Review Journal“Delivering Transportation Infrastructure through Public-Private Partnership- Planning Concerns”

By Matti SiemiatyckiAmerican Planning Association. Journal of the American Planning Association; winter

2010; Vol. 76, No. 1

Reviewed by Iman Sufrian NPM 1206313974

A. BACKGROUND/INTRODUCTORY

Public-private partnership (PPPs) started to gained popularity with governments as means of effectively delivering large-scale transportation infrastructure projects in the 1980s.

In recent years, several governments in some countries have designed special government agencies, and departments designed to facilitate the growing application of PPPS. Those countries are UK, Australia, Singapore, South Africa and Canada (Garvin and Bosso, 2008). While in the US, twenty-three states have enacted special legislation to enable PPPs on state transportation projects (Federal Highway Administration, 2009).

Therefore, one can conclude that the rise of PPPs has been among the most important trends shaping public service delivery (Sagalyn, 2007), as a strategy to stimulate economic growth and create jobs, ameliorate environmental problems, and promote social equity through having high quality urban infrastructure.

Controversies around the PPPs implementationThere are controversies regarding the adoption and implementation of PPPs in order

to deliver public service infrastructure. Those who support the adoption and implementation of PPPs to introduce private financing, competition, and market forces into the procurement of public infrastructure have several advantages. Those advantages are: PPPs can lead projects being built sooner that they would be if entirely paid for by

governments; PPPs can reduce projects lifecycle costs through greater innovation; PPPs introduce more accountable decision making; PPPs reduce the potential for construction cost escalations that have consistently plagued

infrastructure mega-projects (Deloitte Research, 2006; GAO 2008; Levy 1996). However, there are also critics regarding the adoption and implementation of PPPs in

delivering public service infrastructure. Those who criticize PPPs strategy argues that: PPPs are an expensive and inefficient method of delivering infrastructure and : PPP can undermine the capability of government to plan for public interest (Shaoul,

Stafford,and Stapleton 2006; Stapleton, Shaoul, Stafford and Arblaster 2004). The author of this article tries to fulfil following objectives:

To develop a set of criteria on which to evaluate the procedural, spatial, design, public policy, and political implication of these PPPs from a planning perspective, and then to examine whether their proposed benefits are matched by real-world experiences

To examine whether claims about benefit of delivering public infrastructure through PPPs are matched by real-world experience

B. METHODOLOGYThe author of this paper conducted a wide literature review other researches about

PPPs. Based on literature review, the author of this paper then proposed a set of an ex ante criteria from planning perspective to examine and to evaluate PPPs projects in particular the DBFO PPPs partnership.

Based on the literature review, the author of this paper then used the proposed criteria to examine and to evaluate DBFO partnership in general. The proposed criteria then

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applied to examine and to evaluate three selected DBFO projects as case studies. Those selected projects were: the Croydon Tramlink in London, UK; the State Route 91 toll lanes in Orange County, CA; and the Cross City Tunnel in Sydney, Australia.

Based on the examination and evaluation results of those three selected projects the author of this paper then drew conclusion about the implementation of those projects and finally propose suggestions that would benefit the future implementation of future PPPs projects , in particular those use the PPPs DBFO model.

C. JOURNAL CONTENTMention the major results of the study (use past tense). State what the author of the study learned. 1. A Brief History of Infrastructure Delivery Partnership

The author cited the U.S Federal Highway Administration report in 2009 mentioning the variety of models of PPPs according to how responsibility was divided to each party. The variety of PPPs model were Design-Bid-Build (DBB), Design-build (DB), Design-Build-Finance-Operate (DBFO) and Build-Own-Operate (BOO).

The author of this article stated that though both the design-bid-build (DBB) and design build (DB) were PPPs, both have long histories as methods of delivering public infrastructure and reserve the greatest authority and responsibility for the public sector partner. In contrast, the design-build-finance-operate (DBFO) and build-own-operate (BOO) models gave more control and risk to the private sector/private partner. In this article, the author focused on the DBFO model.

Traditionally, DBB model that assigned the public sector primary responsibility (Yakowenko, 2004). In the mid-1980s, government around the world began experimenting the BOO model as a way to raise funds for new projects and improve the efficiency of service provision. However, this strategy experienced strong citizen and political opposition to complete infrastructure privatization, and the level of benefits and service quality varied (Gomez-Ibanez, 1996; Gomez, Ibanez and Meyer, 1993; Sclar 2001).

Britain pioneered the implementation of new model that bundled facility design, construction, financing, and operation into a single long term concession in the early 1990s. This model is called DBFO model. This model became an important model to deliver large public sector transportation and this model claims to achieve benefits by introducing greater competition into project planning processes and harmonizing the interest, rewards, and risk of both public and private partners through a long term contractual agreements (Grimsey and Lewis 2005).

According to Deloitte Research Report (2006), Britain was still the most active for PPPs in the world and had also developed the most sophisticated institutional, legal, regulatory and business structure to support the expansion of DBFO model. However, some countries including Australia, Spain, South Korea, Ireland, Canada, France, China, and Brazil were moving up to what was called as market maturity curve in acquiring DBFO model on transportation sector. While in the US, there had been a relatively small but growing number of transportation projects were being delivered through DBFO partnership as the US Government found DBFO partnership were more expensive compare to self-financing method.

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Criteria for Evaluation PPPs from a Planning PerspectiveEven though PPPs became popular around the world in providing public service

infrastructure, the benefit of PPP had been intensely scrutinized and debated in many scholarly articles from disciplinary perspective including public administration, political science, engineering, finance, business, and project management as well as in government and industry reports and media stories. However, there had been only few examination of infrastructure PPPs through the planning disciplinary (Miraftab 2004; Sagalyn, 2007; Siemiatycki 2006, 2007) with its particular emphasis on preparing the physical, spatial, social and environmental future of places (American Planning Association, 2009).

The author of this article proposed nine criteria particularly relevant to planner’s evaluation whether transportation projects should be delivered through DBFO and BOO PPPs. This criteria are also relevant for academics and policymakers for conducting post-implementation evaluation. The first six criteria were appropriate to short terms concerns, and the last three criteria were appropriate to long term. Based on each defined criteria, the author of this paper also proposed definition of success/indicators of each criteria. Short Term Concern Criteria1. Will it (the DBFO partnership) tap new money for infrastructure?

According to (Vining and Boardman, 2008, many governments experienced shortage of fund to finance new infrastructure project expenditure due to its reluctance to make new debt or to raise taxes. Therefore, PPPs and in particular the DBFO model would provide financing that would allow a heavily indebted or fiscally conservative governments earlier than if they funded those projects entirely through traditional government sources (Allen, 2001; GAO, 2008). Despite of that, other researchers found that raising fund privately to pay for infrastructure does not contribute to a reduction of public debt ( Hodge and Greve, 2007; World Bank 2007). Therefore the use of DBFO model to finance new public infrastructure cannot be seen as a solution to reduce public-sector debt (Quiggin; 2004). The indicator/definition of success of this criteria is whether over one third of total capital costs came from private sources.

2. Will it damage or weaken System wide planning?

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Since governments experience budget constraint or budget limitation, government have to take account this condition as an important factor in determining strategic transportation plan priorities (Taylor, 2000). On the other side, private financing of infrastructure through PPPs gives private financiers and investors influence over investment decisions (Daniels and Trebilcock, 1996, Siemiatycki, 2006). Moreover, Some researchers also mentioned that private investors with significant capital (the author proposed to be at least one third of the project’s capital costs), have an incentive to require that proposals be viable before approving them (Flyvbjerg,Bruzelius and Rothengatter, 2003). However, Siemiatycki (2006) stated that the involvement of private financing for public investment could create a distortion to regional planning priorities, because private sectors priority was to favor projects with the greatest investment return trough user fee, not social benefits. Moreover, Ortiz and Buxbaum (2008) also stated that delivering projects individually, each as a stand-alone PPPs, might weaken government planner’s efforts to plan strategically for an integrated transportation system. The indicator/definition of success of this criteria is whether private sector influenced project selection, so that it did not follow regional planning priorities.

3. Will it spur Project-level Innovation? At the individual project scale, a method of bundling project design, construction, long-term operation and financing into a single PPP is primarily aimed to encourage ongoing innovation that will increase project benefits and cut lifecycle costs. The competition among firms to win the project is driven by profit maximizing motives over an extended operating period. This motive is thought to provide a strong incentive for an innovation (Daniels and Trebilcock, 1996; Deloitte Research, 2006). Efficiencies can be achieved through a variety of mechanisms: applying new technologies, applying a successful methodology from abroad, tight employee management, and even lower employee wages (Federal Highway Administration; 2009; Levy, 1996). The indicator/definition of success of this criteria is whether PPP model contributed to innovative project designs or cost recovery mechanisms that enhanced project benefits

4. Will it limit worthwhile community involvement and consultation?Several studies showed that community involvement and consultation in infrastructure investment are worthwhile as an important element to making the public planning accountable, gaining support from citizen for a project and improving the policy outcomes of the specific initiatives (Flyvbjerg et. al., 2003; Innes and Booher, 2004). Illsley (2003) stated that the meaningful community involvement and consultation can be achieved through several ways : predictable decision making processes ; open access to key documents and data; fair opportunities for stakeholders to provide input into plans; and a transparent and accountable system of integrating stakeholders contribution into final decision that are made. Despite its logical idea, some researchers doubts the ability of such DBFO-partnership to allow such high level of transparency to achieve meaningful community involvement (Daniel and Trebilcock, 1996; Quiggin, 2004; Siemiatycki, 2007). Hodge (2004) mentioned that during project planning, parties involved in the project withhold the key details about the project design, toll levels, funding arrangement and noncompetition clauses because such information is regarded as commercially sensitive information therefore those information were kept confidential. Once the project is operational, the contractual term of the partnership can limit the feedback of community to influence the ongoing facility management. The author used three indicators/definition of success of this criteria. Those indicators were as follows: a. Whether planning process followed a standardized, transparent, competitive

tendering processb. Whether key financial, project design, and contractual documents were released

during the planning phasec. Whether PPP contract supports meaningful public involvement in ongoing facility

management

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5. Will the project be within budget and on time, meet traffic forecast and deliver desired community benefits?The success of transportation infrastructure projects are measured by whether those projects are delivered on time and within budget and whether they achieve their traffic forecasts and performance specification. Those indicators are widely used by scholars, governments and independent auditor in evaluating the success of transportation infrastructure projects. In reality, many large transportation infrastructure projects experience underestimated costs, construction times, and overestimation of traffic users, overestimated projection of economic development and environmental benefits they would provide (Flybjerg et al., 2003; Pickrell, 1992). PPPs are proposed as a key strategy to solve these problems since private financiers are believed to have better risk management since they provide significant capital at stake (Flybjerg et al., 2003). The author used four indicators/definition of success of this criteria. Those indicators were as follows: a. Whether actual delivery costs within the forecasted budgetb. Whether project opened before or on the expected datec. Whether, after 3 years, traffic the project carried met or exceeded forecasted levelsd. Whether project delivered the expected community benefits

6. Will supply and demand risks be transferred to the private partners?Another primary reason for choosing the DBFO PPP model is to transfer risk to private partner. While the standard measures of success for an infrastructure projects are primarily whether cost overruns or revenue shortfalls occur, a successful DBFO project also focused on identifying which partner would bear the cost should those unexpected event really occurred (Quiggin, 2004). In conventional public-sector-led model of delivering infrastructure, the costs of most type of risk are covered by the government agencies and taxpayers. In contrast, the DBFO PPPs method enables the potential to transfer certain supply and demand related risks to private partner with the greatest incentive and ability to manage those risks. As the consequence, transferring risk is often accompanied by a cost premium, and the types of risks shifted to the private partners on transportation projects are those related to construction cost overruns, delays in opening the facility, facility availability and operational performance, and sometimes the unachieved predicted traffic volumes ( Deloitte Research, 2006; Hodge, 2004).The indicator/definition of success of this criteria is whether government need not cover either rising construction costs or financial losses from low traffic volume, outside of contract stipulations.

Long term concern7. Will DBFO Contract terms Constrain Future options?

The planners should take into account the possibility of the long term contractual arrangement between DBFO partners limits the flexibility of future decision makers to respond to changing conditions and make plans that best meet evolving public interest (GAO, 2008). To be more specific, international experience shows that the terms of many DBFO concession agreements include clauses that prevent governments from influencing the size and frequency of toll escalations, upgrading adjacent facilities that would potentially harm the revenue generating capacity of the private operator or demand the private operator to implement more environmentally sustainable practices as those opportunity is available (GAO, 2008; Ortiz and Buxbaum, 2008).The author used two indicators/definition of success of this criteria. Those indicators were as follows: a. Whether government is able to make changes to infrastructure service levels, service

quality, an toll or fare ratesb. Whether government is able to plan for new adjacent infrastructure projects as if they

controlled the PPP facility8. Will PPPs (in particular DBFO model) deliver value for public money?

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Some countries such Britain, Australia, and Canada, uses systematic value for money assessments to conduct an ex ante evaluation of PPP projects. In such approaches, the complete lifecycle cost of a proposed PPPs project is compared with the conventional public sector procurement model. Value for money is achieved if the PPPs model has lower lifecycle cost that the comparator when differential cost of construction, operation, public sector oversight, financing and risks are considered (Grimsey and Lewis, 2005; Quiggin, 2004). However, this analysis failed to address the critics of DBFO PPPs critics that reverse to many studies of DBFO around the world which stated that DBFO public partners pay high transaction costs associated with structuring and monitoring partnership arrangements (Gavin and Bosso 2008 ; Vining and Bourdman, 2008), significant cost premium to ensure projects are delivered on time and on budget (Stapleton et al., 2004) , large cost escalations during project planning (Siemiatycki, 2007), borrowing cost that significantly exceed those available to governments (Quiggin, 2004), and excessively high rates of return to the private investors (Shaoul et. al., 2006). The author used two indicators/definition of success of this criteria. Those indicators were as follows: a. Whether PPP is less expensive than having designed, built and operated a

comparable projects through traditional public methodsb. Whether Concessionaire is highly profitable during the operation period

9. Will Conflict Between the Partners Threaten Project Success? Jacobson and Choi (2008) identified the important factors that contributed to successfully delivering public works through a partnership between a public sector client and a private sector client concessionaire. Those factors were: open communication and trust, willingness to compromise and to collaborate, and respect. In spite of that, international experience showed that frequent and long lasting conflicts often arise between parties involved over the setting of tolls, service quality, and the planning of new competing facilities. Many partnerships ended in bankruptcy or government buyout before the contracts were up. (Gavin and Bosso, 2008; Vining and Boardman, 2008). The author used three indicators/definition of success of this criteria. Those indicators were as follows: a. Whether relationship between concessionaire and elected officials in amicable over

long-term operating contractb. Whether disputes over interpretation of contract are settled through alternatives to

legal challengesc. Whether partnership lasts to the end of the contracted period with the original

concessionaire

Case study of DBFO model Based on the criteria mentioned above, the author of this paper tried to explore whether the theoretical benefits of delivering transportation infrastructure through DBFO PPPs were matched the real-world experience by examining three selected case study projects. Those projects were Croydon Tramlink, UK, SR 91 Express Toll Lanes, US and Cross City Tunnel, Sydney, Australia. The selection of those three projects were based on following reasons: a. Each of the three projects had varied circumstances for case process and outcome

therefore each projects had different starting points. The SR 91 toll lanes was considered as a highly successful project. In contrast, the cross city tunnel was seen as having many deficiencies, while the Croydon Tramlink was initially considered as having a mixed result. This variation enable the author to examine the factors that contribute to projects success or failure in the short term and trace how projects outcome change over time from three different stating points.

b. Those three projects were selected because of the availability of data regarding the project planning process and system performance, as well as community and political responses to the ongoing operation of the facility.

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c. Each of the case were planned and delivered in countries that are different stages on the PPP market maturity curve for the transportation sector (Deloitte Research, 2006). Britain and Australia were both very experienced at delivering DBFO PPs and have substantial institution in place to procure projects using such a model. The US had carried out fewer DBFO partnerships in the transportation sector, and its legal and governance mechanisms relating to DBFOs were not fully formed.

The summary of the evaluation result of the three case study projects based on proposed set of criteria and more specifically each indicator of each criteria were seen at below table: a. Comparison of case studied on short them criteria (1-6)

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b. Comparison of case studies on long term criteria (7 – 9)

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Implication for Planning Based on the comparison and contrast the result of the three case studies the author then tried to reflect on the short and long term implication of delivering projects through PPPs DBFO model. Short Term Implication According to the author of this paper, in the short term, planners had a clear interest in

supporting projects delivery and finance models that facilitate the provision of socially beneficial infrastructure as quickly as possible, although in practice such decision are often made by politicians. This is shown by the fact that the above three case studies of DBFO partnership had effectively raised over US$ 1 billion up front for new transportation facilities even though one have to take account the fact that the decision made during a period of relatively easy access to private capital. Had these project used other method, it would have been more difficult to raise fund from public sector (raising tax or issuing new public debt).

However, the quick decision on financing issue did not mean the projects progress were quicker from conceptual planning to operation compare to more conventional procurement strategies. Negotiating contracts and arranging private financing took a lengthy process.

Based in three project cases, the private sector involvement on project financing and delivery did not appear to have significantly distorted the governments’ regional planning objective or investment priorities. Each of these projects had been a government priority long before it was selected for implementation as a PPP.

Regarding the implementation of innovative technical and cost recovery models, the three case study projects showed that innovation may, but not necessarily, result in project design or cost recover model that elevated social benefit or lower lifecycle costs.

In all three cases, even though standard public meetings were held, opportunities were provided for written comments, and public enquiries were conducted, informed public input was limited by participants withheld key contractual details, including noncompetition clauses, toll rate escalation schedules, and concession payments.

The private partner in two out of three projects suffered heavy financial losses due to revenue shortfall. However, those three projects had risk transfer mechanism included in the DBFO contract so the public sector was not financially responsible. This is significant, since the conventionally delivered infrastructure projects, government had consistently covered the escalating project costs and revenue shortfalls from the public budget.

Long Term Implication While the short-term performance of the DBFO was fairly mixed, over the longer term,

each of the projects experience a similar set of challenges, regardless of their early level of success or the maturity of the national market for PPPs.

Adopting noncompetition clauses and formalizing relationship between the public and private sector with contracts had significant impacts on future spatial and infrastructure planning, limiting government flexibility to respond to changing conditions and public feedback about facility management.

In particular, the DBFO PPP arrangements highlighted conflicts in planning objectives, demonstrating that maximizing private returns was sometimes, but not always, congruent with government social or environmental policy. For example in Orange Country, the noncompetition agreement prevented government from constructing popular new highway capacity, that was likely to increase emissions, while also preventing local officials from continuing to discount tolls for high occupancy vehicles, a policy that was likely to be socially environmentally beneficial (OCTA, 2008). In Croydon, the regional transportation agency was unable improve Tramlink service to make it more attractive to existing and potential users without paying substantial fees to the private operator.

The inclusion of restrictive contractual clauses was fundamentally related to the allocation of risks between the partners. The private sector partner assumed traffic

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volume risk, and in response, sought contractual assurance that would make it easier for them to manage uncertainty that could undermine their investment.

For the public sector partner, however, restrictive contractual terms not only constrained future planning, they were also a source of tension in the relationship between the private and public partners, and with the citizenry. Regardless of whether the project was initially successful or not, competing interpretation of the contract led to high profile arguments between the partner’s and releasing unfavourable information about the PPP contract term led to outcry from politicians and the public.

When the conflict arose, the significant costs associated with any compromise led each partner and to vigorously protect their original position. Lawsuit and the threat of legal actions between the public and private partners occurred in each of the three cases. As the relations deteriorated further, each of the three original concessionaires sold their franchises; two to government agencies and one to another private sector concessionaire following the originals concessionaire’s bankruptcy. This ultimately left governments holding significant long-term risk, an unexpectedly having to make major investments, contrary to the objectives of the DBFO partnership model.

Some of the challenges observed in these three case studies are common to megaprojects regardless of whether they are delivered through traditional or partnership methods. For example, key planning document have been confidential, project construction costs have risen, and traffic volume has been overestimated under both project delivery models. However, the DBFO-style PPP creates new tention points, particularly because it limits governments flexibility to respond to changing conditions over time.

Conclusions and Recommendation by the writer Even when projects were considered successful by the conventional criteria of project evaluation (which is largely determined by the quality of planning processes), the impacts on system users and the environment, and the durability of the partnership might be still uncertain. Based on the evaluation of the three selected case study projects, the author of this paper proposed some recommendation. Those recommendations were as followed: a. The planner needs to conduct a rigorous assessments of the merits of PPP projects

before they are begun. This should extend beyond assessing value for money to consider the effects of using a DBFO-type PPP approach on the flexibility of current and future planning, transparency and citizen engagement, and the equity and environmental impact of toll rates.

b. Planners should develop strategies that preserve government flexibility to plan for future community needs without violating the terms of contract. For example, American states such as Florida and Texas have banned the inclusion of non-compete clauses in transportation PPPs. Another approach would be to analyse the range of risk transfer options before making a decision, comparing the benefits of transferring volume risk to the private sector against the disadvantages of being bound by contractual terms that restrict changes to the facility and may limit its integration into the wider transportation network.

c. Planners should develop strategies to improving the quality of community engagement and ongoing public participation in decision making, with the aim to build trust between stakeholders and resolving conflict before they become unresolved. An essential step is to increase transparency and to disclose important financial, technical and contractual information, which has typically been withheld during the DBFO project planning processes. Independent auditors general or comptroller should have expanded oversight powers while DBFO projects are being planned. This could build public confidence that decision making processes were fair and diverse concerns were considered.

d. Finally, public agencies should better collect and disseminate data on the outcomes of large transportation infrastructure projects as a way to support learning from past experience. Government agencies should develop databases that compile both financial and nonfinancial information on project performance.

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Organization The introductory paragraph summarizes the background information and purpose of the research (specific questions the study researched). Then, explain the methods that were used to investigate the research questions (use past tense). Mention the major results of the study (use past tense). State what the author of the study learned.

Critique: A Critical Review and Assessment of the Article Include a summary as well as your own analysis and evaluation of the article. Know the article thoroughly. Do not include personal opinions. Be sure to distinguish your thoughts from the author’s words. Focus on the positive aspects and what the author(s) of the study learned. Note limitations of the study at the end of the essay: o Do the data and conclusions contradict each other? o Is there sufficient data to support the author’s generalizations? o What questions remain unanswered? o How could future studies be improved?

D. SUMMARYContribution of the paperBased on above parts, it is concluded this articles has provided an adequate

framework on setting the criteria of evaluating PPPs in particular DBFO style PPPs.

This paper also gives important information about the

1.

Many subsequent research successfully applied and tested the prediction of the

models suggested by Akerlof, Spence and Stiglitz. This article also review other

authors’ works that applied and tested the work of these three researchers’ works.

Most of other authors’ works that try to apply and test the models suggested by

George Akerlof, Michael Spence and Joseph Stiglitz confirm the prediction of the

models. Eventhough, some attempts to test the prediction of the models suggested

by Akerlof did revealed some ambiguous results. For example a direct test carried

out by Bond (1982) on data from a market for second-hand small trucks did not

support the asymmetric information hypothesis. Chiappori and Salanie (2000)

examined whether individuals who buy car insurance car insurance with better

coverage have more accidents. They failed to find statistical support for such

correlation as suggested by adverse selection and signalling model. The difficulty of

such tests is to distinguish between adverse selection and moral hazard problem;

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another is that screening and signalling partially eliminate the effect of informational

asymmetries.

Moreover, the models suggested by those three authors were also successfully

applied in many other economic and social settings for example financial economics,

industrial organization. Recently, many insights from economics of information have

been incorporated into development economics. This phenomena can be seen as an

opportunity for further research in the development economics as well as other area

based on the theory of asymmetric information.

REFERENCESMatti Siemiatycki, Delivering Transportation Infrastructure through Public-Private

Partnership- Planning Concerns”, American Planning Association. Journal of the

American Planning Association; winter 2010; Vol. 76, No. 1

Pindyck, Robert S.; Rubinfeld, Daniel L., Microeconomics (3rd edition), Prentice Hall, 1996,

Varian, Hal R., Intermediate Microeconomics – A Modern Approach (Fifth Edition), W. W.

Norton & Company, New York-London, 1999.

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