Public private partnerships consist in the financing, design, development and operation of services and facilities of the public sector and integrate delivery of long-term services, distribution of risks to the private sector and implementation of the contracts between the private sector and the public sector on the long-run and under different forms. The shift of responsibilities to the private segment for accessing financing for projects is one of the big differences between PPPs and conventional acquisitions and, where the situation requires it, the private party has to identify investors and to develop the structure of project financing. Under these circumstances, PPPs are essential in the implementation of infrastructure projects.
Using the PPP, the private sector finances the construction of the project and the reimbursement is made either through a services tax from the authority provided in time or through project revenues or it is a combination between the two concepts. Therefore, when the public authority would not or cannot increase the level of investments, PPPs help the implementation of projects for which the authorities don’t dispose of the necessary financial resources. Such a project adds value to investments if it brings clear advantages to the society which is more important than if it could be achieved by any other acquisition alternative. Therefore, it is very important to elaborate an investment analysis (especially, cost-benefit studies) as initial part in the preparation of a project, irrespective of its method of implementation whether conventional or PPP. In some states, such as Great Britain, which has complex programmes for this type of acquisition, a PPP adds value to the money invested in the case where cost is smaller than the best realistic alternative of the public sector. As part of the PPP application, political support and the implication of interested parties are crucial elements for the success of a project. “The government has to analyse each and every case and its validity, profitability and earning capacity, before initiating tender procedures for investments using PPPs. The authorities should elaborate proposals that would help increase the attractiveness of private investors, especially by using international standards, implementing open and transparent processes and setting clear goals and objectives supported by policies”, show the recommendations elaborated as part of the workshop organised by UNECE on 7 November 2012 on the implementation of PPPs for infrastructure projects.
Confronted with the limited availability of public resources for infrastructure, the authorities have to support PPPs as much as possible as their implementation could result in a return of investment on the long-term (30-50 years). In infrastructure, most projects implemented through PPP schemes have only focused on high-speed lines, airport and maritime connections. The railway projects implemented through PPP are not so many compared to road infrastructure projects, although the application of PPP for railway sector investments is an important opportunity for railways and the approach of projects using the PPP can be achieved by joining efforts and through an efficient collaboration between all the factors involved.
Successful PPPs turn into account the investments of the promoter and of the investor
In Europe, infrastructure development gaps have a negative impact on economic growth, social cohesion and new jobs and governments have constraints in granting transport infrastructure funds. In order to answer to mobility demands, infrastructure projects in the EU aimed to develop the transport network require investments of EUR 500 Billion by 2020 and of EUR 1.5 Trillion by 2030. Thus, there is no doubt that public financing is not sufficient and it is very important to involve the private sector as well. If financing is intense, this will bring considerable revenues to the private sector; for example, the EUR 31.7 Billion proposed for transport through the Connecting Europe Facility will generate investments of up to EUR 150 Billion. However, although infrastructure projects stimulate economic growth, railway authorities, organisations, consultancy companies and railway experts believe that “unfortunately, governments are now cutting only the investments necessary to infrastructure projects, especially for railways, although the demand for investments in infrastructure development at pan-European level continues to increase”, explains UNECE.
Worldwide, decision makers launch new policies that encourage the development of a sustainable transport aimed to stimulate economic growth and, at the same time, to ensure the transport of freight and passengers without harming the environment. Consequently, what authorities should do is to encourage railway transport, the only transport mode which answers to the challenges launched by the social, economic and business environment. Therefore, PPP projects stimulate investments in the development and modernisation of railway infrastructure and railway opportunities consist in the development of the infrastructure capacity by supplementing financial resources, increasing freight volumes, despite competition with railway transport, opportunities for the development of the regions which benefit from railway connections, the increasing demand for railway transport in suburban areas, connectivity to ports, additional capacity for some vital routes. Moreover, it is essential that the opportunities generated by PPP projects contribute to the significant reduction of exploitation and maintenance costs, boosting the efficiency and reliability of railway projects by sharing risks.
India and China, two countries with investment potential
Globally, India is an important market for the implementation of projects using PPPs, especially since the government’s strategy relies on promoting investments by combining public and private investments. Public private partnerships become more and more important for the construction and operation of infrastructure, especially for railways and ports. “The key factors for the development of railway projects through PPPs are environmental changes, here referring to the economic growth in Asia, the increasing population, urbanisation and environmental problems. Also, the need for efficiency, also consisting of reducing operating and maintenance costs, the optimisation of assets, of the private capital and of boosting quality and innovation have also led to the application of PPPs”, declared Mukul Saran Mathur, Executive Director of PPPs within the Indian Ministry of Railways during UNECE’s reunion.
Starting with 2004, the Infrastructure Committee led by the Prime Minister has maximised the role of PPPs through the papers launched. Regulatory institutions have then been consolidated, while contractual papers have been standardized (risk allocation terms, quality of services and performance standards, tender papers). In 2005, the Indian Infrastructure Financing Company (IIFCL) allocated long-term investments for 20% of the costs of a project and has encouraged PPP projects after 2010. In the action plan no.11 for 2007-2012, 40% of railway investments have been directed to PPPs and by 2017, the authorities want to invest a minimum of USD 500 Million in infrastructure projects to be carried out using PPPs.
India has applied the PPP concept not only in railway infrastructure projects, but also for operations (container trains, exploitation of terminals, services for passengers). For example, in 2006-2010, 15 container operators granted permission for the delivery of container services which generated USD 500 Million. The largest project implemented through PPP is the suspended railway corridor in Mumbai worth USD 4.5 Billion and the private sector has to decide on the concession period.
Over the next period, the authorities plan to regulate transparent concession terms and allow construction, maintenance and operations to non-government agencies for achieving true private sector efficiencies.
As regards China, public private partnerships will be promoted, especially while considering that the limited availability of funds is one of the biggest challenges in the development of railway transport compliant to mobility demands. Therefore, introducing the public private partnership concept makes private funds available for the construction of public infrastructure, while efficiently relieving the financial pressure over the government.The possibility to implement projects by using the PPPs is created by the acute lack of freight transport capacity (in 2010, railway investments accounted for only 3.1% of fixed asset investments), especially since cargo transport is the highest in the world (2.9 trillion tonne/km), and by the situation of the Ministry of Railways’ budget – for railway project financing, the ministry’s profit represents 10-20%, its budget is of 10-20%, while its debts amount to 60-70%.
The first minority share investment by MOR paves the way for private participation to railway infrastructure projects. As regards the legislative framework, the separation of regulatory and commercial functions of the MOR is planned to increase transparency, supervision and efficiency. One of the latest PPP projects in China (November 2012) was announced by Beijing municipality who will implement, together with the private sector, the project for the construction and operation of the underground Line 14 (total length 47.3 km). The municipality will be joined in the project implementation by MTR Corp Ltd, a JV including MTR Corp (49%), Beijing Capital Group (49%) and Beijing Infrastructure Investment Corp (2%), with the last one ensuring 70% of the cost necessary for civil engineering works. Also, according to the PPP signed by the parties involved, MTR will be responsible with the development of the mechanical and electrical systems, with the necessary rolling stock and with the 30-year operation and maintenance.
At the middle of 2012, the National Development & Reform Commission (NDRC) of China approved a public-private partnership (PPP) project that covers the investment, construction and operations of Hangzhou Metro Line 1 (48 km and 31 stations). The city plans to build an 8-line network. Hangzhou Metro group will supply 62% for the USD 3.45 Billion project. The new JV will invest USD 1.25 Billion and will deal with the operation of the line for the next 25 years.
As China plans to invest USD 92.5 Billion in 2013 in railway projects aimed to develop the country’s railway system and the authorities plan to build another 24,000 km of railway over the next 3 years as part of the railway infrastructure development strategy, the contribution of the private sector is essential in the implementation of the programmes.
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