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Discussions on Public Private Partnerships (PPP's) in London transport projects, have been carried out since the UK Government started its implementation in the 1990's. In the past 20 years in particular, they have been subject to heavy criticism.
However, there has been a move in recent decades for many government functions to be delivered through PPP's with a narrow range of objectives, as there is an increased focus on accountability and effectiveness.
There is recent increased importance in the financial efficiency of public project investment spending, and a necessity to examine the role of governments' possible financial funding strategies of these projects, from the aspect of how they were made.
The provision of high quality transport infrastructure and an appropriate number of reliable transport services is one of the crucial issues which UK central government and local level authorities face.
Transport is critical for economy, and the benefit of efficient transport supports economic growth. However, public authorities need to balance financial and strategic interests within limited funding for long term PPP transport projects.
Although, there is a breakdown in the funding and administration of public transport projects, which have been caused by a lack of trust between central and local government, in making investment decisions in the UK.
The Public Sector needs to revise its political choices and the financial methodology used for the critical public transport projects according to changes in today's the investment capital. Therefore, issues about financial mechanisms used in PPP transport projects are worth to investigate.
Public Private Partnerships are becoming crucial for today's public project investments. Other than PPP promise of value for money, they can also deliver the projects on time and within budget.
In recent years, there has been a significant change in the number of successful public projects with the current government's PPP approach.
Private Finance Initiative (PFI) is one of the most common forms of PPP's among national and regional governments. It is a system that the private sector provides capital assets for public services in the UK, and enables the government spread the great cost of the project investment over a long period of time.
PFI is used for a number of large scale infrastructure projects, but not all projects are always successful. Especially when we look at recent public transport projects, which failed to meet financial objectives and cost millions of pounds to public sector, such as Jubilee Line Extension project, we can get a better understanding the importance of these partnerships.
Keeping in the mind that failing transport projects create a great depth for the tax-payers, also the issue behind the governments' financial regime for those transport projects affects the decision on government capital expenditure for the future investments.
Therefore, in this research the alternative financial mechanisms will be analysed to find the best option which is suitable for governments' financial objectives in PPPs transport projects. The aim is identifying the conceptual problems which are related to public and private partners' financial objectives in PPPs and their impacts on the success of the transport projects.
PPPs financial objectives and mechanisms are looked from different angles. Although the aim of this study is to identify the most effective financial mechanism to solve the issues rose in recent years, numbers of issues have been identified related to public and private sector objectives, policy design of these organisations according to previous studies and current political changes. The review of different approaches indicates that there is no perfect mechanism which works best for transport projects as the expectations from different transport projects varies which depends on governments politic and strategy in financing PPPs projects.
All in all, objectives of this paper is to offer acceptable argument that based on the analysis in the field and analysis of the problems about current public transport projects in London. However, the main question is how the public sector would benefit from identification of the methodical issues not just theoretically but also in practice.
There are two hypotheses can be brought up from the main questions of this analysis, follow as;
- Long-term PPPs project contracts impact the government budgetary system.
-An alternative financial mechanism Bond Issuing is suitable for public transport projects.
PPP IN LONDON TRANSPORT
United Kingdom is known as one of the first and advanced PPP users in the world. Since early 1990s, UK governments have been using the Private Finance Initiatives (PFI) - a form of PPP- for a large number of public projects and the model still holds key for financing public projects. The PFI stands apart from other classic PPPs in that the private sector party provides funds for the project. Nevertheless, the model enables public sector to spread the cost of investment over a long period of time while, providing extreme incentives to deliver public projects on time and on budget by transferring great part of the risk to private sector. The PFI is a system ,where the private sector provides the capital assets for the public sector projects other than not only being responsible for the design and operation of those assets. Under the PFI, the assets are not publicly owned, however the public sector make committed revenue payments to the private contractor for the use of the facilities over the contract period.
A Public Private Partnership had been first introduced on 20 March 1998 and John Prescott, Deputy Prime Minister, described the PPP as a new approach, which would bring stable and increased investment for LU different than old fashion publicly owned, privatisation or even a half privatisation system . The model is designed to get the best from both public and private sector, also publicly owned and accountable one.
The government especially point out that operations of train and station services will remain publicly owned, where LUL as a single guide will also be responsible for safety matters, service patters and setting fares. The key point lying behind the public-private partnerships were to maintain and upgrade the infrastructure of assets, improving the services for passengers while providing value for money for taxpayers.
Lately, the most remarkable expenditure rate and the most complex public projects have been made with almost %50 of total investment expenditure occurred within transport projects in the UK. According to PPP Forum project data base it said that £27881 million project investment of the £59305 million total project capital expenditure across 20 different public sector departments has been made for completed or in progress transport projects.
At present, PFI is still holding a key for long-term complex public projects, however controlling unexpected cost expenses is one of the formidable problems for those crucial public projects, such as Jubilee Line Extension, NHS health services projects.Keeping in the mind that number of signed PFI contracts with the government increased from 450 to 626 while the capital of investment doubled in just 3 years.
(from 2001 to 2004) part already benefitting from The out come of this partnership for private sector will be the profits from improved performance and maintaining services for passengers. (RPRT)
OPERATIONS OF PPPS IN THE LONDON UNDERGROUND
London's Underground, also known as Tube, is the worlds oldest and one of the largest underground railway which surrounds the city with 270 stations. Around three and a half million journeys are made each day totalling around by one billion passenger journeys each year. The first Line Metropolitan Railway was opened in 1863, operating between Paddington and Farringdon Street.
In 1985 London Underground Limited was established as a subsidiary; however the responsibility passed from LUL to Transport for London on 15 July 2003, following conclusion of the Public Private Partnership (PPP) agreements. As a part of TfL, LUL is responsible for operating 140 years old railway network with 11 different Underground Lines. Of the eleven lines subsume the Underground; seven of them (the Central, Northern, Piccadilly, Victoria, Waterloo & City and Bakerloo) are "deep tube" lines, while the others (the Circle, Hammersmith & City, District and Metropolitan) are "sub-surface lines. London Transport maintenance projects for these lines require millions of investment every year.
The public transport organisation LUL has been through number of considerable organisational and funding changes since then. Management and refurbishment of the trains, stations and tracks and signals divided between three infrastructure companies, where these companies ( referred "Infrascos") were part of the public sector, according to the tube lines that they were responsible, as follows;
Infrasco BCV was responsible from Bakerloo, Victoria, Waterloo & City and Central Lines.
Infrasco JNP was responsible from Piccadilly, Jubilee and Northern Lines.
Infrasco SSL was responsible from East London (no longer exist), Hammersmith&City, District, Circle and Metropolitan Lines.
Following these changes in the operation of Underground, Tube Lines and Metronet signed their individual 30 year contracts with LUL to maintain and improve the London Underground when Tube Lines took over Infrasco JNP in December 2002 and Metronet took over the other two Infrascos in April 2003. Although, Tube Lines and Metronet took a part as private partners in London Underground PPP, LUL (part of the public sector) has Special Shares in both companies; this gives LUL the power of restricting the companies to work only on the PPP contracts. Each of 30 years contracts were break down in to four 7 Â½ year parts.
Plans for the PPPs didn't work as it s expected and Metronet drained out millions of pound funding just after four years of its contract for JLE.
The Tube Lines was one of the private partners in the London Underground PPP and originally owned by Jarvis JNP Limited (Jarvis), UIC Transport Limited (Betchel Holding, USA) and JNP Ventures Limited (Amey UK Plc) in 2002. The share capital of Tube Lines divided between these three private companies. In 2003 Amey Plc sold its share to Grupo Ferrovial SA (Spain) just the year before Amey took over the Jarvis shares.
Today Tube Lines' position and its JNP lines contract haven't changed for LU after the collapse of Metronet. However, TfL bought all the shares of tube lines on 27 June 2010 just after the second Review Period.
The Metronet Corporation was created by five private companies; all companies had equal shareholders, to work with LU as a PPP partner. Metronet took over Infrasco SSL and BCV in 2003. Similar to Tube lines operating structure, Metronet had different holding companies with a main and a financing subsidiary for BCV and SSL. In July of 2007 Metronet became a bankrupt and it went into Administration following a court command. BCV and SSL handed over to TfL in May 2008. After insolvent of Metronet critical questions were raised by media, such as "was that the PPP contracts failed to transfer risk to the private sector? And similar question earlier came up to government's agenda after Railtruck's bankruptcy "Whether the risk of failure on any essential public service can ever be truly transferred to the private sector?" in 2002. After four years, following frequent issues in the Metronet services BBC News reported that " Metronet could be fined more than £1million if it is found responsible for Monday's severe delays on Central and Circle lines". As it can be seen that the repeated similar questions were rose so many times in the history of PPPs. Stephen Glaister, an economist in Imperial College and TfL's board member, London, criticized the PPPs contracts situation with saying that " There simply wasn't enough equity at risk to give incentives for Metronet to perform."
Keeping in the mind all these recent changes, it seems that managing the risk in the delivery of assets and services by combining the expertise of each partner in the interest of improving the services to the public transport projects and delivering value for money and the taxpayer seems challenging when both parties financial objectives considered.
1.2 SCALE OF FUNDING IN TRANSPORT PROJECTS
LUL has been funded from primary and secondary revenues; central government grants and passenger fares. More than half of the daily journeys made related to work propose, as a result of this travel habits and increase in the fare revenue are closely related to the economic activities. Accordingly, the statistics show that passenger journeys dipped during the 1990s and 2007 financial crisis. However, since that time the journeys have risen continuously by all-time peak as LUL has achieving an overall figure of £1,065 million between 2009 and 2010.Appendix 1 Although, big portion of this core grants from the operating the system and ring-fenced grant are spent on the major project investments such as Jubilee Line Extension (JLE), Cross Rail.
After taking these expenses and charges for maintenance into account, LU does not make a profit; in fact LUL received of a £816m grant from government and spent £655m of this grant just for the Jubilee Line Extension project.
(finansal gosterge bul kaynak-Gaffney/shaoul)
2.1 SCHOLAR VIEW OF PPPs (LITERATURE REVIEW)
2.1.1 Criticizing the PPPs for public sector
Widely accepted public-private partnerships are generally recognised as long term cooperative arrangements between the two sectors to achieve an efficient and improved service for public. Over the past decades PPPs have been subject to serious criticism in particularly their effectiveness and efficiencies since they were established in the 1990s. However, there has been a move in recent years many government functions to be delivered through public private partnerships with a wide range of objectives so as to increase focus, accountability and effectiveness. They are not new, yet there has seen dramatic increase in the number of governments moving forward with PPPs projects, and the forms of PPP in use across the globe.
According to many scholars, as a favourite public service delivery tool PPP provides better value for money in the provision of public infrastructure. Some public infrastructure projects could cost millions of pound to public sector over a long period of time, at this point PPPs reduces the pressure on government budgeting system by using private finance initiative for large scale of public infrastructure projects. Some argue that PPPs definitions stress the financial relations between both parties through their functions, while the others focus on PPPs' managerial functions or their development strategy aspects. Furthermore, these different types of PPPs refer a shared responsibility between public and private sectors for providing goods and services. The degree to which responsibility and risk are transferred to the private sector, and the agreements by which the public and private sectors collaborate in working toward policy goals and objectives, differs for each method. Through alternative methods it is possible to identify three most common PPPs frameworks, which are mostly projecting in the literatures on infrastructure projects, as well as why some methods will be preferred over others.
These include: BOT (Build-Operate-Transfer), BOOT (Build-Own-Operate-Transfer) and BOO (Build-Own-Operate). In general the financial arrangements of BOT, the most common of these arrangements, are the project is designed and financed by the private sector, and run and maintained by the private sector for the concession period. The private sector partner receives income from running the infrastructure (e.g. toll road, electricity generation). After the expiry of the concession period, the legal ownership of the project is transferred to the government. Campbell (2001) suggests a definition of PPP focusing on financial arrangements that is 'a PPP project generally involves the design, construction, financing and maintenance and in some cases operation of public infrastructure or a public facility by the private sector under a long term contract'.
Types of Partnerships
There are several types of Public-Private Partnerships used since 1970s; their design depends on the terms related to the partnership contract.
Operations and Maintenance (O&M);
Public, such as local authority or agency, state, with a private partner sign a contract, under this contract private partner is responsible from operation and maintenance where public partner retains ownership of the assets and general management of these assets. However, these types of contracts are not often considered within the spectrum of PPPs.
Operations, Maintenance & Management (OMM);
Private partner is responsible from operation, management and maintenance of the facility or a service and also, in some cases the private partner provides the capital needed. The private partner could get great returns from these types of long term contracts where public partner retains ownership of the assets. The opportunity of having long term contracts increases the private investment, and also encourages the private partner to increase the effectiveness and the efficiency of projects under the contract terms. This type of contracts mostly used for many local governments to provide basic public services, such as waste collect.
Design and Build (DB)
A DB is when the private partner provides both design and construction of a project to the public agency. This type of partnership can reduce time, save money, provide stronger guarantees and allocate additional project risk to the private sector. It also reduces conflict by having a single entity responsible to the public owner for the design and construction. The public sector partner owns the assets and has the responsibility for the operation and maintenance.
While some research has focused only on the benefits and advantages of PPPs for public sector, other scholars' reviews have sought to show how this partnership impacts and reduces the chances for other financial alternatives for public sector. While some scholar argue that "true" PPPs always involve private infrastructure investment and ownership, Benett, Ghorman and Gentry (1999) describe PPPs as a spectrum of cooperative relations between private and public organisations directed towards the supply of infrastructure services.
Estache and Serebrisky (2004) identify four principle type of PPP contracts:
Divestments of public property or businesses to the private sector
Greenfield investments , for example the building of a toll motorway
Service contracts that can include premises on investment
Concessions, licenses and franchise agreements, which often have a life span of 10-30 years, include detailed provisions on investments and service level. (International journal of transport economics)February 2009-Fabrizio Serra editor
The literature has demonstrated different studies regarding financial objectives and the extent of their adoption by public and private bodies in PPPs projects.
2.1.2_Advantages of PPPs
According to Consideration of Business Industry report in 2007, PPPs offer value for money, service improvements and a better chance of delivering projects on time and on budget. Much of the earlier studies emphasized the issues which are related to PPPs public sector projects; however some studies have taken a different approach by looking not just at financial methods of funding projects but analysing how the both parties share the risk, resources and the risk which is related with the procurement of the projects. In a typical study of this type, Klijn and Teisman (2000 and 2005) emphasised risk-sharing as a necessary fundamental. Public and private are both have to share part of the risks involved in projects in this partnership. Another approach, Commission on UK Public Private Partnerships (2001), described this partnership as a sustainable cooperation which PPPs share not just risks also profits and costs of the projects.
2.1.3_Disadvantages of PPPs
Supporting the academic's reviews on PPPs, there is high number of comments on London Undergrounds performance criticizing whether LUL is failing to meet the quality requirements expected by politicians, passengers, business world and government. Despite that the considerable investment in the main railway and underground networks made in 1980s and 1990s, the number of complaints has risen because of the service interruptions and delays which reported on news every other day. Accordingly, customer frustration and anger are rising day by day.
The largest concerns about PPP are based on market failures and equity issues, in this view;
The private sector's consideration on saving from costs of the projects might minimize the quality of service or raise prices for certain groups.
The externalities that can cause many issues for goods and services, which are usually provided by the government, are not private sector's concerns.
The possibility of interruptions in the private sector's service increases by threat of bankruptcy
Many argue that if competition is not strong enough, which encourages the private sector to be efficient, the private partner will fall into the same problems that might affect the government's service supplies.
Grimsey and Lewis (2007) suggested that there are critical tree main issues related to these partnerships contracts that public entity needs to examine;
Capacity: An assessment of private partners' strengths and weaknesses should be done according to its sector. Public interests are clearly mentioned so that bidders are fully aware of particular requirements on these specific grounds.
Motivation: Determination of the private partner's enthusiasm in providing the services or goods with considering the risks and rewards of this participation. Also, private partner's reaction to financial markets and banks willingness to support the project is very important. These risk management matters, taxation and accounting arrangements, the state of current capital markets and activity levels in the selected sector indicates the level of competition for the likely participant.
Value for Money: The cost of PPPs projects and relevant services provided by private sector needs to be less than for the services provided by public sector. When the risk and resulting are taken into account, the cheapest proposal is not always provide value for money so there should be a degree for quality of services, time frame and price.
2.1.4_Alternative Financial Mechanism Approaches for Public Transport Projects
Glaister (2000) suggests that the consideration of an alternative financing mechanism is important which the public sector could use to raise reinvestment capitals. Thus, he argued that options are to use conventional public financing, procurement and management or bond mechanism; still another would be full privatisation of the public transport system. He also mentioned important points about benefit of PFI/PPPs in his finding but he heavily criticised the state of the financial function of PPPs for public transport projects by giving the example of Channel Tunnel Rail Link project experience. In concluding that the PPP is not the only way forward and there are still other opportunities to deliver a cheaper, more democratic alternative for public projects. While there are obvious problems with Glaister's search- he hasn't mentioned any implication methods and implication difficulties of these alternative approaches for public transport projects except PFI/PPP and bond mechanisms in his analysis.
3.1 Methodology and Objectives of the study
To start with as much information as possible was found which are related to background of the PPPs in London Transport, in order to get better understanding from the fundamentals of public and private financial objectives in the partnership I analysed different case studies related to topic. However, due to wideness of the research area, mostly the underground was the main area as a general view of the London Transport.
The historical background of PPPs gave me an idea about the process of grooving number of these partnerships and their relationships with governments' budgetary system.
The process of gathering information on the issue took several forms during the research. Mix methodology, primary and secondary data collected to achieve the objectives of the research, because of the limitation to reach a large number of the sampling for this research. By doing that quantitative data collected from other organisations and relevant statistics.
One of the aims of the research is to obtain information about recent changes in PPPs transport projects therefore, interviews set up with transport project professional. The researcher decided on interviewing 10 of the London Transport management team, one each from management team, although this was seen not achievable and realistic within the time frame.
Semi-structured interview method was preferred for obtaining the project management team views about the financial aspect of these partnerships. The stuff contacted by phone to arrange convenient time or the interviews. Due to issues related to time limit and work commitments of the stuff, all interviews was carried out during the candidates' free time. Each interview was lasted 8 to 10 minutes with a questioner including 3 critical questions related the issue. (Appendix 4)
Both techniques allowed the researcher to plan the research and get clear answers from the candidates which helped to figure the issues out about projects. Also, number of London public transport projects were analysed closely to get better understanding of the current situation of the PPPs projects in London, such as Jubilee Line Extension and Cross Rail projects.
3.2 ANALYSIS (METHODOLOGY) AND RESEARCH
3.2.1 SECONDARY DATA -STATISTICS
In this part of the study pre-existing data and statistics used to answer the main questions of this study about PPPs.
3.2.2 PRIMARY DATA -INTERVIEWS
3.3 KEY FINDINGS
PUBLIC FINANCIAL OBJECTIVES (or the case for the PPP
PRIVATE FINANCIAL OBJECTIVES (or the case against the PPP)
COMPARISION OF BOTH ( LINKING WITH LITERATURE REVIEWS
5.1 THE BOND ISSUING OPTION
5.2 IDENTIFYING KEY ISSUES THAT CAN BE IMPROVED