1 Notes on PPP Options – Roads Sector

The Concession Mechanisms 1

The Shadow Toll Principle 4

Commercial & Financial Risks 5

PPP’s in Transport Telematics? 6

Notes on PPP’s Options - Roads Sector

August, 2010 Loay Ghazaleh, Advisor – Ministry of Works, Bahrain

MBA 2000 (Thunderbird); B.Sc. Civil Eng 1986 (Texas A & M) 973 36 711547,

loay.ghz@gmail.com; Loayg@works.gov.bh

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The Concession Mechanisms

A concession can be defined as a system through which a public authority grants specific rights to an organization (private or semi-public) to build, rehabilitate, maintain and operate an infrastructure for a given period. The company bears the technical risk (during the construction and the maintenance), the operation risk, most of the commercial risk and financial risks. The infrastructure which is usually owned since the beginning by the public sector reverts to it at the end of the contract.

The BOT model (Build-Operate-Transfer) is a type of concession and should not be differentiated. In a BOT, a private company agrees to finance, build, and operate an infrastructure, to maintain it in proper condition for a given period and then to transfer it to the government.

Variations on the BOT include the BOOT (Build-Own-Operate-Transfer) and BOO (Build-Own-Operate). In the latter case, the contract grants the right to build and operate the infrastructure, which is not however subsequently transferred to the public sector; there is an actual private ownership in this case.

In a concession, unlike a simple management contract, the concessionaire chosen by the Government will levy the funds for the investment, maintenance, and operation and will bear a large range of risks

The main components of a concession are:

• Lot size. The Government's task is to define the "exact" size of the package to be contracted by the companies, e.g., a cross subsidization between the different parts of the package.

• Term (construction and operation). The term of an infrastructure concession (construction and operation) is long (usually more than 30 years).

• Charges. A clear cut and stable provision in the concession agreement is needed; each case is different, however, the rule it must be transparent.

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• Bid Selection criterion (The price cannot be the only selection criterion). Whenever possible the choice criterion should be dearly established. And when the contract is signed, a renegotiation between the Government and the concessionaire should be planned so that environmental, political and traffic-related constraints can be evaluated. The framework of such a renegotiation should be clearly established in the initial contract.

• Potential for the development of new ideas. The contract between the Government and the concessionaire should be drawn up to enable the concessionaire to build up a potential for innovative ideas.

• Specifications of the service. There must be strict compliance on the part of the concessionaire with specifications of the service (the "State-of-the-art" is not necessarily recommended). The key advantage of using tolls is the fact that they permit more investments on motorways than would have been possible simply by using taxes. But it is not always possible to cover the costs of building and operating a motorway by tolls, when traffic volumes are low or costs are unusually high. Considerable government support has initially been necessary to enable a toll motorway system to get started. It therefore took considerable cross-subsidizing to extend the network to low-trafficked routes.

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The Shadow Toll Principle

The shadow toll enables the public authority to entrust the concessionaire with the task of building and financing the infrastructure. The concessionaire does not collect a toll from the users, who thus use the infrastructure free of charge. It is the public authority that remunerates the concessionaire in relation to the use made of the infrastructure.

This system is thus one of counting the number of users and paying the concessionaire in proportion to this number based on a previously determined scale. In fact, the public authority's payment takes into account not only the recorded traffic but also the concessionaire's performance. This performance level can be measured from the number of lanes closed to traffic, for example, (and the duration of the works), or from the steps taken by the concessionaire to increase road safety.

The advantages of shadow toll road financing over concession-based toll financing are firstly the fact that it does not keep users away from the infrastructure and secondly there is no expenditure for toll collecting (it is estimated that about 10% of receipts relate to toll collecting if electronic systems are not installed).

The other two main advantages of the "classical" toll-based concession system, which are their flexibility and the concessionaire's financial contribution, are retained in this other type of financing. However, the shadow toll system does not entirely solve the financing problem as the public authority must subsequently pay the shadow tolls to the concessionaire. Therefore, a shadow toll system leads the public authority to finance through budget after a certain period. In a countries where tolling is not socially acceptable, such a system may be appropriate. This seems to be the case in the US. Also in Countries where there is a lack of free routes parallel to concessional highways, tolling roads has been unaccepted by the public.

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Commercial & Financial Risks

In a PPP scheme commercial & financial risks are of particular concern as follows;

Commercial Risks

Experience shows that, particularly at the highway opening, these risks may be too high to be taken only by the concessionaire. Traffic has to be very carefully analyzed and traffic forecasts should be realistic. Moreover, the general trend of unbundling infrastructure and services makes sense to consider the allocation of commercial risks as an open question.

Economic and Financial Risks

These risks are of particular importance as there is always the possibility that the private company may, either be tempted to exploit any monopoly it might enjoy, or benefit by an unreasonable return on investment.

The solution is to strike a balance between protecting the public from potential abuses of monopoly while insuring that the company has an opportunity to earn an adequate return on its investment. Therefore, the Government may consider it useful to keep an operator in the system so that:

i. An acceptable price is always at least available;

ii. Benchmarking principle might be applied; and

iii. The problem due to the asymmetrical information between operator and regulator may be partially overcome.

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Public-Private Partnership in Transport Telematics?

The public-private partnership system (PPP) can be a determining factor not only for road project financing but also in other areas such as telematics applied to transportation and 'the concept of risk-sharing, which is essential for PPP.

Transport telematics has a wide range of applications that already aroused immense interest around the world. Following the investments of the US and Japan in these activities, the European Community has decided to actively consider the deployment of transport telematics throughout Europe.

Road telematics, through electronic pricing and road services to the user (private and commercial), corresponds to a field in which a real public-private partnership seems essential. Depending on the application and also on its development stage, the role of the Government can be the one of a legislator, researcher, sponsor, regulator, monitor, or even disseminator.

A new challenge is that of defining the "minimum service" with regards to road information and inter-operability. This consists primarily in identifying the basic information that must be communicated free of charge to the user (related to road safety: such as the detection of accidents, or the message on road condition). Another type of information, more concerned with user comfort (information on trip times, choice of route, etc.) could be provided by the private sector (subject to a charge). Lastly, a number of services correspond to "customized" processing of information (for example, fleet and freight management, optimized navigation) can be provided to specific private sector users.

The first type of information to be communicated to road users is part of the minimum service and should be provided at no extra fee (the delivery by itself presents a plus for the society as a whole). It is more the role of the Government to ensure that this universal service will be delivered as such (which does not mean that it is up to the Government to operate this universal service). The two other types of information are much more customer oriented and could be part of a commercial service. In this latter case, the service will be launched in the market if it is financially viable.

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One application of this in transport telematics could consist in gathering public and private investments instead of splitting them as is generally the case; for instance, the above identified universal service and commercial service could be provided by the same private operator.

In the case of a highway operated by a concessionaire company, this latter one may provide free of charge the universal service and charge the second type of service. This service provision may of course not only be carried out by a concessionaire company but also by specific operator such as telecom companies. These service providers can be contracted out by the Government or by the concessionaire companies or can even subcontract a larger range of functions (such as electronic fee collection) from the motorway concessionaire company.

Transport telematics is an area where PPP should be favored. At least three private business categories are likely to be interested in these road telematics applications: equipment suppliers (in charge of producing transponders, maps, markers, etc.), vehicle producers, and service and communication companies. Faced with these new major stakeholders from the private sector, it seems essential for the public administrations to anticipate the emergence of these new applications to gauge their impact on the road sector.

The increasing trend must be to design road infrastructure as a means to convey transport systems and information which can reposition road in comparison with the other modes of transport and will improve the service to the user.

The two current trends, one financial (strengthening the "user pays" principle), the other organizational (enhanced monitoring and integration of user needs) give reason to expect that road telematics offer a major challenge that cannot be ignored or underestimated.