This 21st century has started with significant ideological changes involving an increasing popular rejection of a strong role for the private sector in the management and financing of public services. This change is most obvious in developing countries but is not a minor phenomenon elsewhere, most obviously in Continental Europe and to some extent in the UK. Despite these changes, despite the high profile contract renegotiations in Latin America or Africa, despite the railways crisis in England and despite the recurring debate on the matter within the EU, public private partnerships (PPP) continue to be on the agenda of many politicians in both developed and developing countries.1
For many governments, the main motivation is the need to reduce the fiscal costs of the transport sector. The concern to cut unit costs is often also present but less obviously so. It has usually been more present in Anglo-Saxon countries but increasingly so in other countries as well as indicated by the EU experience. The conviction that private operators are likely to be able to deliver services more efficiently is indeed often also a key driver of the continued effort to get into PPPs.
Whatever the driving force behind PPPs, they are expected to deliver infrastructure or services at reasonable cost and with attention to social aspects. They also increasingly involve the government making explicit comparisons with public funded and managed alternatives. Even when public sector borrowing costs will be lower, other factors are considered. These include the opportunity cost of public funds and foreign exchange, the efficiency and expertise the private sector might bring to the project and the availability of international liquidity to support specific project types which lend themselves well to some type of securitization.
To some extent, this continued enthusiasm may be counterintuitive in view of recurring international financial and liquidity crisis over the last 10-15 years. These crises should have reduced the interest in project finance to finance new toll roads, new airports, new ports, or new railways in emerging markets. Although after the financial crises in East Asia, Russia, Mexico, Brazil or Argentina during the 1990s, project financing almost systematically slowed down but it has also systematically recovered. This is because new sources of money continue to appear. From pension assets to emerging bond markets to new types of bank debt, liquidity is not lacking. Private capital flows to emerging markets reached a new peak in 2006, US$ 623 billion2. Even if credit to some actors may be tighter, the global financial markets continue to be liquid and investors are still looking for predictable sources of revenue which most transport infrastructures are potentially capable of providing. Spreads may increase to hedge against increased credit risk and as a result increased de-leveraging but the market will not disappear. Transport infrastructure where the end-user is represented by corporate or commercial clients tends to be less risky given their higher payment capacity of tariffs and charges (i.e., airports, ports, cargo railways, etc.). Conversely, transport infrastructure where the end-user is represented by consumers tends to have more affordability issues and therefore higher risks (i.e., urban transport, toll roads, etc.).
To some extent, this continued enthusiasm may be counterintuitive in view of recurring international financial and liquidity crisis over the last 10-15 years. These crises should have reduced the interest in project finance to finance new airports, new ports, new railways or new ports in emerging markets. Although after the financial crises in East Asia, Russia, Mexico, Brazil or Argentina during the 1990s, project financing almost systematically slowed down but it has also systematically recovered. This is because new sources of money continue to appear. From pension assets to emerging bond markets to new types of bank debt, liquidity is not lacking. Even if credit to some actors may be tighter, the global financial markets continue to be liquid and investors are still looking for predictable sources of revenue which most transport infrastructures are potentially capable of providing. Spreads may increase to hedge against increase credit risk and as a result increased de-leveraging but the market will not disappear.
Although the trend has favored the continued growth of PPP and is likely to continue doing so, some things changed in the way the public sector is associating with the private sector. Every crisis teaches the dealmakers something new about how to improve risk management. Every crisis also reveals an impressive creativity by these dealmakers who learn from the mistakes of the past. In the process, the nature of the deals evolves, so do their size and the level and types of leveraging. New types of financial instruments and contractual arrangements to ease PPP in transport continue to be developed.
Some things however don't change. First, forecasts of revenues, traffic, and economic activity continue to be overoptimistic, so that "best case" scenarios often continue to be "sold" as "base case" scenarios, helping to justify the investment decisions.3 Second, the lack of attention to project evaluation continues to support a willingness to use ever-larger amounts of debt in project capital structures. Even high-risk projects faced heavy debt servicing burdens. Long-term projects continue to be undertaken which use short-term debt, buoyed by confidence that when the debt matured, it will simply be "rolled over" on equivalent (or better) terms. Floating-rate debts are still common, further increasing interest rate risk. Projects that generated local currency revenues continue to be financed in international markets, even if lenders and borrowers know that exchange rates are decreasingly predictable in emerging markets. Third, governments continue to get into deals with risk allocations they don't recognize simply because they ignore the potential consequences of renegotiation. This may explain some of the highest renegotiation rates are observed in the transport sector.4
This paper summarizes the evidence on the evolution of transport PPPs and in the process provides a primer on the associated policy issues. To do so, section 2 offers a brief overview of the evolution of the role of the private sector in transport infrastructure. Section 3 discusses the central role of project finance in the implementation of PPP policies. Section 4 covers the main debate on risk allocation in the design of PPPs. Section 5 addresses the main residual roles for the public sector in transport, with an emphasis on the regulatory debates surrounding the adoption of PPPs. Section 6 concludes.
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1 To our knowledge, there is no single definition of PPP. It covers a wide range of transactions where the private sector is assigned some responsibility, including investment. It ranges from management contracts with no investment obligations to concessions contracts with significant investment obligations in addition to operational and management obligations. In general, these contracts allow the private operators to collect money directy from the users. There are increasingly also many examples in which the government commits ex ante to cover the costs of financing the operations or investment.. The PFI initiative in the UK includes many examples of such contracts. Contract renegotiations often have the same outcome since governments end up subsidizing the operations which were supposed to be self financed when the contracts were signed.
2 World Bank: Global Financial Markets
3 See Trujillo, Estache and Quinet (2002) or Flybjerg (???) for detailed discussion of the strategic motivations explaining recurring optimisms in traffic forecast.
4 See Guasch (2002)