Statutory and Planning Risk: YD2nd Tunnel in Shanghai (China)

In the PPP for the construction of the tunnel, the local authorities assumed the responsibility for land acquisition and compensation risk involved in the project, hence they did not transfer statutory risk to the private-sector party. This party would have faced great uncertainty if it had had to take care of land acquisition and compensation, coping with the political consequences typical of these operations. A number of circumstances under which the public-sector party should bear the site risk have been identified: (i) when the existing site owned by the public-sector party has defects or environmental liabilities; (ii) when the land asset is to be retained or acquired by the public-sector party at the end of the contract life; (iii) when the project involves an environmental impact appraisal, and thus site approvals are likely to be complex; and (iv) when the land asset is subject to ownership claims by indigenous people.

Source: Bing et al. (2005)

Coping with Contract Incompleteness in The London Underground (UK)

The PPP project to rehabilitate and upgrade the London tube was offered to private-sector companies (the so called Infracos) through different contracts involving different parts of the underground network. The responsibility for providing the transportation service to final users, instead, was retained by a public-sector company, the London Underground Ltd. (LUL). In a first stage, contracts were tendered and the preferred bidders, the Tube Lines and Metronet consortiums (Infracos), were chosen in May 2001. The PPP was highly criticized, by the Mayor of London among others, in terms of incompleteness of the contract and unclear value for money. Some argued a PPP contract would not be the best way to upgrade the tube system and made a case for the LUL undertaking works by itself. Besides, despite PPP advocates arguing the contracts contained strong incentives to improve safety standards, some critics raised concerns about the effect on safety of the decentralized nature of the London tube PPP project. The legal and political challenges to the PPP agreement led to large costs for the public sector arising from consultancy services and advisory fees, and to delays in the award of contracts. The uncertainty on contract negotiation and award delays even led bidders to threaten suing the government for the high bidding costs if the PPP contracts were dramatically modified.

The London tube PPP contract was more complex than a typical operation PFI deal. Further, in the London tube PPP there was not a construction phase followed by an operation phase since the contract involved a continuum of work to improve the assets over the contract life. That is, the PPP agreement was similar to a DBFO model with respect to the whole-life cost approach, but building and operation activities were not bundled: the concessionaries would upgrade the existing infrastructure while LUL continued to provide the transportation service.

Sources: Bolt, C. (2003), (2007); NAO (2004a), (2004b); Public Private Finance, various issues; Public Finance, various issues; The Economist, April 2007, June 2007

Innovative Payment Mechanisms for the M1-M15 motorway (Hungary)

The concession to design, finance, build, operate, and transfer a 43-km motorway implemented a user charges payment mechanism that fully transferred traffic (demand) risk to the concessionaire, without any support from the public sector other than the initial planning and site acquisition. The award criterion was the lowest tariff (toll) requested by the competing bidders. The concessionaire was entitled to set initial tariffs at the revenue maximizing level, and to adjust them subsequently according to indexation provisions. Although there was a parallel un-tolled road that remained unimproved, the economic rationale for the project was largely based on time savings to be realized by users (estimated at 20 minutes per full journey). As many commercial vehicles kept using the alternative, un-tolled road, traffic volumes and total revenues were half of the originally forecasted values for the first year of the concession. This led to litigation on tolls, suspension of investments and loan disbursements, and a debt default by the private partner. Both the concession and debt obligations were taken over by the public-sector party. This case highlights the difficulties in applying user charges and forecasting demand, especially when the project involves a green field investment, there are alternative free available services, and no revenue subventions are offered to the private-sector party.

Source: European Commission (2004)

Financing Mechanisms of Bus Rapid Transit (BRT) Systems: The Case of Bogota's Transmilenio

The TransMilenio (TM) Bus Rapid Transit System was developed in 2000 to upgrade and operate the Bogotá bus transport system by a partnership between the public sector and a number of private companies. Before the TM project, the bus transport service was provided by a few bus companies that owned the government-issued routes and rented them to private bus owners and by small private bus operators serving fixed routes. Since the operators' revenue depended on the number of passengers, there were often 'price wars' to attract passengers (Colombians referred to this phenomenon as 'war of the cents' because only minimal price reductions were feasible in bus fares). Outcomes from such a system were far from efficient: long delays, oversupply of seat capacity, and low quality of service. The TM project planned to rationalize bus routes by building exclusive bus lanes in critical areas of Bogotá and using a system of feeder routes to complement the main lanes. A modern infrastructure was planned involving a network of enclosed bus stops, pedestrian bridges, terminals, and transfer stations. The overall bus route system was to be built over 15 years and would include 22 exclusive corridors covering around 400 km with a capacity to transport 5 million people daily.

In the TM project, there was a clear distinction between activities to be financed by the public-sector party and those to be financed by the private partners. Public funding was required to invest in the transport infrastructure. The cost of the main construction works was estimated in USD 240 million for the period 1998-2002, and USD 480 million for 2002-2005. Most of the infrastructure cost was to be borne by the national and local governments. The contribution of the national government was around two-thirds of the infrastructure cost, partly financed with a loan granted by the World Bank. The Bogotá government was able to financially support the TM project thanks to its strong fiscal position and the autonomy granted to local authorities to fund the provision of public services. The city of Bogotá committed half of the revenues from a gasoline sales surcharge for financing the project. On the other hand, the private partners provided financing for buses and ticket machines. Their invested funds were to be recouped by charging fares to final users, with no subsidies nor guarantees offered by the public sector to the private-sector parties.

Source: Transmilenio S.A. (http://www.transmilenio.gov.co)