“The person attempting to travel two roads at once will get nowhere.”
—Xun Zi, Chinese Philosopher, d. 237 BC
Welcome to the second installment of our walk through transport public-private partnerships (PPPs). Last edition we tackled ports and airports. This time we turn to roads and bridges (“R&B”—to save ink on spelling it out, plus it suggests a few cool catchphrases).
R&B is A to B: moving people and goods between fixed geographical points. It is more uni-dimensional than ports and airports, with only limited opportunity for revenues from tertiary services (like road side services) compared with other transport PPPs. Advance planning and studies are important for ports and airports, but for R&B they are critical. After all, a road is unlikely to surprise with super-profits. If the initial studies do not show its potential, it is unlikely to have potential.
But those early studies are especially vulnerable to the optimism bias that infects most demand surveys. As fixed links, R&B should be susceptible to clear traffic surveys. Demand assessments, however, are more art than science—requiring a careful balance of planned and likely economic growth, demographic changes, use changes, and improvements in linkages (ports, rail, airports, interconnecting roads, and competing roads).
Construction plays a particularly important role in R&B. Sponsor teams are usually led by the construction contractor, since that contractor is going to make large profits on the construction contract. This means the anchor investor may be particularly influenced by the profits to be earned during construction, more so than during operation. Government and lenders will want to ensure that these core investors remain committed to the success of the project over the long term, even if this is not financially efficient.
Operation is relatively straightforward, excluding electronic tolling and a few whizzy technologies, but the added value for government of a secure maintenance program is fundamental. In most countries R&B maintenance is poor. This costs the country, since replacing roads due to poor maintenance is about three times as expensive as maintaining them well, but road maintenance is easy to cut when budgets are lean or some other more exciting expenditure is proposed. The discipline of PPP maintenance can save a bundle for R&B.
For these reasons, R&B is less like financing a business (like airports and ports) and more like financing a service (like power generation, water treatment, hospital facilities, prison facilities, and similar operations). This means that assessing an investment in R&B focuses on construction cost, demand forecast, and tariff formulae. The latter is broadly divided between toll-based or availability payment-based revenue streams for the concessionaire. The former looks to users, the latter looks to contracting agency payments. Hybrids of the two include shadow tolls (where the contracting agency pays part or all of the toll that would otherwise be charged to users) and traffic/revenue guarantees (where the contracting agency compensates the concessionaire if traffic and/or revenues are insufficient).
As always, where government bears downside risk (risking part of the cost if the project does not do as well as hoped), government should benefit from upside (when the project does better than expected). This is often achieved through an escalating sharing of revenues above expected levels.
A few comments about R&B PPPs are in order, in reverse order of importance:
The private partner has a key role to play in R&B. While the technology for R&B construction is not overly sophisticated (with obvious exceptions of complex bridges, tunnels, elevated sections, and difficult soil conditions), the private partner can help save money through procurement efficiencies, construction efficiency, life-cycle maintenance/management, and a long-term perspective on the design of the R&B. Less critical but still important are the efficiencies available through operating practices, tolling technology, and cash management. (The volumes of cash managed through toll booths and other tolling mechanisms can be managed carefully to maximize value and reduce transaction costs where incentives are rightly designed.)
Private finance, as with most PPPs, provides additional sets of eyes to oversee project preparation, test project viability, and ensure careful implementation of an R&B project. Public procurement of R&B often results in cost over-runs, delays, and other complications related to lack of forward planning and analysis. While private financing of PPP requires more time and investment in early project preparation, these investments reap rewards in reducing the waste that can often result from public procurement. The benefit of private oversight and assessment is probably most obvious in testing the viability of projects—in particular project selection, alignment selection, and traffic forecasts. Private involvement helps to ensure that projects are driven by economic and commercial priorities rather than political preferences.
Public inputs into R&B are even more important than many other PPP projects. The government will provide essential aspects of an R&B project that the private sector will be less capable of delivering. For example:
- Demand for R&B services is intrinsically linked to government policy and actions. Road traffic will depend on economic growth, transport policy, toll regime, and competing transport links. It is therefore important that the government play a central role in managing demand risk and helping to ensure robust revenues for the project.
- The public sector will provide land, often large amounts of land, for the works, construction of the works, lay-down areas for construction material, and disposal of spoil from construction (in particular tunneling works). The government is well advised to acquire land before receiving bids to avoid delays (and associated liabilities) due to land acquisition complications. The government will also need to help with licenses and permits.
Most important to a successful R&B PPP is the partnership between public and private. The roles of the two are so closely entwined that the partnership becomes all the more critical to the success of an R&B PPP. R&B is not a stand-alone asset that provides a service. It is part of a network, linking roads, interchanges, and competing transport facilities. Therefore, the transport policy heavily influences the success or failure of an R&B PPP, and equally proper management of the R&B will influence what the government can do with its transport policy. Changes in policy will influence and be influenced by the success of the PPP, so the concessionaire needs to be closely consulted and may help guide the government when implementing new strategies and technology. For example, electronic tolling can help both government and concessionaire, but will need to be implemented in a manner that fits with the practices of both partners.
Ideally, design of R&B will be allocated to the private sector to benefit from value engineering, long life-cycle perspective, and latest technology. However, R&B, in particular bridges, can represent important public image issues. Government may want a say in the design and overall aesthetic. The entity responsible for regulating R&B construction (if there is one) may not be familiar with regulating privately managed R&B, creating extra risk for the private investor. The government may therefore wish to determine the basic design. This reduces the opportunity for private investors to influence design and achieve efficiencies, but may result in a more sustainable balance of risk. Nice stories about quick fix R&B through direct negotiations without extensive preparations are usually no more than nice stories, and will end up costing the government.
So, in summary, R&B is not for the fainthearted. It requires government involvement, advance planning, and in particular the three “L”s—land, land, and land. Money and time invested in these early preparations will accomplish the fourth, equally important “L,” leveraging significant benefits for everyone involved.