U.S. Department of Transportation
Federal Highway Administration
1200 New Jersey Avenue, SE
Washington, DC 20590
Each host nation follows a systematic methodology for PPP project programming and delivery. All countries decide to deliver a highway project by PPP after extensive front-end planning, although philosophical differences do exist among the nations on the justification of a PPP approach. Regardless, the programming and delivery processes used are informative, particularly because they provide contrasting perspectives to consider.
A fundamental question with any PPP arrangement is the particular funding arrangement that might prevail. Given the impact that the funding mechanisms can have on the general project programming and delivery process, these are discussed first in this chapter.
PPP arrangements require revenue sources or rights to support their capital, operating, financing, and transaction expenses and to provide a return on equity investments. The host countries employ a variety of mechanisms to provide such funding: real tolls, shadow tolls, and directpayment mechanisms. Real tolls are relatively well understood; users pay a fee to use an asset. Shadow tolls and direct-payment mechanisms are less so. Often, shadow tolls are viewed as payments from a public entity to a contractor based on the volume of asset users. In Portugal and Spain, however, a shadow toll is comprised of a service payment, which is linked to traffic volume, and an availability payment, which is linked to the level of service provided. The simple notion of a direct-payment mechanism was presented in the United Kingdom as the fee the public entity pays the contractor. The payment mechanism is comprised of several components, but the availability of service is the principal one.5 Another potential mechanism is ancillary revenues that might be derived from commercial development or land use arrangements along a roadway, such as service stations, restaurants, or utility corridors.
Portugal uses direct real tolls and shadow tolls to provide the revenues necessary to support PPP projects. EP evaluates the economics of the proposed PPP project and recommends a tolling or funding strategy to the Portuguese government, which makes the final decision on toll structure.
In situations where traffic volumes are projected to exceed 15,000 vehicles per day, EP will generally recommend real tolls and may permit the concessionaire to employ congestion pricing schemes. If traffic volumes are projected to be below 10,000 vehicles per day, EP will usually recommend shadow tolls. In addition, the government may substitute shadow tolls for real tolls on urban commuter routes. Of the 2,500 km (1,553 mi) under PPP contracts, 1,400 km (870 mi) or 55 percent is real toll, 900 km (559 mi) or 37 percent is shadow toll, and 200 km (124 mi) or 8 percent is no toll. Toll-free PPPs result, for example, when a private partner builds a connector road that is not tolled as part of an overall highway concession agreement. Figure 8 (see next page) illustrates the past and projected mix of real and shadow tollways in Portugal's National Motorway System.
Where expected traffic volumes are modest, EP has recommended a dual approach in which real tolls are combined with shadow tolls with two components, a service payment linked to traffic volume and an availability payment linked to the level of service provided. In these cases, the initial basis for the real toll is common for all projects and has a contractual cap, while the shadow toll amount is bid variable. As traffic on these roads increases, the real toll revenues rise while the rate of shadow toll contributions by the government falls. Further, EP is considering removing shadow tolls from highways where the real tolls have become sufficient to meet project financial requirements.
Figure 8. Portugal's National Motorway System with mix of real toll and shadow toll segments.
Similar to Portugal, Spain uses both real and shadow tolls. The government conducts a feasibility analysis to determine whether the expected traffic volume will permit the use of real tolls. If not, shadow tolls are generally used in lieu of any real toll. In the case of real toll concessions, the Spanish government has recently begun to establish the tolling rate and structure. This is a change in philosophy from earlier concessions in which tolling rates and structures, as well as the concession period, were bid parameters. The basic rationale for the change is that fixing these parameters increases competitive pressure.
Of the 4,300 km (2,672 mi) of the National Highway System under PPP contracts, 3,800 km (2,361 mi) use real tolls, while 500 km (310 mi) use shadow tolls. In the Madrid metropolitan area, shadow tolls alone are generally used for PPP projects. The shadow tolls paid during a period usually are linked to traffic volume and the level of service provided. Only one PPP project in the Madrid region relied exclusively on real tolls. Other regions in Spain rely more heavily on real tolls. Like Portugal, Spain also requires construction of toll-free connector roads as part of some of its concession agreements.
With the exception of the M-6, the national motorways under PPP contracts in the United Kingdom use either shadow tolls or direct payment mechanisms exclusively. Early PPP contracts often used shadow tolls based only on traffic volumes. More recent PPP contracts have used a payment mechanism based on various factors, such as congestion, lane availability, minimum performance criteria, and safety. In some cases, the payment is associated primarily with the availability of a required level of service (i.e., an availability payment).6 PPP contractors typically propose the amount of direct payment from the government in their price proposals during procurement. Funding challenges, however, are driving the U.K. government to consider the use of real tolls on future highway PPPs.
In the three states, real tolls are used for highway PPP projects. While governments may propose either a lump sum or an annual contribution to the contractor in their request for proposals, respondents (bidders) have typically proposed the elimination or reduction of these contributions by government in their proposals. In New South Wales, the government now typically specifies the initial toll rate and uses indexing techniques for escalation. In Victoria and Queensland, the initial toll rate is typically a bid variable, but the government sets the tolling structure over time.
Determining whether a project is suited for delivery by PPP is an important, but not daunting, task. A representative for the U.K. Highways Agency indicated that a PPP arrangement is a tool that can provide value for money, but this strategy is unlikely to do so if a project is too grand, too complex, or improperly prepared. "Getting it right is not difficult or a matter of luck," the representative said, but it requires the public sector to define its requirements clearly and to prepare a project for the market. Accordingly, this section explains how the different nations go about getting it right.
A common attribute among the nations is the importance of long-term transportation and highway plans in their overall capital programming process. Each country has a general master transportation plan, and PPP candidate projects are typically identified from the requirements listed in the master plan. Another common perspective is that projects with reasonable to significant scale and complexity are often viewed as possible PPP arrangements. While scale can offset the substantial transaction costs involved in these projects, both attributes are likely to introduce meaningful risks throughout a project's life cycle. Long-term risk assumption by the private partner is seen as a driver of innovative project concepts and solutions.
Generally, Portugal and Spain use similar techniques for analyzing and selecting projects for delivery by PPP, and the United Kingdom and Australia employ comparable methods. Essentially, the principal difference between the pairs of nations is the justification rationale. In Portugal and Spain, a feasibility analysis is conducted during the project programming process. If the majority of a project’s market risks can be transferred to the private sector, the project is likely to proceed as a PPP. Alternatively, the United Kingdom and Australia employ a more methodical approach in which a public sector comparator (PSC) is developed and a value-for-money (VfM) analysis is conducted. Generally, a PPP approach is taken only if VfM is expected by following the PPP strategy.
Portugal has developed and maintains a National Road Plan, which identifies current and future highway requirements as well as their proposed execution. This plan was last updated in 2000, and it serves as the country's framework for highway development and management. Portugal is experiencing 6 percent annual traffic growth overall and 12 percent traffic growth on its motorway system.
Potential PPPs are drawn directly from the requirements in the 2000 plan. In fact, Portugal expects to use primarily PPP arrangements to complete its National Motorway System. During project programming, EP conducts a feasibility analysis to determine the financial viability of alternative funding schemes for upcoming motorway segments. In many respects, the question is what type of funding mechanism to apply to a particular segment. EP studies the circumstances, determines whether a real toll or a shadow toll is appropriate, and makes its recommendation to the Portuguese government. Once a funding decision is made, EP programs the project for execution.
Spain has a 15-year national plan from 2005 to 2020 for different transportation modes. Roughly 25 percent of the expected financing for national highways and roadways during this period will come from nonbudgetary sources— in other words, through concession arrangements.
All potential projects go through a similar programming process, which Spain describes as a "maturation phase." This phase typically lasts 30 months. During it, potential projects undergo an informative study and a project development process. During the informative study, the government completes a feasibility analysis to assess, among other things, the financial circumstances of a project. If the government can define the conditions of the project so that it is a viable candidate for private finance and the appropriate level of market risk can be transferred to the private sector, the project will likely proceed as a PPP arrangement.
Figure 9 (see below), for instance, illustrates a preliminary economic analysis of a group of projects: intercity motorways, new radial highways, and regional development highways. The expected capital cost and daily traffic are depicted on the x and y axes, respectively. The lines radiating from the origin indicate a 7 percent internal rate of return (IRR) for contract terms of 35, 50, and 75 years. Individual projects are plotted on their projected capital cost and daily traffic. Projects in the upper left are quite viable economically, but too attractive for the private sector. Projects in the lower right are uneconomical and, therefore, are not attractive enough. To increase the risks of the three projects in the upper left, the scope of work for the projects will be increased (increasing the capital costs) to drive the projected IRR down toward 7 percent. To reduce the risks of the two projects in the lower right, public funds are introduced to drive the projected IRR up toward 7 percent.
Once the informative study is complete, the PPP versus non-PPP decision has been made and projects proceed through the development phase, during which environmental impact analyses and public information periods are completed. Finally, the scope and conditions of a project are drafted, and it is ready to enter the delivery, or execution, phase.
Figure 9. Example of Spain's preliminary economic viability analysis of projects.
Figure 10 shows the past and future focus of the Highways Agency's investments. The decision on the delivery approach for schemes will consider (1) individual scheme priorities, (2) current or pending program commitments, (3) capital costs, and (4) network occupancy against a hierarchy of delivery options. A private finance strategy must be considered first for any major scheme (defined as any scheme with a capital cost exceeding £7.5 million), but schemes valued at less than £100 million are likely to offer better value if delivered conventionally.
When a major scheme is identified, the project delivery strategy is determined jointly by Major Projects and the Procurement Division. In the case of a potential PPP, a VfM analysis is started by examining five areas:
If this examination suggests that VfM is possible, then a PSC analysis is conducted. The intent of the PSC analysis is to determine if a PPP approach generates value against a public provision strategy when life-cycle costs and risks are quantified, as depicted conceptually in figure 11. In the case illustrated, the PPP approach demonstrates value for money because the base case plus risks retained by the public sector are less in the PPP approach than the public provision estimate (the PSC) of the base case plus the risks retained.8 After completion of this analysis, either a PPP delivery is chosen or not.
Figure 10. U.K. Highways Agency investment profile, 2001â€“2014.
Figure 11. Illustrative PSC analysis in the United Kingdom.
Of note is the difficulty and controversy that surround the use of VfM and PSC analyses. The challenges of implementing this methodology are captured by comments from U.K. elected officials:(f)
Successive administrations have adopted the policy of using the PFI for those cases where the approach is expected to deliver value for money. The Prime Minister said in September 2002 that the PFI has a central role to play in modernising the infrastructure of the NHS (National Health Service)â€”but as an addition, not an alternative, to the public sector capital programme. Yet the PFI is too often seen as the only option. To justify the PFI option, departments have relied too heavily on public sector comparators. These have often been used incorrectly as a pass or fail test; have been given a spurious precision which is not justified by the uncertainties involved in their calculation; or have been manipulated to get the desired result.
Despite such criticism, the methodology at the very least promotes the use of a systematic and auditable process, rather than an expedient or politically motivated one, for making a project delivery decision. In addition, it encourages a thorough business case analysis for any project, particularly large-scale endeavors.
In each of the three states visited, statewide or regional transportation plans have been integral to the identification of possible PPP projects. Similarly, each state uses a VfM methodology including PSCs, comparable to the United Kingdom's techniques for determining whether a PPP approach is justified.
In New South Wales, the Office of Infrastructure Management is responsible for the State Infrastructure Strategy (SIS), a rolling 10-year plan for all infrastructure systems. This plan draws heavily from the agencies' Asset Strategies and Capital Investment Strategic Plans. Other strategies at municipal or regional levels are also considered when developing and updating the SIS.
The highway PPPs in Victoria are more the result of long-term regional planning than routine statewide planning efforts. State officials had studied the need for the projects that became the CityLink and EastLink PPPs for 40 to 50 years. The state has just completed a needs assessment for an east-west limited access corridor in Melbourne.
In Queensland, Main Roads has in place a rolling 5-year Roads Implementation Plan. The plan outlines projects totaling $16.2 billion. The Brisbane City Council has also played an integral role in planning improvements in Queensland's largest city. It has in place a Brisbane Transport Plan Update 2006–2026, and the TransApex Study of 2004 focused on an inner-city ring road system creating three new high-capacity river crossings. Recommendations from this study are shown in figure 12. Two of the projects the study identified are already being delivered by PPP arrangements (North-South Bypass Tunnel and AirportLink).
All three states emphasized the significance of conducting a strong business case analysis before considering PPP delivery as an option. In fact, this consistent refrain indicates the general level of maturity of PPP policies and practices in Australia, where the states have incrementally normalized themselves. New South Wales moved first and Victoria followed. Despite the friendly rivalry between the two, they have learned from each other as their programs have evolved. Recently, Queensland has gotten into the act, and it has borrowed PPP knowledge acquired by the other states and used it to its advantage, even going as far as using public personnel from other states in the procurement process.
Figure 12. Project recommendations from TransApex Study in Brisbane.
In fact, the basic drivers of VfM in New South Wales and Victoria are virtually identical:
In practice, Queensland has followed similar logic. A quick read of these drivers suggests that many projects are not inherently amenable to these drivers, but instead must be configured to conform to them. In this respect, the discussion in this section has come full circle, since this is exactly the point the representative of the U.K. Highways Agency made about getting it right.
All public agencies visited emphasized effective risk allocation as an important aspect of a PPP project. If significant risks throughout the project's life cycle are not transferable to the private sector, then the project is likely not an appropriate candidate for delivery via PPP. This general point was made in the previous discussion about project selection and analysis, but its significance cannot be overemphasized. The basic risk allocation philosophies in each country (or state) differ, particularly on market or demand risk and its impact on the private partner's ultimate financial situation. Further, practices related to changes in conditions throughout a project's life cycle are also markedly different.
Tables 3 through 6 illustrate the general risk allocation approaches for PPP projects in each country. As they indicate, the areas of greatest difference relate to the treatment of market risks and risks associated with changes in conditions over a project's life cycle, such as latent defects or a law change. Another area of interest is how the countries handle the issue of competing facilities. In general, this risk is borne by the private sector subject to certain conditions. "Example: Competing Facility Provisions" provides an example of contract provisions related to competing facilities from a recent concession deed. The sections that follow address these issues in each country, but a more detailed discussion of changes in conditions is provided in a subsequent section.
EP conducts a risk analysis before beginning project procurement to balance risk allocation. It evaluates the expected rate of return for the private sector. If this expected rate is too high, EP will consider adjusting the scope of work or shortening the contract term for the project. If the expected rate is too low, EP may extend the concession period or include a government subsidy. Once the project begins, EP will consider restructuring the financial conditions of the PPP agreement if the ex-ante uncertainties in the project turn out to disproportionally favor either the public or the private sector, a practice termed "rebalancing."9
Like Portugal, the Spanish government attempts to appropriately assign project risks when it conducts a thorough risk analysis during the informative study. If the expected rate of return for a PPP project is too high, the government will investigate means to reduce this rate, such as increasing the project's scope of work to include feeder or connector roadway segments. If the expected rate is too low, the government will consider measures to increase the rate, such as including public subsidies. Once the project begins, the Spanish government will consider rebalancing the contract if the expected economic-financial equilibrium is not maintained. In other words, if risk distribution proves detrimental to either party, a restructuring may occur.
However, Spanish law requires that two conditions be met before rebalancing is triggered. First, the change in conditions must produce a substantial material effect on the party impacted. Second, this effect must be sustained over a reasonable time period. The rationale for this rebalancing concept is twofold: (1) the public and private sectors enter into the PPP agreement for the general public good using the best information available at the time of the agreement, and (2) this practice supports win-win outcomes and promotes stability in the market.
The Highways Agency has learned that a "robust, auditable allocation of risk" is preferable to maximum risk transfer. Over time, the agency has sought to create a stable environment for risk allocation and management through measures such as the creation of a standard baseline contract document and the use of project procurement techniques such as conducting risk workshops and negotiating risk adjustments before finalizing project-specific agreements. Like Portugal and Spain, the United Kingdom may shorten the term of PPP contracts when the private partner's actual revenues exceed originally projected revenues.
Similar to the United Kingdom, Australian states have learned that reasonable risk transfer is preferable to maximum risk transfer. All highway PPPs to date in the three states visited are real toll projects, and the states share the philosophy that private investors in these deals, both equity and debt holders, must bear the downside market risks. In other words, if the revenues or rates of return expected do not materialize, the private investors must endure the consequences.
The maturity of the Australian PPP market supports this philosophy. Both investors and lenders have grown comfortable with these conditions and the marketplace itself can provide remedies to financial hardships (e.g., restructuring financing arrangements).
Generally, all of the host nations use a competitive procurement process for selecting PPP contractors. The principal difference among the countries is the extent of negotiation that occurs during procurement. Extensive negotiations during the procurement process increase both its time and cost. An overview of the processes in each country is shown in figure 13, which arranges the four countries on a continuum ranging from a pure bid to a pure negotiation for selection of the PPP contractor. Spain is on the left and the United Kingdom is on the right, with the others in between.
Figure 13. Continuum of procurement processes of host countries.
|Example: Competing Facility Provisions|
36. Interaction with transport network
36.1 Transport network support
36.2 Consequences of failure to provide State support
A failure by the State to provide the support required of it under clause 36.1 (Transport network support) will not constitute a breach of this Deed but may give rise to a Relevant Effect under clause 45 (Key Risk Management Regime).
36.3 No restriction on State
36.4 Proximate State Work
EP uses essentially a two-stage competitive procurement process to select its preferred bidder. For each procurement, EP typically engages roughly 20 staff members along with complementary financial and technical advisors. In the first stage, an advertisement for bids is placed in the Official Journal of the European Union (OJEU), generally for 2 months. Bids are then presented by interested parties and evaluated. Bids are typically evaluated on several weighted criteria:
Following evaluation, two respondents are short-listed, and this process generally lasts 3 months. In the second stage, EP enters into negotiations with the two remaining teams and ultimately selects its preferred bidder (another 2 months). A contract award is then made (1 month). Financial close occurs after contract award (another 2 months). In total, the process is completed in roughly a year. EP makes all bids received in the first stage available to all respondents for 10 days, and it also makes the final two bids received after negotiations in the second stage available to all respondents for 10 days. This practice helps facilitate the transparency of the process among all respondents.
Spain uses what it calls the "open competition model" for procurement of highway PPP projects. Effectively, the government issues a call for tenders, and interested parties submit binding proposals that comply with the call's project requirements and conditions. Respondents may offer up to three alternatives. Award criteria are typically technical qualities and economic conditions of the proposals. Other variables may be included on a project-by-project basis. An award is made on the basis of the most economically advantageous tender. Typically, a staff of about 20 civil servants handles multiple procurements simultaneously.
The Spanish government views this approach as competitive and efficient, but it also recognizes the importance of clearly delineating its expectations and terms for the project in its request for tenders.(b) Financial close is not required before contract award, primarily because the Spanish markets are quite familiar with the nature of the procurement process as well as its standard contract documentation.
Another rationale indicated for the open competition model is the transaction cost savings it affords. According to representatives in Spain, the cost of its tendering process to the private sector bidders averages €300,000 to €500,000. A study by the European Investment Bank and Polytechnic University of Madrid indicates that the total transaction costs of all respondents and the public sector as a percentage of project capital value of an open competition model versus a negotiated model is roughly 2 to 12 percent. A potential downside of this approach, however, is that it may attract too many bidders. Spain typically receives three to eight bids, but it has received as many as 20. While a reasonable number of bidders promotes fair competition, too many bidders can drive up transaction costs as well as discourage some qualified bidders from participating because the probability of success falls.
The United Kingdom has generally employed a negotiated procurement process for its highway PPP projects. Depending on the scale and complexity of the project, the in-house staff and consulting advisors involved can vary significantly. Procurement of the M25 project included a significant staff of internal and external personnel. "Case Example: M25" describes this project more fully. The primary stages of the process are (1) prequalification, (2) tender, (3) negotiation, and (4) contract award. Each stage is described below.
Prequalification includes the following:
Tender includes the following:
All three states generally follow a multistage competitive procurement process. As discussed previously, both Victoria and Queensland have opted to form temporary public agencies for the sole purpose of procuring and commissioning highway PPP projects. Figure 14 illustrates the structure of the Southern and Eastern Integrated Transport Authority (SEITA), which was established to procure Victoria's EastLink. "Case Example: EastLink" (see page 35) explains certain features of the unique project.
Figure 14. Structure of Victoria's SEITA.
|Case Example: M25|
Background and Chronology
The M25, the orbital motorway that encircles London, is one of the busiest stretches of roadway in the U.K. system. Although considered a single entity today, the M25 was constructed in a piecemeal fashion from 1975 to 1986. Since then, certain sections have been lengthened and widened. Congestion on the orbital and its contiguous roadways led to the ORBIT Multi-Modal Study to examine measures to improve overall mobility in the area. The study concluded that additional capacity was needed on the M25, as well as implementation of Integral Demand Management techniques: (1) incident management, (2) lane management, (3) access management, (4) traveler information, and (5) wide-area traffic management. Following a business case analysis, the Highways Agency decided to pursue the needed improvements via a PPP arrangement—a DBFO delivery using a direct payment mechanism for a contract period of 30 years starting in 2009.
The project road, roughly 400 km (249 mi) long, consists of the M25, the A282 Dartford Crossings, and intersecting radial trunk roads, as shown in figure 15. The project scope requires the PPP contractor to widen four sections of the M25 (roughly 100 km or 62 mi) from a dual three-lane to a dual four-lane route. The expected capital cost of the widening is £2 billion, and construction is anticipated to take 8 years. In addition, the PPP contractor will assume responsibility for operating, maintaining, and managing the road.
Milestones in the project's implementation to date are as follows:
Interesting Aspects of Procurement and Delivery
For the M25, the Highways Agency's general procurement process was augmented somewhat because of the project's complexity and to minimize the transaction costs for both the public and private sectors. Before the formal tender stage, the Highways Agency issued an ISOP, which required the five prequalified teams to respond to a questionnaire on quality issues such as processes, resources, and organizational values. Following assessment, three teams were short-listed and continued to the tender stage. A conforming tender was required, while variant tenders were encouraged. A limited retender was necessary because of noncompliance by all three bidders.
Negotiation and evaluation of the tenders was quite complex because the Highways Agency essentially considered three unique tenders for the project. Accordingly, three separate negotiation and evaluation teams were assembled; their activities were coordinated by a chief procurement official and the project manager. A steering group monitored the process to ensure its integrity and fairness. Evaluation of the M25 tenders was a three-stage process: (1) quality assessment, (2) price assessment of all tenders meeting the quality threshold, and (3) price-quality tradeoff process, if necessary.
The quality assessment criteria were the following:
For each criterion, an overall score was assigned and a minimum quality threshold was established.
The pricing assessment was based on the level of gross annual payments to the PPP contractor; adjustments to the payment amount can be made, including a risk adjustment for any contract amendments. The tender with the lowest adjusted net present value (NPV) wins, subject to the price-quality tradeoff. All tenders within 5 percent of the lowest tender were included in the tradeoff process, in which price and quality scores were weighted 85 percent and 15 percent, respectively.
Project Outcomes and Current Status
In May 2008, the Highways Agency announced that Connect Plus was its provisional preferred bidder (PPB). Connect Plus is a consortium of Atkins, Balfour Beatty, Egis Projects, and Skanska. The overall contract is expected to be worth £5 billion. Financial close was pending at time of publication.
The rationale for a separate authority is based on prior success with this structure, the singular focus of the authority, the facilitation of streamlined decisionmaking, and the ability of the authority to deal with all parties in a transparent and fair manner.
The procurement process in the three states begins with an invitation for expressions of interest (EOI). Following receipt of EOIs, a short-list is created, and then the government issues a detailed RFP.11 The RFP typically includes the following:
Proposals are received from the short-listed teams, active negotiations with individual teams are conducted, final proposals are evaluated against defined criteria established generally on a project-by-project basis (such as tolling structure, concession length, design features, etc.), and a preferred bidder is selected. Subsequently, contracts are finalized and financial close is reached. The states generally request a conforming proposal (i.e., one in full accordance with the RFP), while also allowing nonconforming proposals (i.e., ones with alternatives or deviations from the RFP). This allows the private sector some latitude to bring new project ideas or concepts for consideration by the public sector.
The transparency of a procurement process—the attributes that make it stable, reliable, and predictable to actual and potential participants and to procurement officials, legislators, and the public—is fundamental to the acquisition of public services or works. Given the characteristic scale and complexity of PPP projects, transparency is crucial because interest among citizens, elected officials, and the media is typically heightened and private participants are careful about placing their limited project proposal funds at risk in processes that are poorly structured or unlikely to reach closure. One private representative in Australia explained that its proposal costs are typically 1 percent of a PPP project's capital costs. Of these funds, 25 percent is spent on design work, 7.5 percent on traffic demand modeling, 13.5 percent on internal staff costs, 33 percent on external success fees,12 and the balance on other costs.
The host nations are quite aware of the need for transparency and implement various practices to ensure it during project procurement. Portugal makes all proposals received available to every respondent. Spain solicits bids from its respondents with well-defined parameters and award criteria. The United Kingdom employs probity officers to monitor its sometimes-complex contract negotiations to scrutinize the fairness of such proceedings. Australia not only has closed but also has under construction and completed some of the largest highway PPP contracts in the world. These practices and outcomes, as well as others, are simple illustrations of each nation's recognition of the significance of transparency to the overall credibility of a PPP program.
|Case Example: EastLink|
Background and Chronology
EastLink, Victoria's second fully electronic tollway, links the Eastern Freeway in Mitcham to the Frankston Freeway in southeast Melbourne. The 39-km, $2.4 billion freeway is Victoria's second highway PPP, and it opened to traffic in June 2008.
Original plans for a proposed Scoresby Freeway began in the 1960s, and the public sector reserved much of the necessary right-of-way during this period. Throughout the 1990s, environmental studies and impact assessments were completed. By 2000, the pressure to develop the roadway began to mount as several town councils along the route lobbied the state government to take action.
During 2001 and 2002, the government completed its business case analysis of the project, and the decision was made to combine the Scoresby Freeway and the Eastern Freeway Tunnels Project into the Mitcham-Frankston Freeway Project.
In 2003, the Victoria government announced that the freeway would be funded by real tolls and delivered via a PPP arrangement. The Southern and Eastern Integrated Transport Authority (SEITA) was formed to oversee the procurement and commissioning of the project. Later that year, SEITA called for expressions of interest, and the commonwealth government (national government) granted environmental approvals for the project. SEITA then issued its request for proposals (RFP) to two bidding consortia—ConnectEast and Mitcham Frankston Motorway. In April 2004, proposals were submitted and by October ConnectEast was announced as the winning bidder.
Major construction commenced in 2005, and the project was renamed EastLink. The project includes the following:
Interesting Aspects of Procurement and Delivery
CityLink, Victoria's first highway PPP arrangement, was procured in the mid-1990s and opened for service in 2000. Various lessons from the first procurement, as well as general experiences in the highway PPP marketplace, were incorporated into EastLink's procurement and delivery.
Project Outcomes and Status
EastLink is Victoria's largest urban road project and PPP to date. The project opened 5 months ahead of schedule with no claims or significant issues for the state thus far. It also has the lowest per-kilometer toll in Australia at AU$0.11 per kilometer (2004 dollars). The project is noteworthy for its urban design features (as shown in figure 16) with attractive noise walls, pedestrian bridges, and public art. Fully electronic tolling has also produced innovation in tolling products and flexible approaches to toll collection enforcement. In addition, the project has achieved a net gain in native vegetation in the project area.
Upon opening, the project had a 4-week toll-free period. Tolling began in July 2008.
The contract periods for recent PPP projects in the host nations generally range from 30 to 40 years. Portugal tends to use a standard period of 30 years for its concessions. While Spain has used concessions as long as 75 years in the past, current arrangements vary from 25 to 40 years. The government sets the period based on what term makes sense economically. In the United Kingdom, the Highways Agency has set recent contracts at 30 years. In Australia, the contract period is often a bid variable. In the case of the AirportLink/Northern Busway project, the proposed and accepted term is 45 years.
Generally, all of the host nations use contracts with a standard structure for their PPP projects, which includes (1) the agreement, (2) a common or core set of contract provisions and requirements, (3) project-specific contract provisions and requirements, and (4) common or project-specific schedules or "sheets."
In each country, technical standards for various highway structures and components are specified by the government. Any deviations proposed by the private sector are usually assessed during the procurement stage for suitability. During the design and construction phases, the independent verifier typically provides periodic certification that design and construction are proceeding according to agreed-on standards. Early contracts, in some cases, provided too much flexibility to the private sector on technical provisions, but the nations have learned that the services they seek from PPP arrangements should not come at the expense of sound engineering practices.
Contract modification is also an area in which learning has occurred. Early contracts did not necessarily provide the flexibility needed to update them over time as prevailing conditions changed. For instance, the U.K. Highways Agency is in the process of negotiating major changes in contracts signed in 1996. In Portugal and Spain, the principle of a sustained, material effect is generally applied to determine whether a contract change is warranted for either the public or the private sector's benefit. In the United Kingdom, the Highways Agency has recently adopted a two-tiered contract modification strategy. In the case of a major change, a contract review occurs, which may necessitate negotiation of a new contract. The M25 project is the first to include this contract review condition. Otherwise, a step-change process is included in the contract so standard modifications can be handled within the existing agreement. Step changes may result from eligible changes indentified in the contract, changes in law, modifications initiated by the private partner, or changes to accommodate project improvements or enhancements. Australia typically negotiates contract changes on an as-needed basis, but it has also established processes for handling both major and minor modifications to the contract. Originally, contracts included fairly liberal material adverse effect provisions in the event of changes in conditions; more recent contracts have tightened these provisions to a more limited set of events (see "Example: Contract Modification Provisions" below).
|Example: Contract Modification Provisions|
37.1 Request for information by State
The State may request from each Concessionaire information as to revenue and cost impacts on, respectively, each Concessionaire's Works, Temporary Works, Facilities, Construction Activities or Operation Activities and other matters specified in the request in relation to a proposed Modification of the Works, the Temporary Works, the Facilities or the obligations in the Project Documents which relate to the Construction Activities or the Operation Activities.
37.2 Details of Modification
If the State proposes to request a Modification, it will provide the Concessionaires with details of the proposed Modification and consult with the Concessionaires concerning the proposed Modification at least 30 Business Days prior to issuing the request under clause 37.1 (Request for information by State).
37.3 Concessionaires' Modification Notice
As soon as practicable after receipt of a request from the State under clause 37.1 (Request for information by State), the Concessionaires must provide the State with a notice (Concessionaires' Modification Notice) setting out detailed particulars of:
37.4 Commercially appropriate and reasonable methods
The commercially reasonable and appropriate method or methods by which a material and detrimental effect will be addressed, as contemplated by clause 37.3(h) (Relevant effect) or a proportion of a benefit of any material enhancement returned as contemplated by clause 37.3(i) (Material enhancement) may involve one or more of the following:
Like any project, commissioning activities are important to a successful opening. While technical conditions and issues are just as important as in other project delivery methods such as design-bid-build or design-build, PPP arrangements must focus substantial attention on the project's users—the riders of the facility. While all nations emphasized the importance of public involvement and information dissemination during the project delivery process, Australia in particular stressed the importance of public involvement as a project nears its opening. This is likely because all of its PPP arrangements employ real tolls and are basically greenfield projects, so the public needs to understand tolling products, rates, and enforcement; points of access; etc. Often, a toll-free period is used to test operating systems and familiarize the public with the facility. Without a focus on the facility's users, both the public and private sectors risk alienating their clientele and losing their patronage.
5 In early PPP arrangements in the United Kingdom, shadow tolls based only on volume of service were commonly used; the United Kingdom has evolved to use payment mechanisms based heavily on availability of service. Hence, this overall approach to payment is often referred to as "availability payment."
6 The United Kingdom still tolls some bridges in its existing PPP contracts, such as the Second Severn Crossing along the M4.
7 The Highways Agency in the United Kingdom uses the term â€œschemeâ€� to refer generally to requirements or potential projects.
8 HM Treasury no longer requires the development of a PSC for PFI projects generally; the treasury has determined through its audits and experience that a project with the appropriate attributes most likely will pass the PSC test. The Highways Agency still makes use of the PSC as a mechanism to lend credibility to its delivery decision.
9 Portugal's risk allocation and management practices were likely borrowed from Spain, which has used these techniques for some time in its highway PPP program.
10 A limited retender was required during the period January to February 2008.
11 In some cases, the contract for the proposed project is included with the RFP.
12 External success fees are monies due to external entities contingent on contract award (i.e., bonuses for success).
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