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Paper delivered at the TRB Summer Highways meeting, Athens, 2006
Citation preview
Sources of long-term project sustainability and benefit capture in
tollways and highways PPPs
Dr Mark Brown, Halcrow
Contents
1. PPP in the UK
2. Sources of value in PPPs
3. Sources of long-term value
4. Evidence of risks: revenue forecasts
5. Summary
Terms: In the UK, PPP, PFI and DBFO all refer to variations of similar types of project delivered through public private partnerships. PFI projects usually remain in or revert to public ownership. PPP projects can also involve public sector equity. PFI highways schemes are usually referred to as DBFO.
1) What is a PPP?
Public Private Partnerships
‘A PPP is a risk-sharing relationship between the public and private sectors based upon a shared aspiration to bring about a desired policy outcome’
PPPs deliver long-term
sustainability and
value for moneyPPP is a means of im
proving the
Quality and reducing the volume
Of public services
Evidence is now emerging
Of the success of PPPs in
A variety of sectors, long-term
As well as during construction
PPP/PFI in the UK: long-term evidence
• Over 600 projects since 1992 (all sectors)
• Capital value of signed deals £42bn
• Schools, hospitals, defence, roads, rail, prisons, etc
• Growing focus on service delivery – outcomes
• Growing evidence of operating and maintenance cost efficiencies as well as capital cost savings
• Growing evidence of value for money…but some major lessons
To PPP or not to PPP
• PPP is most successful when government is highly selective about which projects to deliver using this mechanism (eg: in UK only 25% of highways program is delivered by PPP)
• PPP is, perhaps, most credited for bringing financial benefits to (and capital to fund) the construction phase (most evidence to date)
• There is now growing evidence that PPPs bring significant long-term management and maintenance savings also
PPPs are used for
management and
maintenance
Contracts as well as for
new infrastructure
Management & maintenance cost – typical % of contracts value
• Highways - variable: M25 London Orbital Motorway widening (400km) – 70%
• Railways – 30-40%
• Light Rail – 50-60%
• Prisons – 70-75%
• Hospitals – 70-75%
Generally contracts cover 30-year periods
Operating and maintenance cost savings can be
as great if not greater than capital costs
2) Sources of Value of PPPs Include ....
INPUTS OUTPUTS
LONG-
TERM
SHORT-
TERM
Reduced delivery
program time
and capital costs
Whole life costs
minimisation &
sustainability
Improved outcomes
(economic value) through
performance management
Innovation &
risk-sharing through
collaborative working
& modern contracts
3) Sources of value 1: program and procurement
• Streamlining planning and procurement stages
• Shorter construction periods
• Bundling work into larger programs
• Better alignment of users of assets with builders
• Equates to 4% capex saving across all sectors (up to 15% for highway projects)
PPP (PFI) Construction performance
• In the UK PFI (PPP) projects are significantly less likely to over-run on time or budget
• Where costs have over-run, these have been borne by the consortium (ie: risk has been transferred)
• A Government survey revealed that clients believe quality of design of PPP projects is better
Public PFI
procurement
Cost over-run 73% 22%
Delivered late 70% 24%
Source: UK NAO
Sources of value 2: collaborative working
• Integrated teams of specialists
• Non-adversarial forms of contract
• Earlier contractor involvement
• Equates to 6% capex saving
£7.5Bn Channel Tunnel rail Link PPP
delivered on-time, to budget with pain-gain
sharing and target-price contracts
Sources of value 3: performance management
• Payment to PPP consortia (SPV) performance related
• Can relate to outcomes or asset condition
• Payments can supplement or replace other revenue sources…or be shadow tolls
• The better the performance of the PPP, the greater the permitted remuneration
UK Highways DBFO.
Monthly payments
are based on
strict performance
criteria, such as system
availability & safety.
Output-based Payment Mechanisms
= Payment
Performance Measures Adjustment
- Condition Criteria Deduction
- Availability Deduction
Amount Bid
+-
Performance management
drives improved value for
money and enhanced
outcomes
Payment Mechanism: Outcome & Condition Criteria
Payment for:
• Journey time reliability
• Safety
• Response time to incidents
Deductions for:
• Sub-standard carriageway
• Lanes seriously affected by snow or ice
• Loss of technology systems
Failure of DBFO consortium
to respond adequately to
adverse weather will result
in reduced payment
Sources of value 4: whole life sustainability
• Reduced energy costs
• Maintenance cost reductions
• Lower renewal costs
• Lower operating costs
• Greater user productivity
• Better environmental sustainability
• Equates to minimum of 5% p.a. reduced opex (£770m p.a. across UK public sector)
PPPs reduce the
Whole life costs
Of infrastructure
Environmental Sustainability
• Capital resource efficiency (up to 15%)
• Reduced consumption of maintenance materials (whole-life cost minimisation eg: more durable pavements)
• Reduced energy consumption (eg: use of renewable energy for lighting, signing, etc)
• More efficient travel behaviour – reduced veh.km and emissions
• Reduced congestion (with performance management)
• Fewer accidents
PPPs offer greater
design flexibility such
as on the A1/M62
junction where the re-use
of site material brought
major resource, transport
and landscape benefits.
4) Sustainability benefits – caveats & evidence of risks
• PPPs are still relatively new (most less than 10 years’ old)
• Operating /maintenance cost savings may be due to deferral of such activities
• Most are due to run for 25 years, when they will generally require a minimum 25-year residual life at ‘hand-over’
• Selection of appropriate projects for PPPs is critical – not all projects and not all sectors are suitable
• Mixed experience of revenue forecasting reliability
Management of risks is also a source of value!
Revenue & Risk:
‘Empirical evidence suggests that toll road forecasts have, on average, overestimated traffic by 20-30%.’
‘Although considerable care needs to be taken ….. there is little difference between the accuracy of forecasts prepared for toll roads and those prepared for toll-free roads.’
S&P Infrastructure Finance - Traffic Forecasting Risk: Study Update 2004
Traffic and Revenue Risk
• In countries new to tolling, traffic is on average over-estimated by 40% (twice as bad!)
• Risk analysis and benchmarking are often not carried out by forecasters
• Any adjustments for risk and uncertainty are often arbitrary
• Long-term concessions (30 years or more) place critical reliance on accurate forecasts
Economic recessionHigh tariffs
Severity of ramp-upSingle value of time
Ambitious land-use scenarios
Competing mode/route
5) Conclusions
• The performance of highway PPPs seems to mirror those from other sectors
• PPPs can generate significant benefits during the construction phases of projects
• They can also generate significant long-term benefits from operational, maintenance and management efficiencies
• These whole life benefits can, under some circumstances, exceed those of the construction phase
• As we gain more experience of PPPs and as performance management techniques become more sophisticated, we have the ability to generate greater whole life benefits
• …there is also emerging evidence that PPPs bring sustainability benefits…if risks are managed
THANK-YOU FOR YOUR ATTENTION
Dr Mark Brown
Halcrow
00 44 208 970 1804
HALCROW
London, Dubai, Sharjah, Abu Dhabi
USA, Canada, Australia, China