Transport Economics and Other Infrastructure Working Papers

WP-TR-01

Privatizing the German Motorways –

Looking Beyond the A- and F-Models

Christian von Hirschhausen and Thorsten Beckers

Reprint from
SMi’s 5th Annual Event, Private Finance and PPP/PFI in Germany
(May 2004)

Workgroup for Infrastructure Policy (WIP) Chair of Energy Economics and Public Sector
Berlin University of Technology Dresden University of Technology
PRIVATIZING THE GERMAN MOTORWAYS
Looking Beyond the A- and F-Models

Prof. Dr. Christian von Hirschhausen

Dipl.-Ing. Thorsten Beckers

Berlin University of Technology

orkgroup for nfrastructure olicy

SMi’s 5th Annual Event

Private Finance & PPP/PFI in Germany
May 27, 2004, Hotel Adlon, Berlin

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 Agenda

1. Potential Benefits of the PPP-Approach

2. Economic Analysis and Evaluation of the A- and F-Model

3. Current Issues: Toll for Private Cars & Infrastructure Financing

(VIFG)

4. Concession Models for the German Highways – An Outlook

5. Conclusions

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 Potential Benefits of the PPP-Approach

Raising Private Capital

- Private financing without raising tolls (pre-financing-model) passes the burden upon future
generations; private financing should be combined with raising tolls and earmarking the
revenues
Avoiding “White Elephants”, more Transparent Subsidization of Projects,
Higher Acceptance of Tolls

Efficiency Gains, Lower Production Costs

- A study from UK pretends to prove efficiency gains of 15% due to the PPP-approach, but other
studies, from the UK and elsewhere indicate that PPP-projects are not always cheaper: complex
sectors and projects renegotiations cost-plus (e.g. SAPPINGTON / STIGLITZ (1987)
- The realization of efficiency gains depends on the regulation, e.g. risk allocation, tendering
procedure (VICKERS / YARROW (1991))

Application to the (German): highway sector: efficiency gains through PPP

are possible, but regulation matters

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 Agenda

1. Potential Benefits of the PPP-Approach

2. Economic Analysis and Evaluation of the A- and F-Model

3. Current Issues: Toll for Private Cars & Infrastructure Financing

(VIFG)

4. Concession Models for the German Highways – An Outlook

5. Conclusions

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 Structure of the F- and A-Model

Common Characteristics of the F- and A-Model

- Competitive Tender for the Concession
- Concessionaire has the obligation to construct / extend, maintain and operate the road for about 30 years (in
principle fixed term concession)

F-Model Planned & Realised Projects A-Model

- FStrPrivFinG (Fernstraßenbauprivat- - Extension from 4 to 6 lanes
finanzierungsgesetz / Private-Sector Funding
- Stretches of 18 km to 74 km
of Trunk Road Construction Act)
- Private toll + subsidy (from the - Public toll + subsidy (from the general
budget, max. 50 % of estimated costs)
general budget, max. 20 % of estimated costs)
- Application - Projects
• Tunnel, bridges, passes on • Up to 10 projects (first round)
highways • 4,4 % of the federal highways
• national roads with 4 lanes • 3,6 Billion €
- Projects - Project characteristics:
• 1 project opened for traffic technically simple projects
?
(Warnowquerung)
• 1 project in realization
• 1 failed tender
• ? planned projects
- Different project characteristics

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 Risk Allocation:
Theoretical Background & Rules of Thumb
Effects
Effectsof
ofRisk
RiskAllocation
Allocation
Incentives Costs of Risk Bearing Transaction Costs
- to influence the distribution - Users have lower costs of risk bearing (CROCKER / MASTEN [1996]) Avoiding / Allowing
of the risky variable than concessionaire / private enterprise - Information gathering before White Elephants
- to take into account and to (risk spreading, ARROW / LIND [1970]) contracting
limit the effects of the - For uncontrollable risks, the public sector - Costs of contracting
realization of a risky has lower costs of risk bearing than the
variable private sector (beware of „white
- Costs of re-negotiations
- Cost of delay of contracts
Competition Effects
- to reduce risk elephants“, which politicians love)

Rules
Rulesof
ofThumb
Thumbfor
forRisk
RiskAllocation
Allocationin
inthe
theConcession-Contracts
Concession-Contracts
Public Sector Concessionaire Users
Cost Construction, Operation (Inflation
& Maintenance
X Indexation)
Risks
Market Risk Financing X (Indexation)

Demand Risk Revenue Risk X (public toll) X (small part) X (if possible)
Force-Majeure-Risk (X) (X) X
Political Risk Planning Risk (small parts; to
(related to the X reduce transaction X
(higher costs, lower revenues) costs of risk shifting)
project)
Political Risk E.g. taxation
(not related to ?X (X) X
the project)
in the transport sector

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 Risk Allocation in F-Model-Projects
(sources: model concession contract and interviews in the field)

Public
Concessionaire Users Remarks
Sector

Construction, Job Creation

X (cost X
Operation & Program for
overruns) (costs < bid)
Maintenance Experts!
Cost Risks
Market Risk X X (rest of the Indexation can
Financing
(for 10 years) duration) avoid C+Rules
X

Eliminate juridical
doubts:
- Tolls should be X
Demand Risk
increasing in time! (as much as
Revenue Risk - If revenues < costs possible)
in early periods
compensations in
later periods should
be possible!

Force-Majeure-Risk (X) (X) X

Political Risk Planning Risk

(related to the (higher costs, lower X X
project) revenues)

Political Risk Taxation in the transport

(not related to (X) X
the project)
sector

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

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 Risk Allocation in A-Model-Projects
… and Room for Improvement
Public Concessionaire Users Remarks
Sector
Cost Construction, X
Risks Operation &
Maintenance
Financing X=R No indexation is
Market Risk applied

Demand Risk X (main part)

Revenue
Risk “Toll-Collect-
X (partially)
Risk”
Force-Majeure-Risk (X) (X)
Political Risk Planning Risk X
(related to the (higher costs, lower revenues)
project)

Political Risk Taxation in the transport X X

(not related to sector
the project)

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 Looking Beyond the Current A- and F-Models

Conclusions on Risk Allocation

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

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 Agenda

1. Potential Benefits of the PPP-Approach

2. Economic Analysis and Evaluation of the A- and F-Model

3. Current Issues: Toll for Private Cars & Infrastructure Financing

(VIFG)

4. Concession Models for the German Highways – An Outlook

5. Conclusions

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 Toll for Private Cars and Infrastructure Financing (VIFG)

Toll for Private Cars

- Tolls on ALL interurban roads in Germany are the dream of an economist
- … but this can not yet be realized due to the high costs of the tolling systems
- … so one should wait …
- Network-wide tolls should then only be implemented jointly on the highways, the national
roads and parts of the secondary network to avoid inefficiencies

User-Financing can already be improved

… earmarking revenues from the fuel-tax and the vehicle-tax (KFZ-Steuer)
… and / or implementing a vignette

The “VIFG” (Transport Infrastructure Financing Corporation) should be

developed to earmark SUFFICIENT revenues in the road sector

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 Agenda

1. Potential Benefits of the PPP-Approach

2. Economic Analysis and Evaluation of the A- and F-Model

3. Current Issues: Toll for Private Cars & Infrastructure Financing

(VIFG)

4. Concession Models for the German Highways – An Outlook

5. Conclusions

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 Future Privatisation and Organisation Models for Federal Highways:
Concessions of “Individual Stretches” vs. “Network-Concessions”

Concessions of Individual Stretches Network-Concessions

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

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 Agenda

1. Potential Benefits of the PPP-Approach

2. Economic Analysis and Evaluation of the A- and F-Model

3. Current Issues: Toll for Private Cars & Infrastructure Financing

(VIFG)

4. Concession Models for the German Highways – An Outlook

5. Conclusions

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 Conclusion

Empirical evidence indicates that economically sound BOT-projects in the

highway sector can lead to efficiency gains in Germany, too
- Even though PPP is not always more efficient (UK experience)

A- and F-Models
- Improvements in risk allocation are possible
- Extension of the F-Model-Law to all highways
- More speed! Deal flow!

Future concession Models for a privatized highway-network

- “Individual stretches” vs. “network concessions” (needles vs. olympic rings)
- Interesting question for regulation and contract theory and policy
- Industry suggests network concessions, but we do not yet know what is more efficient
- … topic for the next SMI conference in 2006

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