FOSTERING SUSTAINABILITY AND INNOVATION THROUGH PUBLIC PRIVATE PARTNERSHIPS Barcelona, November 17 th 2015 FINANCING PPPS INTRANSPORT AND URBAN PROJECTS José Manuel Vassallo Associate Professor Universidad Politécnica de Madrid
What are PPPs? An Innovative approach to deliver public infrastructure and services through cooperation between the government and the private sector PPPs can be classified in: Institutional Contractual Design Build Finance Operate Transfer A single contractor manages the whole life cycle of the infrastructure asset
Characteristics of PPPs The asset or service is owned by the government The whole project cycle (design, construction, finance, maintenance an operation) is managed by a single company The operator is rewarded in terms of the service it provides (demand, availability, performance) rather than on the works it develops The project is financed, at least partially, by the private sector Risks are allocated among stakeholders to improve value for money
Value for money Value for money can be achieved through: Project on time delivery Incentives to reduce costs Incentives to provide a higher quality to the users Mitigation of risk through insurance
PPPs and efficiency Till now PPPs have been much focused on improving technical efficiency Providing a service at the lowest possible cost given a certain quality level There are a couple of points that are also important: The level of quality provided Allocative efficiency (optimal pricing approach from the social point of view), which is crucial when: Networks are complex There are different types of users Externalities are large
Why PPPs? PPPs make sense if they contribute to improve quality of life compared to alternative approaches Make the projects cheaper for users or taxpayers (Value for money) Encourage on time delivery of the project Improve the quality of the service provided PPPs do not have to be always the best solution for delivering any kind of infrastructure
Advantages and drawbacks of PPPs ADVANTAGES 1. Greater efficiency is expected because of the integration of the life cycle 2. Better quality is provided 3. Better governance structure of the project 4. Possibility of circumventing budgetary constraints for necessary works DRAWBACKS 1. Greater transaction costs caused by private financing 2. Greater financial prices (not necessarily social financial cost) 3. Possibility of being used with the sole objective of moving budgetary commitments forward to the future
Funding vs. Financing FUNDING refers to whom pays the project in the end: Users Taxpayers Beneficiaries (land owners, etc.) FINANCING refers to the original sources to invest: Public budget Infrastructure funds or state own corporations Private sources (equity, debt, etc.)
Funding vs. Financing II MECHANISMS FUNDING (ULTIMATE PAYER) TAXPAYERS BENEFICIARIES USERS ORIGINAL FINANCING PUBLIC BUDGET GOVERNMENT OWNED CORPORATION PRIVATE CORPORATION Conventional approach Shadow and Availability Payment approaches URBAN PPPs Concession approach
PPP revenue approaches Fares to the users The user pays for utilizing the facility Shadow fares (shadow toll) Availability payment The government pays on behalf of the users Rates may vary depending on demand The government pays in terms of the fulfillment off a set of performancebased indicators Hybrid approaches A combination of the previous approaches
Urban PPPs in the world I Amount of projects sorted by region (1984 2009) Source: Siemiatycki (2011), Environment and Planning A
Urban PPPs in the world I Source: Siemiatycki (2011), Environment and Planning A
Key aspects for promoting PPPs in Urban Areas I Physical connection Projects integrated in the network Risk allocation should be fair to the private sector Fare integration Management integration Demand risk is not bearable by the private sector in urban areas Right of way and license acquisition should be shared with the government
Risk allocation Classification of risks for the private sector PRIVATE SECTOR Probability of occurrence Determinability of probability function Potential Loss Measurable Non measurable UNBEAREABLE RISK SHAREABLE RISK MARKET RISK Very small Very High Small Approachable Medium-High Medium Determinable in a certain way Nondeterminable Medium- Bearable
TRAFFIC EVOLUTION IN SOME TOLL MOTORWAYS OF SPAIN Should traffic risk be allocated to the private sector?
Key aspects for promoting PPPs in Urban Areas II Distinction between users prices and PPP fees User prices according to allocative efficiency Use of price discrimination to promote social equity Cross subsidies Capturing positive externalities generated by the project Comercial rents Greater value of urban properties
Source: EMTA Barometer (2013) Massive public transport modes are usually loss making
Source: EMTA Barometer (2013) User fares are usually subsidized
Subsidies contribute to social equity and sustainability Source: Bueno, Vassallo, Herráiz (2013)
Congestion price approaches are being implemented STOCKHOLM LONDON SINGAPURE
Massive public transport modes are usually loss making Source: EMTA Barometer (2013)
Price discrimination approaches Metro extension to Barajas airport Infrastructure concessions 3 tickets for users who do not have the travel pass Managed lanes (USA) Express lanes free for 3+ occupants Variable charge to avoid congestion
Value Capture approaches: the case of Hong Kong Infrastructure investment associated to urban development Greater developable area allowed by the city Greater value of the squared meter because of the new infrastructure Value capture to finance the extension of metro lines and new stations
PPPs for intermodal connection: mobility hubs in Madrid I Location in the city
PPPs for intermodal connection: mobility hubs in Madrid II
Approach to manage cross subsidies in urban PPP projects Mechanisms to cross subsidize projects and promote flexible fares compatible with allocative efficiency User s fares according to allocative efficiency Payment based on performance Project 1 PPP Contractor 1 Metropolitan Project 2 PPP Contractor 2 Fund Project 3 PPP Contractor 3 Subsidies Other revenue Congestion charges Value capture
Summary of ideas PPP projects in urban areas are much more complex than conventional isolated PPP projects Preserving allocative efficiency in urban PPP projects is crucial by: Keeping a flexible pricing policy Separating users prices (based on allocative efficiency) from PPP fees (based on technical efficiency) Cross subsidies among modes and infrastructure may make sense from a social perspective A metropolitan revenue fund may be a good means of managing and coordinating these cross subsidies
Thank you! Further information: Josemanuel.vassallo@upm.es