Privatizing the German Motorways Looking Beyond the A- and F-Models. Christian von Hirschhausen and Thorsten Beckers

Transcription

1 Public Sector Management and Regulation Working Papers WP-PSM-04a Privatizing the German Motorways Looking Beyond the A- and F-Models Christian von Hirschhausen and Thorsten Beckers Reprint from SMi s 5 th Annual Event, Private Finance and PPP/PFI in Germany (May 2004) Workgroup for Infrastructure Policy (WIP) Berlin University of Technology Chair of Energy Economics and Public Sector Dresden University of Technology

2 PRIVATIZING THE GERMAN MOTORWAYS Looking Beyond the A- and F-Models Prof. Dr. Christian von Hirschhausen Dipl.-Ing. Thorsten Beckers Berlin University of Technology orkgroup fornfrastructureolicy SMi s 5th Annual Event Private Finance & PPP/PFI in Germany May 27, 2004, Hotel Adlon, Berlin - 1 -

3 Agenda 1. Potential Benefits of the PPP-Approach 2. Economic Analysis and Evaluation of the A- and F-Model 3. Current Issues: Toll for Private Cars & Infrastructure Financing (VIFG) 4. Concession Models for the German Highways An Outlook 5. Conclusions - 2 -

4 Potential Benefits of the PPP-Approach Raising Private Capital - Private financing without raising tolls (pre-financing-model) passes the burden upon future generations; private financing should be combined with raising tolls and earmarking the revenues Avoiding White Elephants, more Transparent Subsidization of Projects, Higher Acceptance of Tolls Efficiency Gains, Lower Production Costs - A study from UK pretends to prove efficiency gains of 15% due to the PPP-approach, but other studies, from the UK and elsewhere indicate that PPP-projects are not always cheaper: complex sectors and projects renegotiations cost-plus (e.g. SAPPINGTON / STIGLITZ (1987) - The realization of efficiency gains depends on the regulation, e.g. risk allocation, tendering procedure (VICKERS / YARROW (1991)) Application to the (German): highway sector: efficiency gains through PPP are possible, but regulation matters - 3 -

5 Agenda 1. Potential Benefits of the PPP-Approach 2. Economic Analysis and Evaluation of the A- and F-Model 3. Current Issues: Toll for Private Cars & Infrastructure Financing (VIFG) 4. Concession Models for the German Highways An Outlook 5. Conclusions - 4 -

6 Structure of the F- and A-Model Common Characteristics of the F- and A-Model - Competitive Tender for the Concession - Concessionaire has the obligation to construct / extend, maintain and operate the road for about 30 years (in principle fixed term concession) F-Model - FStrPrivFinG (Fernstraßenbauprivatfinanzierungsgesetz / Private-Sector Funding of Trunk Road Construction Act) - Private toll + subsidy (from the general budget, max. 20 % of estimated costs) - Application Tunnel, bridges, passes on highways national roads with 4 lanes - Projects 1 project opened for traffic (Warnowquerung) 1 project in realization 1 failed tender? planned projects - Different project characteristics Planned & Realised Projects? A-Model - Extension from 4 to 6 lanes - Stretches of 18 km to 74 km - Public toll + subsidy (from the general budget, max. 50 % of estimated costs) - Projects Up to 10 projects (first round) 4,4 % of the federal highways 3,6 Billion - Project characteristics: technically simple projects - 5 -

7 Risk Allocation: Theoretical Background & Rules of Thumb Effects of of Risk Allocation Incentives - to influence the distribution of the risky variable - to take into account and to limit the effects of the realization of a risky variable - to reduce risk Costs of Risk Bearing - Users have lower costs of risk bearing than concessionaire / private enterprise (risk spreading, ARROW / LIND [1970]) - For uncontrollable risks, the public sector has lower costs of risk bearing than the private sector (beware of white elephants, which politicians love) Transaction Costs (CROCKER / MASTEN [1996]) - Information gathering before contracting - Costs of contracting - Costs of re-negotiations - Cost of delay of contracts Avoiding / Allowing White Elephants Competition Effects Rules of of Thumb for for Risk Allocation in in the the Concession-Contracts Market Risk Political Risk (related to the project) Political Risk (not related to the project) Cost Risks Demand Risk Revenue Risk Force-Majeure-Risk Construction, Operation & Maintenance Financing Planning Risk (higher costs, lower revenues) E.g. taxation in the transport sector Public Sector (public toll) ()? Concessionaire (small part) () (small parts; to reduce transaction costs of risk shifting) () Users (Inflation Indexation) (Indexation) (if possible) - 6 -

8 Risk Allocation in F-Model-Projects (sources: model concession contract and interviews in the field) Public Sector Concessionaire Users Remarks Cost Risks Construction, Operation & Maintenance (cost overruns) (costs < bid) Job Creation Program for Experts! Market Risk Financing (for 10 years) (rest of the duration) Indexation can avoid C+Rules Demand Risk Revenue Risk Eliminate juridical doubts: - Tolls should be increasing in time! - If revenues < costs in early periods compensations in later periods should be possible! (as much as possible) Force-Majeure-Risk () () Political Risk (related to the project) Planning Risk (higher costs, lower revenues) Political Risk (not related to the project) Taxation in the transport sector () - 7 -

9 Objectives Risk Allocation and Regulation of the F-Model: Suggestions for Improvement - No indirect C+Regulation - Structure of the finance shall not influence the toll level - Demand risk Users should bear main part of the demand risk (if possible, in projects with sufficient demand in the long run) concessionaire bears small part of the demand risk (if possible, in projects with sufficient demand in the long run), concessionaire bears the risk of long term profitability in critical projects Use of (modified) PVR-Auctions - Government fixes interest rate for discounting future cash flows (e.g. Libor + ) - Awarding the concession to lowest PVR-BID (PVR = present value of revenues) - (Additional) Rules for adapting the tariffs in time - Small lump sum payment per vehicle (to cover variable O & M expenditures and to give incentives to stimulate demand) - Additionally option: Bonus-Malus-System (not to complicated!) With (modified) PVR-Auctions Cost Orientation is assured - Privatization for an unlimited period in the utilities sectors requires regulatory decisions for periods < privatization duration - Highways = not very dynamic sector competition for the field is possible (regulation by contract) - DEMSETZ-Competition: E(costs) = E (revenues) and no welfare losses because of C+rules and high TAC! and good lawyers would be able to create an economically senseful Highway-Gebührenrecht or Highway-Entgelt - 8 -

10 Risk Allocation in A-Model-Projects and Room for Improvement Public Sector Concessionaire Users Remarks Cost Risks Construction, Operation & Maintenance Market Risk Financing = R No indexation is applied Revenue Risk Demand Risk Toll-Collect- Risk (main part) (partially) Force-Majeure-Risk () () Political Risk (related to the project) Planning Risk (higher costs, lower revenues) Political Risk (not related to the project) Taxation in the transport sector - 9 -

11 Looking Beyond the Current A- and F-Models Conclusions on Risk Allocation - Improvements possible in A- and F-models (~more demand risk on users) General Remarks on the F-Model - Use of (modified) PVR-Auctions - Extension of the F-Model-Law to all highways (not only bridges, tunnels and passes) - Modification of the F-Model-Law: Better Risk Allocation / Regulation General Remarks on the A-Model - Suboptimal size of A-Model-projects: average size of 44 km < actual size of stretches of public O&M units - Unclear if the A-Model adapts to future organizational models for the German highways General Remarks on PPP in the Highway Sector - Establish a deal flow - Too high transaction costs!, improve the project/conference-ration - Bundesländer ( German Regions ) have too much saying in the highway sector Special knowledge should be centralized to reduce transactions costs (BMVBW, VIFG) German motorways should be managed and monitored at the federal level

12 Agenda 1. Potential Benefits of the PPP-Approach 2. Economic Analysis and Evaluation of the A- and F-Model 3. Current Issues: Toll for Private Cars & Infrastructure Financing (VIFG) 4. Concession Models for the German Highways An Outlook 5. Conclusions

13 Toll for Private Cars and Infrastructure Financing (VIFG) Toll for Private Cars - Tolls on ALL interurban roads in Germany are the dream of an economist - but this can not yet be realized due to the high costs of the tolling systems - so one should wait - Network-wide tolls should then only be implemented jointly on the highways, the national roads and parts of the secondary network to avoid inefficiencies User-Financing can already be improved earmarking revenues from the fuel-tax and the vehicle-tax (KFZ-Steuer) and / or implementing a vignette The VIFG (Transport Infrastructure Financing Corporation) should be developed to earmark SUFFICIENT revenues in the road sector

14 Agenda 1. Potential Benefits of the PPP-Approach 2. Economic Analysis and Evaluation of the A- and F-Model 3. Current Issues: Toll for Private Cars & Infrastructure Financing (VIFG) 4. Concession Models for the German Highways An Outlook 5. Conclusions

15 Future Privatisation and Organisation Models for Federal Highways: Concessions of Individual Stretches vs. Network-Concessions Concessions of Individual Stretches Network-Concessions Regional-Networks ( French System ) Relatively low uncertainty Fixed price rules: economically sound Auction possible Only viable for certain stretches with low insecurity about future cost inefficiently small stretches? Exclusion of special engineering can reduce insecurity about future costs (KNOLL ET AL [1999]) C+elements economically sound Concessionaires can establish know-how for the entire planning process Assessment + Synergy effects + lower overall costs for tendering - less competition - disincentives applying C+rules (problems due to the information asymmetry between regulator and concessionaire) Concession models ( Chilean system ) I-Models (new construction or extension) B-Model ( Bestand, existing state) F*-Model: improved F-model C-Model (urban highways, e.g. Santiago de Chile) remaining stretches with high cost risks - public provision? - management contracts with short-term duration? Privatization Privatization of ofthe thehighway-network highway-network - A-Models would not compatible with the - A-Models would not compatible with the network concessions network concessions - -More Moreresearch researchrequired required Future Research Requirements - Technical state, ability to forecast costs economic risk

16 Agenda 1. Potential Benefits of the PPP-Approach 2. Economic Analysis and Evaluation of the A- and F-Model 3. Current Issues: Toll for Private Cars & Infrastructure Financing (VIFG) 4. Concession Models for the German Highways An Outlook 5. Conclusions

17 Conclusion Empirical evidence indicates that economically sound BOT-projects in the highway sector can lead to efficiency gains in Germany, too - Even though PPP is not always more efficient (UK experience) A- and F-Models - Improvements in risk allocation are possible - Extension of the F-Model-Law to all highways - More speed! Deal flow! Future concession Models for a privatized highway-network - Individual stretches vs. network concessions (needles vs. olympic rings) - Interesting question for regulation and contract theory and policy - Industry suggests network concessions, but we do not yet know what is more efficient - topic for the next SMI conference in

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