1. Financing Roads in Great Britain Peter Mackie and Nigel Smith Institute for Transport Studies University of Leeds

2. Before 1990 A strong public sector procurement tradition that is to say, public procurement from private construction firms using competitive tendering Very little tolling of roads therefore few opportunities for privately owned toll-financed schemes A strict Treasury attitude to private finance (the Ryrie rules): No additionality. Private finance for sector investment should replace public finance not be additional to it Risk transfer. Private finance is acceptable provided that genuine risk transfer to the private sector takes place

3. Exceptions (1) – tolled estuary crossings Severn and Dartford Crossings running out of capacity; new bridges required Private concession awarded to take over existing facility and provide a new crossing for the franchise period Reversion of assets to the Government at the end of the period Regulated tolls Some risk transfer, but flexible franchise period implies risk sharing

4. Exceptions (2) – local development schemes Private sector financial contributions to public sector schemes Used where land development requires improved main road or junction connections Difficulties where multi-developer sites exist – law on planning gain not satisfactory

5. Private Finance Initiative for Roads (1992  ) Economic recession, serious squeeze on public investment. From 1993/4 to 1998/9 –Motorway and trunk road expenditure fell 33% –Local road expenditure fell 50% real Much interest in private finance. Government relaxed the ‘no additionality’ rule Private finance acceptable provided Genuine risk transfer to private sector Private sector cheaper than via public sector –The PUBLIC SECTOR COMPARATOR

6. Design, Build, Finance and Operate Competitive bidding for lowest shadow toll per unit of traffic Why might going private be cheaper? If the procurement structure achieves efficient risk transfer –Design risk – innovation –Construction risk – claims culture –Operating risk – whole life costing In general, more effective scrutiny by all parties But inappropriate risk transfer leads to higher cost – planning risk, ? Traffic risk Efficiency gains need to more than offset differential cost of capital

7. The DBFO first generation payment mechanism Bidders specified ‘bands’ of traffic that would attract different payment amounts. The top band generated no additional return for the concessionaire, so that the procuring agency’s financial exposure was capped Traffic was divided into vehicles below 5.2 metres in length and above 5.2 metres in length, as a proxy for light and heavy axles to reflect differential maintenance costs The service availability component was designed to incentivise contractors to complete construction works on time or early Scheme performance reflected lane-rental charges and highway safety considerations Under this scheme, construction risk, operating risk and a significant proportion of traffic risk was passed to the concessionaire.

8. Annual traffic payment (£ millions) Band 1 9p Band 2 6p Band 3 3p Band 4 0p Vehicle kilometres (millions) Maximum payment Central forecast of payment Low forecast of payment Illustration of traffic related shadow toll payment mechanism 7.4 5.3 0 587088100130146 9.0 8.1 6.3

9. National Audit Office and Parliament Reviews (1998) Capital intensive projects had lower cost via DBFO than conventional procurement. But major maintenance/reconstruction no cheaper and sometimes more expensive Results sensitive to choice of discount rate for public sector comparator Need to stimulate the market and to permit technical variations Need for reliable accurate traffic measurement, and audit of complex financial calculations Procurement process costly and time consuming. Significantly higher transaction costs than conventional procurement

10. Private Finance versus Public Sector Comparator for eight tranche one schemes ProjectPublic sector (NPV) DBFO (NPV)Difference M1-A1 A1(M) A419/A417 A69 M40 A19 A50/A564 A30/A35 372 222 137 66 329 211 91 161 288 192 140 78 228 171 83 180 84 30 (3) (12) 101 40 8 (19) Total15891360229 (-15%)

11. Since 2000 Private finance for roads out of favour, tranche 3 of DBFO programme cancelled DBFO really converts an upfront capital outlay into a mortgage over the life of the asset. Significant % of DfT budget required to pay the mortgages on existing schemes Reduction in public sector discount rate from 6 to 3.5 per cent makes it very difficult to beat the public sector comparator

12. The Future Renewed interest in privately owned and procured toll expressways - M6 Toll around Birmingham now open; Government consulting on extension to Manchester (c.100 kms) DBFO is currently dead, but lessons There is a market in innovatory construction There is a market advantage in private sector control of construction projects There is an advantage in internalising the whole life costing culture There is a good case for a design, build, indemnify and transfer form of turnkey contract – private construction management without private finance