Presentation for the International Transport Forum

							Presentation for the International
       Transport Forum

                Jean Shaoul, Anne
                Stafford and
                Pam Stapleton
Who bears risks in practice?

   Transport projects in the UK in rail, roads and air
    traffic control (and other sectors) examining the
    financial costs and rewards to various stakeholders.
   Evidence base is financial statements of the
    partners, official reports, statistical sources research
    literature and the press.
   Significant proportion of UK transport projects by
    capital value have collapsed / been terminated or
    been re-negotiated - £35bn of £91bn.
London Underground

   General assumption –               Investment scaled back –
    commercial expertise will           slow and over budget
    ensure viable projects             Subsidies 5x previous
   Size – significant – expected      Guarantees on debt
    to provide £30bn investment        Letter of comfort
    over 30 years
                                       Contractual incentives
   Intention was 30% savings           limited impact
    on costs
                                       Metronet companies
   Terminate subsidies                 bankrupt and TfL ownership
                                       Taxpayers / users bore the
                                        cost
National Railways - Three rounds of
franchises

   Purpose of privatisation           Renegotiation of
   Competitive forces – 25             franchises – several
    franchises to11 cos.                rounds
   Outcomes                           History of over
    –   Reduction in competition        optimistic bids –
    –   Subsidies doubled               assumptions of 10%
    –   Dividends paid out of           growth without
        subsidy                         precedent
    –   Poor performance               Ability to hand back the
        against targets that were       keys with limited liability
        no more challenging
Role of the regulator

   RAB model                      Metronet – suffered
    –   Deals with time-            as the regulator
        inconsistency               found it had not
        problem                     been efficient
    –   Guarantees return
                                   Rail – regulator has
        for investors if they
        operate efficiently         not ensured good
                                    outcomes for
                                    customers/ taxpayer
Are PPPs a new phenomena?

   What is different about PPP?
   Our focus is on
    –   Use of the private sector as a financial intermediary – and
        the associated increase in the cost of finance
    –   Complex and opaque organisational structures – designed
        to ring fence each individual project – reducing the senior
        debt lenders’ risk exposure
    –   Increasing proportions of public money spent outside the
        direct control of government together with lack of
        transparency of financial reporting
Cost of finance debate 1

   Costs of public borrowing < private finance
   Taxpayer as holder of equity risk
    –   EIB Helm (2010) 3 elements to equity risk
        bankruptcy / CAPEX / political and regulatory risk.
    –   Factoring in equity risk private finance is costlier.
    –   Risks vary between private sector and taxpayer -
        contractor being ‘on time’ and the non-cash cost
        to taxpayers of a late bridge
Cost of finance debate 2

   Post financial crisis the gap is widening in
    countries like the UK but many of the risks of
    the specific projects are no greater than
    previously
   Small differences in cost can represent very
    large absolute amounts
Efficiency, innovation and the
‘only game in town’

   Only game in town – reduces competition /
    provides perverse incentives to bias bids –
    PPP almost always better than PSC
   Independent evidence on efficiency is mixed
    and on innovation is limited
   Efficiency often equated with ‘on time and
    budget’ but without consideration of actual
    total time taken or cost incurred
Risk transfer

   Risk transfer is absolutely central to the PPP rationale –
    argument is this off-sets the higher costs of finance.
   IMF – warning about overpricing of risk adding cost to PPP
   In practice:
     –   Difficult to find optimal allocations of risk (a/c rules tend to >
         inappropriate risk transfer)
     –   Demand risk very problematical
     –   Evidence on RT in practice is mixed
     –   Low penalties relative to total payment
     –   Inability or reluctance to enforce penalties
     –   Legally or practically difficult to terminate partnerships
Conclusions 1

   Experience of the UK’s transport PPPs:
    –   Rail projects failed to deliver the outputs despite receiving
        more subsidy than under public ownership
    –   Using the private sector as financial intermediary adds cost
        / complexity / bureaucracy and risk
    –   Partnerships have a higher cost of finance than
        conventional public procurement
    –   Risk transfer is supposedly from the state to the private
        sector but in practice is from the consortia to subcontractors
        and their work forces and to the public as users / tax payers.
Conclusions 2

   Internationally the capital intensive nature of
    transport means it is very difficult to achieve a return
    attractive to private sector – especially in a
    geographically comprehensive service
   Higher cost of finance is especially important in
    capital intensive projects
   Transport projects have wide ranging benefits that
    are greater than the benefits to users and investors –
    underinvestment by private sector classic case for
    public funding and financing – in the public interest.