1. Funding strategies for transport infrastructure 10 February 2015 Björn Hasselgren, PhD KTH Architecture and the Built Environment

2. Lecture February 10, 2015 PART 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

3. Historical development of roads and railroads

4. Levels and roles in transport infrastructure Government’s roles Financer Regulator Manager Owner International/EUNationalRegional/local

5. 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

6. Development over time of transport infrastructure -a co-evolutionary approach TechnologyEconomics Politics and ”socio- culture” Public sector Private sector Development of transport infrastructure systems

7. 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

8. Planning models Spontaneous order Centralized planner Market failure Government failure Coordinated Un-coordinated Centralized knowledge Individual knowledge

9. Collective and private Private roads/rail -roads National railroads and roand Municipal and regional streets/roads

10. 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

11. 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

12. The infrastructure development steps Tran- sport pro- blem Plan- ning and priori- tizing Choice of action – mainten ance, mana- gement invest? De- cision on action Finan- cing and detai-led phy- sical plan- ning Procure ment of con- struc- tion, mainten ance 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

13. 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

14. 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

15. 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

16. Planning models Spontaneous order Centralized planner Market failure Government failure Coordinated Un-coordinated Centralized knowledge Individual knowledge PPP

17. 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

18. 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?

19. 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?

20. 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

21. 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

22. 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.

23. Coffe break!

24. 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

25. 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

26. 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

27. 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

28. 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)

29. Priset på SL-kortet höjs Feb 5 2015

30. 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

31. The marginal cost controversy Coase Organi- zational efficiency Institutional Pigou Welfare optimization Neo- classical Marginal cost coverage Full cost coverage Ear-marking General tax revenue Cassel Wicksell

32. Interaction and incentives (following Coase, 1970) User Transport Infrastructure Supplier Government International level 1980s-2010s 1840s-1970s

33. 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

34. The balance between AC and MC Internal efficiency 1944, 1963, 1988, Trafikverket External efficiency 1963, 1979, 1998, 2004, 2008

35. Challenges for the future TechnologyEconomics Politics and ”socio- culture” Public sector Private sector Development of transport infrastructure systems

36. Current EU/US development

37. 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/EUNationalRegional/local

38. Possible ways forward…

39. Björn Hasselgren, PhD KTH Royal Institute of Technology Architecture and the Built Environment +46-70-762 33 16 bjorn.hasselgren@abe.kth.se www.kth.se/blogs/hasselgren @HasselgrenB