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In the countries the scan team studied, highway PPPs play a pivotal role in enabling national and regional mobility, and the team observed both similarities and differences in PPP philosophies, policies, and practices. While conclusions on the relative merits of one policy or practice over another are premature, the team obtained a rich spectrum of information for consideration.
This chapter provides a basic overview of the host nation PPP programs, including their origins, role, structure, evolution, and public acceptance. Accordingly, it provides a foundation for the more detailed discussions in subsequent chapters.
In 1972, the first concession for a tolled motorway was granted with the creation of the private company Brisa. Following the 1974 Carnation Revolution, however, the government took majority ownership of Brisa, effectively making it a state-owned enterprise. Until the 1990s, Brisa was the sole motorway concessionaire in Portugal. During this decade, the Portuguese government decided to privatize Brisa and increase the number of private companies participating in highway infrastructure concessions to promote competition and industry development.(a)
Since then, the Portuguese government has used PPPs extensively to develop and manage its National Motorway System. A key driver of the decision to implement PPP arrangements in earnest was compliance with European Union (EU) convergence criteria, which places limits on public debt and budget deficits.1 This pressure makes the use of PPPs, in which the private partner assumes real risk, quite attractive because its associated debt is moved off the public sector's balance sheet. Other drivers cited include the following:
Private sector involvement in developing and managing highway infrastructure in Spain dates to 1960. At that time, the concession for the Guadarrama Tunnel was granted, based on legislation passed in 1953 allowing private entities to construct tollways for a maximum term of 75 years. New legislation was passed in 1960 to grant the public sector more flexibility in concession arrangements to improve their attractiveness to the private sector. Two concessions were quickly granted under this framework: the Cádiz Bay Bridge, toll-free since 1982, and the Cadí Tunnel, now operated by the Autonomous Community of Catalonia.(b) In 1964, Spain developed a plan for a National Expressway System, which projected the construction of about 3,000 kilometers (km) (1,864 miles (mi)) of expressways by 1980. Subsequently, several concessions were established to begin development of this system. To facilitate rapid construction, specific legislation was passed for each concession, and in many cases, beneficial terms were granted to the private developers.(b)
In 1972, Spain recognized the need for a general legal and regulatory framework to serve as the foundation for future concession arrangements. Building on its own experience as well as that of other countries, Spain passed Law 8/1972 to provide this basis. It served this purpose until 2003, when Law 13/2003 modified the original framework to accommodate contemporary circumstances and practices such as the clarification of the allocation of concession risks. Law 30/2007 was also enacted recently to address all public sector contracts, but it has a section for contracts for public works concessions.
Similar to Portugal, the resurgence of PPP activity in Spain is driven by EU convergence criteria. The other principal driver cited was that the nation's infrastructure requirements exceed its public funding capacity. One public official's opinion on PPPs is that these arrangements are primarily tools to develop infrastructure, and the approach is no better or worse than any other.
Increased private participation in infrastructure provision and management began in the United Kingdom in the 1980s. The momentum from this decade continued into the following one when in 1992 the national government began the Private Finance Initiative (PFI). Her Majesty's (HM) Treasury issued and has administered the policy since its inception. To some, the terms PFI and PPP are synonymous. PFI, however, is a specific U.K. policy to increase private participation in infrastructure financing and provision, which obviously generated various PFI programs in the United Kingdom. Total PFI activity to date approaches £60 billion. The first three highway PPPs were concession arrangements—Queen Elizabeth II Bridge, Second Severn Crossing, and M6 Toll—with real tolls used to secure the private financing. Beginning in 1996, new PPP contracts eliminated real tolls and made road use free at the point of use to drivers. Consequently, PPP contractors have secured financing for capital costs while the government has paid PPP contractor service charges from budgetary funds.
Original drivers of the PFI policy include the following:
Unlike Portugal and Spain, the United Kingdom is not part of the Eurozone, so it is not bound to meet EU convergence criteria. Thus, the pressure to move liabilities off the public sector balance sheet is a less urgent issue.
In contrast to Portugal, Spain, and the United Kingdom, where PPP policies and programs are pushed from the national level, PPP activity in Australia has occurred primarily in three states: New South Wales, Victoria, and Queensland. Each state has used highway PPP arrangements almost exclusively to address mobility issues in their respective major urban centers of Sydney, Melbourne, and Brisbane. Moreover, these states have used PPPs rather selectively to facilitate the development of major segments of highway infrastructure in these urban areas.
New South Wales was Australia's first mover in the highways sector in the early 1990s. At that time, its motivations for PPPs were public sector budgetary constraints and a desire for direct pricing of road use as well as the potential to implement congestion pricing.(c) In 1995 the state government enacted the General Government Debt Elimination Act and subsequently the Fiscal Responsibility Act of 2005. These acts established principles of financial management and specified that the state maintain debt levels at certain thresholds. Consequently, they created an aversion to public debt in the government.(d) Further, the general debt stabilization policy influenced financing decisions on projects such as the Cross City Tunnel, where a no-net-cost-to-government philosophy was pursued.(d) In addition, the notion of transferring significant risks to the private sector was gaining traction, as well as the belief that market risks and rewards, in particular, provided the private sector the incentive to deliver projects as soon as possible.
Victoria began its highway PPP program on the heels of New South Wales when it called for expressions of interest from the private sector to develop and finance a new north-south connector highway in Melbourne in 1992. Unlike New South Wales, Victoria needed special legislation to enable this PPP. In 1995, Victoria passed the Melbourne City Link Act authorizing the PPP arrangement. During this period, one of the overriding concerns was limiting public debt burdens, so PPPs were viewed as a vehicle to this end. In addition, a general belief existed that private sector involvement could drive growth and efficiency, and the PPP model provided a means to price risks allocated to the private sector.
Queensland did not develop a state-driven PPP arrangement until 2006, when it initiated the procurement process for the AirportLink and Northern Busway project. The Brisbane City Council, however, began procurement of the North-South Bypass Tunnel in 2005. Since both PPPs were initiated more than a decade after the first highway PPPs in Australia, Queensland was able to capitalize on the experience of other states to more effectively implement these arrangements.
The public entities charged with administering and managing highway PPPs are structured differently among the host nations. The organizations that manage PPP programs range from traditional highway agencies to state-owned enterprises.
Estradas de Portugal, S.A. (EP) has responsibility for oversight and development of the national highway network. EP was formed in 2005 as a state-owned enterprise, and it holds a 75-year concession with the national government to manage and develop the national highway system. In other words, EP will execute future PPP agreements on behalf of the Portuguese government and ultimately all assets under existing PPP contracts will transfer to EP when the existing contracts expire. EP is the successor to three agencies formed in 1999: Instituto das Estradas de Portugal (IEP), Instituto para a Construção Rodoviária (ICOR), and Instituto para a Conservação e Exploração da Rede Rodoviária (ICERR) that replaced Junta Autónoma das Estradas (JAE), which existed from 1927 to 1999. Its conversion from three public agencies to a state-owned enterprise was driven largely by the need to move government debts off the national balance sheet so the Portuguese government could remain in compliance with EU budgetary standards.
The Spanish highway system is managed by the director general of roads, who reports to the secretary general for transportation in the Ministerio de Fomento (or Department of Development), so no distinct national highways agency or department exists. The director general has oversight of the national PPP program. Autonomous communities also have their own roadway agencies. The government delegate, who works on behalf of the Ministry of Public Works, plays a key role in administering and managing individual PPP contracts.
The Highways Agency is a unit of the Department for Transport and manages the English strategic road network. It has sole responsibility for the national motorway PFI (or PPP) program. Similar to Spain, the department's representative plays a pivotal role in administering and managing individual PPP contracts.
The administration and management approaches adopted by the three active states differ slightly. In New South Wales, the Roads and Traffic Authority (RTA) has oversight of its highway system as well as its PPP program. In Victoria, the state has created temporary public authorities for the sole purpose of managing the procurement of its highway PPP projects. Once operational, the public authorities are disbanded and the responsibility for contract administration and management is handled by VicRoads, the state's highway agency. In Queensland, the state has followed the model in Victoria for the procurement of AirportLink, creating an independent authority for this purpose. The state's Department of Main Roads will ultimately assume responsibility for its contract management.
Across the host nations, PPP arrangements are a small-tomodest portion of the total roadway network. In all of the host nations, however, PPPs have played a key role in the development and management of critical highway corridors.
Portugal has about 16,500 km (10,253 mi) of total roadways, but PPP concessions are fundamental to its National Motorway System. Figure 2 illustrates the pace of development of this system, with the majority of the activity since 2000 being done under PPP arrangements. The planned motorway system will ultimately be 3,300 km (2,050 mi). Currently, 2,660 km (1,653 mi) of the motorway system is operational, of which 2,500 km (1,553 mi) or 94 percent is under a PPP arrangement. While only 15 percent of Portugal's current total roadways are PPPs, these arrangements are certainly focused on the nation's strategic surface mobility corridors. PPP arrangements are used exclusively by the national government.
While the total roadway network covers more than 30,000 km (24,600 mi), the National Highway System is about 16,000 km (9,942 mi). Of this total, 4,300 km (2,672 mi) or 27 percent is under a PPP arrangement. An additional 1,500 km (932 mi) of network enhancements and upgrades are under construction through PPP contracts, which will increase the percentage of the National Highway System under PPPs to 33 percent. PPPs are also used by Spain's Autonomous Communities (Communidad). While the national government does not initiate these arrangements, it may lend funding and management assistance to the autonomous jurisdictions.
Figure 2. Construction of Portugal's National Motorway System.
Since 2000, the level of investment in roads, airports, railways, and ports via concessions has risen to roughly 20 percent of total transport investment, as depicted in figure 3. The vast majority of the concessions during this period were for roads. In the future, Spain expects to continue this approach to transport financing, as shown in table 2.
The National Motorway System is comprised of 7,100 km (4,412 mi). This system constitutes only 3 percent of the total roadways in the United Kingdom, but carries 33 percent of all traffic and 62 percent of freight. Compared to PPP activity in other sectors, PPP highway activity has been relatively modest. Figure 4 (see page 14) shows cumulative PPP investment since 1996 is near £4 billion.
Still, 10 percent of the National Motorway System is managed under PPP arrangements. The United Kingdom, however, is in the final stages of procuring its largest PPP project to date, the M25. Once closed, this will place 17 percent of the national system under PPPs. Local jurisdictions and the Department of Transport also have the authority to execute PPP arrangements, and both have exercised this authority.
Unlike the other countries visited, nearly all highway PPP activity in Australia has occurred at the state or municipal level and primarily in three states: New South Wales, Victoria, and Queensland. PPP arrangements are under consideration at the national level for development and enhancement of the interstate motorway system, but projects have yet to be solicited.
New South Wales has more than 20,000 km (12,427 mi) of state roadways and regional and local roads. It entered into its first arrangement via an unsolicited proposal for the Sydney Harbour Tunnel, which opened for service in August 1992.2 Subsequently, the state has used seven additional PPP contracts to complete the orbital (perimeter or ring road) around Sydney, the most recent being three projects delivered in a 5-year period: the Cross City Tunnel, the M7 Motorway, and the Lane Cove Tunnel (see figure 5 on next page). In total, 108 km (67 mi) of state highway, or less than 1 percent of the total state network, are under PPP contracts.
Victoria has a network of more than 22,000 km (13,670 mi) of metropolitan and rural arterial roads, and only two highway PPP contracts. The first, a 22-km (14-mile) highway named CityLink, opened in 2000 to provide a north-south connection to Melbourne's central business district and airport. The second, a 40-km (25-mile) highway named EastLink, opened in 2008 to provide another north-south connection on the eastern fringe of Melbourne. Both are illustrated in figure 6 (see page 15). Combined, these arrangements are also less than 1 percent of the total state network.
| Mode | Budgetary | Nonbudgetary | Percent of Total |
|---|---|---|---|
| Roads | 75.0% | 25.0% | 26.8% |
| Railways | 81.4% | 18.6% | 48.0% |
| Airports | 2.2% | 97.8% | 6.5% |
| Ports | 9.7% | 90.3% | 9.7% |
| Other | 27.7% | 72.3% | 9.0% |
| Percentage of Total | 59.5% | 40.5% | 100% |
Figure 3. Spain's national investment in transport infrastructure, 1995-2007: public investments (budgetary) and concessions (nonbudgetary).
Figure 4. Highways Agency PFI portfolio, 1996 to date.
Queensland has more than 33,500 km (20,816 mi) of state-controlled roads, but only two PPP contracts. The first, the North-South Bypass Tunnel, was an arrangement brokered by the Brisbane Municipal Council to provide another crossing of the Brisbane River. This 6.8-km (4.2-mi) tunnel is under construction. The second is a state project, AirportLink/Northern Busway (illustrated in figure 7), a multifaceted $4.6 billion connection between downtown Brisbane and the airport. The preferred bidder was selected in May 2008 and financial close was achieved in July.
Figure 5. Sydney's orbital roadways.
Each of the PPP programs has evolved since it began. While institutional learning has certainly occurred by experience, it has also come via external and internal scrutiny of the programs. Hence, the program changes have not manifested themselves just through the adjustments in organizational practices that occur naturally as familiarity with conditions and circumstances increases, but also through modifications to law and policy.
For instance, Spain's Law 13/2003, passed in May 2003, was established to reinforce private financing of public facilities and to improve the legal framework by defining a new risksharing approach, particularly for the risks involved in estimating traffic demand.(e) This law, among other things, established the principle of recalibrating the economic terms of the PPP contract. The law "specifies which events may cause the modification of the economic terms of the contract in order to rebalance the financial terms of the concession. Consequently, the bidders know, at the time of preparing their offers, which specific cases may lead to changes in the contract conditions initially stated."(e) This is a significant shift in how uncertainties throughout the project life cycle are managed, especially the traffic demand risk that can be challenging to forecast for a new toll road.
Figure 6. PPP highways in Victoria.
Figure 7. Queensland's AirportLink/Northern Busway PPP.
The United Kingdom's PFI has been the subject of tremendous scrutiny by its National Audit Office (NAO) and Parliament. The first of 50 NAO reports on PFI was issued in 1998. While this report concluded that value for money (VfM) through PFI projects was being achieved, it also found grounds for improvement in risk allocation, contract provisions, etc. With time, the United Kingdom has implemented a variety of changes designed to improve its PPP program. A standard PFI contract is now used, and approval is required if contract deviations are sought. National employment legislation exists to protect public employees if an existing asset or service is transferred by contract to a private provider or operator. In effect, they must receive a comparable opportunity and benefits with the private service provider. Finally, contract modifications over such long-term agreements are inevitable as standards and expectations change, so current and future contracts provide more flexibility to negotiate changes. The Highways Agency, in particular, has learned that it makes sense to revisit contracts more frequently to assess potential changes rather than allow changes to accumulate and attempt to negotiate a major modification.
Similarly, New South Wales adopted new policies following external scrutiny. Public reaction to the opening of the Cross City Tunnel in 2005 prompted a Review of the Future Provision of Motorways in New South Wales by the Infrastructure Implementation Group of the Premier's Department (commonly referred to as the "Richmond Report"). The report examined seven prior PPP motorway projects in the Sydney metropolitan area. While the report concluded that the RTA had generally complied with existing policies and procedures, it made a number of recommendations. As a result, the government of New South Wales has made several changes in its PPP policies and practices—refocusing its emphasis on value for money for its roadway users, improving overall transparency by disclosing all contract documents and amendments, and abandoning the no-net-cost-to- government policy.
Earlier, Victoria built on its 1990s experience while also drawing on the knowledge of countries such as the United Kingdom when it issued its Partnerships Victoria policy in 2000. This policy represented a fundamental shift in the state's perspective and implementation of PPPs. Foremost, the policy established a clear aim of achieving value for money in the public interest, made no presumption that the private sector was more efficient in building and operating public assets, and emphasized optimal rather than maximum risk transfer to the private sector. Since promulgating this policy, Victoria has issued a variety of publications on PPP procedures, ranging from practitioner's guides to contract management frameworks. Perhaps the strongest indicator of the maturity of its overall program is reflected in its project selection policy. Budgetary funds must be available to support any potential infrastructure project for it to be considered for inclusion in a capital program. If the potential project has the attributes necessary for a PPP, then it will be evaluated through Victoria's "Value for Money" guidelines. Only if the project demonstrates value for money as a PPP will it proceed that way. Otherwise, Victoria's provincial budgetary funds will be used to finance its conventional delivery.3
Similar to the United Kingdom, the Australian national government is working on a standard PPP contract by infrastructure sector, due in 2009. Some host country representatives viewed moves toward standardization in procedures and contracts as somewhat troubling. While standardization can promote stability and reduce transaction costs, too much standardization, especially in contracts, can limit flexibility, effectively reducing avenues to structure PPPs as unique service arrangements. Instead, some representatives suggested dissemination of process guidelines for project definition and selection, procurement, and award coupled with a reasonable number of standard contract provisions to promote essentially the same end: market reliability and transaction cost reduction.
As PPP programs have evolved in the host countries, so too has public acceptance of PPPs, although some issues remain. In many respects, public perspectives of PPPs have improved over time as the nations have tightened policies and improved practices. This is not to say that resistance has dissipated entirely, but that the public has come to expect better government decisionmaking on and oversight of PPPs.
Public concern over private sector profiteering was quite pronounced in some of the host nations at the onset of PPP programs. Public apprehension over the potential for unreasonable private sector profits was a real issue. With time, adjustments in policy and practice have reduced this apprehension. The more recent adoption of value-formoney principles for PPP projects and the public sector's contractual regulation of private revenues or profits as well as sharing in the financial upside have helped minimize this concern. More specific practices are described in subsequent chapters.
Resistance to tolling exists in the host nations visited, particularly the imposition of tolls where none existed before. "Excerpt: Private Sector Financing in Roads: Review of the Major Australian Toll Roads" is from a 1998 report by Austroads, the association of Australian and New Zealand road transport and traffic authorities, that provides an insightful perspective on toll roads. Both opposition aspects identified suggest that public resistance to a roadway or a toll road may have more to do with the fundamental source of the opposition than with who is providing the service. Representatives in New South Wales indicated that while general resistance to tolling has subsided somewhat, a new circumstance described as "toll fatigue" has developed.4
Officials in the United Kingdom have observed two interesting issues related to public acceptance of PPPs. The first is confusing PPP with privatization. To some these words are interchangeable. The difference between the two, however, is more than semantic. The transfer of ownership of an asset to the private sector qualifies as privatization, in which governance is through regulatory bodies such as public utility commissions. PPPs are service arrangements between the public and private sectors that are governed by contracts and the accompanying body of contract law. The second issue is general public opposition to the overall PFI policy, but project-specific support once the public is exposed to the advantages and disadvantages of a PPP approach versus an alternative strategy. In both cases, the government's transparency and accessibility on policy and project information and audits have improved public knowledge and acceptance of PPPs.
| Excerpt: Private Sector Financing in Roads: Review of the Major Australian Toll Roads |
|---|
It is the politics of toll roads, rather than their economic legitimacy, that has become the issue by which toll roads in Australia have been judged in recent times. There are two aspects to the opposition which has arisen to these toll projects:
In the first aspect, road versus no road, ownership is not the issue. Good planning involves:
Governments must be informed managers to ensure the above requirements are met, whether the private sector is involved as project proponent or not. The politics can manifest into "no road" community pressure if the planning process is not successful. In the second aspect, free versus user pays, again ownership is not the issue. Whether the government or a private developer owns a road, recent toll projects have been private sector projects with the tolls providing the revenue stream. Therefore the issue is that the community, if given a choice, prefers not to have to pay directly to use particular roads. Where roads are financed from general taxation, road use appears to be "free." Given that the majority of roads have no direct pricing, users exposed to toll roads may believe they are being treated inequitably compared to users of other facilities funded from general taxes. |
1 Convergence criteria are the criteria for European Union member states to enter the third stage of European Economic and Monetary Union (EMU) and adopt the euro. The four main criteria are based on Article 121(1) of the European Community Treaty. Member countries that adopt the euro need to meet four criteria: (1) Inflation rate: The inflation rate must be no more than 1.5 percentage points higher than the three lowest inflation member states of the EU. (2) Government finance: The ratio of the annual government deficit to gross domestic product (GDP) must not exceed 3 percent at the end of the preceding fiscal year. If not, it is at least required to reach a level close to 3 percent. Only exceptional and temporary excesses are permitted. The ratio of gross government debt to GDP must not exceed 60 percent at the end of the preceding fiscal year. Even if the target cannot be achieved because of specific conditions, the ratio must have sufficiently diminished and must be approaching the reference value at a satisfactory pace. (3) Exchange rate: Applicant countries should have joined the exchange-rate mechanism (ERM II) under the European Monetary System (EMS) for 2 consecutive years and should not have devalued their currency during the period. (4) Long-term interest rates: The nominal long-term interest rate must not be more than 2 percentage points higher than in the three lowest inflation member states.
2 No other unsolicited highway proposals have been developed in Australia.
3It is worth noting that this was the policy described by Victorian officials; whether this policy is being followed is unknown. Still, the mere existence of such a policy suggests a radically different political view of PPPs than in the United States.
4 A partial explanation of this fatigue might be the variable rates that residents of Sydney pay when using different sections of the Sydney Orbital. Since the Orbital was developed incrementally by different PPP contractors, the per-kilometer rates vary from segment to segment.
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