Funding strategies for transport infrastructure10 February 2015

Björn Hasselgren, PhD

KTH Architecture and the Built Environment

Lecture February 10, 2015PART 1 Theory of Public Sector funding of transport infrastructure Alternatives to Public Sector funding PPPs – how do they work

Coffee

PART 2 Some examples of PPPs Co-financing – how does it work Some examples of co-financing Long term prospects for funding and organizing

Historical development of roads and railroads

Levels and roles in transport infrastructure

Government’s roles

Financer Regulator Manager Owner

International/EU

National

Regional/local

Why the public sector funds transport infrastructure

High costs

Externalities – positive and negative

High risks – construction and operation

Difficult to collect fees

Important policy areas – growth policies, regional policy, distributive issues

Natural monopolies

Regional development

Growth policies

Control of territory

Economies of scale

Financing

Development over time of transport infrastructure -a co-evolutionary approach

Technology EconomicsPolitics and

”socio-culture”

Public sector

Private sector

Development of transport infrastructure systems

Government and market

Natural monopol

ies

Finan-cing

External effects

Welfare econo-mics

Scale-effects

Competi-tiveness

Inno-vation

Incen-tives

Flexi-bility

Cust-omer orien-tation

Central planning

Decentralized coordination

Planning models

Spontaneous order

Centralized planner

Market failure Government failure

Coordinated

Un-coordinated

Centralized knowledge

Individual knowledge

Collective and private

Private roads/rail-roads

National railroads and roand

Municipal and regional streets/roads

Government’s funding of transport infrastructure in Sweden

NATIONAL (40-45 bill SEK)

Roads, railroads – infrastructure paid for by the Government – some fees for railroad and road

Air-traffic – traffic control and airport services paid by users via fees

Maritime – piloting, lighthouses etc – paid for by users via fees

Government’s funding of transport infrastructure in Sweden

REGIONAL AND LOCAL (40 bill SEK)

Local roads - tax

Local railroad systems – tax, fees

Local airports – tax, Government grants

Harbors – tax and fees

Multi modal freight centres - fees

The infrastructure development steps

Tran-sport pro-blem

Plan-ning and

priori-tizing

Choice of action

– maintenance, mana-gement invest?

De-cision

on action

Finan-cing and

detai-led phy-

sical plan-ning

Procurement of

con-struc-tion,

maintenance

Mana-gement

of constr-uction and

main-te-nance

Use of the

asset, collectio

n of taxes/ fees

Public Sector Activities

Public/Private Sector Activities

Alternative funding

Fees paid by users (railroad, road, air, maritime)

Congestion taxes (road)

Co-financing (local and regional governments)

PPPs - few examples in Sweden

Concessions – used in some EU-countries for roads

Government funding and roles

Government funds, makes plans, constructs, owns and manages the infrastructure

Either:

- Tax is collected for VAT, fuels, vehicles, congestion – no connection to use of infrastructure

Or:

- Fees are collected for use of infrastructure – connected to the use of infrastructure• Voluntary or• Obligatory

Private-Public Partnerships

Government initiates the infrastructure projects

Private sector actor – finances, constructs and manages the assets for a defined period of time (30-50 years)

Private sector actor receives revenues from the users – or from Government

In the end the assets are transferred to the Government

Planning models

Spontaneous order

Centralized planner

Market failure Government failure

Coordinated

Un-coordinated

Centralized knowledge

Individual knowledge PPP

Positive aspects of PPPs

Different actors focuses on their main activities

Efficiency in procurement, construction and maintenance

Life cycle cost – management

Efficient construction phase

Risks carried by actors with experience

Off-balance – positive for many EU MS

Negative aspects of PPPs

Difficult to define contract and services – gives room for new negotiations

Financing costs higher than for Public Sector

Remaining risks are often transferred to the Public Sector – traffic volume (revenue risk)

Difficult organizational setting, Governance

Worn out assets tranferred to the Public Sector?

Where are PPPs going?(”Rethinking PPPs - Strategies for turbulent times,

Greve/Hodges 2013”)

Different strategies in different countries:

- Abandon PPP?

- Skeptical view?

- Marginal change?

- Status Quo?

- Reconsider the PPP-concept?

- Increased use, different purpose?

Some major themes in the development of PPPs

Increased focus on organization and management, less on financing

Search for ways to increase information to the public

Are risks transferred and how can it be safeguarded?

Increased focus on power and influence

A more active public sector in PPPs

PPPs including non-profit organizations

Current development in some other countries

PPPs, road charging, regions have wide authorities

Road charging, government controlled corporations, some PPPs

PPPs, per kilometer charging investigated

PPPs, concessions, new organisational form for roads

PPPs, charging for heavy (and light?) foreign vehicles

PPPs, decentralisation, charging systems

PPPs, some centralisation, corridor management, charging

US Congressional Budget Office: “Using Public-Private Partnerships to Carry Out Highway Projects” January 2012

Private financing will increase the availability of funds for highway construction only in cases in which states or localities have chosen to restrict their spending by imposing legal constraints or budgetary limits on themselves.

Cost of financing a highway project privately is roughly equal to the cost of financing it publicly

Any remaining difference will stem from the effects of incentives and conditions established in the contracts that govern public-private partnerships.

Partnerships have built highways slightly less expensively and slightly more quickly, compared with the traditional public-sector approach.

Coffe break!

Examples of PPPs

Arlanda Railroad

- cost 6 bill SEK

- built by private consortium, 1,8 bill SEK Gov Funding

- owned by the Government – Arlandabanan Infrastructure AB

- operated by Private Corporation A-Train AB (40 y)

- close cooperation with SL and Transport Administration

Examples of PPPs

New hospital in Stockholm – Karolinska

- construction cost 14,5 bill SEK

- built and managed for up to 40 years by private

consortium

- total costs for SLL 27 bill SEK for 30 years (in 2010

prices)

- yearly payment from SLL to consortium, ca 1,4 bill

SEK

Co-financing – how it works

Government and Local Government/Region (and sometimes Private Corporation) agrees to finance investment in new assets

Contribution from Local Governments/Regions - 20-50 % of total costs

Direct funding or user taxes/user fees

Common discussion on the best design of the project, maximaze the net positive value of the project, build value together

Co-financing - some examples

Stockholm City line

New road – E4 Sundsvall

New railway station Uppsala

New railway station and road connection Haninge Municipality

Metro line extensions in Stockholm, 26 bill SEK

“Sverigeförhandlingen” – value capture

The two tracks

Economic planning• Government planning

directions• 12 year horizon• Yearly budget discussions

and decisions• Parliamentary decision on

total frame• Government decides on

which objects to include• Transport Administration

manages the budget and construction

• Physical planning- Initiative comes from

Government, Transport Admin. Region/Local Government, train operator

- Is the investment necessary?- Prestudy, Railroad Study,

Railroad Plan- Local Government physical

planning- Environment considerations

(noise, emissions, building/operations, water, construction waste material)

Priset på SL-kortet höjsFeb 5 2015

Two basic management and financing strategies

Organizational (internal) efficiency (1940s-1980s)

- competition, markets, customers, decentralization

Vs

Economic (external)efficiency (1970s-2010s)

- cost/benefit analysis, coordination, central planning

The marginal cost controversy

CoaseOrgani-zational

efficiency

Institutional

PigouWelfare

optimization

Neo-classical

Marginal cost coverage

Full cost coverage

Ear-marking

General tax revenue

Cassel

Wicksell

Interaction and incentives (following Coase, 1970)

User

Transport Infrastructure Supplier

Government

International level

1980s-2010s

1840s-1970s

Contradictions in transport infrastructure policies

1944-1980

Business economics

Full cost coverage

Competition

Government owns

infrastructure

1980-2010

Welfare economics

Marginal cost coverage

Deregulation/ alternative financing

Privatization

The balance between AC and MC

Internal efficiency

1944, 1963, 1988, Trafikverket

External efficiency

1963, 1979, 1998, 2004, 2008

Challenges for the future

Technology EconomicsPolitics and

”socio-culture”

Public sector

Private sector

Development of transport infrastructure systems

Current EU/US development

Long term development

Introduction of fee-systems with new payment technology

User fees for congestion management

More market like conditions -> efficiency gains

Government focuses on core values and issues

Change the balance between government and regions

Government’s roles

Financer Regulator Manager Owner

International/EU

National

Regional/local

Possible ways forward…

Björn Hasselgren, PhD

KTH Royal Institute of Technology

Architecture and the Built Environment

+46-70-762 33 16

bjorn.hasselgren@abe.kth.se

www.kth.se/blogs/hasselgren

@HasselgrenB