How does a government go shopping for new infrastructure ? Instead of buying design, construction and long-term maintenance services from separate vendors, government agencies more and more often procure infrastructure using a public-private partnership — PPP or P3 for short — mechanism that combines all these services into a single contract. In a conventional P3 arrangement, the completed facility’s revenues, such as tolls or transit fares, should comfortably exceed the capital and operating expenses, thereby attracting private investors to finance the project. As a result, public sector clients often consider the P3 approach to be infeasible for procuring infrastructure that is not expected to generate enough revenue to cover its own costs, or where the end-user fees needed to generate an adequate revenue would simply be unpalatable. Despite this, such projects can sometimes still be delivered as P3s if they are made suitably attractive to the private sector. To date, there has been little research to examine which tools, or ‘fiscal support mechanisms’, are best suited to facilitate P3 projects whose revenues do not fully cover their costs.
Arup’s research characterized six types of fiscal support mechanisms, based on a review of literature and P3 practice internationally:
1) Change in policy or law
2) Financial support
3) Technical assistance
4) Risk guarantees
5) Monetary support
6) Usage or service fees.
This research developed a typology of both direct and indirect fiscal support mechanisms and identified where these mechanisms have been employed. The information gathered and analysed drove the creation of an initial framework to guide governments assessing a wider range of P3 project candidates than previously considered feasible.
Investigating the particulars of case study projects helped illustrate and characterize the settings in which each mechanism tends to be most effective. Examples of these case studies and their outcomes included the following:
– Inflation-linked availability payments in the Netherlands attracted investment from pension funds at the start of procurement
– Capital contributions to the Tours-Bordeaux high-speed rail scheme allowed the project to advance during a financial crisis and may have saved the French P3 programme
– A policy change in Puerto Rico enabled reaching financial closure of three project transactions in three years, shortly after enactment of the enabling legislation
– A least-subsidy procurement strategy and variable-length concession in Chile allowed the government to reduce the subsidy necessary to deliver the Route 43 highway project.
This research directly supported several publications, including:
– Conference paper and presentation “Use of Fiscal Support Mechanisms in Public-Private Partnerships: An Exploration of Three International Case Studies” at the 2nd International Conference on Public-Private Partnerships in Austin, Texas, USA (May 2015)
– Collaboration with national PPP Working Group to produce the policy report “Partnership Financing: Improving Transportation Infrastructure Through Public Private Partnerships” edited by the Eno Center for Transportation (April 2014)
Prior to this research project, there had been little research available on P3 delivery options for projects that are not financially self-sustaining. This research identified and characterized successful approaches, arranged by type and global region, and presented worldwide case studies to illustrate the use of these tools. In these cases, governments provided a variety of additional support to enable these projects to reach financial close. This assistance – the fiscal support mechanisms – represented both monetary and non-monetary forms.
Arup’s analysis in this realm produced guidance for public owners to consider when designing effective future partnerships with the private sector.