Prospects And Pitfalls Of Public-Private Partnerships In The Transportation Sector – Theoretical Issues And Empirical Experience

Abstract

One effect of the regulatory reforms in the transportation sector is that private companies increasingly participate in the investments in new transportation systems. These investments may amount to very large sums in the coming 10-year-period. There are several different ways to categorise these projects, but with a common name they may all be viewed as Public- Private Partnerships (PPPs). Some PPP projects may be very long-term, including new infrastructure investments as in concessions and Build-Operate-Transfer projects, while others may be more short-term, concerning reinvestments only – and sometimes even limited to the task of operating a finished construction. The overall goal of PPP projects is to find solutions to problems in which the advantages of the private sector (such as financial assets, efficient management, propensity to innovative and entrepreneurship) are combined with the advantages of the public sector (such as social and environmental concern). When carried out successfully, PPP projects can be very powerful tools to quickly construct new infrastructure facilities and operate them efficiently. However, experience has also shown that they may sometimes go wrong, creating transportation systems that are inefficient, under-used and lossmaking. Although PPPs are still considered to be interesting solutions for urgent projects when budget constraints limit the possibilities for public-only investments, the discouraging experience of some high-profile projects have had a negative impact on the reputation of the PPP model. In this paper, we discuss the prospects and pitfalls of PPPs in the transportation sector, focussing on long-term projects involving investments in new infrastructure for roads and railways. Of particular interest are the various problems related to the sharing of risks between different partners in a PPP project. This includes both the risk sharing between the private and the public sector and the distribution of risk among the involved private firms, such as the members of a consortium but also their relations to banks and similar institutions. The risks of a PPP project are typically related to estimations and forecasts of market development and other factors. We discuss these issues by using the theoretical concepts of lock-in and hold-up problems, and what can be done to avoid them in terms of PPP and contract design. The theoretical discussion and the conclusions of the paper also draw from the gathered empirical experience of previous projects, primarily from European countries.Institute of Transport and Logistics Studies. Faculty of Economics and Business. The University of Sydne