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Funding strategies for transport infrastructure10 February 2015
Björn Hasselgren, PhD
KTH Architecture and the Built Environment
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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
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Historical development of roads and railroads
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Levels and roles in transport infrastructure
Government’s roles
Financer Regulator Manager Owner
International/EU
National
Regional/local
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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
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Development over time of transport infrastructure -a co-evolutionary approach
Technology EconomicsPolitics and
”socio-culture”
Public sector
Private sector
Development of transport infrastructure systems
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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
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Planning models
Spontaneous order
Centralized planner
Market failure Government failure
Coordinated
Un-coordinated
Centralized knowledge
Individual knowledge
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Collective and private
Private roads/rail-roads
National railroads and roand
Municipal and regional streets/roads
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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
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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
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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
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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
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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
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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
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Planning models
Spontaneous order
Centralized planner
Market failure Government failure
Coordinated
Un-coordinated
Centralized knowledge
Individual knowledge PPP
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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
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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?
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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?
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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
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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
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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.
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Coffe break!
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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
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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
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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
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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
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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)
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Priset på SL-kortet höjsFeb 5 2015
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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
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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
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Interaction and incentives (following Coase, 1970)
User
Transport Infrastructure Supplier
Government
International level
1980s-2010s
1840s-1970s
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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
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The balance between AC and MC
Internal efficiency
1944, 1963, 1988, Trafikverket
External efficiency
1963, 1979, 1998, 2004, 2008
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Challenges for the future
Technology EconomicsPolitics and
”socio-culture”
Public sector
Private sector
Development of transport infrastructure systems
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Current EU/US development
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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
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Possible ways forward…
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Björn Hasselgren, PhD
KTH Royal Institute of Technology
Architecture and the Built Environment
+46-70-762 33 16
www.kth.se/blogs/hasselgren
@HasselgrenB