CONTEXT OF PRIVATE PUBLIC PARTNERSHIPS FOR HIGHWAYS

Transcription

CONTEXT OF PRIVATE PUBLIC PARTNERSHIPS FOR HIGHWAYS
FINAL REPORT
PUBLIC-PRIVATE PARTNERSHIPS AND THEIR ROLE
IN A POSSIBLE NATIONAL HIGHWAY PROGRAM
Prepared by
Federal-Provincial-Territorial Working Group
on Public-Private Partnerships
For the Council of Deputy Ministers
Responsible for Transportation and Highway Safety
March 1999
TABLE OF CONTENTS
CONTENTS
PAGE
Background............................................................................................ 2
Executive Summary ............................................................................... 5
Section 1 Introduction............................................................................................ 8
Section 2 Summary of Previous Reports .............................................................. 9
Section 3 The Role and Impacts of PPP ............................................................. 34
Section 4 PPP Promotion and Facilitation .......................................................... 42
Section 5 PPP and Instruments of Federal-Provincial-Territorial
Cooperation.......................................................................................... 52
Section 6 Tolls and User pay Issues ................................................................... 58
Section 7 Summary of Recommendations .......................................................... 77
Appendix A.......................................................................................... 79
BACKGROUND
At the March 1997 meeting of the Council of Deputy Ministers Responsible for Transportation
and Highway Safety (Council of Deputy Ministers) members agreed with the need: to demystify
the concept of public-private-partnerships (PPP); to present an exhaustive practical view of their
pros and cons, the possible conditions of success for their application in Canada; and their
suitability for a possible National Highway Program.
A federal-provincial-territorial Working Group was tasked in June 1997 to address the merits and
limitations of the PPP model. The program of the working group included work on:
n The context of public-private partnerships: a description of the context in which PPP are
being discussed; their characteristics and various forms; the nature of assumed policy
constraints that appear to make PPP attractive or unattractive relative to conventional
procurement; and the identification of the claimed or intended benefits of PPP, as well as the
criticisms and limitations.
n The experience, structure, financing, applicability and comparative assessment of PPP
for highways: with the assistance of a consultant, the summary of Canadian and foreign PPP
experiences with highway projects; the preparation of a practical guide to assist senior public
officials in determining whether and under what conditions PPP may be appropriate for
highway procurement and how they could be best structured, financed and applied to meet
various objectives; and the comparison and quantitative assessment of PPP options relative to
conventional procurement for three highway projects representative of the variety of different
circumstances faced in Canada.
n The applicability of PPP and its role in a National Highway Program: the advice of the
Working Group to the Council of Deputy Ministers on the potential scope and impacts of
application of PPP for highways in Canada, bearing in mind low-volume roads, projects with
low benefit-cost ratios, existing versus new highways and public perception; and, specifically,
in the context of a possible National Highway Program, the possible federal and provincial
roles in supporting or promoting PPPs.
The opinions expressed in this document do not necessarily reflect the official policy of the
individual federal, provincial or territorial governments that were represented.
PAGE 2
MEMBERS OF THE WORKING GROUP
Transport Canada:
David Stambrook
Ghislain Blanchard
Chair
Newfoundland Department of Works, Services and Transportation:
Thomas Beckett
Prince Edward Island Department of Transportation and Public Works:
Joe Murphy
Nova Scotia Department of Transportation and Public Works:
Don Stonehouse
New Brunswick Department of Transportation:
William Smith
David Johnstone
Darrell Manuel
Ministère des Transports du Québec:
Pierre Toupin
Ontario Ministry of Transportation:
Ravi Girdhar
Julius Gorys
Kevin Jones
Murray McLeod
Manitoba Department of Highways and Transportation:
Don Norquay
Amar Chadha
Joan Sunderland
PAGE 3
MEMBERS OF THE WORKING GROUP (CONTD)
Saskatchewan Department of Highways and Transportation:
Gordon Braun
Alberta Department of Transportation and Utilities:
Rod Thompson
Vince Wu
British Columbia Transportation Financing Authority:
Robert Miller
Alexis Fundas
Northwest Territories Department of Transportation:
Masood Hassan
Russell Neudorf
Yukon Department of Community and Transportation Services:
Wally Hidinger
Transportation Association of Canada:
Louise Pelletier
ex officio
Consultants to the Working Group:
SG (Societé Générale Canada):
Matthew Vickerstaff
Liam Rafferty
Darryl Murphy
Vicki Dimick
Abzal Ayubeally
PAGE 4
EXECUTIVE SUMMARY
The interest in public-private-partnership (PPP) arrangements is growing, notably due to the
growth in the demand for infrastructure, limited public funds to meet current and future needs,
and acceptance of a greater role for the private sector in the provision of infrastructure.
PPP arrangements display three essential characteristics:
1) the public sector transfers a significant level of responsibility and risk to the private sector
based on the principle that risk should be allocated to the party best able to manage it;
2) contractual arrangements are built around performance-based outcomes, rather than work
specifications; and
3) a new type of relationship is supported by a long-term contractual arrangement.
In addition, PPP might involve: the financing of public infrastructure development off-the-book
of governments; and real tolls or other user fees.
The PPP projects reviewed by the Working Group generally succeeded in meeting or exceeding
project objectives, where success is defined as securing private finance for the timely and on
budget completion of the project according to performance requirements.
A comparative assessment framework was developed by the Working Group which:
·
·
·
accounts for the impact of public sector capital constraints on the efficient programming of
the required investments;
separates the choice of procurement decision from that of applying tolls on a highway; and
focuses on value-for-money of PPP procurement, relative to conventional procurement, on
the basis of both the financial impact on the public accounts, and the net socio-economic
benefit expected from the project.
The assessment of the various PPP procurement approaches (Design/Build (DB);
Design/Build/Operate (DBO) and Design/Build/Finance/Operate (DBFO)) involves weighing
possible efficiency savings against: increased project-based private financing relative to
sovereign government debt financing, and higher costs of negotiating, managing and monitoring
a PPP procurement, relative to conventional procurement.
This framework was applied to three case studies: the Montreal urban by-pass project in Quebec
(estimated cost of $632 M on a life-cycle cost basis); a twinning project on the Saskatchewan
Trans-Canada Highway ($52 M); and the South Campbell Highway improvement project in the
Yukon ($49 M). For these three case studies, the Working Group accepted that PPP procurement
would likely result in efficiency gains of 10 percent relative to conventional procurement.
PAGE 5
Efficiency gains are most likely to be realized in PPP procurement for large- and medium-sized
projects which are complex and/or involve a broad range of risks that the private sector can better
manage. These efficiency gains may arise as a result of:
· Competition which could attract intense competition between private sector companies;
· Procurement Process a single private sector entity can demand subcontractors efficiencies;
· Economies of Scale allow reduced negotiated unit prices for raw materials and increased
productivity from intensive use of assets such as equipment and skilled labour;
· Time to Completion greater flexibility in the ability to reschedule activities within the
project timetable;
· Value Engineering increased scope of design to achieve life-cycle cost reductions; and
· Innovative Construction Techniques new, innovative construction techniques to save time
and/or money on projects.
Based on the results for the three case studies, the potential scope of application of PPP
procurement to the National Highway System was assessed. Key observations are:
·
·
·
·
·
efficiency gains from PPP procurement are expected to be most significant for projects that
are large, complex and/or involve risks that the private sector can better manage;
owing to the relatively low traffic density found on most of the National Highway System,
and the toll rates that are likely to be considered reasonable by the general public, the
application of PPP based primarily on real tolls is currently limited to large scale projects on
relatively busy, urban segments of the highway network;
PPP, DBO or DB procurement would appear to offer the greatest potential for broad-based
application across Canada, including new highway construction and significant refurbishment
or upgrading of highway segments ranging in value from ten to twenty million dollars in
scale, up to hundreds of millions of dollars;
PPP-DBFO procurement is expected to be most appropriate for much needed highway
projects that cannot obtain, over a reasonable time frame, the required financial resources
from the public sector under conventional procurement; and
conventional procurement remains an appropriate method in situations where the life-cycle
project scale is sufficiently small to make the PPP procurement process costs unwarranted,
and where PPP procurement is not expected, based on the comparative assessment
methodology outlined in this report, to produce value-for-money benefits, to overcome a
capital constraint, or to allow off-the-book financing of the project debt.1
1
This is not automatic as it requires a sufficient level of risk transfer through contingent revenues to the private
sector. The public accounting of the transaction will reflect the substance of the transaction.
PAGE 6
A PPP procurement should result in better value-for-money (either in terms of life-cycle costs to
government or net benefits to society) than if delivered through conventional procurement.
Public authorities should account for the project business case, the presence of public sector
financing constraints, the nature of the project itself, any public policy on user fees, and the
possibility and appropriateness of applying real tolls for the scheme under consideration.PPP
procurement is not a panacea and might not offer significant advantages over conventional
procurement for small-scale highway resurfacing projects or small-scale rehabilitation projects.
PPP procurement represents a significant departure from traditional practice, and is a relatively
new paradigm. The institutionalization of the PPP procurement process through the adoption of
recommended practice and usage, well enunciated policies and rules, the development of
standard PPP model contracting structures, instruments, clauses and definitions, could lower the
costs and increase the benefits from PPP procurement. Other measures to facilitate the formation
of PPP include an education and awareness campaign, as well as promoting networking
opportunities to allow all stakeholders to move faster up the steep learning curve, and the
dissemination of information on PPP procurement approaches and experiences.
One possible instrument of federal-provincial-territorial cooperation in support of PPP
procurement remains the traditional form of cost-shared highway agreements, with suitable
amendments to take into consideration the special nature of PPP procurement. Specifically, one
approach could involve the determination of cost-sharing based on the discounted net present
value of the provincial-territorial net disbursements over the expected lifetime of the highway
facility to be delivered under the PPP procurement and/or toll project. New instruments of
federal-provincial-territorial cooperation should be developed and considered including
infrastructure banks, joint purpose vehicle and the like to provide a greater range of support
mechanisms for the application of PPP procurement under a National Highway Program, and to
engage both the federal and provincial-territorial governments in the sharing of risks.
In the presence of a variety of views among jurisdictions as to a policy on tolls,2 the Working
Group recommends that further work be undertaken to develop policy perspectives on this issue,
including whether roads should be considered fully as a public good, whether financing should
be fully based on general tax revenues, and the role of user pay as it relates to highways.
2
Certain jurisdictions oppose the application of tolls on the National Highway System namely Newfoundland,
Prince Edward Island, and Manitoba.
PAGE 7
SECTION 1 INTRODUCTION
This report synthesizes the work of the
federal-provincial-territorial Working Group
on public-private partnerships for highways,
as directed by the Council of Deputy
Ministers Responsible for Transportation
and Highway Safety. It presents major
findings and makes recommendations to the
Council with respect to follow-up work and
policy analysis and options.
Section 2 presents a summary of the major
findings and results from each of the four
reports previously produced by the Working
Group. These were: the context paper, as
drafted by the Working Group; the
experience, structure, financing,
applicability and comparative assessment of
PPP for highways, as documented by the
consultant to the Working Group, including
objective 1 review of Canadian and
foreign experiences; objective 2 how to
and why for primer; and objective 3
comparative assessment.
Section 3 identifies the conditions under
which PPP procurement is expected to offer
significant benefits over conventional
procurement, the nature, conditions and
potential scale of PPP application, and the
impacts from such application. It also
summarizes circumstances where PPP
procurement does not fit into the context of
the National Highway System. The section
also discusses the role that PPP might play
in the context of constrained public capital
budgets.
SECTION 1
Section 4 examines and evaluates measures
that governments could consider to facilitate
and promote the implementation of PPP for
highways in Canada.
Section 5 examines how PPP procurement
can be supported under instruments of
federal-provincial-territorial cooperation,
and whether there is a need to develop
policies, modify clauses in standard
agreements, or develop new instruments of
cooperation to facilitate PPP procurement
and to address issues with respect to the
application of tolls.
Section 6 examines the issues of tolls and
user pay. It recognizes that PPP and tolls are
two distinct issues, but that PPP may require
the application of tolls. It addresses,
specifically, the general guiding principles
with respect to the applicability of tolls, and
in particular with respect to federalprovincial-territorial highway agreements
and their use to support PPP procurement.
Other issues include the rationale to toll or
not to toll highways, including public
acceptance of alternative user pay regimes.
Finally, Section 7 contains a summary of the
recommendations of the Working Group.
PAGE 8
A PPP displays three essential
characteristics:
SECTION 2 SUMMARY OF
PREVIOUS REPORTS
·
This section summarizes the results from the
previous four reports prepared by or for the
Working Group, namely:
the public sector transferring a
significant level of responsibility and
risk to the private sector;
·
The context of PPP for highways in
Canada, as drafted by the Working
Group; and;
contractual arrangements built around
performance-based outcomes, rather than
impact or work activities; and
·
a new type of relationship between the
private and public sector, supported by a
long-term contractual arrangement.
·
·
The experience, structure, financing,
applicability and comparative
assessment of PPP for highways, as
documented the consultant under
contract to the Working Group:
·
objective 1 review of Canadian
and foreign experiences;
·
objective 2 how to and why for
primer
·
objective 3 comparative
assessment.
2.1 Context
Worldwide, the interest in PPP arrangements
is growing, notably due to the growth in the
demand for infrastructure, limited public
funds to meet current and future needs as a
result of deficit reduction efforts, resistance
to further tax increases and competing
spending priorities, as well as the increased
recognition and acceptance of a greater role
for the private sector in the provision of
infrastructure traditionally delivered by the
public sector.
SECTION 2
In addition, a PPP might involve:
·
the financing of public infrastructure
development off-the-book of
governments, which might include new
sources of project revenues to secure
project financing; and
·
the imposition of real tolls or other user
fees to finance the project.
A PPP can take many forms depending on
the extent of risk transfer to the private
sector of responsibilities and risks that were
traditionally borne by the public sector.
Risks generally include public approvals,
regulatory and legislative risks; design risks;
construction risks; demand risks; force
majeure risks; project financing risks;
operating and maintenance risks; third-party
liability risks; economic risks;
environmental risks; and political risks.
PAGE 9
In part, the interest in PPP is dictated by the
limitations of the conventional delivery
method and in particular the various policies
of government that can create an
environment that might not always be
conducive to the most efficient provision of
highway infrastructure.
These include the relatively uncommon use
of capital accounting and budgeting that
mirrors private sector practices; the
reluctance to provide multi-year funding
commitments and the requirement for annual
appropriation controls; the absence of
pricing signals to direct public investments;
and constraints in the public sector
environment that might not be conducive to
delivering infrastructure that meets intended
performance for the least cost, such as the
pursuit of multiple public policy objectives.
The possible merits of PPPs might include:
achieving greater value-for-money through
improved management of project risk and
monetarization of risks assumed; private
sector incentives; demand signals;
performance-based outcomes; life-cycle
management; intensive use of resources;
monetary incentives for creativity;
acceleration of infrastructure provision;
more commercial orientation in
infrastructure provision; the potential for
easier public acceptance of new user fees;
stable project capital funding; greater
accountability to users; and greater cost
recovery of transportation infrastructure.
The possible concerns about PPP might
include: reduction in safety standards for the
project; constraints imposed by use of public
funds; the limitations of real tolls including
their impact on trade and traffic; higher
private sector financing costs; higher
SECTION 2
administrative, legal and contract costs;
uncertainties around the achievability of the
PPP concept; the potential for monopoly
pricing and excess private profit; limited
Canadian experience with PPP; undue cost
cutting; the potential impact on small- and
medium-size firms if PPP procurement
becomes widespread; the potential
responsibilities of the public sector and the
pressures on public finance in case of PPP
failure; and risk avoidance behaviour of the
private sector.
2.2 Canadian and foreign experiences
Canadian and foreign PPP experiences for
highway transportation projects have been
reviewed and summarized.3
These PPP transactions are synthesized in
the following summary.
2.2.1 Conditions of procurement
In most instances, PPP requirements were
identified by the public authority.
3
The case studies reviewed were: Nova Scotia
Highway 104; Ontario Highway 407; Quebec
Highway 40; the Confederation Bridge between P.E.I
and New Brunswick; British Columbia maintenance
contracts; Ontario Queen Elizabeth Way; British
Columbia Westview Interchange and Johnson
Mariner Way; Manitoba Charleswood Bridge; United
Kingdom A1 (M) Motorway; Australia M2
Motorway; California SR 91 Express Lanes; Virginia
Dulles Greenway; California San Joaquin
Transportation Corridor; Indonesia Cikampek to
Padalarang Toll Road. The results presented here
reflect the projects as represented in the
documentation reviewed by the consultant.
PAGE 10
Only in a few cases were the public sectors
responding to proposals from the private
sectors, where the project in question was
not part of the future capital program of the
jurisdiction.
The general policy commitment to PPP as a
form of procurement varied significantly:
·
some case studies showed a commitment
to PPP based on a policy determination
that value-for-money would result from
this procurement method (see summary
of UK Private Finance Initiative in
section 2.2.8 below);
·
others reflected the testing of the utility
and effectiveness of PPP, with no policy
preference for PPP being expressed in an
enabling legislation;
·
in some other cases, the PPP resulted
from a response to a private sector
proposal to undertake work with no
overall government policy favouring
PPP;
·
finally, some governments have used a
form of PPP procurement for a specific
transaction, where timing and cost
pressures required their use, with no
abandonment of the conventional
procurement (e.g. public fiscal constraint
which prevented funding of the full cost
of the work, or advancing the completion
of the work in a reasonable time frame,
or a desire to implement user fees).
government agencies to partner with the
private sector, special measures to enhance
the viability of the project, or exemptions
from laws or policies of general application.
In many PPP projects, special government
agencies were created, or existing special
agencies were parties to project agreements.
The functions of the special agencies
uniformly included the monitoring and
enforcement of project agreements, and
often involved the ownership of the project
assets and the collection of the project
revenues, with the associated advantageous
tax consequences of government
undertakings.
Specific examples of measures and
exemptions which aided project completion
included:
·
tax enhancements such as: tax
exemption for the business affairs of the
special corporation or trust owning the
road (e.g. on income, capital, sales,
transactions, realty, education, and
business taxes); public ownership of the
right-of-way, the highway and the
project revenues to reduce tax liabilities;
advance tax rulings confirming taxexempt or tax-deferred structure of
project income distributions from trust;
and statutory tax-exempt status of
private sector borrower resulting in no
tax liability for bond interest income
earned by lenders;
2.2.2 Special measures
The special measures taken to accommodate
PPP in the absence of a general policy or
legislation governing PPP were also
examined, including the creation of special
SECTION 2
PAGE 11
·
·
competitive restrictions such as:
directing traffic to the project with
mandatory routing of truck traffic;
differential speed limits between the toll
highway and the alternate route;
warranties with respect to competing
roads or improved level of service on
alternate route; and mandating or
prohibiting certain types of traffic; and
· all risks insurance protection provided
by the private sector, with the public
sector as a name insured;
other enhancements such as: indemnity
for unpaid tolls; assistance in enforcing
toll collection; guaranteed annual
subsidy payments for the life of the
concession; and non-discriminatory
legislative covenants to preserve the
integrity of the financial structure.
· incorporation of contractor business plans
into PPP contracts;
2.2.3 Performance management
framework
Public controls of private sector
performance in PPP arrangements can take
many forms:
· construction inspection undertaken, and
progress payments authorized by an
Independent Engineer or the public
authority for the project, with reference to
approved design and stated performance
standards;
· performance and completion bonds with
insurers and project lenders exercising
their own supervisory authority and rights
with respect to contractor performance;
· liquidated damages for late completion;
· public sector approval required for
deviations from or variations of design or
standards;
SECTION 2
· penalty points assessed against the
contractor for poor performance, with
accumulated penalty points that can result
in lower project revenues or a declaration
of default;
· third-party audits of contractor
performance; and
· toll rate control where non-governmental
agencies would otherwise exercise
absolute control over rate setting, or
where project economics require
governments to commit to escalation
formulae for the benefit of lenders.
In a PPP the public sector is limited to the
enforcement of contractually determined
standards. Even though, in long term PPP
concessions, performance requirements can
be negotiated in advance to be set with
reference to prevailing public sector service
levels as they evolve over time, the
requirements of the PPP process necessarily
deny the public sector the same flexibility
which exists in conventional procurement to
manage performance on an ongoing basis.
2.2.4 Financing PPP
PPP projects can display a variety of
financial structures, the key distinction being
whether ancillary guarantees are given by
the public sector to provide a level of
security or assurance to project lenders.
PAGE 12
Over and above the granting of subordinated
rights to lenders to assume operation of the
concession, which are normal commercial
requirements, the devices by which
governments provide comfort to project
lenders are varied.
The scope of ancillary guarantees seems to
increase in proportion to the risk of the
viability of the project, and have included,
for example:
· partial government guarantee of project
debt once it reaches prescribed levels;
· waiver of declaration of default against
the private sector from the government
for specific circumstances;
· indemnity from the government to
lenders for abandonment or cancellation
of the project;
· elimination of traffic diversion potential
resulting from tolling through
implementation of shadow toll systems
and restrictions on alternative routes; and
· protection or indemnity from
discriminatory legislative or regulatory
initiatives.
Off-balance-sheet treatment, by the public
sector, of project debt, for which some
comfort has been given by government to
lenders, is unlikely. Unconditional
obligations for the government to make
payments for the benefit and security of
lenders, which substantially protect
outstanding project debt, appear to be a
significant consideration when this
accounting objective is sought by the public
sector.
SECTION 2
In projects for which private financing has
been secured, the debt/equity ratio and the
term of the debt appear directly related to the
perceived viability of the project and the
likelihood of repayment. The term of project
debt will typically be of shorter duration
than the concession period.
2.2.5 Achieving results and value-formoney
The PPP projects reviewed by the consultant
have succeeded in meeting or exceeding
project objectives, where success is defined
as securing private finance for the timely and
on budget completion of the project
according to performance requirements
(from the viewpoint of the procuring
agency).
However, this does not mean that the private
developers did not have problems. Some
projects generated lower than forecast traffic
volumes following commissioning, resulting
in investors not receiving income
distribution or forcing project debt
renegotiation and restructuring.
The Ontario Highway 407 project was
delayed by the need to adapt tolling
technology to meet revised project
requirements. The design/build contractor
completed the project before the completion
date, but a safety audit subsequently
necessitated alteration to safety protections
along the highway. The short time required
to install remedial devices suggests that
these were not a material breach of
performance standards.
PAGE 13
With one exception, a prospective value-formoney comparison against a public sector
comparator was not undertaken. However,
some projects were subject to a retrospective
assessment by respective Auditors General.
The use of a PPP structure was treated in the
four Canadian projects as a departure from
normal procurement policies. Concern was
expressed by various auditors about the
potential for less than optimal negotiated
terms, conditions and prices in lieu of
fixed bids on a uniform set of project
specifications. This being said, their audits
did not assert that the projects materially
deviated from the principle of due regard for
economy and efficiency.
The Nova Scotia Highway 104 and the
Confederation Bridge audits did question the
economy of privately secured finance, given
the higher financing charges when compared
to direct government borrowing. The
Ontario Highway 407 audit expressed the
view that there had not been sufficient risk
transfer to consider the project to be a PPP.
A retrospective evaluation of the UK A1
(M) Motorway, undertaken as part of a
review of seven similar procurements,
concluded that a cumulative 15 percent
reduction in life-cycle costs had been
achieved, compared to the public sector
comparator.
A restrospective evaluation of the Australia
M2 Motorway concluded that it delivered
at least equivalent value-for-money to
a conventionally procured road, but
questioned the utility of urban toll roads as a
public expenditure.
SECTION 2
PPP which involves private sector financing
consistently accelerated the provision of
infrastructure. Furthermore, value
engineering and project costs within the
expected range of government budgeting
were noted features of the Nova Scotia,
Confederation Bridge, United Kingdom,
Australia, Virginia and California
procurements.
2.2.6 Pitfalls
Instances where PPP procurement processes
failed, functioned less effectively or yielded
adverse or unexpected results as enunciated
in project goals, were also considered.
The goals of many projects included
securing private finance and accelerating the
provision of infrastructure. An expected, but
less well enunciated goal, has been securing
off-balance-sheet treatment for privately
financed debt. In some instances, it seems
that this expected goal will not be met.
The PPP procurement process costs can be
considerable. The consultant suggested that
PPP procurement costs, especially in the
absence of uniform policies and processes,
will be considerably higher than under
conventional procurement.
The Australian and American experiences
suggest that tolling is resisted by motorists,
even in relatively congested traffic areas.
Ancillary government guarantees with
respect to toll road failure present a risk of
future financial liability.
PAGE 14
The default limitations imposed in certain
instances as a condition of securing private
financing indicate that governments may be
compelled to limit by contract the long-term
exercise of their sovereign authority, or
provide indemnities which render the
exercise of that sovereignty impractical.
Long-term commercial agreements which
limit the future freedom of private parties
are not exceptional in the private sector. The
implications of such limitations on public
sector agencies, and the public policy
considerations which result, are matters
which at the very least need to be understood
as likely outcomes of PPP procurement.
Exemptions and variations in taxation rules
of general application were evident in
certain procurements. Creating transaction
specific exemptions to general tax liabilities
increase the time and costs required to close
a PPP transaction and presents the risk of
pressure for further exemptions for similarly
situated future projects, and the potential
loss of confidence in the integrity of the tax
system.
The consultant suggested that PPP
procurement which is guided by policies of
general application, which establish
principles and practices for the provision of
public infrastructure by innovative means,
will avoid the pitfalls enumerated above and
lower the costs of closing PPP transactions.
In Australia, it was noted that government
policy promoting private financing of public
infrastructure gave rise to the potential for a
conflict of interest, specifically the
promotion of private finance for public
infrastructure, not for its own merits, but as
a means to reduce public expenditures and
tax liability.
Government procurement is based on
principles of accountability and
transparency. The attractions of privately
financed procurements, and the urgencies
often attending private sector transactions,
may create pressures to expedite project
commissioning without the requisite analysis
and public consultation and debate. This
emphasizes the need to standardize the
approach to establishing PPP, so as to
reduce the time and costs and to maximize
the benefits of a PPP transaction.
2.2.7 Benefits
The consultants identified instances where
PPP procurement processes succeeded or
yielded enhanced results with respect to
enunciated project goals, as distinct from
specific contract requirements.
Privately financed PPP contributed to
accelerated infrastructure provision. Design,
build and operations/maintenance contracts
have reduced costs and fixed government
financial liabilities.
PPP provide a degree of liberalization from
the detailed preliminary design requirements
of conventional procurements in larger
projects, as demonstrated by the
Confederation Bridge.
2.2.8 Private Finance Initiative
SECTION 2
PAGE 15
The United Kingdom (UK) is one of the
most advanced countries in the use of PPP
for infrastructure service provision.
In 1992, the UK instituted a policy known
as the Private Finance Initiative (PFI) of
procuring public infrastructure through
contracts that transferred to the private
sector the responsibility for the design,
construction, financing, operation and
maintenance of assets under long-term
agreements. Risk transfer and an analysis of
the resulting value-for-money were essential
principles of this policy.
The PFI has effected a fundamental change
in government procurement policy, with the
public sector becoming a procurer of
services and a regulator and no longer being
the direct provider of services to the public.
The stated purpose of the PFI was to
better allocate project risk, create better
performance and efficiency incentives for
private sector partners, more closely
integrate operational requirements with
design and construction requirements, and
more clearly define the responsibilities of
public and private sector.
PFI transactions have been characterized by:
The UK established and published an
elaborate policy explaining the rationale of
the PFI and those conditions under which it
was to be applied.
Compliance was enforced by a Treasury
directive that no capital expenditure would
be approved until it could be shown that PFI
options had been rigorously explored and
had proven inappropriate.
The authority to approve projects for PFI
procurement was vested in Ministers.
Consideration of PFI procurement was to be
given to any new capital asset procurement,
the continuation of any existing government
agency which provides services to the public
and in the formulation of annual budgets and
work programs for government departments.
2.3 How to and Why for primer
The how to and why for primer was
prepared to assist senior public officials in
determining whether and how PPPs could:
· be structured relative to conventional
procurement methods;
· be financed and applied to achieve greater
value-for-money;
risk transfer to the party best able to
manage the risk sufficient to avoid the
capitalization of future payments and the
recording of the transaction at the start of
the project in the government accounts;
· better respond to public and user
accountability requirements;
·
achievement of best value-for-money;
and
· be financially viable.
·
assessment of value-for-money against a
conventional procurement alternative.
·
SECTION 2
· meet highway user performance
outcomes and safety standards; and
PAGE 16
2.3.1 Process and procedures
2.3.1.3 Planning and approval
A five-step process was identified for
concluding PPP transaction, as follows:
The public sector should secure the
necessary planning approvals, perform the
necessary planning work, and obtain the
required permissions to ready the project for
the competitive process.
2.3.1.1 Identification
The preliminary identification of a need for
highway investment constitutes the first
stage in the process. Project requirements
are identified at that stage in broad terms so
as to assess the scale of the cost pressure
without detailed consideration of the
procurement method to be chosen. The
recommendation to proceed with a project
should be supported by the production of a
preliminary outline business plan.
2.3.1.2 Option Analysis
The choice of the procurement method
constitutes the second step of the process.
The approach and specific methods for
guiding this choice can be found in section
2.4.1 where it will be further elaborated.
Factors that will determine whether PPP
procurement should be considered include
the public sector financial constraints
whether public sector financial constraints
allow for the efficient programming of the
project under the conventional delivery
method; the size of the scheme, as smaller
schemes may limit the private sector
opportunity to generate efficiencies in the
service delivery; and timing, as a PPP
procurement process might require time for
government to enable the necessary
feasibility analysis and competitive
procurement process while simultaneously
delivering a shorter design/construction
period.
SECTION 2
2.3.1.4 Implementation
A fair, open and transparent competitive
procurement process, with adequate
resources to carry out the task, is the most
reliable method of demonstrating that best
value has been achieved for public money.
A sole source contract, contracts with
requirements for local content and products,
and contract processes which limit
competition should be avoided. Their use
must be balanced against the requirement
to achieve best value-for-money. The
competitive procurement approach would
also minimize the risk of legal challenge
from unsuccessful proponents.
Conventional procurement lends itself to a
tender based procurement approach. The
service being procured can be described in
detail; the successful proponent is the bidder
with the lowest price who meets the public
sectors detailed specifications; and the
valuation is relatively straightforward.
By contrast, PPP procurement lends itself to
a request for proposal (RFP) approach. The
public sectors needs can be defined in
terms of outcomes rather than inputs; the
successful proponent is the consortium that
demonstrates that they can meet the
performance requirements for the least lifecycle costs; and the evaluation of responses
to proposal calls is more complex.
PAGE 17
The key steps of the proposed PPP
competitive process are represented
schematically in figure 2.1 below.
2.3.1.5 Post transaction
When the transaction is completed, a PPP
will typically require ongoing monitoring
and evaluation to ensure that performance
standards are met and maintained.
Figure 2.1
PPP process
Identify
Identify
Requirement
Requirement
Prepare the
Prepare the
Market
Market
Request for
Request for
Proposals
Proposals
Specification
Specification
Contract
ContractStrategy
Strategy
Evaluation
EvaluationCriteria
Criteria
Research
Research
Communication
Communication
Prequalification
Prequalification
Request
Requestfor
forProposal
Proposal
Form
FormofofProposal
Proposal
Terms
Termsand
andConditions
Conditions
Proposal
Evaluation
Tender Evaluation
Evaluate
EvaluateProposals
Tenders
Best
Bestand
andFinal
FinalOffers
Offers
Recommendation
Recommendation
Award and
Award and
Debriefing
Debriefing
Negotiation
Negotiation
Award
Award
Debrief
Debrief
It is assumed that a PPP solution will
proceed only if it offers the prospect of
greater value-for-money compared to
conventional procurement. The value-formoney assessment is made at two decision
points: before requesting proposals and
before finalizing the contract. This is further
elaborated in section 2.4.
SECTION 2
The PPP process and procedures can be
constantly improved based on the experience
gained the successes and lessons learned
from completed PPP transaction. Soliciting
the views of the bidders on the process may
enhance the analysis.
2.3.2 Structural issues
A PPP is based on a genuine risk transfer,
through contractual agreement, from the
public sector to the private sector, based on
the principle that risk should be allocated to
the party best able to manage it.
When it is not clear whether value-formoney would be achieved from a
contemplated risk allocation scheme, one
approach is to ask private bidders to price a
risk according to whether it is transferred,
shared or retained. This can then be assessed
by the public sector in terms of its value of
the risk to be transferred.
In a PPP which involves the full transfer of
design, build, finance and operate activities
(DBFO) the private sector could assume
virtually all risks, except the following for
which the private sector might look for
contractual remedies, and which the public
sector might choose to retain or share:
Political The risk of commercial changes
resulting from a change in government or
government policy, including the nonapproval or non-implementation of a PPP
project.
PAGE 18
Planning The planning risks, which entail
the production of a preliminary design,
environmental assessment, preliminary
environmental approvals and land
acquisition.
The private sector could, however, assume
the final environmental approval risks for
its proposed detailed design, subject to
the public sector obtaining preliminary
environmental approvals to the worse case
scenario in terms of elevation of water
crossings, habitat replacement, etc.
Design Design changes requested by
government due to a change in the
specification of the highway services
required, or by a third party or
environmental assessment requirement not
identified during the preliminary design
phase.
Construction First Nations
archaeological rights and land claims;
securing public access to the construction
site; monitoring private sector performance;
latent defect risks in non-greenfield projects
and protester action; utility diversions
that are extensive and complex; and
archaeological finds and protected species
risk might be retained by the public sector.
The private sector might be provided
incentives through a sharing mechanism to
report early any findings of this kind.
Maintenance and operation None
Usage Competing road or a new public
transportation system along the highway
corridor.
Legal and Regulatory Risk Force
majeure (i.e. uninsurable events outside the
SECTION 2
control of the private contractor preventing
the contractor from meeting its contractual
commitments); changes in legislation that
discriminate specifically against the
contractor or project, or against DBFO
contracts or privately operated road as a
class; and contract variations requested by
the public sector.
Financial Risk While this risk can be
fully borne by the private sector, it would
be subject to intense discussions and
negotiations with regard to the contingent
financial support (e.g. performance
guarantees or warranties), insurance
protection and minimum equity participation
from the private sector that might be
requested by the public sector, as well as
financial enhancements (e.g. the extent to
which the usage is transferred to private
sector through the payment mechanism) that
may be requested by the private sector.
A PPP procurement does not relieve
government from its ultimate accountability
for the strategic management of the overall
highway system. Furthermore, while a PPP
contract legally binds the public and private
sectors, it does not displace or take priority
over the legal obligations existing between
governments and public road users.
Specifically, in both common law and the
civil law jurisdictions, courts can require
governments to compensate road users
suffering damage because of inadequate
performance of maintenance.
Governments are also responsible for
ensuring that the design and construction of
a road will create safe travelling conditions
for users.
PAGE 19
Some governments have created statutory
obligations to maintain roads in a reasonable
state of repair. Even in the absence of such a
statutory duty, government failure to respond
to knowledge of a particular hazard may
result in liability.
Finally, governments are responsible for
ensuring that road construction and
maintenance are completed without creating
hazards for road users, or people in
proximity to the road work.
Compared to conventional procurement, a
PPP does not offer governments any legal
advantages or disadvantages in the area of
legal liability for roads, as governments
have legal responsibility for the actions of
independent contractors performing services
under contract. In any case, the financial
aspects of this risk can be mitigated through
court actions against contractors or
contractual remedies (i.e. indemnification
guarantees, insurance protections,
government rights of monitoring/supervision
and sanctions.) Furthermore, PPP
procurement does not relieve governments
from being accountable to citizens for the
broad range of issues pertaining to public
roads, including the acceptability of tolls or
other charges, the quality of maintenance,
the safety of the road, environmental and
other regulatory compliance, speed limits
and policing.
While there are contractual provisions that
can be negotiated to address each of these
issues, the contractual nature of the
arrangement might not leave the government
with as much flexibility as under a
Governments undertaking a PPP road
procurement will produce both mandatory
SECTION 2
and indicative standards for use by private
bidders. Mandatory standards detail
the required safety and performance
requirements to be met by any proposal
including the output performance
requirements of the Transportation
Association of Canada (TAC) design
specifications. Indicative standards are the
existing design standards and are intended to
illustrate an accepted approach to meeting
core requirements, and also serve as a
minimum quality benchmark.
The incentive for a contractor to perform
will depend on the basis of the payment
mechanism. The key is to determine a
payment mechanism which rewards or
penalizes the contractor, according to
whether it is providing the service required
by the public sector or not (e.g. the
opportunity to travel comfortably and safely
between two locations in the minimum
possible time).
In the UK, this was achieved through a
shadow toll payment mechanism which
rewards the operator according to road use,
and which incentives them through payment
deductions for lane closures and payments
for the beneficiary effects of approved safety
improvements.
By making government payments over the
life of a project, and related to usage levels,
instead of upfront and unrelated to use, is
more likely to achieve a bona fide risk
reward relationship.
Large upfront public sector contributions
(relative to future payments) makes the
payment less contingent on usage and more
likely that the transaction will be accounted
as on-credit and on-book of government
accounts.
PAGE 20
Under PPP procurement, the main
responsibility of government is to monitor
the performance of the contractor through
the project life cycle.
In doing so, the public sector must remain as
hands-off as possible and only monitors
the performance outputs and not the inputs
of the project.
The consultant examined whether special or
legislated tax concessions were desirable for
PPP and concluded that special or general
tax concessions or exemptions would not be
as effective instruments as direct
contributions to incentives the contractor.
For example, special or general tax
concessions or exemptions would be:
difficult to implement as it would require the
co-operation of several levels of
government; would lead to unnecessary
distortions in the tax system; would be
difficult to value accurately as to the cost to
government because of the uncertain value
of future tax obligations; and could raise
questions about the integrity of the entire tax
system.
This being said, the revenue foregone from
any special tax exemptions or concessions
that might be given should be considered in
the overall net cost to government when
determining the value-for-money, as should
any additional tax revenues that might be
created under a PPP proposal relative to
SECTION 2
Tax exempt status can be conferred to a PPP
project without legislation. For example, the
government could establish a procuring
entity with not-for-profit or crown
corporation status. The tax result is
something akin to conventional
procurement: the contractors and
subcontractors to the entity would pay taxes
but the entity would be treated for tax
purposes as part of the government.
However, there are other important policy
considerations besides tax consequences that
should be considered in structuring a PPP
(e.g. value-for-money, optimal risk transfer,
impact on public finances).
The consultant also examined the three basic
models used which are likely to be
considered from use with a road project,
namely (these are illustrated graphically in
Appendix A to this report):
1) A special purpose vehicle owned by the
private sector sponsors and fully taxable.
The finances available to a SPV are wide
ranging, the selection of which would be
based on the needs and strengths of each
individual project. The SPV could take
many forms, including a joint venture,
limited partnership, operating
company/asset-holding company,
a plain vanilla corporation. As with the
financing tools, the tax impact is relatively
straightforward and not materially affected
by use in a PPP context.
PAGE 21
2) A not-for-profit, controlled by users,
the government and/or the private sector
sponsors, which is non-taxable for corporate
and capital taxes but liable for realty taxes in
certain instances. Care must be taken to
ensure that the structure meets the
requirements of Revenue Canada.
The structure itself does not preclude the use
of certain financing tools. However, the
degree of revenue risk and shareholder
controls may be of concern to potential
financiers.
3) A government controlled entity, owned
by government, and which is non-taxable for
corporate and capital taxes and which would
likely be created by legislation to set out its
responsibilities and control structure.
The choice of a particular structure will
depend on the tax treatment sought, the
degree of public sector control, and whether
the project debt is to be issued on nonrecourse, off the government book basis.
The relationship with the prime and
operation and maintenance contractors are
not materially different across these three
basic models.
2.3.3 Financing issues
The rates of return for PPP-DBFO projects
can vary greatly. PPP highway project
financing is typically constructed out of a
series of layers of capital. Each layer of
capital bears different levels of risk and
therefore requires a different expected
return, depending on the overall risk profile
of the project. The risk profile of the project
includes the detailed technical and
operational project specific risks, as well as
the overall sovereign, currency (for projects
SECTION 2
involving foreign investors) and
political/legal risks. The overall liquidity of
the financial market will also determine the
opportunities available elsewhere and the
required rates of return for the different
layers of capital.
The security available for financing highway
projects, where most of the assets are
generally non-moveable, is based on the
right to access the cash flow generated by
the assets (e.g. real tolls, performance based
shadow tolls, or availability payments).
A key factor affecting the cost of private
financing is the extent to which revenue risk
is transferred to the private sector through
the method of payment. Revenues from
availability type payments are less risky to
the private sector (and more risky to the
government) than shadow toll payments,
which in turn are less risky than real toll
revenues.
There are three main sources of private
capital for PPP projects:
Long Term Debt This consists of both
senior debt (i.e. limited recourse loans
from commercial banks or multilateral
institutions) and junior debt (i.e. ranking
behind senior debt holders for repayment
and access to available security, and
attracting therefore a higher rate of interest).
These loans would normally constitute the
majority of the project financing and are the
cheapest form of finance available for major
projects. They are the first to be repaid and
have the highest priority rights to access
project revenues and to take over assets of
the borrower as security should the project
run into difficulties.
PAGE 22
The loan maturity will commonly be less
than the concession period to mitigate
against unforeseen circumstances which may
necessitate a requirement to refinance the
debt and extend the maturity.
The various financial instruments will be
brought together to match the risk profile of
the PPP project. For example, in a full
DBFO project, the construction and traffic
risks will likely be borne by equity investors.
For projects that are considered well
structured and with low perceived risks,
maturities of between 15-20 years are
currently available.
The level of equity needed to secure private
sector debt will depend on lenders
assessment of the project risks. Once the
costs and traffic base of the project have
been established at an acceptable level, the
private developer will normally refinance
using cheaper long-term financing.
Capital Markets Bond Financing In
theory, infrastructure financing should be
very attractive to institutional investors who
are looking to match long-term assets with
long-term liabilities. However, the market
has not yet matured, given the reluctance on
the part of institutional investors to accept
project completion risk. This being said, it is
possible that the project could be initially
financed through limited recourse
commercial bank debt, and then, subject to
successful project completion, refinanced
under more advantageous terms and
conditions once a successful operating track
record had been established.
Equity This portion is generally provided
by the project sponsors (or third-party
investors such as infrastructure funds) and
is the highest risk portion of the funding
package. It carries no fixed return and
dividends are only paid in any year after all
debt service payments have been made and
the required levels of debt and maintenance
reserve accounts are provided for.
2.3.4 Public accounting issues
The traditional public accounting of public
sector payments for assets acquired under
conventional or design/build procurement
is simple. The public expenditures are
accounted for when the cash payments are
made, or when the work has been materially
delivered. More complex, however, is the
determination of the public accounting of
public sector liabilities and payments in the
case of a PPP project involving private
financing (e.g. DBFO).
This determination will reflect the substance
of the transaction and is likely to be
influenced by the ownership structure of the
project delivering entity, and whether the
project debt is issued on a non-recourse
basis, as well as on the degree of risk
transfer.
The required debt/equity ratio to satisfy debt
holders is highly variable and will be largely
driven by the final allocation of risks
between the public and private sectors. The
realized return on equity might not appear
until quite late in the project lifetime.
SECTION 2
PAGE 23
The scope of the financial reporting entity,
and the degree to which financial statements
are consolidated, varies widely between
government jurisdictions. This being said,
there is considerable debate surrounding the
consolidation of liabilities of a government
owned and controlled corporation when
liabilities of the corporation are assumed on
a non-recourse, project-specific basis to the
jurisdiction.
For example, the Province of Nova Scotia
did not consolidate the debt of the Highway
104 Corporation, as it was issued on a nonrecourse basis to the province.
On the other hand, the provincial Auditor
General argued for consolidation on the debt
on the books of the province on the grounds
that the province owned and controlled the
corporation (despite the fact that they
recognized that the debt was issued on a
non-recourse basis).
If the payments of the public sector are made
to a private sector entity with little
uncertainty and risk transfer, then the
transaction could be capitalized and charged
in the first year of the contract, as the
payments are essentially borrowing from the
private sector (i.e. a capital lease).
In the UK, the non-capitalization of the
public sector payments to the private sector
in DBFO transactions was based on a
determination of a potential for significant
variability in the expected return to the
equity holders, and some risk of the equity
return falling below the lenders return.
SECTION 2
The policy requirement for an off-balance
sheet solution has driven the specific manner
of the procurement contracts of a number of
Canadian Highway Projects (e.g. Highway
104, Fredericton-Moncton Highway,
Confederation Bridge). However, auditors
have been cautious in their view of the
appropriate accounting treatment of the
realized transaction.
2.3.5 Revenue sources
Shadow tolls, availability payments or
contributions from governments, and real
tolls from users are the principal revenue
sources to secure private financing in DBFO
type PPP projects.
The role of other revenue sources such as
advertising, concessions (e.g. rest areas and
service stations), right-of-way/easements for
utilities, and value capture from nearby
properties, will vary markedly depending
upon the location and importance to local
development of the new infrastructure. In
certain instances this could be significant
(e.g. 48.5 percent of the cost of the ChicagoKansas City toll road was covered by
developer fees).
Shadow tolls are payments to the private
sector operator of a highway by the public
sector which are linked to actual traffic
volumes. Shadow toll payments lead to
project demand and traffic risk being shared
between the public and private sectors. The
public sector pays for the use of the asset,
not for its provision.
PAGE 24
Shadow tolls are completely transparent to
users, avoid the traffic diversion problems
that may be experienced with real tolls, and
reflect a fundamental shift in the highway
management philosophy.
Governments pay for the use of a service,
rather than for the provision of an asset.
Therefore, the payments to the private sector
are at risk, and may be higher or lower than
expected depending on whether the project
attracts and services the expected level of
traffic (and indirectly accrue the expected
level of benefits).
Hence, usage and benefit risks become more
readily apparent. This risk is shared by
government and the private sector through
the use of the banding levels and toll rates.
For the UK DBFO roads, most bidders opted
for four shadow toll bands with the lowest
band representing a cautious view of traffic
and the tolls within that band set at a level
that would cover senior debt service
requirements (but would not provide a return
on equity).
In addition, the private sector does not get
any additional revenue when the traffic
reaches the upper traffic band (where the
shadow toll rate is zero), in effect capping
the private sector rate of return on the DBFO
project.
For shadow tolls, an ongoing government
liability would be included in the annual
government budget. This can result in an
issue of future affordability in terms of the
required annual payment, if a number of
such highway projects are undertaken.
SECTION 2
Shadow tolls might be less appropriate for a
highway built to serve relatively low traffic
volumes at a relatively high cost, as a small
variation of the traffic base could lead to a
relatively high variability of shadow toll
payments, involving substantial payment
risks to government.
Another option for government to provide
support to projects is through upfront capital
contributions. For example, in a situation
where the expected real toll revenues do not
cover all the project costs, project bid
selection could be based on a competition
for the lowest upfront capital payment.
Projects that are fully dependent on upfront
capital payment from government might
qualify as a DBO but not as DBFO project.
Rental based payments have all the
characteristics of a capital lease which
equates to an alternative, likely more
expensive, method of financing for
government. However, the payments might
be tied to performance-based criteria to
incentives the project company to deliver a
high quality and safe service through such
attributes as lane availability, safety
performance or environmental performance.
Rental based payments differ from shadow
tolls as they are not related to traffic usage.
2.3.6 Tolling
Real tolls are another potential source of
revenues for projects. Their viability largely
depends on the degree of public support for
the project, and various perceptions of
fairness in how the tolls are applied and set.
PAGE 25
Public acceptance of road pricing differs
between nations and regions. Factors
affecting acceptance include: the stated
purpose of road pricing, the use of the
revenues (e.g. targeting revenue to specific
rather than general transportation purposes
gains more support), the time period the toll
regime has been successfully in place, the
technique used to collect tolls (e.g. whether
toll collection requires stopping of vehicles)
and, the degree to which a free alternative
is provided.
The results of a Canadian survey suggests
that general taxation, or specific taxes such
as fuel taxes and licence fees, are more
acceptable approaches for the funding of
highways compared to annual fees or special
user charges such as tolls.
One of the greatest fears of implementing
real tolls is that significant portions of traffic
will be diverted to non-tolled facilities. The
evidence suggests that the traffic impact of
real tolls could vary widely depending on the
alternatives available, the purpose and time
of travel, vehicle user type and income level,
vehicle class, commodity type, etc.
Key principles associated with the setting of
toll rates are the distance travelled, the
vehicle classification, the toll rate factor
(e.g. whether it involves factors such as
congestion pricing) and exceptions and
exemptions (e.g. for high occupancy
vehicles, public buses, government/
emergency vehicles).
SECTION 2
Key design decisions with respect to tolling
systems are whether they should be closed
(i.e. not allow a vehicle to enter or exit the
system without being detected) or open (i.e.
to allow for vehicles doing a short trip to
enter or exit the system without being
detected) and the techniques for collecting
tolls (e.g. manual, automatic, prepaid
electronic, postpaid electronic or a
combination thereof).
2.4 Comparative assessment
A comparative assessment framework to
assess different highway procurement
options was developed by the consultant,
working closely with the working group, and
applied to three case studies.
2.4.1 Comparative assessment framework
The comparative assessment framework
(illustrated in figure 2.5) takes as its starting
point that a socio-economic case for the
highway project can be made, and that the
choice is how to procure the services of the
highway project that would deliver best
value-for-money. The working group noted
that the scope and timing of a highway
project should be economically justifiable
irrespective of the choice of the procurement
method.
PAGE 26
be funded from public funds available in the
year in which they are needed. Accordingly,
such projects may have to be staged over
time which would have the effect of
delaying the socio-economic benefits that
would have resulted from the project being
brought on stream sooner, as well as
foregoing the economies of scale from a
large integrated project.
Figure 2.5
HighwayProcurement DecisionTree
Project Not
Undertaken
Now
Project EconomicallyAttractive
No
Yes
Project DeliveryConstrained
byPublicFunding
Yes
No
Options with
different benefits
stream
TolledHighway
-consider rangeof issues
Call PPPBid
Conventional
Procurement/
Project not
Undertaken
No
Yes
Optionwith
samebenefits
stream
Call PPPBid
No
Yes
Competitive
Procurement
Process
Competitive
Procurement
Process
Enter PPPContract
Yes
No
Conventional
Procurement/
Project not
Undertaken
PPP
Procurement
No Enter PPPContract
Yes
The comparative framework also considers
whether there are constraints on the public
sector capital budget (e.g. in terms of its
availability for a project given the overall
budget or its regional allocation) which may
prevent the efficient programming of the
required investments. For example, certain
large capital projects, even if they are
economically attractive, may not be able to
SECTION 2
In such instances, a PPP-DBFO option may
allow the project to be brought on stream
sooner while respecting the public sector
financing constraints. Accordingly, the
project socio-economic benefits would
commence earlier and the present value of
the project benefits would be higher. The
life-cycle costs borne by government may
also be higher as they would accrue sooner.
Accordingly, in situations where PPP
procurement might allow to overcome the
limitations from public finance constraints,
the value-for-money assessment would
account for both the life-cycle costs borne by
government and the present value of socioeconomic benefits as determined by a
benefit-cost analysis.
If there is no capital budget constraint, it is
assumed that a common frame of
comparison would be developed to ensure
that each procurement option deliver an
equivalent level of benefits and result in the
same level of negative external effects.
Accordingly, the recommended criterion for
assessing value-for-money in this case is the
PAGE 27
present value of the government net lifecycle costs.4
The comparative framework also separates
the assessment surrounding the decision to
apply real tolls on a highway from the choice
of the procurement method. A highway
could be tolled under conventional
procurement and a PPP is not necessarily
based on real tolls.
The decision to apply real tolls requires
consideration of a broad range of policy
issues and public responses, and needs to be
consistently assessed across the available
procurement options to ensure a fair
comparison. The value-for-money analysis
can be carried out for projects including real
tolls, although it is important to consider the
change in benefits accruing to the scheme as
a result of traffic diversion compared to
no-real-toll options.
It is assumed that a PPP solution will
proceed only if it offers the prospect of
greater value-for-money compared to
conventional procurement. This means that a
conventional procurement solution, the
Conventional Procurement Comparator
(CPC), must be developed in parallel, and
forms the basis of the value-for-money tests
against the PPP solution.
To ensure a fair comparison that focuses on
the inherent merits of alternative service
delivery approaches in achieving stated
public sector objectives, great care should
be taken to develop a common frame of
comparison for all project delivery options
4
Under a PPP-DBFO solution based on a for-profit
special purpose vehicle, corporate income taxes
would accrue to government which is deducted from
the gross costs borne by the public sector.
SECTION 2
(For example, all potential solutions should
meet the same environmental and output
performance requirements).
The potential PPP solution should be
based on a comprehensive allocation of
responsibilities and risks between the private
and public sectors for the project core
requirements. The allocation of the planning
risk will be particularly important (if the
public sector retains this risk, then a
preliminary design specification will be
required).
This process should be guided by a complete
and systematic detailed project risk analysis
to fully understand the total project risk, to
assess the optimum level of risk transfer that
a PPP should achieve, to develop a shared
understanding of the project by project staff,
to define the project to other parties, and to
set a framework for any future risk analysis
necessary prior to contract award.
Other benefits from such a detailed project
risk analysis include: an overall appreciation
of the project risk profile, a public risk
management strategy for the risks retained
by the public sector; the preparation of
contractual documentation and insurance
requirements, and a full accountability
framework for the PPP process.
In some instances, the requirement to
systematically evaluate the individual
project risks could be challenging. Notably,
if some of the demand risk is borne by the
private sector in a PPP-DBFO, the value of
this risk transfer would need to be quantified
when comparing this to conventional
procurement, where traffic risk is borne by
the public sector (i.e. in terms of
materialization of expected benefits).
PAGE 28
The value-for-money assessment is made at
two decision points:
·
·
whether to call PPP bids the initial
value-for-money assessment is
conducted to determine whether there is
sufficient prospect and expectation of
project life-cycle cost savings, or project
net present value gains.
2.4.2 Illustrative Applications5
Three prototype projects were selected to
illustrate how the comparative framework
could be applied across a representative
range of highway circumstances. These
were:
·
Montreal By-Pass in Quebec a highvolume, high-cost, urban by-pass project.
This project would involve the extension
of Autoroute 30 from Autoroute 15 to
the junction of Autoroute 20 and
Highway 540 at Vaudreuil (total
estimated costs of capital works under
conventional procurement $632
million in 1998 $);
·
Trans-Canada Highway improvement
in Saskatchewan a high-cost,
medium-traffic volume, four-lane
extension project in a rural area. This
project would involve the twinning of
Highway 1 from 4.8 kilometres west
of Gull Lake 1 kilometre west of the
Alberta border to connect into an
existing four-lane highway, for a total of
108 kilometres (total estimated costs of
capital works under conventional
procurement $48 million in 1998 $);
whether to enter into a PPP
contracting process the definitive
value-for-money analysis can only be
undertaken once the private sector bids
are reviewed so that it can be determined
whether a PPP contract is likely to result
in value-for-money.
In each instance, government needs to
expect that a PPP procurement will be
advantageous relative to a conventional
procurement.
The first decision analysis is more difficult,
as it is based on estimation of both the
Conventional Procurement Comparator
(i.e. expected cost of a conventional
procurement), and the likely payments for
the project under a PPP process. This is done
a priori, before a competitive RFP process.
The second decision analysis involves
the comparison of the Conventional
Procurement Comparator with the best
PPP bid (e.g. lowest cost to government,
including value of risk transferred) received
in the actual competitive RFP process, based
on a common frame of comparison (e.g.
common time frame, tolling regime,
discount factor, etc.).
5
Please note that the PPP options examined for these
three case studies have been developed for
comparative purposes only and do not represent the
official policy of the provincial governments.
SECTION 2
PAGE 29
·
South Campbell Highway upgrading
in the Yukon a low-volume, highcost, resource access project in a remote
area. This project would involve the
upgrading of 213 kilometres of highways
between Watson Lake northward
towards Carmacs from a development
road standard to a standard compatible
with bulk haul in support of a planned
mining development at Kudz ze Kayah
(total estimated costs of capital works
under conventional procurement $52
million in 1996 $);
In each of these cases, preliminary
information was available on the costs of
procuring the highway under conventional
procurement.
In the absence of a benefit-cost analysis for
these projects, illustrative assumptions were
made to parallel a benefit stream that might
result from each of these projects, so as to
demonstrate how the comparative
framework could be applied.
The results are shown in discounted current
million dollars. Also shown is the
interquartile range and the standard
deviation as certain outcomes should be
preferable to uncertain ones.
The results of the delivery methods are only
directly comparable for a given scenario.
In other words, the results of the delivery
methods involving the application of tolls
should not be directly compared with those
not involving tolls. Further, capital
constraint cannot either be directly compared
with non-capital constraints scenarios as
they are based on different metrics: (1)
present value of net government life-cycle
costs at a discount rate reflective of the
government borrowing costs (6.5 percent
nominal) for financial analysis; and, (2)
present value of net benefits, using a social
discount factor (12.2 percent nominal) for
benefit-cost analysis.
A detailed, comprehensive feasibility study
of each of these potential projects, which
would be required to progress a PPP
solution, was beyond the scope of this work.
2.4.2.1 Results
The table on page 32 summarizes the results
from the application of the comparative
assessment framework to the three case
studies.
SECTION 2
PAGE 30
SUMMARY OF RESULTS
OF COMPARATIVE ASSESSMENT
(1)
Financial
Analysis ($Million) (2)
Project
Scenario
Delivery method
Mean
Benefit-Cost
Analysis ($Million) (3)
Standard
Interquartile
Deviation
Range
Standard Interquartile
Mean
Deviation
Range
Montreal
No capital constraints
CPC
502
11
15
120
3
4
By-Pass
and no real tolls
DBO
443
26
39
168
22
33
DBFO-Shadow tolls
525
39
56
168
22
33
No capital constraints
CPC Real tolls
222
18
23
16
10
13
and real tolls (*)
DBFOReal and shadow tolls
313
29
38
65
73
98
DBFOReal tolls (not-for-profit)
205
11
14
65
71
93
Capital constraints
CPC
463
8
11
56
7
10
and no real tolls
DBFOShadow tolls
525
39
56
168
22
33
South Campbell
Capital constraints
CPC
68
3
4
-11
0
1
Highway
and no real tolls
DBFO Shadow tolls/Availability
75
6
8
3
1
2
TCH Twinning
Saskatchewan
Capital constraints
CPC
73
1
2
-2
1
1
and no real tolls
DBFO Shadow tolls/Availability
78
1
1
4
3
4
*
For all the delivery methods under this scenario, the user life-cycle contributions to the
project through tolls are estimated at $317 million in present value terms discounted at the
government rate of borrowing (6.5 percent nominal).
(1)
The results of the financial analysis are based on reasonable, prudent and deliverable financial plans. As
part of the competitiveness tendering process, private sector proponents would seek to optimize the
financial structure in order to minimize the cost to government.
(2)
NPV of expected government net outlays discounted at the government rate of borrowing
(6.5 percent; nominal)
(3)
NPV of expected net benefits less costs, discounted at 12.2 percent nominal (10% real).
SECTION 2
PAGE 31
2.4.2.2 Analysis of results
Under certain circumstances, efficiency
gains were expected from PPP procurement,
relative to conventional procurement based
on the overview of PPP implementation and
the best judgment of the Working Group.
Based on the consultants review of the
evidence, it was the collective judgment of
the Working Group that for large projects,
PPP procurement would result in most likely
efficiency gains of -10 percent for capital
costs (with maximum savings of -25 percent
and possible dis-benefits of +5 percent), and
-10 percent (with a range around the most
likely value) for O&M costs, relative to
conventional procurement. These
assumptions have been reflected consistently
across the three case studies.
These gains would accrue equally to DBO or
DBFO types of PPP projects. In other words,
the efficiency gains would not be dependent
on the transfer of the financial risks to the
private sector.6
It was also agreed that there would be less,
or nil, scope for private sector efficiency
gains for smaller highway projects.
Project-based private financing will typically
be more expensive than sovereign
government debt financing for the following
reasons: reflection of the inherent project
risks; need to respect certain financing
coverage ratios to secure private lenders,
preventing the full capitalization of the
project revenue stream; be amortized over a
period that is less than the concession
period; and, result in higher fees for raising
private sector capital.
As the efficiency gains from a PPP project
have not been presumed to be dependent on
the transfer of the financial risk,7 the above
implies that PPP-DBFO solutions will be
more expensive to the public sector than
PPP-DBO solutions.8
In the case of the Montreal by-pass project,
of the options involving the application of
real tolls under the no-budget constraint
situation, the one that resulted in the least
life-cycle costs to government was DBFO
special not-for-profit, tax-exempt
corporation, responsible for designing,
building, and operating the highway, raising
toll revenue bonds and project-based debt on
a non-recourse basis, based on the
availability payments from the public sector.
The efficiency gains from PPP procurement
would accrue for reasons of competition,
economies of scale, greater flexibility in
time to completion, procurement process,
value engineering and innovative
construction techniques.
7
6
This is a simplifying assumption. There are
theoretical reasons (e.g. incentivization of financial
risks) that would argue that efficiency savings would
be higher for DBFO than for DBO.
SECTION 2
This is a simplifying assumption as there are
theoretical arguments as to why the transfer of the
financial risks should result in further efficiency
gains.
8
On the assumption that the tolling regime is the
same in both cases.
PAGE 32
This PPP structure allowed the accrual of the
efficiency gains from transferring the DBO
responsibilities to the private sector, while
retaining the tax-exempt status of
conventional procurement and reducing the
cost of financing for that portion of the
project debt backed by the availability
payment of the public sector.
On the hand, while being more expensive
than public financing, private financing
might be the only solution to allow public
sector projects to be efficiently programmed
so as to achieve their intended socioeconomic net benefits. This might be the
case for the three projects examined which
could not be publicly financed in a way that
would allow for their immediate
construction, and would therefore need to be
staged over time.
Furthermore, for the conventional and DBO
solutions, the full amount of the expected
costs would need to be accounted for upfront
in the government books, which might not
be the case for the DBFO solutions.
Specifically, under a DBFO based on
shadow tolls, the capital obligations are
transformed into annual revenue payments.
Furthermore, the UK shadow toll payment
mechanism has been treated as an offbalance sheet transaction. Government
accounting requires the government only
recognize the outstanding contingent
liability as a note to the accounts in a similar
manner to private companies applying
Generally Accepted Accounting Principles.
DBFO solutions based on shadow tolls
could make government payments
contingent on the use of the assets, which is
not the case for the conventional or the DBO
solutions.9
The results of the life-cycle cost analysis
reflect a discount rate based on the
government risk-free cost of capital (i.e. the
rate pertaining to long-term government
bonds). A discount rate based on the
opportunity cost of the funds used (i.e. what
the funds would earn if lent to projects with
a similar risk profile) might have changed
the conclusions.
Conventional procurement, and PPPDesign/Build procurement options require
government to assume a significant amount
of debt on its balance sheet, to reflect that
the governments future financial obligations
to the project are essentially known and not
subject to shared revenue risk with the
private sector.
Under a PPP-Shadow Toll payment, the
capital obligations are transformed into
annual revenue payments that are uncertain
and subject to revenue (and usage) risk.
Hence, some portion, perhaps the majority,
of future government payments do not have
to be capitalized and reflected on the
government accounts.
9
This has not been tested yet with auditors general in
Canada.
SECTION 2
PAGE 33
SECTION 3 THE ROLE AND
IMPACTS OF PPP
The Working Group was tasked with
providing an assessment of the potential
scale of PPP applications within a possible
National Highway Program.
This section examines the specific
conditions under which PPP may offer
benefits over conventional procurement, as
well as conditions where PPP might not fit
into the context of the National Highway
Policy. The role of tolling is addressed
separately in Section 6.
3.1 The potential scale of PPP application
under a National Highway Program
The scope of PPP application within a
possible National Highway Program would
depend on the nature of such a program,
specifically:
· the objectives, scope, scale and duration
of such a program;
· the eligibility criteria for project selection
and the pool of projects that meet the
selection criteria;
· any possible preferences or incentives
that might be given to PPP projects, or to
projects that entail sources of financing
other than the general tax revenues of
federal, provincial or territorial
governments. Such incentives might
include, for example, differential cost
sharing ratios, special allocations or
targets at the national, regional,
provincial or territorial level for PPP
projects, or the establishment of new
SECTION 3
innovative financing mechanisms or
institutions to support PPP project
delivery; and
· the public policy of the jurisdiction
responsible for program delivery.
A few general principles would apply to the
application of PPP:
· The efficiency gains from PPP
procurement are expected to be most
significant when projects are large,
complex and/or involve a broad range of
risks that the private sector can better
manage. These would accrue for the
following reasons:
Competition A large PPP contract
could attract intense competition
between private sector companies,
including foreign-based consortia.
Procurement Process a PPP involves
a single private sector entity, as opposed
to numerous contractors under
conventional procurement, allowing for
greater efficiency savings in the
management of subcontractor
relationships in the private sector.
Economies of Scale a large scale PPP
allows for single private sector entity to
reduce costs on the negotiated unit price
for raw materials and more intensive use
of assets such as equipment and skilled
labour, compared to conventional
procurement where the project would
be subdivided as a series of smaller
contracts.
PAGE 34
Over the longer term, with further
advances in electronic pricing technology,
global warming concerns, and greater
public acceptance of direct user pay for
road services, more such projects might
become feasible in Canada. On the other
hand, the desire to finance highways from
general taxes or special dedicated taxes
could continue to limit the applicability of
PPP projects based primarily on real tolls.
Time to Completion a single private
sector entity will typically have greater
flexibility in the ability to reschedule the
project timetable, leading to reductions
in the time to complete a project.
Value Engineering single private
sector entity will generally follow a
value engineering exercise which
typically involves an increase in the
scope and cost of the design phase,
which is offset by the resulting life-cycle
cost reductions.
Innovative Construction Techniques
a single private sector entity may be able
to utilize new, innovative construction
techniques to save time and/or money on
projects.
· However, owing to the relatively low
traffic density found on much of the
National Highway System, the
opportunities for PPP projects based
primarily on real tolls are relatively
limited. PPP projects which could
primarily be financed from real tolls
would tend be large in scale on relatively
busy, urban segments of the highway
network.
·
The widespread application of real tolls
would require a fundamental review of
the principle of user pay, coupled with
reform of existing road taxation, and
the need for institutional reforms for the
organizations responsible for road
delivery.
·
PPP procurement through either DBO or
DB would appear to offer the greatest
potential for broad-based applications
across Canada, including new highway
construction and significant
refurbishment or upgrading of highway
segments ranging in value from as low
as ten to twenty million dollars to
hundreds of millions of dollars.11
Such arrangements may accrue
efficiency gains over conventional
procurement methods while continuing
to rely on lower-cost public sector
financing.
Furthermore, the choice of the project
procurement method will be made by the
jurisdiction having responsibility for
project delivery. Certain jurisdictions
have already indicated they oppose the
application of real tolls on the National
Highway System.10
10
11
This issue is discussed more thoroughly in
Section 6.
Manitoba Charleswood bridge capital works were
in the order of $10 million.
SECTION 3
PAGE 35
However, the requirement for upfront
public sector financial support and the
perceived lack of significant benefits
from PPP procurement, relative to
conventional procurement, for smallscale highway rehabilitation or
resurfacing projects (i.e. under
$10 $20 million on a life-cycle cost
basis) establishes a limit to the
applicability of the PPP procurement
method.
· PPP procurement through DBFO has
been shown to be the most appropriate
delivery method for much needed
highway projects that cannot obtain, over
a reasonable time frame, all the required
financial resources from the public sector
under conventional procurement.
The analysis suggests that, for capital
constrained projects, there could be a
trade-off between the net life-cycle costs
borne by government and:
· the net socio-economic benefits from
projects that are subject to public
sector capital constraints;
· the time profile of the public resources
needed to support the project (upfront
versus staged over the project life
cycle);
· the visibility of the use risks borne by
the public sector; and
In other words, there are instances where
the higher costs of private sector
financing, relative to government
borrowing costs, can be justified, as it
allows much needed highway projects to
proceed and deliver benefits to users and
society that could not be realized from
available financing from the public purse,
or if the value of the demand and other
risks shifted to the private sector is worth
the additional life-cycle costs of private
sector financing.
This being said, private sector capital
would be secured by contingent revenues,
either real tolls or shadow tolls. In the
case of shadow tolls, these are financed
from future general tax revenue, or from
future dedicated user fees.
In situations where the public sector
financing constraint would preclude the
efficient implementation of needed
highway projects, there might be a better
receptivity to considering such
procurement mechanisms.
However, there is no precedent for DBFO
projects based on shadow toll payments
in Canada. There is a lack of Canadian
experience with this form of procurement,
which involves complexity in such
arrangements, and which changes the
focus from the cost of asset acquisition to
the cost of service delivered.
· the commitment to the life-cycle
performance of the asset and the
associated financial requirements.
SECTION 3
PAGE 36
For this reason, further work to develop
greater awareness and experimentation
with this form of PPP procurement is
discussed in Section 4.
PPP procurement based on real tolls
would assist to secure private sector
capital12 and to overcome public sector
financing constraints. However, the
application of real tolls raises a broad
range of issues that will be further
addressed in Section 6.
·
In addition to the potential for cost
efficiencies and increased social benefits
that may arise from PPP procurement,
there is also the important optical
consideration of how a PPP procurement
might be reflected on the public accounts
and the public debt of the jurisdiction.
Provided that substantial risks have been
transferred to the private sector, and that
the payment stream to the private sector
is, in part, contingent and uncertain, then
it is likely that the future payment
obligations of government under forms
of PPP procurement such as DBFO with
shadow tolls or real tolls would be
considered off-book and would not
need to be fully reflected in the public
accounts.
To conclude, the various forms of PPP
procurement expand the range of
procurement options available to the public
sector for developing and rehabilitating the
National Highway System. While not being
a panacea, and recognizing that conventional
procurement is still expected to play a
significant role in the years to come, the
scope of PPP applications under a possible
National Highway Program is potentially
large.
3.2 Criteria for assessing potential
applications
To determine the form of procurement
which is most appropriate for a particular
project, public authorities should account for
the following factors:
· the business case for the project, that is
the extent to which the expected project
benefits can justify the project costs. A
poor project will remain a poor project,
even if delivered efficiently;
· the presence of public sector financing
constraints that might prevent the
efficient programming of the public
investments required for the project and
the delivery of the project facility within
a desired time frame;13
· the nature of the project itself, in
particular its size and timing, the scope of
work to be accomplished, and the
inherent project risks;
13
12
Private capital will be sensitive to the project risks
and hence will be more expensive than sovereign
borrowing.
SECTION 3
The presence of such public financing constraints
should be reflected consistently across the
procurement options considered to ensure a fair
comparison.
PAGE 37
· any prevalent public policy on user fees,
and the possibility and appropriateness of
applying real tolls for the scheme under
consideration.
The factors that should guide the
consideration of this issue are elaborated
in Section 6.
PPP forms of procurement are expected to
be most advantageous when one or more of
the following conditions are met:
·
the project scale is large on a life-cycle
cost basis;
·
there are significant project risks, where
the skills of the private sector could be
applied most productively to manage
some of these risks;
·
there is significant potential for
innovation and efficiency gains from
integration of design and asset life-cycle
cost management responsibilities;
·
·
there are public financing constraints
that prevent needed investments in a
timely manner for the project in
situations where PPP can deliver the
project sooner, at lower costs, and within
the budget constraint; and
where the capacity for the public sector
to assume the project debt on-book
would be deleterious.
SECTION 3
3.3 Assessment of PPP relative to
conventional procurement
PPP procurement forms such as DB, DBO
and DBFO methods involve the transfer of
the design and build responsibilities, and
most of the associated risks to the private
sector. Performance-based project
requirements, and a single contract
encompassing these responsibilities for the
entire project, provides flexibility for the
private sector to achieve better value-formoney.
This being said, DB procurement might not
offer as much incentive as DBO and DBFO
procurement in minimizing the entire project
life-cycle costs, as the private sector would
not be responsible for the operational phase
of the project. On the other hand, the scale
of the project may not permit a reasonable
private sector approach to managing
operating and maintenance costs.
The transfer of the financial risks to the
private sector creates a fundamental
difference between DBFO, on the one hand,
and conventional delivery, DB and DBO
procurement methods on the other hand.
To assess the merits of PPP procurement
methods relative to conventional
procurement, the Working Group
recommends using the comparative
assessment framework developed during the
course of this study. This framework helps
identify the procurement method which
minimizes expected government life-cycle
costs, or which maximizes the net socioeconomic benefits that accrue to society
within the government budget constraint.
PAGE 38
The Working Group is satisfied that the
quantitative approaches to comparing PPP
with conventional procurement and to
valuing risks are reasonable and will help
identify the procurement option that delivers
best value-for-money (see Section 2.4.1).
3.4 PPP in the context of constrained
public capital budgets
Public sector financing constraints might not
allow project completion under optimal
conditions under conventional procurement.
PPP-DBFO procurement, by obtaining
private sector financing, secured by revenues
from shadow tolls, real tolls or availability
payments,14 can help overcome these
limitations and allow the economy to accrue
net socio-economic benefits from these
needed highway projects, otherwise
unachievable.
On the assumption that PPP procurement
would be used for cost-beneficial projects, a
net improvement for the overall economy
could result. This trade-off between the
financial and socio-economic objectives has
been illustrated in the three case studies
examined by the Working Group.
14
Availability payments should not be used fully, as
the transaction would likely be capitalized and
charged in the first year of the contract (as the
payments are essentially borrowing from the private
sector, i.e. a capital lease) and therefore would not
respect the assumed financial constraints.
SECTION 3
A transfer of the financial risks to the private
sector requires contingent payments (either
real or shadow tolls). There are a number of
other considerations that public authorities
should bear in mind:
· PPP procurement involving real tolls will
change traffic levels and patterns relative
to a situation where no tolls applies. More
specifically, the trips which are valued at
less than the toll rate would not be
undertaken, would take an alternative
route, or would be made at another time
when the tolls might be lower.
· Highway users may be made worse off
when tolls are applied to improve a
highway where alternatives to that
highway are either non-existent or are
made worse.
· Shadow tolls (alone or in combination
with availability-type payments) could
achieve the same objective of raising
private sector capital off the government
books but without any traffic impact. It
could also shift part of the use risk to the
private sector.15 Government payments
would be reduced if highway use is less
than expected (and indirectly highway
benefits). This traffic risk would be
mostly absorbed by the private sector
financial supporters assuming the highest
component and hence the most risky part
of the expected traffic levels at the
premium risk payment.
15
The extent of risk transfer will depend on the toll
band structure.
PAGE 39
Hence, shadow toll payment mechanisms
reveal through the cost of financing the
facility use risk unlike procurement options
where the public sector retains the financial
risks.
If the purpose of government procurement is
to pay the least for the acquisition of an
asset, than this form of procurement is more
expensive than necessary, as the public
sector would be paying a premium for which
it attaches no value (the transfer of the use
risk).
On the other hand, if the purpose of
government procurement is to pay the least
for the use of a service (and indirectly the
accrual of benefits), then this form of
procurement might be attractive.
Needed projects on low or very low volume
roads are not generally likely to be least cost
to government under PPP supported by real
tolls or shadow tolls. The potentially high
variability of the use of the highway
generally makes private sector financing
based exclusively on shadow toll payments
prohibitively expensive. A mixture of
shadow toll and availability payments might
reduce the risks to the private sector and still
achieve off-balance sheet government
financing. This being said, it should be clear
that the public sector would be retaining the
project use risks for that component of the
project financing that is backed by public
sector availability payments.
While PPP DBFO based on shadow tolls
might help overcome current financial
constraints, they also result in future
SECTION 3
liabilities for the public sector and hence
reduce future financial flexibility.
3.5 Limitations of the PPP model
PPP procurement is not a panacea in all
instances and is not without consequences.
For example, PPP procurement might not
offer significant advantages over
conventional procurement for simple
highway resurfacing projects or small-scale
rehabilitation projects.
Another limiting factor is the lack of public
sector procedures and resources to facilitate
the conclusion of successful PPP
transactions, especially the most complex
ones involving the transfer of the financial
risks to the private sector.
PPP procurement for large projects means
that the public sector would lose some
flexibility in breaking up a large contract for
individual contractors. Although there are a
few Canadian consortium capable of
conducting large-scale PPP transactions, the
Canadian highway construction scene is still
dominated by small, non-integrated
enterprises which are important to the
local/regional economy.
The wide application of the PPP concept
could favour the development of a Canadian
road service industry, encompassing all the
associated functions. This could impact the
local construction industry but favour the
emergence of integrated road consortia that
can compete in global infrastructure
markets.
PAGE 40
Worldwide, there are tremendous market
opportunities for firms capable of providing
road infrastructure through partnership
arrangement.16
3.6 The impacts of PPP
Under the proposed framework, the decision
to deliver a project through a PPP type
arrangement would only be made if they can
be demonstrated to result in better value-formoney (either in terms of life-cycle costs
to government or net benefits to society)
than if delivered through conventional
procurement. Given this premise, the impact
of PPP procurement is expected to be on the
whole positive.
Many of the fears expressed about the
effects of PPP, namely their impact on
shippers, trade, tourism and macro-economic
performance, are not really directed at PPP
per se, but at the application of real tolls. As
we have indicated throughout this document,
we believe it is important to dissociate the
issue of tolling from the choice of the
procurement method that delivers best
value-for-money. The issue of tolling is
specifically addressed in Section 6.
16
For example, in Winning in global infrastructure
markets solutions through partnership, a
consultation paper prepared by Industry Canada in
advance of a National Conference to help Canadian
firms better compete in global infrastructure markets,
it was reported that PPP infrastructure projects in
developing countries has increased 13-fold from
US$2.7 billion in 1990 to US$37.5 billion in 1995.
SECTION 3
PAGE 41
SECTION 4 PPP PROMOTION AND
FACILITATION
Typically, PPP contracts are complex, might
take significant time to reach financial
closing, and result in larger transaction costs
than under conventional procurement. In
Canada, these inherent characteristics of PPP
procurement have been amplified by the lack
of private and public sector experience with
this new form of procurement, the myriad of
public institutions that could potentially
conduct PPP transactions in their own way,
and the absence of an overall facilitating
policy that would provide a framework for
the launching of specific PPP initiatives.
The institutionalization of the PPP
procurement process through the adoption of
recommended practice and usage, well
enunciated policies and rules was found in
the UK to have been extremely useful. 17
Other measures to facilitate and promote
PPP include initiatives to raise awareness
and know-how about PPP, possible special
tax initiatives to facilitate PPP procurement
and the possible strengthening of
institutions.
17
For example, the UK set up the Private Finance
Panel to act as a facilitator for PPP projects and to
ensure a common framework for PPP projects across
sectors. This resulted in a number of reports such as:
common contractual terms (aimed at developing
template terms for all projects); guidelines for
selecting advisors; writing output specifications;
analyzing risk and reward; case studies of completed
PPP transactions. The PFI panel has been replaced
with a Treasury Task Force charged with similar
duties.
SECTION 4
4.1 Model PPP contracts and clauses
PPP model contracts and contractual clauses
that could be used as a base for specific PPP
transactions could be extremely useful: Use
of model contract as the basis of negotiation
for each DBFO contract saves bidders time
in preparing their bids and provides
significant efficiencies for the (procuring)
Agency, both in negotiation and operating
the contracts.18
Standard PPP model contracting structures,
instruments, clauses and definitions could
be developed for a limited set of PPP
procurement options (e.g. DB, DBO,
DBFO). Modules could be developed for
each area of responsibility that might be
transferred to the private sector, which could
be rearranged to suit the particular need of a
PPP transaction.
Standardization has its limits as each PPP
transaction has its peculiarities that will need
to be accommodated. PPP model contracts
and clauses should therefore serve as a
template and be capable of accommodating
the specific circumstances of each PPP
transaction.
Definitions of key terms used in PPP
agreements (e.g. force majeure) would also
facilitate understanding of common concepts
and the drafting of agreements.
18
DBFO Value in roads, Highways Agency, UK.
PAGE 42
Other model contracts to be developed
include the step-in-rights of third parties
involved in financing or securing PPP
transaction. Such contracts define the rights
of such parties to take over operation of the
project during a limited time should the
procuring agency be in position to terminate
the contract with the PPP private contractor.
This agreement might be a pre-condition for
obtaining financing and security under
reasonable terms and conditions.
The development of legal instruments to
address contracting relationships between
the private partner and its subcontractors
should be left to the private sector.
The PPP model contracts, clauses and
definitions could be shared as a true public
good for the benefits of federal, provincial,
territorial, regional, and municipal agencies
as well as private sector interests
contemplating entering into a PPP
arrangement. This information should reside
on the public web site described in Section
4.3 for wide access and easy downloading
4.2 Procedures and processes 19
Key to a successful PPP are effective,
fair open, competitive and transparent
procedures and processes overseen by a
competent Project Management Team (or a
PPP office).
The institutionalization of such procedures
and processes through the development of
common recommended practices would
offer many advantages:
·
reducing the time and costs and
increasing the benefits of PPP
transactions;
·
benefiting from the experience of each
other and sharing the cost burden;
·
shortening the learning curve as the
private and public sector stakeholders
would be conducting PPP transactions in
an environment which follows a
reasonably consistent set of principles
and rules;
·
clarifying the role of both the private and
public sector;
·
reducing the risks to private sector
participants, increasing their
commitments during PPP competition,
and facilitating project financing during
the riskiest part of the PPP process bid
preparation;
·
communicating to the general public a
consistent policy rationale behind
specific PPP transaction;
·
securing potential lenders;
·
reducing the time and efforts of private
bidders in PPP procurement;
transferring all appropriate risks to the
private sector partner from the public sector.
19
This section has benefited heavily from the
following document: Canadian Council on PrivatePublic Partnerships Best practice guidelines,
initiating contracts and contracting with the private
sector June 1996.
SECTION 4
PAGE 43
Specific elements to be considered in the
development of such procedures and
processes would include:
·
the commitment to PPP as a form of
procurement ranging from a
commitment to PPP based on a policy
determination that value-for-money
would result from this procurement
method to: experimenting with this new
form of procurement; responding to a
specific private sector proposal; or,
addressing a special pressure point
through a specific transaction; bearing
in mind the two step process outlined in
Section 2.4.1.
·
PPP management issues such as:
·
the managerial structure for PPP
transaction and the delegation of
authority for PPP transaction;
·
conflicts of interest rules for
government financial, legal and
technical advisors (they should not be
involved in project execution and
delivery, to avoid conflict of interest);
·
guidelines with respect to establishment
of the negotiating mandate, authority to
make decisions within this mandate, and
quick access to decision-makers for
changes that are outside the negotiating
mandate;
·
statutory and contractual changes that
might be required to facilitate the
implementation of a PPP, including
possibly amendments to the Public
Tender Act, the taxation regime and the
employment regime of public
employees;
SECTION 4
·
means of signaling clear political
support and government commitment to
a specific PPP project, to attract
competitive private sector bids;
·
published policy guidelines on the PPP
processes and procedures to ensure
competition, transparency and fairness,
including clear decisions on sole
sourcing, local content requirements and
nationality restrictions;
·
communication guidelines for informing
the general public and the various
stakeholders of the rationale and
development of the PPP transaction;
·
the basis on which the decision to call
for a PPP proposal will be made;
·
whether best value-for-money or best
net gains to society needs to be
demonstrated prior to entering into PPP
contract;
·
whether a technical pre-qualification
(request for qualification) stage should
be conducted, prior to calling for formal
bids, so as to reduce the number of
bidders that need to prepare costly bids
to a predetermined maximum, sufficient
to ensure adequate competitive
pressures (four, for example);
PAGE 44
·
the approach to meeting the
environmental requirements;
·
changes in the composition of the PPP
consortium before and after financial
closing and the manner in which they
would be addressed;
·
the possible need for and the approach
to ensuring the acceptability of the terms
of the subcontracts between the private
partner and its various subcontractors
before closing the PPP transaction;
·
guidance on the attendance of
representatives of potential lenders
during the negotiations with the selected
bidder (given that they will inevitably
need to be agreeable to the terms
of the contract for the project to be
bankable);
·
rules of disclosure;
clarifications with respect to key issues
during a PPP competitive process such
as confidentiality, the treatment of noncompliant bids, bid clarification process,
the relative importance of evaluation
criteria, risks that will not be borne by
government under any circumstances
and other non-negotiable conditions;
·
evidence of formal funding commitment
from lenders prior to financial closure;
·
auditing of the PPP process, and appeal
and review rights to ensure that the
process is and appears to be fair,
transparent and competitive.
·
limitations on the right to renegotiate
any fundamental aspects of the RFP
following selection of a private partner,
without reopening the bidding process;
·
retention of the second best qualified
bid during the negotiation with the best
bidder, to retain competitive pressures
during the negotiation phase and to
secure a fall back position;
Standard processes and procedures might
apply to each stage of PPP procurement,
including the pre-qualification of bidders,
the invitation to tenders, negotiation and due
diligence with selected bidder.
·
whether and under what conditions a
portion of the bid preparation costs
of unsuccessful bidders would be
reimbursed, including for example
public ownership of the proposed design
so that subsequent value-for-money
engineering with the successful bidder
can benefit from all the good ideas
generated through the bidding process,
and inclusion of this within the PPP
process;
·
guidelines on the public accounting
treatment of PPP transaction and the
criteria that would guide such treatment,
including specifically the requirements
to ensure that contract liabilities remain
off-balance sheet;
·
guidelines on the nature of the
documentation that should be offered in
PPP competition;
·
SECTION 4
PAGE 45
Another important element to be considered
in the development of recommended
practices is the nature of the documentation
for PPP competition, specifically:
·
deadlines for the delivery of the request
for proposal;
·
the bid clarification process;
·
a description of the relationship that will
result between the government and the
bidder (e.g. joint venture, partnership,
co-shareholders etc.)
·
a transfer plan including a description of
the proposed lease, if applicable;
·
restrictions and limitations on
mortgaging and assignment of rents;
·
how confidentiality will be handled
between competing bidders;
·
equity requirements;
·
permit requirements;
·
any value engineering elements of the
bid and how compensation will be paid
(including any points to be awarded as
part of the evaluation criteria);
·
what negotiations will be permitted
between the procuring entity and bidders
with respect to their proposals prior to
the selection of a winning bid, and how
those negotiations will be conducted;
·
the means by which bidders may seek
clarification of the solicitation
documents and information as to
whether the procuring entity intends to
convene a meeting of contractors;
·
explicit evaluation criteria (where
possible);
SECTION 4
·
risks that the procuring entity will not
assume under any circumstance;
·
bonding requirements;
·
incentivization clauses;
·
the identity of the procuring entity
officers authorized to communicate with
respect to the PPP competition;
·
appeal or review rights;
·
restrictions on bidders with respect to
discussions with third parties;
·
application of privacy and access to
information laws;
·
expected compliance with public policy
objectives such as employment equity,
use of languages etc.;
·
the nature of a legal contract arising from
the tender and the essentials of the
expected contractual relationship to be
subsequently negotiated with the
winning bidder;
·
any prohibitions with respect to
disclosing details of the competitive
process or bid contents, the extent to
which information provided by bidders
will be disclosed and treated in terms of
ownership;
·
the period of validity of bids (to maintain
competitive pressures during the
negotiations with the selected bidder and
to preserve the option of negotiating with
the second runner-up should
negotiations fail with the selected
bidder).
PAGE 46
Finally, recommended standard analytical
techniques reflecting state-of-the-art
practices should be adopted when
conceiving PPP projects and considering
their merits. The Working Group is satisfied
that the quantitative approaches to
comparing PPP with conventional
procurement and to valuing risks which were
developed through the course of this study
are reasonable and will help identify the
procurement option that delivers best valuefor-money (see Section 2.4.1).
·
the specification of performance-based
project requirements, instead of detailed
design specifications;
·
the evaluation of the bidders proposals
from different perspectives than under
conventional procurement;
·
the negotiation of complex contracts
with the selected bidder, requiring a
significant level of expertise and
understanding of commercial and
financial practices of the private sector;
4.3 Education, Information Dissemination
and Networking
·
the monitoring and enforcement of
contractor performance requirements
over a longer duration and in a different
manner than under conventional
procurement.
Many stakeholders are involved in and
are affected by PPP transactions. The
government planners and engineers that
prepare the highway specifications; the
lawyers, financial advisors, contracting
officers and project managers that put
together viable PPP proposals; the
politicians, senior managers of transport
departments and central agencies that
approve and budget for PPP projects; the
private sector consortia that compete for
PPP projects; the private sector lenders and
investors that provide funding to PPP
projects; the highway construction, design,
and operating companies that are involved in
the transaction.
For all these stakeholders, a PPP transaction
is a significant departure from the traditional
way of doing business; it is a new paradigm.
In the case of the public sector, specifically,
PPP requires the development of skills
which meet:
SECTION 4
As Canadian experience with PPP
procurement for road projects is relatively
new, education and awareness campaign
allowing all stakeholders to go faster
through the steep learning curve could be a
strategic tool to facilitate and promote
PPP.20 Stakeholders would work better
together and bring sooner, more successful
PPP transactions that achieve best value-formoney.
20
For example, it was reported that the Treasury Task
Force in the UK runs a course to train middle-level
bureaucrats across departments so as to take away the
dependency on the handful of senior bureaucrats able
to run a PPP procurement process and negotiate
transactions.
PAGE 47
Measures that could be considered in this
respect include the development of a
standard curriculum on the web on publicprivate partnership in transportation
providing information on the different
perspectives that need to be integrated in a
successful PPP transaction, including the
managerial, financial, contractual, legal,
economic, engineering and construction
aspects that could form the basis for a
graduate or advanced undergraduate level
course, seminars for public service officials,
etc.
Measures that could be taken to facilitate
the dissemination of information on PPP
includes the creation of a web site on PPP
for highways, under the auspices of TAC
and with the possible assistance of the
Canadian Council on Private-Public
Partnerships, to help raise awareness on
PPP, reduce the
cost of PPP transactions, and share PPP
experiences. The information posted on such
a system could include:
·
information on closed PPP transaction,
including review and summary of such
transactions; calls for proposals,
contractual documents;
·
advance notice of upcoming PPP
transactions in the Canadian road
transportation sector;
·
studies on PPP and links to such studies,
including the studies of the Working
Group;
·
guidelines on the procedures and
processes for the establishment of a PPP;
SECTION 4
·
model contracting instrument, clauses
and definitions for PPP transaction,
including examples of specification of
performance-based contractual
requirements for PPP projects;
·
standard analytical techniques;
·
links to discussion groups on PPP;
·
other relevant information.
Other measures to promote and facilitate
PPP might include the sponsorship of
seminars and forums to disseminate
knowledge on PPP. For example,
consideration could be given to the
sponsorship of a national forum or
roundtable on PPP in road transportation,
where key decision-makers of the public and
private sector could discuss measures and
initiatives that could be taken to take full
advantage of PPP opportunities in the
domestic road transportation market place.
Networking is essential to the formation of a
partnership, as it requires the combination of
a broad range of disciplines. Favouring
networking opportunities between the broad
range of disciplines, private firms and public
agencies that could be involved in a
partnership arrangement would favour the
formation of alliances, increase awareness
on the possibilities in the marketplace, and
favours exchange of views and
dissemination of knowledge.
PAGE 48
Measures to promote and facilitate
networking include the formation of
discussion groups on private-public
partnerships in transportation, special
sessions on private-public partnership during
events such as the annual meeting of the
Transportation Association of Canada,
joint technical sessions between the
Transportation Association of Canada and
the Canadian Council on private public
partnerships, encouraging formal contacts
between senior public transportation
officials and organizations such as the
Canadian Council on Private-Public
Partnerships.
4.4
Taxation
Tax concessions of one form or another
appear to have been discussed for all
significant PPP transportation projects
undertaken to date in Canada. This raises the
issue of whether there is any need for special
tax concessions, enactment of an all
encompassing tax approach to PPP, or PPP
arrangements designed to achieve specific
tax treatment to facilitate the formation of
PPP in transportation in Canada. Relevant
taxes include taxes on income, sales, capital
and property.
Here, it is important to make a distinction
between a tax concession (e.g. a concession
on a particular type or rate of tax) and a
corporate structure which minimizes taxable
earnings (e.g. not-for-profit).
SECTION 4
Most of the members of the Working Group
believe that government support to PPP be
provided directly through a contribution
instead of indirectly through advantageous
tax exemptions or concessions, for the
following reasons:
·
tax exemptions or concessions for
specific categories of undertaking cannot
be targeted as effectively to meet specific
public sector requirements as a direct
contribution;
·
a tax concession or exemption has a
potentially limited life span, which could
significantly discount its economic value
from the private sector perspective;
·
tax concessions aimed at making capital
cost cheaper (e.g. tax-free bond) may
distort the efficient allocation of
resources as it would reduce the costs of
capital relative to operation and
maintenance (O&M);
·
tax exemptions or concessions for a
specific PPP project could raise public
suspicions, undermine the credibility of
the overall taxation regime, and are less
transparent as a direct contribution;
·
the value of a tax concession or
exemption to a specific project is
difficult to assess;
·
the benefit of the tax concession might
not be fully transferred to the PPP
project and the beneficiary might be
among the highest income group.
PAGE 49
This being said, the revenue foregone from
special tax exemptions or concessions that
might be given should be considered in the
overall net cost to government when
determining value-for-money, as should any
additional tax revenues that might be created
under a PPP proposal relative to
The incentives to account for the tax
revenues accruing to another level of
government might not be strong.
As a general principle, the Working Group
believes that the tax system should be, as far
as practical, neutral with respect to the
choice of procurement options, in other
words the tax burden should not be
significantly different across the
procurement methods.
The Working Group considered whether
special measures should be taken for PPP
procurement to be in a similar tax position
as conventional procurement, specifically
by exempting from taxes the activities
transferred from the public to the private
sector. Two approaches can be followed for
achieving this purpose: one impractical; and
the other, practical, but incompatible with a
PPP concept based on a for-profit
corporation.
The impractical approach would require that
the for-profit corporation separates all of its
revenues and expenses between those
activities that would have been and not have
been taxed due to the PPP approach, leading
to an inefficient structure.
SECTION 4
The practical approach would call for the
creation of a special purpose vehicle (SPV)
corporation with not-for-profit or crown
corporation status. From a taxation
perspective, the result would be something
akin to the traditional procurement approach,
as the contractors and subcontractors to the
SPV would pay taxes and the SPV would be
treated for tax purposes as part of the
government.
However, there are other important policy
considerations besides tax consequences that
should be considered in structuring a PPP
(e.g. value-for-money, optimal risk transfer,
impact on public finances). For example,
if the SPV is a government owned or
controlled company with liabilities that are
non-recourse to the province, these liabilities
might or might not be consolidated with the
government financial statements.
The application or exemption from GST or
provincial sales taxes on real tolls would be
up to each individual government. An HST
exemption would require action by both the
federal and provincial jurisdictions.
In Ontario, the 407 tolls are subject to both
GST and PST. In Nova Scotia, the Highway
104 tolls are exempt from HST under a
specific statute provision.
Provincial and federal capital taxes would
apply to all non-governmental not-for-profit
entities as provided in existing statutes.
This type of tax does not represent a
substantial portion of the overall tax burden
on corporations.
PAGE 50
Privately owned roads such as highways or
toll roads (excluding bridge structures) fall
under Class 17 for capital cost allowance
purposes under the federal tax regime (i.e.
capital depreciation of 8 percent on a
declining balance basis), which provides a
reasonable match with the economic
depreciation of the asset.
The Working Group recognizes that further
work needs to be done in this area,
specifically the tax burden of alternative PPP
procurement models relative to conventional
procurement and the associated tax revenues
for each level of government, and the
investigation of possible measures to further
the principle of tax neutrality.
4.5 Institution
The mandate of the Finance and Investment
Standing Committee of the Multi-Modal
Council of the Transportation Association of
Canada is to become the TACs centre of
excellence in a number of subject areas,
including innovative financing, PPP, shadow
tolls, dedicated taxes, user charges and other
financing options.
The Committee should examine the reports
produced by the PPP Working Group,
especially the measures to promote and
facilitate the implementation of PPP in
Canada, and develop a work program to
carry forward these recommendations.
Another institutional issue, which transcends
the mandate of the Working Group, is the
scope of joint work between and within
governments on the issue of public-private
partnerships. For example, in the UK, the
directives pertaining to the PFI (private
finance initiative) applied to all sectors and
to all levels of government. In Canada,
such approach would not be feasible nor
desirable. While the Working Group has
obviously focused its efforts on the road
sector, senior management might want to
consider the need for, the extent of and the
approach to cooperative work on PPP across
sectors and across jurisdictions.
This Committee could be a focal point to
ensuring a follow-up to a number of joint
initiatives that could be launched to promote
and facilitate the formation of PPP in the
Canadian transportation sector, including the
dissemination and updating of information
such as analytical and evaluation tools.
SECTION 4
PAGE 51
SECTION 5 PPP AND
INSTRUMENTS OF FEDERALPROVINCIAL-TERRITORIAL
CO-OPERATION
The Working Group acknowledges that the
philosophy underlying the traditional
instrument of federal-provincial-territorial
cooperation in highways, namely cost-shared
agreements, may not work well or be
appropriate for PPP arrangements.
Traditionally, cost-shared highway
agreement have involved a limited duration
of financial support, in the form of upfront
capital cost offset, with fixed program-level
financial commitment, and the attainment of
a cost-sharing ratio based on expenditures
paid by the province-territory to the private
contractor under a conventional procurement
approach.
The new paradigm of the PPP arrangement,
especially the whole-life DBFO approach, is
based on life-cycle costing, long-term
contractual commitment, significant risksharing, and payments based on use or
facility performance.
·
the decision to enter into a PPP
procurement process will be made by the
jurisdiction with legal responsibility for
the project delivery (i.e. for provincialterritorial highways this is provincialterritorial government);
·
instruments of federal-provincialterritorial co-operation should be
sufficiently flexible so as to allow for
their application across a broad range of
PPP procurement options, and to allow
for flexibility in project-specific PPP
agreements and circumstances; and
·
instruments of federal-provincialterritorial co-operation should respect
federal and provincial-territorial
jurisdiction,21 objectives, accountability,
transparency and visibility requirements.
The Working Group identified several
possible instruments of federal-provincialterritorial co-operation for the support of
PPP procurement options:
·
adaptation of the existing instrument of
cost-shared highway agreements to
support PPP procurement while
maintaining a limited involvement of
the federal government, consistent with
traditional practices (Section 5.1); and
·
new instruments, which allow for a
broader range of federal government
involvement and which would depart
significantly from traditional practices
(Section 5.2).
The Working Group recommends that:
·
PPPs be considered and assessed as an
appropriate procurement method for
highway projects considered for
financial support under a federalprovincial-territorial National Highway
Program;
21
Jurisdictional responsibility for specific highways
follows ownership of the right-of-way.
SECTION 5
PAGE 52
5.1 PPP and cost-shared federalprovincial-territorial highway agreements
·
the contributions of each government
under a highway agreement are capped,
on a program basis, at a known fixed
level and, based on mutual agreement,
can be reallocated between projects. 22
The provinces and territories remain
fully responsible for all the liabilities
they have contracted with private
contractors;
·
a federal-provincial-territorial
management committee administers the
cost-shared highway agreement;
·
This section discusses how cost-shared
agreements could be adapted to support PPP
procurement. A more detailed discussion of
some of these issues, specifically as they
relate to the application of real tolls, is
discussed in Section 6.
both federal and provincial-territorial
environmental assessment requirements
are addressed when a project receives
support under the cost-shared
agreement;.
·
there is a valid basis for the payment of
the provincial and federal contribution;
·
The principles which have guided
jurisdictions in managing federal-provincialterritorial cost-shared highway agreements
include:
both parties are able to evaluate and
attest that the cost-sharing ratio has been
achieved; and
·
both parties receive visibility with
respect to their financial contributions
made to the project under the cost-shared
agreement.
Historically, federal-provincial-territorial
cost-shared agreements were silent on PPP
procurement and tolls as they were designed
to support the delivery of highway projects
through conventional procurement methods.
The Working Group provided the first
opportunity for multilateral discussions
between federal, provincial and territorial
officials as to how PPP and tolls could be
addressed using this traditional instrument
under a possible National Highway Program.
·
the choice of the procurement method is
made by the jurisdiction having
responsibility for project delivery;
·
the federal government is not party to the
assumption of risk with respect to an
agreement between the private developer
and the provincial-territorial government
for a highway under their responsibility,
nor does it take part in the partner
selection process and the negotiations
that follow;
SECTION 5
22
When the costs of individual projects are higher or
lower than expected, project commitments of both
levels of government can be adjusted accordingly,
subject to mutual agreement. However, total federal
program commitments would not be exceeded.
PAGE 53
Changes to this traditional framework that
need to be considered as a result of PPP
procurement are centered around three
issues: the eligibility of the project costs; the
potential use of contingent payment methods
over a long period of time; and the
calculation of the cost sharing ratio.
5.1.1 Eligibility of project costs
PPP procurement involves the transfer to a
private contractor of significant highway
service provision responsibilities. (e.g.
construction, design, operation and
maintenance (O&M), etc.). Accordingly, the
payments to the private contractor would
cover construction costs, as would be the
case under conventional procurement, as
well as design and, possibly, operation and
periodic maintenance costs.
This raises the issue of whether the federal
government should cost-share the design,
operation and maintenance, or financing
costs embedded in the provincial-territorial
payments under a PPP procurement
agreement.
There are precedents for the federal
government to pay for specific design
projects under cost-shared highway
agreements. These have normally been
funded from a planning reserve, distinct
from the funds set aside for specific highway
projects. Furthermore, existing highway
agreements include a fixed notional
allocation for provincial overhead costs
including, specifically, design, site
supervision and environmental assessment
set at 10 percent of the construction costs.
SECTION 5
The Working Group acknowledges the
principle that there should not be double
payment, in both the provincial-territorial
overhead and the PPP payments for design
and other activities. It is recommended that
the appropriateness of the fixed notional
allocation of 10 percent for provincialterritorial overhead costs be reviewed to
prevent possible double payments, as well as
to reflect possible increased provincialterritorial overhead costs to manage a PPP
procurement process.
While there are no precedents for the cost
sharing of O&M costs under cost-shared
highway agreements, the Working Group
recommends that, given the difficulty of
isolating O&M costs for DBO or DBFO
projects, that such costs be considered
eligible project costs in cases involving PPP
procurement, where the O&M is part of an
integrated PPP agreement.23
Land acquisition costs have not been
eligible project costs under conventional
procurement. This reflects the fact that
jurisdiction flows from land ownership. It is
unclear what legal implications would arise
from joint acquisition of land right-of-way
for a highway.
23
In a case where there is a separate O&M
agreement, these costs would not be considered as
eligible costs under the cost-shared agreement, as
they have been shown to be separable from the design
and construction costs.
PAGE 54
5.1.2 Contingent payment methods over a
long period of time
Provincial-territorial payments for DBFO
type projects could extend over a long period
of time, and could be contingent on
performance and traffic levels. Currently,
federal payments are paid upfront and are
tied to the provincial-territorial conventional
procurement payment.
This raises the issue of whether federal
government contributions to a PPP project
should be specifically linked to the known,
realized stream of provincial-territorial
payments, which would imply that the
federal government contributions are of a
similar contingent and unknown basis over a
long period of time, which are only realized
as events transpire and the known costshared amounts can be determined.
The Working Group recognizes that the
principles of traditional cost-shared
agreements, elaborated in Section 5.1, imply
that the federal government would continue
to provide its contribution upfront, and on a
fixed amount basis to achieve the costshared ratio even for PPP-DBFO project.
Accordingly, it would be consistent with
traditional cost-shared practice, for federal
contributions to be based on agreed
milestones reflecting progression of the
project. This approach is further described in
Section 6.
5.1.3 Cost sharing ratios
It is relatively straightforward to determine,
under conventional procurement, what level
of federal contribution is justified on a
project, following the known provincialterritorial disbursements to the private
contractor.
However, under a PPP-DBFO procurement
supported by public sector payments
extending over the life of the concession, the
financial obligations of the public sector
could extend over a very long time period
(e.g. 25 to 30 years).
One option discussed by the Working
Group,24 that conforms to the principles of
existing cost-shared agreements, would
consist of linking federal contributions, in
terms of the cost-shared ratio, to the
discounted value of the expected provincial
net disbursements to the PPP. This issue is
elaborated further in Section 6.
5.1.4 Working group assessment
The Working Group acknowledges that one
instrument of federal-provincial-territorial
co-operation in support of PPP procurement
is cost-shared highway agreements, with
amendments as suggested in the approach
outlined in Section 5.1 and in Section 6.
24
This approach was developed by the federal
members of the Working Group.
SECTION 5
PAGE 55
Several provincial members of the Working
Group felt that the existing instrument of a
cost-shared agreement is inappropriate in the
context of a PPP procurement, as it involves
limited federal contributions and no federal
risk sharing, and therefore does not engage
the federal government as a partner in the
key risk sharing aspects of the PPP
procurement process.
The Working Group recommends that new
instruments of federal-provincial-territorial
co-operation be developed and considered,
to provide a greater range of support
mechanisms for the application of PPP
procurement under a National Highway
Program.
The Working Group notes that such new
instruments would represent a significant
departure from the principles that have
guided traditional cost-shared agreements,
and that the full scope of the implications of
such new instruments have not been fully
identified at this time.
5.2 PPP and new instruments of federalprovincial-territorial cooperation
The Working Group discussed a range of
new instruments for federal-provincialterritorial co-operation to support PPP
procurement. These range from:
·
at one extreme: the federal government
would commit a fixed sum to a PPP
project, but would otherwise not be
involved in risk sharing, cost sharing or
any other role with respect to the PPP
project, and the provincial-territorial
SECTION 5
responsibility would undertake to ensure
the successful delivery of the project
facility;
·
at another extreme: both the federal and
provincial-territorial governments
would be joint partners (reflecting some
agreed ratio of partnership) who
participate in the risk sharing,
contingent payments and liabilities, PPP
tender and agreement negotiation
process, and all other payments and
revenues related to the PPP project; and
·
other intermediate forms of partnership
for the PPP project.
The manner in which some form of
partnership could be structured might
involve, for example:
·
separate or joint special purpose
vehicle agencies or entities;
·
separate or joint highway infrastructure
banks; and
·
separate or joint highway agencies.
The purpose of these entities would be to
provide some structure and principles for
both the federal and provincial-territorial
governments to enter into a PPP project
agreement.
The Working Group recommends that such
entities be developed and structured so as to:
·
initially have a limited duration life, that
could be renewed based on a satisfactory
evaluation of their effectiveness in
achieving desired outcomes;
PAGE 56
·
have access to a known source of funds,
either as a fixed stream of general
revenues, and/or from a highway user fee
such as fuel taxes; and/or from tolls;25
·
have the right to enter into agreements
with a private sector contractor, and
where necessary with their counterparts
from other jurisdictions, for the purpose
of a PPP procurement, on terms that
are non-recourse to the federal and
provincial-territorial crown;
·
have a clear policy mandate to support
highway projects, which can be shown
to deliver better value-for-money
under PPP procurement relative to
conventional procurement, on a lifecycle cost basis, and which are either
cost-beneficial, or meet other specific
policy objectives consistent with their
mandate; and,
·
have the flexibility to support PPP
procurement through financial
contributions, as well as other innovative
forms of support such as land grants, full
or limited loan warranties, bridge loans,
risk assumptions, etc.26
25
Newfoundland, Manitoba and Prince Edward
Island oppose the application of tolls on the National
Highway System.
26
These innovative forms of support are not available
under a traditional cost-shared agreement instrument.
SECTION 5
PAGE 57
SECTION 6 TOLLS AND USER PAY
ISSUES
An earlier section showed that the policy
decision to use PPP as a procurement
method is independent of the policy decision
to apply real tolls.
Tolls can be imposed where no PPP exists
(e.g. B.C. Coquihalla Highway), while some
forms of PPP, such as DBFO with shadow
tolls,27 do not require real tolls.
The Working Group was, however, tasked
by the Council of Deputy Ministers to
consider general guiding principles with
respect to the applicability of real tolls. In
particular, the Working Group was tasked to
recommend how federal and provincialterritorial contributions under cost-shared
highway agreements should be considered
with respect to tolls.
The issue of tolls (which are user fees
collected on a geographically specific
basis)28 should be considered in the broader
context of the role of user fees in financing
public highway infrastructure, of pricing
signals in allocating scarce resources, and
other broad policy issues such as equity.
In Canada for the most part, highways are
financed from general tax revenues as a
matter of public policy.
While there may be desire to link the amount
of highway expenditures to the amount of
road-related revenues (including excise fuel
taxes, vehicle registration fees and drivers
licence fees, and tolls), the official policy of
most governments is not to dedicate the
proceeds of such revenues to road
expenditure decisions.
The public policy decision regarding the
amount of highway expenditures is made
independently of decisions with respect to
road-related revenues, indicating that there is
no effective form of user pay at work in
the financing of highways in Canada.29
Accordingly, in general, it must be judged
that there is no explicit user cost-recovery
policy applying to the provision of highways
by the public sector in Canada.
27
Shadow tolls are payments to the private sector
operator of a highway by the public sector which are
linked to actual traffic volumes. Shadow toll
payments lead to project demand and traffic risk
being shared between the public and private sectors.
The public sector pays for the use of the asset, not for
its provision.
28
Tolls can be either project-specific (e.g. as
is the case for Highways 104 and 407, and the
Confederation Bridge), or they can be network-wide
(e.g. as in the case of France and Spain toll highway
networks). Where this section deals with projectspecific contributions of the federal and provincialterritorial governments, tolls should be considered
as project-specific.
SECTION 6
29
The public might perceive that road-related taxes
are a form of user pay.
PAGE 58
In practice, as opposed to in theory, roadrelated revenues such as excise taxes on fuel
or vehicle registrations are not a form of
user fee.30
Should jurisdictions, either the federal
and/or provincial governments, decide that
some form and/or portion of an existing or
new road-related revenue is to be explicitly
dedicated for the purposes of financing
highway expenditures, then it could be said
that an explicit policy of user pay has been
established.31
In this situation, the policy issue becomes
one of determining the best mechanism for
the collection of the user fee, taking into
consideration factors such as: cost of
collection; potential for avoidance and fraud;
efficiency losses resulting from the
collection method; public acceptance; the
effectiveness of the price signal; the
distributive effect by income level; and
possible consistency with other policy
objectives.
In this case, user fee collection methods
could include various forms: periodic fixed
amounts, such as annual vehicle registration
and drivers licence fees, and annual permits
for vehicle access to certain areas of the
network; amounts which are variable as to
distance driven, such as excise fuel taxes or
distance-related tolls or charges; and highly
variable amounts, such as congestion toll
rates which vary by time of day and/or level
of congestion.
The application of geographically specific
user fees, such as tolls, could be considered
for either:
·
project-specific financing on certain
segments of the highway network, where
they are required to supplement limited
public sector funding required for a
specific project of highway
improvement;
·
congestion pricing in a specific
congested area, such as a central
business district or congested commuter
approach; and/or
·
network-wide financing across a
relatively wide highway network.
30
One jurisdiction, British Columbia, has a legislative
basis for the dedication of 2¢ per litre of the
provincial tax on gasoline and diesel, and a $1.50/day
tax on vehicle rentals to the B.C. Transportation
Financing Authority. While other jurisdictions may
demonstrate that their highway expenditures are of a
comparable order of magnitude to their road-related
revenues, this is a result of informal, non-legislative,
fiscal policy or practice, which may, or may not be
part of an explicit transportation user pay policy.
In general, toll revenues are a form of user pay,
provided that the project agreement is based on their
collection.
31
Information of the relative amounts of road-related
revenues and expenditures by jurisdiction are
described in Transport Canada Road Infrastructure
Expenditures, Fuel Taxes and Road Related
Revenues in Canada, TP12795E (June 1996).
There was a lack of agreement as to whether user
pay was necessary in order for pricing signals to
operate in highway investment decision making.
SECTION 6
PAGE 59
6.1 Policy rationale for tolls
The policy rationale for tolls is dependent on
the perspective of policy makers regarding
the following issues:32
·
should some or all of the costs of road
infrastructure, delays imposed by users
on others and other forms of external
effects from road use and provision be
borne by the road user?
·
what principles should guide the
recovery of these costs from the various
categories of users?
·
what should the role of network-wide
versus link-specific charges, use versus
access charges be in the context of a
possible pricing system for roads?
·
should the introduction of road prices
and the level of such prices be linked to
current levels of taxes and road-related
fees which are not considered by
government as user fees?, and
·
should the impacts of user pay on overall
road network net benefits be assessed,
and relative to what base case?
financing problem to be addressed by
dedicated funding and greater commercial
principles in the financing of road building.
The financing problem is about raising an
appropriate amount of funds, and ensuring
its availability for necessary road
maintenance and construction, either on a
project-specific or network-wide basis.
The pricing of congestion is about
allocating scarce urban roadway space, and
reducing marginal trips or diverting them to
other times of day or other modes.
6.1.1 Policy rationale to toll
A policy rationale to toll has most often been
advanced in the context of congestion
pricing, where other collection methods are
less practical.33
It is important to distinguish between the
pricing of congestion and other external
effects from road use and provision, and the
Furthermore, there is an economictheoretical argument for dedicated funding
of congestion pricing so that society can
achieve benefits of congestion pricing,
through reduced congestion, despite the fact
that users who continue to use the roads and
pay tolls, and former users who are tolledoff the road, may be both made worse off
from the application of tolls. In such a case,
the social benefits from congestion pricing
are captured by the entity collecting the
tolls.34
32
33
The Working Group recognizes that policy
decisions change according to government priorities.
In this section the Working Group attempts to provide
a logical and coherent approach to policy analysis for
tolls.
SECTION 6
There can be geographically differential rates of
excise fuel tax related to congestion points, although
avoidance is a bigger issue.
34
Hau, T. Efficient Transport Pricing and
Investment, (2nd APEC Urban Transport Forum,
September 23, 1997).
PAGE 60
While congestion pricing can make society
better off, there are clear winners and losers,
leading to a compensation problem and a
fairness perception problem. These can only
be addressed if the affected groups are
compensated, either directly or indirectly,
from the expenditure of congestion toll
revenues. Public opinion, reported in 6.2,
demonstrates that user acceptance of tolls is
strongly linked to the use of the toll
revenues.
User pay for highways has sometimes been
urged to address other external effects from
road use and provision, such as pollution,
greenhouse-gas emissions and other social
costs. Social costing of highway use is
beyond the scope of this report.
It is also possible to argue for user pay
mechanisms, including fixed annual vehicle
registration and drivers licence fees and
charges, variable charges such as dedicated
fuel taxes, and geographically variable tolls
to solve the financing problem. Often,
to give effect to such user pay regimes,
specific institutional structures are created
such as the U.S. Highway Trust Fund,
French and Spanish toll-highway network
companies, or the New Zealand public road
agency.
A proposal has been developed in the U.K.
for a public road authority, whereby road
user charges (tolls) could replace current
road taxes (including gas and diesel taxes,
licence fees and vehicle excise duties)
and adequately cover the cost of road
infrastructure, with congestion pricing for
urban areas where rationing of scarce road
SECTION 6
capacity is a priority.35
This road pricing scheme would have
distributive impacts: the majority would pay
less, while a minority would pay more; and
urban users would pay more, while rural
users would pay less.
The main advantage of such a road authority
approach is to escape the constraints of
public financing that restrict adequate road
investment. Furthermore, toll revenues could
be used to fund the road (and public
transport) network in general, rather than
having these dedicated specifically to those
roads which make the most money.
Provided that network investments are nondistorting and are based on benefit-cost
considerations, congestion pricing becomes
a road user fee, rather than a tax per se.
Ownership of roads would rest with the
public sector, because of the local monopoly
rents that can accrue, arguing for forms of
commercialization (e.g. PPP) to introduce
greater management efficiencies, rather than
privatization.
A road pricing scheme may differentiate the
toll rate to reflect congestion differences, but
competing routes must also be priced so as
not to shift traffic and congestion from tolled
to non-tolled roads. There may also be
network inefficiencies that arise when
certain components of an integrated network
are priced, while others are not.
35
Newbery, D. The Case for a Public Road
Authority, (Journal of Transportation Economics
and Policy, September 1994, pp. 235-253)
PAGE 61
Another pragmatic issue is the cost of toll
collection. While various forms of electronic
toll collection have now been tested and
applied, it would be expensive and difficult
to implement a tolling system that covers the
entire highway network.
The increasing application of projectspecific tolls will require harmonization of
technology so as to permit interoperability,
so that existing equipment and systems can
adapt to new applications. Over time,
the convergence of many Intelligent
Transportation System (ITS) technologies
could lead the deployment of a ground
based-infrastructure that could support toll
application on a wide network basis.
6.1.2 Policy rationale not to toll
The reasons that tolls should not be applied
are based on the following rationale:
·
existing road-related revenues should be
treated as user fees and fully dedicated
by various jurisdictions, and their
amount is sufficient to adequately fund
highways without new taxes or user fees
such as tolls;
·
the cost of collecting a user fee is
much less expensive through excise or
sales taxes on fuel, so some existing
portion of this tax should be dedicated as
a user fee;
SECTION 6
·
introduction of a toll might discourage
mobility and trade,36 particularly in the
absence of tax reform;
·
highways are a public good and should
receive sufficient general revenue funds,
despite other public policy spending
priorities;37
·
tolls for the purposes of congestion
pricing, pricing of externalities such as
pollution or other public policy reasons
are not warranted or supported by
evidence as to their necessity.
The Working Group notes that several
jurisdictions have stated that tolls are
undesirable on the National Highway
System.38
36
If collected in addition to existing taxes; although
this depends on the level of benefits that users may
derive from improvements to the highway that are
funded from the toll revenue.
37
Highways are similar to health and education,
which are both areas of provincial jurisdiction where,
in the case of health and post-secondary education,
the federal government provides financial support to
ensure that Canadians access to these public services
is not affected by the fiscal capacity of the
jurisdiction, as well as to ensure policy objectives of
universality and portability of benefits. Highways
allow a spatial distribution of centralized public
resources such as hospitals and schools which would
need to be provided in greater numbers in the absence
of highways.
38
The Premier of Newfoundland and Labrador
opposes the application of tolls, by any jurisdiction,
on the National Highway System.
The Manitoba Minister of Highways and
Transportation has stated opposition to tolls on
existing Manitoba highways, and all highways
forming the National Highway System.
Prince Edward Island has stated its opposition to tolls
on the National Highway System.
PAGE 62
In the absence of clear policy positions by
various jurisdictions on user pay for
highways in general, it is difficult to know
whether jurisdictions oppose or support
tolls, and whether such positions imply
opposition or support for user pay in
general, through other forms such as
dedicated fuel taxes.39
·
49 percent believe that annual drivers
licence and vehicle registration fees are
very appropriate;
·
49 percent believe that general tax
revenue is very appropriate; and
·
38 percent believe that special user
charges (such as tolls on kilometres
driven) is very appropriate.
6.2 Public acceptability of tolls
During March-April 1997, EKOS Research
Associates undertook a survey of 1,500
Canadians as part of a wider study. Several
questions were asked with respect of
highway funding and infrastructure opinions.
100%
90%
80%
70%
60%
50%
The following section reports on some of the
key findings.
40%
30%
20%
10%
6.2.1 Appropriateness of funding sources
The survey asked people to describe on a
4-point scale the appropriateness of four
different funding sources for highways.
Of the 1,300 respondents:
·
59 percent believe that specific tax
revenue (such as excise taxes on gasoline
and diesel) is very appropriate for
funding major highways;
39
It is possible that some jurisdictions have no
coherent policy on highway tolls and user pay in
general, and believe that general tax revenues should
be used to finance highways. In this case, the
involvement of the federal government through
financial contribution is based solely on an argument
about the policy priority of highways relative to other
public spending priorities, to deficit reduction and to
tax cuts, including fuel taxes collected by the federal
government.
SECTION 6
0%
SpecificTax
General Tax
VeryAppropriate
Annual Fees
SomewhatAppropriate
Special User
Charges
Not Appropriate
N= 775 for Specific tax; N=757 for General tax;
N=1519 for Annual Fee; N=1535 for Special User Fees
Regarding the respondents who felt that
special user charges (e.g. tolls) were very
appropriate, there was:
·
lower acceptance in Prairie Canada
(27-28% very appropriate), among nonuniversity educated (32-33%), and
among the unemployed (22%); and
·
higher acceptance in British Columbia
(48%), among the elderly over 65 years
of age (48%), among university educated
(47%) and among higher household
income over $60,000/year (42%).
The regional variation is shown below:
PAGE 63
When respondents opinions about the
appropriateness of special user charges (e.g.
tolls) are matched with their belief about the
priority that government should assign to
highways and roads infrastructure, it appears
that there is a fairly distinct polarization of
Canadian public opinion.
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Atl
Que
Ont
V e ry
M b/S a
Som ew hat
Alta
No t
B.C.
ALL
D/N
N=1535
6.2.2 Appropriateness of special use
charges and importance given to highway
infrastructure
The survey asked people to indicate on a
3-point scale the priority that government
should assign to spending on various forms
of economic and social infrastructure.
Of the respondents, 78 percent believe that
highways and roads should be assigned a
high priority by government. This was:
·
a relatively lower priority than: schools
(91% assign high priority); hospitals
(86% assign high priority); and research
and technology (82% assign high
priority); but
·
a relatively higher priority than: airports,
ports and the rail system (70% assign
high priority); sewers and water systems
(68% assign high priority); information
highway (52% assign high priority); and
cultural institutions, e.g. art centres,
museums (40% assign high priority).
SECTION 6
35
30
High
25
20
Medium
15
Priority for
10
Low
5
0
Not
Somewhat
Very
Highway
Infrastructure
Appropriateness of Special User Charges
N= 775
Almost 30 percent of respondents feel that
highway infrastructure should be a high
priority of government and that special
user charges are very appropriate; while
33 percent feel that highway infrastructure
should be a high priority of government and
that special user charges are not appropriate.
The remaining third of respondents feel that
highway infrastructure should be only a
medium or low priority of government, and
are split as to the appropriateness of special
user charges.
This is not surprising, as other findings,
reported below, show that public opinion
about tolls is highly dependent on how toll
revenues are used.
PAGE 64
6.2.3 Findings on opinions on tolls
·
simplicity is important to gain public
understanding of the scheme. The initial
road pricing schemes in Singapore and
Bergen-Oslo-Trondheim were based on
cordon tolls or area licences for
entry of a vehicle into the central
business district. This is seen as a
possible first step in accustoming the
public for more sophisticated road
pricing regimes, which can be
implemented with advanced technology;
·
equity and payback relate to how the use
of the revenue collected from the road
pricing regime is used, and how this is
perceived by two different groups: those
who continue to use the road but at a
higher price than previously; and those
who have been tolled-off and who now
use the road less.
In the wake of Canadian and international
experiments and applications of tolls, there
is considerable evidence showing that
motorists are reluctant to support an option
for dealing with congestion which involves a
personal monetary outlay.40
The willingness of the public to accept a
scheme of congestion pricing depends on
how the revenues derived from road pricing
(e.g. congestion pricing) are used, and
whether there is some compensation for
the losers through the betterment of public
transportation or alternative transportation.
Several principles have been established
internationally about how public acceptance
of road pricing can be achieved:
There are several possible uses of
toll revenue: for general revenue of
government (which is much less
publicly acceptable); for specific
public transportation infrastructure
improvements (in order to benefit those
tolled-off the roads); for specific road
transportation projects (in order to
benefit motorists); and to reduce the
level of road-user taxation or licensing
(which would be seen as a financial
trade-off for motorists);
40
Ison, S. Acceptable Road Pricing: A Three Step
Process (TRF 37th Annual Meeting Proceedings,
1995, Vol. 1, pp. 125-140)
Thomson, J.M. Reflections of the Economics of
Traffic Congestion, (Journal of Transportation
Economics and Policy, Vol. 32, Part 1, September
1997, pp. 93-112).
Verhoef, E., Nijkamp, P., Rietveld, P. The Social
Feasibility of Road Pricing, (Journal of
Transportation Economics and Policy, September
1997, pp. 255-276).
Langmyhr, T., Sager, T. Implementing the
Improbable Urban Road Pricing Scheme, (Journal of
Advanced Transportation, Vol. 31, No. 2 1997, pp.
139-158).
SECTION 6
·
the electronic road pricing experiment
in Hong Kong (early 1990s) was
abandoned as the public felt illinformed, especially of how the revenues
were to be used;
PAGE 65
·
the Singapore area licensing was part of
a larger package of measures including
improvements in public transport
networks;
·
a 1991 survey of London U.K. motorists
found that acceptance of road user
charges jumped from 43 to 63 percent
when it was presented as part of a
package to improve public transport and
road infrastructure;
·
public consultation and cooperation
in the local political process in the
establishment of the Trondheim
cordon-toll scheme in Norway was
able to overcome an initial majority
public opposition to the scheme.41
A compromise was reached among the
local political parties, and sufficient
public support was obtained through
various coalition alliances which were
possible through the negotiation of the
expenditures that were to be financed
from the toll revenue. The use of these
funds for public transport is seen
as critical in establishing support
among environmental groups, and
representatives of the central business
district. The process of public
consultation and debate, the transparency
of the process, and the public perception
of the fairness of the toll implementation
and the expenditure of toll revenues was
seen as critical to the success of the
scheme;
41
Langmyhr, T., Sager, T. Implementing the
Improbable Urban Road Pricing Scheme, (Journal of
Advanced Transportation, Vol. 31, No. 2 1997, pp.
139-158)
SECTION 6
·
survey of Dutch motorists in a dense
urban area found that motorists were
more likely to find congestion pricing
acceptable when: they had a higher
willingness-to-pay for time savings from
congestion pricing, when they expect to
be compensated (presumably from their
employer) for the cost, when they have a
higher income, when they view
congestion as a social problem, when
their trip length is longer, and when they
face more severe congestion;42
·
the overwhelming majority (83%) of
Dutch motorists stated, in the same
survey, that their opinion on congestion
pricing is dependent on how the revenue
is used. Motorists were most in favour of
spending on road infrastructure capacity,
reducing the fixed annual vehicle
ownership tax (which in Holland is used
for highway construction), reducing fuel
taxes and improving public transport
infrastructure. The public acceptability
of congestion pricing or dedicated road
financing is complicated by the already
high level of road taxes paid by
motorists.
The various international findings reinforce
the conclusion that the redistributive effect
of personal financial impacts is the most
important determinant of motorists opinions
on congestion pricing.
42
Verhoef, E., Nijkamp, P., Rietveld, P. The Social
Feasibility of Road Pricing, (Journal of
Transportation Economics and Policy, September,
1997, pp. 255-276)
PAGE 66
The Working Group was not able to review
comparable, public opinion research on the
public perception of tolls, as they have been
applied, in Canada.
In Ontario, extensive public opinion and
focus group analysis was conducted prior
to the establishment of the toll rates for
Highway 407, but this analysis is not in the
public domain. Certainly, the opening of
Highway 407 without tolls, and their
subsequent introduction did coincide with a
dramatic reduction in vehicle usage,
reportedly up to 50 percent, suggesting a
very real toll elasticity and public aversion to
pay a toll when a reasonably similar, albeit
more congested, free alternate route is
available.
Notwithstanding this tolled-off
phenomenon, the vehicle traffic experienced
since the introduction of tolls appears to be
in the expected range of the project plan.
In Nova Scotia, there was a general belief
that a toll rate in excess of 10 cents per
kilometre was unacceptable, based on a
review of toll rates in application across
North America. Certainly there was public
criticism of the application of tolls as unfair,
given that access to the free alternative
route was not available to commercial
vehicles.
In both Canadian experiences of projectspecific tolls, the public reaction was
dependent on the perceived benefits derived
from the project, and on various concepts of
fairness of the project process.
6.3 Policy guidelines for the application
of tolls
SECTION 6
The Working Group discussed the
application of tolls as a matter of policy. It
was apparent that there is no consensus, at
this time, about whether tolls (as either a
project-specific financial source, or as a
matter of general user pay policy) should
be applied to the National Highway System.
Newfoundland and Manitoba have stated
positions that tolls should not be applied to
the National Highway System.
Several jurisdictions, by their past or current
actions to deliver a project, have indicated
that project-specific tolls are acceptable.43
In light of the diversity of opinion and
views, the Working Group has not attempted
to formulate a recommendation regarding
the application of tolls in the current context
of the National Highway System.
43
B.C. applies tolls to the Coquihalla Highway,
which is the effective commercial route on the TransCanada Highway between Kamloops and Vancouver.
Ontario applies tolls to Highway 407.
Nova Scotia applies tolls to Highway 104 section of
the Trans-Canada Highway, although the present
government has stated that it would rather have no
tolls on that project.
New Brunswick will apply tolls to the FrederictonMoncton Highway, which will become the main
Trans-Canada Highway route in the province.
The Federal Government allows the application of
tolls on the Confederation Bridge between Prince
Edward Island and New Brunswick, and is now the
Trans-Canada Highway link to PEI.
PAGE 67
Instead, the Working Group offers the
following framework for further work and
analysis which should be conducted, jointly
by the various jurisdictions, in order to
enlighten the policy making activities of
each jurisdiction:
·
·
jurisdictions must decide, as a matter of
transportation and fiscal policy, whether
highways are to be made more
commercial and subject to a user pay
policy, or are to be recognized as a
public good and remain part of their
overall public policy and fiscal policy
process;44
if jurisdictions decide that highways are
a public good and remain part of their
overall public policy and fiscal policy
process, then further work is required to
determine conditions under which
highway projects deserve to receive
scarce public funding, and under what
conditions private financing is
appropriate;
44
Newfoundland expressed the view that no further
work is necessary at this time if tolls are not to be
applied to the National Highway System, if general
tax revenues are to remain the source of highway
funding, and if the federal government continues to
collect fuel excise taxes at current level for the benefit
of the federal consolidated revenue fund.
SECTION 6
·
if jurisdictions decide that highways are
to be made more commercial and subject
to a user pay policy, then there should
be further analysis of the public policy
merits of various forms of user pay
collection, including fixed annual
vehicle registration and drivers licence
fees; variable charges such as dedicated
fuel taxes, and geographically variable
tolls;
·
in this latter case, tolls may be
considered as appropriate for either
specific projects, where additional funds
from users is required in order for
significant user benefits from the project
to be realized; or for application to the
wider network of highways;
·
if tolls are considered for specific
projects, their impact on the broader
network should be assessed, as well as
potential diversion of traffic to nontolled highways, and the public
acceptance of tolls in light of free
highway access in adjoining sections of
highway;
·
if tolls are considered for wider
application to the highway network,
factors should be considered such as: life
cycle, full social costing of the highway;
the disposition of the toll revenues; the
relationship of existing road-related
revenues to these toll revenues; and the
availability of alternative general
revenues in light of other public policy
objectives. Such tolls must be based on a
clear sense of policy objectives as they
relate to mobility, support of trade and
tourism, sustainable development,
economic efficiency and public
PAGE 68
acceptability.
They must also address the possible
differentiation of toll rates according to:
level of congestion; vehicle type and
characteristics; incidence on different
income or social classes; peak pricing;
and type of toll payment.
The Working Group recommends that
further work, involving both transportation
and finance officials, be undertaken on
highway financing, user pay and toll
policy jointly by all jurisdictions.
6.4 Tolls and federal-provincial-territorial
highway agreements
The Working Group was tasked with
recommending how federal and provincialterritorial contributions under cost-shared
highway agreements should be considered
with respect to PPP projects and to tolls.
This issue gained prominence in light of the
Nova Scotia and New Brunswick cases.
Highway 104 in Nova Scotia was part of a
PPP with real tolls, with a significant part of
the capital cost (about 70 percent) funded
jointly under the terms of the Canada-Nova
Scotia Highway Improvement Program
(HIP) agreement. Public debate has ensued
regarding the absence of specific provision
on tolls in this agreement.
The Fredericton-Moncton highway project
in New Brunswick also raised public
concerns, in this case because a portion of
recently completed highway, funded jointly
under the Canada-New Brunswick HIP, was
included in the project which was to be
SECTION 6
subject to tolls in the PPP arrangement for
the construction of an adjacent new 4-lane
facility.
The question which both these situations
pose is how contributions from both levels
of government, under the terms of a costshared highway agreement, would be
affected by the application of real tolls,
either retrospectively (i.e. after the project
is completed, as was the case in New
Brunswick) or prospectively (i.e. as part of a
planned PPP with real tolls, as was the case
in Nova Scotia).
In response to these concerns, Canada and
Nova Scotia agreed to a provision of the
amended HIP agreement which prohibited
the establishment of tolls on any highway
funded under the cost-shared agreement,
unless mutual agreement was reached on the
establishment of tolls and the treatment of
toll revenues, and until some other terms are
mutually agreed upon and executed.45
45
Canada-Nova Scotia Highway Improvement
Agreement (Amendment No. 7, July 22, 1998) Clause
6.7. (b) Nova Scotia shall not, at any time during the
term of this Agreement and for a duration of twentyeight (28) years after the date of termination of work
on all the projects described in Schedule B,
establish, cause or permit to be established tolls on
the use of any work described in Schedule B unless
a mutual agreement is reached with Canada relative to
the establishment of tolls and the treatment of funds
contributed by Canada under this Agreement.
(c) Canada and Nova Scotia acknowledge and agree
that the provisions of the preceding paragraph shall
apply until, by written instrument executed by both
parties, it is substituted by terms mutually agreed to,
consistent with the policy on highway tolls currently
under development by a federal-provincial-territorial
task force.
PAGE 69
The intent of this provision was not to make
a policy statement about the desirability of
real tolls, but to express a federal reservation
about the combination of federal
contributions under a cost-shared agreement,
with the application of real tolls to recover
some or all of the costs of the project.
This concern is highlighted by the
asymmetry that arises, as the province is
fully represented in the negotiation of the
details of the PPP arrangements, while the
federal government is often privy to neither
the negotiations, nor the confidential
provisions of the resulting PPP agreement.
One of the implicit assumption of a costshared agreement is that both the federal and
provincial-territorial governments will
assume, according to the agreed cost sharing
formula, the capital costs of the project,
which is intended to provide an upgraded
highway facility for the benefit of motorists,
truckers and shippers.
It would be possible, using various
accounting methods and a posteriori postvalidation by the provincial-territorial
auditor general, to assert whether the PPP
agreement and its risk and revenue sharing
provisions did not threaten the achievement
of the cost sharing commitment between the
federal and provincial-territorial
governments.
If this cost-shared agreement is combined in
a specific project with a PPP agreement,
which involves a private consortium and the
provincial-territorial government (with no
active involvement of the federal
government), in which the private
consortium and the provincial-territorial
government agree to certain risk sharing and
revenue sharing provisions, involving the
raising of project-specific user fees through
tolls or other charges, then it becomes
difficult for the federal government to assure
itself that the cost sharing commitment will
be met.
The Canada-New Brunswick Highway Improvement
Agreement also includes this clause.
SECTION 6
However, such an accountability regime
would impose significant costs in terms of
tracking and documenting project-specific
costs and revenues, especially in a situation,
such as the Fredericton-Moncton highway,
where the cost-shared portion represents
only a fraction of the overall PPP project.
As stated in Section 5.1, the philosophy
underlying existing cost-shared
arrangements (e.g. limited duration, upfront
capital cost offset, fixed financial
commitment, cost sharing based on
expenditures) is fundamentally at odds with
the philosophy underlying PPP
arrangements, especially whole-life DBFO
solutions (e.g. life-cycle costing, significant
risk sharing, payments based on use or
facility performance). In the current
situation, the provincial-territorial
government must attempt to straddle these
two arrangements, in one case in partnership
with the federal government, and in the other
with the private sector.
PAGE 70
The ability of a provincial-territorial
government to successfully meet the
conditions of both sets of agreements is
difficult, especially in light of the
complexities (e.g. legal, contractual, tax etc.)
inherent in the structuring of a successful
PPP arrangement.
The potential for the PPP arrangement to
create variance with the philosophy and
intent of the relatively simple provisions of a
cost-shared agreement is real.
In order for federal contributions under a
cost-shared federal-provincial-territorial
agreement to be made to a PPP project,
including projects that involve real tolls,
specific provisions should be negotiated.
The principles governing such provisions are
outlined below. These principles are stated
in terms of a prospective PPP project, where
the provincial-territorial government
identifies a project that it will tender as a
PPP, and for which federal contributions are
sought under the terms of a federalprovincial-territorial cost-shared highway
agreement.
6.4.1 Principles of cost sharing when
applied to prospective PPP projects,
including those with real tolls
The policy principles underlying federal
contributions to existing cost-shared
highway improvement projects that have
been identified by the provinces-territories
are (among others):
·
·
to achieve a certain, agreed-upon cost
sharing participation, while ensuring that
the federal government limits, in amount
and duration, its financial commitment
to the project, and bears no risk related
to the completion, warranty, usage or
other risks associated with project
procurement and operation;
·
to allow for the timely completion of
projects that would not otherwise be the
case in the absence of federal support;
·
to provide benefits to the users of the
highway; and
·
to improve the functioning of the
National Highway System in particular,
and the Canadian transportation system
in general.
While these principles are simple to state,
their appropriate application in a PPP
procurement situation, and/or in a situation
involving real tolls is much more complex.
This arises from the fundamental differences
underlying cost-shared agreements (as
conventionally procured) and between PPP
and toll arrangements, as stated above.
For this reason, the following, more specific,
approach was discussed by the Working
Group as a possible basis for agreement of
how federal contributions might be
to offset the cost of the project;
SECTION 6
PAGE 71
negotiated and treated in these situations:46
a) the PPP agreement (or agreements)
would be negotiated between the private
government (or its agent);
b) specific provisions governing federal
contributions to the PPP project would
be negotiated between the federal and
provincial-territorial governments, and
would form a part of the overall PPP
structure of the project. These would
be comprised of an agreement in
principle, and a final agreement. Only
the final agreement would finalize the
terms of the financial obligations on both
parties;
c) a cost sharing agreement in
principle, related to the specific project
which is to be the subject of the PPP,
would be reached by written instrument
between the federal and provincialterritorial governments with respect to
the amount of funding which is to be
cost-shared under the PPP project, and
the cost-share ratio that is to be achieved,
as stated below in section d).
46
This approach was suggested by the federal
members of the Working Group. Discussions among
Working Group members clarified that the intention
of these provisions is to create flexibility to permit the
application of cost-shared agreements to projects
involving PPP procurement and/or the application of
tolls, while respecting the principles of existing cost
sharing agreement and the current limited financial
involvement of the federal government. As stated in
Section 5.1, several provincial members felt that the
existing instrument of a cost-shared agreement is
inappropriate in the context of a PPP procurement.At
this time, it should be considered as a basis for further
discussion, as agreement on its specifics was not
achieved.
SECTION 6
This agreement in principle may be
negotiated and executed prior to the PPP
tendering process. This would provide
assurance to both the province-territory
and the prospective private sector
consortia that federal funding would be
made available, subject to the conditions
established in section d) being met.
The contingent nature of the federal
contributions should be conveyed to any
prospective PPP bidder;
PAGE 72
For this reason, a more acceptable
solution from a federal perspective,
would be to use the results of such
negotiation to finalize the terms of the
agreement between the provincialterritorial and federal government (i.e. to
calculate the federal share of the present
value of the expected net provincial
disbursements to the project).
d) a cost sharing final agreement would
be concluded between the federal and
provincial-territorial governments prior
to the closure of the overall PPP
agreement(s) between the private
government.
This would provide assurance, to both
the federal government, and the
provincial-territorial governments47 that,
on an expected Net Present Value (NPV)
basis, the provincial-territorial
government expects to make net
disbursements over the expected
lifetime of the project that equal or
exceed its agreed share of the project
life-cycle costs.48
While provinces-territories and the
private sector would understandably
prefer to have a binding commitment
from the federal government in advance
of the final PPP agreement closure,
it is recognized that material clauses
affecting toll rates and provisions of
assurance to project lenders are often
subject to protracted negotiations, whose
resolution occurs in the time leading up
to PPP agreement closure.
47
And their respective Auditor Generals and
taxpayers.
48
Eligible costs would be defined in the cost-shared
agreement, following past practice.
SECTION 6
The federal government would require
independent third-party assurance that
the agreed cost sharing could be
expected to be met prior to the
conclusion of the final agreement,
based on a review of all of the PPP
agreements, official provincial-territorial
cash flow, cost, traffic and revenue
projections;
e) in the event, at the time of the
negotiation of the final agreement,
that the independent third-party advisor
finds that the expected NPV of the
provincial-territorial governments net
disbursements over the expected
lifetime of the project is less than its
agreed share of the project life-cycle
costs, as stated in the agreement in
principle, then the NPV amount of the
federal governments contributions
reflected in the final agreement to be
executed would be reduced by an
amount needed to maintain the agreed
cost-share of the project life-cycle
costs;49
49
Several jurisdictions oppose the notion of reducing
the federal contribution in this situation, although
they have not proposed an alternate basis for ensuring
the provincial-territorial commitment to the cost-share
ratio.
PAGE 73
(i.e. not project-specific) tax revenues
from normal commercial activity and
revenues from assessment of general
application;
f) for the purposes of the NPV analysis:
·
·
·
expected lifetime would mean the
time period agreed by the federal and
provincial-territorial governments prior
to the final agreement, based on
engineering and economic analysis, to
reflect the expected whole life-cycle use
of the facility to be delivered under the
project;
NPV of federal contributions would
mean all federal contributions expected
to be paid to the provincial-territorial
government for the PPP project; these
may be based on progress statements
from the independent engineer engaged
to monitor and attest to project progress
and completion, fully upon project
completion, or according to some other
negotiated basis;
NPV of provincial-territorial net
disbursements would mean all
disbursements by the province-territory
(or its agent) specifically related to the
project under the terms of the PPP
agreement(s), whether they take the form
of construction payments, availability
payments, shadow toll payments or other
form of payment, in order to secure the
availability of the project facility, net of
all project-specific revenues collected by
the province-territory (or its agent),
whether they take the form of toll
revenues, other payments from users,
development charges, or other payments
from any other party, including those
payments related, or similar in nature, to
services rendered such as annual
highway maintenance, snow removal or
policing services, but excluding general
SECTION 6
·
a nominal discount rate, reflecting the
Government of Canada or applicable
provincial-territorial governments longterm bond rate, would be used, as this is
a financial analysis. The NPV would be
based on official provincial-territorial
cash flow, cost, traffic and revenue
projections that are current and relevant
to the final PPP agreement as of the date
of final agreement closure;
·
where appropriate, in the opinion of the
independent financial advisor,
adjustments would be necessary to
reflect the risk profile of the PPP and the
degree of risk borne by the provincialterritorial government, these would be
made in the NPV analysis;
The approach outlined in Sections
6.4.1a) to 6.4.1f) constitute a basis for
allowing the vehicle of a federalprovincial-territorial cost-shared
highway agreement to be applied to a
project involving a PPP and /or tolls.
PAGE 74
The Working Group draws attention to the
fact that this approach would leave the
province-territory and the private sector the
full benefits and losses from the subsequent
realization of the risks and uncertainties that
are inherent in PPP risk sharing
arrangement. The sole basis on which the
federal governments financial commitment
is being assessed is on the achievement of
the agreed cost-share ratio on an expected
NPV basis, at the time of the PPP contract
close.50
Provinces-territories expressed concern that
this approach would complicate the
negotiations on a PPP agreement between
them and a private sector consortium.
However, federal members believe that this
approach is relatively simple and the
financial advisors representing both the
province-territory and the private sector
could fairly easily assess, during the
negotiations of the PPP agreement, whether
there was a significant risk that the agreed
cost-shared ratio might be in jeopardy.
The federal government would, in addition,
most likely seek assurance from the
province-territory that the structure of the
PPP agreement would not, over some
reasonable amount of time, be changed in a
manner that is expected to materially affect
the provincial-territorial undertaking to the
cost-sharing commitment.51
The concurrence of the principles of risk
sharing between the parties undertaking
the PPP, and the fixed, no-risk financial
contribution of the federal government,
imply that there is no condition under which
the amount of the federal governments
contribution would exceed the amount stated
in the final agreement. The federal
contribution would be the subject of a costshared agreement between the federal and
provincial-territorial governments, with no
project-specific risk being borne by the
federal government, and a fixed upper limit
on the amount of the federal contribution to
the project.
50
In particular, the PPP agreement may contain
various clauses whereby payments and toll rates are
dependent on realized traffic levels and toll revenues
collected. The expected NPV calculation would
apply a probabilistic approach to assess the expected
value of various payments and revenues according to
the traffic and revenue forecasts and distributions.
51
The negotiation of specific language for this is left
for further discussion.
SECTION 6
In order for the federal and provincialterritorial governments to demonstrate
accountability, the final agreement and the
NPV analysis would be available for review
by the respective Auditors General.
Wherever possible, this analysis would be
made public.
6.4.2 Principles of cost sharing when
applied to retrospective PPP projects,
including those with real tolls
PAGE 75
Situations could arise where a highway
project that has recently been the subject of
federal contributions under a cost-shared
highway agreement will be included in a
larger project involving PPP procurement
and/or tolls.
To deal with the possibility of such
situations, the federal government could
seek to prohibit such occurrences for some
fixed period of time following the
completion of a project which has received
federal contributions.52
The Working Group recognizes that an
approach needs to be developed to deal with
these situations.
52
This is the result of Clause 6.7.b of the current
Canada-Nova Scotia Highway Improvement
Agreement, and a similar clause of the Canada-New
Brunswick HIP. The period stated is 28 years.
SECTION 6
PAGE 76
SECTION 7 SUMMARY OF
RECOMMENDATIONS
The Working Group offers the following
recommendations to the Council of Deputy
Ministers:
Recommendation 1 a PPP procurement
should be based upon the concept of optimal
risk transfer and should be pursued when it
demonstrates better value-for-money
relative to conventional procurement either
by lowering life-cycle costs or by achieving
greater net socio-economic benefits by
providing access to private financing that is
necessary for the timely delivery of a needed
highway project.
The decision to proceed with a PPP
procurement should be considered as
separate from the decision to apply real tolls.
Recommendation 2 A value-for-money
evaluation, including the consideration of
both financial and socio-economic costs and
benefits, should be adopted as a key criterion
for assessing a PPP procurement option
relative to conventional procurement, using
the methods developed by the Working
Group during the course of this study.
Recommendation 3 PPP procurement can
play a role under a possible National
Highways Program. The Working Group
recognizes that the scope of PPP
procurement under such a program could
potentially be broad, but would not at this
time be applicable across the entire National
Highway System.
SECTION 7
Recommendation 4 All jurisdictions
should consider their general policy towards
PPP as a procurement option, including
a possible requirement for formal
consideration of PPP procurement under
certain conditions. This should include the
adoption of formal procedures, guidelines
and processes to assess and facilitate PPP
procurement.
Recommendation 5 All jurisdictions
should continue to work cooperatively to
develop and adopt a standard PPP model,
specification of performance-based output
requirements, analytical techniques,
and procedures and processes for the
establishment of PPP. A Working Group
under the auspices of the Council of Deputy
Ministers should be assigned this task.
Recommendation 6 A broad range of
measures aimed at facilitating PPP through
education, information dissemination and
networking should be developed and
considered, as outlined in the report.
The Finance and Investment Standing
Committee of the Multi-Modal Council of
the Transportation Association of Canada
should be given this mandate.
Recommendation 7 Consideration should
be given by governments to undertaking PPP
procurements so as to further facilitate the
development of Canadian expertise and
capability in the road building sector, that
would increase Canadas success in the
world export market for privately financed
public infrastructure provision.
PAGE 77
Recommendation 8 Public sector support
in PPP procurement should be provided
primarily through financial contributions or
other innovative forms of risk sharing.
Special tax concessions for PPP should be
generally avoided.53
Recommendation 9 The tax system treats
private and public sector activity differently.
The decision to proceed with PPP
procurement should be based on
comparative analysis which reflects this
differential tax treatment, and decisions
should be based primarily on tax-neutral
considerations of value-for-money.
Further work is needed to establish whether
the tax regime provides a fair and reasonable
environment for PPP procurement.
Program. Various entities should be
investigated and developed according to the
general principles which are outlined in this
report.
Recommendation 12 In the presence of a
variety of views among jurisdictions as to a
policy on tolls, the Working Group
recommends that further work be undertaken
to develop:
·
a policy perspective on whether roads
should be considered fully as a public
good, whose financing should be fully
based on general tax revenues;
·
a policy perspective on whether a general
policy on user pay as it relates to
highways is needed and desirable; and
Recommendation 10 One option for
providing federal support to PPP
procurement in the context of traditional
cost-shared instrument of federal-provincialterritorial cooperation involves amending
such agreements to allow for their use in
support of PPP procurement, along the lines
of the approach outlined in this report.
·
an assessment as to whether user pay
is best achieved through dedication of
specific road user taxes, such as annual
vehicle registration and drivers licence
fees, specific excise and sales taxes on
motor fuels, or direct tolls on users,
either in the form of project-specific or
network-wide tolls.
Recommendation 11 Further new
instruments of federal-provincial-territorial
cooperation should be developed and
considered, to provide a greater range of
support mechanisms for the application of
PPP procurement under a National Highway
The Working Group recommends that such
analysis and policy assessment be conducted
by officials representing both transport and
finance departments, as some issues relate
to both transportation and fiscal/taxation
policies. This work would look at issues
including road pricing, congestion pricing
and the financing problem facing
highways in light of other public priorities
for general tax revenues.
53
The New Brunswick member felt that tax
expenditures are a legitimate instrument of support to
PPP procurement.
SECTION 7
PAGE 78
APPENDIX A
PUBLIC-PRIVATE PARTNERSHIPS AND THEIR
ROLE IN A POSSIBLE NATIONAL HIGHWAY PROGRAM
SPECIAL PURPOSE VEHICLE
Operator /
Manufacturer / Supplier
Third Party Equity
Maintainer
Shareholders Agreement
Project Funders
Concession Agreements
Credit Agreements
SPV
Equity
Revenue Agreements
Infrastructure Provision
Contract
Third Parties
Pre and Post Completion
Service Contract
Operator and Maintenance
Prime Contractor
Contractor
Sub-Contract Agreements
Subcontractor
Public Sector
Subcontractor
APPENDIX A
Subcontractor
Subcontractor
PAGE 79
APPENDIX A
SPECIAL PURPOSE VEHICLE
Service
Providers
Government(s)
Users
Management Agreement
Project Funders
Credit Agreements
SPV
Concession Agreements
Revenue Agreements
Infrastructure Provision
Contract
Third Parties
Pre and Post Completion
Service Contract
Operator and Maintenance
Contractor
Prime Contractor
Subcontractor
Public Sector
Equity
Subcontractor
SECTION 7
Subcontractor
Subcontractor
PAGE 80
APPENDIX A
G O V E R N M E N T E N T IT Y
G o v e rn m e n t
1 0 0 % O w n e rsh ip
E q u ity In v e stm e n t
N o n -re c o u rse
H ig h w a y A g e n c y
P r o je c t F u n d e rs
C re d it A g re e m e n ts
( In f ra stru c tu r e
R e v e n u e A g re e m e n ts
a sse ts)
a n d /o r
T h ird P a rtie s
In fra stru c tu re P ro v isio n
P re a n d P o st C o m p le tio n
C o n tra c t
S e rv ic e C o n tra c t
O p e ra to r a n d M a in te n a n c e
P r im e C o n tr a c to r
C o n tra c to r
S u b -C o n tra c t A g re e m e n ts
S u b c o n tra c to r
P u b lic S e c to r
S u b -C o n tra c t A g re e m e n t
SECTION 7
PAGE 81

CONTEXT OF PRIVATE PUBLIC PARTNERSHIPS FOR HIGHWAYS

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