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The Role of Private
Investment in Transport
Infrastructure

2

The Role of Private
Investment in Transport
Infrastructure

Dejan Makovšek
International Transport Forum
Paris

Working Group Paper
2019

The International Transport ForumThe International Transport Forum is an intergovernmental organisation with 60 member countries. It
acts as a think tank for transport policy and organises the Annual Summit of transport ministers. ITF is
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Cite this work as: Makovšek, D. (2019), “The Role of Private Investment in Transport Infrastructure”,
Working Group Paper, International Transport Forum, Paris.

THE ROLE OF PRIVATE INVESTMENT IN TRANSPORT INFRASTRUCTURE | WORKING GROUP PAPER | ITF

Foreword

Transport infrastructure is a major enabler of economic development. In the drive to refurbish or build,
governments worldwide have turned to the private capital market for financing. The primary narrative
behind this push is the huge stocks of private capital that are available, while public financing capabilities
are said to be limited and insufficient.
The almost exclusive vehicle of private investment in transport infrastructure, including social
infrastructure, is Public-Private Partnerships (PPPs). In the context of PPPs, two important aspects havereceived little attention.
First, sufficient attention has not been given to the role of suppliers. The focus of governments andIntergovernmental Organisations has been on resolving the challenges to private investment from theviewpoint of investors: reducing the uncertainty they face and enabling them to price risk more
efficiently by establishing infrastructure as an asset class.
However, looking only at investors gives an incomplete view of the total cost of the risk transferred fromthe public to the private sphere. In PPPs, investors transfer some of the major risks they are not
comfortable bearing to design, construction, maintenance, and operations contractors.
Suppliers, too, face uncertainties and are unable to efficiently evaluate price risk. In such cases, the basecost of the initial investment – and of subsequent services – may be much higher than they might havebeen, and not just the cost of their financing.
Uncertainty arises from the difficulties to accurately estimate the cost of construction, maintenance,
operations, and financing. But it also stems from “unknown unknowns” (the so-called Knightian
uncertainty). For instance, changes in weather patterns or paradigmatic technological shifts, the timing
and impact of which are unclear, will influence what infrastructure is needed and where.
So what can policy makers do to reduce the cost of inefficient risk pricing of suppliers? Where does thisput PPPs? How can public decision makers reconcile long-term uncertainty with private investment ininfrastructure? Who should bear long-term uncertainty in projects: the public or the private sector?
These were some of the guiding questions for a Working Group of 33 international experts convened by
the International Transport Forum (ITF) In September 2016. The group, which assembled renowned
practitioners and academics from areas including private infrastructure finance, incentive regulation, civilengineering, project management and transport policy, examined how to address the problem of
uncertainty in contracts with a view to mobilise more private investment in transport infrastructure. As
uncertainty matters for all contracts, not only those in the context of private investment in transport
infrastructure, the Working Group’s findings are relevant for public procurement in general.
The synthesis report of the Working Group was published in June 2018. The report is complemented by aseries of 19 topical papers that provide a more in-depth analysis of the issues. A full list of the Working
Group’s research questions and outputs is available in Appendix 1.

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Acknowledgements
The author is grateful to Alexander Galetovic, Stephen Alchin, Jagoda Egeland, and Nathan Zhivov forcomments received on earlier drafts of this paper. Support from OECD DAF/INV in the development ofan early concept of this paper and from ITF colleagues in the editing and preparation of this paper for
publication are gratefully appreciated.

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Table of contents
Executive summary ............................................................................................................................. 6
Introduction ........................................................................................................................................ 8
Can private investment in transport infrastructure improve productive efficiency? The firm level ...... 9Road infrastructure ....................................................................................................................... 10
Railway infrastructure and operations .......................................................................................... 11
Seaports ........................................................................................................................................ 12
Airports ......................................................................................................................................... 14
Privatisation impacts in other infrastructure sectors .................................................................... 15
Can private investment in transport infrastructure improve allocative efficiency? The project
selection level.................................................................................................................................... 17
Credible commitment to the contract is not always assured ........................................................ 18
Demand risk must be systematically transferable ......................................................................... 19
An appetite for demand risk must always be present ................................................................... 20
Asking investors to filter white elephants may not be justified by government failure rates ....... 21
Can private investment close the transport infrastructure investment gap? ..................................... 24
Potential impacts of private investment on transport infrastructure ................................................. 28
Notes................................................................................................................................................. 30
References ........................................................................................................................................ 32
Appendix 1. Research questions and outputs of the Working Group on Private Investment inInfrastructure .................................................................................................................................... 39© OECD/ITF 20195

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Executive summary
What we did
This paper investigates the case for mobilising private investment for infrastructure. Does private
investment lead to greater economic efficiency? Can it improve project selection? Will it help close theinfrastructure gap? Does foreign private investment boost the economy? Private investment is a means
to an end, rather than a goal in its own right. Understanding when private investment serves a purpose
requires clarity about what it can and cannot achieve.
Four common propositions with regard to private infrastructure investment are investigated in thispaper. First, that it leads to a greater economic efficiency. Second, that private infrastructure investment
can improve project selection. Third, that it can help close the infrastructure gap or extend the publicborrowing constraint. Fourth and finally, that foreign private investment in public infrastructure
specifically will boost the local economy.
The analysis for this paper was carried out as part of the work of the International Transport Forum
Working Group on Private Investment in Infrastructure.

What we foundPrivate investment can result in efficiency gains and increased consumer welfare if appropriateorganisational, institutional, and regulatory conditions are met. Evidence for this comes from sea ports
and airports, which tend to face continuous competitive pressure, as well as from non-transport sectors,
notably utilities.
Most private transport investment flows into road infrastructure projects. For this sector, practically no
direct evidence exists that public-private partnerships (PPPs) have resulted in improved Value for Money.
The same is true for railway infrastructure. This raises the concern that PPPs in sectors with little to nocompetition, such as road, rail or social infrastructure, may have difficulty ensuring value for money. The
main reason for this appears to be various failures in risk pricing that are endemic to the PPP model.
It seems economically indefensible that PPPs can prevent “white elephant” projects by transferring
demand risk on the merit of improving project selection.
Achieving such an outcome requires that at least four conditions are met. First, the commitment to acontract must be credible. Second, demand risk must be transferred on all projects of the same class(e.g. all motorways) - a government cannot have a discretionary right as to when the risk is transferred
and when it is not. Third, demand risk must always be transferable on all projects, and private investors
must have a stable appetite for accepting the risk. Fourth, the cost of transferring demand risk should
not require unrealistically high rates of failures in the project selection by governments.
The evidence shows that it is unlikely the second and third conditions can be achieved. Additionally, thefirst and the fourth conditions may be at odds with each other. Countries with a high rate of project
failure will generally have a weaker institutional structure and thus a lower propensity for credible6© OECD/ITF 2019

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commitment to the contract. The transfer of demand risks leads to a significant increase in total projectcost. It is unlikely that rates of project failure in developed countries would justify such a premium.
Private investment cannot close the infrastructure gap. A PPP is a financing vehicle (a way to borrowmoney) and an investment gap is a funding problem (the question who will repay what is borrowed). A
financing solution cannot resolve a funding problem. If taxpayers can afford a new motorway, they will
be able to pay for it regardless of whether the tolling is done by the state or a private company.
Conversely, if the government cannot afford to finance the project from public funds, it will not be able
to afford it as a PPP.
The reason why PPPs have a role as an instrument to overcome public funding constraints, and continues
to be an incentive to use them, is a persistent reliance on accounting standards which do nottransparently and fully represent the fiscal implications of PPPs. The upgrading of accounting standards
to remove this bias is relatively easy, so the lack of progress in this area can be attributed to insufficient
political will.
Allowing foreign private investment in infrastructure can positively influence competition for the PPP
contract or bidding in the privatisation of regulated assets. As observed in other sectors, more distantdirect and indirect effects of foreign direct investments, such as technology transfer and labour market
impacts of Multi-National Enterprise investment, will apply as well.

What we recommend
Pursue private infrastructure investment on the basis of efficiency
There is no case for suggesting that private investment in infrastructure can close an infrastructure gap
or improve project selection. Demand risk should only be transferred to the private partner where thatrisk is manageable and provides and incentive for greater efficiency and service quality in theperformance of the private partner.
Collect and analyse the data necessary to determine when public-private partnerships lead to greater
efficiency
An oft given recommendation is that more data is needed on PPP performance to inform decision
making. This would include information on cost and time variability, speed, end cost per physical unit,
quality, etc. Without the data, no decision process or support tool can be reliable.
Upgrade accounting standards to offset any bias in favour of public-private partnerships
The International Monetary Fund encourages a reassessment of accounting standards for PPPs. They
have outlined their recommendations in the PPP Financial Risk Assessment Model. Countries have often
cited “technical” barriers as the reason for not implementing the standards. In reality, there is no reason
advanced economies could not put the measures into place. Not doing so shows a lack of political will.
Learn how to improve PPPs in general and when to replace them with alternative models
There are several ways in which the performance of the PPP model could be improved. For example,
better informed bidders facilitate more efficient risk pricing. Alternatively, the Regulatory Asset Basedmodel could replace PPPs in many areas. These and other solutions are presented in the synthesis reportand supporting papers of the ITF Working Group on Private Investment.

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Introduction
Private investment in infrastructure can have multiple impacts, positive and negative. Not all are wellunderstood, or systematically accounted for in literature. The resulting lack of clarity can present achallenge for policy makers. Pursuing private investment for the wrong reasons can lead to adverse
outcomes. Being unable to explain to civil society how the right reasons work can also threaten policies.
This paper aims at providing an overview of potential impacts of private investment by pulling together
the evidence base available to date. It reviews four common propositions on the benefits of private
investment in infrastructure.
The first proposition suggests that private investment in infrastructure can improve efficiency at firmlevel, (though not necessarily an individual project). In this case, private management of infrastructure
procurement and operation can be more efficient than public management in managing existing assets
or delivering new ones. There is a stock of evidence available for regulated utilities. This paper will assess
what empirical evidence is available for the four modes of transport: road, rail, sea and airports.
The second proposition is that private investment can help improve efficiency of infrastructure
investment in the context of project selection. This is the desired effect. Private investors need to ensurethat a project can recover its cost. With their own money at risk they should be more diligent before
accepting any investment proposal. In this context, private investment is supposed to guard against
white elephant projects (Engel et al., 2011) or “bridges to nowhere”.
The third proposition claims that private finance can help close the infrastructure financing andinvestment gap. Numerous publications have proposed that an infrastructure investment gap exists
across the world. During the recent global financial crisis this was a common view, as fiscal constraints
were implemented under which investment was the first expense to be cut. A common narrative is thatprivate finance, known as investment, can help resolve this conundrum (OECD, 2015; WEF, 2013;
Schwartz, Ruiz-Nuñez and Chelsky, 2014). A number of multilateral development banks and otherinstitutions now exist to help facilitate private investment, with the most recent notable addition being
the Asian Infrastructure Investment Bank. In essence, this proposition suggests that private investment
enables infrastructure investment that could not otherwise take place, instead of crowding out public
initiatives.
The final proposition is that foreign private investment has a positive impact on local know-how andcompetition and other aspects, as well. This idea follows from the literature that focuses on international
trade and foreign direct investments (FDI).
Each of the above propositions will be investigated in a dedicated section of this paper. As the first three
propositions deal with different aspects of economic efficiency, those sections will begin by briefly
reviewing economists’ concept of efficiency.
The analysis focuses on transport infrastructure, though references to other evidence are made whenrelevant. Transport infrastructure typically refers to large CAPEX assets such as bridges, roads, railways,
air/sea port infrastructure. They have a long life, can have some public good characteristics1, create

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externalities (e.g. noise, pollution, displacement of homeowners due to right of way) or other indirect
effects (e.g. improved land value through better accessibility), and the costs of which are generally
considered sunk2. Transport infrastructure is a separate concept from the operations that take place onit (road/rail/air/sea transport, including sea port terminal operations), though many infrastructure
systems are integrated and operations cannot be easily disentangled.
Due to these characteristics private investment in infrastructure almost never takes place without someform of a regulatory framework. In essence, there are two such frameworks with many variations inpractice. In competition for a contract (the concept at the heart of the PPP), the efficiency incentive isprimarily determined through the competition in the tender process. In incentive regulation, theefficiency targets are set and reset periodically by the economic regulator, generally an independentagency. The latter approach is commonly applied to utilities and some transport cases, such as rail andairport infrastructure.
Because of the multiple meanings of the term “private investment”, this paper is interested in twocontexts. One is where private investment leads to a change of ownership and/or management ofexisting assets (through privatisation or a PPP, although commonly the term “concession” is used, aswell)3 and the other where private investment leads to a delivery of a new asset or an upgrade 4. In
practice, there are overlaps between the two. Both privatisation and PPP can require the investor toaccommodate an expansion or rehabilitation of existing assets.

Can private investment in transport infrastructure
improve productive efficiency? The firm level
Pursuing productive efficiency is one way of achieving Value for Money. This is a common consideration
which governments are called on to demonstrate when pursuing private investment as an option.
A firm achieves productive efficiency when it produces a given quantity of output at minimum cost.
However, any infrastructure system is a multi-input, multi-output environment. One cannot make any
inferences by observing improvements in any one dimension of the system. For example, comparing thecost of maintenance of two railway infrastructure managers, without considering that one has inherited
a much higher density of switches will not yield a fair comparison. The measurement of economic
efficiency improvement requires that a comparison of the situation be made after a change to a
counterfactual, ideally using econometrics. The counterfactual can be a system’s own past performanceor another system.
In light of the challenges of achieving like for like comparisons, it is not easy to establish or measure
which form of governance (and ownership) is better for cost efficiency. For competitive markets, it took
economists several decades to agree (Megginson and Netter, 2001) that private ownership performs
better than public governance.
Most infrastructure systems, however, do not exist in competitive markets. Road and railway networks
have natural monopoly characteristics and in most5 parts of the world they are a monopoly. Sea andairports may have fewer such characteristics and can be subject to continuous competitive pressure. All© OECD/ITF 20199

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four have substantial impacts in terms of their externalities6. All four also require some form ofgovernment regulation. Since infrastructure generally involves large capital outlays that are sunk once
made, assurances are necessary from the government that private investors will not be explicitly or
implicitly expropriated. Rules and supervision need to be put in place to prevent abuse of market power
when the exploitation of a particular infrastructure asset is a monopoly. In short, one cannot generalise
the findings on superior performance of private governance and ownership from a fully competitivemarket to the infrastructure context.
Governments also sought a change of governance and ownership in infrastructure sectors. In
infrastructure procurement, cost overruns and delays were not uncommon. In infrastructure
management, overemployment in passenger and freight operations and unsatisfactory service levels
were associated with State Owned Enterprises. Makovšek and Veryard (2016) provide a review ofconcerns with regard to public infrastructure governance.
Aside from trying to improve public governance, governments sought to introduce market mechanisms
and private interest. One part of that process was trying to separate operations from the infrastructure.
The economic characteristics of operations (often lower capital requirements, sunk cost, etc.) can makethem less restrictive to private involvement (and in consequence, market creation).
Table 1. Infrastructure and operations in transport – an illustration
SectorInfrastructure

Operations

Operations in relation to
infrastructure

Road

Roads, bridges, signaling/traffic
control equipment
Track, switches, bridges,
signaling/traffic control
equipment

Freight/passenger road transport

Airport building, runways,
parking lots, signaling/traffic
control equipment
Pier substructure, break waters,basin…

Air carriers/planes

Liberalised and separate from
infrastructure management
Diverse organisation models (Integrated
and liberalised companies, separate
infrastructure and liberalised freight
and/or passenger companies, etc.)
Liberalised and separate from
infrastructure management

Rail

Air

Sea

Freight/passenger railway cars,
locomotives, motor-rail cars

Terminal operations (ship-to-shore
cranes, straddle carriers,
warehouse…)
Shipping

Mostly separated (Farrell, 2012),
competition for the contract
Liberalised

Source: Makovšek (2019).

Even when operations can be separated from infrastructure, the conditions may still not immediately
allow the creation of a competitive market for operations on the infrastructure. The broad meaning of
the two concepts and market types are illustrated in Table 1.
The interest of this paper is in private investment in transport infrastructure systems which have notbeen fully liberalised (are not competitive). Since these systems are subject to different types oforganisation and forms of private investment, the evidence treating them often overlaps the subjects ofinfrastructure and operations. To not exclude such evidence, this paper treats both.

Road infrastructure
In road infrastructure, the public-private partnership (PPP) model has been practically the exclusive
vehicle for private investment. Several countries (e.g. Portugal, Spain, Italy, France7) entrusted large
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shares of their motorway network to the private sector through PPP (concessions) and relied heavily on
PPPs to create new connections. In Chile, the motorway network consists exclusively of PPPs. There is nocompilation of the total value or share of private investment road infrastructure for developed countries.
Despite a rich history of experience, it is not yet clear whether the use of PPPs in motorway development
has resulted in improved value for money with regard to existing or new assets delivery.
This is particularly striking since road PPPs are the most represented sector in terms of private
investment value in transport infrastructure. In Europe, for example, the EPEC’s PPP market reports
traditionally cite transport as the number one sector in terms of value8. Since 1993, more than 1800
projects are listed in the World Bank Private Participation in Infrastructure database under transport
infrastructure for developing countries. These involve more than USD 458 billion of private investment,with about half in road infrastructure9. No such compilation is available for developed countries, though
it is generally considered that private investment represents only a small share when compared to the
public. Many governments, including the members of G20, intend on mobilising more private investment
in infrastructure, making the current lack of understanding of past performance, particularly in roads, all
the more striking.
Although there are dozens of studies on the different aspects of road PPPs, a lack of data has inhibited acomprehensive analysis of cost efficiency. However, a recent study did make progress with regard to
PPPs used in delivery of greenfield assets in developed countries (Makovšek and Moszoro, 2018). It
suggested that risk pricing failures lead to higher financing and construction costs than in traditional
procurement, without a change in quality10. This makes it less likely for a PPP to demonstrate Value forMoney, but does not bring closure to the Value for Money debate. More evidence is needed tocorroborate the work in the study and no evidence currently exists on performance during maintenanceand operations, comparative service levels, or asset condition, when the contract expires. Clearly, an
important factor is the extent of inefficiency on the public side. Significant differences may be expected
between different countries, especially developed and developing.

Railway infrastructure and operations
There exists a body of research on the cost efficiency of infrastructure management for railways,
including that of passenger franchising operations. Evidence is very limited for railway infrastructure
privatisations, however, as they are relatively infrequent. The most studied case of infrastructure
privatisation is that of the formerly state-owned company British Rail in the United Kingdom. British Railwas vertically separated, with on-the-track competition established in the rail freight transport and forthe-track competition in passenger transport. After several difficult years for policy makers, theeconomic regulator and the private owners, the company went bankrupt and was eventuallynationalised. Smith and Nash (2014) review the literature and show that railway infrastructure
privatisation led to a major loss of efficiency in infrastructure management, which has not yet been
recovered. There are multiple reasons for this result, an important one being insufficient preparation forthe privatisation with the simultaneous introduction of incentive regulation (any organisation needs time
to build capacity).
There have been a few other cases of railway infrastructure privatisation, but they are less wellunderstood in terms of a comprehensive view on their performance/efficiency.
The Japanese National Railways were privatised in 1987, after a lengthy process of restructuring. Six
regional integrated railway companies and a nationwide freight train operator were created. 77 000© OECD/ITF 201911

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employees – almost a third of the company’s staff – were shed during privatisation. Today, five out of six
companies are profitable, with improved service levels and expanded commercial operations (though
there is mounting pressure on rural operations due to declining population density). Thirty years later,
the Japanese privatisation experience is generally considered a success.
Apart from the two major cases, there was a series of other international experiences where theprivatisation of railway infrastructure in an incentive regulation context or via a PPP failed for different
reasons. Estonia privatised its infrastructure and operations in 2001, but shortly thereafter the politicalclimate changed and the private company was nationalised in 2007. The New Zealand railways wereprivatised in 1993 and renationalised in 2008. In the intervening period, private operators were
unsuccessful in making the railway business financially viable. In Argentina, the national railways wereprivatised in 1993. After initial contraction of the service scale and improved performance, a series of
events, political and other (including the 2001 economic crisis), led to gradual renationalisation in 2012.
Experiences with privatisation of railway infrastructure are infrequent and do not easily lead to broadconclusions. For railways, any inference on the impact of private investment into infrastructure isparticularly difficult. The primary reason is that railways around the world operate in different policy
narratives and serve different goals, making straightforward comparisons impossible (ITF, 2019). If
privatisation is an important condition for performance improvement in railway infrastructure, it is not a
sufficient one. This is also the message of the cumulative World Bank experience in railway reform(World Bank, 2011).
There is somewhat more evidence available with regard to passenger franchising, albeit limited todeveloped countries. Nash et al. (2016) provides a recent overview:

Germany and Sweden: 20-30% cost savings (Alexanderson, 2009; Alexanderson and
Hultén, 2007)

Netherlands: 20-50% cost savings (Van Dijk, 2007)Rail franchising reforms in Britain: unit cost increased by 14% between 1997 and 2006
(Smith and Wheat, 2012).

Regardless of the cost increase in the last case, passenger demand grew and has continued to growduring the period of economic crisis, suggesting that private operators, at least in part, contribute to thistrend. This, despite earlier suggestions (Wardman, 2006) that the UK trend is driven by other socioeconomic reasons, including higher gas prices and greater congestion due to rising car ownership.
In summary, evidence from passenger rail franchising clearly shows efficiency gains in a point of
departure from state ownership and management11.

Seaports
Private investment in ports occurs primarily in two ways. Either the concession for an existing terminal
infrastructure is awarded to a PPP, where the private party executes cargo handling operations; or a
Build-Operate-Transfer (BOT) type project is commissioned. In the latter case, the private party builds
the terminal superstructure and handles terminal operations on it and the state provides theinfrastructure (as in Guasch, Suárez Alemán and Trujillo (2015), for example). The majority (88 out of 136
in 2008) of competitively tendered concessions were concessions of existing terminal infrastructure(Farrell, 2012).

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In relation to different port management models around the world, private investment in the context of
this paper only happens in the last two, as summarised in Table 2 below.
Table 2. Basic port management systems
Type

Infrastructure

Superstructure

Port Labour

Other functions

Public Service Port

PublicPublicPublicMajority public

Tool Port

PublicPublicPrivatePublic/Private

Landlord Port

PublicPrivatePrivatePublic/Private

Private Service Port

PrivatePrivatePrivateMajority private

Source: World Bank (2007), adjusted by ITF.

The concession process in ports started about thirty years ago with the majority of terminal operations
now being private. Privately managed terminals account for 70% of operational container terminals and
78% of global container terminal throughput. Hence, the land-lord port is by far the most dominant formof port management systems (Farrell, 2012).
Despite being subject to a concession, the port operations can be competitive businesses. Although thecompetitiveness of the port is subject to many factors (location, maritime connectivity, hinterlandtransport connections, etc.), the service quality of the port and its commercial orientation (e.g.
marketing) does enable some management of demand. In effect, different terminal operators and ports
within the same catchment area can compete with each other. Competition, the ability to affect demandthrough service quality and limited sunk cost investment are contexts in which one would expect theprivate sector to outperform a state-owned enterprise.
Limited evidence exists of efficiency gains from private sector ownership and management. A few older
papers suggest that ownership does not matter (Valentine and Gray, 2001; Notteboom, Coeck and Van
Den Broeck, 2000). More recent papers find positive effects of private ownership on port efficiency(Cullinane and Song, 2003; Tongzon and Heng, 2005; Cullinane et al., 2006; Cheon, Dowall and Song,2010). As Gong, Cullinane and Firth (2012) report, earlier work may have led to mixed results due tosimplistic categorisation of port ownership and governance (i.e. state vs private rather than applying amatrix of who controls which port functions in line with Baird (1995)). Along with the importance ofownership, the port’s organisation and how markets were (de)regulated also played a role.
The most positive impact comes from reorganisation. Reorganisation splits the function of the port
infrastructure management from the terminal operations, which are a more attractive form for theprivate sector to invest in. For purely private ports, Baird (2000) argues that the outright sale of port
land, combined with a transfer of operation and regulation functions to the private sector, will not
automatically lead to increased productive efficiency and can be counterproductive. The reason is thatport infrastructure is capital intensive and takes a long time to recover. Relying on the private sector toprovide both port infrastructure and superstructure may result in significantly delayed investment incrucial operational facilities and equipment.
In a comprehensive review of research, Gong, Cullinane and Firth (2012) provided several caveats to the
explanatory power of the evidence above. These are based on measurement and data problems asprivatisation, regulatory and structural reforms were introduced simultaneously in most developing
countries. The effects of these reforms are difficult to disentangle. There is also an unsettled theoreticaldebate regarding the costs and benefits of partial privatisation, possible implementation problems inprivatisation, and the influence of political forces in privatisation (both pre- and post-privatisation).

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More importantly, efficiency comparisons in most existing studies between private and public sector
producers or service providers are only made on the basis of technical efficiency. If privatised ports havenot been subject to significant competition for the same catchment areas, the result may have been
abuse of market power, rather than improved technical and allocative efficiency.
In summary, there are, at the very least, indications that private investment could lead to improved
economic efficiency provided it is executed in an adequate organisational setting and is subject to amarket or regulatory setting to keep any abuse of market power in check.

Airports
Traditionally, governments have been the main provider of air transport infrastructure. The very natureof such assets – the natural monopoly and their relative importance for governments’ national security
agendas – provided the rationale for retaining such infrastructure under public ownership. However, fora number of reasons, airports are increasingly being transferred to the private sector. Similar to the sea
port reorganisation, the unbundling of air transport infrastructure activities has allowed governments toretain control of key activities important for national security, e.g. air traffic control and safety andsecurity services, while permitting the private sector to undertake the more commercial activities,
notably the operation of airports and ground-handling services.
Increased private participation in the sector has generally taken place through PPPs for ground-services
and airport management contracts to full divestiture. Concession agreements represent 41% of airports
with private participation (ACI, 2016). An overview of what incentive regulation scheme was applied, if
any, is not available. Over 40% of global traffic is currently being handled by non-public airports and thatpercentage is increasing.
The performance of airports has been influenced by a complicated nexus of changes in the governancemodel, increased private participation and commercialisation, and the liberalisation of air services. Thereis a vast literature covering these aspects. In this paper, these are only outlined to illustrate what is
known about the impact of private investment in airport infrastructure.
The evidence on the relevance of ownership for airport efficiency is mixed. Several earlier studies failed
to determine any impact of private ownership on airport efficiency (Parker, 1999; Oum, Yu and Fu, 2003;
Vasigh and Gorjidooz, 2006; Lin and Hong, 2006). Others find a positive relationship (Yokomi, 2005;
Vogel, 2006; Barros and Dieke, 2007; Oum, Alder and Yu, 2006; and Oum, Yan and Yu, 2008). Adler andLiebert (2014) demonstrate the importance of competition regardless of ownership and Bel and Fageda(2010) do the same for price regulation.
For much of this literature, the same considerations apply as raised by Gong, Cullinane and Firth (2012)
on the challenges to disentangle the effects of organisation, competition and regulation, and ownership.
A point that is less subject to challenge is that private ownership is better at extracting value fromcommercial operations. In airports, commercial revenues from non-aeronautical activities represent up
to half of total revenue (Graham, 2009). According to ACI (2016), during times of economic distress, nonaeronautical revenues serve as a cushion between airports and their airline customers with respect tocharges. How well this works, though, depends whether both streams of revenue are considered in
airport infrastructure cost recovery (dual till) or only aeronautical revenues (single till).

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Privatisation impacts in other infrastructure sectors
When considering private investment in the context of privatisation or concessions it helps to look atother infrastructure systems, as well. Utilities, for example, have very similar, if not the same economic
characteristics as road and rail networks.
Prior to the 1990s, only a few OECD countries undertook large scale privatisation programmes. Except
for the United Kingdom, Germany and France in Europe and countries such as Chile, New Zealand,
Mexico and Canada outside of Europe, the programmes were rudimentary and rather narrow in scope.
In the United Kingdom, prior to the sale of British Telecom, a number of transactions were carried out.
However, the sale of British Telecom in 1984 is considered the beginning of large-scale privatisations that
continued well into the mid-1990s (OECD, 2003). Privatisation strategies in some jurisdictions lasted
through the mid-2000s but can now be considered to have stalled (OECD, 2016).
There is no comprehensive overview available of private involvement in infrastructure. The sector which
recorded the biggest private capital flows in the past was telecommunications (OECD, 2003). But inflows
of private capital took place in other sectors as well, where next to divestitures, PPPs as a form of private
investment proliferated. In both cases, countries such as the United Kingdom and Chile were among thefirst and went the furthest in this process by also privatising the utilities sector (water and sanitation,
electricity production and distribution). The ex post evidence for the utility sector suggests that theprivatisation process induced a reduction in workforce and increased the cost efficiency of the firms.
In the developed countries, one of the most well-documented examples of privatisation outcomes is theUnited Kingdom. Table 3 presents an overview for utilities.
Table 3. Privatisation outcomes in selected utility industries in the United Kingdom
1

Industry

Number of employees atprivatisation/(year)

Number of employees
after privatisation/(year)

Changes (real ) in end user
prices (time of study)

Electric power distribution

127 300(1990/1991)

66 000(1996/1997)

from -25 to -34%
2
(1990-1999)

Telecommunications (British
Telecom)

238 000(1979/1980)

124 700(1999)-48%
3(1984-1999)

Gas distribution

92 000(1986)

70 000(1994)-26%
4(1986-1997)

Notes: (1) The figure is based on the general price level growth, which means that the nominal drop was evengreater. (2) Measured in England and Wales. (3) In this case the decrease can also be attributed to technologicalprogress and, indirectly, an increase in competition as a result of privatisation. (4) In the original text, ‟2.6% per
year,” which would amount to 26.6% in 11 years, rounded down.
Source: Parker (2004).

However, privatisation has not always translated into greater social welfare, nor gone smoothly12. In
Chile, for example, the economic incentive regulation in utilities was successful in inducing productivity
gains. It was less successful in diverting those gains from accumulating in the form of higher profits
rather than lower prices or other benefits for the users (Engel et al., 2003).
In developing countries the experience and research by development banks yielded a substantial amountof evidence on the impacts of private investment in infrastructure. Performance improvements intelecommunications, electricity and water supply sectors have been reported.

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Thillairajan, Mahalingam and Deep (2013) reviewed 424 pieces of evidence from 67 studies (including
Gassner, Popov and Pushak, 2009). The analysis found that the incidents of positive evidence far
outnumbered that of the negative evidence. The positive evidence was the strongest for those outcomes
where there was a strong corresponding benefit to the private player. Where improvements would needhigher levels of capital investment or the benefits to the private player would occur over a longer period,
the evidence for positive impact was not as strong. In line with the above, telecommunications had themost positive outcomes as a sector, which also has the greatest scope for the introduction ofcompetition of the three sectors analysed.
Gassner, Popov and Pushak (2009) show that not all countries and regions were equally successful inbenefiting from private participation, at least not in terms of greater coverage and capacity. This wasmost notable in less competitive markets like electricity and water distribution. Even when the private
sector has led to operational efficiency gains, these have not necessarily been translated into higher
investment or lower prices. To some extent, the difference in results across sectors may reflect thevarying degrees of price reforms implemented. Where reforms have allowed prices to recover the cost ofoperations and the initial investment into physical infrastructure, as often the case in electricity
generation and telecommunications, private investment has more easily expanded and resulted inservice expansion. In other network industries cases, aligning prices with the costs of services has proved
more difficult (Foster and Yepes, 2006).
Overall, efficiency improvements alone may not have been large enough to compensate for limited pricereforms (Gassner, Popov and Pushak, 2009). This may also explain the relatively lower levels ofinvestment by public and private utilities in those sectors. A particular challenge for developing countries
is that the introduction of private investment needs to be part of a broader reform. Private sector
investment is not very effective in achieving the desired outcomes without corresponding changes in themarket and in institutional and governance structures (Thillairajan, Mahalingam and Deep, 2013).
Andres, Schwartz and Guasch (2013) focused on these broader conditions in the case of fixed
telecommunications and utilities in Latin America and the Caribbean. They found that differences inownership, regulatory governance and corporate governance of state-owned enterprises significantly
explain some of the variance in the performance of infrastructure sectors in terms of output, efficiency,
labour productivity, services quality, coverage and prices.
In the review of the evidence for transport and other sectors, a conservative assessment would be thatprivate participation in infrastructure with private money at risk can matter, with the evidence being
mixed. The impact depends on the appropriate organisational, institutional, and regulatory framework inwhich it is made. The relative importance of each particular ingredient remains an area of further
investigation.

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Can private investment in transport infrastructure
improve allocative efficiency?
The project selection level
The previous section discussed productive efficiency in the context of the firm. The firms were
infrastructure managers and/or providers of transport services and the question was whether ownershipmatters. Any consideration of investment in new infrastructure or its renewal was mainly done at an
aggregate level, where one firm does not necessarily equal one project.
If the productive efficiency referred to the question “how”, then the remaining questions of efficiency
are “what infrastructure” (which projects) and “how much of it”. Allocative efficiency13 addressed thelatter two questions. Allocative efficiency is achieved when firms expand production until the marginal
benefit of an additional unit equals the (long-run) marginal cost. Allocative efficiency also involves theefficient pricing of the services the infrastructure provides, on a road network, for example. If pricing is
optimal, benefit is maximised. This section focuses only on project selection and assumes pricing is
implicitly efficient.
The consideration of allocative efficiency can also be showcased on a more granular level than a firm – aproject. To maximise allocative efficiency and, thereby, social welfare, decision makers need to invest
only in those projects that yield the highest net benefits. Cost Benefit Analysis (CBA) is the standard
method to help them do that. As the costs and benefits are always estimates, the ex post outcomes will
differ. This is not problematic if these estimates are on average correct. (Some investments turn out
better, others worse, but on average the errors cancel out.) If the costs turn out to be deliberately
underestimated or the benefits overestimated, the best investment options are not selected and social
welfare is not maximised.
Systematic cost overruns or demand shortfalls have been empirically proven in many areas of public
investment. The transport sector is the best represented in this literature. Since the seminal work of
Flyvbjerg, Holm and Buhl (2002), there have been multiple studies on cost overruns (Makovšek andMoszoro (2018) provide an overview) and demand shortfalls (Flyvbjerg, Holm and Buhl, 2005; Bain,
2009) in the transport sector. Systematic evidence for other sectors is much more limited (Ansar et al.
(2014) for hydro dams, Sovacool, Gilbert and Nugent (2014) for electricity transmission, Butts and Linton(2009) for defense and NASA). Flyvbjerg, Holm and Buhl (2005) contended that the main culprit for thiswas governance failure on the public side (deliberate misrepresentation), while more forgiving authors
used the term “optimism bias”, as in the UK’s Green Book, for example (H.M. Treasury, 2014).
A common proposition with regard to PPPs was that private investors will be more diligent in projectappraisal than the public sector. The construction and the demand risk were to be transferred to theprivate sector through PPPs and the private sector would accurately assess the risks and refuse execution
if it sensed no full cost recovery was possible. This intuition was not confirmed by evidence and four
elements make it difficult to defend, as explained below.
It is important to note that the below analysis is relevant primarily for the non-competitive infrastructure
sectors, such as roads. Unlike others – sea or air ports in the same catchment area, for example – these
are not subject to continuous competitive pressure. If a sector is competitive, demand becomes amanageable risk and the operator can pursue other actions to attract users, i.e. is not exclusively
dependant on users’ price elasticity. It then makes sense for the private party to bear demand risk in part

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or completely. The intricacies of how competitive a sector is and what extent of demand risk should betransferred are beyond the scope of this paper.

Credible commitment to the contract is not always assured
For private investors to care about a particular risk, their money needs to be credibly at risk. If a contract
stipulates that a contracting party must bear a risk if it materialises, that actually needs to happen when
the risk does materialise. Were this not so, firms bidding for the contract would be able to renegotiate
when things started going badly. Competition for the contract would lose its purpose.
Changes in contracts during their execution manifest in renegotiations. These are not an adverse
element per se. Long-term contracts in particular cannot be complete and foresee every eventuality that
may arise during their execution. Renegotiations may be necessary to accommodate unforeseen
exogenous circumstances that would unduly threaten the viability of the contract. However, a lack ofdata availability makes it difficult to determine the real reasons behind each renegotiation.
The existing evidence across different countries shows that renegotiations are not infrequent (Table 4).
This is not necessarily a problem as long as the value of the renegotiations is limited.
Table 4. Renegotiations of PPPs in different regions
Region / country

Sector% of renegotiated contracts

SourceLatin America and Caribbean

Total

68%

Guasch et al. (2014)

Electricity

41%

Transport

78%

Water

92%

India

All sectors

0%

Guasch et al. (2014)

United States

Highways

40%*Engel, Fischer and Galetovic(2011)

FranceHighways50%

Atthias and Saussier (2007)

Parking73%

Beuve, de Brux and Saussier (2014)

United Kingdom

All sectors

22%*NAO (2003)

United Kingdom (Scotland)

All sectors

51%*CEPA (2005)* These studies include samples, which may not be representative of the population at the time of sampling.
Source: ITF (2017).

In the United Kingdom, for example, the NAO’s survey of 171 PFI projects (from all sectors) reports themonetary impact of changes to contracts for the year 2006 (NAO, 2008). 82% of changes involved
GBP 5 000 or less. Nearly all changes originated with a request from the public sector, rather than theprivate sector contractor, or as a result of a change in law. Beyond this example, very public high-impact
renegotiation cases exist, such as the Channel Tunnel Rail Link. Their very low incidence is not anindication of a credible commitment problem in the United Kingdom.
A high incidence, timing, and the financial impact of renegotiations do suggest a credible commitment
problem. A more detailed overview of the characteristics of renegotiations in Chile, Peru, and Colombia

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in Table 5 show that renegotiations are frequent, can start very early (in Chile and Peru they can begin as
early as the first year or during construction), and have a significant impact on the taxpayer.
In the Chilean case, for example, Engel, Fischer and Galetovic (2014a) recount that the data is consistent
with opportunistic behaviour by the government (and the contractors), where the government can use
renegotiations to increase expenditure beyond agreed fiscal spending limits.
Table 5. Summary statistics on renegotiations inChile, Peru and Colombia, 1993-2010
Chile

Colombia

Peru

Total road concessions

21

25

19

Mean initial value of contract

246

263

166

Mean initial term (years)

25.2

16.7

22.1

Mean concession length (km)

114

195

383

Mean concession years elapsed

12.5

9.0

4.6

Renegotiated road concessions

18

21

11

Total number of renegotiations

60

430

53

Mean number of renegotiations per concession

3.3

20.5

4.8

Mean time of first renegotiation (years)

2.7

1.0

1.4

Mean fiscal cost of renegotiations *

47

266

28

Mean fiscal costs / initial value (percentage)

17

282

13

Mean added term (years)

0.9

6.3

0.8

Mean added length (km)

0

54.6

0

Number of renegotiations / concessions year elapsed

0.2

1.9

0.9

* Constant USD Dec 2009, million.
Source: Bitran, Nieto-Parra and Robledo (2013).

Even where credible commitment to the contract is present on the public side, there may be
opportunistic behaviour on the private side. Multiple examples exist where the private project
developers misled private investors by misrepresenting project cost or expected demand. Notable
examples are the Channel Tunnel Rail Link in Europe and several cases in Australia14. While these cases
may not fall on the taxpayers' shoulders immediately, they may increase the cost of future projects
when investors try to accommodate developer opportunism in their risk pricing or avoid taking
demand risk altogether.

Demand risk must be systematically transferable
To incentivise the private partner to filter out white elephants, demand risk must be transferred toprojects systematically with other risks. For road projects, for example, the implication is then thatdemand risk transfer applies to projects on all roads of a particular class on the network (e.g. all
motorways). If the private filter for the project pipeline is not systematic, the state could choose theprojects to which it would transfer the demand risk and those to which it would not. Such a system
would introduce a moral hazard problem, allowing the state not to transfer the demand risk forpolitically preferred projects where it suspected the private sector would reject them.

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The previous paragraph assumes for the sake of argument that all projects can recover their costfinancially. In practice, this is not so. Many projects cannot fully recover their cost financially but are built
because they are economically justified (e.g. because they reduce negative externalities). These projects
require subsidies. It is not only financial due diligence that determines whether such projects should bebuilt, then, but economic analysis as well. If responsibility for the economic analysis is transferred to theprivate sector the onus is no longer on the financial cost recovery but on showing that the project isworthwhile and should be subsidised (since in the opposite case there would be no project). This would
replace one moral hazard problem with another.

An appetite for demand risk must always be present
If project selection would benefit from transferring demand risk to the private sector, then a stableappetite to accept demand risk should exist. Why? Firstly, it would be impractical for public decisionmakers to rely on transferring demand risk for project selection if the private sector was unwilling to takeany demand risk for long stretches of time. Secondly, decision-makers need to have confidence thatprojects are rejected because they are not financially viable and not due to other reasons that affect theperformance of the investors or their risk perception.
Recent history has shown that the global financial and economic crisis substantially affected private
investment in transport and other infrastructure. In the years that followed, a marked drop in demandbased contracts occurred. This is clearly visible on the types of road PPPs in the European Union in Figure
1. Any balance between demand-based and availability-based contracts that may have existed prior thecrisis shifted almost exclusively to availability-based contracts.
Road projects are a typical example of a non-competitive sector where the demand risk is generally
unmanageable (NAO, 1998; Roumboutsos and Pantelias, 2015)15. If the traffic forecast was overly
optimistic, raising the tolls only accelerates the death spiral.
Figure 1. The distribution of demand-based vs. availability-based contracts
in private investment in roads, 1995 – 2014, European Union.
Demand Based

Availability Based

No. of projects

100%

20

90%

18

80%

16

70%

14

60%

12

50%

10

40%

8

30%

6

20%

4

10%

2

0%

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

0

Source: DEALOGIC database, BENEFIT4Transport project data.

This shift also occurred a few years after several pieces of research highlighted the ex post performanceof traffic forecasting for publicly and privately sponsored projects. There is no evidence that private

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sector involvement produces more accurate traffic forecasts on average16, as summarised in Box 1.
Traffic forecasting is difficult and involves considerable uncertainty.

Box 1. Traffic forecasting and ex post performance
Traffic forecasting is a scientific field in its own right. It is not an exact science, however, and systematic
errors have been observed in traditionally procured projects and private toll concessions. Traffic risk
must be assessed for each project specifically, using historical information and expected future
developments. An investor or a lender cannot directly observe the riskiness of a project by comparing
some of its characteristics to similar projects. But they may get a limited view by observing systematic
errors in expectations for similar projects. This is the subject of ex post analysis. Related evidence issummarised below.
Bain (2009) presented evidence on 104 toll road concessions from around the globe to find that, on
average, traffic demand is 23% overestimated. By contrast, in the sample of traditionally procured andpredominantly European road projects, Flyvbjerg, Holm and Buhl (2005) and Næss, Flyvbjerg and Buhl
(2006) found a systematic error in the opposite direction: actual traffic averaged 9.5% higher thanforecasted traffic. Their data included cases over several decades and does not reveal how many weretolled or not. Button and Chen (2014) examine pure public and public–private US highway investment
traffic demand forecasts to find no evidence that the latter are more accurate. In the case of rail, Julien
Dehornoy (Finger and Messulam, 2015) has reviewed cases of PPPs with demand risk since the 1980s. Of
the 14 projects reviewed, five were not yet developed enough to allow analysis; in the remaining nine
the average ridership, assessed at different years of operation, was 63% below estimates. Flyvbjerg,
Holm and Buhl (2006) report a –54% average error on 25 projects, though these may include many of
the ones studied by Dehornoy (Finger and Messulam, 2015) (which the authors did not reveal).
Source: Makovšek and Moszoro (2018).

The growing awareness of uncertainty inherent to traffic forecasting in the investor community and theuncertainty brought about by the general economic crisis may have been two contributing factors in theshift from demand-based to availability-based contracts. The details are beyond the scope of this paper.
The key point for this analysis is that the appetite to accept demand risk is not stable. Moreover, it may
be subject to uncertainty aversion, meaning that investors (and consumers) are simply more careful
about their bets and spending during a crisis. This would not be particular to infrastructure investment.
Relying on the private sector to screen investments during a crisis could thus be paradoxical if the state
wanted to jump-start the economy by increasing the spending.

Asking investors to filter white elephants may not be justified bygovernment failure rates
The transfer of demand risk to the private sector involves a considerable premium in terms of therequired return. When demand is not manageable, transferring the demand risk to a private partner willproduce a pure financing premium that cannot be offset by efficiency gains on the project itself. The
efficiency gains would need to come from improved project selection entirely.

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Take, for example, a situation where a country has decided to pursue a road PPP and is considering
whether to choose an availability-based model or a demand-based model. In the first case, theresponsibility for project selection rests entirely with the public side and in the second would be subject
to private sector due diligence. Table 6 below illustrates a range of capital cost. The low end represents
the availability-based PPPs and the high end demand-based PPPs. It is generally acknowledged thatprojects bearing demand risk should achieve margins above availability-based ones. However, noresearch is available to determine what the impact is for a particular demand risk transfer mechanism (allelse being equal).
Following issues with pricing diversifiable risk in projects in line with Makovšek and Moszoro (2018) thispaper also illustrates a case where the construction risk transfer to the PPP incurs an inefficient risk
pricing premium. A premium in the order of EUR 10 million and EUR 20 million is added on the as built17
construction cost.
Table 6. Weighted average cost of capital and total financing cost illustration
As built CAPEX(EUR million)

Capital cost
5% (base case)

6%

7%

8%

9%

100

171 112184 021

197 258

210 801

224 630110

188 224

202 423

216 983

231 881247 094120

205 335

220 826

236 709

252 961269 557

Note: The simulation assumes a three-year construction and grace period. The loan amortisation is semi-annual.
No refinancing is considered, loan approval cost fees are ignored and loan insurance costs are set at 1.2% per
year. The loan tenure is 20 years.

For demand risk transfer to make sense, its added cost needs to be smaller than the damage from poor
project selection. In the base case of Table 6 a project (a road, for example) with the investment of
EUR 100 million is built as an availability-based PPP. At a cost of financing (WACC) of 5%18,
EUR 171 million will need to be repaid over the life of the project. If the transfer of demand risk raises
the cost of capital to 7%, an additional EUR 26 million (= 197 - 171) needs to be repaid over the life theproject. All else being equal this amount enables an extra EUR 15-million-project to be built with thesame financing conditions as the base case (i.e. with a 5% cost of financing). If demand risk transfer
would be applied on a systemic level, it also means at least 15% of all projects selected by the public
sector would need to be white elephants to justify demand risk transfer. Including CAPEX growth due toinefficient construction risk pricing, these numbers grow to 27% at EUR 110 million and 38% at
EUR 120 million.
At face value these numbers suggest that the potential cost of transferring demand risk to the private
sector very quickly requires high rates of government failure to be justified. Some economists would
argue though that the marginal cost of public funding needs to be considered in the above
interpretation19. As Box 2 explains, the argument is out of context and does not change theaforementioned conclusions.

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Box 2. Marginal cost of public funding and project selection
The question of marginal cost of public funding (MCPF) deals with the price distortions or inefficiencies
caused by additional taxation. It would come into play if the state had no other options to cover projects’shortfalls than to increase taxes (e.g. if it exhausted options to cross fund profitable projects withlossmaking ones, extend the repayment period, etc.).
Additional taxation can negatively affect incentives to work, invest, stimulate tax evasion and have otherimpacts. A sizeable body of literature in the last decades has dealt with these issues (e.g. Feldstein, 1999;
Chetty, Looney and Kroft, 2009; Chetty, 2009; Barrios, Pycroft and Saveyn, 2013) producing different
ranges of estimates on how much additional cost an additional EUR 1 of taxation could incur. The
inefficiency cost of additional taxation can be substantial and depends on multiple factors (the existinglevels of taxation, tax type and others). In the European Union’s CBA guidelines (Sartory et al., 2014) an
MCPF of one is recommended, which means that every additional EUR of taxation causes an additional
EUR 1 of income loss.
If, in the numerical example above (required project failure rate to offset the added cost of financing),
one assumes that all traffic shortfalls would need to be recovered through general taxation at MCPF=1,
the social cost of these shortfalls would be double their actual value. This is because economics
distinguishes between users paying the tolls voluntarily and taxpayers, paying under threat of coercion. It
would also substantially improve the rationale of transferring demand risk to the private sector (i.e. it
would halve the numbers in the simulation above).
In this particular case, MCPF would imply that a cost overrun on a motorway project paid through a raisein taxes would have greater social cost than a cost overrun, which the private party has absorbed but
which would then be repaid through higher tolls, assuming users perceive those differently than taxes.
This comparison is, of course, inadequate. It ignores the difference between funding and financing(discussed in the next section). If there are users available to fund the project, the state can spread its
higher cost over time, and toll them itself. If users are not an available option, the funding of the project
comes through taxation anyway, regardless of whether the project is procured traditionally or throughan availability-based PPP.
Because the problem of project selection to the private sector (as laid out in the sections above) is nottransferable, the public sector remains responsible for whether a project will have a positive Net Present
Value. The key question, then, is which procurement mode is more efficient, not where the funding will
come from (taxation, user charges, or a combination), as it is known ex ante. In summary, the MCPF
argument is not relevant to this analysis, i.e. is out of context.

There is little research available with insight on the systematic ex post Benefit-to-Cost ratios or achieved
Internal Rates of Return. The first wave of the French TGV programme was entirely positive, despite
systematic cost overruns (Crozet, 2016). In developing countries the evidence is limited as well, wherehigh government failure may actually be the case. A rare example is a study by Ansar et al. (2016), whichroughly20 assessed the ex post Benefit-to-Cost ratio for 65 major Chinese transport projects. The study
found that 55% probably did not achieve a positive Benefit-to-Cost ratio.
To summarise, four conditions need to be fulfilled for the transfer of the demand risk to the private
sector in non-competitive infrastructure sectors to make sense. These are:


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Systematic transfer of demand risk to the private sector for a particular asset typeConsistent transferability of demand risk to the private sectorRates of public project selection failure that are higher than the added cost of demand risk
transfer.

Failure to meet any one of these conditions makes the proposition of demand risk transfer on the meritof improved project selection invalid. As demonstrated, the second and third conditions are unlikely tobe achievable. No country systematically transferred demand risk on all projects of the same class.
Demand risk is also not always transferrable. The appetite to accept the demand risk (or its uncertainty)
may depend on other factors beyond the project itself, as well. Lastly, the potential cost of demand risk
transfer requires very high levels of government failure in project selection. Based on the evidence fromthe People’s Republic of China and Latin America, for example, one may conjecture that countries thatlikely have high rates of government failure in project selection are unfortunately also less likely tocredibly commit to contracts.
The practical reality of decision-makers may also be that once a project is put to the market, it is difficultfor governments to stop the process. Political expectations are built up when a project is put to themarket. Governments, as well as parts of the public administration that have invested themselves in
preparing the project, will seek to avoid the embarrassment of stopping a project at such a late stage. An
additional challenge is that bidders would also incur a cost every time they discovered that a project
could not be delivered. To conclude, project selection was and remains a challenge inherent to public
governance.

Can private investment close the transport
infrastructure investment gap?
The consideration of how much to borrow and spend relates to the third and last dimension ofefficiency: dynamic efficiency. Dynamic efficiency occurs when firms invest until the return of themarginal euro spent equals the opportunity cost of postponing consumption (i.e. the cost of raising themoney). This extends the scope of allocative efficiency concept with the notion of limited resources andthe need for prioritisation.
Government borrowing constraints determine how much the state can borrow and then spend (oninvestment as well), given a country’s fiscal targets. In principle, the government should borrow andspend (on consumption and investment) as long as the benefits of this practice outweigh the cost. On
one hand, government spending fosters economic growth. On the other, if debt is too high, governments
have to raise taxes to fund the repayment of debt-interest and principals. These taxes are a drag on theeconomy (through disincentives to work or to invest).
The optimal level of public debt or when the government should start focussing on reducing debt is an
evolving issue in macroeconomics21. Its details are beyond the scope of this paper. For the sake of
discussion, this paper assumes the borrowing constraint is set at the optimal level, the last point where24© OECD/ITF 2019

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the benefits of additional government spending still outweigh the cost of higher taxation. If the state
wants to invest more, it must reallocate existing expenditures22.
What is the fiscal impact: when the government transfers investment (financing, delivery and operation)
in infrastructure to the private sector? This question considers the impact of private investment per se(the “additional” finance) and is unrelated to the importance of private management/ownership,considered in the previous section. To simplify the argument it is useful to consider three cases where a
project is financed either by the state or the private sector23. Following Funke, Irwin and Rial (2013), in an
example where a project’s revenues exactly cover the expenditures, i.e. the net present value of cash
flows is zero, the following occurs for project cash flows:

Traditional procurement: If the state procures the project, it incurs an immediate cost during
construction. Alternately, through borrowing, government can spread out its expenditures
through time. The project then generates economic benefits and revenues collected throughusers or taxation over the project’s life time that exactly cover its cost. The fiscal impact will be
neutral – zero.

An availability-based PPP with government funding: The state can transfer the execution of the
project to the private sector and pay annual payments for the availability of the infrastructure
to the private operator of the infrastructure. As in the first case, the state will collect therevenues and the fiscal impact will be zero.

An availability- or demand-based PPP with user funding: The state can transfer the execution
and the revenue collection from users to the private sector. With the state avoiding the cost of
construction it also forfeits the revenues from the project, the fiscal impact will again be zero.

In the simplified examples above the direct fiscal impact is the same. However, the accounting treatmentof these examples in most countries today will not be. Depending on the accounting principle applied,
PPPs will be classified on or off the balance sheet – i.e. they will or will not be reported in the public debt.
Historically, developing projects and not showing the related liabilities in the public debt made PPPs
especially attractive to governments. The downside of the accounting treatment element is that
inadequate reporting creates a moral hazard:It creates an apparent impression that the government can actually spend more than it should.

It can also stimulate the government to pursue PPPs on the merit of their accounting treatment
regardless of their Value for Money characteristics or stimulate sacrificing Value for Money toachieve an off the balance sheet treatment.

The accounting aspects above are tightly related to the budgeting process. The government plans how
much it can spend based on the medium-term economic growth forecasts. The budget takes into
account revenues from current taxation and the extent to which the government can spread expenditure
over time by borrowing. The budget is then allocated to individual departments (transport, health,defence…). While the government as a whole can spread its expenditure through time by taking public
debt, the individual department cannot. It can do so indirectly by pursuing a PPP, effectively borrowing
from the PPP partner. By borrowing, the department changes the timing of the cash flows.
By not transparently accounting for future liabilities from PPPs a government at the level of adepartment can effectively overdraw on the already set borrowing constraint. In the extreme case, a© OECD/ITF 201925

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department could fully commit a series of its future budgets to frontload the delivery of a long-term
investment plan, losing all budget flexibility for years to come.
To control fiscal risks from PPP use, some governments have introduced prudential limits to the amountof their budgets that can be committed to service PPPs. In parallel, the International Monetary Fund(IMF) and the World Bank have developed the PPP Financial Risk Assessment Model (PFRAM)24 as an aid
to governments. It follows that an adequate public accounting framework would largely eliminate theneed of current measures, like the PFRAM, and would hold in check the moral hazard.
There are two main public accounting concepts available to governments today: 1) the risk and reward
criterion, and 2) the control or economic ownership criterion (Box 3 provides a brief overview). The latter
removes the moral hazard aspect and is the basis for the IMF recommended IPSAS 32 standard. In
advanced economies this standard is relatively easy to implement with regard to PPPs specifically anddoes not require the overhaul of the complete public accounting framework25.

Box 3. PPP and accounting principles
With risk and reward criterion, the economic ownership of an asset lies with the party that possesses theasset and carries the majority of the risks, benefits and burdens in connection with the asset. Eurostat,for example, classifies risk into three major groups: construction, availability, and demand risk. At facevalue transferring two out of three risks would be sufficient to achieve off the balance sheet treatment.
With control criterion, the economic ownership of an asset lies with the government if it:(1) Controls or regulates what services the private partner must provide with the asset, to whom it must
provide them, and at what price; and(2) Controls—through ownership, beneficial entitlement or otherwise—any significant residual interestin the asset at the end of the term of the arrangement.
For a whole-of-life asset, the first condition alone is sufficient. Both rules pursue the substance-overform principle, i.e. it is not the legal ownership that determines the accounting treatment but thefulfilment of the above mentioned conditions.

Regardless of the public accounting treatment, the choice of financing option – the government
borrowing directly or through the PPP – does not change the ability of the users or the general
population to ultimately pay for the service. A similar argument to take account of the broader
affordability of the project was also raised by earlier OECD work (Posner, Ryu and Tkachenko, 2009). In
short, financing options cannot solve funding problems26. This is indirectly recognised in the OECD(2012)27 PPP recommendations. That said, one must recognise that marginal cases also exist (see Box 4)with exceptions to the general rules above.
The discussion above still requires a slight extension with regard to the third, initially-presented case of auser-funded project. Regardless of the effective fiscal impact of a particular project the public debt forthe moment remains one of the leading indicators for macroeconomists and politicians. In the day-today reality, ministries of finance can find themselves in a position where the public borrowing has been
constrained, but there may still be project propositions available that can recover their cost themselves.
The state will not want to do these projects if the current borrowing constraint has already been met.

26

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Does this mean that using private investment is the only way to do these projects faster? The answer
depends on the accounting principle applied.

Box 4. When PPPs should extend the public borrowing constraint
Several situations could be constructed where one could argue for the use of PPPs to actually extend
the public borrowing constraint or, more accurately, to ignore it. For example:

If a government would be imposing a sub-optimally restrictive fiscal policy28, then some offthe balance sheet private financing could actually be useful. But this is not a very realistic caseand involves a part of the public sector pursuing an autonomous policy that is not aligned withthe top level of the government. Moreover, the realisation on the private side that the
government is pursuing a PPP agenda to secure off balance sheet treatment could lead tostrategic behaviour/hold-up problem for the government, where the private parties would
extort improved contractual conditions, knowing that the efficiency is not the primary target
but rather the achievement of off balance sheet treatment.

A unique opportunity for a very beneficial new project might present itself, which will not wait
and cannot be accommodated in the current budget of a department.



A country’s macroeconomic stability is impaired to such an extent that an international
corporation may be able to borrow at a cheaper rate than the state.

The exceptions, such as in the case of the unique project, should be regarded as just that – asinfrequent and exceptional. They should be treated on a case-by-case basis at a very high level of thegovernment and not in the framework of some general guidelines that could give rise to moral hazard.

With the risk and reward principle the answer is no. The state can establish arm’s-length infrastructurecompanies that borrow against their own balance sheet and in many cases spread user-/demand-risk
across multiple assets. Examples include motorway companies (ASFiNAG in Austria, DARS in Slovenia,
NDS in Slovakia, etc.) or major project companies, such as the Sund and Baelt Holding AS in Denmark,which owns the project companies of three mega projects in Denmark (Stoerebelt, Oresundsbron andFehmernbelt). Following the previous section it must be stressed that in either case (involving private
investment or not) the responsibility for project selection remains with the state (and hence also the
responsibility for the viability of such arm’s-length entities).
Under the control criterion a user-funded PPP will be considered as a transfer of a right to collect therevenues. The asset and the related liabilities will be recognised as unearned revenues (debt). Thisliability would then decrease as the revenues materialise. Hence, the answer to the initial question isagain no, but in the sense that a project would not be affordable neither under public provision or a PPP.
One alternative (in principle), is the regulated utility model, also addressed as RAB (Alchin, forthcoming;
Makovšek and Veryard, 2016). Under this model, user-funded infrastructure would be off the balance
sheet under both accounting principles; however, this is a comprehensive strategic approach (on a road
network, for example, rather than individual sections as is customary for PPPs).
In summary, the ability to fund infrastructure ultimately lies with the taxpayers and users. Switching thesource of financing from public borrowing to private borrowing does not change that. If the government
cannot afford to finance the project traditionally it also cannot afford it as a PPP. Conversely, if the© OECD/ITF 201927

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government can afford the project as a PPP, it can also afford to finance it traditionally (Funke et al.
2013; Engel, Fischer and Galetovic, 2014b). Private investment per se, therefore, cannot close theinfrastructure financing gap or the investment gap. If there is affordability to be tapped (users’
willingness to pay), this can be done by the public sector as well. Only an efficiency differential cancontribute to an increased fiscal space, which could be used to pursue more investment in the long run.

Potential impacts of private investment ontransport infrastructure
The first two sections of this paper examine what economic theory has to say about private ownership or
investment and economic efficiency. No distinction was made with regard whether private investment
was domestic or foreign. In many countries private investment in infrastructure is entirely domestic. Thissection provides only a high-level overview what the “foreign” could bring on top of “private”.
A substantial body of research exists with regard to investment of Multi-National Enterprises (MNEs).
This section draws on the comprehensive literature review by Dunning and Lundan (2008). The literatureon the effects of foreign investment distinguishes between direct and indirect effects (Box 5). These are
primarily related to how an MNE presence will affect the different dimensions of the local markets. A key
point is that most parent MNEs generally originate from the most industrially advanced economies29.
Hence, the more distanced a country is from this level, the greater the potential benefits. Whether thesebenefits will materialise however, also depends on the institutional capacity of the host country to
regulate market power, labour practices and other aspects.
The potential for MNE benefits is largely dependent on whether the MNE is allowed to operate in thehost country. Many countries still include implicit restrictions that prohibit direct foreign investment
even if, officially, such investment is welcome. If foreign competition is welcome to bid for a PPP contract
or participate in a privatisation of a regulated infrastructure asset, the increased competition should
already yield improved outcomes. Most of the direct and indirect effects of MNEs will only follow later.
Australia, for example, is concerned with the capacity of the local market and is actively pursuinginternational competition in its PPP market30 and in privatisations.
What is important in the context of privatising existing infrastructure assets is that the new owners might
not necessarily bring with them the power to completely transform the infrastructure value chain
themselves. In many cases ownership is taken by financial investors and not companies specialised ininfrastructure construction or management. MNE presence in the upstream markets, in which theinfrastructure management company buys its services, therefore matters as well. This pertains inparticular to the construction and infrastructure maintenance market.

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Box 5. Direct and indirect investment effects of Multi-National Enterprises
Direct effects (through wholly owned affiliates)
Balance of payments effects: If an MNE establishes a manufacturing plant in a country, which
involves different values or volumes of intermediate product imports and exports it will affect thebalance of payments.
Competition: MNE activity can increase domestic industrial concentration and improve
performance. In the absence of proper regulation it can lead to abuse of market power, reducing
efficiency and consumer welfare. Similarly, FDI has sometimes broken up national or international
cartels with beneficial effects; but at other times it has fragmented markets, created surplus
capacity and fostered inefficient levels of production.
Labour market: MNEs can concentrate the best practices to stimulate employees and theirproductivity in any of its subsidiaries. They can also enforce greater power and flexibility innegotiating employment conditions with labour unions or governments, as they carry more sway
than a local counterpart might. This may also affect government policies.
Technology transfer: Most technological capacity is concentrated in the wealthier industrial
economies. Because R&D is costly and risky it tends to be concentrated in large or specialised
enterprises, which have the necessary financial capacity. Beyond the already existing cross-border
trade in technology, MNEs can foster the forward or reverse transfer of know-how.
Institutional transfer: A range of historical and contemporary examples exist where MNEs played arole in the transfer of formal (accounting practices) or informal practices (quality standards suchas ISO, corporate governance, etc.).
Indirect effects
Linkages (through related local firms – joint ventures, suppliers/distributors): These are similar to
direct effects, but depending on the relationship and motives of the MNE parent.
Spillovers (unrelated local firms): Labour market spillovers occur due to transfer of trained
employees from MNEs to the local unaffiliated companies. The need of technologically moreadvanced MNEs may also lead to increased demand and supply of education, which may again
positively affect the local economy.
Technological spillovers come from demonstration effects (e.g. imitation, reverse engineering by
local firms).
Source: ITF, based on Dunning and Lundan (2008).

In summary, there is no immediate reason why the direct and indirect effects in the literature on MNEs
would also not apply to private investment in infrastructure. The only exception is that, unlike in someother industries, MNEs cannot make the local infrastructure market grow. For example, in a liberalised
telecommunications market MNEs may be more efficient in extending the service coverage faster than astate-owned operator. This cannot be the case in transport infrastructure, where the market context iscompletely different (the state adopts infrastructure plans, especially with regard to transport).

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Notes

1 Public good characteristics have to do with whether access to infrastructure (excludability) can be controlled and whether an extra user will
reduce the availability of infrastructure to others if that infrastructure is not close to capacity.
2 This reflects the irreversibility of the investment decision. Once a transport asset is constructed, it cannot be moved, nor can the owner of theasset recover any significant value from it by scrapping it if there are a limited number of users that need it.
3 The terms PPPs and concessions are used interchangeably in the literature. This paper uses them as they are used in the literature for thisparticular sector. Two types of PPPs exist: those where demand risk is transferred to the private party and those which are availability-paymentbased. Within these there are many combinations, whether the project cost is recovered directly from the users or not (e.g. by tolling on aroad). Concessions generally refer to PPPs where demand risk is transferred and the project cost recovery is based on the user charges.
4 Other interpretations of private investment may also include private or state-owned enterprises borrowing on the capital market or a change
in ownership of an already private company (mergers and acquisitions). From an efficiency perspective these are less relevant as they do notlead to shift from the public to the private management and ownership.
5 Railways in Canada, the United States and Mexico, for example, are vertically integrated companies managing infrastructure and operations.
Although the market is liberalised, the companies are subject to ex-post economic regulation and some infrastructure sharing (through accesscharges) exists between them. These companies compete with each other, build their own infrastructure, and are primarily freight dedicated.
Conversely, in the European Union a similar model is not possible for historical reasons (for example language barriers, interoperability issues).
The approach chosen was access pricing (with desired vertical separation) and the liberalisation of freight and passenger transport services.
6 Large airports make vast claims in terms of land. Choosing their location can be a very long process, affecting many property owners and theirrights. Similar issues are related to large sea ports and intermodal freight terminals when they are close to urban areas. Invariably, any
investment decision that affects a large number of stakeholders and their rights becomes a political issue and can lead to very protracted project
development periods. It is, therefore, common for the state to develop such infrastructure assets first with the private sector becominginterested to invest only after their development is finished and performance established.
7 About 80% of the French motorway network is managed by private concessionaires.
8 Their reports can be found on the EPEC’s home page of the http://www.eib.org/epec/.
9 An unknown part of this sum was contributed by the public sector and international aid. Source: https://ppi.worldbank.org. Our query included
the world, any projects that included fixed assets (build or rehabilitate) and excluded leases and management contracts. All values were in
original price levels. The database does not enable distinguishing to what extent the PPPs involved investment in existing or new assets (thevalue of investment in fixed assets is stated but it is not clear when or to what extent existing assets were also brought under management).
Private investment was calculated by multiplying private ownership share in the project with the value of total investment.
10 A higher infrastructure quality is an argument used to explain higher cost of infrastructure construction in PPPs. Higher quality of constructedasset is supposed to be a reflection of life cycle cost optimisation. If this is not the case, very high (perhaps unattainable) efficiency gains in themaintenance and operations phase are necessary to offset both the higher cost of financing and the larger principal to be repaid.
11 The first generations of franchising contracts capitalised on the “stored” efficiency reserves under state ownership. Many of the current
contracts struggle financially and there is a lack of bidder interest to compete for new ones (Beck et al., 2018).
12 To some extent this is also true for the United Kingdom, though their experience is far from that of developing countries. One example wasfinancial engineering in the utilities sector (Helm, 2009), leading to excess profits in some cases. Discussions about the recent and futurechallenges of economic regulation go well beyond the scope of this paper.
13 The terms productive and allocative efficiency are also commonly expressed in a single term -“economic efficiency”.
14 For example, the1392242857?tesla=y).

CLEM7tunnelin

Brisbane(https://www.wsj.com/articles/legal-wrangle-over-australia-toll-road-collapse-

15 Can be managed only through toll price elasticity.
16 As pointed out by Makovšek and Moszoro (2018) and the previous section, any evidence showing that PPPs have more accurate demand
forecasts on average than the public projects would need to overcome a selection bias problem. It is unlikely that the authorities would try toforce a demand-based PPP on a project they politically prefer ex ante.
17 These are end cost of construction. No more cost overruns are possible.
18 A 5% WACC for an availability-based PPP is a fairly optimistic illustration that would apply to a country like the United Kingdom (implying astrong institutional environment, mature capital market, equity competition, an accepted model, and recent record low risk free rate of around1%). The author thanks Her Majesty’s Treasury for providing this clarification.

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19 The author is grateful to Douglas Southerland for pointing this out.
20 The study inflated (reduced) the initial project cost (demand performance) with the ex post percentage of cost overrun (demand shortfall).
This ignores, for example, that demand represents about 70% of the total project benefits.
21 For example, as recent as in the last crisis the dominant belief was that governments should pursue a restrictive fiscal policy (not increase
public debt and spending). It was recognised in the aftermath that this was a mistake. But when exactly should a country start consolidating andreduce borrowing remains a contested idea. High initial levels of public debt do negatively affect growth, though there are non-linearities (Wooand Kumar, 2015). Other work suggests that it is the debt growth trajectory that may matter, not so much the overall level of debt (Jorda et al.,2011; Pescatori et al., 2014). Spending a lot fast might be a sign of deeper economic health issues. On the other hand, restricting borrowing toosoon may have cost, as well. The IMF, for example, suggested (Ostry et al., 2015) that the expected costs of the higher taxation are likely tooutweigh the expected benefits (from the lower risk of a default in the event of a crisis) by about ten times. This is, “if” the country is not at riskof a fiscal crisis and “if” the benefits of investment outweigh their cost of financing. The corollary of this finding is that the focus on public debt
reduction is only necessary when a country reaches levels close to default (the “upper limit” determined by the rating agencies).
22 Or shoulder the current and next generation of taxpayers with too much debt, reducing their welfare.
23 In reality there are multiple combinations of structures involving public and private finance, including state guarantees, which would
complicate but not change the exposition of the basic logic.
24 https://www.imf.org/external/np/fad/publicinvestment/pdf/PFRAM.pdf (accessed on 20 September 2017).
25 The reason that this standard is not broadly implemented across countries is unrelated to the technical intricacies of implementation.
Advanced economies could easily implement it, the only challenge pertaining to data collection on PPPs. (The author thanks the International
Monetary Fund for providing this clarification.) The more likely reason is political willingness. In the European Union, the Eurostat’s ESA10, forexample, still applies the risk and reward principle despite an attempt to reform it. A paper by EPEC (2010) at the early stages of the ESA reform
noted, “It is clear that, without a revision of the Maastricht rules and a subsequent major change in the operation of the EDP, such adevelopment would severely limit the growth of the PPP market.”
26 It is useful to add that many languages actually do not distinguish between funding and financing. There is a distinction in English, but it
cannot be found in Merriam-Webster or Oxford English dictionaries. For the financial industry professionals “financing” pertains to who makes
the initial stock of money available to execute an investment, e.g. build a road. Financing implies taking on debt. “Funding” pertains to who will
repay it. Only two sources of funding exist – the user and the taxpayer.
27 The OECD recommendations stress that the choice for the PPP should be based on the merit of Value for Money and not accounting
considerations. Some countries, such as the United Kingdom, have already made a step towards this by introducing accrual-based accounting
and International Financial Reporting Standards. However, according to a recent report by the independent think-tank Institute for Government,
the accounting treatment and budgeting determinations at the department level remain the defining driver of private financing decisions (Atkins
et al., 2017).
28 A restrictive fiscal policy means a state is raising taxes or cutting spending to dampen GDP growth or to curb inflationary pressures. A “suboptimally restrictive fiscal policy” would then be, when is the state too restrictive or restrictive at the wrong time. Arguably, a suboptimal
restrictive fiscal policy was pursued during the recent global financial crisis in Europe. Under the generally uncertain growth prospects and whennational economies were stagnating or contracting, the governments cut their spending to compensate the drop in tax revenues. Instead theyshould have increased their spending to jump-start the economy. Following the reasoning in Makovšek (2019), during the crisis governments
were the only ones that could.
29 Some of the largest construction companies in the world are involved in PPP construction and investment (Vinci, Bechtel, Odebrecht,
Ferrovial, China Communications Construction Group, etc.).
30 http://infrastructureaustralia.gov.au/policy-publications/publications/Barriers-to-Competition-and-Efficiency.aspx (accessed on
15 November 2017.

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Appendix 1. Research questions and outputs of theWorking Group on Private Investment inInfrastructure
Introduction: Getting the basics right
What are the economic characteristics of infrastructure?
What is infrastructure and what are operations? What are
the models of private participation in infrastructure andthrough which significant private investment actually takes
place?

Makovšek, D. (2019), “What is Private
Investment in Transport Infrastructureand Why is it Difficult?”, Working Group
Paper, International Transport Forum,
Paris.

Can private investment improve productive efficiency?
Makovšek, D. (2019), “The Role of Private
Improve project selection? Close the infrastructure funding Investment in Transport Infrastructure”,
gap? Have other positive effects when it is private?
Working Group Paper, International
Transport Forum, Paris.
What have the private investment trends in transport
infrastructure been over the last 20 years? How much ofthat was foreign private investment?

Mistura, F. (2019), “Quantifying Privateand Foreign Investment in Transport
Infrastructure”, Working Group Paper,
International Transport Forum, Paris.

Defining the challenge: How uncertainty in contracts matters
How does uncertainty affect risk pricing? Beyond investors,
do suppliers in PPPs also have issues with risk pricing? How
does its transfer to the private sector affect competition?
What does uncertainty mean for the public vs. private costof financing?

Makovšek, D. and Moszoro, M. (2018),“Risk pricing inefficiency in public–private
partnerships”, Transport Reviews, 38(3),298-321.

Is uncertainty also an issue in long-term
services/operations contracts?

Beck, A. et al. (2019), “Uncertainty inLong-term Service Contracts: Franchising
Rail Transport Operations”, Working
Group Paper, International Transport
Forum, Paris.

What is the competition for large transport infrastructure
projects in the EU Market? Is there a difference between
traditional procurement and PPPs?

Roumboutsos, A.
(forthcoming),”Competition for
Infrastructure Projects: Traditional
Procurement and PPPs in Europe”,
Working Group Paper, International
Transport Forum, Paris.

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Addressing uncertainty for suppliers: the construction phase as example
Adversarial vs. collaborative procurement – is collaborative Eriksson et al. (forthcoming),
contracting the future?
“Collaborative Infrastructure
Procurement in Sweden and theNetherlands”, Working Group Paper,
International Transport Forum, Paris.
What lessons in dealing with risk and uncertainty werelearnt in Danish mega projects from Storebaelt toFemernbaelt?

Vincentsen, L. and K. S. Andersson (2018),“Risk Allocation in Mega-Projects in
Denmark”, Working Group Paper,
International Transport Forum, Paris.

What can governments do in the short run to reduce
inefficient pricing of risk by construction contractors?

Kennedy et al. (2018), “Risk Pricing in
Infrastructure Delivery: Making
Procurement Less Costly”, Working Group
Paper, International Transport Forum,
Paris.

Addressing uncertainty in long-term contracts in the absence of continuous pressure for efficiency
What is the public sector organisational counterfactual on Holm, K.V. and T.H. Nielsen (2018), “The
which private investment should seek to improve?
Danish State Guarantee Model for
Infrastructure Investment”, Working
Group Paper, International Transport
Forum, Paris.
Partial fixes to the Private-Public Partnership approach
How would an organisational structure consisting of PPPs
come close to a network-wide management approach?
What benefits would it yield?

Vassallo, J. (2019), “Public-Private
Partnerships in Transport: Unbundling
Prices from User Charges”, Working Group
Paper, International Transport Forum,
Paris.

Should the public or the private side bear the cost of long- Engel et al., (forthcoming), “Dealing withterm uncertainty? How could we design a PPP contract to the Obsolescence of Transport
avoid hold-up due to incomplete contracts?
Infrastructure in Public-Private
Partnerships”, Working Group Paper,
International Transport Forum, Paris.
Long-term strategic approach
How do the PPP and regulated utility model (RAB)
compare in terms of efficiency incentives?

40

Makovšek, D. and D. Veryard (2016), “TheRegulatory Asset Base and Project Finance
Models”, International Transport Forum
Discussion Papers, No. 2016/01, Paris.

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What basic considerations underlie the choice between a
PPP and RAB approach?

Hasselgren, B. (forthcoming), “Risk
Allocation in Public-Private Partnerships
and the Regulatory Asset Base Model”,
Working Group Paper, International
Transport Forum, Paris.

Which are the preconditions a country would need to take Alchin, S. (forthcoming), “A Corporatised
to establish a RAB model on a motorway network? Is user- Delivery Model for the Australian Road
charging a must?
Network”, Working Group Paper,
International Transport Forum, Paris.
From the investors’ point of view, does a RAB need to be
fully reliant on user-charging?

Francis, R. and D. Elliot (2019),“Infrastructure Funding: Does it Matter
Where the Money Comes From?”,
Working Group Paper, International
Transport Forum, Paris.

Incentive regulation can also yield perverse incentives. Can Smith, A. et al. (2019), “Capex Bias andthe capex bias be managed?
Adverse Incentives in Incentive
Regulation: Issues and Solutions”, Working
Group Paper, International Transport
Forum, Paris.
Does it make sense to pursue hybrid solutions between
PPP and RAB?

Zhivov, N. (2018), “The Thames Tideway
Tunnel: A Hybrid Approach to
Infrastructure Delivery”, Working Group
Paper, International Transport Forum,
Paris.

Uncertainty and private investment mobilisation in transport infrastructure
What lessons can we draw from recent attempts tomobilise private investment in infrastructure in theaftermath of the global financial crisis?

Makovšek, D. (2018), “Mobilising Private
Investment in Infrastructure: Investment
De-Risking and Uncertainty”, Working
Group Paper, International Transport
Forum, Paris.

Synthesis

ITF (2018), Private Investment in Transport
Infrastructure: Dealing with Uncertainty inContracts, Research Report, International
Transport Forum, Paris© OECD/ITF 2019

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CPB

CPB

CPB

Private Investment inTransport Infrastructure
Dealing with Uncertainty
in Contracts

The Role of Private
Investment in Transport
Infrastructure

Risk Pricing in
Infrastructure Delivery:
Making Procurement Less
CostlyThe Role of Private Investment
in Transport Infrastructure

Corporate Partnership
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This paper investigates the casefor mobilising private investment
for infrastructure. Does private
investment lead to greater economic
efficiency? Can it improve project
selection? Will it help close theinfrastructure gap? Does foreign
private investment boost theeconomy? The paper is part of aseries of 19 papers and a synthesis
report produced by the International
Transport Forum’s Working Groupon Private Investment in Transport
Infrastructure.

CPB

CPB

Dealing with the
Obsolescence of Transport
Infrastructure in PublicPrivate Partnerships

Risk Allocation in
Mega-Projects in Denmark

Risk allocation in PublicPrivate Partnerships andthe Regulatory Asset Base
Model

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12

CPB

CPB

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The Thames Tideway
Tunnel: A Hybrid Approach
to Infrastructure Delivery

The Danish State Guarantee
Model for Infrastructure
Investment

Infrastructure Funding:
Does it Matter Where theMoney Comes From?

Corporate Partnership
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14

18

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Public-Private Partnerships
in Transport: Unbundling
Prices from User Charges

A Corporatised Delivery
Model for the AustralianRoad Network

Collaborative Infrastructure
Procurement in Sweden and
the Netherlands

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20

24

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CPB

CPB

Competition for
Infrastructure Projects:
Traditional Procurement
and PPPs in Europe

Capex Bias and Adverse
Incentives in Incentive
Regulation: Issues andSolutions

Uncertainty in Long-term
Service Contracts:
Franchising Rail Transport
Operations

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26

30

CPB

CPB

CPB

Quantifying Private andForeign Investment inTransport Infrastructure

What is Private Investment
in Transport Infrastructureand Why is it Difficult?

Mobilising Private
Investment in Infrastructure:
Investment De-Risking
and Uncertainty

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International Transport Forum
2 rue André Pascal
F-75775 Paris Cedex 16+33 (0)1 73 31 25 00
contact@itf-oecd.org
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Publlished: 09/2019 | Photo credit: Aarón Borrás

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