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ROLE OF INNOVATIVE FUNDING IN

INFRASTRUCTURE

Alain FAYARDFrench Directorate general for roads April 2006

The views expressed in this presentation are those of the author and not necessarily those of the organizations which the author belongs to.

Joint OECD/ECMT transport research centerWorking group on

transport infrastructure investment

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SPECIAL FEATURES OF INFRASTRUCTURE

Important initial investment

Duration (construction, operation)

External effects (positive and negative) economic profitability ≠ financial profitability how “ polluter pays?”

Pricing at marginal cost/budget balance

Long-term financial return and strong need of cash, in particular at the beginning

Multiple users / one - few buyers

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Labels used in PPP jargon such as Turnkey contracts, BOT, DBFO or performance-based maintenance contract have no single and clear definition. Each PPP solution is too complex and too unique to be characterized in one word or acronym. Adapted from World BankToolkit

A CONTINUUM OF ALTERNATIVES

Works & Services Contract

s

General Contracts

Turnkey Contracts

Concession

B.O.T.

Full Privatisatio

n

low highExtent of Private Sector Participation

Public private partnership : the usual situationPublic private partnership : the usual situationBack to the future : a centuries old story The key issue : co-operation / competition

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A MATRIX APPROACH OF THE TOLL AND THE PPP

No Toll Toll

Risks not shared

Govt. Administration Autonomous

Org.

Govt. Administration Autonomous

(e.g., so called concessionaire)

Risks shared

’’Concession’’ Construction

and/ or Operation

* With Traffic

Risks : Shadow Toll

Without Traffic Risks : Lease

’’Concession’’ Construction

and/ or Operation

A THIRD DIMENSION : A COMPREHENSIVE VIEW FROM INVESTMENT TO SERVICES TO USERS THROUGH MAINTENANCE

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PPP : RATIONALE (1/2)

THREE CORE ISSUES : Partnership “ CORPORATIZATION ”

• Autonomous public or quasi public body• Delegated management

More efficient organization of service Earmarking of resources

Benchmarking Management Discipline with/without privatization

Public private-partnership / public-public partnership

A COMPREHENSIVE & LONG RANGE APPROACH• Performance criteria / means obligations• A set of tasks including services

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PPP : RATIONALE (2/2)

RISKS reasonably and a priori shared• Political and legal risks • Economical and financial risks • Technical risks : construction and operation• Commercial risks (tariff x traffic) (?)

One indicator : balance of profits and losses account(commercial risk is only a part of it)

• Risk for the Gvt in case of default of the private partner

A POSSIBILITY : TOLL User pays Supplementary resource Leverage effect by borrowing mutualization (competition issue to be

addressed) Diversion of traffic (lower economic profitability)

shadow toll (to avoid traffic diversion) + toll (for resources)

PPP : an organisation process a financing mechanism

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PPP EQUALIZER

Scope of work : tasks assigned to the private sectorAutonomy : initiative left to the private actors Pooling : number and type of projects concerned by the

agreementRisks : how to share them among actorsCost recovery : how to pay back, mainly users/tax payersFinance : project/corporate finance ; Gvt involvementWorld bank Toolkit : http://rru.worldbank.org/toolkits/highways

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KEY ELEMENTS OF A CONCESSION MECHANISM

Package size

- Risk of monopoly- Backing by collateral alleviating risks

Choice criteria - Not a contract with a contractor - What place for contractors ? - Openness/so called objective award

Duration

- Risk of "overprofit" - Financial safety

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PRICING: CORE QUESTIONS

THREEFOLD PRICE ROLE :• cost recovery• demand orientation• financing

are these roles compatible?• High demand=low price (cost recovery)

high price (offer and demand)• Marginal eco. (or social) cost?

what about financial balance constraint? what about “external effects” charges?

CROSS-SUBSIDIZATION ? MAY PRICING BE FREE?

•natural monopoly & non disputable market•competitiveness, spatial planning, equity….•Tariff elasticity of traffic lower social utility

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ORGANIZATIONAL CHANGES

Breakdown of road network between central government and local authoritiesFocus on core network (E, F, I, Ö…..)Clarification of responsibilities (CH : NFA….)No link with political organization (central./fed.)

Delegated managementPrivate concessions (E, F, I….)Institutionalized PPPs (IPPPs) ≠ only toll operators (D, N)

State-owned companies (Ö, SF, SK…)

Executive agencies (England, EU comm.’s proposal) In-house contracts ≠Road funds (CH, CZ, SF…) only for earmarking resources

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A STRENGTHENED GOVERNANCE

Different roles for different bodies Strategic plan, programming, resources allocation, project

design, project management, political and adm. process management….

ContractualizationGlobal contract

Medium term contracts (embedded) for fine tuning / ≠ renegotiation

Regulations & best practices

Audits and users’ surveysHow to reconcile competition

and partnership?

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“COMMERCIALIZATION” & PARTNERSHIP

ProcurementLess direct labor (even in maintenance)Performance-based contractsDesign & build Purchase of infra. services and not infra. asset

but asset-based financial securities and ESA?Life-cycle cost savings by bundling const.& op.“competitive dialogue”

Quest for new resources“fiscal” toll (D, N, S, UK….)

“concession” tollTime spreading of financial burden

PPP as a management process a financial process

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THANK YOU

Alain.fayard@equipement.gouv.fr