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Capturing The Benefits Of Highways PPPs

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Paper delivered at the TRB Summer Highways meeting, Athens, 2006

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Capturing The Benefits Of Highways PPPs

  1. 1. Sources of long-term project sustainability and benefit capture in tollways and highways PPPs Dr Mark Brown, Halcrow
  2. 2. Contents <ul><li>PPP in the UK </li></ul><ul><li>Sources of value in PPPs </li></ul><ul><li>Sources of long-term value </li></ul><ul><li>Evidence of risks: revenue forecasts </li></ul><ul><li>Summary </li></ul><ul><li>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. </li></ul>
  3. 3. 1) What is a PPP? <ul><li>Public Private Partnerships </li></ul><ul><li>‘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’ </li></ul>PPPs deliver long-term sustainability and value for money PPP is a means of improving 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
  4. 4. PPP/PFI in the UK: long-term evidence <ul><li>Over 600 projects since 1992 (all sectors) </li></ul><ul><li>Capital value of signed deals £42bn </li></ul><ul><li>Schools, hospitals, defence, roads, rail, prisons, etc </li></ul><ul><li>Growing focus on service delivery – outcomes </li></ul><ul><li>Growing evidence of operating and maintenance cost efficiencies as well as capital cost savings </li></ul><ul><li>Growing evidence of value for money…but some major lessons </li></ul>
  5. 5. To PPP or not to PPP <ul><li>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) </li></ul><ul><li>PPP is, perhaps, most credited for bringing financial benefits to (and capital to fund) the construction phase (most evidence to date) </li></ul><ul><li>There is now growing evidence that PPPs bring significant long-term management and maintenance savings also </li></ul>PPPs are used for management and maintenance Contracts as well as for new infrastructure
  6. 6. Management & maintenance cost – typical % of contracts value <ul><li>Highways - variable: M25 London Orbital Motorway widening (400km) – 70% </li></ul><ul><li>Railways – 30-40% </li></ul><ul><li>Light Rail – 50-60% </li></ul><ul><li>Prisons – 70-75% </li></ul><ul><li>Hospitals – 70-75% </li></ul><ul><li>Generally contracts cover 30-year periods </li></ul><ul><li>Operating and maintenance cost savings can be </li></ul><ul><li>as great if not greater than capital costs </li></ul>
  7. 7. 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
  8. 8. 3) Sources of value 1: program and procurement <ul><li>Streamlining planning and procurement stages </li></ul><ul><li>Shorter construction periods </li></ul><ul><li>Bundling work into larger programs </li></ul><ul><li>Better alignment of users of assets with builders </li></ul><ul><li>Equates to 4% capex saving across all sectors (up to 15% for highway projects) </li></ul>
  9. 9. PPP (PFI) Construction performance <ul><li>In the UK PFI (PPP) projects are significantly less likely to over-run on time or budget </li></ul><ul><li>Where costs have over-run, these have been borne by the consortium (ie: risk has been transferred) </li></ul><ul><li>A Government survey revealed that clients believe quality of design of PPP projects is better </li></ul>Public PFI procurement Cost over-run 73% 22% Delivered late 70% 24% Source: UK NAO
  10. 10. Sources of value 2: collaborative working <ul><li>Integrated teams of specialists </li></ul><ul><li>Non-adversarial forms of contract </li></ul><ul><li>Earlier contractor involvement </li></ul><ul><li>Equates to 6% capex saving </li></ul>£7.5Bn Channel Tunnel rail Link PPP delivered on-time, to budget with pain-gain sharing and target-price contracts
  11. 11. Sources of value 3: performance management <ul><li>Payment to PPP consortia (SPV) performance related </li></ul><ul><li>Can relate to outcomes or asset condition </li></ul><ul><li>Payments can supplement or replace other revenue sources…or be shadow tolls </li></ul><ul><li>The better the performance of the PPP, the greater the permitted remuneration </li></ul>UK Highways DBFO. Monthly payments are based on strict performance criteria, such as system availability & safety.
  12. 12. 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
  13. 13. Payment Mechanism: Outcome & Condition Criteria <ul><li>Payment for: </li></ul><ul><li>Journey time reliability </li></ul><ul><li>Safety </li></ul><ul><li>Response time to incidents </li></ul><ul><li>Deductions for: </li></ul><ul><ul><li>Sub-standard carriageway </li></ul></ul><ul><ul><li>Lanes seriously affected by snow or ice </li></ul></ul><ul><ul><li>Loss of technology systems </li></ul></ul>Failure of DBFO consortium to respond adequately to adverse weather will result in reduced payment
  14. 14. Sources of value 4: whole life sustainability <ul><li>Reduced energy costs </li></ul><ul><li>Maintenance cost reductions </li></ul><ul><li>Lower renewal costs </li></ul><ul><li>Lower operating costs </li></ul><ul><li>Greater user productivity </li></ul><ul><li>Better environmental sustainability </li></ul><ul><li>Equates to minimum of 5% p.a. reduced opex (£770m p.a. across UK public sector) </li></ul>PPPs reduce the Whole life costs Of infrastructure
  15. 15. Environmental Sustainability <ul><li>Capital resource efficiency (up to 15%) </li></ul><ul><li>Reduced consumption of maintenance materials (whole-life cost minimisation eg: more durable pavements) </li></ul><ul><li>Reduced energy consumption (eg: use of renewable energy for lighting, signing, etc) </li></ul><ul><li>More efficient travel behaviour – reduced veh.km and emissions </li></ul><ul><li>Reduced congestion (with performance management) </li></ul><ul><li>Fewer accidents </li></ul>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.
  16. 16. 4) Sustainability benefits – caveats & evidence of risks <ul><li>PPPs are still relatively new (most less than 10 years’ old) </li></ul><ul><li>Operating /maintenance cost savings may be due to deferral of such activities </li></ul><ul><li>Most are due to run for 25 years, when they will generally require a minimum 25-year residual life at ‘hand-over’ </li></ul><ul><li>Selection of appropriate projects for PPPs is critical – not all projects and not all sectors are suitable </li></ul><ul><li>Mixed experience of revenue forecasting reliability </li></ul>
  17. 17. Management of risks is also a source of value! <ul><li>Revenue & Risk: </li></ul><ul><li>‘Empirical evidence suggests that toll road forecasts have, on average , overestimated traffic by 20-30%.’ </li></ul><ul><li>‘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.’ </li></ul><ul><li>S&P Infrastructure Finance - Traffic Forecasting Risk: Study Update 2004 </li></ul>
  18. 18. Traffic and Revenue Risk <ul><li>In countries new to tolling, traffic is on average over-estimated by 40% (twice as bad!) </li></ul><ul><li>Risk analysis and benchmarking are often not carried out by forecasters </li></ul><ul><li>Any adjustments for risk and uncertainty are often arbitrary </li></ul><ul><li>Long-term concessions (30 years or more) place critical reliance on accurate forecasts </li></ul>Economic recession High tariffs Severity of ramp-up Single value of time Ambitious land-use scenarios Competing mode/route
  19. 19. 5) Conclusions <ul><li>The performance of highway PPPs seems to mirror those from other sectors </li></ul><ul><li>PPPs can generate significant benefits during the construction phases of projects </li></ul><ul><li>They can also generate significant long-term benefits from operational, maintenance and management efficiencies </li></ul><ul><li>These whole life benefits can, under some circumstances, exceed those of the construction phase </li></ul><ul><li>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 </li></ul><ul><li>… there is also emerging evidence that PPPs bring sustainability benefits…if risks are managed </li></ul>
  20. 20. <ul><li>THANK-YOU FOR YOUR ATTENTION </li></ul><ul><li>Dr Mark Brown </li></ul><ul><li>Halcrow </li></ul><ul><li>[email_address] </li></ul><ul><li>00 44 208 970 1804 </li></ul><ul><li>HALCROW </li></ul><ul><li>London, Dubai, Sharjah, Abu Dhabi </li></ul><ul><li>USA, Canada, Australia, China </li></ul>