site, reduces legal uncertainties and purchases the output. Second, they are mechanisms for monitoring risk, and the explicit incorporation of a risk premium by private investors aids this process by making project risks more apparent.
A further attraction of partnerships is their versatility. Earlier we noted that infrastructure is often classified into ‘economic’ or ‘social’ and within these into ‘hard’ or ‘soft’ (see Table 2.1). PPPs in the UK were originally used for
‘hard’ economic infrastructure projects such as roads, bridges, ports, and so on. They then spread to social infrastructure such as schools, hospitals, prison and detention centres, sewerage and so on. Now the ‘hard hats’ have become providers of ‘soft services’ (D & P, 2001). Instead of being interested only in the construction contract and the first two years of a project, the facilitators are now servicing the asset throughout its life. Major UK construction companies, for example, have become more like facilities management companies, re- inventing themselves as project operators and service providers. They have effectively started to be infrastructure services companies, a development which helps to insulate their bottom line from cyclical construction markets.
Much the same trend is occurring across Europe and in other locations where the UK-type model has been adopted. This is an indication of the flexibility of the PPP arrangement, and its ability to engage the private sector in a number of different ways.
impact statement was needed as new lanes were simply being added to the median of an existing and operating eight-lane freeway (Lockwood et al., 2002). A private investor is in charge of financing and operating the new lanes, which are priced and tolled, whereas the rest of the highway can be used free of charge. In line with congestion pricing rules, the toll for the express lanes is increased in peak periods. The operators’ concession is to run for 35 years and, beyond a certain threshold, profits are shared between the state and the concession company. According to the operator, a major factor of success is the high demand on this particular route at peak hours, along with public acceptance of the idea of congestion pricing and other charging incentives to users. For example, the 91 Express Lanes offer discounted tolls to 3+ car- poolers, motorcycles, zero-emission vehicles, and vehicles with disabled persons licence plates.
Toll charges are levied using the FasTrak system, which is the electronic toll collection system that enables a customer to drive on the 91 Express Lanes without having to stop at toll booths. The FasTrak system comprises three elements: an electronic transponder that is mounted on the inside of a vehicle’s windscreen; toll recording equipment located on the road; and an enforcement system. When passing through the toll zone, the transponder is read by an overhead antenna, and the posted toll amount is automatically deducted from the customer’s account. Since there are no toll collection booths on the express lanes, California state law requires that all vehicles be equipped with a prop- erly mounted FasTrak transponder allowing tolls to be collected electronically.
Travelling on the 91 Express Lanes without a transponder properly mounted on the vehicle could result in toll-evasion fees of $100 for the first violation,
$250 for the second violation, to $500 for each additional violation within one year. As part of the California State Highway system, the 91 Express Lanes are subject to the same laws that apply to other California State Highways, and are enforced by the California Highway Patrol.
Express Lanes account holders are responsible for maintaining a minimum value in their account as described in the application and agreement to become an account-holder. The prepaid toll account is automatically replenished by the amount of $30 to a holder’s credit card, or the average of the monthly toll usage, whichever is greater, each time the account falls below the minimum balance. The minimum balance is equal to the average toll usage for a ten-day period as calculated by the 91 Express Lanes, or $10, whichever is greater.
Neither trucks nor cars with trailers can use the toll lanes. The only over- sized vehicles that are allowed on the 91 Express Lanes are motorhomes and buses. Large trucks are prohibited for several reasons:
• Caltrans has approved a maximum vehicle weight of 10,000 pounds for the 91 Express Lanes.
• Under Californian law, a variety of vehicles, including vehicles towing a trailer, and trucks with more than two axles, may only use the right two lanes of a four lane limited-access highway such as the 91 freeway.
Therefore, these vehicles may not used the 91 Express Lanes.
• Most larger trucks using the 91 freeway must stop at one of the weigh stations which are not accessible from the 91 Express Lanes.
Melbourne City Link
By contrast, although at 22 km in length it is not much longer than SR 91, Melbourne City Link is a much larger and more ambitious project, being a totally new development, which was financed, designed and built by the private sector, and uses much more advanced tolling technology. In fact, the Aus$1.8 billion/US$1.2 billion venture was, at the time, Australia’s largest ever privately financed public infrastructure project (since surpassed in size by the Western Sydney Orbital at Aus$2.2 billion). The City Link project sponsor is Transurban, a single project company listed on the Australian stock exchange in 1996. Transurban has a 34-year concession with the government of the State of Victoria, to design, build, own and operate the toll road. At the end of this time, the project is to be transferred back to public control at no cost to the State.
In the words of Arndt (1998), the concession agreement was hard fought, detailed and expensive to negotiate, forcing the creation of novel risk-sharing mechanisms. By the time of financial closure, the successful tenderer had committed Aus$24 million, including design costs. Presumably, the losing bidder (the ‘reserve’ tenderer) had committed nearly as much. Obviously, those tendering for projects on this scale cannot bear these high bidding costs indefinitely, and must seek to recoup costs accrued on unsuccessful bids when they win projects by factoring them into the required rates of return (a fact often overlooked by critics who focus on the apparently high ‘gross’
returns).14In this particular instance, the other tenderer, CHART Roads, which was kept on ‘active reserve’ status until financial closure was reached, was paid $3 million by the state government, partly compensating it for extra costs incurred due to the protracted bidding process.15
Sponsors of the private company Transurban include Transfield Infrastructure Investments Pty Ltd, Hastings Fund Management Pty Ltd and Obayashi Corporation of Japan. Financial closure was achieved in March 1996, and the project marks significant innovation in the issue of infrastruc- ture equity placements, infrastructure revenue bonds and significant non- recourse financing on the basis of the toll revenue. The Victorian government saw this agreement as a basis for future ventures, including projects in indus- tries other than roads, and the Victorian auditor-general has generally been in
favour of the agreement (Report of the Auditor General, 1997). Despite a later change of government, the project in reality did serve as a precursor for other large projects undertaken as public private partnerships.
Overall, the project entails a 5 km long tunnel and six toll zones, using automated electronic toll collection. It involved significant construction, including the widening of existing, formerly public freeways,16new elevated sections, and major new bridges and tunnels under densely populated areas and the Yarra River. Essentially, City Link connects existing publicly funded freeways and allows traffic to bypass the Central Business District (CBD).
Previously, traffic approaching the CBD from the north (Tullamarine Freeway), the east (Eastern Freeway), the south-east (South Eastern Arterial), and the west (West Gate Freeway) had to pass through already congested city streets. City Link widens and upgrades the Tullamarine Freeway (which serves Melbourne airport) and the South Eastern Arterial, and connects both of these formerly public roads with the West Gate Freeway. In all, about 22 kilometres of road were built or upgraded.
City Link is one of the first urban toll roads to be developed as a BOOT (build-own-operate-transfer) project. Urban toll roads are generally more constrained on right-of-way availability than interurban or country roads. This may sometimes preclude toll plazas altogether, as it did with this project. A fully automated tolling system therefore was required, but such a system had never been used on a real project at the time when the City Link negotiations began, and thus an entirely new system had to be developed.
In some automated tolling systems, the cars need to pass through toll plazas, slowing down to 50 kph as they pass through the gates. This was impracticable in the City Link application. Tolling technology is also rela- tively easy in SR 91 because the vehicles are travelling in a dedicated lane and cannot switch to and from the untolled lanes in the freeway. In the City Link case, cars could move between lanes on the freeway system. The problem was thus one of devising a system to ‘capture’ for tolling purposes cars that are travelling at 110 kph (or more) and switching from one lane to another and from one route to another at high speeds.
In the event, a system that would do the job, Transroute, was designed by French engineers. The result is a tolling system for the project that is completely automated, so there is no need for motorists to slow down approaching tolling plazas or to stay in one lane. A transponder in the car regis- ters even high speed lane changes at tolling points and payment is transferred from the road user’s account by direct debit, according to ‘user pays’ principles.
The City Link project embodies many significant innovations in terms of project financing arrangements and risk management, and the interested reader is referred to the article by Arndt (1998) which is reprinted, along with many other of the articles to which reference is made in this volume, in
Grimsey and Lewis (2004). However, in view of the discussion that takes place in the next chapter, two aspects of the risk allocation are noteworthy.
This history of private sector involvement in transport infrastructure invest- ment suggests that private initiatives are particularly vulnerable to two things:
(1) technological and economic developments that lead to demand risk, and (2) changes in government regulations. Both risk factors are explicitly addressed in this case.
Traffic demand is probably the largest single risk for an urban toll road. In situations where there are many alternate routes available for toll-averse drivers, there is ample opportunity for those drivers to avoid tolls. This is particularly true for the City Link facilities, since there are many alternative routes in and around the CBD. One preliminary study estimated a 40 per cent diversion rate if manual tolling was introduced, which was an additional spur for the contractors to ensure that the (untried) automated tolling system was easy to use and worked effectively. Often, in such circumstances, demand risk guarantees are sought from public sector bodies. Significantly, Transurban explicitly accepted the risk of traffic demand, which it considered to be the most critical risk to the project’s viability once construction was completed.
There are no state-provided minimum usage or revenue guarantees.
The government stuck to the policy of accepting only those risks that it is best placed to control and manage, while adhering to the concept of risk–reward, in which the party assuming a risk should have access to associ- ated rewards. Conversely, it is argued that the party to whom the rewards flow should accept the risk. Consistent with this position, the government took on the risk of changes in the state-controlled road network that connects to City Link, adversely affecting City Link patronage. It is also important that this risk allocation be symmetrical. That is, if one party accepts the consequences of a downside risk, it should also gain the benefits of an upside risk. Thus the government agreed fully to compensate Transurban under the Material Adverse Effect regime for any detriment to the project resulting from publicly sponsored changes in the transport network. However, if any modifications result in increased traffic volumes and profits for Transurban, only 50 per cent of these are passed back to the State.
NOTES
1. Martini and Lee (1996).
2. Threadgold (1996).
3. East Asia Analytical Unit (1998).
4. The Allen Consulting Group (2003, p. 4).
5. The leading luminary is Douglass North (1990). For later contributions see Deepak Lal (1999) and Rodrik (2003).
6. Cost–benefit analysis is the appraisal of an investment project that includes all social and
financial costs and benefits accruing to the project over its expected life, to determine whether the discounted value of the benefits exceeds the costs. For a classic analysis of the issues involved, see Mishan (1971).
7. For an overview of monetarist views, see Lewis and Mizen (2000, chapter 7).
8. For example, a US study found that transport costs as a percentage of product prices ranged widely, from 3 to 27 per cent. The actual proportion of industry that falls into the transport cost sensitivity range may be relatively small (Hurdle, 1992).
9. The ability-to-pay principle is that taxes or charges for public services should be levied according to the user’s capacity to pay, whereas the benefit principle holds that individuals should pay taxes or charges in line with the benefits each would receive from the services, akin to transactions in the marketplace (see Musgrave, 1959).
10. The City Link (linked motorways and tunnel) project is analysed in Arndt (1998).
11. A transponder is a small battery-powered radio device which is mounted inside the vehicle on the windscreen and identifies the customer’s prepaid toll account. When travelling through the toll zone, the transponder is read by an overhead antenna, and the posted toll amount is automatically deducted from the customer’s account. The transponder can be easily moved from one vehicle to another. In addition, it is possible to add other vehicles to the account even if not equipped with transponders, so long as the licence number is advised to the relevant operator.
12. See The Economist, 15 February 2003, pp. 51–3.
13. A system currently using global positioning system (GPS) technology in a limited way is the
‘distance-based heavy vehicles fee’ (LSVA), which was introduced in Switzerland in 2001.
Trucks travelling through Switzerland are charged per kilometre travelled. GPS is used as an auditing tool to check the distances recorded on the truck’s on-board unit, which is activated and deactivated as the truck enters and leaves the country. A more developed GPS-based truck tolling system is being developed in Germany for possible implementation in 2005.
See The Economist, Technology Quarterly, 12 June 2004, pp. 22–4.
14. This is, in fact, an issue for government because tenderers must recoup costs on other works, either other government projects or private projects. In the former case, the government pays directly in the longer run. In the latter case, it is an additional burden on the economy which raises the costs of doing business.
15. A recent review of PPPs in Victoria recommended that the government should give consid- eration to creating a fund to compensate bidders where a particular design innovation becomes the property of the state or where additional costs are imposed on participants due to ‘process changes’ by the state (Fitzgerald Report, 2004).
16. This particular aspect drew criticism from those who objected to paying tolls on stretches of road which were previously free. The critics overlooked that public roads are heavily subsi- dized in many different ways. Not surprisingly, some of the strongest criticism came from the road haulage contractors who ignored the fact that trucks do more than ten times the damage to roads than motor cars, yet do not pay commensurate taxes for road use.
INTRODUCTION
This chapter mainly is concerned with the increased involvement in recent years of the private sector in the provision of infrastructure-related services.
Our particular focus is on the variety of forces that lie behind and have come together to underpin and to inform this trend. Here we refer to the ‘new public management’ agenda, dissatisfaction with traditional procurement methods and the development of the private financing model, and the conceptualization of ‘partnering’ as a management process. But we begin with history, for there is a rich tradition of private sector investment in infrastructure. It is important to understand this history, and why so many of the projects come to grief, in order to appreciate the special risks that infrastructure investment poses to private entities.
Many people would think of the ‘railway mania’ of the mid-nineteenth century as the grand era of private sector involvement in infrastructure invest- ment, and with good reason because the railway construction boom ‘over- shadowed all other economic developments of the period’ (Briggs, 1959, p. 296). Some idea of the extent of private activity in this infrastructure sector can be discerned by the calculation of Thomas Tooke, the Victorian economist, that at the height of the railway construction boom in Britain in the late 1840s, as many people were employed in railway construction activities as the total population engaged in factories in the whole of the United Kingdom at that time (Court, 1962). In addition, railway construction in Britain was soon followed by the construction, using British finance and equipment and often British management and labour, of railways abroad, especially in the Americas.
Yet, roads and water projects provide some of the earliest examples of private activity in infrastructure, and it is on these that we focus in the first part of this chapter by examining the turnpike system of toll roads in Britain and the United States, and the concession approach to infrastructure in France, first used for water distribution. In terms of railways, we look briefly at the early history of the London underground, which is arguably from today’s perspec- tive a more interesting example than the ‘age of steam’ in view of the UK government’s recent decision to use public private partnerships to rebuild and
41
refurbish the London underground 100 years after much of it was originally constructed. In fact, the PFI contracts with the Tubelines and Metronet consor- tia to modernize London Underground, signed in 2002 and 2003, represent the largest PFI contracts by capital value (HM Treasury, 2003b, p. 19). It is this recent resurgence of private sector involvement in infrastructure that is the subject of the rest of this chapter.