Researcher: Patrick Hoss
Project Duration: October 2018 – Juni 2019
Project Partner: Mott MacDonald
Research Summary:
Within the Netherlands, especially in the densely populated West, the mobility needs are increasing, and the capacity of existing transport systems is limited. Congestion of roads, air pollution and travel delays are the consequences. Policy makers and transport planners identify the shift of surface passenger transport to rail bound systems as a possible sustainable solution. Despite the increasing demand, public budgets are limited and most of the money is needed for maintaining existing infrastructure, leaving a gap between the need for new investments and the public money available. One possibility, to finance new infrastructure investments, is the use of private money under a Private Public Partnership (PPP) scheme. To take the route of private project financing, the project must be attractive enough for private investors to provide the necessary financial resources.This research was conducted to investigate and understand the factors that determine the attractiveness of a light rail PPP project within the Netherlands to lenders, and when those factors need to be considered by the contracting authority throughout early project stages. When setting up a light-rail PPP project, the public authority takes several decisions, going through different project stages. The project identification phase, the preparation phase, a phase in which the contracts and the tender are drafted, and the actual tender and award phase. The decisions made in those phases, shape the project and determine its unique project characteristics. Lenders searching for new investment opportunities assess prospective projects and decide, whether or not to commit, based on the attractiveness of the project. For assessing the projects attractiveness, they evaluate if the project characteristics comply with their criteria. Consequently, providing recommendations for the public authority in taking these decisions and shaping the projects characteristics in a way that they comply with the criteria used by lenders, is supposed to increase the attractiveness of the project to lenders. To develop those recommendations, the process was researched in reverse. 1. The criteria, used by lenders, were identified. 2. The project characteristics related to the criteria were investigated. 3. The decisions leading to the related project characteristics were identified. 4. The recommendations were drafted based on all the previous results.
1. A literature study, reviewing academic sources and other publications like PPP guidelines or conference reports, was used for the identification of the criteria. This resulted in a list of 23 criteria, which could be grouped under the six main-criteria, namely: Economic and political environment, Legal and regulatory environment, Project specificity, Project financial structure, Third party risk allocation and Contract arrangement.
2. For investigating the project characteristics, related to the list of lenders’ criteria, a literature study was not sufficient and a case study, including five different light-rail projects, was conducted. The projects are the RegioTram project in Groningen (Netherlands), the Brabo II project in Antwerp (Belgium), the Tram de Liege in Liege (Belgium), the NET Phase 2 in Nottingham (UK) and the ION Rapid Transit Phase 1 in Waterloo (Canada). The cases were chosen considering several aspects and with the main intention of covering a broad variety of project characteristics by assessing different projects. They differ in their location, their size, their contract form, some of them are new system whereby others are extensions to an existing one, some were more successful than others, and some are in a country with a track record of successful PPPs, like the UK with their long PFI history or Canada. Semi-structured interviews with private parties, involved in each of the case study cases, were conducted. The participants were asked to identify project characteristics based on the list of the lenders’ criteria. The outcome was a set of 101 project characteristics, which were grouped according to the related lenders’ criteria.
3. The set of characteristics was then used to identify the decisions, made by the public authority, which influence the related project characteristics. Again, semi structured interviews with parties involved in the case study projects, were conducted. However, the interviewees were people from the public authority, who were expected to have a better understanding of the decisions made on the public side of the project. The results indicated, that there are four main-decisions. They are related to the four early project phases and determine if the project is ready to proceed to the next project phase. When making those decisions, a variety of subjects, grouped in several decision areas, need to be considered in each of the consequent phases.
4. With the insights and results from the previous phase it was possible to draft a set of recommendations related to the different decisions which the public authority faces in each of the four project phases. The recommendations are presented per phase and decisions making area. In total, 82 recommendations are provided in 18 decision areas to be considered during the four project phases. The findings indicate that most of the lenders’ concerns, regarding a project, are negotiable, and subject to discussion in the dialogue phase of the tender procedure. Nevertheless, it appears that some prerequisites need to be met to get them interested. Those include a high level of stable political support, retaining the traffic volume risk, an availability-based payment mechanism, a suitable approach to deal with unexpected utilities, and an appropriate size of the project respectively of their ticket. Whereby some of the recommendations are a trade-off between retaining risks on the public side and consequently increasing the attractiveness, some are expected to increase the attractiveness without entailing any disadvantages for the public authorities. Even though most of the recommendations comply with general PPP guidance, they are only meant to increase the attractiveness to lenders, and other considerations need to be taken into account when making decisions in early project stage.
Nevertheless, lenders ultimately enter into an agreement with the SPV, and have, with the direct agreements being an exception, no direct contact with the public authorities. Therefore, the public authority can set the right framework conditions, but are limited in their influence. Further, there are other measures to increase the attractive of light-rail PPPs to lenders, not related to a single project, but rather on a high-level national context. These include: the development of a projectpipeline, standardisation of contracts and establishing a centre of expertise, which could be, next to a validation of the recommendations, subject to further research.