracy and risk – Partnerships have a higher cost of finance than conventional public procurement – Risk transfer is supposedly from the state to the private sector but in practice is from the consortia to subcontractors and their work forces and to the public as users / tax payers.

12. Conclusions 2 Internationally the capital intensive nature of transport means it is very difficult to achieve a return attractive to private sector – especially in a geographically comprehensive service Higher cost of finance is especially important in capital intensive projects Transport projects have wide ranging benefits that are greater than the benefits to users and investors – underinvestment by private sector classic case for public funding and financing – in the public interest.