Prospects And Pitfalls Of Public-Private Partnerships In The Transportation Sector – Theoretical Issues And Empirical Experience

One effect of the regulatory reforms in the transportation sector is that private companiesincreasingly participate in the investments in new transportation systems. These investmentsmay amount to very large sums in the coming 10-year-period. There are several differentways to categorise these projects, but with a common name they may all be viewed as Public-Private Partnerships (PPPs). Some PPP projects may be very long-term, including newinfrastructure investments as in concessions and Build-Operate-Transfer projects, while othersmay be more short-term, concerning reinvestments only – and sometimes even limited to thetask of operating a finished construction. The overall goal of PPP projects is to find solutionsto problems in which the advantages of the private sector (such as financial assets, efficientmanagement, propensity to innovative and entrepreneurship) are combined with theadvantages of the public sector (such as social and environmental concern). When carried outsuccessfully, PPP projects can be very powerful tools to quickly construct new infrastructurefacilities and operate them efficiently. However, experience has also shown that they maysometimes go wrong, creating transportation systems that are inefficient, under-used and lossmaking.Although PPPs are still considered to be interesting solutions for urgent projectswhen budget constraints limit the possibilities for public-only investments, the discouragingexperience of some high-profile projects have had a negative impact on the reputation of thePPP model. In this paper, we discuss the prospects and pitfalls of PPPs in the transportationsector, focussing on long-term projects involving investments in new infrastructure for roadsand railways. Of particular interest are the various problems related to the sharing of risksbetween different partners in a PPP project. This includes both the risk sharing between theprivate and the public sector and the distribution of risk among the involved private firms,such as the members of a consortium but also their relations to banks and similar institutions.The risks of a PPP project are typically related to estimations and forecasts of marketdevelopment and other factors. We discuss these issues by using the theoretical concepts oflock-in and hold-up problems, and what can be done to avoid them in terms of PPP andcontract design. The theoretical discussion and the conclusions of the paper also draw fromthe gathered empirical experience of previous projects, primarily from European countries.