Project 4

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Foreword

Jean-Yves PERROT

In 1993, France’s Ministry of Public Works and Transportation, under the gui-dance of my predecessor Claude Martinand, published an initial collective work on the French experience , already at that time deeply-rooted and widely-practiced, in the area of private-sector financing and management of public infrastructure pro-jects.

Six years ago, this first book served to ignite and spur on a debate over the methods needed to associate the private sector in performing public service assign-ments. The French experience, featuring a broad-based approach applicable to a cross-section of services and infrastructure, proved to be quite original (even unique), against the backdrop of a worldwide economy still heavily and at times dogmati-cally championing total privatization as the sole alternative to public-sector facilities management.

Since then, the range of public-private partnerships, in terms of both geographic location and service sector, has continued to spread throughout the world.

A large number of diverse countries, stretching across all continents, have been holding international calls for tender in order to build facilities and run public servi-ces within a partnership framework, especially in water/sewerage and transportation. Energy production, waste handling/treatment and, to a broader extent, the environ-ment, telecommunications and public housing have all been managed using public-private partnerships, with the legal and financial configurations of such partnerships taking on a wide variety of forms.

Reliance upon a delegated management framework (whether a concession or another type of public-private partnership), as a means of improving the quality of public services, has thereby come to the fore as one of the basic tools in economic modernization. Moreover, this brand of partnership has helped refocus the role and resources of the public authority on its regulatory missions.

During these past six years, the debate over managing public services through delegation (in all its international, economic and legal dimensions) has both matured and become less vehement. No longer is it concentrated on the legitimacy of joint public-private intervention in satisfying public service or facility requirements, but rather on the most efficient manner in which such facilities and services can be set up and operated, via a veritable and well-balanced partnership between public authority and private operator. In conjunction with these developments, considerable advan-

1. DAEI (French Minstry of Public Works, Economic and International Affairs Division), Private Financing of Public Infrastructure, supervised by Claude Martinand, Paris, 1994.

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FINANCING OF MAJOR INFRASTRUCTURE AND PUBLIC SERVICE PROJECTS

ces (e.g. other publications, conferences, seminars, manuals) have allowed gaining greater insight into the topic.

French firms have participated extensively in this opening onto the world by demonstrating their longstanding tradition of involvement in public services within many countries. These firms have made the most of their practical experience of working in partnership with France’s public administration, as well as of their tech-nological prowess, in order to develop original formulae adapted to each context and each project. This book has been intended to draw upon the depth and richness of their collective experiences.

By its very nature, public-private partnership cannot stem from a single contrac-tual template, but instead must be assembled using lessons gleaned from past expe-rience. As such, it is incumbent upon us to share this experience with other public and private actors as far and wide as possible, in an effort to incite meaningful and beneficial exchanges. From a public authority’s standpoint, this book provides:– series of recommendations, reflecting the outcome of such practices and up-to-date realities;– the various processes during the life of a contract: preparation, award and execu-tion;– detailed descriptions of sector-specific parameters;– examples of successful partnerships conducted in various service sectors across the globe.

The Ministry’s Division of Economic and International Affairs has sought, by virtue of this latest book (which combines a broad range of contributions from com-pany sources, consultants, public authorities and financial advisers), to extend the geographic and sectorial scope of strategies related to public-private partnerships. This effort has also been intended to distinguish future trends shaping such par-tnerships, as regards pertinent European and French references (while highlighting successful ventures encountered the world over), in the aim of offering public autho-rities if not an actual delegated-management user’s manual, at least some sound gui-delines for building sector-specific partnerships.

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Outline

Foreword ........................................................................................................................................................................................................ 3Outline ............................................................................................................................................................................................................ 5Introduction .............................................................................................................................................................................................. 7 Summary ....................................................................................................................................................................................................... 9

I. PUBLIC-PRIVATE PARTNERSHIP IN THE CONSTRUCTION

AND MANAGEMENT OF MAJOR INFRASTUCTURE AND PUBLIC SERVICE

A. In favor of a pragmatic approach towards public-private partnership ....................... 17B. Ten years of public utility reforms: 7 lessons

(from privatization to public-private partnership) ............................................................................ 31

II. CONDITIONS FOR A SUCCESSFUL PUBLIC-PRIVATE PARTNERSHIP

A. The concessionary contract: a framework, a process, a contract ...................................... 43 B. Risk analysis and sharing: the key to a successful public-private

partnership ....................................................................................................................................................................................... 57C. The contract’s life cycle .................................................................................................................................................... 81D. The legal framework ........................................................................................................................................................... 91E. The financial approach .................................................................................................................................................. 103

III. CONCESSIONS IN THE FIELD OF TRANSPORTATION

A. Roads and road-related infrastructure ......................................................................................................... 125B. Public transit systems ...................................................................................................................................................... 169C. Ports .................................................................................................................................................................................................... 201D. Airports .......................................................................................................................................................................................... 219

IV. DELEGATED MANAGEMENT OF MUNICIPAL SERVICES

A. Municipal services: the stakes involved in delegation ............................................................... 245 B. Water and sanitation services ................................................................................................................................. 277C. Waste management ........................................................................................................................................................... 309

V. CLOSE UP: THEORETICAL FRAMEWORK

AND PERSPECTIVE OF MULTILATERAL ORGANIZATIONS

A. A draft typology of public-private partnerships ............................................................................... 333B. The European Commission’s point of view:

Mobilising partners for networks of tomorrow ................................................................................ 349C. Public-private partnership financing for European infrastructure:

The role of the European Investment Bank ......................................................................................... 355D. The World Bank’s point of view ....................................................................................................................... 363

LISTE OF CONTRIBUTING AUTHORS ............................................................................................................................... 377TABLE OF CONTENTS ................................................................................................................................................................... 383

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Introduction

Objectives of this book

As of the 16th century in France, public authorities began envisioning the use of private entities to perform, on behalf of and under the control of the authority itself, an economic activity aimed at public service provision or a contribution to the overall economy. The nation’s very first concession was granted to Adam de Craponne in 1554 for the construction of a canal.

These partnerships between public sector and private sector began to take on prominence in France towards the beginning of the 19th century, with the appearance of new public services, especially in the area of water supply. Private companies have been commissioned to treat and distribute water to the population as an economic undertaking on behalf of and under the control of appropriate public-sector authorities. The same would go on to happen in other public service areas, such as public transit.

Since the beginning of the 1990’s, the principle of public-private partnership has enjoyed, the world over, renewed success. A host of factors explain this regained interest, with the most predominant being: the heightened need for public services, in a context of limiting public-sector outlays, and a sharper analysis of the division of roles between public entity and private operators. In this vein, a pragmatic approach has taken shape, enabling greater overlap of both parties’ objectives for the modernization and improvement of public services, while transferring a portion of the taxpayer’s financial burden onto users.

The advent of public-private partnership can also be legitimized by the respective roles played by the public authority and the private operator. The former is responsible for ensuring the provision of services essential to the population’s economic and social well-being, in accordance with society’s expressed needs; while the latter seeks to carry out assigned missions in optimizing the cost-benefit ratio. The use of public-private partnership thus enables reconciling these two positions. Nonetheless, considerable insight into the process is a basic prerequisite; prior to calling upon a public-private partnership, the public authority must have a solid grasp of the potential advantages and inherent risks, and fully comprehend the process for enhancing a partnership’s success.

Public-private partnership has thus become a key issue for the beginning of the new millennium in the field of public-sector management worldwide. Its implementation necessitates in-depth preparation in order to develop a truly global approach. This book aims at underscoring the main characteristics associated with delegated management and concessions, as well as displaying their economic

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configurations, preparation conditions, contract-award procedures and execution. The presentation format includes both the general theoretical standpoint and a sector-by-sector analysis; each chapter closes with a series of recommendations addressed to public authorities interested in pursuing this mode of contracting.

Contents of the book

We have produced a book intended for several types of readers. As for content, background material critical to the success of partnerships, in terms of economic, legal and financial principles, has been raised in Part II. Parts III and IV examine these conditions for success in a pragmatic fashion, by economic sector, for the various modes of transportation and types of urban public services. Part V is aimed at sharpening some of the theoretical angles and gleaning the perception of multilateral organizations involved in such projects.

As for presentation, this book has been designed to accommodate a variety of reading approaches: from a quick skim to a more thorough perusal. Each chapter is led off by a brief abstract which provides an overview of its contents. A section has been included at the end to highlight the set of recommendations addressed to public authorities seeking to enter into partnerships with private operators. Chapters are also accompanied, whenever necessary, by tables or summary diagrams of the key points discussed. In a number of cases, inserts allow grasping a particular subject in greater detail; in the sector-specific chapters, descriptions of example set-ups help illustrate the material presented.

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Summary

Gautier CHATELUS

Part I – Introduction

The first (introductory) part of this book is aimed at discerning the key stakes involved in public-private partnerships. The first chapter (I-A) portrays the poten-tial advantages generated by these partnerships, while cautioning against an overly-idealistic vision and stressing that their success depends, above all else, on both the degree of partner involvement and the project’s intrinsic quality.

Chapter I-B presents 7 general conclusions which can be drawn from experience with public-private partnerships over the past ten years. These conclusions encom-pass: heightened pressures to justify increased reliance on public-private partnerships; the growing emphasis placed on pragmatic approaches as opposed to public-private partnership “models”; the importance of an ad hoc approach to public-private par-tnership able to respond to narrowly-defined problems; the institutional environ-ment’s fundamental role; the life cycle of public-private partnerships projects; the necessity of a contract regulator; and the need to take contractual procedures through to the stage of implementation quickly.

Part II – Conditions for a successful public-private partnership

This part is devoted to a cross-sector analysis of the basic conditions necessary for a partnership to succeed. The introductory chapter (II-A) presents the contrac-ting process and the features of the contract itself. The contracting process must begin by defining a host framework for the public-private partnerships and then developing the specific contract. It is essential to distinguish between the concessio-nary contract containing a public service-delegation component and a conventional public procurement contract. The contracting process must be laid out clearly, yet incorporate performance objectives. The chapter then turns to the nature of the con-tract, which must be firmly tied to: a detailed description of the works program, the operating conditions stipulated for the public service, and the terms governing contract termination. The guiding principles always focus on the contractual equili-brium between partners and the guarantee of public service provision.

The second chapter (II-B) goes right to the heart of project analysis, which entails the evaluation of risks, their limitation and the breakdown of those risks impos-sible to contain. This exercise, valid for all public-private partnership projects and applicable over the long run, is fundamental to the project’s overall configuration. Many risks can be mitigated thanks to effective measures on the institutional and regulatory environment and a solid project organization. Others need to be split


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between partners in accordance with the principle of risk assignment to the party most capable of bearing the risk, depending both on the benefit derived from the project and on the notion of contractual equilibrium.

Chapter II-C focuses on the primary parameter influencing a partnership: the contract’s life cycle. As opposed to the classical public procurement contract, a par-tnership is entered into for the long haul and engenders relations between public authority and private operator that last a good number of years, and in most cases span decades. Such a contract therefore must be set up to adapt to the inevitable changes affecting its domain of application. This chapter highlights the characteris-tics of the contract life cycle and their ultimate impact on both the preparation of the economic and institutional framework up front and the options available following the award procedure.

Chapter II-D helps clarify the project’s legal-related concerns and describes the set of legal clauses essential to the preparation of a regulatory and institutional envi-ronment for awarding contracts and ensuring successful partnerships. It also goes into detail on the basic clauses not to be overlooked during the drafting of a contract. The chapter’s underlying notion is the lack of a single universal public-private par-tnerships model; the ensuing partnership and clauses may be applied within different types of national legal systems, while maintaining the potential to adapt the contract to a particular context.

To close this Part, Chapter II-E is aimed at presenting the appropriate financial approach to public-private partnerships. This approach cannot be merely based on conventional banking tools due to the level of risk involved from the banks’ stand-point and the length of contractual periods. The financial organizations working in this field have thus devised a new set of sophisticated tools. Yet, even the most favo-rable financing set-up can only function successfully for projects with solid economic justification.

Part III – Concessions in the field of transportation

Parts III and IV lay out a sector-by-sector approach organized around two major themes: transportation and municipal services. Public-private partnerships do not entail use of a single “recipe”, but rather must be applied on a case-by-case basis. Individual sectors display their own set of specificities, and the experience acquired in each allows identifying how best to integrate the general principles described in Part I.

Part III addresses the broad domain of transportation, which must be conside-red both as an economic activity in and of itself and as a support service for the economy. Consequently, owing to the magnitude of capital investments involved as well as to the fact that users can be required to pay for services, the public-private

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partnership proves a particularly well-adapted formula. Four sectors have been ana-lyzed in-depth: roads, public transit, airports and ports.

Chapter III-A discusses roads and road-related infrastructure. This sector pre-sents contrasting aspects: simple in the approach (the primary objective of a public-private partnership in this sector is to finance infrastructure), yet difficult due to very sizable investment outlays coupled with highly-uncertain and imprecise revenue projections. Public-sector subsidies are often justified and essential. A key to toll road, bridge and tunnel projects, especially in urban settings, concerns the social acceptability of paying tolls.

Chapter III-B discusses public transit systems. In this case, the partnership may be focused not only on the infrastructure component, but on service operations as well. Such services often exhibit low profitability levels, yet remain essential to urban cohesion (at least as far as urban public transit is concerned). Concessionary con-tracts can thereby incorporate a variety of elements. Rail operating franchises enable optimizing the use of infrastructure. New high-speed train networks have to be desi-gned from an overall standpoint, so as to enhance compatibility between infrastruc-ture, rolling stock and operations; such projects, however, necessitate considerable subsidization up front. Tramway or metro systems can be handled using different types of project set-ups, with varying doses of management delegation.

Chapter III-C takes a close look at port systems. Their complexity lies in the multiplicity of agreements relative to two functions: port authority (regulatory) and operator (industrial and commercial). Ports can be divided into three main catego-ries, depending on the level of delegation exercised: operator port, tool port and lan-dlord port. The selected model must be well-adapted to local conditions regarding competition, traffic volumes handled, etc.

Chapter III-D presents the characteristics of airport systems. This category of transportation infrastructure has undoubtedly come to represent the most profitable and the most straightforward to implement as concessions. The concessionaire is entrusted with the status of airport authority and must coordinate operations with four types of entities: airline companies, passengers (and their accompanying par-ties), non-aeronautical commercial activities, and the host of regulatory public ser-vices (airport security, customs, air traffic control, etc.). This assemblage requires a truly multi-faceted partnership established over the long term.

Part IV – Delegated management of municipal services

Part IV describes public-private partnerships principles pertaining to municipal services. Though the nature of such public-oriented services remains heavily under the responsibility of the competent local public authority, the economic activities they engender may be delegated. Quite often, these services associate a local facility with a specific service provision, which in general comprises the very core of the acti-

Summary


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vity. Use of the generic term “delegated management” for these service partnerships is definitely most appropriate.

Chapter IV-A discusses the entire array of municipal services. As a result of the diversity encountered among these services, it would have been difficult to devote a separate chapter to each. Four major categories have nonetheless been assembled:– environmental protection services (water and waste, which are developed in this book in two distinct subsequent chapters);– economic services, both basic (energy, telecommunications) and specific (public fairs, tourism, slaughterhouses, etc.), and all services related to streets and public space (street lighting, public amenities, etc.);– construction and maintenance of public buildings;– recreational services (athletic, cultural, etc.).

An insert included in this chapter provides a closer glimpse at electricity supply and telecommunications services.

Chapter IV-B focuses more specifically on municipal water services (production, distribution and sewerage). This sector illustrates to a great extent the multitude of issues arising in service-oriented public-private partnership projects. Though a pro-duction function is very often present (e.g. water treatment plant), the critical feature herein revolves around the provision of an absolutely vital service (water supply), with its array of issues pertaining to user relations, the social acceptability of water service rates, quality of service, etc. On the other hand, this sector includes services intended for the locality as a whole, such as sewerage. A wide variety of delegated-management approaches are available, extending from a simple Build, Operate and Transfer “BOT” contract (for a treatment plant) or a service management contract (for overseeing distribution) all the way to the overarching system concession (with varying levels of investment exposure).

This part closes with Chapter IV-C, which examines the environmental services, and more precisely those services related to the entire waste sector. This sector is currently undergoing tremendous growth and features an emphasis on innovation and heavy capital investment. Service is provided to the local population, but often indirectly through a local authority (as opposed to water, whereby the user is served directly). As is the case with water, a combination of pure service activities (waste collection) and more industrial activities (treatment) typifies this sector. Moreover, these industrial activities involve a strong degree of product reuse and may combine provision of services for both public and private clients.

Part V – Close-up

The final part of the book serves to gain a more in-depth perspective on the sub-ject. To lead off, a more theoretical chapter allows insisting upon the rationale and need for making use of a panoply of public-private partnership models, adapted to specific economic and political contexts and stressing certain invariant parameters

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encountered in all forms of public-private partnership. Accompanying chapters pre-sent the points of view of several eminent international organizations. The opinions expressed by the World Bank, the European Investment Bank and the European Commission have all been assembled here.

Summary

I

PUBLIC-PRIVATE PARTNERSHIP

IN THE CONSTRUCTION AND MANAGEMENT

OF MAJOR INFRASTRUCTURE

AND PUBLIC SERVICES

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1. The public-private partnership: seeking an equilibrium for generating mutual benefits

Partnership, or partner: this term refers first to the person chosen to share a dance, then to an ally in a game and finally to a teammate in bringing a project to fruition. The definition provided in one of the most reputed dictionaries is a rather interesting one in both its scope and evolution.

As the saying goes: “It takes two to tango”

In the book produced in 1993 by the International and Economic Affairs Divi-sion of the Ministry of Public Works, Transport and Housing (under the supervision of Claude Martinand), the comparison was drawn between public-private partner-ship and a marriage. Etymologically speaking, it can also be compared to a dance, like the tango. Such partnerships, of immense utility in modernizing a country’s public services and offering a whole host of advantages for both public authority and private company alike, should however not be presented as a risk-free panacea.

The first utopia would be to presume that a public-private partnership features a “perfect equilibrium” in the harmony achieved between two parties. Like in dance, beyond the visual impression of harmony, the two partners are not altogether equal: there is always a leader, the one who “energizes”, sets the tempo, leads.

The second utopia lies in believing or inciting the belief that a public-private partnership yields a “state of grace” (objective) which all project actors, whether public or private, would have reached through steadfast determination and expe-rience. Such a view is to be completely avoided: the historical assessment provided in this book is a cruel reminder for all those who champion public-private partnerships that this “newfangled” approach is merely a rehash of the same tried and true for-mula.

These two preliminary remarks are not intended to rebuke public authorities for utilizing such public-private partnership formulae, but rather to highlight the fact that each application of public-private partnership must be designed and perceived as one of the most effective solutions to a multi-faceted problem (building a piece of infrastructure or setting up a public service) involving financial constraints. Its

A. IN FAVOR OF A PRAGMATIC APPROACH TOWARDS PUBLIC-PRIVATE

PARTNERSHIP

Corinne NAMBLARD

FINANCING OF MAJOR INFRSTRUCTURE AND PUBLIC SERVICE PROJECTS

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implementation however requires the full-fledged support and a sizable and lasting investment on the part of both partners.

“A new name, but the same old game”: PPP (Public-Private Partnership), a new acronym?

Regardless of the titles and formulae chosen, the objectives have never really changed. Even the term Public-Private Partnership (or PPP for short) is just another recent buzzword for encompassing a broad array of tools that enable associating pri-vate firms and public authorities in the completion of public service assignments. Included herein would be the various infrastructure concession systems introduced in France during the 16th century or the delegated management of France’s urban services, which began to thrive towards the end of the 19th century, along with the panoply of formulae developed throughout the world over this last part of the 20th century in response to changes in local contexts (with, on occasion, preference being given to the extreme option of total privatization).

The second section of this article will thus be devoted to the benefits provided by public-private partnerships in this quest to satisfy the same basic set of objectives.

Yet, as stressed above, all temptation to idealize such approaches must be resisted. As such, an effort to demystify this notion would be most opportune in order to hone a pragmatic approach focused on identifying a tangible basis for advancing and executing these desperately-required projects (regardless of their size and level of sophistication, in both industrialized and developing countries). The third section of this chapter will undertake an assessment along these lines.

In sum, it is unavoidable to focus on the existence and evolution of public-private partnership models and to examine how the “French model” is positioned (and evol-ves) either in France or internationally, albeit the term “model” has been inappro-priately used here to merely reflect a solid and conclusive experience stemming from longstanding tradition. The last section reviews these notions and proposes several orientations for future initiatives, including potential courses of action.

2. The primary advantages from the public authority’s standpoint of utilizing public-private partnership formulae

2.1 A Partnership that provides services of the highest quality at the lowest cost to the public

At the outset, it is fundamental to observe that reliance upon public-private par-tnership for the provision of public services and infrastructure represents a solution

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offering a considerable number advantages, yet one which remains difficult to imple-ment and fully accompany throughout its duration.

Public-private partnership set-ups are, by their very nature, partnerships built between public authorities and private-sector firms/investors in the overall aim of designing, planning, financing, building and operating infrastructure projects, which are usually developed through more conventional market mechanisms, such as public procurement procedures.

Public-private partnership does not only signify reliance upon the private sector for financing capital investment projects on the basis of revenue streams to be gener-ated by the future facility, but also incorporates the use of private-sector skill and managerial expertise in building and operating public service projects more effi-ciently throughout the project life cycle. In this respect, the core of a public-private partnership encompasses more the notion of service provision than simply infra-structure financing and construction.

This observation leads to describing the basic advantages associated with the introduction of a public-private partnership approach, along with the implications of such an approach in terms of the public authority’s role.

2.2. Financial and budgetary benefits for the State

2.2.1. Easing budgetary constraints

By making it possible to employ private-sector financing, public-private partner-ship enables developing some projects at little or even no expense on the part of the public authority (albeit with the need in most instances for a certain level of project subsidization). The cost of service provision can often be transferred onto users (e.g. road tolls, water bills) by charging rates close to real costs, provided an adequate user acceptance campaign has been conducted beforehand – a task expected of the public authority. Some financially-profitable projects serve to generate new resources by means of sharing profits between operator and public authority (e.g. tolls, taxes, etc.).

Projects can thereby be developed without increasing debt exposure or overex-tending the national budget. Public resources are then available for meeting other policy objectives, such as education or health. As a result, a country’s image – or even its financial rating – gets upgraded, which in turn makes capital markets less expensive to access and foreign investment easier to attract.

2.2.2. “Value for money” issues

In addition to easing budgetary constraints, the use of effective public-private partnership set-ups – provided they have been applied to well-suited projects – allows optimizing project impacts while raising profitability for a given level of investment,

In favor of a pragmatic approach towards public-private partnership


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in comparison with a basic public procurement contract. Such advantages are mani-fested in the following aspects:– better coordination and greater synergy between the phases of design, construction and operations, under the condition that a sole tender be held for all three phases together;– an innovative design, the application of reengineering principles and efficient man-agement techniques;– emphasis placed on the quality of service offered to the user-customer;– an approach aimed at minimizing total project costs throughout the entire project life cycle (capital investment + maintenance + operations);– a more effective use of capital, coupled with the generation of complementary revenue.

2.2.3. Optimal allocation and transfer of part of the risks onto the private sector

Public-private partnershi-type projects almost always comprise a high level of risk, due to: the magnitude of the financial stakes involved, uncertainties over con-struction and operating costs, and revenue-related uncertainties. A partnership-based project organization relies upon a balanced allocation of these risks (once they have been properly identified) and enables transferring a certain portion of them onto the private operator when said operator is better able to shoulder them than the public authority. In return, the public authority can significantly reduce its risk exposure (even though certain risks must remain on the authority’s side), while overseeing project optimization efforts. The analysis, mitigation and allocation of a project’s risks will be discussed in Chapter II-B further on.

2.2.4. A realistic evaluation and control of costs

A public-private partnership set-up enables public authorities to better evaluate a project’s actual cost. A precise and realistic assessment of costs is of fundamental importance to project sponsors with respect to attracting financing, both on the equity and borrowing side. Public-private partnership also enables preventing against most types of cost overruns encountered all too often in major infrastructure projects. Indeed, by conferring a broad range of responsibilities upon the private public-pri-vate partnership partner, it becomes possible to avoid underestimating actual project-related costs early on in the process and, at the same time, to tighten cost (and schedule) controls by virtue of the bond developed between project builder, financial sponsor and operator. This actual cost then serves as a benchmark for all subsequent improvements to the quality and efficiency of other public services.

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2.3. Economic and social benefits

Should the primary concern of actors appear exclusively oriented towards “finan-cial” considerations, the momentum of a public-private partnership project may eventually stall. Of critical importance herein is for the economic and social benefits to remain at the core of the project’s rationale, first and foremost because the project (to be financed in large part from operating revenue) must be designed from the standpoint of obtaining the best service at the most competitive price in meeting the needs of the largest customer base.

A public-private partnership’s underlying principle stems from the fact that the public authority remains responsible for service provided to the public, without nec-essarily being responsible for the corresponding investment. By means of the public-private partnership set-up, the public authority is therefore relieved of all investment-related obligations and able to concentrate on service quality control, while the pri-vate operator seeks to optimize its capital outlay in its provision of service at this specified level of quality. Furthermore, by extension the user becomes a customer, and the operator is thus in a situation of having to optimize the quality of service offered.

2.3.1. A streamlined construction schedule and reliable project implementation able to enhance economic development

Whenever a project is deemed beneficial to society, a public-private partnership set-up allows speeding up both implementation and construction. In this respect, it depends to a much lesser extent on budgetary resources, a condition which often leads to project postponement; it then incorporates a more political dimension. This accelerated construction schedule, in turn, makes it possible to realize benefits more quickly for both the private company and the politicians backing such projects. This perspective remains valid regardless of the level of development of the countries which implement public-private partnership projects.

2.3.2. Modernization of the economy and indirect benefits

By accelerating project implementation, these types of project set-ups help stim-ulate economic modernization as well: infrastructure gets built and new technolo-gies introduced more quickly. Given their service quality-oriented implementation, projects (construction + operations) are better able to respond to demand and adapt fast to changes in demand, thereby giving rise to a more dynamic modernization of the economy. Sizable indirect benefits for the country’s overall economic develop-ment are engendered as a result.



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2.3.3. Access to financial markets, combined with the development of local financial markets

Reliance upon private-sector financing also displays a decisively beneficial impact from a macroeconomic standpoint for developing countries. Such initiatives allow improving access to international financial markets, by means of: attracting interna-tional capital; strengthening the country’s image in the capital markets, and utilizing well-renowned operators enjoying special access to these markets.

In the long run, this reliance also enables developing a local financial market. Complex project configurations imply a number of financing sources and often act to catalyze the local market, which is then led to modernize (or evolve) and adapt.

2.3.4. Social benefits: improvements in services to local residents

By refocusing the role of the public authority, in enabling it to better identify its expenses and in scaling back budget allocations, major public-private partnership projects allow better earmarking resources for financing the unprofitable portion of a project’s public service provision. Yet, for the most part, financial resources are freed up for other public services not compatible with the public-private partnership framework (health, education, social welfare, etc.). As such, local public agencies are able to channel resources and energy into their social service missions.

Furthermore, some of the case studies developed in Parts III and IV of this book reveal that public-private partnership set-ups can provide highly-innovative solutions for accommodating the less well-off population segments (e.g. water supply in La Paz or Manila, waste services in Caracas).

2.3.5. Sights set on sustainable and environmentally-compatible development

As opposed to a commonly-held misconception, involvement of the private sector (within the scope of a public-private partnership) may actually enhance the environ-mental aspects associated with a development project, from two vantage points. First of all, the creation and expansion of environmental services (primarily sewerage and waste removal/treatment) has become a fundamental component of any sustainable development program. The infrastructure needed to operate such services requires sizable capital investment, and collection functions (as regards waste) must be run under flexible conditions. In this vein, a public-private partnershipapproach allows creating these services more quickly and efficiently at a considerably lower cost for public-sector budgets.

The second positive environmental impact of public-private partnershippertains to the involvement, across the entire range of public services, of major international corporations with access to the most up-to-date and “environment-friendly” tech-nologies. These corporate groups are increasingly cognizant of environment-related needs (noise control, air pollution mitigation) and have considerable experiencing

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adapting to the strictest of regulatory systems found throughout the world. Moreo-ver, they are capable of innovating and tailoring their service provision to changes in environmental demands. Building a partnership between public authority and private operators enables designing solutions better adapted to reconciling service quality demands, the economic profiles of both users and the public authority, and environmental imperatives.

2.3.6. Refocusing the role of the State on its regulatory functions

By relieving the public authority of its role of service operator, the public-pri-vate partnershipgives the authority the opportunity to pursue its regulatory mission exclusively, which may consist of more accurately identifying public service demands and their corresponding costs. In this manner, the authority is in a position to effec-tively assess the optimal level of service provision desired by the society, along with the associated cost, in order to reach an appropriate tradeoff between economic and social efficiency. Public-private partnershipset-ups also make it possible to determine users’ «ability to pay» threshold as well as the amount of subsidies necessary to main-tain unprofitable services deemed of public interest: the aim herein is to optimize financing of such services or at least to initiate a critical examination of this topic.

2.3.7. Technological benefits

Public-private project partnerships serve to attract high-level experts who have already acquired broad international experience: builders, operators, along with spe-cialists and consultants in the engineering, finance and legal fields. While this high-level expertise is naturally exhibited by the private partner, it must also be accessible for the public authority, either in-house or through retained advisers. The resultant transfer in technology or know-how turns out to be significant from several points of view:– construction and operating systems (the most modern techniques can be proposed in a way that has been adapted to meet local conditions);– project and operations management;– financial engineering;– institutional engineering;– etc.

This transfer in technology and know-how exerts an impact not only on local firms, whether directly involved in the project or not (by means of benchmarking for industry-wide standards), but also on the administrative agencies responsible for monitoring the project, local financial institutions and other context-specific actors. Another important factor pertains to the training of local personnel. Within a part-nership involving an international consortium, foreign firms will first seek to rely upon local personnel which it can train at the outset of the project, therefore leaving



24

on site just a minimum number of foreign office executive staff beyond the transition phase.

2.4. The political benefits

2.4.1. A new role for the public authority

The political benefits also prove to be significant. By refocusing public authority action on its regulatory missions, a public-private partnership strategy transforms the authority’s role from a service owner/operator into a regulator and controller. This newfound role then provides the opportunity for promoting efficient demand-oriented services of social benefit. The public authority comes out a winner by virtue of providing a better quality of service, while concentrating its resources on social welfare issues. In addition, the introduction of a public-private partnershipallows rethinking the breakdown of public vs. private roles outside the confines of a purely dualistic mindset.

This political advantage, however, may backfire if the public-private partnership is not applied under adequate conditions and if the State has not procured the means for: establishing its objectives realistically, preparing its agencies and institutions for the successful implementation of public-private partnership formulae, and in par-ticular conducting effective regulatory action.

2.4.2. Allocation and not “abdication”

Although the term privatization sometimes gets abusively used in public-private partnership cases, keep in mind that a public-private partnership is not a privatiza-tion program. Rather, it serves to attract private investors without abdicating public service missions to the benefit of private concerns. In sum, the public-private par-tnership can be defined as the delegation of a public service provision to a private operator for a given period of time. In no way does it alter the public sector’s owner-ship rights to the service infrastructure (as those facilities existing prior to the conces-sionary contract as well as those built during the concession return under public authority possession upon contract expiration). The authority maintains both its role of shaping public service missions and its regulatory oversight. Moreover, this process is indeed reversible, either at the end of the stipulated contract period or (in exceptional cases of serious conflict) during the contract’s execution. The public-private partnership approach thereby allows retaining the “public” essence of these services while steadfastly refuting all accusations of “selling off ” national public assets (or service activities) to foreign interests or third parties.

2.4.3. Project stability

The social and economic advantages described above exert obvious impacts on a country’s economic, hence political, stability. For one thing, contracts are signed

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for periods exceeding the terms of elected officials. As a result, the public services considered tend to be less sensitive to both direct and indirect “electoral” effects. The parameters of maintenance and quality of service are less likely to be subjected to uncertainty, and projects will be required to display a tangible socioeconomic value in order to be selected.

Secondly, by enhancing the quality of public services without drastically increas-ing fiscal pressures, public-private partnership projects are able to instill economic well-being in addition to social stability. Here again, any hasty introduction of a public-private partnership-type partnership must be avoided: taking the time neces-sary to prepare both the population and local administration and to plan out the transition periods is crucial to ensure not only acceptance of the notion that one should pay for service (at least in part), but also an appropriate regulatory framework to prevent against abusive practices.

3. A therapeutic infusion of reality

3.1. No miracle solution exists.

It should start to become clear by now: public-private partnership can provide a number of benefits in the domain of public interest projects. This type of set-up often represents a more efficient alternative to the conventional public procurement contract formulae for projects featuring a sizable “service” component. But be advised of the dangers in simply jumping on the bandwagon or blindly believing in the exist-ence of a new miracle solution which – on its own – enables localities or the State to realize all their projects without investing any effort, time or money.

The public-private partnership tool remains complex to implement and by itself cannot take any project and turn it profitable. The bottom line is to recognize that a public service or infrastructure project devoid of any real socioeconomic value cannot be taken to fruition by virtue of merely introducing a public-private partnership structure. In order to be deemed viable, a public-private partnership project must above all fulfill the prerequisite (yet not entirely sufficient) condition of presenting an adequate level of socioeconomic profitability, i.e. combining utility for society with economic feasibility.

3.2. A contract between a public administrative entity and a private operator

3.2.1. Instituting a basic contractual relationship between public authority and private firm

Once these preliminary remarks have been fully incorporated, the public-private partnership constitutes in the end the formalization of a relationship, via a con-tract, between a public authority and a private builder/operator. As highlighted by



26

Rémy Prud’homme in Chapter V-A of this book, all public action implies privately-generated material supplies in one way or another (with the minimum consisting of outright public-sector procurement).

As with any contract between a public entity and a private firm, both partners are seeking to gain from the relationship. The public authority is looking to maxi-mize the socioeconomic profitability of public-sector investment (i.e. optimizing the cost-to-benefit ratio from society’s standpoint). The private operator, on the other hand, is looking to maximize its financial profit (i.e. increasing the return on capital outlay).

These objectives overlap to some degree (seeing the project succeed) while diverge otherwise (how to share project-induced benefits): a discussion is thereby held both to determine how best to achieve overlapping objectives and to strike a balance (through vying for leverage) in dividing project benefits. In conventional public pro-curement contracts, this bipolar confrontation is simplified within the scope of the tender procedure and competitive bidding process: the public authority establishes both the project’s objectives and set of specifications, while the bids received from candidate firms serve to determine the price level, hence the breakdown, of benefits.

3.2.2. Who actually leads this public-private dance?

The public-private partnership approach is a complex one, by virtue of shared risks and benefits against the backdrop of an evolving long-term relationship. None-theless, this “tango” gets choreographed as a real tug of war as regards the diverging objectives. Two overlapping and interrelated factors (yet subject to widely-varying interpretations) set this dance’s tempo: time and money.

For the public authority, the chosen form of public-private partnership must allow developing and implementing the necessary infrastructure without excess budget pressures and in a timely manner. For the private operator/builder, the key is to be able to perform its activity at an acceptable level of remuneration. If the user is solvent and if his propensity to pay for service enables covering production costs, it may be envisaged to pass on the entire cost to users. This situation reflects a profitable public service and the critical issue then turns to ascertaining whether a potential revenue stream should be tapped and split between operator and delegating authority. Such is typically the case with airports and certain kinds of water distribution services. This dance-tug of war thereby focuses both partners on the amount to be paid for supplying and operating the service. On the other hand, both parties share the same impetus to accelerate the start-up of service operations as much as possible.

In other cases, the service proves to be of intrinsic value for society (socioeco-nomically, but not financially, profitable), i.e. users alone are not able (or willing) to cover production costs. Such is the case with a number of toll roads (not all), urban transit systems and rail services. In these instances, it becomes necessary for the public authority to award a subsidy, either at the beginning of the construction

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phase or on a proportional basis following start-up of operations. When a subsidy is involved, the financial discussion is centered on the amount to be offered (and, in direct correlation, on the partners’ respective risk-bearing thresholds). However, a second element then comes into play: time. In most cases, the private sector infuses capital investment at the outset and thus prefers operations to start up as quickly as possible once construction has gotten underway. In particular, the private partner will be incited to complete project construction ahead of schedule whenever feasible. Similarly, once the tender procedure has been held, the private builder/operator has every interest in seeing the process advance without delay.

In contrast, this issue is much less straightforward from the standpoint of the public authority. For a combination of socioeconomic and political reasons, the authority would prefer the project to be built quickly, or at least to be able to announce a timely construction schedule. This impetus often gives rise to projects being announced and tender procedures held before the “maturation period” has been completed. Consequently, the tender process runs the risk of getting bogged down due to the project’s poor technical preparation and the public authority’s inca-pacity to set the course right. Moreover, from a budgetary standpoint, the authority would be better served by putting off the tender to enable spreading public spending over a longer period and, to a certain extent, reducing the subsidy amount (since, in most cases, demand increases over time with respect to both service volumes and user solvency). The authority is thereby tempted to procrastinate either during the tender process (which sometimes gets launched prematurely, again for political reasons) or through obstructing a speedy project implementation (e.g. by holding up certain vital administrative procedures).

This conflict over timing and schedules can adversely impact the project in that it engenders heavy surcharges which get passed on not only to the operator, but also to the users and the authority either directly or indirectly. Such surcharges are to be avoided by effectively preparing the project and its financing plan ahead of time.

3.3. The sharing of risks: reality or illusion?

Time and money therefore serve to drive the decisions and negotiations involved in building Partnerships. The discussions held at this stage get reflected in the project’s organization, which is based on the notion of “risk sharing”. Chapter II-B provides an in-depth examination of this notion’s application.

At this point, only the importance of this principle really needs to be stressed, along with its limitations. The breakdown of risks is after all what distinguishes a public-private partnership from a conventional public procurement contract: these risks may take on a wide variety of forms, anywhere from the basic construction risk



28

(a water treatment or waste plant BOT) to the full-fledged construction/commercial operations risk (State Highway 91 in California).

In basic terms, the project itself must dictate how risks are to be divided to best ensure maintaining overall equilibrium. It must be kept in mind that any assump-tion of risk necessitates some type of payment. The sharing of risks is not to be considered like a transfer of risk free of charge from the authority to the private partner, but rather a more optimal allocation of risks among partners based on their respective risk-bearing capacities. This feature also signifies that the cost associated with a given level of risk assumption is sometimes the factor being minimized in a public-private partnership set-up. As an example, the construction/operations risk may be controlled to a large extent by the private partner, hence the private partner’s perceived low cost for providing protection against this risk (implicitly included in the construction price). On the other hand, the commercial risk is often quite sig-nificant and the cost of its assumption by the private partner may prove to be rather high (which would engender a high contract price and an even higher subsidy should the project happen to be unprofitable). If the authority were to absorb this risk, it might wind up having to pay out compensation in the event of inaccurate traffic or use forecasts. Yet, justification could be found for a project carrying with it strong socioeconomic advantages.

In the end, the sharing of risks is not a miracle solution, but instead a means for optimizing a project with respect not only to the technical and service quality options, but to the cost of protecting against inherent risks as well. In this vein, the approach recommended via the English PFI (Private Finance Initiative) framework, despite other rather severe limitations, seems most worthwhile.

Furthermore, it is quite comforting to recognize that the most dynamic private firms on the international scene are now capable of citing the various public-private partnership “approaches” as references of their past successes. This continual enrich-ment and overlapping of experience are of great benefit by providing real-life case studies for assessing the breakdown of risks/costs, the cornerstone of all public-pri-vate partnershipprojects.

4. Public-private partnership projects cannot be integrated intoa strictly-deterministic model, but instead must be adaptedto the local context and allowed to evolve over time.

As indicated above, France’s experience with various forms of public-private part-nership is indeed longstanding. As recalled in the Ministry of Public Works, Trans-port and Housing’s publication produced under the guidance of Claude Martinand, this manifold experience has often been channeled into the notion of a “French model”. The term model is most certainly a misnomer since the very nature of

29

public-private partnership does not in any way suggest the application of a model. A public-private partnership’s emphasis lies in an experience requiring adaptation to the individual project and its unique context: as opposed to a basic public procure-ment contract, the public-private partnership cannot be easily standardized accord-ing to a strict set of criteria.

This statement should not be construed as license to do anything and everything. This book has been intended to demonstrate that it is possible and even necessary to develop strict approaches, yet adapted to each individual case, on the basis of a set of economic, legal, ethical, administrative and financial principles.

In France, the strong tradition of relying upon concessions has led to setting up an efficient overall system, some elements of which however have been progressively criticized within the scope of European integration. Nonetheless, the pertinence of neither concessions nor the concept of delegated management has been challenged; rather, implementation practices were deemed not entirely adapted to the evolution in the economic and institutional context. It has thus been necessary to modernize the system in the aim of ensuring consistency: the corresponding steps are currently underway in France.

This process has been facilitated by the fact that the most active French compa-nies in the domain of concessions have built up their operations abroad and, as such, have been able to tailor public-private partnership implementation practices to sat-isfy a wide array of institutional frameworks.

Regular and ongoing adaptation of experience gained in the area of public-pri-vate partnerships is thereby necessary, while not overlooking the founding principles which remain unchanged from one project to the next.

5. A few recommendations for ensuring effective partnerships

In the book’s following chapters, the various aspects of public-private partner-ships will be discussed and a series of pertinent recommendations will be derived. We will focus herein on the general approach to be employed for ensuring a successful public-private partnership.

First of all, it is essential to reinstate the good name of the term partner. Each member of a partnership is obviously promoting an agenda which cannot (and must not) totally overlap. Nonetheless, the common objective of all partners is to con-struct in the most efficient manner and at the lowest cost a piece of public infra-structure, and then to provide service operations under the most optimal conditions. Common interest therefore dictates that all public service projects be completed and operate in accordance with contractual specifications.

As such, an approach must be adopted which accommodates the interests of each party to the greatest extent possible by means of drawing commonalities from these diverse interests. At the same time, each actor must be able to defend a clear and



30

well-founded position regarding the various points of divergence, so as to stream-line negotiations in the aim of reaching the fairest and most judicious compromises between potential economic gain, incumbent costs and assigned risks.

To be avoided therefore are: the fruitless meetings where one partner is played against the other; overly drawn-out negotiations in which the objectives and goals of both parties are not clearly expressed; position changes during the course of bilateral discussions, etc. The financial stakes involved, coupled with the efficient allocation of time, money and resources, incites a more streamlined process.

One of the recent advances within the scope of economic internationalization is without a doubt the growing necessity of tightening the respective obligations

contained in written contracts. The commitments undertaken by project actors can no longer simply be based on moral grounds, but instead must be expressed in written, tangible terms. The outcome of negotiations leading to the final mode of contractual relationship must be recorded in the contract. Furthermore, all contracts must stipulate arbitration or discussion clauses to handle situations in which the public-private partnership’s initial hypotheses prove invalid. Every potential scenario cannot be anticipated ahead of time (as the Anglo-Saxon legal tradition calls for); however, it can very well be anticipated that changes to the project’s context will require adaptations, hence the need to outline discussion conditions (so-called land-scaping amenity clauses). The body of jurisprudence is continually evolving and con-tracts should reflect this evolution.

It is still necessary for each partner to uphold its commitments as well. The risk exists for partners with greater leverage in the contractual relationship to elect to waive their commitments and change the terms of the contract unilaterally. Such might be the case for the operator if it happens to possess considerably greater exper-tise than the public authority. Then again, such could also pertain to the authority, which alters its commitments either directly by invoking the «Imperial fiat» or more indirectly by failing to execute the planned complementary projects or modifying the legal and regulatory framework.

Recording the application of public-private partnership formulae in a “formal register of concessions/public-private partnership”, along the lines of State-backed financial guarantees (which are entered into Central Bank accounts), could be rec-ommended as a measure to avoid such temptations and to firmly cement each party’s commitments, especially political commitments.

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Against a backdrop of public monopolies, both national and sector-specific, the privatization movement of the 1980’s was interpreted as a strong statement. It rep-resented the tearing down of conceptions built between the Great Depression and the post-War era which were inspired by planned-economy and Keynesian notions, whereby public intervention provides the efficient means for correcting market fail-ures. Moreover, during this period, natural monopolies were considered as signs of market dysfunction.

Spurred by the winds of political change sweeping in from the United States, Great Britain, Australia and New Zealand, the telecommunications sector was dereg-ulated, followed by the electricity sector and ultimately urban utilities (mainly water). These reforms took place at just the right time to bolster a French tradition, stem-ming from a longstanding (not well known) history of conferring public service management upon private firms. For many, the French “experience” in this field remained the domain of major nationalized companies, which was not at all the case.

This initial period of reform was characterized by strong political input and enthusiasm, along with the excesses such input engenders. The ideas championed by these reformers often got mistaken for reality. As is the case with any new phe-nomenon on the verge of taking off, backers were pressed to justify, defend and win acceptance of their actions. This period brought with it a flurry of intellectual activ-ity, thanks to the attention given by the disciplines of economics, political science and law (Law and social sciences) (Demsetz, 1968; Stigler, 1971; Kay et al., 1986; Littlechild, 1986; Vickers and Yarrow, 1989).

Ten years later, at the end of the 1990’s, the change is striking. What had to be justified and defended ten years ago today is simply taken for granted; the age of heated debate has been left behind. All of the major industrialized countries have adopted a stance in favor of such policies, and but a few of the developing coun-tries have yet to join the movement. For these reasons, the overall issue regarding delegated management has shifted considerably. Emphasis is no longer on deciding whether to delegate, nor on discussing the virtues of large private firms versus public agencies: focus has moved from the “why” to the “how”. How should a durable coop-eration be organized between public authority and private firm? How can services be developed to ensure accessibility to the greatest number of users while fulfilling all

B. TEN YEARS OF PUBLIC UTILITY REFORMS: 7 LESSONS

(FROM PRIVATIZATION TO PUBLIC-PRIVATE PARTNERSHIP)

Dominique LORRAIN


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pertinent public service obligations? How can contracts be made robust enough to withstand crises?

On the basis of a broad array of experience, encompassing a handful of sectors on all continents, an objective assessment can now be drawn. At this juncture, such an assessment is aimed at deriving general lessons reflective of the overall situation. The history of delegated management is still obviously very present; for this reason, the exercise conducted below is to be considered as a sort of intermediate benchmark. The perception, in embarking upon this assessment, depends heavily upon the par-ticular frame of reference, the angle used to approach such operations. In spite of these safeguards, a close examination of key issues via a survey of past and present cases (Lorrain, 1995 and 1999) has yielded a series of germane and pivotal results, leading to a group of seven lessons:

1. From political doctrine to a needs-based response

The strong debates over the choice of management structure during the initial years have given way to a stance of pragmatism. The past was characterized by reforms relying upon a critique of existing bureaucracies: too costly, lack of respon-siveness to users; today, on the other hand, the pressures generated by service needs are such that a private sector presence is now mandatory. The reason behind this transition is quite simple: infrastructure-related needs have become tremendous, whether in the area of large-scale technical systems (telecommunications, electricity, highways or the railroad) or municipal utilities (water, sewerage, waste, public tran-sit). Changing urban demographics in the world’s major conurbations, the industri-alization of developing countries and environmental protection impetus constitute three forces all favoring the creation of a single gigantic market: a sort of urban infra-structure industry.

These heightened needs explain the diversity found in the basic terms for naming the new formulae between public authority and private firm: Public Private Partner-ship (PPP), Private Finance Initiative (PFI), privatization, delegated management, etc., all added to the lexicon with the traditional French term “concession”. Public-sector budgets have not been designed to accommodate this new level of expendi-ture. The net result is the arrival of major firms in the field of urban services manage-ment, for many of them, a phenomenon which should endure over the long run. This represents a turning point in the evolution of city management, with impacts spanning the spheres of local government and urban planning.

Until now in most countries (France not included), urban issues had been han-dled by either a city’s public works department, one of local government’s branch agencies or large public corporations. The arrival of multinational and multi-sectorial firms raises a whole new set of issues, with respect to both utility network regula-

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tion and metropolitan area governance. The scope of privatization operations has surpassed the sector specificity intended at the outset.

A decade ago, the experiences conducted throughout the world were still rather limited; at present, the number of requests received by firms to undertake projects is soaring. The choices offered are indeed quite broad: the tendency is to opt for major metropolitan areas, able to propose large-scale projects and whose populations are often more affluent than the rest of the country (with the prospect of high enough volumes to allow benefiting from economy-of-scale effects). A “map” of the world’s major «privatization» operations closely resembles that of the largest conurbations. It remains to be seen whether a country’s dissemination of such experiences and a harmonious spatial balance can occur.

2. From competition among models to a problem-resolution approach

At the time of the first privatization decisions, defending the use of such prac-tices tended to polarize the contrast between the two most prevalent models: Anglo-American and French. Differences admittedly exist: each country has over the course of history developed its own conceptions of how to go about structuring its munici-pal utility networks. These differences are not at all trivial or superficial; they per-tain to design, project selection, control measures, contractual relationships, conflict-settlement procedures, etc. The types of institutional architecture are also not the same (Martinand, 1993). Moreover, these differences have on occasion been insti-gated by the competition held among firms since competitive bids were typically involving France’s three major service-provision firms, the main English utilities and a few of the top American players from the fields of energy services, waste and sys-tems engineering. Yet these stable «formulae» (referred to as models), thanks to their durability, reflect above all a level of constancy in the solutions to problems previ-ously encountered, without adding any presumption regarding solutions to new-found problems.

One of this past decade’s key lessons has been to downplay the theoretical antagonism between models. Actors in this domain wind up adopting pragmatic approaches, depending upon the nature of the problems at hand, such that:• Actors set out to devise well-adapted technical solutions with a balanced cost struc-ture based on a service fee affordable to all users. This approach has allowed involv-ing private firms in those countries and cities with sizable shares of low-income population. If for cost-related reasons it proved impossible to provide the same qual-ity of service as in industrialized countries, operators would seek out and implement new solutions.

Ten years of public utility reforms: 7 lessons


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• Actors innovate with financing set-ups, combining equity contributions with bor-rowing from international financial markets. Here once again, each contract is to be handled case-by-case.• The contractual structures themselves are getting fine-tuned. Regardless of their national origin, contracts are designed to offer a steady stream of solutions, giving rise to a wide range of potential learning situations and public-private partnerships. This line of discussion strengthens the argument against the presence of irreconcila-bly-opposed “models”. Through the use of different terms, each country has created distinct types of contracts which correspond with varying degrees of private-sector involvement and contract durations. From a low involvement profile to complete privatization, the gradation of potential solutions spans the entire gamut. In each case, the pertinent public authority chooses from among the range of available con-tract types, which all stem from either American, English or French legal doctrine. The firms, for their part, simply adapt.

The various type of contract.

The “invention” of new urban service provision models, assemblages of bits and pieces from existing models coupled with lessons drawn from past experience, is certainly ongoing. The number of multinational, multi-sectorial firms created over these last ten years attests to this trend: they are able to develop and implement solu-tions across sectors and across countries.

High PrivatizationConcessionBOOTBOT

Leasing“Affermage”

Contracting outIncentivecontracts,managementcontracts

Low

“Marché d’exploitation”Delegated managementOperating & maintenance

Short-term Medium-term Long-term

Leve

l of a

utho

rity

conf

erre

dto

the

firm

Length of commitment

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3. Public-private partnership as a customized solution

Out of this discussion comes the simple idea that no one best way, no single preferred model, exists which could be reproduced from one sector to the next or from one urban setting to the next. In order to last, contracts must be adjusted to meet specific problems, contexts and actors.

They must also be designed to accommodate both the type of service network and the responsibilities being assigned to the firm:• Type of service network: Each category of network is naturally a unique technical composition and features distinct constraints in terms of coordination. The first few years of the privatization process tend to focus on economic and bid-related consid-erations. It sometimes seems that the same tender procedures (competition for the market) and the same competitive framework (competition on the market) could be applied to all sectors – from electricity to transportation, from cable networks to water supply systems. The inclusion of real factors, such as sunk costs1, and the issue of asset “indivisibility” have instigated the search for customized solutions in each type of network.• Along the same lines, the public procurement framework has exerted the most dominant influence (Laffont and Tirole, 1993); efforts were undertaken to apply this framework to relationships between private firm and public authority in the area of public service delegation as well. Diversification in the form of privatization then made it possible to discern that service operations under private-sector management responsibility clearly belonged to a separate category. Two factors certainly account for this difference: i) the transaction per se does not pertain to a precisely-defined good, but rather to the provision of a more nebulously-defined service; and ii) such contracts often extend over long periods of time. In order to incorporate these spe-cificities, project actors focus on building institutional configurations adapted to the risks borne by each project partner. Some of these newly-devised contracts have become complex and sophisticated instruments.

4. The importance of the institutional environment

At the end of the 1980’s, international institutions and a good number of cor-porations embarked on «the good cause» by presuming that private-sector manage-ment of public services simply entailed buying and selling the assets of public-sector monopolies and conferring operations. Such a vision however did not stand up very long. The list of failures and incomplete projects have served as ample reminder of the truth that collective action can only succeed when propped up by a set of


1. A notion signifying that in this type of sector, a minimum threshold of investment must be met prior to conducting any activity; such investment would be unusable elsewhere should the firm withdraw from the project.


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stable, public-oriented rules shared by all the actors. In the area of urban services, the involvement of private firms presupposes the existence of a certain kind of insti-tutional environment. Put otherwise, the presence of action implies having met the prerequisites for action, a stance which pays tribute to the neo-institutionalism economists (Coase, 1937; North, 1990; Williamson, 1994).

Once this aspect has been fully recognized, the solution is taken to the halfway point. It is still possible to resurrect a few laws prior to adopting privatization poli-cies, yet their inadequacy would quickly become apparent: passing laws is one thing, but instilling a new mindset is altogether different. The institutional framework in place cannot be dissociated from the culture and values ingrained in the actors apply-ing the laws. The cultural side of action programs cannot be reformed overnight.

This last aspect has incited an evolution in favor of new approaches for designing reforms. In the past, simply privatizing public monopolies and signing contracts was considered sufficient. Now, credence has been placed in the notion of dual-faceted action featuring the contract as well as the overall project environment. However the global environment can only be partially altered before privatization by outside reform. In most instances, the actors themselves build the institutional framework as the action unfolds on the basis of the problems/solutions encountered.

This orientation leads from an instantaneous conception of reform – possibly incorporated within the scope of a political program – to a process-based concep-tion. It takes time to build effective rules; in order to ensure their acceptance and comprehension by all actors (elected officials, service users, firms), a participatory process is required. In response to this perception, international institutions invoke the term “capacity-building”.

5. The “proper” sequencing and corresponding exceptions

In many countries, sizable efforts have been expended by international financial institutions to set up initial experiences. As such, reformers and their consultants had considered that by following the “proper” sequence (i.e. preparing the bid, award-ing the contract and then regulating operations), it would be possible to execute the contract under harmonious conditions. In other words, according to the initial idea, a strong launch phase would be enough to ensure a successful project.

Over time however, repeated events have revealed that the launch phase in and of itself is not sufficient: it proves most difficult to develop forecasts and plan out the details of long-term service provision contracts (Annales des Mines, 1999; Defeuilley, 1999). Admittedly, greater attention focused on preliminary design studies (hence a more costly preparation phase) has been a step in the right direction. While such studies yield a new source of knowledge which can be shared by all actors (public

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authorities, international institutions and firms alike), they are unable to provide the precision of real-life contract experience or to predict major environmental transfor-mations. The basics tend to get covered, yet implementation often requires adapta-tion to new givens: updated environmental standards, revised investment priorities, a currency devaluation, or even social upheaval.

With respect to contracts, it had often been deemed preferable and feasible during the first years of privatization to draft complete contracts2 (Henry, 1997). The past decade of experience tends to refute this position and suggests starting out with incomplete contracts. This approach promotes a new balance in the contractual effort over time. It turns out to be advantageous not to seek precision at all costs from the outset, so as to preserve resources and flexibility over the life of the project. This notion gets reflected in concrete terms during two specific time periods:• Incomplete contracts have practical impacts on the preparatory phase. It is not advised to advance the design studies too far before selecting the operator since the preliminary design may be quickly superseded and will, in any event, overlap with the chosen operator’s input.• While it is acknowledged that long-term contracts cannot forecast all project parameters with accuracy, contract revisions should not be viewed as project crises. This point is a critical one inasmuch as contractual adaptation has much too often been perceived as a failure, as an attempt by the firm to realign the contract to its advantage. Contractual adaptation is nothing more than a normal adjustment mechanism for coping with changes in the initial conditions.

6. The need for a regulator

Throughout the rivalry between firms and between models, the French have long challenged the idea of a heavy-handed regulator. National experience leads to the spontaneous reaction that the same results can be achieved using less expensive mechanisms and that the relationship with the public authority can be set up to avoid confrontation. To a certain extent, experience has affirmed the validity of this attitude. Regulation carries with it a cost, which may turn out to be quite high and not necessarily in proportion with the results obtained.

On the other hand, it has also been demonstrated that the notion of self-regula-tion, as practiced in a country like France (for urban utilities), proves difficult to apply in developing countries. In France, contractual relationships between local public authority and private operator are placed into a long-term setting of laws, rules and standards structured by the State and administrative agencies. When such a setting is lacking (the case in several developing countries), the absence of an inter-


2. A notion developed by economists to designate contracts with outline all possible scenarios and specify all obligations.


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mediary – the regulator – can leave the public authority and private firm in a paralyz-ing standoff. The contract should not be viewed as a cure-all: it cannot address all project parameters, especially exogenous parameters.

One key lesson from these various experiences is the vital need for a regulator in developing countries. The history of the industrialized world shows that building an institutional framework within each sector has taken a sizable amount of time: sev-eral decades in order to derive a set of rules covering the majority of situations. It is not imaginable that developing countries could do likewise in less time: institutional systems cannot be exported like any ordinary industrial good.

Granted the obligation of a regulator, but how should this regulator be consti-tuted? for which set of missions? In light of the above discussion, it would clearly be preferable to position the regulator more towards the realm of overseeing the proper implementation of public service-related rules (in accompaniment of State and local authority efforts) than with a strict mandate for inspecting/validating con-tract execution. In extending this concept further, a two-tier type of regulation can be foreseen, featuring:– ongoing technical monitoring on the part of the municipality: this component would allow settling the day-to-day, micro-level problems which cannot be anticipa-ted and incorporated into the contract; such problems are specific to the operations of each utility network and do not merit being routed up to the level of the regula-tory authority;– sector-by-sector regulation performed by a specialized agency, assigned a triple mission: i) overseeing the fulfillment of the major contractual commitments and conducting statistical comparisons; ii) assisting the local public authority; and iii) providing backup for the State level in adapting rules and building the institutional framework.

7. Progress through accepting risk

In the absence of appropriate rules however, what course of action should be taken, given the reliance of utilities on a heavy dose of industry-wide rules? Would it be necessary to wait for a body of rules to be produced? Yet, how are such rules to be produced and where does the production process begin? Action cannot be initiated without some sort of prop: nothing can be built out of thin air.

As opposed to the rationality which guided reforms over the first few years, the inexistence of rules obviously leads to accepting incomplete contracts and tolerating behavior which does not necessarily comply with the principles of rational action – consistent, communicative – along the lines of the Weberian ideal. One could wager that experience generated from these imperfect set-ups is still more valuable than inaction and that, thanks to the inherent lessons drawn, project actors will be in a position to draft new, more effective rules.

39

This means of conceiving action occurring within imperfect institutional set-tings leads to the notion of “building” markets (the construction of urban service models), i.e. the rules, standards and institutions necessary to incite action do not represent a fixed, available, exogenous stock for actors to choose from. In emerging fields – nowadays, information technologies; at the beginning of the 20th century, it was water and electricity – or in developing countries, these elements get generated by actors during the action process. This dynamic, which happens to be especially pronounced in the utilities sector, engenders several consequences:• Contract-based consequences : If all contract parameters cannot be fully antici-pated, if actors are developing some of the rules during the action process itself, the use of incomplete contracts (designed as a learning process and not as an ultimate document) is to be favored.• Regulation-based consequences : Current conceptions (the principal-agent theory) are based on the notion of a separation between regulator and firm. In many instances, the absence of rules is due to the public authority’s incapacity to draft them on its own; if the authority delegates there would be no reason to rapidly expand its know-how in this area. What stance should be adopted then? Acknowledge the asymmetry existing between private firm and public authority; recognize that the production of new rules is the fruit of a joint effort on the part of these entities; as a consequence, the strict breakdown in those roles which theoretically underpin the regulatory activity is not, in reality, so absolute.

One major lesson from this past decade of reforms is the urgency of instituting new regulatory modes which incorporate: the breadth of skills possessed by large firms, the principle of jointly-produced rules, and the need to enforce public service obligations.

What lessons are to be learned from the experiences of the 1990’s?

u As a result of sizable and ever-increasing needs, major industrial rms have entered the domain of public service management in an enduring fashion, in par-ticular in the world’s largest metropolitan areas.

u An increasingly-pragmatic approach has been favoring ad hoc project organi-zations adapted to each legal and economic context as well as to each type of network, as opposed to the application of strict models.

u The development of an appropriate institutional framework in accompaniment of the contracts themselves is vital, within the scope of a necessarily-lengthy institutional learning (“capacity-building”) process.

u The public-private partnership constitutes a long-term association, which is necessarily based on incomplete contracts. Unforeseen events must be antici-pated, and the regulatory system must often rely on the involvement of an inde-pendent body.



40

u A public-private partnership is meant to be long-lasting and entails a certain degree of risk to be shared between partners: risk tolerance proves essential to a project’s evolution.

References

“L’Europe des grands réseaux”, Annales des Mines, Réalités industrielles, april 1991.

“Les réseaux de services publics”, Annales des Mines, Réalités industrielles, october 1994.

“Exporter les services publics”, Annales des Mines, Réalités industrielles, october 1999.

COASE R.H. – “The Nature of the Firm” in The Nature of the Firm, 1937; Williamson O.E., Winter S.G., London, Oxford University Press, 1991.

DEFEUILLEY C. – Services urbains et développement durable. Paris, Ministère de l’Équipement-Isted, Institut de la gestion déléguée, 1999, 20 p.

DEMSETZ H. – “Why Regulate Utilities?”, Journal of Law and Economics 11, 1968, p. 55-65.

HENRY C. – Concurrence et services publics dans l’Union européenne. Paris, PUF, 1997, 225 p.

HIGH J. (ed.) – Regulation, Economic Theory and History. Ann Arbor, The University of Michigan Press, 1991, 191 p.

KAY J.A., MAYER C., THOMPSON D. (eds) – Privatisation and Regulation: The U.K. Experience. Oxford, Oxford University Press, 1986.

LAFFONT J.-J., TIROLE J. – A Theory of Incentives in Procurement and Regulation. Cambridge, The MIT Press, 1993.

LITTLECHILD S. – Economic Regulation of Privatised Water Authorities. London, HMSO, 1986.

LONG M. et al. – Les grands arrêts de la jurisprudence administrative. Paris, Sirey, 1993, 820 p.

LORRAIN D. (ss la dir. de) – Gestions urbaines de l’eau. Paris, Economica, 1995.

LORRAIN D. – Urban water management. Levallois-Perret, Ed. Hydrocom, 1997.

LORRAIN D. (ss la dir. de). Retour d’expériences (six cas de gestion déléguée à l’étranger). Paris, Minis-tère de l’Équipement-Isted, 1999, 94 p.

LORRAIN D. – “The construction of urban service models”, in Bagnasco & Le Galès (Eds), Cities in contemporary Europe, Cambridge University Press, 2000, p. 153-174.

MARTINAND C. (ss la dir. de) – L’expérience française du financement privé des équipements publics. Paris, Economica, 1993.

NORTH D.C. – Institutions, Institutional Change and Economic Performance. New York, Cam-bridge University Press, 1990.

STIGLER G. – The Theory of Economic Regulation. Bell Journal of Economics 2, 1971, p. 3-21.

VICKERS J., YARROW G. – Privatization, (An Economic Analysis). Cambridge, London, The MIT Press, 1989, 433 p.

WILLIAMSON O.E. – Les institutions de l’économie. Paris, InterÉditions, 1994.

II

CONDITIONS FOR A SUCCESSFUL

PUBLIC-PRIVATE PARTNERSHIP

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The decision on the part of a public authority to “contract out” in a concession or «delegate» responsibility for an infrastructure project or a public service to the private sector requires, regardless of the country involved, fulfilling three essential conditions.• First of all, an appropriate political, legal, fiscal and administrative framework must be set up to accommodate this type of contract, which is considered as distinct from an ordinary public procurement contract. The concession is a long-term partnership-building process established between a public authority and a private entity aimed at enabling the latter to invest profitably in a public service – or public works – related project. In contrast, public procurement merely consists of an acquisition procedure without any consideration paid to either contract period, service operations or level of capital investment.• Secondly, this authority will be required to follow a specified contract-award pro-cess, which requires several stages which encompass facility or service design, con-struction and operations.• Lastly, a contract will be introduced to bind both parties over the long run. Such a contract must contain minimum threshold conditions in order to: ensure the suc-cessful execution of the entire project, assign each party’s corresponding set of risks, and protect their vested interests. French tradition, for example, distinguishes four major types of contracts.

In sum, a public-private partnership will be completely built around these three basic stages. The present introductory chapter provides a thorough review of these stages, with special focus on contract content and the contract-award process. Subse-quent chapters will detail a public-private partnership’s core elements. Chapter II-B looks at the economic side, which covers analysis and the breakdown of risks. Chap-ter II-C highlights a single vital parameter in a concessionary contract: the long-term nature and need to incorporate a contractual period spanning into the tens of years. Chapter II-D then parlays these contractual notions into legal prescriptions by outlining the necessary legal context and clauses. Lastly, Chapter II-E provides a discussion on the financial approach.

A. THE CONCESSIONARY CONTRACT: A FRAMEWORK, A PROCESS,A CONTRACT

Xavier BEZANÇON


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1. A concession-compatible framework

The concession is a process which allows associating a private partner, due to its particular competence and financing power, in the provision of a public service or in the construction and operations of public infrastructure projects over a long time period. This contract, as well as the so-called “public-private partnership” contracts, is not at all identical to a public procurement inasmuch as their complex nature necessitates a different, customized legal framework.

However, the legal framework alone is not sufficient in launching a concession: it is also necessary for the authority or the country backing the project to exhibit a strong pro-partnership stance and fulfill a series of preliminary technical condi-tions. Without such conditions, long-term capital investment programs could not be implemented.

This notion will receive considerable attention in both Chapters II-C and II-D. In what follows, we will examine more specifically two key elements to this contrac-tual set-up: the definition of a concession (Section 1.1), and the need to lay out a clear contracting process for concessions (Section 1.2).

1.1. The definition of a concessionary contract

1.1.1. A concessionary contract is not a basic public procurement contract.

A concessionary contract is profoundly different from a classical contract for the purchase of facilities or services, which is simply awarded to the low bidder on the basis of a set of predefined specifications.

The public-private partnership is in essence the outcome of a search for the most appropriate long-term partner able to provide the necessary expertise and manage-ment capacity to effectively run a public service or facility. This type of contract can be distinguished in broad terms from a public procurement contract by the follow-ing characteristics:– the total or partial assumption of the project’s capital investment program by the concessionaire within the scope of a long-term contract, which affords the time span necessary to both fully depreciate this investment and carry out the contractu-ally-stipulated service obligations;– the transfer of public service obligations from the concession-granting entity to the concessionaire with respect to public liability and the ensuing breakdown of risks between the two parties;– the unique, all-encompassing and complex nature of the contract, including design, financing, construction, maintenance, facility operations, service provision, etc., the magnitude of which necessitates in-depth negotiations between the two parties prior to drawing up the contract;

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– the link established between concessionaire remuneration and service operat-ting performance, notwithstanding the type of fee collection (e.g. tolls paid by the public authority), and even if the right to financial equilibrium is supported by a considerable body of national jurisprudence, and as the concession-granting authority’s participation in project financing or facility operations does not impact contract characteristics, as long as some risk (even operation-only) is borne by the concessionaire.

In cases where the concession involves both the construction and operations of a facility (as opposed to merely the delegated management of an existing service network), it is commonplace for the project to encompass a long works period prior to service start-up, hence before revenue-generation. This financial situation results from the sizable investment required up front, thereby producing a project financial curve unique to this type of concessionary activity. On the other hand, a purely-service concession typically entails a correlated remuneration as of the contract’s effective date.

The concession is defined therefore by a multiplicity of criteria. National law must provide for a legal framework dedicated to concessions, as distinct from that set up to accommodate public procurement contracts featuring specific rules for their award and execution. Table I below presents the essential differences between these two contract types.

1.1.2. A long-term process

The concession is part and parcel of a long-term process, as discussed throughout the remainder of this book. The fundamental feature of any concessionary approach is reliance on a longstanding political commitment, not only for the project in ques-tion but also for concessionary formulae applied to other projects within the same country. Failure on the part of the public authority to fulfill its commitments may have negative repercussions on the country’s international relations and on other public-private partnership projects as well. To prevent this from occurring, it is nec-essary to establish a distinct legal framework for this type of contract.

1.1.3. A specialized working group within high-level government bodies

Many countries with rather limited experience in the use of public-private part-nership, including those in Western Europe, have set up specialized working groups for concessionary contracts either within the Finance Ministry or at a high level of government. Such steps have allowed deriving a standardized methodology for awarding concessionary contracts by capitalizing on cumulative experience at the national level. Such working groups are composed of specialists and external consult-ants, combining a wide variety of skills and providing guidance to public authorities on how to draw up concessionary contracts.

The concessionary contract: a framework, a process, a contract


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Table I – Comparison between a public procurement contractand a concession.

N.B.: Please note that the source of firm remuneration has not been highlighted in this table, since this parameter in no way serves (not even marginally) to differentiate these two contract types.

1.2. A clear concession-granting process

1.2.1. An approach based on project performance

Whenever the concession-granting authority requests bids from the private sector, it is highly advised that authority demands be expressed in terms of expected service performance and that these demands incorporate at an early stage project externali-ties and administrative constraints. Unfortunately, it is not extremely rare to encoun-ter near-insurmountable obstacles further on in the development process, seriously jeopardizing the project’s feasibility. The private sector is indeed better able to define a performance-based response to both the problem and its associated constraints, provided they have been accurately defined at the outset, than when the public authority has opted to handle the implementation. The private sector’s propensity to innovate must be harnessed to generate customized solutions as of the project

Public Procurement Concessionary Contract

DéfinitionProvision of supplies, component (s) of a worksprogram, or a service determined by the publicauthority

Création of a public facility and management ofa public service by a private entity via anagreement negociated with the public authority

PrimaryCharacteristicsThe contract

The contractawardee

– Single objective

– Short-term

– Lack of association with service management

– Not granted a public service delegationmission

– Multiple objectives

– Long-term

– Definite association with service management

– Has been granted a public service delegationmission

Basiccharacteristics

– Supervision of execution of works by thepublic authority

– Absence of pre-financing, co-financingt orfinancing of the works on the part of thecontracted builder

– Zero capital investment from the contractedfirm

– No freedom in service or facility designaccorded

– Contract devoid of any service creation ororganization function (“secondary” contract)

– The contracted firm is not the projectdeveloper

– Lack of contract management leeway grantedto the firm

– No long-term hold of public domain

– Absence of joint Construction – Management- Maintenance responsability

– Supervision of service operations by theconcessionaire

– Pre-financing, co-financing and financing ofthe facility on the part of the concessionaire

– Capital investment contributed by theconcesionaire

– Freedom accorded in service/facility design

– Contract instituting and organizing the servicespecified by the public authority (“primary”contract)

– The concessionaire is the project developer

– Contract management leeway granted to theconcessionaire

– Generally associated with a long-term hold ofpublic domain

– Long-term joint responsability assigned to theconcessionaire

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consultation phase. The notion of performance indicators is examined in the insert at the end of this chapter.

An increasing number of countries have been opening up to privately-developed projects (and not just those inspired by infrastructure concessions) after having set up an appropriate legal framework. This trend should be looked upon favorably and can be attributed to a longstanding tradition of “private-public” relationships.

The proprietary status of the original concepts and innovative technological con-tributions submitted by the various candidate firms in a concessionary bid must be protected by an ad hoc legal mechanism, so as to incite an innovation-driven proc-ess. Bid candidates would not be forwarding the same bold proposals if doubts were to linger over the confidentiality of their ideas.

Having all candidate firms compete on the basis of an idea submitted by one firm and the subsequent application of innovations or original solutions collected by the concession-granting authority during the bidding procedure without obtaining consent or compensating the innovative firm(s) represent poor practices and serve to discourage potential concessionaires.

1.2.2. A fair treatment of all concessionary candidates

The coordinated development of concessions requires that all firms submitting bids be treated equally. Candidate firms must be capable of assembling all of the skills necessary to fulfill the concession’s objective without the preliminary specifica-tion of the legal status for the candidate firms or consortium.

Since the feasibility studies associated with a concession prove long and costly, it may be useful to anticipate compensating candidate firms for a significant share of the bid-preparation costs incurred in the event of non-selection.

1.2.3. The negotiated aspect of the concessionaire-selection procedure

With the concessionaire of a public facilities project being obliged to undertake a long-term commitment and assume a multiplicity of risks (technical design, con-struction, financing, commercial, operations), it is essential for:– the public authority to clearly state the selection criteria used;– an initial stage of the tender procedure to draw up a short-list of candidates which have submitted attractive proposals for basing a round of public authority-candidate negotiations, to be conducted in preserving the confidentiality of all ideas contrib-uted by each candidate;– the concession’s negotiation to be held with the various selected candidates with-out dismissing the possibility to propose variant solutions;– the principle of an intuitu personae assignment of concessions to be recognized, according to which the concession-granting party’s assessment of the concession-aire’s inherent qualities (on the basis of previous project references) is a key to the contract-award decision.



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1.2.4 Contract stability and fairness

The concessionaire and its financial backers must be ensured that the contract will extend until expiration without any potentially-destabilizing modifications being intro-duced. Both imperial fiat and Acts of God clauses must be included from the outset when drafting the contract. In more general terms, the right to immediate compen-sation for the concessionaire must be anticipated in the event of a contract modifica-tion introduced by the public authority, while not altering the contract’s initial con-ditions.

1.2.5. A concession built upon the notion of economic equilibrium

The concessionary contract is to be built upon the notion of economic equilib-rium, which in part gets manifested by a well-balanced breakdown of risks between concessionaire and concession-granting authority. Furthermore, the contract must include appropriate clauses to allow for its evolution and eventual adaptation to changes in the contract environment, while maintaining the potential for public authority control. These economic aspects of concessionary contracts will be dis-cussed in greater detail in the following chapters.

2. The concessionary contract

The contract serves to institute the rights and obligations of each of the two par-ties. It must contain certain clauses relative to the construction works and service operations, as well as other clauses which establish the project’s financial equilibrium. Moreover, the contract stipulates the respective responsibilities of each party over the various phases of its execution.

The contract must be written in a way that introduces no ambiguity in the mean-ings ascribed to each term or clause so as to avoid any potential misunderstanding during execution.

The concessionaire agrees to perform construction work and operate a service. Four obligations are incumbent upon the concessionaire: building the infrastructure, maintaining it in a good state of repair, providing service, and transferring control of

project facilities to the public authority upon expiration of the contract period.

2.1. Construction phase

Most concessionary contracts entail the infrastructure to be built up front, and in some instances, some of the construction work is spread over the contract period. The initial capital works and all subsequent upkeep, repair work and heavy mainte-nance are typically absorbed by the concessionaire, and the contract must be explicit on this point. The concessionaire is bound to building the infrastructure under the conditions laid out in the set of specifications. The public administration has the

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right to oversee this phase. The concessionaire cannot assign its role of prime con-tractor to a third party for any facilities development, in accordance with the precept of intuitu personae, which implicates the concessionaire “personally” in the contract’s execution. According to French legal theory, the concessionaire holds no actual right to the facilities, but has to deliver the infrastructure specified in the contract.

Furthermore, the concessionaire is required to announce a detailed construction program, along with a calendar of completion dates for each project component. A smooth technical transition from the initial works phase to the subsequent main-tenance mode requires emphasis on preliminary coordination efforts. Maintenance costs for facilities contracted out as a concession may prove, over the long run, to be significant, yet the absence of an ongoing maintenance program can jeopardize structural integrity and result in handing over a facility in a poor state of repair upon contract expiration. This transference at the end of the concessionary period presup-poses a state of repair and service operations in accordance with the contract’s initial terms.

As such, all of the concessionaire’s construction-related responsibilities must be defined and then overseen by the public authority until the contract’s completion. The definitions employed may indeed make reference to international or European standards. An appendix to the contract contains a detailed diagram of the works program, some selected drawings and a calendar with the sequencing of operations.

The concessionaire, by acting in the stead of the public authority as regards the construction and operations of public works, is granted the actual rights of a public body with respect to third parties. In this manner, the concessionaire holds the legal power to expropriate in the name of public utility.

The completion of certain sequences of the works program is decided through joint agreement by both parties; such components need to be identified and their execution determined at the outset of the contract1.

Concessionary theory is based on the concept that a concession does not imply the transfer of ownership rights, whether temporary or permanent, but rather the right to provide a public service. While the concessionaire enjoys no actual property rights to the facilities it builds, it is still empowered to collect either payment from users, usually in the form of tolls, or remuneration for service provided. The author-ity agrees to grant a use right (sometimes an exclusive right) of public domain in order to build the facility.


2. The conditions stemming from European Community directives relative to public procurement contracts (i.e. Directives 93/97 and 93/38) are in application throughout Europe.


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Table II. Primary stages during a concessionary contract.

Stage Stage-completion criteria

The first stage consists of creating theproject, obtaining all necessary politicaland social approvals and beginningto assimilate all project-developmentconditions

Political approvals of the PPP by both elected officials andthe administrationSocial and economic acceptance of the future facilityProject feasibility studySite expropriation and procurement of rights-of-wayInitial technical development studyProject profitability analysisDefinition of expected performance levelsIdentification of environmental problems

The second stage consists of creatingthe project's legal framework favorable tothe use of a concessionary format

Commercial law and public-private partnership-based jurisprudenceForeign investment lawPublic-private partnership tax lawPublic domain

The third stage consists of preparingthe tender procedure

Creation of a project team at the national government levelVerification of the country's financial ratingSpecification of the expected performance levelsSelection of potential variantsPre-qualification of concessionaire characteristics

The fourth stage encompasses boththe tender procedure and all risk-relatednegotiations

Dissemination of a call for candidate bidsFollowed by the international call for tenderStep-by-step concessionaire-selection procedureFirst round of negotiations with short-listed firmsIdentification, quantification and attribution of risks between the twoparties through negotiationFirst draft of contract

The fifth stage, once the best bid hasbeen chosen, consists of establishingand signing the contract

Determination of the definitive set of financial conditions offered bythe parties involved (banks, the State, financial institutions)Drafting of the definitive contract and (in some instances) a vote ofapproval by the National Parliament

The sixth stage corresponds to projectstart-up

Transference of project site to concessionary controlIssuance of pertinent administrative authorizations and buildingpermitsExecution of construction worksService start-up of the facilityStart of operation supervision by the Public Authority

The seventh stage covers the contract'sentire execution phase

Supervision of the concessionaire:– for execution of the construction works– for facilities managementPrecise assessment of complementary investment requirementsRegular contract meetings to discuss and (if need be) adjustexecution conditionsPayment of subsidies or loans, in accordance with contractstipulations, and fees for use of public domainUpon contract expiration: handover of facility and equipment to thepublic authority

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2.2. Service or facility operations

The public service outlined in the contract must be provided continuously under conditions stipulated with utter clarity. The assigned rate schedule must be respected and the public authority is responsible for carrying out controls lying within its scope or jurisdiction.

The concessionaire’s obligations must also be precise concerning facility opera-tions: the contract establishes both the characteristics and quality of the service pro-vided to users. The public authority defines the nature of the concessionaire’s obliga-tions, which may be subject to subsequent modification, upon mutual agreement.

The public authority at all times remains liable for the actual provision of the delegated public service, regardless of the delegation status adopted.

The contract’s conditions are to structure the relationships between the conces-sion’s customers and the concessionaire by virtue of a set of technical and administra-tive specifications of user access and corresponding rate schedules.

In general, service operating conditions comply with the principles introduced over time into public service jurisprudence:– the service continuity principle : service to users must be ensured on a continuous basis, without any interruption whatsoever on the part of the concessionaire; this principle is then balanced by the following one;– the principle of concessionary financial equilibrium : although service operating con-ditions are liable to change upon public authority request, the concessionaire’s right to ensure the financial equilibrium of its contractual commitments is fully recog-nized;– the principle of equality implies application of the same rate schedule and service access conditions to the entire public;– the principle of adaptation or evolution stems from changes in user needs and con-tinual advances in leading-edge technologies: the concessionaire must be able to adapt its service to accommodate these modifications, and it is advisable for the contract to address such eventualities;– the principle of neutrality : this principle stipulates that no category of user shall be subjected to discrimination not grounded on economic differences.

The concessionaire is granted a true level of management autonomy in carrying out the missions assigned in the contract. The public authority agrees not to meddle in management practices implemented by the concessionaire during the fulfillment of its obligations. On the other hand, the public authority must perform controls in accordance with contract provisions; this function corresponds to one of its obliga-tions in the concessionary process.

Since the concessionaire (chosen to a great extent on the strength of references furnished) is being held “personally” to its commitment of fulfilling service obliga-



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tions, a contract transfer to a third party can only take place with full public autho-rity consent.

2.3. A well-balanced contract

The concessionary contract draws its equilibrium over the long run and in accord-ance with initial expenditure projections. The extent of this contract period depends upon the capital investments and services assigned to the concessionaire. The longer the contract period, the greater the likelihood that the concessionaire will be able to depreciate construction costs and provide service under profitable conditions.

The concessionaire’s remuneration incorporates the risks being absorbed (design, construction, financing and operations, in addition to all exogenous risks); it must be fair and allow the concessionaire to earn a reasonable profit.

With respect to infrastructure concessions, technical risks are often very sizable. The commercial (or traffic-generation) risk may also prove to be considerable when-ever a change in consumption patterns or product/service prices occurs during the life of the contract.

Concessionary contracts contain a clause relative to the principle of «unforesee-able events», as discussed above. Such a clause stipulates that the concessionaire is entitled to compensation for an imbalanced operating situation should the contract be modified significantly by events or circumstances exogenous to both parties and beyond their control2.

The contract must also contain specific mechanisms to enable modifications should the need arise or should a change be sought by both parties.

The contract must address the issue of liability in the event of damage caused to customers or third parties. Generally speaking, operations liability is assumed by the concessionaire in its capacity as service manager. In the case of concessionaire default, public sector liability may be implicated. Such is also true if the public authority has not adequately exercised its power of control over the concessionaire.

Since the concessionaire has been granted the right to operate the facility, it enjoys complete independence, free of all public authority dictates3. The operator’s principal rights pertain to policing the facility and collecting user fees; the policing function stems from the contract itself, which assigns the concessionaire the respon-sibility of ensuring the service runs properly pursuant to the delegation of power.

The right to collect tolls and user fees is also laid out in the contract. Fee sched-ules are often established by administrative agencies in conjunction with the con-cessionaire, which retains full rate-setting freedom within the scope of fully-private concessions subject to a ceiling set forth by the public authority.

2. A simple modification to the contract execution conditiond does not cause this principle to be invoked; rather, a sizable and durable contract desequilibrium is necessary.3. The contract may forbid the concession-granting party from awarding a second concession in com-petition with the first.

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Table III – Public service delegation: Each party’s role during contract execution.

The first column corresponds to the level of “political determination”: the contract’s founding legal premise.The second column serves to shape the two parties’ joint statement of purpose, covering both the con-tractual organization and service regulation.

The third column specifies the concessionaire’s responsibilities throughout the contract’s execution.


The public authority Both public authorityand concessionaire

The concessionaire

Organization of the public service DelegationTransfer

Service contracting

Provision of thedeleguated public service

Overall delegation design Detailed delegation design Design and technical/financialoptions

1. The public entity assumes controlof the public service, examines theissue of potential delegation

2. Overall design responsibility forthe delegation process (degree ofdelegation or association, feasibilityconsiderations, financial impacts,etc.)3. Establishment of the Rights andObligations assigned to theconcessionaire and users, along withprimary service characteristics:– Third-party considerations– Equality-continuity-

transferability of service4. Decision on the public sector'spower to delegate made bycouncil/assembly deliberation5. Selection of the concessionaireand contract award6. Setting up the concessionarycompany (approvals / permits /public domain rights-of-way)

Remark: Two objectives arepossible:– Complete public service– Partial public service, especially

public works (infrastructure)concessions

1. A long-term contract:– Agreement– Set of specifications– Remuneration bases– Risk-taking– Breakdown of risks– Phasing of project operations– Public authority prerogatives– Service regulation– Service continuity organization

2. Negotiations held between thetwo parties3. Joint statement of purposeissued by the two parties

1. Technical solution proposalssubmitted by the concessionaireregarding service management,capital investment program,remuneration framework, etc.

7. Delegation control– Control of construction work– Control of service provision

4. Acceptance of completedfacilities

5. Relations between the twoparties with respect to serviceprovision:Adjustments, amendments, etc.

Depending on the level ofautonomy built into the contract:

2. Investment - Financing -Subcontracting3. Public service operations andprovision - relations with:– Users (rates/level ofservice/responsibilities, etc.)– Third parties– Personnel

8. Handover or buyout 6. Transfer of the service inexchangeHandover of equipment

4. Eventual buyoutTermination of contract


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2.4. Termination of the concession

The concession comes to an end either upon expiration of the contractually-stip-ulated concessionary period, contract cancellation, concessionaire default, or buyout by the public authority.

At the contract’s expiration, the public party begins acting in the stead of the concessionaire, which is thereby obliged to hand over all facilities in a good state of repair to the public authority.

Contract cancellation announced by the concessionaire occurs infrequently: con-tracts are typically cancelled by mutual consent.

Contractual default on the part of the concessionaire is pronounced by the public authority, which then decides unilaterally to cancel the contract (often in association with penalties depending on the severity and duration of the default).

Lastly, contract buyout is a right held by the administration to replace the conces-sionaire before expiration of the normal concessionary period, in exchange for com-pensation. Such an eventuality however must be stipulated in a separate contractual clause.

Bibliography

BEZANÇON X. – Essai sur les contrats de travaux et services publics. Contribution à l’histoire adminis-trative de la délégation de mission publique. Paris, Librairie générale de droit et de jurisprudence (LGDJ), 1999.

BEZANÇON X. – Les services publics en France du Moyen Age à la Révolution. Paris, Presses des Ponts et Chaussées, 1994.

BEZANÇON X. – Les services publics en France de la Révolution à la Première Guerre mondiale . Paris, Presses des Ponts et Chaussées, 1999.

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Quality considerations: The introduction of performance indicators

André BINDER

The objective of any public-private partnership is to expand the possibilities for providing high-quality public service by means of combining the resources and expertise of each partner and then channeling them into achieving a common set of goals. Keep in mind that the fun-damental goals of both public authority and private rm tend to be in mutual opposition.

The public authority primarily focuses upon:– the long term, materialized by the major structural effects generated by physical infrastruc-ture;– minimization of the reliance upon public-sector funding.The private operator, on the other hand, places emphasis on:– the short and medium term, materialized by the rm’s project-generated workload;– maximization of nancial returns.

Within this context, the objective of pursuing a set of overlapping project goals can be met only through the application of detailed, clearly-understood and relevant ground rules throughout the life of the partnership; these rules serve to limit any divergence in incentives caused by differences in the two parties’ specic intentions.

1. The central thrust in the qualitative evaluation of public service provision

The partnership engaged in order to develop a project can be characterized by a series of commitments from both parties, comprising qualitative as well as quantitative criteria.

As regards the quantitative side, the ground rules used to assess project compliance with commitments are straightforward to identify and implement.

On the qualitative side however, such is not the case: satisfying the public authority’s long-term objectives basically involves upholding qualitative commitments across all stages of the partnership’s life cycle: selection of partner(s), project design and construction, and then facil-ity operations.

The public authority must therefore make use of methods and tools that allow determining, dening and ranking these qualitative aspects, so as to be able afterwards to evaluate the level of compliance with contractual commitments.

2. Keys for incorporating qualitative evaluation into public service provision

a) During the private partner-selection process

The qualitative aspects being sought by the public authority must be identied and estab-lished within the tender’s set of contract specications.

This step entails signicant efforts in order to:– determine the qualitative factors deemed important by the facility’s future customers (users);– rank these qualitative factors on the basis of future customers’ expectations;– dene each factor using terms which are not just comprehensible, but also capable of being employed within the performance-compliance evaluation system.

The last point needs to be formalized to a great extent, inasmuch as qualitative factors revolve around general concepts such as: personal safety, user information, comfort, hygiene, recep-tion amenities and human presence.

Moreover, the manner in which proposals are incorporated into the overall bid evaluation must be indicated in the tender rules. This feature would enable each candidate to devise, in a situation of perfect information, its bidding strategy.



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The means implemented to monitor performance regarding qualitative attributes, in particular the compliance of results with respect to contractual commitments, must be mutually agreed upon so as to ensure that each party fully recognizes the inherent representativeness and fairness of the approach.

Candidate rms may nd it worthwhile to propose performance-evaluation techniques as of the time of bid submission. Such a move would then allow establishing and approving per-formance measurement conditions during the negotiations held prior to signing the nal part-nership contract.

In conclusion, an approach along these lines provides enhanced visibility to both parties when formalizing contract specications and selecting a partner (from the vantage point of the public entity), and when formulating a bid (as seen from the private side).

b) During the life of the partnership

In order to satisfy its long-term objectives, the public authority must be in a position to ensure, throughout the life of the partnership, the compliance of service provision or construction work with contractual commitments.

Both the pertinence and mutual acceptance of the means employed to evaluate such compli-ance are thus critical. The evaluation process must be agreed upon from the outset of the partnership and acknowledged as being representative; in this manner, the groundwork may be laid for subsequent cooperation which will allow assigning responsibilities through applica-tion of each party’s rights and obligations.

Furthermore, in such a nebulous realm as a project’s qualitative aspects, it is most essential to remain exible while regularly calling into question, as the partnership progresses, the continued relevance of the initial contractual framework.

This issue gets raised to the extent that customer expectations are inuenced not only by the experience acquired from use of the service, but also by exogenous factors, such as competi-tion from other services, technological evolution and the regulatory environment.

The periodic reevaluation of qualitative specications is thus imperative to achieving long-term public authority objectives.

Any such reevaluation, as well as that of the monitoring methods, must be conducted with the approval of both parties in a truly cooperative spirit, thereby enabling each party to act within the scope of its specic agenda while remaining a positive actor to a well-balanced partner-ship.

3. A well-balanced partnership based on both qualitative and quantitative evaluations

As highlighted by a plethora of examples, incorporating quantitative factors alone raises a serious risk of failing to meet the public authority’s long-term objectives.

An efcient public-private partnership therefore also necessitates taking account of qualita-tive factors. This requirement has already made it possible to extend the search for pertinent solutions, based on exacting approaches.

Only once quantitative and qualitative factors have both been included into the equation can a true public-private partnership, well-balanced and in the vital interests of the community, actually be instituted.

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The heart of a public-private partnership project lies in the analysis of the inher-ent risks. Such an analysis serves to shape the project, determine its feasibility, devise the measures necessary to limit risks, and enhance viability of the overall project environment. Moreover, risk analysis allows structuring the Partnership: each par-ty’s role, level of involvement, contractual commitments and financing premises. In short, this analysis gives rise to the entire set of conditions governing the success of a public-private partnership.

B. RISK ANALYSIS AND SHARING: THE KEY TO A SUCCESSFUL PUBLIC-PRIVATE PARTNERSHIP

Jean-Marie AOUST, T. Craig BENNETT, Roger FISZELSON

The preferred economic approach for analyzing Public-Private Partnerships is centered on the equi-table sharing of risks. This notion serves as the basis for building a well-balanced partnership between private operators and public authorities. The goal herein consists of each partner stamping its mark on the project blueprint in a way that allows both parties to come away winners. While the fundamental interests of each party are quite distinct, both stand to gain from a successful public-private partnershipproject.

Project risk management involves a four-stage process: risk identication, assessment of the poten-tial impact in the event of risk occurrence, risk-by-risk limitation, and allocation of residual risks.

The primary categories of risk are as follows: technical risks (design-construction), nancial risks, demand-based risks (service operations), revenue-based risks, risks of “force majeure” (Acts of God), macroeconomic risks, and legal risks. Some of these risks happen to be specic to the private sector (e.g. insufcient return on investment), while others only pertain to the public authority (non-performance of a public service).

A number of measures can be taken in a coordinated manner by private operator and public authority in order to limit overall project risks, namely by means of establishing a sound project basis, deter-mining the most appropriate choice of nancing, and adopting a well-targeted marketing approach with respect to the end user. Nonetheless, once these more general “project” risks have been con-tained, the inherent residual risks must still be allocated. From this standpoint, the two partners’ set of interests do not overlap; hence, an effective public-private partnership represents the successful completion of a well-balanced negotiation process conducted with a long-term perspective.

Two basic principles serve to guide this division of risks. The rst stipulates that risk must be remuner-ated, with the quantity of risk borne by a partner being made proportional to the level of prot earned (nancial, socioeconomic, etc.) from the project. The second principle states that each risk is to be assigned to the actor most capable of managing it, given the nature of the risk; such an approach must be applied with the rst principle keenly in mind.


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1. Reminder: The primary risks borne by the public authority and the private operator

In a concessionary (or delegated management) framework, the public authority and private operator enter into a partnership with an overlapping objectives, yet highly-distinct motivations: the former is seeking to improve the quality of service provided to the public, whereas the latter is seeking a reasonable return on capital investment, sharing of expertise and assumption of risk. However, this deviation in objectives does not exclude a certain degree of commonality in the purposes behind pursuing the partnership, first among them being customer satisfaction.

Reliance upon a public-private partnership can be of benefit to both partners provided that the risks inherent to this type of project set-up have been sufficiently well analyzed beforehand and fairly apportioned, i.e. individual risks being assumed by the most appropriate partner. It is also necessary to have won acceptance for the partnership politically, socially and even culturally.

Once these conditions have been fulfilled, each partner is in a position to contrib-ute in a meaningful way to building the partnership. The private party contributes its skills, innovation capacity, management expertise, productivity, and both direct and indirect financial sources (equity and debt). On the other hand, the public partner (within the scope of its public service mission) is able to cut its financial expenses, thereby freeing up newly-available resources for other public service obligations (e.g. education, health and safety) in areas with no direct revenue-generation potential.

In an optimal scenario, the result is a “win-win” situation where both parties along with the ultimate beneficiary – the service user – gain from the partnership.

In order to make the most of such a project set-up, it is essential to accurately determine the most suitable contractual period: keep in mind that ventures of this type typically last a minimum of 20 years and, just like during a human’s life, are very prone to risk (risks at “infancy”, “adolescence” and “adulthood”).

It is quite obvious that a drop in performance, let alone a breakup of the partner-ship, would most certainly engender:– for the public authority, a degradation in the quality of service provided, coupled with the risk of budgetary surcharges if it must eventually step in to assume respon-sibility for running the service, in the absence of private-sector interest;– for the private operator, a lower remuneration, or even a loss of a portion of capital invested.

As such, a risk affecting one of the partners has repercussions not only on the project, but on the other partner as well. It is in the common interest of both part-ners therefore to work together to limit all risks with a bearing on project success.

These risks are not generated from a single cause, but rather may stem from a number of both direct and indirect causes arising throughout the life of a project,

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from its origin all the way to maturity, which at any point in time may undermine or kill the project.

In order to minimize the occurrence of such risks and to prepare, in the event of risk occurrence, the appropriate remedial measures, it is essential to identify as far ahead of time as possible the various types of risks capable of upsetting the project balance, distorting it, or even leading to its demise.

These considerations have incited us to conduct a typology of risks (broken down into general risks and risks specific to either private operators or the public authority) and to analyze the means by which their mitigation and elimination is possible. Risk limitation normally involves four successive stages as follows:– risk identification and inventory;– quantitative and qualitative evaluation of potential project impacts due to risk occurrence;– risk mitigation;– allocation of each residual risk to the most relevant partner.

2. Typology of common risks

All projects entail risks: the key to setting up a Public-Private Partnership lies in evaluating the inherent risks and in determining how best to manage them.

This process involves distinguishing risks intrinsic to the project from exogenous environmental risks and then categorizing them on the basis of both their period of occurrence over the project’s duration and their direct or indirect influence on operating material and financial flows.

From this vantage point, it is necessary to differentiate between risks capable of occurring during the design-construction phase, those capable of affecting the opera-tions phase, and those related to the project environment.

2.1. Risks arising during the design-construction phase

This category encompasses risks on both the “technical” side and the “economic/financial” side.

2.1.1. Technical risks

The technical risks (or construction risks) encountered during the design-con-struction phase result from technological choices and the sequencing of the con-struction program: they consist of cost overrun risks and schedule overrun risks.

• Cost and schedule overrun risks

These risks can stem from several sources: delay in administrative approvals and/or land acquisition, geological conditions, poor appreciation of the local con-text, default on the part of a supplier or subcontractor, etc.

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The risk of cost overruns can also arise from an underestimation of the cost of works and facilities or from a change in project specifications (in particular by virtue of public authority request). This risk does not necessarily engender a schedule overrun as well; however, the reverse is highly unlikely due either to the extra costs required in accelerating construction in order to reduce delays (at least partially) or to the application of intervening financial charges.

The consequences of risk occurrence can be measured in financial terms: increase in the amount of capitalized interest, hence higher financing needs or deferment of the initially-projected operating revenue.

• Risk factors introduced during design

Restraint must be exercised within the scope of a public-private partnership when resorting to untested technological innovation, given that financing outlays are to be reimbursed and remunerated for the most part by future revenue streams. The use of untested technological developments implies risks of implementation, capac-ity shortfall and operating difficulties. Even the combination of several tried and tested techniques or a simple “scale jump” can raise detrimental compatibility- or performance-related problems.

The level of caution necessary in the use of new techniques however should not dissuade from pursuing technological innovation, which remains an integral part of the makeup of a concession whenever innovative techniques represent the sole means for completing the facility (e.g. the “Rion Antirion” Bridge in Greece, the upcoming viaduct project in Millau, France) or enable reducing construction costs, hence tolls, significantly. In such cases, the financing plan must integrate risk by means of setting aside an adequate reserve. A number of risks, especially geological ones, can even be borne by the concession-granting authority when its assessment proves overly uncer-tain (see Colombia’s highway-building program: El Vino / Puerto Salgar).

• The project completion risk factor

This risk pertains to the technological risk as well as to the construction firm’s capacity to build the facility; it may lead to the risk of both schedule overrun and cost overrun. Moreover, it may be tied to the builder’s incapacity to execute the project satisfactorily (project completion risk), in addition to other factors governing the interactions between project actors.

It is not uncommon for several construction firms to be involved, with each being assigned responsibility for a specific component of the project (e.g. water treatment plants, which incorporate both a civil engineering firm and a process company). This scenario presents an interfacing risk, or a coordination risk between the actors involved, which could engender a risk of both schedule and cost overruns.

For reasons, either imposed (mandatory recourse) or inspired by competitive pressures, reliance upon subcontractors (particularly local ones) may engender risks

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of insufficient technical capacity and incomplete control over individually-assigned project components, which imply risks of both schedule and cost overruns (the sub-contracting risk).

Lastly, for many large-scale projects, unforeseeable risks related to conditions exogenous to the work site must not be overlooked either. These pertain, in particu-lar, to climatic and subsoil conditions (which prove considerable in projects involv-ing undergrounded structures or especially deep foundations).

2.1.2. “Economic/financial” risks

“Economic/financial” risks are related to parameters inherent in the project’s financial set-up. The impact of their occurrence is felt as cost and/or schedule over-runs, hence an overall inflation of project costs and a loss of overall economic profit-ability. This category of risks lies, first and foremost, within the set of parameters exogenous to the contract which serve to establish its financing conditions; it also encompasses the respective capacity of the contractual parties to uphold their finan-cial commitments.

• Risks related to the contract’s reference financial parameters

The indexation risk can arise, notably in the case of a long-term construction contract whereby the price is not firm but rather indexed to certain economic param-eters (such as the construction cost index). Should the rate of inflation prove higher than anticipated and reserves insufficient to cover this excess, the amount of financ-ing allocated will fall short of needs.

The interest rate risk arises when variable-rate financing has been allocated for the construction period (e.g. Euribor, Libor programs). Since the project is not gen-erating any revenue during this period, any increase in the variable rate will give rise to an increase in capitalized interest and thus to additional financing needs.

The exchange rate risk may arise whenever expenditures and revenues are based in different currencies.

• Upholding commitments and refinancing

The refinancing risk may arise whenever financing has only been settled for the construction period. This risk weighs on the project if, upon completion of construc-tion, no long-term financing can be procured to take up the slack in expired finan-cing.

The counterparty risk may stem not only from a misevaluation of the project builder’s financial capacity (up-front equity contribution, financing of cost overruns or shortfalls in revenue generated from the service’s partial start-up, etc.), but also from misevaluation regarding subcontractors (weak financial status, inadequate level of guarantees, etc.). Such a risk may engender the inability of the builder to fulfill its contractual obligations, thereby incurring at least a risk of schedule overrun. These



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“private” risks are then complemented by the “public” risk resulting from failure of the public authority to meet its specific set of commitments (provision of subsidy, customs fee waiver, V.A.T. waiver, etc.).

2.2. Risks arising during the operations phase

Once the construction phase has been completed, risk then gets transferred onto both project-generated cash flow volumes and operating costs. This risk intensifies as the period of operations, over which the accuracy of forecasts cannot be ensured, grows longer.

2.2.1. The income risk

This risk can be divided into a pure patronage (or “volume”) risk and a price risk leading to an insufficient volume of income.

The pure patronage (or “volume”) risk is characteristic of infrastructure projects, and in particular for newly-constructed transportation facilities. It tends to be deci-sively higher than in cases of merely improving existing infrastructure (e.g. upgrad-ing a thoroughfare to meet highway standards), especially if the new facility (toll roads, toll bridges/tunnels, public transit, etc.) is subject to competition from either free modes of transportation or from modes considered to be less expensive.

User demand is very difficult to assess at the project’s outset: estimation errors may lead to project failure regardless of the toll or service price set. The price elasti-city of demand is critical, yet remains a parameter quite complex to evaluate. These estimation errors may pertain to the initial level of demand, the ramp-up period or the medium- and long-term traffic growth rate. In this respect, any dysfunction takes on major proportions, leads to added costs and could render the service inoperable. Such errors can also stem from the presence of a competitive alternative which could not have effectively been prohibited in the initial concession contract.

Generally speaking, demand must be projected using very conservative bases; at the present time, demand forecasting is not an exact science.

Other types of projects, notably in the water services sector, are not expected to encounter any problems in selling off their production, yet may show extreme sensi-tivity to both the price charged the consumer and social acceptability. In this instance, the volume risk turns out to be low, while the revenue risk is high, inasmuch as imposing the price required to ensure project profitability may meet resis-tance.

Some projects, such as power plants, can display both volume- and price-related risks by virtue of their acute sensitivity to the elasticity of the service rate/volume couple.

Other direct risks of revenue shortfalls exist, which are indirectly tied to both the level of demand and price elasticity. Revenues, on their own (without any increase in operating costs), may thereby be insufficient.

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Such a situation can be caused by several factors, a sample of which are listed below:– performance on the part of the operator or certain suppliers;– service interruption;– personnel strike;– technical failures;– total or partial default on subsidy payment;– absence of supplies for the newly-contracted concessionaire (e.g. reserve of fuel oil for a power plant, procurement of water use rights for a dam project);– nonpayment of the customer or user (of critical importance in water supply and energy projects).

2.2.2. Risk of operating cost increases

If design has been well-controlled, construction adequately performed and start-up testing carried out satisfactorily, it can reasonably be expected that operating costs will be held in check.

However, a number of factors may enter into play to induce an increase in operat-ing costs. The following list provides an illustration:– poorer management results than projected;– omission or underestimation of a cost category;– rise in the price of raw materials or certain purchases;– exceptional climatic conditions;– underestimation of maintenance costs, major repairs and facility renewal;– increase in the level of fee paid to the public authority without any accommoda-tion in exchange, or more stringent demands made by the public authority (e.g. safety, quality of service);– subcontracting of a portion of service operations, capable of creating an interfac-ing risk.

2.2.3. Financial risks

The same types of financial risks encountered during the design-construction phase are also found during operations, yet at times with a slightly different orienta-tion.

Those risks related to the financial parameters guiding the contract, in particular the exchange rate risk and the interest rate risk, tend to rise as the concession con-tract and reimbursement period grow longer. Moreover, foreign shareholders in the concession expect their dividends to be paid in strong currencies, which further adds to the impact of exchange rate risks. As regards the indexation risk, procurement, operations and sales contracts are normally set in constant money terms at the outset and then reevaluated on an annual basis. Nonetheless, the risk remains of encounter-



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ing indexation formulae which lead to stronger rates of increase on the expenses side than on the revenue side (the so-called “scissors effect”).

Since the number of project participants is higher during the design-construction phase, the sources of counterparty risks prove to be greater as well; the operator, the shareholders, the suppliers or even the buyers may be the cause of such risks.

2.3. Permanent «indirect» risks related to the project environment

This category of risks does not pertain to either of the two parties to the contract, yet may spur financial and commercial repercussions on the private partners, while affecting service provision and overall project costs for the public authority.

2.3.1. The risks of Force Majeure (Acts of God)

These may involve events and incidents associated with not only classical cases of Force Majeure, such as natural disasters, but also political causes, such as an embargo on the delivery of raw materials, refusal to deliver a work permit for expatriates, etc.

2.3.2. Macroeconomic risks

The recent financial crises experienced in South America and Asia have demon-strated, if it were really necessary, the consequences of a sudden drop in currency value and the ensuing repercussion on project profitability (e.g. Mexico’s highway-building program). Other major macroeconomic changes can also affect projects, e.g. an energy crisis or an economic crisis reflected in a lower standard of living.

Macroeconomic risks may also arise due to the failure of certain hypotheses to come to fruition (e.g. lack of market success) or to the presence of new constraints.

2.3.3. Legal risks

This category pertains both to a failure to comply with pertinent legislation and regulations and to the risk of an adverse change in existing regulatory legislation. The legal environment must be examined from a broad perspective, including:– corporate law;– banking law;– tax law;– environmental legislation;– sector-specific legislation;– avenues of legal recourse, especially arbitration-related clauses (possibility or not of resorting to international arbitration).

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3. Private partner-specific risks

Within the scope of the partnership, the private operator bears those risks inherent in any partnership concluded with a public entity, which are usually grouped under the heading “political risk” and which encompass:– expropriation, nationalization, confiscation, embargo;– shift in governmental priorities, retroactive legislation, change in institutional context;– inability to transfer or convert project-generated revenues.

This classical political risk is to be coupled with a new political risk (called the “extended political risk”), which spans the public authority’s failure to comply with “specific commitments” undertaken in order to support the partnership (e.g. contractual obligations with respect to the concessionaire to enhance the feasibility of construction and operations, financing, underwriting on the part of project insurers, etc.). Project investors, lenders and insurers pay close attention to the strict fulfillment of contractual obligations of the public partner; failure to meet these commitments invokes the political risk.

Such commitments include:– unrestricted application of service rates– delivery of all necessary permits and approvals by the scheduled date– competition-exclusion commitments– subsidy provisions– use of eminent domain– nonintervention in the project’s construction, financing and operations– compensation in the event of buyout or unilateral termination of the concessionary contract without operator default.

The public authority is increasingly represented by its local-level divisions: regions, provinces, departments, municipalities, which tend to be considered by both public and private project insurers-lenders as administrative and not political entities, from a risk-related standpoint in bilateral and multilateral agreements. This phenomenon should only become more acute in the sectors of public infrastructure, water supply, sanitation and energy. This risk of running into a “gray area” might turn out to be an unavoidable obstacle in the development of public-private partnerships.

Last comes the risk of social and cultural acceptability. Depending on the specific project, the public attitude (in particular that of low-income population segments) as well as the positions held by trade unions, pressure groups and non-governmental organizations (NGOs) may given the right set of circumstances lead to a risk that is difficult to accept or shoulder by the private sector.



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3. The contract’s sensitive clauses

The so-called negotiation phase obviously represents the occasion for the selected partner(s) to discuss with the concession-granting entity the set of clauses critical to project success.

Within the highly-interwoven contractual layout shaping all public-private part-nership projects, a number of clauses appear to be quite sensitive and thereby require special attention on the part of both public authority and private firm.

The quality built into the various clauses will be determinant to the contract’s legal security, which must be guaranteed by both parties.

3.1. Respecting the contractual equilibrium instilled between the contracting party, the investor and the user

All of these clauses actually pertain to the fundamental notion of contractual equi-librium. Without trying to aggrandize this notion, which often winds up concealing inherent pressures within the partnership, awareness needs to be directed to the fact that a public-private partnership, negotiated between two parties, is in reality a three-party contract, in which the user must be included.

While not invited to sit at the negotiating table, the user – who typically repre-sents the public-private partnership’s primary source of financing over the long term – eventually makes his presence felt to the two contract signatories. In industrialized countries, this dynamic takes the form of litigation over service rate hikes; whereas in developing countries, it tends to get reflected by social protest or increases in the rate of unpaid bills.

The “successful” public-private partnership – completion of the contract term and achievement of the quantitative and qualitative objectives for service improvement – is more than ever oriented away from locking in an income stream for the private partner and/or public entity; rather, the “three-party” contractual equilibrium lies at the heart of negotiators’ concerns.

The direct balance of financial relationships between public entity and conces-sionaire must not be overlooked either. In this respect, “financial turnaround” clauses allow the public authority to recover all or part of its outlay at the beginning of the contract period. From the opposite perspective, within a concession, delegated-man-agement contract or BOT, the concessionaire and/or the banks must be assured of being able to repatriate their profits when the time comes.

3.2. Financial clauses

The contract’s financial clauses will naturally exert a special impact on the project: they establish or allow establishing the service rate schedule and rate-revision formulae

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as well as the financial flows between public entity and private firm (in both direc-tions).

Meeting clauses are very frequent with respect to rate-setting (see the example of South-East Water in the U.K.); however, even without such clauses, close and regular controls are to be expected on the part of the public authority.

France’s Council of State has laid down the set of rules applicable to financial clauses by rebuking, for example, rate structures which force the user to bear costs beyond the actual service provision, or unwarranted payments from the concession-aire to the public entity. When working abroad, all sorts of situations can be encoun-tered, yet it is clear that political sensitivity to rate issues remains a universal6. If per chance the public entity were able to overlook this sensitivity and concentrate solely on its own financial interests – which is the case in authoritarian regimes – it would be incumbent upon the private firm to recall to the public entity (how paradoxical!) the risk it runs of causing the rate of bill collection to drop and engendering serious difficulties.

However, the issue of rate levels is far from being the only one requiring close attention. The definition of rate categories is often equally as important and neces-sitates in-depth economic studies based on a service audit.

Lastly, the public-private partnership’s current and future tax system must be speci-fied, to the extent allowed by the constitution. If need be, an article to the law should be requested.

3.3. Obligations of the private partner

Directly tied to the financial clauses, the contractual conditions stipulating private partner obligations must also be drafted with care and precision.

A true partnership presumes priority placed on performance obligations as opposed to mere resource obligations, which implicitly assumes that the private firm enjoys the maneuvering room to enable meeting the assigned objectives.

To the extent possible, the objectives assigned must be guided by a set of quantita-tive indicators which can be determined consensually. Such a prospect may prove dif-ficult when the service’s information system lacks reliability. In many instances, an initial audit serves to derive temporary indicators at the time the contract is awarded; these indicators are then confirmed a few months after the contract takes effect, at the time of a second audit conducted by the newly-appointed private partner (under public entity control).

Target results are often set gradually (number of service customers connected to the network, drop in number of unpaid bills, service quality indices, etc.); it then becomes

6. In this vein, see the work conducted by the OECD: PUMA, Summary memo n°. 3: “The billing of public services to users: Guidelines for improved practices”, March 1998.

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necessary to forecast impacts in the event the public-private partnership deviates from the critical path.

Special attention must be paid to penalty clauses, which are particularly common-place in BOT or PFI set-ups (see the example of Barnet Hospital) in a situation of captive demand where the end user is unable to intercede as mediator.

3.4. Reducing uncertainty and meeting clauses

Reducing uncertainty is without a doubt the most arduous exercise within public-private partnership negotiations; it presupposes the involvement of experienced pro-fessionals well-versed not only in the specific economic sector, but in the host country as well.

All of the probable, or even possible, changes in public-private partnership must be described in full and their impacts on the public-private partnership’s equilibrium assessed: the term employed here is “background clauses”. The creativity of the plu-ridisciplinary team assigned to draft the contract must at this point be put to the task: the most unfavorable scenarios for contract execution must be evoked and their even-tual impacts discerned. Example: for an electricity distribution concession, a change in energy policy would have to be envisaged; for an airport concession, the construc-tion of a competing facility or the availability of a competing service are cases to be negotiated (see the example on Phnom Penh).

Not all events obviously can be predicted; it is therefore necessary to establish a set of general principles applicable to each of the fundamental hypotheses shaping the public-private partnership project. The inclusion of meeting clauses, which allow comparing viewpoints from both sides of the partnership, and potential corrective measures are also highly recommended (see the example on the Abidjan Airport).

In countries exhibiting a strong legal tradition in the area of public-private partner-ship (e.g. France), these general principles stem from the body of jurisprudence which acknowledges the financial equilibrium of contracts, thereby giving rise to compen-satory procedures for the occurrence of «unexpected events». In countries devoid of such tradition, it would be judicious to stipulate these principles directly in the con-tract and to explore in-depth all hypotheses leading to unexpected situations or to the application of “Imperial fiat”, i.e. unilateral decisions on the part of the public authority.

3.5. Breakdown of risks

These clauses are also to be introduced in order to translate, as accurately as pos-sible, the breakdown of risks borne by the private firm and public entity, respectively. Such a breakdown, which constitutes the very core of the contract, has been fully analyzed in Chapter II-B above and will not be repeated here.

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3.6. Public domain status

Rules regarding the public domain of property and facilities must also be high-lighted in the contract. The French system for handling concessions and infrastructure leasing contracts incorporates a strong notion of public domain, whereas the Anglo-Saxon equivalent (BOT) and its variants tend to downplay the public domain angle. Herein most certainly lies the main distinction between the two models; in practice however, this issue must always be treated and resolved with extreme care, regardless of the legal framework opted for.

Two distinct approaches are possible:– the project’s facilities remain tied to the public domain and, as such, are gener-ally subjected to heavy constraints: inalienability, imprescriptible status, etc. This status restricts the private partner’s management leeway; procedures would need to be implemented to waive some of these constraints (e.g. fixing a time limit for the public authority to respond to the firm’s request for a status change in the aim of selling off equipment);– the project’s facilities (especially those resulting from private investment) remain subjected to a private law regime, thereby allowing for more flexible facilities man-agement practices.

If national legislation prescribes the need for public domain authorization, the attempt should be made to incorporate such an authorization into the actual contract or at least to add it as a suspensive condition.

When confronted with a complex situation involving project property rights, French law offers a panoply of tools for reaching a fair solution. A line is drawn between those facilities/equipment required to be handed over – in most cases, free of charge – to the public entity upon contract expiration and “recovery” equipment, which only gets handed over (in exchange for payment) should the public entity elect to exercise the option. The former belongs to the public domain, i.e. the public sector’s private property , whereas recovery equipment remains, up until contract termina-tion, the concessionaire’s property.

3.7. Accounting and taxation system

The inventory and legal classification/valuation of public-private partnership project equipment must be accompanied, in most countries, by specifications as to the type of accounting and fiscal conventions applied to depreciation allowances, espe-cially if such equipment is to be handed over free of charge upon contract expiration. In this case, a lapse depreciation technique is to be practiced, whereby reserves are set aside during the initial period and then recovered at the end of the contract.

However, if the handover equipment is returned to the public entity in exchange for compensation, a value-based depreciation technique would have to be employed, according to which depreciation allowances will be carried as expenses until contract expiration.

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Practices regarding depreciation and financial reserves – along with the respective taxation system – are obviously critical to the public-private partnership’s financial equilibrium; the specific conditions governing their application must be determined up front once the contract has been signed. In industrialized countries, instituting such conditions presupposes involvement of the nation’s tax administration either directly within the contract or by means of a unilateral commitment included as a contract appendix.

3.8. Public entity control measures and regulation

Public entity control over contract modifications must also be stipulated. While such control is vital, it must not be performed as a perfunctory task. In order to prevent this tendency, it is advisable to stipulate different control frequencies and methods, depending on the specific control objectives. For example, an annual control could be scheduled for a contract’s accounts and general progress, while a frequency of 3 to 5 years would probably suffice for more in-depth audits of the project’s economic, financial, social and physical data.

At the beginning of the contract, close monitoring is to be expected in any event from the public entity; experience has shown that this period requires an ongoing dialogue extending beyond mere contractual obligations. Controlling a contract’s execution is to be incorporated into the body of regulation of the pertinent economic sector.

In its strictest sense, the regulatory function ensures that a given economic sector is operating smoothly by means of both preventing against disruptive competitive pressures and advising the corresponding public authority on appropriate compli-ance measures. In many cases, including France and other industrialized countries, this function is often mistaken for the compliance function. Two scenarios can be depicted:– first, the regulator can be mistaken for the public contracting entity. The risk of the regulator taking action unilaterally in conflict with its own set of interests is thus low, yet conflicts may arise between its role of contracting party and that of regula-tor in the event of differences raised between public-private partnership partners. In order to avoid such conflict, the public authority can set up and empower an independent regulatory body;– second, the regulator may be a distinct entity. Such is the case for local public-private partnershipprojects governed by national-level regulation, in general admin-istered by a technical Ministry office. The risk of interference will have already been examined at the time the contract is drafted and, in many instances, at the time it is first proposed (see Section 2.4 above).

It is clear that no contract can reasonably be signed, especially for a long-term period, with the perpetual risk of interference from a sector-specific regulator not

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acting in the role of a neutral referee. This issue must be settled either in the contract itself or in the sector’s legislation establishing this role of referee and then adopted prior to the public-private partnership.

Efforts must be directed at creating a regulator out of a different mold than a project controller, i.e. an administrative authority which does not report to the Mini-stry and which will theoretically outlast near-term changes in political preferences. In addition, this authority is to remain neutral in all arbitration held between con-tractual parties.

4. Compatibility of the final project set-up with the host country’s legal culture

In conclusion, in order to achieve the objectives of a public-private partnership, it is necessary to pay close and prolonged attention to the legal system being applied. Keep in mind that no ideal blueprint for a national or contractual system exists. Beyond the necessary precautions taken by investors, assurance must be provided that the project’s ultimate set-up is sufficiently compatible with the host country’s legal culture. Herein lies another guarantee of the public-private partnership’s durability, which is just as important as that resulting from the negotiation of the contract’s sensitive clauses.

An example of a new legal system for public-private partnership projects in Chile

During the 1980’s, the privatization of companies assigned responsibility for running public service networks was considered in several Latin American countries to be a prerequisite for achieving economic efciency. At the beginning of the 1990’s, only little progress had been made due to the typical obstacles created by such ventures. It was at this time that the use of public-private partnership really started to win recognition as a politically-acceptable alterna-tive to privatization. Each country however elected to develop its own brand of public-private partnership formulae. This nding is clearly revealed when comparing experiences in Chile and Argentina.

In Chile, public procurement contracts – the simplest form of public-private partnership – were initially introduced with great success. EMOS, the Santiago area water distribution company, had even encouraged its own employees to create private companies to bid on such con-tracts. EMOS went on to become one of the region’s most productive companies, with an incredibly low ratio of number of employees per service connection. At the same time, pen-sion funds dedicated to infrastructure nancing were also being created. National legislation relative to foreign investment was modernized and the types of PPP contracts diversied. Chile progressively adapted its PPP-related legislation in 1981, 1991 and 1994, and set up a stable legal and taxation system to accommodate foreign investment (Decree-Law 600).

In Argentina, the use of public-private partnership proved instrumental in stimulating the eco-nomic changes ushered in at the beginning of the 1990’s. In conjunction with the country’s pri-vatization program - 90% completed as of the end of 1994 - some twenty public services were contracted out as concessions, including the Greater Buenos Aires water supply concession (still considered by the World Bank as a model project). In the case of Argentina, public-private partnerships were introduced over a brief period and directly in their most advanced forms.

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What are the lessons for a successful legal framework?

u A stable and consistent institutional framework, adapted to the public-private partnership project (which does not resemble a public procurement contract), is fundamental. It must be based upon an analysis of both the directly-applicable legal aspects (an ad hoc law often proves necessary) and the indirect regulatory environment.

u The public authority must also provide the private operator with a set of straightforward and unambiguous procedures, as well as an independent juris-dictional control.

u A public-private partnership contract is built around the notion of upholding an equilibrium between the contracting party, the investor-operator and the user.

u A contract’s most sensitive clauses are: nancial clauses, the private part-ner’s obligations, background and meeting clauses, property ownership, and the accounting and taxation system.

u The public authority must institute basic regulatory mechanisms in order to conrm the successful execution of a public-private partnership. Such mecha-nisms must not only guarantee neutrality for the private operator, but also enable the public authority to ensure that the objectives and conditions it has set are being met by the operator.

III

CONCESSIONS

IN THE FIELD OF TRANSPORTATION

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The field of transportation, including urban transit services, represents one of the major areas of responsibility involving public authorities in which partnership with the private sector may lead to significant added value in terms of both efficiency and quality of service, while allowing the public authority to retain full regulatory control. Three fundamental characteristics in this field exert a critical impact on the ways potential public-private partnerships are implemented.

The first characteristic is the magnitude of the externalities generated. Transpor-tation does not represent a result in and of itself, but rather a means for performing an economic or social activity. From this perspective, the transportation system in general implies some highly-positive economic and social externalities; on the other hand, it generates some highly negative externalities as well (environmental, in par-ticular). In the area of transportation, what holds true at the system level is also applicable, to varying degrees, for each component project. As a result, the socio-economic profitability of a full-fledged transportation project – i.e. the added value for society that a project be built – is typically quite distinct from its purely financial profitability – the ratio of direct revenues (e.g. highway tolls, train tickets) to costs for a given project.

A second essential characteristic of a transportation project has to do with the high level of infrastructure consumption and with the fact that each new project requires a capital investment profile which is difficult to spread over time since the bulk of investment remains heavily concentrated prior to operations start-up. Con-sequently, the portion of total financing needed up front is very high, while the anticipated duration of transportation infrastructure – i.e. its depreciation period – is very long.

The third characteristic associated with most projects (to a lesser extent for ports and airports) is the relatively weak level of captive market demand. In almost all instances, one or several trip-making alternatives are available (different mode of transportation, different itinerary). Traffic forecasting – and the accompanying rev-enue stream projections – is difficult to perform and naturally accounts for sizable margins of error, especially for new projects.

The impact of these three characteristics results in an extremely high level of risk and often in a rather weak financial return from a social utility standpoint. As such, it becomes necessary for the public authority to assume heavy involvement, side by side with the selected partner, in financing the infrastructure. This involvement could take the form of a cash participation or in-kind contributions (e.g. a piece of exist-ing infrastructure, income streams generated from another facility). The size of this in-kind contribution is often reflected, in the case of public transit systems, ports or


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airports, by the fact that the concession involves the operation of an existing piece of infrastructure over a given period. In this fashion, the public authority has shoul-dered the responsibility for building the initial infrastructure (and assumes the inher-ent risk), while the private operator is responsible for modernization and all subse-quent investment in operations (train stations, airport terminals, container-handling facilities, rolling stock, etc.).

While these aspects serve to characterize transportation systems as a whole, each mode exhibits a number of particularities, thereby lending justification to the use of an individualized approach which, in turn, leads to highly-varied types of conces-sions (or other forms of public-private partnership). Part III of this book is devoted to analyzing each of the major categories of transportation projects likely to rely upon public-private partnership:– roads and road-related infrastructure (bridges, tunnels, etc.);– public transit systems running on dedicated facilities;·– airports;– ports.

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1. A Partnership aimed at the supply of infrastructure

The current chapter will discuss under the generic heading of “road infrastruc-ture” three distinct categories: open roads and highways (through unbuilt areas), urban streets and roads, and road-related civil engineering works (bridges and tun-nels). Generally speaking, these types of infrastructure lie within the responsibility of the public authority inasmuch as road projects are intended to fulfill, first and foremost, the needs of the locality (certainly to a greater extent than the other infra-structure discussed in this book). A road network is of absolute necessity in running a country, whether in terms of national cohesion, economic development, or mobil-ity. No society can do without a system of roadway connections (dirt strips, roads, streets, highways, etc.) and continue to exist. Building, maintaining and providing accessibility to a road network are thus essential and logical obligations of the State.

Another fundamental characteristic of road infrastructure is that the service (transportation) operations are actually being handled by the end user. The role of the public authority or the operator lies exclusively in supplying the infrastructure, yet responsibility for the service itself (i.e. transportation from point A to point B) is left entirely up to the user. This distinction is critical, in comparison with the other sectors covered in this book. With the exception of roads, the service delivery com-ponent takes on much greater importance than the supply component: for rail trans-

A. ROADS AND ROAD-RELATED INFRASTRUCTURE

Alain FAYARD, Olivier BONNIN

Major highway construction projects and road-related infrastructure undoubtedly give rise, as do large-scale rail projects, to the most complex and complicated forms of public-private partnerships. Two charac-teristics lie behind this assertion.

For one thing, the nancial risks involved are tremendous: the sums to be invested are extremely high, dif-cult to smooth over time and necessary in their entirety before any revenue can be generated. The level of trafc (hence revenues) obviously increases only over the long run, whereas depreciation allocations taper off from one year to the next.

Moreover, revenue projections prove very difcult to perform: determining the level of interest generated in a new facility prior to its completion is, to say the least, full of uncertainty. It is next to impossible to assign an optimal toll acceptable to the user. The process of deriving road tolls must avoid over-reliance on the economic theory of surplus maximization in order to integrate the psychological factors associated with the user’s perception of toll levels and overall road transportation supply.

For major road infrastructure projects, the involvement of the State as a public partner is vital. The level of direct nancial return on such projects tends to be limited, especially compared to the magnitude of the inherent risks. Non-monetary benets to the locality are quite often considerable, wherein lies the necessity of the participation of public authorities.


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portation or urban utility services, other entities are always encountered, including at least the service operator and, in some instances, the producer (e.g. water, electri-city). As such, the forms of public-private partnership adopted in the other sectors involve a multiplicity of actors and can present quite varied features, although in most cases the basic infrastructure is being supplied by the public authority. For the sake of simplicity, the term “operator” will be used in the rest of this chapter to refer to the entity assigned responsibility for managing and maintaining the road and, when applicable, for collecting road tolls. This term, however does not include supply of the transportation service.

Eventually, the use of public-private partnership for road infrastructure projects encompasses just the supply component and excludes all of the associated service provision (i.e. vehicle transportation or the shipment of freight by truck, which rep-resent the end user’s service, would obviously not be the focus of a public-private partnership). This feature makes a public-private partnership difficult to implement, all the more so given that the service provider is none other than the user himself (i.e. the motorist or the truck driver); this situation implies that the final product (the trip from A to B) can take on as many forms as there are users, with each one exhibiting a distinct set of characteristics.

2. The forms of partnership

The use of public-private partnership in road infrastructure projects is reserved for those instances when the public authority has identified a collective need for such a project. This identification process entails a strong level of socioeconomic profitability for the society as a whole, yet is coupled with insufficient public-sector financial resources and often a significant contribution capacity from users. The other rationale for introducing public-private partnership stems from the desire of the State to relinquish its responsibility for maintenance of highway facilities, which it thereby seeks to delegate along with the responsibility for highway construction, without being concerned by the effect of user participation.

As a result, the forms of public-private partnership for road infrastructure projects are less diversified than for the other sectors: they span facility financing and main-tenance, with the revenue stream being based on traffic levels and smoothed over time. Three types of financing participation can be differentiated: complete (or close to complete) financing of all construction and maintenance; partial financing of the construction, combined with maintenance financing; and strictly maintenance financing. For each category of public-private partnership, two remuneration meth-ods are applicable: direct remuneration by the user via toll collection, and State sub-sidies (more or less tied to the intensity of facility use).

In practice, the mode of remuneration enables distinguishing between the two major categories of public-private partnership. If the user pays a large portion of

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construction and maintenance costs, the public-private partnership resembles a toll-based concession. On the other hand, if the public authority feels that the user should not be asked to pay, either because of national policy or a low contributive capacity (i.e. small traffic volumes), and that the facility serves to support regional development goals, the concession tends to feature a system of shadow tolls. In such a system, the public authority remunerates the builder/operator on the basis of traf-fic levels. Both of these systems can be substituted for one another or even coexist, as described in the insert on Portugal.

From a general standpoint, a road infrastructure project provides benefits to soci-ety beyond that enjoyed by the user himself. The very nature of the project induces sizable indirect impacts on the economy, regional development patterns, other com-ponents of the road network, the environment, road safety, etc. A project cannot be examined solely from the perspective of its financial profitability in terms of what the operator is able to collect in exchange for added user benefit. It is thus often legiti-mate for the public authority to contribute to a project’s financing. The legitimacy of a road toll, and consequently its acceptability, has been assessed in careful detail in the following insert by Vincent Piron on user-toll concessions. Some uncommon examples demonstrate that certain projects could be considered as purely private, inasmuch as the public authority has already provided the basic infrastructure and the private company is merely responsible for developing a complementary facility to raise the overall level of service. Such is the case with State Highway 91 in Southern California, whereby a toll road was built on the median divide of an existing freeway, on the basis of the project’s financial profitability alone. However, this case proves to be the exception in a sector where public interest generally exceeds by a wide margin the sum of individual user benefits (i.e. socioeconomic profitability consider-ably higher than the direct financial profitability).

An in-depth analysis of the actors and their interrelationships within the frame-work a toll road concession is provided in the first part of Vincent Piron’s insert on toll road concessions.

3. Analysis and breakdown of risks

Road infrastructure projects engender, for the use of a public-private partner-ship format, tremendous risks, which require careful examination. For purposes of simplification, let’s consider road infrastructure to be characterized by: a sizable ini-tial investment that cannot be easily apportioned; and an income stream beginning only once service has started up, increasing over the long run, and very difficult to forecast. The level of uncertainty and risk is therefore particularly high. In what fol-lows, we will focus primarily on two types of risks: the financial risk (related to the size of the initial investment), and the income risk (related to traffic volumes).

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3.1. The financial risk

The level of financial risk is maximal in a highway concession since the initial investment proves, far and away, to be the greatest expense and the period of opera-tions is very long. Furthermore, income flows increase over time, whereas financial expenses are decreasing. In addition, the construction period often extends over many years, while the project is only able to generate revenue once the construction phase has been completed. Consequently, the project’s financial layout must take these features into account, by providing for long-term resources and by accommo-dating an initial period devoid of income.

Application and enforcement of a programming timetable during construction is critical to the success of the financing set-up, which allows for very little margin. Even the slightest delay in construction and delivery of a project can prove detri-mental to its viability. From the public authority’s standpoint, herein lies one of the primary advantages of a public-private partnership. In reality, the cost of construc-tion delays is so prohibitive that a private operator would do their utmost to meet schedules, even up to completing the project ahead of time. It is not that uncommon for public-private partnership projects to be delivered before the scheduled date (e.g. the M1/M15 motorway in Hungary), which practically never occurs with conven-tional public procurement contracts.

3.2. The income risk

The income risk is fundamental to road infrastructure projects involving public-private partnership. In general, it is extremely difficult to assess with certainty the future revenue streams generated by the planned project. Several factors account for this difficulty, with the most important one being that the project’s future patrons are individual users, each one of whom exhibits his own set of characteristics, behavior and incentives. Determining these characteristics would entail a massive and fine-tuned data collection effort on current trip-making patterns and user behavior. Basic macroscopic observations of existing traffic flows would not suffice in this context.

Yet, even if current user behavior patterns could be discerned, this would still not suffice. In essence, an accurate assessment is needed of how users would react both to the presence of a new piece of infrastructure and to the application of a toll, if relevant. Several scenarios can be anticipated:• When the new facility is based on shadow tolls, the user is not asked to pay directly for using the facility. In this case, his behavior is easier to predict (systematic use of the new road, which is supposed to provide better service); the problem then lies in determining the volume of additional traffic induced and the new equilibrium established with existing infrastructure.• When a toll is charged on the new facility, which happens to replace or compete with other charged, but less-expensive transportation services, a reference then exists

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for evaluating the public’s reaction to the presence of this new facility. Such is par-ticularly the case for bridges and tunnels which replace or complement existing infra-structure (e.g. the Prince Edward Island Bridge in Canada). The main uncertainty concerns the level of traffic induced by the new facility.• When the toll facility is built in a country where similar facilities already exist, the data held on existing facilities tend to be sufficient in evaluating the public’s reaction to the toll. Such data can be employed to forecast the reaction of users and determine the breakdown of traffic flows between the new facility and the toll-free existing network. This scenario is especially true for open toll roads built in a country like France.• Lastly, when the toll facility represents an innovation in a given country, it is very difficult to forecast the reaction of the local population. Calculating the elasticity of the traffic volume with respect to the toll amount is an extremely complex task. An elasticity of this nature is very seldom linear, as economic parameters alone do not enable evaluating traffic levels. In his insert, Vincent Piron discusses this subject in depth. A very cautious approach must therefore be favored when addressing the notion of toll in such cases, as shown in the examples of urban tolls in France or certain interurban motorway projects in Europe (e.g. Hungary’s M1 motorway).

The third aspect to deriving income projections for road infrastructure is more straightforward: the operations phase starts up several years after the project’s financ-ing has been established and after the initial series of expenditures; moreover, the income stream may be spread over periods well beyond twenty years. Given this time horizon, future changes in macroeconomic and social parameters mean that produc-ing reliable traffic forecasts for the existing road network is an impossible exercise, and even more so for new facilities. Trend-line projections can be developed for the period beyond 10-15 years to provide an order-of-magnitude indication of revenue levels, yet any figures based on such projections must be treated with caution.

3.3. Other risks

The risks described above are fundamental to any public-private partnership set-up for a road or road-related project. The other categories of risk discussed in Part III-1 of this book are also applicable, yet most can ultimately be ascribed as either financial risk or income risk. Issues related to procedures, the environment, safety and standards exert a direct impact on the financial risk by causing potential schedule delays and cost overruns capable of upsetting the project’s financial equilib-rium.

The exchange rate risk influences revenue levels, as do macroeconomic risks and the risk of changes in the institutional and physical environment. This latter cat-egory of risk can be particularly sensitive from two points of view, one of which concerns the specific legislation applicable to public-private partnership. The ensu-



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ing legal interpretation may engender modifications to the terms of the contract (e.g. through structuring toll systems, granting new user rights). These risks are especially predominant in countries without any public-private partnership experience, which are hence required to experiment with new contractual forms. The general context must also be taken seriously. Transportation and environmental policy, in particular, can heavily influence the profitability of toll roads and road-related infrastructure. For example, policies encouraging rail transportation in mountainous regions are aimed at significantly reducing the amount of truck traffic, which of course generates a negative impact on highway toll revenues in these regions. Similarly, the construc-tion of competing infrastructure can also adversely impact revenues.

4. Risk limitations

4.1. Financial risks

As a means of limiting the financial risks associated with project delays, which can be detrimental to both the private partner and the public authority, each party must absorb those risks which it is best able to handle. As a first step, the project must be defined in precise terms, a definition which requires a preliminary identifi-cation of the project’s functional attributes from the public authority. All relevant considerations must be addressed prior to finalizing the contract, chief among them the set of technical and environmental standards to meet and the required level of safety. A poorly-defined project is likely to be subject to modification during the construction phase, a situation which could easily disrupt the project’s equilibrium with respect to both cost and schedule overruns.

Secondly, the public authority is responsible for ensuring, within an acceptable time frame, that all preliminary procedures have been duly completed; such proce-dures might entail laying the coordination groundwork, acquiring land and ease-ments or obtaining the necessary construction permits and approvals. The risk of suspensive recourse or permit refusal can be detrimental to the project.

Once the objectives and scope of the project have been specified by the public partner, it becomes essential for the private partner to be able to optimize construc-tion and operating costs, a step which implies that the responsibility for the entire project is put in the hands of a unique consortium encompassing both construction and operations. This consortium will be asked not only to absorb its own risks, but also to propose the most optimal solutions for fulfilling the public authority’s set of objectives. The role of the operator, asked to bear responsibility for project quality over the long run, proves vital to this consortium.

As regards the actual construction phase itself, the concessionaire must be able to bear, thanks to adequate and sufficient preliminary studies, all of the envisaged construction risks, whether related to the works program or to the (potentially-

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innovative) techniques employed. Nonetheless, certain risks (e.g. geological) are dif-ficult to predict, and the contract must stipulate the set of standards for resolving potential problems, so as to limit the use of recourse as much as possible.

In light of the investment sums involved, the least-costly solution which still pro-vides the requisite service quality must be systematically favored. The sizing of the infrastructure must thereby satisfy two opposing objectives: minimizing the initial outlay and accommodating the gradual rise in load on the new facility as traffic levels climb. Project phasing is typically impossible for bridges and tunnels; however, for highways built in developing countries with a rising rate of car ownership, staggered projects could be envisaged (e.g. a two-lane road at first, followed by expansion to a four-lane highway as traffic allows or necessitates) (see the case study on the Maputo Corridor below).

In many instances, the investment required is very substantial and the project’s socioeconomic profitability is significantly greater than its financial profitability. Consequently, the public authority is bound to participate in the project’s financing one way or another. This participation might take on the form of subsidies, loan guarantees or in-kind contributions consisting of: land, an existing facility free of charge to be incorporated into the project, or an adjacent toll facility which would generate revenues as of the beginning of the construction phase. This latter contribu-tion characterizes some of France’s autoroute systems, in which revenues from exist-ing toll facilities get pumped back into the system to build new highways; it also applies to Portugal, as discussed below. Moreover, arrangements of this type are often encountered in the construction of a new bridge next to an existing toll bridge (e.g. the new Tagus River Bridge). In these cases, transferring the former piece of infra-structure constitutes not only a financial contribution, but also enables running the two facilities in a coordinated fashion. However, as demonstrated below by Vincent Piron, upsetting the use of the preexisting facility may incite strong public reaction (e.g. protest against the toll hike announced for the existing Tagus River Bridge as part of the concessionary agreement reached for the new bridge).

4.2. Limiting and spreading the income risks

Dealing with the income risk is an essential step to any toll concession, especially when experience with this type of approach is recent and not sufficient to predict user reaction to the introduction of tolls. The first step to ascertaining the extent of this risk requires a detailed understanding of existing flows. The success of a pub-lic-private partnership relies primarily herein. In-depth studies must be conducted beforehand by the public authority in order to determine the scope of its actual needs. These studies must subsequently be submitted to the project’s concessionaires-to-be for completion and verification. Many projects wind up getting shelved or performing poorly due to inadequate initial perception.



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In his insert, Vincent Piron describes the stakes and criteria involved with respect to public reaction to the introduction of tolls. Anticipating this reaction, albeit easier said than done, is fundamental to setting up a public-private partnership. A poor assessment at this juncture can produce a very negative impact both on the conces-sionaire, who would not generate the income necessary and be forced to abandon the project, and on the public authority, who would change the ground rules at the last minute under the pressure exerted by users and wind up enduring the financial consequences. A conservative solution consists of underestimating the users’ willing-ness to pay and placing priority on accustoming them to pay for the use of high-quality infrastructure. The user would then be able to assess the quality of the service provided by the new facility. In countries with an intermediate standard of living, the introduction of a maintenance and development toll on facilities built thanks to State financing may prove to be effective in: improving the quality of the road network; providing users with a high level of service; and accustoming users to pay for quality, while respecting their financial constraints.

User-toll concessions for road facilitiesVincent PIRON

Within the area of roads and road-related infrastructure, and more specically as regards user tolls, the revenues necessary to cover construction and operating costs stem from two sources: Public Authority subsidies, and user tolls (private vehicles and trucks). The break-down between subsidies and toll revenue is the outcome of a dual economic/social impera-tive: achieving a fair equilibrium is prerequisite to the full success of all projects.

1. The economic benets behind a road concession

The economic benets behind a road concession is shaped by three essential principles:– the concessionaire is responsible for both the construction and operations of the facility and, hence, is able to minimize overall “construction and maintenance” costs from a long-term perspective;– the facility is to be sized in accordance with economic criteria;– the project-nancing procedure allows gathering the nancing more quickly than by follow-ing the rules governing public-sector budgets. This acceleration in turn creates a leveraging effect as new technologies or new product development conditions are introduced.

These general rules offer considerable exibility in drawing up concessionary contracts. The actors in this process remain the same, yet the breakdown of risks among them varies heav-ily depending upon the specic context; consequently, an entire array of solutions can be envisioned, ranging from a narrowly-scoped public procurement contract to a concessionary contract in which the concessionaire bears all risks.

1.1. Presentation of the actors

Let’s consider the case of a concession which ties a local public authority (a municipality, department or region) to a concessionary company. The leading actors (seven in all) are listed below and displayed in the series of diagrams that follow:– the concessionary company itself, represented by its shareholders, whose aim is to realize dividends once the nancial climate allows to do so (arrow 7 in the diagram);– the end customer/user, who pays for the proposed service. This actor is represented by the motorist, the transportation operator, the railway company or airline, which pays a fee for use

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of the infrastructure made available (arrow 1);– the concession-granting authority. This actor holds the power to: determine the level of service to be provided, grant a concession in order to ensure the level of service so dened, put a concession out to bid, issue guarantees or award subsidies, and sign the concession contract with the designated concessionaire (arrow 2);– the Ministry of Finance, which collects the direct and indirect taxes related to the contract and the income generated (arrow 3);– the lending organizations, which advance the funding necessary to build the facility and then begin to be reimbursed only once the operation starts (arrow 4);– the construction rm, which is responsible for building the project on behalf of the conces-sionaire (arrow 5);– the facility operator, which collects tolls and performs all necessary maintenance work on behalf of the concessionaire (arrow 6).

Diagram 1 – Initial phase: project organization and construction(example of a State-granted concession).

In many instances, the same organization lls the roles of several actors. For example, a situation may arise where some of the concessionaire’s shareholders are construction rms and/or service operators; as such, they will not have the same strategic outlook on the project as shareholders with a purely nancial interest in the company, since the former are involved at several stages in the project and accumulate different types of risks and returns.

It is also quite frequent for the Public Authority to act either as the concession-granting author-ity, sole shareholder in the concessionary company, tax collector, or even lender! It goes without saying that a concession of this type would be run quite differently from one in which the majority of shareholders abide strictly by the rules of private investment/management.

Alongside this group of lead actors, other necessary actors take their place: legal and techni-cal specialists, whose role consists of validating the project’s underlying hypotheses and the soundness of the contractual relationships; and the rms assigned to implement toll-collection systems. Continual renements in toll-collection system technology has now made it pos-sible to apply a highly-targeted and customer-oriented toll rating structure, thereby enhancing project feasibility.


1

CONCESSIONAIRE

TAXESMinistry ofFinance

SHAREHOLDERS– purely-financial investors– project builders-investors

LENDERSAllocation of

funds

CONCESSION-GRANTINGAUTHORITY

Ministry of TransportationFINAL CUSTOMER

Motorists, truckers, airlinecompanies, railway companies,

airline passengers

CONTRACTORConstruction company

OPERATOR

2

3

45 6

7


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A concession is always composed of three phases: the construction phase, the normal opera-tions phase, and the nal phase, which corresponds to either the buyback of the concession or its contractual expiration. The three following diagrams depict the nancial ows between actors during each of these three phases. The arrows indicate the direction of monetary ows in a conventional concession.

Diagram 2 – Operations phase.

Diagram 3 – Final phase (buyback of the concession).

1

CONCESSIONAIRE




funds




airline passengers


OPERATOR

2

3

45 6

7

1

CONCESSIONAIRE




funds




airline passengers


OPERATOR

2

3

45 6

7

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Diagram 4 – Tacit contracts.

1.2. Tacit contracts

All of the ties between actors are to be formalized by means of contracts, regulations, laws, shareholder agreements, guarantees, etc. The legal instruments will guide actors at the stage of the contract’s signature and stipulate reactions to given circumstances. Yet, two types of tacit (unwritten, difcult to formalize, not well-known) contracts also exist: one between the population and the concession-granting authority, the other between the group of users/customers and the population as a whole.

Prior to granting the concession and initiating the bidding procedure, the political decision to build a facility and divide the ensuing costs between taxpayers and users has already taken place. These two populations are far from being one and the same. All State (or local) residents pay taxes and express their opinions at the ballot box. The customer, on the other hand, is an economic agent who determines the acceptability of paying a given amount at a given time for the service proposed by the concessionaire at that very moment. Only a por-tion of the population is composed of actual customers, yet the other portion of the population benets indirectly from the presence of the new facility (less congestion on the road network constitutes a benet for all residents, whether motorists or not) without having to pay any toll.

The two types of tacit contracts thus bind the concession-granting authority with the popula-tion in setting tolls at an optimal level, i.e. whereby each population category considers it is paying the right price given the corresponding benets, either indirectly (through taxes), directly (toll), or in a mixed form (a toll facility subsidized up to 50%, 70% or even more by tax revenues).

The following diagram presents the various actors in the concession by indicating all of the links existing, explicitly showing both political relationships and the social acceptability of tolls, between the population, the concession-granting party and the customer.


1

CONCESSIONAIRE




funds




airline passengers


OPERATOR

2

3

45 6

7

POPULATION


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2. Socioeconomic and nancial assessments: the purpose of a rate structure

2.1. Socioeconomic assessment

The construction of a public works facility or a piece of transportation infrastructure creates wealth. This wealth, however, is not easy to assess over the service life of the facility since the changes induced on the local standard of living and mode of operations get introduced very gradually, settle in for the long term and remain difcult to dissociate from the country’s overall evolution. One economic observation is clear and uncontestable: the wealth created is no less than the cumulative sum of what customers are willing to pay for use of the facility. Such a perspective however overlooks:– the indirect benets generated for non-users thanks to the resultant improvement in overall trafc conditions;– the economic surplus derived for users beyond the toll they pay;– the increase in land prices in the zone where trafc conditions have been alleviated;– the increase in land prices in zones benetting from enhanced accessibility (reduced access time) as a result of the new facility.

It is difcult to evaluate the sum of these four sources of creation of wealth («creation of value» would be the term used in private microeconomic theory). Yet, several indicators can provide an order of magnitude. For example, the value of time spent consuming transporta-tion resources, which the public authority ascribes to all trip-making, multiplied by the number of hours saved thanks to the new facility yields an indication of the benet reaped by the non-user population.

The rise in market price of land located adjacent to the new facility can be evaluated using data on actual transactions. Yet, all property sales gures must be adjusted to account for market trends throughout the targeted zone.

On the other hand, a comprehensive assessment of the project must also include the adverse impacts induced (noise, air pollution, threats to the groundwater table, etc.).

Eventually, by comparing the many examples of user-toll facilities, it can be determined that the socioeconomic benet generated is on the order of 3 to 5 times the present-value amount of the tolls collected. Herein lies the justication behind the rather systematic granting of sub-sidies, either as in-kind contributions or in cash, from the State or local public authorities to the concessionaire at the beginning of the construction phase.

2.2. Financial assessment

Organizing an infrastructure project through use of a concession formula necessitates, at the time of groundbreaking, the availability of all funds dedicated to the project: subsidies, capital and bank loans. At this stage, each of the actors is to submit the nancial projections on which its involvement has been based (capital investment, revenue, operating costs and taxes). The entire range of hypotheses are then combined within the framework of a nancial model, which in turn provides each actor with a view of the life of the concession over time. The only sources of revenue to be taken into consideration are the nancial income from tolls and cash subsidies.

As regards the evaluation of revenues, the issue of which principles to apply for basing rates naturally gets raised. Several options exist for setting tolls:– maximize revenues for the concessionaire;– attain the socioeconomic optimum;– incorporate the nancial constraints of lower-income households.

The rst method leads to high tolls, with an eventual rate increase during rush hour. The second leads to a lower toll rate, thereby at times generating less income yet accommodat-ing decisively higher trafc levels. Experience has shown that what often gets perceived as the socioeconomic optimum actually turns out to be the nancial optimum and that revenue is maximized at a toll rate distinctly lower than what trafc models suggest! The third method,

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which consists of adjusting the toll to meet the constraints of lower-income segments so as to expand the potential customer base as much as possible, generates less income and thus presupposes the authority’s willingness to grant a subsidy.

Choosing from among these three methods lies exclusively in the political arena. At stake herein is the decision of how best to divide revenue between the taxpayer and the facility’s future customers. To perform this division, it is incumbent upon the public powers to be apprised to the greatest extent possible of customer behavior with respect to the payment of tolls. Section 3 below is devoted to this topic.

3. Keys to the political acceptability of a toll facility

A study of various toll facilities has led us to identify three key parameters:– the frequency with which the average customer uses the facility;– the degree of toll obligation imposed on potential customers;– the country’s practices with respect to toll facilities.

3.1. Frequency of use

When the subject of building a toll road gets raised, the potential customer will be led to evalu-ate the cost of this new service from his vantage point. In Western societies, most households now reason in terms of a “monthly budget” and, for a handful of major expenses, an «annual budget». Whereas taxes and the purchase/ insurance of a vehicle are typically drawn out of a household’s annual budget, housing, food and gasoline tend to lie within the monthly budget and compared with a household’s monthly income. A toll paid on a regular basis, such as when crossing an entrance to an urban center (e.g. Oslo, Singapore) as part of a daily com-mute, will immediately be assimilated as a monthly cost and hence evaluated in terms of the household’s income and savings power. The same does not apply for highway tolls, which are paid only infrequently and whose cost gets absorbed by a more substantial expense (e.g. holiday travel, trips for family reasons). For the purposes of this article, we will reason in “annual” terms and assume that the annual commute budget is equal to 11 times the monthly commute budget.

The assessment of a toll’s level of acceptability is directly related to the frequency of use by the average customer for bridges or tunnels, or in the case of an urban entrance toll.

Take the example of either Oslo’s urban toll or Lisbon’s Tagus River Bridge. The geographic division between employment sectors and residential sectors is such that the majority of resi-dents in entire districts pay toll for their daily commute trips. Add in a couple of extra trips towards the end of the week or for evenings out, and the total monthly spending in tolls comes to around 45-50 times the amount paid for a single crossing, or some 550 times the amount on an annual basis.

In contrast, for facilities such as the Prado-Carénage Tunnel in Marseilles or the A14 motor-way in the Paris region, it can be observed that the majority of trips are generated by individu-als paying toll just 4 or 5 times a week, thereby drawing down their monthly budget in the neighborhood of 20-25 times the toll amount and 250 times for the annual budget.

When examining connecting motorways, the frequency of use falls even lower: the number of trips generated per household is best taken as an annual gure. For a household enjoying the use of a holiday home (easy to reach by motorway) during vacation periods and summer weekends, the number of annual trips is on the order of 25 to 30, thus 20 times less than the frequency of commute trips.

In some cases, the difference between urban and interurban facilities is very distinct, with the two extremes being an urban entrance toll (e.g. Oslo, Singapore) and the yearly holiday trip on the interurban motorway. In other instances, this distinction is not as sharp: the networking of cities has given rise to more frequent (up to 200 a year) and shorter (40-60 km) interurban trip-making. For this reason, some motorway operators now propose specic passes.



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3.2. The degree of obligation

This notion is a complex parameter, which we have taken as representative of the extent of choice available to the trip-maker in deciding whether or not to pay toll. Several examples help illustrate the degree of obligation:

Paying for automobile insurance or the annual motor vehicle tax obviously represents a 100% degree of obligation. The degree of obligation associated with a toll road can be measured as the ratio of the capacity of the toll road to the total transportation capacity available in the particular corridor, including public transit services. The construction of a toll bridge following the dismantling of a ferry service carries with it a very high degree of obligation, whereas for a newly-built toll highway located adjacent to a toll-free two-lane road, the degree of obligation is quite low. Mountain tunnels display a high degree of obligation, since avoiding them means adding considerable distance, hence time and cost, to the journey. Introducing a public transit line alongside a toll road reduces the degree of obligation.

Whenever public (tax) money is invested in the construction of a toll facility, the argument can always be forwarded that this money could have been allocated to the construction or improvement of a toll-free facility, possibly with less stringent standards. A certain degree of obligation to use the toll facility, imposed by the public authority, is thereby present and only increases as the alternative routes or modes become less attractive. Toll facilities are logically categorized therefore by these two parameters:– frequency of use;– degree of obligation imposed on the motorist.

Diagram 5 presents a sample of typical road operations. Some appear twice if the facility happens to be used by two distinct categories of customers: frequent users and occasional users. In these cases, the facility’s various frequency levels, from exceptional use (once or twice a year) to daily use, have been cumulated. This procedure was followed for the A14 motorway, the Ile de Ré Bridge (in France) and the Nice metropolitan bypass road. When a facility is only subject to tolls in one direction, we divided the toll amount in half in order to represent the actual nancial cost for each use. The same rationale was adopted for the Dartford Crossing.

Diagram 5 – Political acceptability of a toll facility(high frequency of use: rates for use passes).

GoldenGate7 F

Tunnel duMt-Blanc

110 F

Nicecontournement

7 F

A 1412 F Lisbonne

5 F

NiceBypass road

3 F

407 Toronto10 F

DartfordCrossing

8 F

AREA60 F

Istanboul6 F

SAPN35 F

Autoroute de l'Est50 F

Israël11 F

A 1430 F

Californie15 F

MarseillePrado Carenage

12 F

Eurotunnel250 F

OsloSingapour

5 F

Toulouse5 puis 0 F

Ile de Ré5 F

Vehicle insuranceand taxes: 3,500

Lyon TEO16 puis 7 F

Ile de Ré55 F

0

100

200

300

400

500

600

700

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Degree of obligation

Fréq

uenc

y (n

umbe

r of t

rips/

year

)

Natural obligationArtificial obligation

Artificial obligation:obtained byreduction of exixtingcapacities (e.g.

d

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Four categories of facilities can be distinguished:– facilities whose use is both frequent and mandatory; included in this category are urban bridges, the urban access tolls in Oslo and Singapore, Lyon’s northern bypass road (“TEO”) prior to upgrading the adjacent boulevard to four lanes, and the southern access into Tou-louse (the Roques toll facility);– facilities whose use is frequent, despite a low degree of obligation; included herein are the Prado-Carénage Tunnel in Marseilles, the A14 motorway in the Paris Region, the Toronto bypass road (A 407), a segment of toll road parallel to a toll-free highway in California (SR 91);– facilities whose use is infrequent for non-reimbursed households and for which an alterna-tive mode (e.g. Channel Tunnel, high-frequency trains) or even a free mode (high-quality toll-free road) exists;– facilities whose use is infrequent, yet which remain almost fully mandatory (e.g. the Ile de Ré Bridge for vacationers); we also include in this category all mandatory expenses, such as motor vehicle taxes.

Within the four use categories depicted in Diagram 5, distinction can be drawn between:– high frequency and limited obligation, with toll rates varying between 10 and 15 francs, used by a high-income customer segment (fourth quartile);– high frequency, coupled with a high degree of obligation, exhibiting toll rates in the range of just 5-6 francs since the customer segment begins as of the second quartile;– low frequency, with the toll rate tied to the price of alternative means of transportation and the corresponding degree of obligation.

As a case in point, the Lyon bypass road, whose toll rate was initially set at 16 francs during rush hour, proved to be too expensive to appeal to the entire second quartile; for this reason, the population reacted disapprovingly when the road was rst opened. Yet, this reaction was not encountered with either the Prado-Carénage Tunnel, the A 14 motorway, or the SR 91 in California, whose recent service start-up incited no emotion whatsoever. At the other end of the spectrum, the toll now charged on the preexisting Tagus River Bridge in Lisbon is heavily underpriced, three times less than the Bosphore bridges in Istanbul, even though the Lisbon population’s standard of living is substantially higher. Since the start-up of the new bridge in April 1998 and the widening of the preexisting bridge in November 1998, road trafc over the Tagus River has increased by 40%. For political reasons, the Portuguese government still holds the toll down on the old bridge in the year 2000, preferring to supplement the shortfall in toll revenues by a budget allocation from tax income. However, this situation might not last and the toll level, very low today, might be pushed higher; with user passes being proposed to mitigate the impact on frequent users.

In order to address the concerns of the facility’s frequent users, the operator will be propos-ing a system of passes, aimed at segmenting the customer base and maximizing the eco-nomic surplus generated for the entire locality through achieving an optimal use level. This will necessitate the following segmentation:– one-time crossing (exceptional use);– pass for a xed number of crossings;– monthly pass;– half-year or even full-year passes.

In 1999, the toll on the A14 motorway in France stood at 37 francs for one-time use; the pass for a xed number of journeys brings the rate down to 20 francs, and the monthly pass brings it down to 12 francs.

From a classical standpoint, toll rates are based on the output from trafc models developed to represent trafc ows during rush hour. A nancial optimum is then sought by modulating rates as a function of the presumed “willingness to pay” of the local population. This willing-ness is established using a marginal cost approach to evaluate what an individual, given the choice between two routes or two modes (public transit vs. private automobile), is willing to spend in order to save time. This largely depends upon household wealth and standard of living.



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The marginal nature of this approach presupposes that decision-makers are able to obtain a precise and well-documented segmentation of the local population’s standard of living, since a toll-pricing strategy using average values is too crude to base a projection of trafc ows and revenue streams and tends to stir vehement public reaction from low-income households. The incorporation of low-income households (rst quartile) can take the form of subsidies granted to individual population groups (e.g. partial reimbursement of the user’s pass by the employer).

The resultant toll rate must then be reviewed in light of the three parameters previously dis-cussed: frequency of use, degree of obligation, and country-specic practices. It is apparent that whenever facilities exhibit a high degree of obligation, trafc models lead to expensive tolls, hence neglecting the facility’s potential use by lower-income households. From a politi-cal perspective, the opposite decision will be favored. If a high-quality alternative mode is available within the transportation corridor, a high toll rate could be maintained on the infra-structure; if not, the toll charged will have to be signicantly less than what the model pre-scribes.

The tolls charged on well-accepted facilities yield an annual cost per vehicle ranging from 2,200 francs for an almost completely mandatory toll (Oslo) to 6,500 francs for a toll with a very low degree of obligation (the Paris Region’s A14 motorway). The Nice bypass road, featuring a particularly low toll rate, happens to be a beltway as opposed to a radial access road, thereby inducing less pressure on demand. The same applies to the tolls charged on all bypass roads if the objective is to have through trafc skirt the urban area.

3.3. Country-specic practices

The third parameter involved in determining the political acceptability of tolls is the impres-sion given of having to pay in addition to the normal tax amount. This fundamental psy-chological parameter varies considerably from one country to the next, and even from one road connection to the next. Let’s take a close look at a few examples:

In Norway, given the country’s physical layout, reliance on short ferry rides to move from island to island is taken for granted. When such a ferry service gets replaced by a bridge and the bridge toll remains the same as the cost of the ferry, users accept the new facility with-out difculty. The same can be said to explain the public’s acceptance of the Prince Edward Island Bridge in Canada, the rst bridge in Lisbon opened in 1966 and the Izmit bridge project in Turkey. The replacement of a ferry service by a bridge does not impact the obligation to pay, as this obligation had already been instilled into the user’s habits. Yet, keeping tolls constant without any hikes to account for ination results in the service’s undervaluation, a situation difcult to turn around.

In both France and Italy, for some fty years now, tolls have been charged on interurban motorways. Motorists have come to recognize, and accept, that it is preferable to pay a toll and benet from a high-quality road for infrequent long journeys than to cope with saturated trafc conditions. Yet, this mindset did not spread into other European countries, whose infra-structure had been in a better state of repair.

Motorways in the vicinity of urban areas have, until now, remained free of tolls. A poignant example in France is the round of negotiations held leading to the partial buyback of: the A4 toll road near Paris, the A43 in the Lyons area, and the A64 in Toulouse. The suburbs, socioeconomically less well-off than the central cities, were not about to «pay their commute» when they were already paying for the extra time spent commuting!

Individuals tend to reason by applying the principle of “a fair tradeoff». Since taxes normally go towards paying for infrastructure, the use of infrastructure «should logically” be free of charge inasmuch as the service provided is considered as already paid for. If a toll were to be charged, then some additional compensation would be necessary. Such compensation may take the form of: an accelerated construction schedule; participation in a consensual urban renewal program; a freeze on tax hikes on the grounds that the facility’s nancing is being

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shouldered by the customer and not by the taxpayer; or any other rationale which can be recognized, understood and accepted by the population. The municipality of Oslo conducted a series of preference surveys several years before their decision to implement an urban toll and now regularly polls user satisfaction, with survey results being released for publication. One of the keys to this effort is the extent of information provided to local residents concern-ing the use of toll revenues.

Diagram 6 displays the operating cost for a small car, while Diagram 7 presents the break-down of the industrial cost before taxes, the after-tax cost (VAT, tax on petrol, etc.), the urban toll (3,000 francs/year), and a hypothetical parking cost (4,500 francs/year); these graphs highlight the proportion paid out in taxes. It is clear that the urban toll is merely a complement to the other costs and is perceived as such, necessitating even further sound justication.

A special case is encountered when the degree of obligation is high, subsequent to a volun-tary measure introduced by the local area’s transportation authority to cut back the free com-ponent of existing road services. An issue only in urban areas, this approach is a subtle one to implement since the segment of the population not using the new facilities, who continue to pay taxes and whose travel time continues to increase, have every reason to protest.

It can be observed that the dismantling of a toll-free road or urban open space is easily accepted provided the user-taxpayer acknowledges that this capacity reduction goes hand in hand with a perceptible advantage (e.g. urban renewal projects in connection with the Strasbourg and Grenoble tramway systems, pedestrian malls, waterfront restoration work in Oslo). Such is not at all true however when capacity is reduced solely to increase trafc volumes on the toll facility without any tradeoff in terms of urban amenity. In this instance, public reaction will be directly tied to the toll amount charged and the relative afuence of the local population.

Diagram 6 – Costs to operate a small vehicle.


0

20 000

40 000

60 000

80 000

100 000

120 000

140 000

160 000

0 1 2 3 4 5 6

Year

Cos

t in

fran

cs

Used, gas-powered: 10,000 km/yearUsed, diesel-powered: 15,000 km/yearNew, gas-powered: 15,000 km/yearTransit pass: 450 FF/month


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Diagram 7 – Breakdown of operating costs for a small gas-powered used car(urban setting-use: 10,000 km/year).

Diagram 8 shows the rise in the monetary cost relative to a 10-km urban automobile trip repeated 600 times a year at a toll rate of 12 francs and a low degree of obligation. Lower-income households only use the facility on rare occasions: the monetary impact of the toll is weak. For those population groups using the facility on a regular basis, the increase varies between 50% and 120% of the initial per-trip cost, depending on whether the comparison is made with respect to average cost or perceived cost. The corresponding toll amounts range from 3,000 to 9,000 francs depending on the household’s level of income.

Diagram 8 – Increase in per-trip monetary cost (10-km urban trip, toll rate: 12 FF).

4. Key guidelines for instituting acceptable tolls

Regardless of the quality of studies conducted prior to instituting a toll, in particular for urban tolls, three unknowns remain pervasive:– How will the public react to the facility and toll rate structure?– How will decision-makers react to the unknown nature of the public’s reaction?

0

20 000

40 000

60 000

80 000

100 000

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0 1 2 3 4 5 6

Year

Cum

ulat

ive

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in fr

ancs

199

6

before taxesafter taxes

0%

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0 200 400 600 800

Annual income in 1994 ’000 FF

Perc

enta

ge a

dded

to th

e in

itial

cos

tof

the

trip

In comparison with average cost

In comparison with perceived cost

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– What lines of communication should be opened with the public to enhance understanding and acceptance of the toll?

Over time, experience and lessons continue to accumulate, revealing a certain behavioral rationale which will enable further advances in predicting public reaction to the introduction of tolls and hence in sharpening the quality of projects and project nancing methods. One sensible approach consists of working with all modes of transportation together, within the framework of an urban transportation plan with heavy public backing and reasonable nanc-ing pressures. Stockholm’s «Dennis package» (a master plan encompassing both infrastruc-ture and urban transportation), by virtue of its consensual nature which called for including the desiderata of all political parties, cannot be completed as initially planned due to excessive costs: the entire equilibrium of the project as well as of its nancing has to be rethought.

The principle behind tolls stems from three basic advantages:– trimming public debt and budgets;– generating an economic surplus, to be transformed into monetary income;– having the customer and not the taxpayer pay for services, which helps support the eco-nomic approach to basing choices.

It would be regrettable to see past and present mistakes tarnish the image of a source of nancing that not only accommodates the perspective of a sustainable city with smoother-owing trafc inside its central district, but also provides a powerful resource-redistribution effect from businesses to households and from afuent households to those with more limited means thanks to monetizing the creation of economic value in order to cut taxes.

The previous examples have illustrated a few of the leading guidelines for estimating a toll’s level of acceptability:• If customers are having a portion of their tolls reimbursed by their employer, they naturally become less sensitive to the toll rate; the only concern has to do with control.• If a toll facility provides additional capacity without reducing the capacity of existing toll-free roads, it tends to be well accepted. In this case, the facility represents additional transporta-tion supply for those interested and able to pay for it.• If a toll facility has required the injection of public subsidies, its toll rate must be held low or else low-income taxpayers, who use the facility only rarely, will be given the impression of «paying for the rich».• The geographical coverage of the region paying out the subsidy must be broad enough to encompass the majority of future facility customers.• The order of magnitude of a toll cost must resemble that of any consumer good (purchase of a newspaper, a drink, a lottery ticket, etc.).• Such a representative consumer good must obviously come from the zone where the facil-ity has been located. The principle of equal application of the law does not mean equality in the acceptance to pay tolls. Oslo’s urban toll was designed so as to include the city’s poorer districts inside the toll belt. A uniform toll rate all around Paris would raise a problem in that what the more afuent west side deems as acceptable is not necessarily so on the east side.• An urban facility is more intended to ensure a given travel time, thereby capable of inducing behavioral modications, rather than simply generate time savings.

In conclusion, and perhaps here lies the essential point, a transportation program cannot be dissociated from an urban planning program. It takes a united and sincere motivation to beautify the city in order to accept paying an urban toll.



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What specic features concern the concession-granting authority?

u Roads represent a sector in which two distinct activities can be associated with the concession/delegated management contract: construction and/or main-tenance.

u Two types of nancing can be envisaged: direct nancing by the user (in the form of tolls), and indirect nancing by the State, depending partly on trafc volu-mes. This latter mode, while considerably less risky for the operator, allows the public authority to spread the infrastructure payment over time.

u The socioeconomic return is often quite a bit higher than the nancial prota-bility, thereby lending justication to the public authority’s participation in the pro-ject’s nancing.

u The strength of the builder-operator partnership (hence the use of a single general contractor) is essential in limiting the risks of cost overruns and schedule delays.

u The income risk is very high for toll facilities: it is composed of: an overall trafc volume risk, a price level risk, and a price/demand elasticity risk. The income risk must be divided between the concession-granting authority and the concessio-naire according to the benets each party can expect to reap from the project.

u The political and social acceptability of the toll is independent of the classical economic model and must be used to determine the appropriate rate-setting policy.u In order to evaluate this acceptability, the toll rate must incorporate both the facility’s frequency of use by the average customer and the degree of user obliga-tion. It depends on the specic context of each project and the particular country’s practices.

u The public authority and the service operator must do their utmost to inform and convince the public of the value of a toll-based system, by means of well-adapted and durable marketing policies and awareness-building campaigns.

The network of French highway concessions

In 1960, France was lagging tremendously with respect to its highway network (only 173 km of its highway network had been built). Concessions were created during the 1960’s by call-ing upon mixed-economy companies; and in 1970, the number of kilometers in the national system had reached 1,570, with over 1,000 under concessionary control. However, even this construction pace was considered insufcient, and the use of concessions intensied by call-ing upon strictly private companies. Unfortunately, the oil shock occurred just as some vast highway projects were gearing up; the private companies, with the noteworthy exception of Coroute, ultimately had to be bailed out by the State. Moreover, the State began occupying a dominant position in the mixed-economy companies as of the second half of the 1980’s.

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Regardless of their shareholder composition, concessionary companies have helped shape the nature of highway projects and strengthened the network in developing a system of del-egated management for both project construction and operations. Thanks to the efforts of these companies, France now boasts one of the world’s most extensive and modern motor-way networks, with a total road length of nearly 9,300 km, 7,000 km of which are under con-cessionary control (including 800 km run by the private company Coroute). Concessions have also been relied upon for road-related infrastructure projects (e.g. the Normandy Bridge, the Ile-de-Ré Bridge, the Mont-Blanc and Fréjus Tunnels in the Alps). Urban projects, such as the Prado-Carénage Tunnel in Marseilles or the A14 and A86 motorways (in part) in the Paris Region, have also been set up as concessions.

Summary statistics on the French autoroute network (1/1/1999).Total road length of the network as Jan. 1,1998 ............................................. 9 309Interurban highways ..................................................................................................... 8 319

– of which toll roads ................................................................................................... 7 048– of which toll-free roads ......................................................................................... 1 271

Urban highways .................................................................................................................. 990

Length of the French road network under concessionary control (1/1/1999).SANEF ......................................................................................................................... 1 254 kmSAPN ................................................................................................................................ 354 kmSAPRR ........................................................................................................................ 1 707 kmAREA ................................................................................................................................ 366 kmASF ............................................................................................................................... 1 976 kmESCOTA .......................................................................................................................... 430 kmATMB ................................................................................................................................ 107 kmSTRF ................................................................................................................................... 55 kmCOFIROUTE ................................................................................................................ 799 km


V

CLOSE-UP:

THEORETICAL FRAMEWORK

AND PERSPECTIVE

OF MULTILATERAL ORGANIZATIONS

333

The forms of public-private partnership in the domain of infrastructure financing are indeed numerous, especially in France; deriving one or several typologies would, in no way, be a futile exercise. The expression «infrastructure financing» has crept into common usage as a convenient term for a designation which is still misleading. What needs to be stressed here is not exclusively, or even primarily, the financing per se of a piece of infrastructure, but rather the provision of goods or services by means of infrastructure for the purposes of public amenity. The public-private partnership can and must be focused on precisely this notion of goods/service provision. At this stage, it would be most fruitful to pause and examine the nature of these goods.

Generally speaking, most of these goods are privately-owned, with the market serving as the ideal institution for providing the goods demanded by consumers at the most efficient cost. This generalization, however, is subject to a good number of exceptions. Certain goods, which also display a high level of consumer demand, cannot, and must not – in the interest of the consumer himself – be provided by market mechanisms alone so as to prevent against any market dysfunction. The spe-cific instances of market failure have been well studied by economists. The first cat-egory of such market incapacity pertains to what have been designated as the “pure” public goods (e.g. national defense), to which no group can be denied access or ben-efit. The second category concerns goods whose consumption results in the genera-

A. A DRAFT TYPOLOGY OF PUBLIC-PRIVATE PARTNERSHIP

Rémy PRUD’HOMME

The term “infrastructure nancing” has been coined to cover the range of issues related to the provision of public-sector goods and services. Such goods, for which exclusive reliance upon market forces proves inadequate and public authority intervention mandatory, can be sorted into three broad categories: purely public goods, external effect-inducing goods, and natural monopolies. All three overlap by virtue of their use of infrastructure facilities, thereby tying up large quantities of capital for long periods and making them good candidates for public-private partnership.

These goods and services vary to a great extent when assessed on the basis of four key parameters: size of infrastructure-related investment, degree of technical sophistication, fee-generating potential, and the optimal geographic service supply zones. The type of public-private partnership entered into will obviously depend on this set of parameters, yet reliance on the private sector involves the objective of the public-private partnership as well. The method of service payment chosen will also inuence the actual provision of the public good or service.

Ultimately, public-private partnership-type contracts are to be classied according to: the type of private-sector involvement (facilities and/or service provision), the compensation basis adopted, the capital outlay, the contract’s lifespan, to name some of the most commonly-employed indicators. The use of public-private partnership can thus take on a wide variety of forms, within a continuous and multidimensional context, even though certain buzzwords and acronyms (e.g. Concession; Build, Operate, Transfer - BOT,; or more recently Project Finance Initiative - PFI), have focused attention on just a handful of features.

FINANCING OF MAJOR INFRASTUCTURE AND PUBLIC SERVICE PROJECTS

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tion of external effects, the inherent cost of which is not typically passed onto the consumer (e.g. wastewater and sanitation services). The third category encompasses those goods whose marginal cost decreases with production volume and which give rise to natural monopolies (e.g. rail transportation). For all three of these categories, the private sector, or more precisely the market, is not able to function adequately, thereby necessitating a certain measure of public-sector intervention. Within this conception however, no room has been allotted for the introduction of any value judgment whatsoever; all economists, including the most vehement free-market pro-ponents, agree on this point. The list of such “public” goods, which when combined account for roughly 20% of the GDP in industrialized countries, is indeed a long one. To this list «social» goods (e.g. education and health services) would have to be added; while the market could produce this category of goods and services, pre-vailing societal opinion has deemed that neither the quality nor the quantity pro-duced would meet expectations and that public intervention would prove essential. These social goods, whose definition necessitates a value judgment in the first place, account for another 20% share approximately of GDP.

1. Infrastructure and public goods

From the standpoint of our examination, these public and social goods exhibit two main characteristics: they have been created through the use of infrastructure; and they are inherently predisposed to a public-private partnership-type organiza-tion. Each of them can be associated with the specific infrastructure or facility used for its production. Table I after, which in no way claims to be exhaustive, matches goods with their “source” infrastructure.

It can be added that all public goods, including those held by the private sector, are also produced with capital. It appears however that the level of capital used to produce public goods (i.e. infrastructure), in relative terms, turns out to be higher. Such goods normally demonstrate less geographic mobility: a factory can ultimately be relocated; a tunnel can’t. This type of capital often displays a longer lifespan than private capital. Moreover, some of these goods are referred to by employing the name of the infrastructure responsible for producing the good: the word «sewer» is com-monly used to refer to wastewater and sanitation services, “roads” designates road transportation, “school” serves as a generic for indicating not only the facility itself but education in general, etc. Yet, this overlapping terminology can be misleading; a primary danger lies in mistaking the development of a piece of infrastructure for the provision of a public service and, in so doing, overlooking the implementation, operations and maintenance, which prove as essential to the service as the physical existence of the infrastructure. In the following sections, even if the word infrastruc-ture does at times creep into the discussion, the emphasis is wholly placed on the provision of goods and services to consumers and/or intermediate producers.

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Table I – Public goods and services with their corresponding infrastructure.

2. Public goods and the private sector

The second key characteristic of these public goods and services is their strong predisposition to a public-private partnership format. The very nature of their provi-sion must obviously include a certain number of “public” precepts. It is coupled in all cases with a share of private involvement. A fully self-sufficient public entity, capable of producing on its own all of the pencils, automobiles or whatever else needed for operations, is not easy to envisage: there is no such thing as a purely public supply of goods. Even national defense agencies, despite the presence of weapons and military installations, still rely upon the private sector for the majority of supplies1. Public goods and services are therefore always produced jointly by the public and private sectors. The public aspect within the provision of public goods and services is not absolute, but merely relative, and can be assessed for the most part in comparative terms. The critical issue should not be focused on the underlying principle of the public-private partnership itself, but rather on the magnitude and specific condi-tions. The premise inherent in a public-private partnership is already legitimate and its importance recognized.

A draft typology of public-private partnership

1. Up until recently, France had been in a paradoxical situation whereby its military aircraft were being produced by a private manufacturer while civil aircraft were being contracted to a public-sector corpora-tion.

Public good/service Related infrastructureEducation Primary/secondary schools, universities, etc.Health Medical offices, clinics, hospitals, convalescent homes, retirement homes, etc.Defense Military barracks, warehouses, workshops, etc.Civil Security Stations (fire, police), facilities/equipment, etc.Justice Courts, prisons, etc.Culture Museums, theaters, cinemas, etc.Transportation:

airroadrailwaterwaymaritimeurban transit

Airports, radar stations, control towers, etc.Roads, highways, bridges, tunnels, etc.Railway lines, train stations, signaling, etc.Canals, locks, etc.Ports, lighthouses, etc.Subways, street networks, information systems, traffic signals

Telecommunications Lines, satellites, switching stations, cables, etc.Electric power Power plants, transformers, power lines, etc.Water supply Dams, pumping stations, piping networks, water purification plants, etc.Sanitation Sewer systems, wastewater treatment plants, etc.Street lighting Streetlights, etc.Recreation Parks, public gardens, stadiums, gymnasiums, swimming pools, etc.Postal services Post offices, mail processing centers, delivery vehicles, etc.Religion Places of worship, cemeteries, etc.Research Laboratories, offices, etc.


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Why should a private component be introduced into the provision of public goods and services? The answer is for reasons of economic efficiency: for a given economic cost, the private sector is generally able to produce in greater quantity and at higher quality than a public authority. This rule however is obviously exposed to a number of exceptions: cases of inefficient private firms and efficient public agencies can be easily cited2. Nonetheless, from an overall standpoint (based on the findings of many studies, conducted principally in the United States), the opposite is true. Four reasons or explanations can be forwarded to justify this statement.

The first of these pertains to the economies of scale potentially realized by the pri-vate sector. This reason may seem paradoxical, in that a firm’s capacity to outperform the State is difficult to conceive, yet it must be kept in mind that the public sector is not necessarily synonymous with the State. A sizable proportion of the public goods and services listed in Table I display distinctly local-level characteristics and, in prac-tice, are supplied by local and regional authorities; the move towards decentralization has served to increase this proportion. The major public service supply groups on the market tend to be much larger than their client local authorities. Furthermore, and such is the case for the French market, these major groups pursue export-related activities, which contribute to their expansion while reducing their average costs. Indeed, the wealth of experience gained in this field has nurtured the private sector’s unquestionable expertise.

3. Diversity in the array of public goods and services

The types of public goods and services, whose actual provision entails a certain proportion of private-sector involvement, are far from being identical; both the scope and conditions relative to the PPP depend for the most part on the characteristics of the specific goods under consideration. It is thereby necessary to emphasize and analyze this diversity in the public goods and services encompassed within a public-private partnership framework. From this vantage point, four aspects appear to be critical: the magnitude of the infrastructure, technological complexity, ease of fee collection, and size of the production or consumption zone. Table II summarizes the outcome of this analysis.

The magnitude of a piece of infrastructure varies from one public good to the next. While very important for road transportation, urban transit, telecommunica-tions, electricity distribution, water and sanitation services, and street lighting, the infrastructure necessary to run education, health services, national defense, civil pro-tection, research and the justice system remains fairly minimal. The production func-tion inherent in these latter goods and services requires, above all else, a properly-

2. It has been shown, for example, that the cost of adult education provided by the private sector is twice that of the public sector (R. Prud’homme, “Quand le public fait mieux que le privé”, Le Monde, July 19, 1994).

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trained labor force. With respect to just the infrastructure-financing component, it is safe to say that those goods and services relying most heavily on infrastructure prove to be the most suitable candidates for a public-private partnership.

Table II – Characteristics of public goods and services.

Note: A score of 1 indicates that the characteristic under consideration (infrastructure, tech-nical complexity, etc.) plays a less signicant role in the supply of service, while a score of 5 suggests a very powerful inuence. The scores listed in the above table reect the assess-ment of the author and are therefore open to debate.

The magnitude of a piece of infrastructure varies from one public good to the next. While very important for road transportation, urban transit, telecommunica-tions, electricity distribution, water and sanitation services, and street lighting, the infrastructure necessary to run education, health services, national defense, civil pro-tection, research and the justice system remains fairly minimal. The production func-tion inherent in these latter goods and services requires, above all else, a properly-trained labor force. With respect to just the infrastructure-financing component, it is safe to say that those goods and services relying most heavily on infrastructure prove to be the most suitable candidates for a public-private partnership.

This category of public goods and services also exhibits wide variations in terms of the degree of technical sophistication required. Some such as street lighting, public gardens and open space, and postal services rely upon straightforward and tried-and-true technologies, whereas others such as medical and health services, air trans-portation, telecommunications, and research necessitate more complex and rapidly-


Infrastructuremagnitude

Technologicalcomplexity

Ease of feecollection

Size of localzone

Education 2 4 2 1 - 4Health 2 5 2 4Defense 2 3 - 5 1 1Civil Security 1 3 1 2 - 5Justice 1 4 1 4Culture 2 3 4 4Transportation:

airroadrailwaterwaymaritimeurban transit

254234

534234

545552

443345

Telecommunications 5 5 5 2 - 5Electric power 5 4 5 2 - 5Water supply 5 4 5 5Sanitation 5 4 1 5Street lighting 5 2 1 5Recreation 4 2 4 5Postal services 1 2 5 3 - 5Religion 2 4 2 2 - 5Research 2 5 1 5


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evolving technologies. It must be underlined that in this field, evolution may take place very quickly. Services such as water delivery and sewerage, which for a long time had been associated with reliable and relatively-unsophisticated technologies, are now instituting extremely refined techniques in areas like water/wastewater treat-ment and billing. Given the private sector’s technological superiority, which hap-pens to be even more pronounced in cutting-edge and high-paced disciplines, the more technically-oriented services readily accommodate greater levels of private-sector involvement.

Another fundamental feature, from the standpoint of a public-private partner-ship format, is the relative ease with which a service can concretely be remunerated. This feature varies considerably from one service to the next: consumption-based fees can be levied without great difficulty for services like water delivery, telecommu-nications, electricity distribution and rail transportation; however, this is impossible with respect to national defense, street lighting, sanitation services, the justice system and research, which mainly lie in the category of purely-public goods, a category which cannot be paid for by service users alone, but instead draws its resources from taxpayers as a whole. For other types of services (e.g. road transportation), a system of tolls, despite its cost and inefficiency in purely economic terms, may be opted for. In yet other cases (e.g. education or health services), a fee-based system is techni-cally feasible but gets voted down for sociopolitical reasons. In this domain, as in many others, technological advances can allow shifting the boundaries between one category of good or service and another; as a case in point, only with the advent of the time-stamped ticket machines (a relatively simple device, in reality) a short time ago did it become possible to collect street parking fees. The smooth functioning of urban toll roads has not yet been fully attained, but improvements are on their way thanks to developing technologies. In general, as it becomes easier to set rates for a public good or service, greater private-sector involvement in the provision process is also easier to introduce.

Public goods and services display varying degrees of local specificities. Their pro-duction and/or consumption zones vary in size: some, like defense or research, can only be laid out within a national or international framework, while others, like street lighting, sanitation, water supply or urban transit, must by definition remain local in scope. Still others, such as education, prove to be more complex inasmuch as the primary school market is not at all coterminous with that of secondary or higher-level education; furthermore, the optimal zone over which an educational program should be formulated is not necessarily contiguous with the provision of actual instruction. A service’s spatial dimension entails a dual focus: technical and jurisdictional. A service lends itself more readily to private intervention as its scope of activity becomes more locally dominated. The justification for this lies in the private sector’s stronger advantage over smaller local- or regional-level authorities than over large-scale or State-level authorities, as discussed above.

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In summary, the tolerable (and, by the same token, optimal) level of private involve-ment within a public-private partnership-based service rises as the service becomes more: capital-intensive, complex, conducive to rate-setting, and local-specific (i.e. as the tally in Table II increases). Water supply, for instance, a service which relies heavily on major infrastructure, which makes use of continually-evolving technologies, which is easily subject to rate-setting, and which remains focused on the local level, lends itself very well to a major dose of private sector input; it comes as no great surprise then that water services are typically provided by private companies. These considera-tions must be taken into account when establishing a public-private partnership’s set of conditions. Each individual service requires a customized form of public-private partnership. In theory, no one single set of conditions is best. Some forms are simply

better-suited than others for a given technical and institutional setting.

4. Diversity in the set of public-private partnership objectives

The public-private partnership format, as highlighted above, pertains to the pro-vision of a public good or service. Yet, this provision can be viewed from several perspectives, each of which can be the focus of a separate public-private partnership. For our purposes, four such perspectives will be examined: decision-making, pay-ment, production and financing.

The provision of a public good or service involves making a certain number of decisions. It must be decided: whether to produce the service in the first place, for which group of recipients, at what price, under which financing conditions, using which means (technologies), with which targeted level of service, and on some occa-sions on which bases for rationing access. For decisions of this type, reliance on a PPP framework must remain limited or absent. The decision-making process must lie within the “public domain”, as dictated by the very notion of what constitutes a public good or service. Any role for the private sector must be severely limited. This point is indeed crucial. In some circles, the presence of the private sector, as manifested by use of the term «privatization», is an all-or-nothing proposition, with the choice of provision formula being narrowed to 100% public vs. 100% pri-vate. Such a position is completely inappropriate in light of the four-dimensional nature of the provision process itself: privatization may apply very well to just one of these dimensions, but in almost all cases does not apply well to the decision-making dimension. The claim has even been made that the public authority’s capac-ity to perform its decision-making function can only be enhanced by delegating its production function.

There is no such thing as a free public service in that the cost of setting up and running a service has to be picked up somewhere along the line. A service’s payment must be assumed either by the user, through service fees or tolls, or by the taxpayer, or by a combination of both. Payment by the user could be considered as a form



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of private-sector involvement, due to its resemblance with the method of payment for privately-owned goods. The choice of mode of payment is never straightforward; technical, social and economic parameters must all be taken into consideration. From a technical point of view, a price can be ascribed to public goods and services with varying degrees of difficulty; some do not allow conducting any kind of pric-ing. The classical case is related to the category of purely public goods (e.g. national defense): such services are not to be exposed to mercantile forces, since those who would be unwilling to purchase the service could not actually be deprived of its ben-efits. This entire category has to be financed through taxation. Others however, such as water supply, can be easily bought and sold. The boundary between what can be priced and what cannot is obviously subject to modification; in sync with the pace of technological change, this boundary has been shifting in favor of the setting of rates. All of the services subject to user fees are not necessarily billed out as such for reasons of social equity, yet it should be pointed out that the social impacts of tax-based financing (and hence of zero user cost) are far from conclusive. Should the tax turn out to be regressive or even proportional (which is often the case with local taxes) and should the free public service be consumed primarily by the well-to-do (which is also often the case since the act of consumption entails time, knowledge or a specific location more accessible to the wealthier social classes), offering this service would then be tantamount to having the less well-off pay for the more fortu-nate. Ultimately, considerations related to economic efficiency must be taken into account. The service fee, depending on the fee structure and the specific amounts, influences both demand and consumption levels. A zero fee, for example, leads to higher consumption and potentially to wasteful consumption.

The third dimension to the provision of a public service pertains to the produc-tion side. This dimension lends itself to private-sector involvement more easily than the other three. Yet, the very notion of “production” can be divided into a number of distinct sub-dimensions, which cannot - and must not - be incorporated in a similar fashion into a public-private partnership perspective. For purposes of simplification, the four most prominent of these sub-dimensions have been identified as follows:– engineering services, which can easily be subcontracted to the private sector; – construction of the infrastructure facilities, even more easily subcontracted; – management functions, which entail the production of the service using the built infrastructure, also quite often easy to delegate to the private sector, albeit less so than construction; – and infrastructure maintenance operations, which can generally be conferred to the private sector without much difficulty.

The final component involves the public service’s financing. This dimension should not be confused with that of the service’s payment (through taxes or user fees). As mentioned earlier, due to the reliance on sizable and long-lasting infrastruc-ture for producing many public services, heavy capital investments are required up

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front. Such outlays may be financed either by the public authority through tax hikes or by the private sector in the form of bank loans or equity. This dimension to public service provision is independent of the other three. The situation could be envisaged whereby a fully “public” service (i.e. one that has been approved, paid and produced by the public sector) is actually financed by the private sector (i.e. by means of bank lending). Conversely, a primarily “private” service (paid by users and provided by pri-vate companies) could be envisaged in which the infrastructure is financed through public monies.

Table III below summarizes the preceding discussion.

Table III – The extent of private-sector involvementby public-private partnership objective.

The number of combinations in the choices available is infinite. In considering just the payment, engineering, construction, management, maintenance and financ-ing dimensions to service provision, along with just two possible strategic positions (all-public or all-private) for each dimension, the number of combinations already comes to: 26 = 64 types of public-private partnership. In reality, the number of pos-sibilities is much higher since other dimensions can be added into the assessment and especially since a purely public vs. private dichotomy for every single dimen-sion represents an extreme oversimplification. From this perspective, the multiform nature of a public-private partnership is clearly apparent.

Some dimensions however should perhaps be weighted more heavily than others, and their combination may lead to simpler typologies. This approach has been adopted in Table IV, which focuses exclusively on production and payment, with three potential payment positions: payment by the taxpayer, payment by the user, and a mixed payment – relatively widespread in practice – by both taxpayer and user. With this set-up, six categories can be distinguished, each of which has been illus-trated using a French example. Keep in mind however that this framework merely represents a sample public-private partnership typology; others, perhaps equally as relevant and incisive, could also be proposed.


Public-private partnershipobjective

Degree of private-sector involvement

Decision-making Limited or inexistentService payment Variable, depending upon the applicability of the pricing structureProduction

Engineering Rather broadConstruction Very broadManagement Rather broadMaintenance Very broad

Financing Variable, depending upon the means of payment and the borrower'sfinancial strength


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Table IV – A sample typology of modes of public service provision.

5. Content of public-private partnership contracts

A public-private partnership almost always takes on the form of a contract entered into between a public entity and a private firm. The combination of different types of public entities (national, regional, local, municipal, intermunicipal, etc.), coupled with the different types of private firms (major industrial group, small- or medium-sized firm, mixed-capital company, etc.) could be used to develop an initial typology of public-private partnership contracts. However, a better approach would surely be to examine the content of public-private partnership contracts themselves. As men-tioned previously, this content varies widely from one contract to the next, depend-ing on the type of public good or service under consideration as well as on the con-tract’s set of objectives. Nonetheless, at least two main parts are always included: specifications of the private firm’s production; and terms of the firm’s remuneration. Other parts of the contract, pertaining to potential conflicts and their resolution or to eventual revisions, must also be added. Table V presents an overview of the various types of private-sector missions and possible remuneration formulae stipulated in a public-private partnership contract.

Table V – Possible contents of public-private partnership.

The private firm’s missions can, depending on the nature of the contract, relate to the provision of the infrastructure alone, to the provision of the service alone, or to the provision of both.

Means of payment Public production Private productionPublic: through taxation/the taxpayer Purely public model

(National defense)Supply contract(Waste processing)

Private: through service fees/the user Public monopoly(EDF - electric power supply)

Concession contract(Water supply)

Mixed: through both taxation anduser fees

Subsidized monopoly(SNCF - national railway)

Subsidized concession contract(Local bus services outside of Paris)

Services provided by the private firm Remuneration of the private firmInfrastructure, without service:

DesignConstructionMaintenance

Service, without infrastructure:Limited managementAll-encompassing management

Both infrastructure and service:Service, with initial infrastructureService, with additional infrastructure

By the public-sector entity (price):Fixed price:ImmediateDeferred

Proportional pricing:On the basis of the service providedOn the basis of financial outlay

By the user (service fee)Mixed (service fee and price)

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As regards the infrastructure alone, this mission can encompass one or several of the three dimensions alluded to above: design (or engineering), construction and maintenance. In the frequently-encountered case where the contract has been estab-lished for all three dimensions, a key issue gets raised: should the public entity engage a single fully-integrated firm or rather three distinct firms? Anglo-Saxon practices and legal precepts have, for a long time, called for a more pluralistic approach, whereas French practices have been inclined to favor singularity. Each formula presents advantages and disadvantages. Singularity, or reliance upon a single company, carries with it the guarantee of overall compatibility and generates economies of informa-tion. If the firm commissioned to build a piece of infrastructure knows in advance that it will also be assigned maintenance responsibilities (and, often, service manage-ment functions), it will be less tempted to sacrifice the long run for the short run, and thereby less likely to opt for less-expensive solutions during construction which result in higher maintenance costs down the road. If the engineering firm contracted to design the project has also been retained for the construction phase, considerable time will be saved and coordination mishaps avoided. The downside of a singular approach lies in the removal of competitive pressure. In the traditional Anglo-Saxon system, three calls for tender are held: one for design, one for construction and the third for maintenance and/or operations management. In the French system on the other hand, only one is held: for all three dimensions lumped together. Weighing the theoretical pros and cons of such an “all-in-one” strategy could be discussed ad infinitum, yet observation of practices over the past few years at the international level would suggest that the singular approach is in fact winning converts. A couple of trends help support this observation: integrated French firms or firms operating with French-fashioned methods being awarded an increasing number of contracts; and, perhaps even more pointedly, Anglo-Saxon firms displaying a greater propensity to become fully-integrated, capable of incorporating engineering/design, construc-tion and operations management responsibilities.

With respect to service-only contracts (without the infrastructure component, which in this case is built and owned by the public authority), the distinction can be drawn between missions relative to the entire service and those relative to just one or several narrower aspects of the service, such as infrastructure maintenance or labor management.

In the majority of cases however, the contracted missions will pertain to both the production and management of infrastructure, i.e. the overall service provision. A well-known distinction can be drawn between contracts which call for producing all of the infrastructure and those which call for producing only the additional infra-structure required either to meet the forecasted increase in demand or to introduce a new technology.

The issue of infrastructure ownership is important, yet not essential to the public-private partnership. In general practice, the public entity retains ownership of the



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service’s infrastructure. In those instances where the infrastructure is owned by the private entity, this status is usually only temporary: once a predefined period of time has elapsed, the private firm retrocedes ownership to the public authority. It is criti-cal to point out that in the area of public service provision, the public sector always has the last word, even when the private sector has been “delegated” to ensure full provision of the service and to undertake all necessary capital investments.

The private firm engaged in a public-private partnership contract obviously expects to be remunerated. The contract always establishes the conditions of such remuneration, which correspond with one of the two following scenarios:

First, the private firm can be directly remunerated by the public entity, in which case the remuneration takes on the form of a price or fee, along the lines of a price paid when two private firms conduct an ordinary transaction. This price however can be determined in a multitude of ways, based on either a fixed price or a propor-tional price.

The fixed price, as stipulated in the contract, is intended to remunerate the serv-ices performed by the private firm; it may be revisable, by applying for example a price indexation formula, and subject to schedule overrun penalties or, much less commonly, to early completion bonuses. This fixed sum is typically paid in its entirety once the construction phase has been terminated, with the possibility of intermediate instalments during the course of the construction work. Recently however, a deferred payment scheme has been gaining prominence, according to which the remuneration gets spread over a potentially much longer time frame (10 to 15 years) through periodic payments. In this case, the contract encompasses a basic service provision contract plus a loan agreement: the private firm is thus responsible for the service’s production as well as its financing, while the public authority covers long-term debt through tax revenues. In general however, the authority relies upon banks for its financing needs.

The price paid by the public entity to the private firm can also be proportional, but proportional with respect to which parameters? To the actual service provided, as in the case of household waste disposal where remuneration is normally based on the volumes removed and/or processed. The service provided, which often includes a distinct qualitative component, must be defined using utmost care and coupled with a fine-tuned monitoring system. Shadow tolls represent another example of proportional remuneration. According to this system, a private entity builds a road at its own expense; users then benefit from the infrastructure free of charge; and the concession-granting public entity remunerates the private firm on a pro-rata basis depending on the number of vehicles traveling on the new road segment. This proportional-remuneration system differs substantially from that of capital outlays; it can be found in the areas of research, supply of military equipment and, to a partial extent, urban bus transit. The private firm covers all of the expenses “neces-sary” to ensure provision of a public service; the public entity then reimburses these

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expenses plus a small profit margin. Even when accompanied by mandatory cost-control measures, this system lacks a strong cost-minimization incentive.

Remuneration of the private firm can also take on the form of a price or service fee paid by the user. Many possible formulae could be adopted to base such a user fee, including: average cost, marginal cost, the Ramsey-Boiteux function, binomial distributions, discriminant. Each presents a distinct set of advantages and disadvan-tages. Both the structure and amount of the user fee are obviously not to be left to the discretion of the private firm, but rather carefully stipulated in the public-private partnership contract. The contract also specifies how this fee is to evolve over time.

Lastly, the remuneration may be mixed, thereby combining a component of user fee with another component of price or subsidy. The price paid to the private firm could take on the form of a guaranteed minimum or of a subsidy proportional to the service provided. The amount of such a subsidy should increase as pressure mounts on the level of the user fee. Here again, the range of formulae conceivable – and cur-rently in practice – is very broad.

6. Characteristics of partnership formulae

From a more analytical perspective, certain characteristics inherent to public-private partnership-specific formulae, whose diversity in terms of both objectives and contractual contents have already been discussed, do merit further examination. Three in particular, which happen to be very closely tied to one another, will be raised herein: the contractual period, the private firm’s capital commitment, and the breakdown of risks between the public and private sectors.

The duration of public-private partnership operations is highly variable and can span the short term (1 or 2 years), the medium term (2-5 years) or the long term (10+ years). The private firm’s capital commitment - the amount of funds invested and the investment period – also varies considerably between the two ends of the spectrum. As shown in Table VI, a general correlation can be drawn between the contractual period and the level of capital commitment.

Table VI – Capital commitment and contractual periods.

The public entity responsible for negotiating contracts thereby finds itself in a predicament. On the one hand, it would like to negotiate short-term contracts so as to maintain greater flexibility over the long run. Being in a position to renegotiate


Type of contract Degree of private capitalcommitment

Length of contractualperiod

Technical assistance Very low 1 to 2 yearsOperations and maintenance Low 2 to 5 yearsLeasing Moderate (capital flows in the system) 5 to 10 yearsConcession of an existing network High (influx of new investment) 10 to 20 yearsBOT (concession for a new piece of infrastructure) Very high 20 to 40 years


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the contract more frequently enables the public entity to solicit (or at least threaten to solicit) outside competitive bids, hence to take greater advantage of the economic efficiency associated with the private sector. The rationale behind calling upon the private sector would, in the first place, tend to favor short-term contracts. Yet, on the other hand, a company’s capital commitment depends directly upon the length of the contract: for a three-year contract, for example, no company will agree to a heavy capital investment requiring fifteen years to be fully depreciated. Yet, experience has shown that a good number of public services are indeed provided with such levels of capital investment. The technological rationale behind the provision of public goods and services would thus plead in favor of long-term contracts. It then becomes essen-tial to seek out the appropriate middle ground between these two points of view by negotiating contracts which are long enough to benefit from extensive capital com-mitment and short enough to benefit from a healthy dose of market competition. In general, the size of the capital investment determines the length of the contract.

The provision of public goods and services, to a greater extent than most other activities, involves risk-taking; the nature of these risks is both technical and com-mercial. The technical risk concerns, first and foremost, the cost of building the infrastructure. Since many infrastructure projects require “customized” facilities for site-specific and service-specific reasons and since the construction schedule spans a long period of time, cost projections are difficult to develop with accuracy. No one even bothers to keep track of the number of projects whose actual cost winds up exceeding the projected cost. The commercial risk concerns above all the use of the finished infrastructure and is also quite difficult to assess. The set of explanatory vari-ables related to infrastructure use is so vast (income levels, price, consumer prefer-ences, the presence of competing infrastructure, technological factors, etc.) and so uncertain, especially for longer time frames, that even the results of the most sophis-ticated forecasting models often prove wrong. Here again, the number of instances in which actual use rates differ radically from the projected rates is no longer recorded. In sum, uncertainty exists with respect to both the expenditure side and the revenue side (at least when a user fee is charged), hence the presence of risk.

The public-private partnership contract must address this risk through devising formulae that: minimize risk or at least the inherent uncertainty; distribute all resid-ual risk “equitably”; and/or transfer the risk to an insurer. Some systems for provid-ing public goods and services are indeed more prone to introduce forecasting errors than others. In particular, entirely-public systems would naturally tend to minimize cost forecasts and inflate use rate forecasts: the civil servants responsible for the fore-casts, the politicians responsible for project-related decisions and the contractors responsible for the works program are all relatively immune to the consequences of such errors, which would be borne by the taxpayer, and they stand to gain when-ever additional investment is approved and carried out. They are thus prone to pro-duce involuntary miscalculation. A preferable system would be one in which those

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responsible for producing and sanctioning forecasts hold a stake in the accuracy of their work. Such is the case when the private sector is remunerated on the basis of actual use rates and then required to absorb any cost overrun. Incentives aimed at improving accuracy in forecasting can help reduce the risk of introducing error, but certainly not eliminate it altogether.

A certain degree of risk will therefore always have to be shared or assumed. The conditions laid out in the public-private partnership contract are to, either implic-itly or explicitly, define the way risk is to be divided. Formulae in which the public entity assumes all risks are definitely to be avoided: the private partner would in no way be motivated to minimize costs and maximize use rates. Also to be avoided are those formulae in which the private firm absorbs all risks: the public entity’s apparent advantage here is merely superficial, as the private firm is in fact required to protect itself against any excessive risk (a point its bankers would never overlook) and would pass on the cost of such protection to the public entity in the form of higher prices or user fees.

7. The necessity of adopting a case-by-case approach

A framework for analyzing the various forms of public-private partnership with respect to financing infrastructure projects has been forwarded herein. The process involved widening the scope of the public-private partnership for the entire provi-sion (and not just the financing) of public goods and services (and not just the infra-structure necessary for their production) because this broader angle of assessment is more relevant. The investigation has focused on the diversity of these public goods and services, which cannot be treated using a generic approach, as well as on the diversity of the potential - and actually applied - solutions and formulae. Claiming to be “for” or “against” the public-private partnership format is not at all relevant. Instead, emphasis should be placed both on defining, for each given situation, the optimal role of private-sector involvement with respect to each of the service pro-vision dimensions (decision-making, payment, engineering/design, construction, management, maintenance, etc.) and on negotiating one or several contracts that clearly stipulate the missions and remuneration bases, with due consideration paid to the contractual period, the breakdown of risks, and the private sector’s capital com-mitment.

Such a framework definitely lends itself best to a customized approach as opposed to any standardized packaged formula. Table VII below reflects an attempt at a typol-ogy which, by virtue of heeding the advice of Valéry who stresses that “all things simple are untrue but all things complicated are useless”, proves to be neither too useless, nor too untrue3.

3. Borrowed from the French Ministry of Public Works.



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Table VII – Different types of public-private partnership.

APPENDIX : Primary types of contracts underlying a public-private partnership

ConcessionThe concessionaire carries out all of the capital investment, operates the resulting service and is remunerated primarily through service fees paid by users. The facilities are to be handed over to the oversight public authority at the end of the contract period.

LeasingThe lessee manages either the facilities side or the operations side of the project and is remu-nerated primarily through service fees paid by users. Equivalent to the Anglo-Saxon Mana-gement Contract (plus a “success fee”).

BOOT (Build Own Operate Transfer)Within a project financing framework, several private entities – via a series of contracts – finance, build, own and operate an infrastructure facility designed to accommodate the set of needs established by the public authority, which in many instances acts as guarantor for the project. Ownership of the facility is to be transferred to the public authority upon expiration of the contract.

BOT (Build Operate Transfer)A variant of the BOOT contract, whereby facility ownership is transferred to the public authority once the building phase has been completed.

BOO (Build Own Operate)A variant of the BOOT contract, whereby facility ownership remains in the hands of the private investors beyond the contract’s expiration.

Reverse BOOTThe public authority finances and builds the facility, and then confers service operations to a private firm which assumes ownership as the building phase winds down.

Option Operations &maintenance

Capitalinvestment

Commercialrisk

Asset ownership Contractperiod

Public agency (non-public-privatepartnership) management

Public Public Public Public –

Service contract (Outsourcing) Public/private Public Public Public 1 to 2 yearsManagement contract Private Public Public Public 3 to 5 yearsLeasing Private Public Shared Public 8 to 15 yearsConcession of existing network Private Private Private Public 25 to 30 yearsBOT (Build, Operate & Transfer) Private Private Private Public => Private 20 to 30 yearsPrivatization Private Private Private Private indefinite

Project 4

Documents

Transcript of Project 4