Public benefits of private cash

By BRIAN FALLOW economics editor

The use of public-private partnerships to build roads does not necessarily mean motorists will end up paying tolls, bankers say.

Alternatives such as shadow tolls, where the Government pays the builder and operator an annual sum based on traffic levels, or availability payments, a kind of rental, have also been used overseas.

The Government plans to introduce legislation this year that will allow public-private partnerships (PPPs) to finance some large roading projects.

Stuart Lea and Paul Orton, Deutsche Bank executives familiar with PPPs in Britain and Australia, said the partnerships should not be seen just as an alternative means of funding infrastructure.

It was about finding a better way to deliver a public service by using the private sector, Orton said.

But some sceptics are wondering how a PPP can be cheaper than the traditional model, where a Government agency designs the road, puts its construction out to tender and pays for it upfront.

Surely, they say, the private sector cannot borrow money more cheaply than the Government, and there is also the question of private operators needing to make a profit as well.

What that line of reasoning overlooked, said Lea, was risk.

In evaluating a PPP, bidders worked out an annual payment they needed from the opening of the project, he said.

The Government then took the net present value of that stream of costs over time, which was the cost of the private sector doing it, and then compared that with the cost doing the work itself.

"If you just compare those two costs it is quite feasible that the private sector will cost more."

But a meaningful comparison had to take into account the risk of delays and cost over-runs, which were common. Under a PPP that risk was transferred to the contractor.

Britain's National Audit Office had looked at the first eight toll roads built in that country and found an average 12 per cent saving for the Government, Lea said.

A private operator might take another view of the trade-off between front-end and maintenance costs.

"Government projects typically deliver high-spec on day one, which may reduce maintenance costs over 30 years.

"Say they lay 130mm of tarmac at the outset. That's very expensive.

"The private sector might take a different view, put in 75mm on day one and take the risk that it might have to add an extra 50mm in 15 or 20 years."

That could be cheaper overall, said Lea.

Orton said that with the Sydney toll roads there had been cases where the design solution put forward by the private sector was quite different from the public sector's.

"In one instance it allowed the road to operate at 80km/h rather than 70km/h. Clearly that increases the capacity of the road.

"Give the private sector the opportunity and the incentive and that's the kind of innovation that comes out of it."

Since 1995 there have been £20 billion ($65 billion) worth of PPP projects in Britain.

Similar "Boot" (build, own, operate, then transfer) schemes have been used for major Sydney roads for more than 10 years.

PPP deals are typically highly geared, with up to 90 per cent of the funds provided by either bank debt or bond issues.

Lea said that as finance markets became more familiar with PPP transactions, the pricing and terms improved markedly.