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PUBLIC PRIVATE PARTNERSHIPS, THE ADVANTAGES AND DISADVANTAGES EXAMINED G.W.E.B. van Herpen Dutch Ministry of Transport, Public Works and Water Management Directorate-General of Public Works and Water Management AVV Transport Research Centre
1. Introduction This essay is written as part of my study of the Economics of Transport and Logistics at the Erasmus University Rotterdam in the Netherlands. The aim of this essay is to analyse the advantages and disadvantages of public private partnerships (PPPs), particularly in the infrastructure sector. At first a desk research had been carried out. After this literature study a questionnaire had been sent out to different public and private actors, mainly in the United Kingdom as well as in the Netherlands. The responses have been processed in this essay and cited in italics. Important to note is that the aim of this paper isn't the promotion of public private partnership, nor the opposite; PPPs neither imply nor exclude the private ownership of infrastructure or the use of (shadow) tolls. In contrast, there can be no PPP without risksharing and an approach that takes overall of the infrastructure and services in a transparent and stable contract drawn up within the framework of stable, appropriate and respected legislation. 2. Public private partnerships A public private partnership can be described as a co-operation between the public and the private sector, in which the government and the private sector carry out a project together on the basis of an agreed division of tasks and risks, each party retaining its own identity and responsibilities. The interest in PPPs is growing, notably due to the growth in the demand for infrastructure, limited public funds to meet current and future needs and acceptance for the private sector in the provision of infrastructure. The underlying principle behind PPPs is that, although the public sector may need to be responsible for the delivery of a particular service, it does not have to be responsible for actually providing the service or for undertaking the investment themselves. In this way, all actors of a public private partnership can concentrate on doing what they are likely to do best. Major public infrastructural projects have always been undertaken by the private sector under contract. The major difference between this conventional procurement model and public private partnerships is the fact that the private sector can be regarded as a fullfledged actor. Infrastructure can be characterised as a large, indivisible and non-rival capital good that produces services for its s. The non-rivalness (or non-excludability) and the large cost of infrastructure causes it to be a public good. However, infrastructure also possesses some characteristics of a private commodity because it facilitates the use of a complementary private commodity, like the use of a car. A couple of decades ago the term infrastructure only referred to the material components of transport and public utility networks, like gas, water and electricity. By now, the term has © Association for European Transport 2002
widened to embrace all aspects of public services, managed by both the public and private sector1. Infrastructure services exist out of two service-levels: 1) The first-level services represent the private use that is made of the second level. These services belong to the private domain, thus are marketable. They cannot be used without the complementary service on the second level. Example: physical infrastructure. 2) The second-level services are non-marketable services and originally belong to the public domain. Example: performance measurement, political decision-making process. Public private partnerships can take many forms, from simple commercialisation to full privatisation, but in general PPP's can be considered as long term agreements between the public and the private sector to provide and operate transport infrastructure and / or service. These new forms of agreements are aimed at optimising the input of knowledge from both sectors. Most of these agreements aren't based on equality, but on a principle-agent relationship. The principal is the public infrastructure agency and the agent is the infrastructure operator. PPP arrangements display three essential characteristics: 1) A significant level of responsibility and risk that is transferred from the public sector to the private sector. 2) Contractual arrangements are built around performance-based outcomes, rather than work specifications. 3) Long-term contractual arrangements. In addition, a partnership might involve: 4) The financing of public infrastructure development off-the-book of governments, which might include tapping into new sources of project revenues to secure project financing. 5) The imposition of real tolls or other fees to finance the project. Government Department
Public Service Authority Contract
Operations Cooperative and Maintenance
Lease-BuildOperate
Fully public
Build-TransferOperate
Build-OperateTransfer
Wrapround Addition
Design-BuildFinance-Operate
Fully private
Figure 1: The spectrum of public private partnerships
A PPP process can be represented by the different phases: • In the identification phase, the objective is to select a scheme for development, taking into the socio-economic benefits which the scheme is anticipated to deliver. • In the option analysis, the question is whether a PPP should be considered at all. Key factors, which should help to answer this question, are: economic factors, size of scheme, timing, project scope, market-consultation, project risk analysis, reference project, the conventional procurement comparator and the outline business case. 1
Before this change of point of view, the realisation of infrastructure was a typical task of the government. In most countries, the government was the initiator, the principal, the financier, the owner, the manager and the exploiter of roads, water systems and other infrastructure. The only reason the private sector was involved in the realisation of infrastructure was because of their role as contractor of the design and construction. The implicit justification for this practice was that infrastructure was so important would, benefit so many people and require so much capital that the private sector couldn't be entrusted with this responsibility - and in any event lacks the resources.
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• • •
The approval process is the key step between project development and implementation. Once the project has been approved, the planning phase can commence if the planning risk is retained by the public sector. A fair, open and able competition for host governments is of extreme importance in the implementation phase. In the post-transaction phase, the public sector is responsible for ensuring that the private sector contractors meet statutory standards, such as safety, design and construction standards. These should be contractually enforced by a requirement of the contractor to submit design, construction and safety plans for approval and by the requirement that the infrastructure will not be opened until all necessary approvals have been satisfied.
Public
Public / Private
Private
Private
Private
Private
Private
Public / Private
Public
Political risk
Planning risk
Design risk
Construction risk
Maintenance risk
Operational risk
Financial risk
Usage risk
Legal & Regu- latory risk
The allocation of risk is often seen as the defining quality of a PPP arrangement. The general rule regarding risk transfer is that it should be allocated to the party which is best able to manage it and at the least cost. The following categories of risk can be identified: political, planning, design, construction, maintenance, operational, usage, legal & regulatory and financial risk.
Identification Option Analysis Planning & Approval Implementation Post-Transaction
No hard rules can be laid down for the allocation of risk. However, in general, the scheme above can be drawn, combining the different phases of a PPP process and the different categories of risk. The table also shows which sector will generally assume which category of risk. 3. Advantages of public private partnerships: The advantages of public private partnerships can be defined as follows: §
Value for Money The most important advantage of a public private partnership is the creation of value for money. This means delivering a project with the same quality as under conventional procurement for less money, or delivering a project with a superior quality for the same amount of money. There are six primary value for money drivers: §
Risk Transfer Risk will be transferred to the party which is best able to manage this risk and at
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the least cost. Risk transfer ensures that the parties involved will use conservative assumptions in developing their expectations of benefits and costs. “A detailed project risk analysis promotes a shared understanding of the project by all parties involved in order to communicate the complexity and detail of a scheme”. §
Output based specification Specifying the project result as outputs allows innovation to take place. Outputs are the products of a service. In the conventional procurement, an input specification is used, therefore describing the asset used to provide a service. "Many clients (public sector) find it difficult to articulate precisely which outputs they want. They can have whatever they want, but at a price. Our skill in bidding (private sector) is to offer alternatives that reduce the price, but still deliver reasonable outputs”.
§
Long-term nature of contracts (including whole life costing) Investments in the capital assets used to be based upon buying the cheapest. After a short period of time, the maintenance of the assets began to cost a lot and in extreme cases had to be replaced. The long-term nature of contracts allows the service provider more time to recover the cost of the investment, enabling the supplier to reduce annual charges. It also gives the supplier greater depth of experience in running the business which could be a source of efficiency gain. It also makes it easier to transfer technology risk to the supplier by enabling the supplier to make better judgement about when renewal of assets and capital expenditure is incurred. To be cost-effective, performance measures and payment systems must be included in the contract. Early termination of the contract may occur on one of several grounds including default, voluntary termination and force majeure. The contract must be able to deal with unforeseen changes in circumstances. "Incentivisation to achieve better whole life costing can be explained by reduced maintenance expenditure, time accommodation to be out of use for refurbishment and a more efficient use of utilities. In the long run, significant cost savings can be obtained by integrating capital investment and the delivery of services, because maintenance will be considered when the asset is designed to maximize efficiency (whole life costing)". However, long-term contracts can also cause problems. It reduces the competitive pressure on the supplier to (1) reduce costs and (2) to enhance quality in order not to loose the contract. Because the private sector needs a return on its investment, the contracts must be long. This means that change over time is very difficult. Not only current, but also future generations may find that they are trapped into forms of delivery and behaviour that others decided for them long ago.
§
Performance measurement and incentives Linking performance to payment provides the service provider the vital incentive to deliver the required standards as defined in the output specification. Performance measurement reflects risk transferred to the private sector, incentivised through the payment mechanism. It is important for the government to retain some inhouse provision, so that they retain the knowledge base to engage in proper
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monitoring the contracts. "The payment mechanism is usually a payment deduction if the private party fails to perform. This leads contractors to give a higher price than they otherwise would, so that they can afford to get it wrong on occasions. A target cost arrangement would be better, where all costs are agreed on an open-book basis and the contractor and client share the pain / gain when the target cost is exceeded or beaten". §
Private sector management skills Private sector management skills allow the project to be delivered ahead or on time. By using public private partnerships for infrastructure investments the government will have access to new skills. The public sector can get both significant R&D and the testing of different approaches at private sector risk. Lower or stable rates over the long-term, equal or improved service levels, better understanding of the utility, lower taxes and improved technology are benefits that can be directly transferred to the customer from an effective PPP.
§
Competition Generally, the benefits of introduction of competition to an area which is normally dominated by public sector monopolies are: lower prices, greater innovation, increased investment and better service. Governments have a wide range of options for creating competitive procurement: service contracting, management contracting, leasing and concessions. The construction and maintenance of public assets have always been done by the private sector; the difference PFI has brought, is that it integrates all the activities, including project management, so there is a single competition rather than several. It's important to realise the trade-off between competition and the length and cost of negotiations. The best way to ensure competition is for the government to clarify as early as possible in the process the outputs which are wanted, to avoid the need for too many changes as the negotiations proceed.
§
§
Various Other value for money drivers have shown to be: § Innovation. § Alignment of interest of authority and contractor. § Public sector project development skills. § Public sector comparator. § Quality of advice to public sector and bidders. § Transparency of process. § Cost of capital. § Deal flow. § Public sector implementation. § Release of hidden asset value. § Project bundling. § Involvement of third party financiers.
Cost efficiencies Public private partnerships can lead to cost efficiencies, which are the results of increased competition, an improved proportion of risk transfer, a closer integration of the different aspects of a project, better whole life costing and improved innovation. Significant cost savings can be obtained in the long run by integrating capital investment
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and the delivery of services (i.e. servicing the asset), because maintenance will be considered when the asset is designed to maximise efficiency. Another reason for the creation of cost efficiencies is the departure from standards (thus innovation). §
Time-to-delivery savings Public private partnerships can also lead to time-to-delivery savings, caused by a greater private incentive to generate revenue as soon as possible and the increasing experience with public private partnerships. Another reason for these time-to-delivery savings is the existence of a learning curve for all parties involved. The private sector is driven by profit motives and is able to shareholders to ensure that the profit isn't diminished by higher interest charges and revenue losses from delays in project completion. In the public sector, project completion delays might not have the same perceived direct financial impacts. "PPP-projects can be delivered quicker than under conventional procurement because of better project management, better management of project risks and because the service provider is not paid until the facility becomes operational". However, the advantage of a quicker delivery of the project has to be shaded a bit more. The design and construction itself can be realised quicker than under the conventional method, for the reasons mentioned above. "PPP-processes take longer than conventional procurements because the contracts are for long periods (25-30 years) and therefore the financial assumptions underlying bids have to be looked at in depth. Negotiations with bidders are also lengthy. (… ) The longest period of time in the project delivery process is usually the approval phase. If the government tenders the project before approvals have been cleared or if the approval phase is not streamlined, very little overall time savings may accrue. (…) However, this process is beneficial in that it allows for innovation and a rigorous appraisal of the project risks". Therefore, it must be concluded that the approval-phase is of extreme importance. An extensive negotiation-phase may result in a shorter design and construction-phase. The extra costs of these phases will have to be set out against cost savings in other phases. Although a PPP-project can be delivered quicker than a project based on the conventional procurement, the progress of transport infrastructure projects can still be threatened or delayed by external objections and challenges: judicial reviews, the EU complaints procedure, the requirements of other public bodies, the presence of public opposition or a combination of these factors. Also very important to the time scale of a PPP-project is the capacity of the construction and ancillary sectors. In Ireland, capacity constraints have led to above average price inflation in the construction area. This may lead to adverse affects for the quantum of infrastructure delivered (Irish CrossDepartmental Team of Officials, 1999). Therefore, communication is very important in order to prevent stakeholders from obstructing progress.
§
Reduction on the public treasury Public private partnerships help reduce the capital demands on the public treasury for infrastructure development. This may be of importance to a country's hip of the European Union. Public private partnerships will give the government more freedom to spend on other non-infrastructural investments in the short term. However, one has to realise that public private partnerships are actually posting bills to the future. After several years, the civil work will be transferred from the private sector ownership to the public
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sector ownership. The government will probably have to pay for this transfer. Even if this transfer is free, the government will have additional costs, compared to the concession period before the transfer. For example maintenance costs. There are also aspects of shadow tolls to consider. "It is a clever mechanism that enables public sector schemes to be funded without having to raise taxation levels”. §
Improved response to market forces In case of -fees, an improved response to market forces will be created, resulting in greater efficiency. Traditionally, transportation facilities are publicly-funded. While s do pay for the facilities they use, price signals aren't available to guide demand or supply. These improvements in incentives to market forces are the improved profit margins, the long term business, the whole life costing, the payment for performance and the merging of design, build, finance and operation.
§
Broad In common, public private partnerships are broadly ed by the European government, the national, regional and local government and by the private sector because of the creation of value for money and because of the new source of income. 'Attitudes to the Private Finance Initiative', a survey carried out by PricewaterhouseCoopers, confirms that participants in the PFI believe it has been a success in the UK. In the survey, 71% of senior decision makers in the public and private sectors agree that 'PFI has been good for both the public and private sector'. Another 73% believe that 'PFI projects are delivering value for money for the public sector'. The survey confirms that, after initial doubts, the private sector is now convinced of the merits of PFI. The survey also shows that the financial markets are responding positively by thinking creatively about financing solutions In order to gain more from the community it is important that the government (and the private parties involved) informs the community as soon as possible, thereby involving them in the project. This doesn't only help improve the quality of the investment, it can also prevent major delays to occur.
§
4.
Improved cost calculations Because of the public private comparator or the public sector comparator, improved cost calculations will result. The sunk cost, cost which the government isn't used to take into when making cost estimates, will become visible. These sunk cost is consisted of the cost of civil servants, maintenance cost during the economical life-cycle of the project and overhead-cost, which the government isn't used to take into when calculating cost estimates. What also becomes more transparent are the real costs of assets, including some internal management costs, the costs of self-insurance, future maintenance costs and technical obsolescence. Disadvantages of public private partnerships:
The disadvantages of public private partnerships can be defined as follows: §
Poor Value for Money The most important advantage of a public private partnership is the creation of value for money. However, value for money also consists of some disadvantages:
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§
Higher transaction cost Williamson defines transaction costs as: "the ex ante costs of drafting, negotiating and safeguarding an agreement, and more especially, the ex post costs of maladaptation and adjustment that arises when contract execution is misaligned as a result of gaps, errors, omissions and unanticipated disturbanc." PPPs represent opportunities to reduce total project cost. However, tendering costs and developing costs are usually much higher than under conventional procurement. The procurement costs appear to be higher because PPP projects are often unique and have to anticipate up to 30 years of external events and circumstances. PPP contracts are much more complicated to negotiate and ister than the traditional construction contracts, partly because there are more actors involved. That’s why they require more time, effort, complexity of contract forms and additional experts. Public-sector finance costs are lower than private-sector finance costs, because the public sector can spread risk the widest by making the taxpayer an involuntary risk-taker in government projects. The advantage of public financing is that it allows to tax-exempt debt and government grants, thereby reducing project costs. However, in contrast to the capital cost of the public sector, the cost of the projects risks are calculated into the capital cost of the private sector. The profit required by private developers as compensation for undertaking project risks adds to the costs of a franchised project. That's why profit is a function of project risk. The transaction cost will increase with the complexity of relations and the duration of such relations. They will decline with more and more experience with PPPs and its (standardised) contracts. "A well prepared and managed transaction will consume less by way of adviser costs. Also, contract and other process standardisation have a major impact on the amount of transaction costs. But given the high value, long term and complex nature of these transactions the public sector needs to have the right kind of advisers".
§
§
Higher capital cost Public private partnerships will also result in higher capital cost because of private borrowing. The additional cost of private finance is - in general - approximately 1% to 2%.
§
Advantages which can turn into disadvantages § Transferring risk from one party to the other will have its price. § Over-specification and mis-specification of the project result can cause outputspecifications to be deficient. § Short term efficiency gains may be at the expense of a dynamic efficiency in the longer term. § Having an extreme monitoring process can cause one to miss the fact that the overall service has improved.
Insecurity Whenever two or more parties enter into a contract, there is a risk that the istrative efforts on each side will be frustrated by a lack of co-operation on the part of the other party(s). Also, when a party enters into the tender procedure, the party may not even be granted the concession. Because of these insecurities, the number of bidders may be
© Association for European Transport 2002
limited and thereby reducing the competitiveness of the tender process. The quality of bids can be significantly improved through the payment of compensation to unsuccessful bidders and by keeping the number of pre-qualified bidders relatively low (from UK-, Greek- and Hungarian-experience, between two and five bidders). If the government has chosen to deliver an infrastructural investment by means of a public private partnership, then the private parties have to be involved as soon as possible. This way, the investment's quality will improve and the project will be multifunctional. Although the European Union strongly s public private partnerships, the European tender-procedures may have a negative effect on the realisation of efficiency-gains. Early s between the government and the private parties in a pre-mature phase may be hampered due to the fact that favouring certain actors in case of granting a concession is out of the question under the general principles of competition and equality. This may prevent private actors wishing to be involved in the early phases of a public private partnership. §
Inefficiencies Long-term operating contracts can lead to value for money. However, they can also lead to inefficiencies due to a lack of contestability and competition. The tender-procedure at the beginning of the process may have introduced competition, the developer who has signed the contracts will have the exclusive rights to an infrastructure facility, therefore practically enjoying a monopoly. During the operation phase inefficiencies may be created due to a lack of contestability and competition. The of contract are very important. The public sector has to remain its position as client and specify the services it requires. If the service provider defaults in the provision of that service or delivers a sub-standard service, there should be arrangements in the payment mechanism for dealing with such instances. Continuous default has to be able to result in termination of the contract. The payment mechanism should also award the licensee when performances are superior to contractual standards.
§
Culture gap There exists a culture gap between the private and the public actors, which may result in a loss of confidence in each other. The private sector's motive to take part in a public private partnership is primarily profit-making or image-building; the public sector's motive is merely social attractiveness. Another example of this culture gap is the different discount rates used by the private and the public sector, which can be explained by the difference in motives of both parties involved. In order to let the discount rates be comparable, and thus reduce the culture gap, the public discount rate has to be adjusted to the private discount rate. Unfair and unrealistic cost comparison procedures can contribute to slow implementation or even failure of public private partnerships, thereby raising transaction costs. To overcome the gap in culture, trust is one of the most important aspects in a partnership; without trust, real success is hard to realise. The public actors, as well as the private actors, have to respect and comprehend each others goals, considerations and decisions. "There is definitely a culture gap. However, private companies are at least as good as the public sector at realising what the customers - the end-s - really need. We ('private company') often help clients ('public sector') to understand these needs. Many clients are also compartmentalised and people from one department don't talk to people from another department. We add value by getting the client to cut across these boundaries for the benefit of the customers. They would never think of doing that by themselves without our assistance. This is one of the key areas where private
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company thinking helps improve efficiency and effectiveness". §
Short term rigidities A public private partnership can be compared to a network. Durable networks create stability and lower the uncertainty of actors. At the same time this also means rigidities, dependencies and inability to adapt to changed conditions2. That's why PPP-contracts should allow for changes to take place and prices benchmarked or market-tested from time to time. "The only way to speed up the procurement process is to create stability and certainty through the use of standardised contractual , etc. The flexibility should generally be reserved for scheme specific issues".
§
Hold-up problem Another disadvantage of public private partnerships is the existence of the hold-up problem, whereby a party may be able to enforce a new cost-revenue-ratio than previously agreed upon. This problem may take place when the negotiation-position of the parties involved change over time and when observance of the contract isn't perfectly possible. The relative position of negotiation is influenced by the sunk cost aspect of investments and the alternative possibilities of usage.
§
Public sector staff concern If a public private partnership is intended to replace an existing public facility, this may result in concern about the public sector staff's and conditions of employment. This fear will have to be dealt with seriously, otherwise it could influence the output of the project negatively.
5. Recommendations: In order to make the advantages more advantageous and the disadvantages less disadvantageous, a couple of recommendations can be drawn up: § § §
§
§
In order to let the whole partnership succeed, trust is of extreme importance. Therefore, working as transparent as possible and each actor trying to adapt to the other actors is needed. Risk should only be transferred to the party who is best able to manage it, because transferring risk will have its price. Observance of the contract and the performances have to be carried out regularly. If necessary, the service provider should receive a bonus when his services are of superior quality. Otherwise, he should receive a payment deduction or a penalty when his services are inferior to the agreed contractual quality level. However, having an extreme monitoring process can cause one to miss the fact that the overall service has improved. Before the market consultation and the tender procedure start, the government will have to define it's goals, desires, principles and performance requirements as clearly as possible. Over-specification and mis-specification of the project result can cause output-specifications to be deficient. The party who experiences most of the inconveniences has to have the direction over the whole process.
2 Temporary networks represent the opposite; instability and increased uncertainty, but also flexibility, higher independence and ability to change.
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§ § §
§ § § §
6.
The real reasons for the broad have to be examined before decisions about whether to proceed with the public private partnership are made. ing treatment shouldn't be prioritised over value for money. The private sector has to be brought in the partnership as soon as possible, either as a tender-contestant or as a participant in the market-consultation. However, primarily design, public involvement and the environmental approvals have to be taken care of first by the public sector before the private sector can be brought in as a tendercontestant. It is also wise to develop some sort of compensation system in order to stimulate private actors to the tender-procedure. The total number of bidders should be enough to introduce effective competition, but should be limited in order to keep control over the transaction cost, the quality of the bids and the probability of success. In order to diminish the transaction cost, the delays and time-scale and the uncertainty, it is wise to use standardised contracts. In order to prevent major delays, an honest and early communication to stakeholders is of extreme importance. One has got to be careful not to overrate the possibilities of value capturing as an additional source of finance. Value capturing - also known as scope-optimalization means attracting additional sources to the project. These sources are derived from functions which - directly or indirectly - profit from the investment in infrastructure. However, the control on these functions is often in hands of parties which aren't involved in the public private partnership. A rise in value of assets not directly involved in the PPP, is hard to realise without a change in ownership. Abstract:
In this essay, the advantages and disadvantages of public private partnerships are being described. PPP-projects are likely to be successful as those genuinely combining capital and service requirements; where the risks are primarily commercial; where scope for innovation exists; and with skilled and committed public sector management. The main advantage of public private partnerships is the creation of value for money, which is a collection of several factors. The most important value for money-drivers are the transfer of risk, the output based specification, the long-term nature of contracts, the performance measures, the increased competition and the private sector management. Other important advantages of public private partnerships are the quicker delivery of projects, the improved incentives to market forces, the cost efficiencies, the broad for PPP and the improved cost calculations by the public sectors. However, public private partnerships also have some disadvantages. The most import one is the increased transaction costs. This is a result of the complexity of the relations between the diverse actors and because of the long duration of these relations. The other most important disadvantages are the higher capital costs, the insecurity of being granted the concession, the culture gap between the two sectors and the hold up problem. 7.
Bibliography:
ABN-AMRO Economisch Bureau Binnenland & Afdeling Public Sector (1997) Nieuwe wegen, andere bronnen, een toekomstschets van de investeringen in infrastructuur in Nederland. © Association for European Transport 2002
Arthur Andersen and Enterprise LSE (2000) Value for money drivers in the private finance initiative. Bartelsman, E.J., Canoy, M., Ewijk van, C., Vollaard, B.A. (1998) Economie van publiek private samenwerking, ESB Dossier. Canadian Council for PPPs (2000) British and Australian experts discuss progress in p3s abroad. Conférence Européenne des Ministres des Transport (1999) Conclusions recommendations on public-private partnerships, Transport Infrastructure Financing.
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Laan van de, G., Ruys, P., Talman, D. (2001) Optimal provision of infrastructure using public-private partnership contracts, Tinbergen Institute, discussion paper. Middleton, N. (1999) PPPs a natural successor to privatizations, PricewaterhouseCoopers, International Privatisation Review 1999/2000. Montague, A. (1999) Public-private partnerships in the UK – lessons for international projects Moore, A.T., Segal, G.F., McCormally, J. (2000) Infrastructure outsourcing: leveraging concrete, steel and asphalt with public-private partnerships. Private Finance Taskforce (1999) Great Brittain, DBFO value in roads, a case study on the first eight DBFO road contracts and their development. Raad voor Verkeer en Waterstaat (2000) Meer markt, andere overheid, advies over de veranderende relatie tussen markt en overheid op terreinen van Verkeer en Waterstaat. Savas, E.S. (2000) Privatization and public-private partnerships. Spackman, M., Dijk van, Th. (1998) Ervaringen met publiek-private samenwerking in het Verenigd Koninkrijk, ESB Dossier. Treasury Committee (2000) Fourth report. Twynstra Gudde (2000) Op de goede weg ? Naar een optimale samenwerking tussen publiek en privaat bij infrastructurele projecten. Westlund, H. (1995/97) An interaction-cost perspective on networks and territory. Williamson, O.E. (1998) Transaction cost economics: how it works, where it is headed. Wilson, T. (2000) DCMF Prisons: an example of savings forecast under UK government’s Private Finance Initiative. 8.
Further Information
Ministry of Transport, Public Works and Water Management Directorate-General of Public Works and Water Management AVV Transport Research Centre G.W.E.B. VAN HERPEN Consultant enger Transport Boompjes 200 P.O. Box 1031 3000 BA ROTTERDAM THE NETHERLANDS Email: Phone: Fax: Internet:
[email protected] +31 10 282 57 78 +31 10 282 50 14 www.rws-avv.nl
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PUBLIC PRIVATE PARTNERSHIPS THE ADVANTAGES AND DISADVANTAGES EXAMINED
BAS VAN HERPEN AVV Transport Research Centre Dutch Ministry of Transport, Public Works and Water Management
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• Introduction into PPP and infrastructure • Case: N13 Leeuwarden – Nijega • Main advantages • Main disadvantages • General advantages • General disadvantages • Recommendations • Discussion AET-Conference - September 9, 2002
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PUBLIC PRIVATE PARTNERSHIPS Main characteristics: o Long-term contractual arrangements o Risk transfer o Own identity and responsibilities o Performance-based outcomes
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INFRASTRUCTURE First level services
Physical infrastructure Second level services Politics AET-Conference - September 9, 2002
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N13 LEEUWARDEN - NIJEGA
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N13 LEEUWARDEN - NIJEGA
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MAIN ADVANTAGES N13 (1) o Cost Economies o Reduction on the public treasury o Value for money: o Risk transfer o Output based specification o Long-term contracts (incl. whole life costing)
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MAIN ADVANTAGES N13 (2) o Value for money: o Performance measurement and incentives o Private sector management skills o Competition o Various
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MAIN DISADVANTAGES N13 o Poor experience with PPP o Public sector staff concern o Poor value for money o Higher transaction cost o Higher capital cost o Advantages turning into disadvantages
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• Introduction into PPP and infrastructure • Case: N13 Leeuwarden – Nijega • Main advantages • Main disadvantages • General advantages • General disadvantages • Recommendations • Discussion AET-Conference - September 9, 2002
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GENERAL ADVANTAGES o Time-to-delivery savings o Improved response to market forces o Broad o Improved cost calculations
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GENERAL DISADVANTAGES o Insecurity o Inefficiencies o Culture gap o Short term rigidities o Hold-up problem
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• Introduction into PPP and infrastructure • Case: N13 Leeuwarden – Nijega • Main advantages • Main disadvantages • General advantages • General disadvantages • Recommendations • Discussion AET-Conference - September 9, 2002
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RECOMMENDATIONS
(1)
o Work transparent o Risk transfer only to best parties o Performance measurement necessary o Government be clear o Private sector involvement early in process
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RECOMMENDATIONS
(2)
o Minimum and maximum amount of bidders o Use standardised contracts o Communicate early and honest o Choice PPP or conventional is project-dependent
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• Introduction into PPP and infrastructure • Case: N13 Leeuwarden – Nijega • Main advantages • Main disadvantages • General advantages • General disadvantages • Recommendations • Discussion AET-Conference - September 9, 2002
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ACTOR vs PHASE vs RISK ACTOR
Public
Public / Private
Private
Private
Private
Private
Private
Public / Private
Public
Political
Planning
Design
Construction
Mainte nance
Operational
Financial
Usage
Legal & Regulatory
PHASE
Identification
Option Analysis
Planning & Approval
Implementation
Post-Transaction
RISK
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Further Information
Ministry of Transport, Public Works and Water Management Directorate--General of Public Works and Water Management Directorate AVV Transport Research Centre
G.W.E.B. VAN HERPEN (MA) Consultant enger Transport
Boompjes 200 P.O. Box 1031 3000 BA ROTTERDAM THE NETHERLANDS
Email:: Email
g.w.e.b.vherpen g.w.e.b. vherpen@ @avv avv..rws rws..minvenw minvenw.nl .nl
Phone:: Phone
+31 10 282 57 78
Fax: Internet:
+31 10 282 50 14 www..rws www rws--avv avv.nl .nl AET-Conference - September 9, 2002
1. Introduction This essay is written as part of my study of the Economics of Transport and Logistics at the Erasmus University Rotterdam in the Netherlands. The aim of this essay is to analyse the advantages and disadvantages of public private partnerships (PPPs), particularly in the infrastructure sector. At first a desk research had been carried out. After this literature study a questionnaire had been sent out to different public and private actors, mainly in the United Kingdom as well as in the Netherlands. The responses have been processed in this essay and cited in italics. Important to note is that the aim of this paper isn't the promotion of public private partnership, nor the opposite; PPPs neither imply nor exclude the private ownership of infrastructure or the use of (shadow) tolls. In contrast, there can be no PPP without risksharing and an approach that takes overall of the infrastructure and services in a transparent and stable contract drawn up within the framework of stable, appropriate and respected legislation. 2. Public private partnerships A public private partnership can be described as a co-operation between the public and the private sector, in which the government and the private sector carry out a project together on the basis of an agreed division of tasks and risks, each party retaining its own identity and responsibilities. The interest in PPPs is growing, notably due to the growth in the demand for infrastructure, limited public funds to meet current and future needs and acceptance for the private sector in the provision of infrastructure. The underlying principle behind PPPs is that, although the public sector may need to be responsible for the delivery of a particular service, it does not have to be responsible for actually providing the service or for undertaking the investment themselves. In this way, all actors of a public private partnership can concentrate on doing what they are likely to do best. Major public infrastructural projects have always been undertaken by the private sector under contract. The major difference between this conventional procurement model and public private partnerships is the fact that the private sector can be regarded as a fullfledged actor. Infrastructure can be characterised as a large, indivisible and non-rival capital good that produces services for its s. The non-rivalness (or non-excludability) and the large cost of infrastructure causes it to be a public good. However, infrastructure also possesses some characteristics of a private commodity because it facilitates the use of a complementary private commodity, like the use of a car. A couple of decades ago the term infrastructure only referred to the material components of transport and public utility networks, like gas, water and electricity. By now, the term has © Association for European Transport 2002
widened to embrace all aspects of public services, managed by both the public and private sector1. Infrastructure services exist out of two service-levels: 1) The first-level services represent the private use that is made of the second level. These services belong to the private domain, thus are marketable. They cannot be used without the complementary service on the second level. Example: physical infrastructure. 2) The second-level services are non-marketable services and originally belong to the public domain. Example: performance measurement, political decision-making process. Public private partnerships can take many forms, from simple commercialisation to full privatisation, but in general PPP's can be considered as long term agreements between the public and the private sector to provide and operate transport infrastructure and / or service. These new forms of agreements are aimed at optimising the input of knowledge from both sectors. Most of these agreements aren't based on equality, but on a principle-agent relationship. The principal is the public infrastructure agency and the agent is the infrastructure operator. PPP arrangements display three essential characteristics: 1) A significant level of responsibility and risk that is transferred from the public sector to the private sector. 2) Contractual arrangements are built around performance-based outcomes, rather than work specifications. 3) Long-term contractual arrangements. In addition, a partnership might involve: 4) The financing of public infrastructure development off-the-book of governments, which might include tapping into new sources of project revenues to secure project financing. 5) The imposition of real tolls or other fees to finance the project. Government Department
Public Service Authority Contract
Operations Cooperative and Maintenance
Lease-BuildOperate
Fully public
Build-TransferOperate
Build-OperateTransfer
Wrapround Addition
Design-BuildFinance-Operate
Fully private
Figure 1: The spectrum of public private partnerships
A PPP process can be represented by the different phases: • In the identification phase, the objective is to select a scheme for development, taking into the socio-economic benefits which the scheme is anticipated to deliver. • In the option analysis, the question is whether a PPP should be considered at all. Key factors, which should help to answer this question, are: economic factors, size of scheme, timing, project scope, market-consultation, project risk analysis, reference project, the conventional procurement comparator and the outline business case. 1
Before this change of point of view, the realisation of infrastructure was a typical task of the government. In most countries, the government was the initiator, the principal, the financier, the owner, the manager and the exploiter of roads, water systems and other infrastructure. The only reason the private sector was involved in the realisation of infrastructure was because of their role as contractor of the design and construction. The implicit justification for this practice was that infrastructure was so important would, benefit so many people and require so much capital that the private sector couldn't be entrusted with this responsibility - and in any event lacks the resources.
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• • •
The approval process is the key step between project development and implementation. Once the project has been approved, the planning phase can commence if the planning risk is retained by the public sector. A fair, open and able competition for host governments is of extreme importance in the implementation phase. In the post-transaction phase, the public sector is responsible for ensuring that the private sector contractors meet statutory standards, such as safety, design and construction standards. These should be contractually enforced by a requirement of the contractor to submit design, construction and safety plans for approval and by the requirement that the infrastructure will not be opened until all necessary approvals have been satisfied.
Public
Public / Private
Private
Private
Private
Private
Private
Public / Private
Public
Political risk
Planning risk
Design risk
Construction risk
Maintenance risk
Operational risk
Financial risk
Usage risk
Legal & Regu- latory risk
The allocation of risk is often seen as the defining quality of a PPP arrangement. The general rule regarding risk transfer is that it should be allocated to the party which is best able to manage it and at the least cost. The following categories of risk can be identified: political, planning, design, construction, maintenance, operational, usage, legal & regulatory and financial risk.
Identification Option Analysis Planning & Approval Implementation Post-Transaction
No hard rules can be laid down for the allocation of risk. However, in general, the scheme above can be drawn, combining the different phases of a PPP process and the different categories of risk. The table also shows which sector will generally assume which category of risk. 3. Advantages of public private partnerships: The advantages of public private partnerships can be defined as follows: §
Value for Money The most important advantage of a public private partnership is the creation of value for money. This means delivering a project with the same quality as under conventional procurement for less money, or delivering a project with a superior quality for the same amount of money. There are six primary value for money drivers: §
Risk Transfer Risk will be transferred to the party which is best able to manage this risk and at
© Association for European Transport 2002
the least cost. Risk transfer ensures that the parties involved will use conservative assumptions in developing their expectations of benefits and costs. “A detailed project risk analysis promotes a shared understanding of the project by all parties involved in order to communicate the complexity and detail of a scheme”. §
Output based specification Specifying the project result as outputs allows innovation to take place. Outputs are the products of a service. In the conventional procurement, an input specification is used, therefore describing the asset used to provide a service. "Many clients (public sector) find it difficult to articulate precisely which outputs they want. They can have whatever they want, but at a price. Our skill in bidding (private sector) is to offer alternatives that reduce the price, but still deliver reasonable outputs”.
§
Long-term nature of contracts (including whole life costing) Investments in the capital assets used to be based upon buying the cheapest. After a short period of time, the maintenance of the assets began to cost a lot and in extreme cases had to be replaced. The long-term nature of contracts allows the service provider more time to recover the cost of the investment, enabling the supplier to reduce annual charges. It also gives the supplier greater depth of experience in running the business which could be a source of efficiency gain. It also makes it easier to transfer technology risk to the supplier by enabling the supplier to make better judgement about when renewal of assets and capital expenditure is incurred. To be cost-effective, performance measures and payment systems must be included in the contract. Early termination of the contract may occur on one of several grounds including default, voluntary termination and force majeure. The contract must be able to deal with unforeseen changes in circumstances. "Incentivisation to achieve better whole life costing can be explained by reduced maintenance expenditure, time accommodation to be out of use for refurbishment and a more efficient use of utilities. In the long run, significant cost savings can be obtained by integrating capital investment and the delivery of services, because maintenance will be considered when the asset is designed to maximize efficiency (whole life costing)". However, long-term contracts can also cause problems. It reduces the competitive pressure on the supplier to (1) reduce costs and (2) to enhance quality in order not to loose the contract. Because the private sector needs a return on its investment, the contracts must be long. This means that change over time is very difficult. Not only current, but also future generations may find that they are trapped into forms of delivery and behaviour that others decided for them long ago.
§
Performance measurement and incentives Linking performance to payment provides the service provider the vital incentive to deliver the required standards as defined in the output specification. Performance measurement reflects risk transferred to the private sector, incentivised through the payment mechanism. It is important for the government to retain some inhouse provision, so that they retain the knowledge base to engage in proper
© Association for European Transport 2002
monitoring the contracts. "The payment mechanism is usually a payment deduction if the private party fails to perform. This leads contractors to give a higher price than they otherwise would, so that they can afford to get it wrong on occasions. A target cost arrangement would be better, where all costs are agreed on an open-book basis and the contractor and client share the pain / gain when the target cost is exceeded or beaten". §
Private sector management skills Private sector management skills allow the project to be delivered ahead or on time. By using public private partnerships for infrastructure investments the government will have access to new skills. The public sector can get both significant R&D and the testing of different approaches at private sector risk. Lower or stable rates over the long-term, equal or improved service levels, better understanding of the utility, lower taxes and improved technology are benefits that can be directly transferred to the customer from an effective PPP.
§
Competition Generally, the benefits of introduction of competition to an area which is normally dominated by public sector monopolies are: lower prices, greater innovation, increased investment and better service. Governments have a wide range of options for creating competitive procurement: service contracting, management contracting, leasing and concessions. The construction and maintenance of public assets have always been done by the private sector; the difference PFI has brought, is that it integrates all the activities, including project management, so there is a single competition rather than several. It's important to realise the trade-off between competition and the length and cost of negotiations. The best way to ensure competition is for the government to clarify as early as possible in the process the outputs which are wanted, to avoid the need for too many changes as the negotiations proceed.
§
§
Various Other value for money drivers have shown to be: § Innovation. § Alignment of interest of authority and contractor. § Public sector project development skills. § Public sector comparator. § Quality of advice to public sector and bidders. § Transparency of process. § Cost of capital. § Deal flow. § Public sector implementation. § Release of hidden asset value. § Project bundling. § Involvement of third party financiers.
Cost efficiencies Public private partnerships can lead to cost efficiencies, which are the results of increased competition, an improved proportion of risk transfer, a closer integration of the different aspects of a project, better whole life costing and improved innovation. Significant cost savings can be obtained in the long run by integrating capital investment
© Association for European Transport 2002
and the delivery of services (i.e. servicing the asset), because maintenance will be considered when the asset is designed to maximise efficiency. Another reason for the creation of cost efficiencies is the departure from standards (thus innovation). §
Time-to-delivery savings Public private partnerships can also lead to time-to-delivery savings, caused by a greater private incentive to generate revenue as soon as possible and the increasing experience with public private partnerships. Another reason for these time-to-delivery savings is the existence of a learning curve for all parties involved. The private sector is driven by profit motives and is able to shareholders to ensure that the profit isn't diminished by higher interest charges and revenue losses from delays in project completion. In the public sector, project completion delays might not have the same perceived direct financial impacts. "PPP-projects can be delivered quicker than under conventional procurement because of better project management, better management of project risks and because the service provider is not paid until the facility becomes operational". However, the advantage of a quicker delivery of the project has to be shaded a bit more. The design and construction itself can be realised quicker than under the conventional method, for the reasons mentioned above. "PPP-processes take longer than conventional procurements because the contracts are for long periods (25-30 years) and therefore the financial assumptions underlying bids have to be looked at in depth. Negotiations with bidders are also lengthy. (… ) The longest period of time in the project delivery process is usually the approval phase. If the government tenders the project before approvals have been cleared or if the approval phase is not streamlined, very little overall time savings may accrue. (…) However, this process is beneficial in that it allows for innovation and a rigorous appraisal of the project risks". Therefore, it must be concluded that the approval-phase is of extreme importance. An extensive negotiation-phase may result in a shorter design and construction-phase. The extra costs of these phases will have to be set out against cost savings in other phases. Although a PPP-project can be delivered quicker than a project based on the conventional procurement, the progress of transport infrastructure projects can still be threatened or delayed by external objections and challenges: judicial reviews, the EU complaints procedure, the requirements of other public bodies, the presence of public opposition or a combination of these factors. Also very important to the time scale of a PPP-project is the capacity of the construction and ancillary sectors. In Ireland, capacity constraints have led to above average price inflation in the construction area. This may lead to adverse affects for the quantum of infrastructure delivered (Irish CrossDepartmental Team of Officials, 1999). Therefore, communication is very important in order to prevent stakeholders from obstructing progress.
§
Reduction on the public treasury Public private partnerships help reduce the capital demands on the public treasury for infrastructure development. This may be of importance to a country's hip of the European Union. Public private partnerships will give the government more freedom to spend on other non-infrastructural investments in the short term. However, one has to realise that public private partnerships are actually posting bills to the future. After several years, the civil work will be transferred from the private sector ownership to the public
© Association for European Transport 2002
sector ownership. The government will probably have to pay for this transfer. Even if this transfer is free, the government will have additional costs, compared to the concession period before the transfer. For example maintenance costs. There are also aspects of shadow tolls to consider. "It is a clever mechanism that enables public sector schemes to be funded without having to raise taxation levels”. §
Improved response to market forces In case of -fees, an improved response to market forces will be created, resulting in greater efficiency. Traditionally, transportation facilities are publicly-funded. While s do pay for the facilities they use, price signals aren't available to guide demand or supply. These improvements in incentives to market forces are the improved profit margins, the long term business, the whole life costing, the payment for performance and the merging of design, build, finance and operation.
§
Broad In common, public private partnerships are broadly ed by the European government, the national, regional and local government and by the private sector because of the creation of value for money and because of the new source of income. 'Attitudes to the Private Finance Initiative', a survey carried out by PricewaterhouseCoopers, confirms that participants in the PFI believe it has been a success in the UK. In the survey, 71% of senior decision makers in the public and private sectors agree that 'PFI has been good for both the public and private sector'. Another 73% believe that 'PFI projects are delivering value for money for the public sector'. The survey confirms that, after initial doubts, the private sector is now convinced of the merits of PFI. The survey also shows that the financial markets are responding positively by thinking creatively about financing solutions In order to gain more from the community it is important that the government (and the private parties involved) informs the community as soon as possible, thereby involving them in the project. This doesn't only help improve the quality of the investment, it can also prevent major delays to occur.
§
4.
Improved cost calculations Because of the public private comparator or the public sector comparator, improved cost calculations will result. The sunk cost, cost which the government isn't used to take into when making cost estimates, will become visible. These sunk cost is consisted of the cost of civil servants, maintenance cost during the economical life-cycle of the project and overhead-cost, which the government isn't used to take into when calculating cost estimates. What also becomes more transparent are the real costs of assets, including some internal management costs, the costs of self-insurance, future maintenance costs and technical obsolescence. Disadvantages of public private partnerships:
The disadvantages of public private partnerships can be defined as follows: §
Poor Value for Money The most important advantage of a public private partnership is the creation of value for money. However, value for money also consists of some disadvantages:
© Association for European Transport 2002
§
Higher transaction cost Williamson defines transaction costs as: "the ex ante costs of drafting, negotiating and safeguarding an agreement, and more especially, the ex post costs of maladaptation and adjustment that arises when contract execution is misaligned as a result of gaps, errors, omissions and unanticipated disturbanc." PPPs represent opportunities to reduce total project cost. However, tendering costs and developing costs are usually much higher than under conventional procurement. The procurement costs appear to be higher because PPP projects are often unique and have to anticipate up to 30 years of external events and circumstances. PPP contracts are much more complicated to negotiate and ister than the traditional construction contracts, partly because there are more actors involved. That’s why they require more time, effort, complexity of contract forms and additional experts. Public-sector finance costs are lower than private-sector finance costs, because the public sector can spread risk the widest by making the taxpayer an involuntary risk-taker in government projects. The advantage of public financing is that it allows to tax-exempt debt and government grants, thereby reducing project costs. However, in contrast to the capital cost of the public sector, the cost of the projects risks are calculated into the capital cost of the private sector. The profit required by private developers as compensation for undertaking project risks adds to the costs of a franchised project. That's why profit is a function of project risk. The transaction cost will increase with the complexity of relations and the duration of such relations. They will decline with more and more experience with PPPs and its (standardised) contracts. "A well prepared and managed transaction will consume less by way of adviser costs. Also, contract and other process standardisation have a major impact on the amount of transaction costs. But given the high value, long term and complex nature of these transactions the public sector needs to have the right kind of advisers".
§
§
Higher capital cost Public private partnerships will also result in higher capital cost because of private borrowing. The additional cost of private finance is - in general - approximately 1% to 2%.
§
Advantages which can turn into disadvantages § Transferring risk from one party to the other will have its price. § Over-specification and mis-specification of the project result can cause outputspecifications to be deficient. § Short term efficiency gains may be at the expense of a dynamic efficiency in the longer term. § Having an extreme monitoring process can cause one to miss the fact that the overall service has improved.
Insecurity Whenever two or more parties enter into a contract, there is a risk that the istrative efforts on each side will be frustrated by a lack of co-operation on the part of the other party(s). Also, when a party enters into the tender procedure, the party may not even be granted the concession. Because of these insecurities, the number of bidders may be
© Association for European Transport 2002
limited and thereby reducing the competitiveness of the tender process. The quality of bids can be significantly improved through the payment of compensation to unsuccessful bidders and by keeping the number of pre-qualified bidders relatively low (from UK-, Greek- and Hungarian-experience, between two and five bidders). If the government has chosen to deliver an infrastructural investment by means of a public private partnership, then the private parties have to be involved as soon as possible. This way, the investment's quality will improve and the project will be multifunctional. Although the European Union strongly s public private partnerships, the European tender-procedures may have a negative effect on the realisation of efficiency-gains. Early s between the government and the private parties in a pre-mature phase may be hampered due to the fact that favouring certain actors in case of granting a concession is out of the question under the general principles of competition and equality. This may prevent private actors wishing to be involved in the early phases of a public private partnership. §
Inefficiencies Long-term operating contracts can lead to value for money. However, they can also lead to inefficiencies due to a lack of contestability and competition. The tender-procedure at the beginning of the process may have introduced competition, the developer who has signed the contracts will have the exclusive rights to an infrastructure facility, therefore practically enjoying a monopoly. During the operation phase inefficiencies may be created due to a lack of contestability and competition. The of contract are very important. The public sector has to remain its position as client and specify the services it requires. If the service provider defaults in the provision of that service or delivers a sub-standard service, there should be arrangements in the payment mechanism for dealing with such instances. Continuous default has to be able to result in termination of the contract. The payment mechanism should also award the licensee when performances are superior to contractual standards.
§
Culture gap There exists a culture gap between the private and the public actors, which may result in a loss of confidence in each other. The private sector's motive to take part in a public private partnership is primarily profit-making or image-building; the public sector's motive is merely social attractiveness. Another example of this culture gap is the different discount rates used by the private and the public sector, which can be explained by the difference in motives of both parties involved. In order to let the discount rates be comparable, and thus reduce the culture gap, the public discount rate has to be adjusted to the private discount rate. Unfair and unrealistic cost comparison procedures can contribute to slow implementation or even failure of public private partnerships, thereby raising transaction costs. To overcome the gap in culture, trust is one of the most important aspects in a partnership; without trust, real success is hard to realise. The public actors, as well as the private actors, have to respect and comprehend each others goals, considerations and decisions. "There is definitely a culture gap. However, private companies are at least as good as the public sector at realising what the customers - the end-s - really need. We ('private company') often help clients ('public sector') to understand these needs. Many clients are also compartmentalised and people from one department don't talk to people from another department. We add value by getting the client to cut across these boundaries for the benefit of the customers. They would never think of doing that by themselves without our assistance. This is one of the key areas where private
© Association for European Transport 2002
company thinking helps improve efficiency and effectiveness". §
Short term rigidities A public private partnership can be compared to a network. Durable networks create stability and lower the uncertainty of actors. At the same time this also means rigidities, dependencies and inability to adapt to changed conditions2. That's why PPP-contracts should allow for changes to take place and prices benchmarked or market-tested from time to time. "The only way to speed up the procurement process is to create stability and certainty through the use of standardised contractual , etc. The flexibility should generally be reserved for scheme specific issues".
§
Hold-up problem Another disadvantage of public private partnerships is the existence of the hold-up problem, whereby a party may be able to enforce a new cost-revenue-ratio than previously agreed upon. This problem may take place when the negotiation-position of the parties involved change over time and when observance of the contract isn't perfectly possible. The relative position of negotiation is influenced by the sunk cost aspect of investments and the alternative possibilities of usage.
§
Public sector staff concern If a public private partnership is intended to replace an existing public facility, this may result in concern about the public sector staff's and conditions of employment. This fear will have to be dealt with seriously, otherwise it could influence the output of the project negatively.
5. Recommendations: In order to make the advantages more advantageous and the disadvantages less disadvantageous, a couple of recommendations can be drawn up: § § §
§
§
In order to let the whole partnership succeed, trust is of extreme importance. Therefore, working as transparent as possible and each actor trying to adapt to the other actors is needed. Risk should only be transferred to the party who is best able to manage it, because transferring risk will have its price. Observance of the contract and the performances have to be carried out regularly. If necessary, the service provider should receive a bonus when his services are of superior quality. Otherwise, he should receive a payment deduction or a penalty when his services are inferior to the agreed contractual quality level. However, having an extreme monitoring process can cause one to miss the fact that the overall service has improved. Before the market consultation and the tender procedure start, the government will have to define it's goals, desires, principles and performance requirements as clearly as possible. Over-specification and mis-specification of the project result can cause output-specifications to be deficient. The party who experiences most of the inconveniences has to have the direction over the whole process.
2 Temporary networks represent the opposite; instability and increased uncertainty, but also flexibility, higher independence and ability to change.
© Association for European Transport 2002
§ § §
§ § § §
6.
The real reasons for the broad have to be examined before decisions about whether to proceed with the public private partnership are made. ing treatment shouldn't be prioritised over value for money. The private sector has to be brought in the partnership as soon as possible, either as a tender-contestant or as a participant in the market-consultation. However, primarily design, public involvement and the environmental approvals have to be taken care of first by the public sector before the private sector can be brought in as a tendercontestant. It is also wise to develop some sort of compensation system in order to stimulate private actors to the tender-procedure. The total number of bidders should be enough to introduce effective competition, but should be limited in order to keep control over the transaction cost, the quality of the bids and the probability of success. In order to diminish the transaction cost, the delays and time-scale and the uncertainty, it is wise to use standardised contracts. In order to prevent major delays, an honest and early communication to stakeholders is of extreme importance. One has got to be careful not to overrate the possibilities of value capturing as an additional source of finance. Value capturing - also known as scope-optimalization means attracting additional sources to the project. These sources are derived from functions which - directly or indirectly - profit from the investment in infrastructure. However, the control on these functions is often in hands of parties which aren't involved in the public private partnership. A rise in value of assets not directly involved in the PPP, is hard to realise without a change in ownership. Abstract:
In this essay, the advantages and disadvantages of public private partnerships are being described. PPP-projects are likely to be successful as those genuinely combining capital and service requirements; where the risks are primarily commercial; where scope for innovation exists; and with skilled and committed public sector management. The main advantage of public private partnerships is the creation of value for money, which is a collection of several factors. The most important value for money-drivers are the transfer of risk, the output based specification, the long-term nature of contracts, the performance measures, the increased competition and the private sector management. Other important advantages of public private partnerships are the quicker delivery of projects, the improved incentives to market forces, the cost efficiencies, the broad for PPP and the improved cost calculations by the public sectors. However, public private partnerships also have some disadvantages. The most import one is the increased transaction costs. This is a result of the complexity of the relations between the diverse actors and because of the long duration of these relations. The other most important disadvantages are the higher capital costs, the insecurity of being granted the concession, the culture gap between the two sectors and the hold up problem. 7.
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and
Corry, D., Le Grand, J., Radcliffe, R. (1997) Public-private partnerships. Cowie, H. (1996) Private partnerships and public networks in Europe. Dysard, J. (1999) Sharing the benefits of public-private partnerships, R.W. Beck Inc. Farrel Grant Sparks and Goodbody Economic Consultants in association with Chesterton Consulting (2000) Report submitted to the Inter-Departmental Group in relation to PPP. Fayard, M. (1999) Overview of the scope and limitations of public-private partnerships, Seminar on public-private partnerships in Transport Infrastructure Financing. Federal-Provincial-Territorial Working Group on Public-Private Partnerships (1999) Publirivate partnerships and their role in a possible National Highways Program. Hambros, SG (1999) Objective One Final Report, Public private partnerships for highways: experience, structure, financing, applicability and comparative assessment. Hambros, SG (1999) Objective Three Final Report, Public private partnerships for highways: experience, structure, financing, applicability and comparative assessment. Hambros, SG (1999) Objective Two Final Report, Public private partnerships for highways: experience, structure, financing, applicability and comparative assessment. Herpen van, G.W.E.B., Terpstra, M., Beemt van den, R. (2000) Publiek-private samenwerking: een andere kijk op infrastructuur. HM Treasury / Private Finance (1995) Private opportunity, public benefit (progressing the Private Finance Initiative). Irish Cross-Departmental Team of Officials (1999) Framework for action on infrastructural development, including PPP. Klink van, H.A. (2001) Private financiering van infrastructuur: waar een wil is, is nog geen weg. Kopp, J.C. (1997) Private capital for public works: deg the next-generation franchise for public private-partnerships in transportation infrastructure. Korving, W., Veld in ‘t, J.G. (1998) Selectie van PPS-projecten, ESB Dossier. © Association for European Transport 2002
Laan van de, G., Ruys, P., Talman, D. (2001) Optimal provision of infrastructure using public-private partnership contracts, Tinbergen Institute, discussion paper. Middleton, N. (1999) PPPs a natural successor to privatizations, PricewaterhouseCoopers, International Privatisation Review 1999/2000. Montague, A. (1999) Public-private partnerships in the UK – lessons for international projects Moore, A.T., Segal, G.F., McCormally, J. (2000) Infrastructure outsourcing: leveraging concrete, steel and asphalt with public-private partnerships. Private Finance Taskforce (1999) Great Brittain, DBFO value in roads, a case study on the first eight DBFO road contracts and their development. Raad voor Verkeer en Waterstaat (2000) Meer markt, andere overheid, advies over de veranderende relatie tussen markt en overheid op terreinen van Verkeer en Waterstaat. Savas, E.S. (2000) Privatization and public-private partnerships. Spackman, M., Dijk van, Th. (1998) Ervaringen met publiek-private samenwerking in het Verenigd Koninkrijk, ESB Dossier. Treasury Committee (2000) Fourth report. Twynstra Gudde (2000) Op de goede weg ? Naar een optimale samenwerking tussen publiek en privaat bij infrastructurele projecten. Westlund, H. (1995/97) An interaction-cost perspective on networks and territory. Williamson, O.E. (1998) Transaction cost economics: how it works, where it is headed. Wilson, T. (2000) DCMF Prisons: an example of savings forecast under UK government’s Private Finance Initiative. 8.
Further Information
Ministry of Transport, Public Works and Water Management Directorate-General of Public Works and Water Management AVV Transport Research Centre G.W.E.B. VAN HERPEN Consultant enger Transport Boompjes 200 P.O. Box 1031 3000 BA ROTTERDAM THE NETHERLANDS Email: Phone: Fax: Internet:
[email protected] +31 10 282 57 78 +31 10 282 50 14 www.rws-avv.nl
© Association for European Transport 2002
1
PUBLIC PRIVATE PARTNERSHIPS THE ADVANTAGES AND DISADVANTAGES EXAMINED
BAS VAN HERPEN AVV Transport Research Centre Dutch Ministry of Transport, Public Works and Water Management
2
• Introduction into PPP and infrastructure • Case: N13 Leeuwarden – Nijega • Main advantages • Main disadvantages • General advantages • General disadvantages • Recommendations • Discussion AET-Conference - September 9, 2002
3
PUBLIC PRIVATE PARTNERSHIPS Main characteristics: o Long-term contractual arrangements o Risk transfer o Own identity and responsibilities o Performance-based outcomes
AET-Conference - September 9, 2002
4
INFRASTRUCTURE First level services
Physical infrastructure Second level services Politics AET-Conference - September 9, 2002
5
N13 LEEUWARDEN - NIJEGA
AET-Conference - September 9, 2002
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N13 LEEUWARDEN - NIJEGA
AET-Conference - September 9, 2002
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MAIN ADVANTAGES N13 (1) o Cost Economies o Reduction on the public treasury o Value for money: o Risk transfer o Output based specification o Long-term contracts (incl. whole life costing)
AET-Conference - September 9, 2002
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MAIN ADVANTAGES N13 (2) o Value for money: o Performance measurement and incentives o Private sector management skills o Competition o Various
AET-Conference - September 9, 2002
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MAIN DISADVANTAGES N13 o Poor experience with PPP o Public sector staff concern o Poor value for money o Higher transaction cost o Higher capital cost o Advantages turning into disadvantages
AET-Conference - September 9, 2002
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• Introduction into PPP and infrastructure • Case: N13 Leeuwarden – Nijega • Main advantages • Main disadvantages • General advantages • General disadvantages • Recommendations • Discussion AET-Conference - September 9, 2002
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GENERAL ADVANTAGES o Time-to-delivery savings o Improved response to market forces o Broad o Improved cost calculations
AET-Conference - September 9, 2002
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GENERAL DISADVANTAGES o Insecurity o Inefficiencies o Culture gap o Short term rigidities o Hold-up problem
AET-Conference - September 9, 2002
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• Introduction into PPP and infrastructure • Case: N13 Leeuwarden – Nijega • Main advantages • Main disadvantages • General advantages • General disadvantages • Recommendations • Discussion AET-Conference - September 9, 2002
14
RECOMMENDATIONS
(1)
o Work transparent o Risk transfer only to best parties o Performance measurement necessary o Government be clear o Private sector involvement early in process
AET-Conference - September 9, 2002
15
RECOMMENDATIONS
(2)
o Minimum and maximum amount of bidders o Use standardised contracts o Communicate early and honest o Choice PPP or conventional is project-dependent
AET-Conference - September 9, 2002
16
• Introduction into PPP and infrastructure • Case: N13 Leeuwarden – Nijega • Main advantages • Main disadvantages • General advantages • General disadvantages • Recommendations • Discussion AET-Conference - September 9, 2002
17
AET-Conference - September 9, 2002
18
ACTOR vs PHASE vs RISK ACTOR
Public
Public / Private
Private
Private
Private
Private
Private
Public / Private
Public
Political
Planning
Design
Construction
Mainte nance
Operational
Financial
Usage
Legal & Regulatory
PHASE
Identification
Option Analysis
Planning & Approval
Implementation
Post-Transaction
RISK
AET-Conference - September 9, 2002
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AET-Conference - September 9, 2002
20
Further Information
Ministry of Transport, Public Works and Water Management Directorate--General of Public Works and Water Management Directorate AVV Transport Research Centre
G.W.E.B. VAN HERPEN (MA) Consultant enger Transport
Boompjes 200 P.O. Box 1031 3000 BA ROTTERDAM THE NETHERLANDS
Email:: Email
g.w.e.b.vherpen g.w.e.b. vherpen@ @avv avv..rws rws..minvenw minvenw.nl .nl
Phone:: Phone
+31 10 282 57 78
Fax: Internet:
+31 10 282 50 14 www..rws www rws--avv avv.nl .nl AET-Conference - September 9, 2002
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