Best Practice Report

Index

Public-private collaboration / Enabling green infrastructure and systems / Large-scale infrastructure collaboration
4.1.

Large-scale infrastructure collaboration

Public private partnerships have been increasingly used to finance and operate infrastructure developments. Japan had its first PPP examples in 1987; the UK Private Finance Initiative was initiated in 1992. Governments can draw from experience and lessons, good and bad, from over 25 years of investments in large-scale infrastructure with contract-based PPPs in areas such as energy, water, transport, and telecommunications (Garvin and Bosso, 2008). Possible benefits for the public partner in a large-scale infrastructure PPP is that a task can be fulfilled at lower costs and paid for over time, with the upfront investment provided by the private partner. If user revenues are enough to cover the investment and operation costs, government expenditure may not be required at all (Martins et al., 2011; UNESCAP, 2011; and Jooste and Scott, 2012).

PPP tendering processes may also help remove barriers to infrastructure innovation as infrastructure markets are traditionally monopolistic, with very high entry barriers, creating a lack of incentive for incumbents to embrace new technologies (Corfee-Morlot et al., 2012).

Private engagement takes place in different stages of infrastructure development: design, construction, financing and operation (Alfen et al., 2009; Kaminker et al., 2013; and Kaminker and Stewart, 2012). When designing and implementing the expansion of infrastructure, public authorities must make key decisions between public and private provision of the infrastructure or some combination of both. This can include using PPC mechanisms, and elaborating on principles for private sector participation in infrastructure (OECD, 2007).
For instance, a government could contract a private consultant to develop an infrastructure investment or perform funding, building and maintenance tasks. It could also develop more holistic concepts such as ‘Build-Operate-Transfer (BOT)’, ‘Build-Transfer-Lease (BTL)’, ‘Design-Build-Finance-Maintain-Operate (DBFMO, see Case 8)’ or ‘Build-Operate-Own (BOO)’ (Alfen et al., 2009). These models differ in terms of ownership and to whom project revenues accrue. For selecting a PPC form with the highest value-for-money for taxpayers and end-users, the following aspects can be considered: effectiveness of current government infrastructure initiatives, governance strength of state-owned enterprises responsible for infrastructure development and operation, and implementation challenges that public authorities may face if a PPC route is selected instead of a government-driven program (Beltramello et al., 2013).

However, in terms of cost-effectiveness and value-for-money, PPP could also induce higher costs than government action due to, for instance, the private sector’s higher cost of borrowing. In order to check whether PPC delivers ‘value for money’ for taxpayers, tools such as the Public Sector Comparator may be used before tendering (Alfen et al., 2012; ADB, 2012; and Burger and Hawkesworth, 2011). The literature also highlights that many governments have failed to take full advantage of the PPP mechanism owing to a lack of public sector expertise in the identification and procurement of projects with PPP potential (OECD, 2010).

Case 9 shows an example from Brazil of a large-scale public transport infrastructure project (using BOT concept), which serves as an example of a ‘traditional’ PPP on infrastructure investments. The example shows that the application of PPP in this infrastructure development project could not, due to flaws in the design of the partnership, prevent considerable delays with the project completion. It also describes how such delays could be avoided in the future through an improved PPP design. PPPs can be used to procure a wide range of social infrastructures, such as community sanitation, agricultural facilities, government offices, education, or health services (see Case 10).

The success of infrastructure PPPs depends on conditions such as the creation of an (internationally) open investment environment for private sector participation in large infrastructure investments, dismantling unnecessary barriers to private sector entry in the bidding process, and implementing and enforcing adequate competition laws (OECD, 2007).
 

Case 8: DBFMO contracts for highway construction in the Netherlands

DBFMO is a contract form where the Design, construction (Build), Finance, Maintenance and possibly the Operation of a project are integrally transferred from the government to a private party. The private party is usually a consortium of several companies providing all project services during its entire lifespan, including the funding. The consortium can sometimes be (partly) compensated by user fees, for example in the case of a railway or a toll road or fees from the government on the basis of performance during the full lifetime of the project.

In the Netherlands, several road, rail and canal projects are carried out through DBFMO contracts. An example is the N31 highway in Fryslân, where two extra lanes were constructed by the Wâldwei consortium during 2004-2008. Until 2022, the consortium will be responsible for the management and maintenance of the road. An assessment showed that contracting private entities for this infrastructure task would result in a 21% reduction of the total costs during the lifecycle of the project compared to a situation in which the task would have been performed by a public entity (Ministerie van Financiën, 2012).
 

Case 9: São Paulo’s Metro Line 4

Strong population growth in São Paulo’s periphery coupled with a lack of employment in these areas has led to long and overly crowded commutes between the city’s suburbs and the urban centres. Metro line 4 addresses this need and was implemented through a 30 year operating concession to a consortium of private companies and a separate contract for the construction of line.

However, delays in the approval of the PPP law by the State of São Paulo meant that the original plan to have one concessionaire execute all works and acquisition of equipment and system was replaced with a separate procurement of civil works and electrification (World Bank, 2012). Based on this negative experience, it has been recommended that in the future, for similar projects, it would be better to entrust the full project implementation and operation to a concessionaire selected on an open and competitive basis (World Bank, 2012).

The line-4 project has demonstrated that PPPs could be viable for urban rail in Brazil, but that due to the high and intrinsic complexity of major infrastructure projects implementation problems and delays may occur. The project has shown that very stiff penalties for construction delays are needed, and that there should be a clear mechanism and responsibilities for handling unexpected changes in the project design (Rebelo, 2012).
 

Case 10: Punjab Grain Silo in India

In recent times, the increase in food prices due to threats to food security and huge losses of nutritional value from insufficient and inadequate public-owned storage capacity for rice and wheat has been a growing concern in India, leading to violence and instability in some areas. In order to prepare for increasing food demand and food shortage, the government of Punjab state, with the assistance of the International Finance Corporation (IFC), decided to build state-of-the-art, long-term steel storage silos through a public-private partnership scheme. In July 2010, LT Foods limited, an Indian grain exporting, commodity trading and handling company, bid on the first pilot project to build silos with a 50,000-ton-capacity. LT Foods will finance, build, own, operate and maintain grain silos for 30 years. The project became operational in March 2012 and this PPP model is now being replicated in other states in India and Pakistan (IFC, 2013).