Efficiency, What About It? PFI Experience in the Dutch Road Sector



Efficiency, What About It? PFI Experience in the Dutch Road Sector

Authors

C Horchner, M Ham, RebelGroup, NL

Description

Abstract

In the aftermath of the nineties the Dutch government took a cautious step towards private finance of transport infrastructure or Public Private Partnerships (PPP) as it is called in the Netherlands. Demonstrating economic and financial value added of PPP vis-à-vis other ways of project implementation was given much emphasis, revealing economic rationality rather than ideology as a basis of PPP policy.

The jewel of Dutch PPP policy is the Infraprovider contract for the HSL South rail link. A contract closed in 2001 and most probably the biggest PPP contract in years to come. Meanwhile, private finance of roads, bridges, tunnels etc. took its own course of development. As road tolls were a political no go area, the Design Build, Finance and Maintain concept was introduced and further developed. Only recently the first road DBFM contract was awarded on the A59 road in the south of the Netherlands. Another is presently being tendered in the north of the Netherlands, the N31.

The paper provides an analysis of the first results of the PPP route for roads in the Netherlands. The authors have been involved as financial advisors to the Government for both the A59 and the N31 project. They provide an economic analysis focusing not only on efficiency but equally on quality of service. For road quality is the winner of the PPP game.

The DBFM concept introduces private finance of roads as opposed to the longstanding practice of public finance. From an economic point of view private finance is instrumental in increasing economic efficiency or road user quality. The incentives it provides, that is what makes private finance interesting. Rather than paying for construction works, government starts paying for a service. The performance payment mechanism is at the core of PPP contracts. Roads are transformed into products or services for which purpose service level agreements can be made with service payments to private operators. For the Netherlands, this is an entirely new way of looking at the road infrastructure sector and road management.

When introducing the DBFM concept, high hopes abound. Efficiency gains would be easily made; just as had been the case in the United Kingdom. Did they in fact materialize? The paper asserts that only limited efficiency gains were actually made. These gains can be measured by the Public Sector Comparator, a financial and economic benchmark for private bids on PFI contracts. Application of the PSC is standard practice in Dutch PPP policy and forms the basis for awarding a PPP contract. The A59 project provides an interesting example. Breaking down the PSC benchmark into its constituting parts one may note that the PPP contract shows only minor technical innovation, resulting in small efficiency gains. An explanation can be found in the Dutch public procedures, narrowing down innovation early on in the development process.

Economics is what money can buy. The performance payment mechanism is at the core of the DBFM contract, giving a strong incentive to optimize on life cycle cost and quality. Paying for performance, with the latter measured in terms of road availability. A new variable enters the equation. As road availability was previously left unvalued in money terms, life cycle optimization was restricted to cost optimization. In the DBFM approach availability is given a financial value corresponding to the forgone benefits of road users. Difficult as it may seem, it brings in another economic consideration in the life cycle optimization process. An operator must strike a balance between (partially) closing the road for maintenance and thus losing on availability and the cost of maintenance. For efficient maintenance contracting may be at the expense of road availability. The A59 and N31 project show that this results in a new organization of road maintenance and renewal.

Putting a value on road availability also presents a new element in the Dutch budgetary process. An element previously left out. At this point the PSC benchmark and the budget may diverge, putting a strain on a project?s decision making process. The recent DBFM road projects show that there is a clear need to bring these two decision making variables on common ground. This process of reconciliation has only recently begun.

Publisher

Association for European Transport