August 03, 2015

PPP rail projects: are governments realising the full benefits?

Written by  George Kaulbeck
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Public-private partnerships, in particular build-operate-transfer arrangements (BOT), are increasingly being deployed to deliver new rail infrastructure projects. However, as George Kaulbeck, principal consultant at CPCS argues, policymakers should not assume that BOT is the preferred option for these schemes.

WITH the world's population climbing toward 9 billion, the Organisation for Economic Cooperation and Development (OECD) estimates that $US 70 trillion in infrastructure investment is required by 2030.

 

In developed nations this growing demand is challenging policymakers to rehabilitate or replace aged infrastructure, while in developing countries, the lack of basic infrastructure is an obstacle to meeting human needs and increasing economic development.

Governments are increasingly using public-private partnerships (PPPs) to facilitate this infrastructure development. Complementing the role of the public sector, the private sector brings an entrepreneurial approach to infrastructure development with market-based solutions that can expand the provision of essential services. In addition, harnessing the private sector usually results in decreased lead times thus allowing projects' economic benefits to be reaped sooner.

George KaulbeckAlthough the term PPP has become popular in the past 30 years, collaboration between the public and private sectors in the railway sector has a long pedigree. Initially, railways in most countries were privately-owned but soon it became common practice for national and sub-national governments to provide construction subsidies or interest and dividend guarantees.

Since 1985, PPPs have been used to develop new and reinvigorate existing railways throughout the world with varying degrees of success.

Several PPP models are now in use and analysis by CPCS of 27 railway PPP projects - four high-speed, 17 light rail and six urban rail projects - reveals that build-operate-transfer (BOT) is the most commonly used structure in recent years. This is most likely due to the perception that it is the simplest to execute and provides the best value to government.

However, there is no evidence that either of these assumptions is true and there are many reasons to consider alternative PPP structures for railway projects:

  • Government control of railway assets: if the government wishes to retain control over how the railway is used or developed, the BOT structure is the least suitable as by its very nature, it is designed to provide the most freedom of control to the private-sector proponent. BOT contracts can grant this control to the government but this will add a high degree of complexity to the contract agreement.
  • Open-access: BOT structures by their very design provide operational exclusivity to the BOT concessionaire. Providing for alternative private sector and government rail operators is possible but it does add significant complexity to BOT agreements.
  • Integrating with an existing or another proposed railway: here the use of a BOT model is not appropriate as it is designed to provide maximum operational autonomy to the private sector proponent. BOT contracts can be developed around integration with an existing railway, but this adds a high degree of contractual complexity, especially when the existing railway operator is also a private sector proponent.

More complex

BOT contracts also tend to be more complex than affermage and BLT structures because they cover both infrastructure development and operations. Hence, BOT contracts generally take longer to develop, negotiate and close.

However, there is a case for combining the preferred elements of BOT with other PPP structures. This technique has been successfully used on the Light Rail Mass Transit Blue Line in Lagos where the government committed to designing and building railway infrastructure such as track, station buildings, and the depot while the affermage contract was being developed, negotiated and closed. This provided a means to "fast track" the project relative to the use of a BOT.

There is inevitably a trade-off between the loss of competition associated with bundling several smaller projects into a PPP contract and the potential efficiency gains from a PPP agreement. The bidders are often foreign multi-national firms, which may make little use of local firms and expertise.

Analysis by the Construction Design Alliance of Ontario (CDAO) of a large PPP rail project in Ontario, finds that "had the tender been broken down into smaller bites, and stations been tendered individually, up to 10 small and medium-sized Ontario-based construction and design firms would have bid on each of the smaller projects, resulting in increased competition and lower costs to taxpayers."

This outcome limits the project's local and national economic benefits, which is an acute issue in the developing world, and is particularly relevant to BOT projects as virtually all facets of infrastructure and operations are in a single contract.

Introducing contract clauses requiring a minimum use of local firms and the training of local tradespersons could mitigate this issue. Indeed it is important for government to consider these factors when selecting the right PPP structure. And as governments continue to utilise PPPs, we expect that these structures will evolve to best suit the demands of both governments and the private sector.

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