Mythbusters: Overcoming macho tendencies in funding toll roads- PPP

I love the TV show “The Big Bang Theory.” It gives a sympathetic view of geeks, where the nerdy guy gets the beautiful girl—I just wish it had been made when I was in high school. I was the geek, without the chic. At the mercy of the big, macho kids, who seemed to have gone through puberty years before I even knew what the word meant.

I thought I had left all of that in high school, but there is a tendency in PPP to perpetuate the macho stuff. Let’s take toll roads as an example. A few frustratingly macho myths about toll roads that only a geek can bust:

The private sector should bear traffic risk

There is this exceedingly macho tendency to push traffic risk on the private sector, or more accurately, to view any toll road project that does not push traffic risk on the private sector as some sort of failure. After the macho posturing, and once the negotiations begin in earnest, these projects usually result in traffic guarantees from government. In the worst cases this traffic guarantee is negotiated at the last minute, and is therefore poorly designed and results in government bearing down-side risk but not sharing in the up-side. A more sensible project design looks first at how the risks can be shared most efficiently. The macho type will cram risk; the geek takes the time to work out the best balance and the best all-around deal for all parties.

Use as little public money as possible

In the same vein, we tend to assume a minimum amount of private capital is needed for a project to really be a PPP, usually something like 50%. But why? The Gautrain Rail Project in South Africa was financed with 90% public funding of different types, and many other projects, in particular in transport, are based on large public contributions. PPPs are not about maximizing private capital, they are about finding the most efficient and effective combination of public and private—a partnership. There needs to be enough private commitment to keep them engaged, but more is not necessarily better. The macho approach seeks to win, to get as much private capital as possible, to take. The geek finds a way to work together, to get the right amount of private funding, in the right balance of debt, equity and other financial instruments; the right amount of public financing, in order to achieve a robust and successful project, something sustainable, that will survive change, challenges and chaos (and alliteration…).

The bigger the better

Another well-trodden high school myth: size matters but often in inverse proportion. Bigger is not necessarily smarter, easier or more successful. More often than not, overly big projects crumble under their own weight, or languish on government wish lists. In Russia, the Saint Petersburg Government decided to launch the Western High Speed Diameter toll road as a large, single project with project costs exceeding €12 billion in 2007. The subsequent tender process resulted in a single bidder, primarily due to the size of the project. After negotiation efforts, the city chose to cancel the bidding process, restructure the project, and retender based on smaller phases of the project with more creative use of available financing. This led to the successful implementation of the project—a rare example of macho beginnings willing to adjust to geeky perceptiveness.

Use the project to push land acquisition, tolling levels and other reforms

Acquiring land, charging tolls, improving collection, and other reforms of the regulation of the toll road sector require time and effort. In many cases, the government uses the necessity of a PPP project to try to force through these reforms. This macho approach assumes the urgency of a project will force government entities to comply and submit. But if these reforms do not come as quickly as one might like, then the cost will be enormous. In most cases, the private sector will not take the risk of these reforms, and therefore delays or shortcomings in such reforms will be at the government’s cost. For example, the Lekki Expressway in Nigeria assumed that tolling of roads could be implemented once the road construction was complete. The road was built, but it turned out to be politically unacceptable to charge tolls. The road earned no revenues, and had to be repurchased by the government at great cost. More important is the acquisition of land. Many a government has signed a PPP contract before having acquired all of the land. The last piece of land is often critically difficult to obtain, and ends up costing the project huge amounts. Since land is usually a government obligation, delays in land acquisition incur costs for the government, to the investor to cover construction crews that stand idly waiting, and in lost revenues. The macho pushes as fast as possible, trying to force change through PPPs. The geek delivers the reform in parallel with preparing the project, acquires the land first and establishes the tolling regime before building the road. The geek says not to sign the contract until the land has been acquired. All of it.

The macho is about the short term, getting the recognition and awards, but often results in a failed project.

The geek is about the long game, resulting in robust projects, successful services and good investments.

Unfortunately, none of this helped when I was trying to find a date for my senior year high school dance.

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