Master Thesis Jose Andres Peña IMRE 2005

FREIBERG UNIVERSITY OF MINING AND TECHNOLOGY International Management of Resources and Environment
Master Thesis The Introduction and Future of Transportation Public-Private-Partnerships in Mexico: Developments, Problems, Hindrances and Solutions
Prepared by: Jose Andres Pea Gonzalez Code: 47935
Freiberg, 2008
The Introduction and Future of Transportation Public-Private-Partnerships in Mexico: Developments, Problems, Hindrances and Solutions Jose Andres Pea Gonzalez, IMRE 2005
_______________________________________________________________________________________________________
Table of Contents Table of Contents .2 List of Figures 5 List of Tables .6 List of Annexes .6 Acknowledgements ..7 1. Introduction ..8 1.1 Purpose and Objective ...9 1.2 Scope and Methodology ..10 2. Public-Private Partnerships in Transportation Projects .....12 2.1 Background ..12 2.2 Definition and Types of Public-Private Partnerships ...14 2.2.1 Private Contract Fee Services ...14 2.2.2 Alternative Project Delivery Approaches ..15 2.2.3 Multimodal Partnerships .15 2.2.4 Joint Development ...15 2.2.5 Long-Term Lease or Concession Agreements ...15 2.3 Public-Private Partnerships Arrangements ..16 2.3.1 Private Contract Fee Services, including Contract Maintenance ....16 2.3.2 Alternative Project Delivery Approaches ..17 2.3.3 Full Delivery or Program Management .20 2.3.4 Transit Related Development Approaches ..20 2.3.5 Multimodal Partnerships .26 2.4 Benefits of PPPs ...27 2.4.1 Stronger Working Relations ...27 2.4.2 Reduction of Financial Constraints ...28 2.4.3 Faster Delivery .28 2.4.4 Innovation and Expertise ....28 2.4.5 Greater Cost Efficiency and Productivity .29 2.4.6 Integration .29 2.4.7 Greater Choices ...29 2.4.8 Increased Competition 29 2.4.9 Risk Management 30 2.5 Risks of PPPs 30 2.5.1 Transaction Costs 31 2.5.2 Potential Higher Life-Cycle Costs .....33
_______________________________________________________________________________________________________
2.5.3 Taxation Constraints 33 2.5.4 Moral Hazard ....33 2.5.4 Loss of Control over Assets 33 2.6 Critical Success Factors ..34 2.6.1 Stakeholder Consultation and Support .34 2.6.2 Public Sector Involvement ..34 2.6.3 Political Leadership ..34 2.6.4 Secure Public Control ..35 2.6.5 Limited Complexity and Appropriate Risk Sharing and Rewards ....35 2.6.6 Effective Working Relationships among Partners During/After Contract Negotiations ....35 2.6.7 Legal Authority ..36 2.6.8 Other Key Success Factors for Transportation Project PPPs ..36 3. Transportation PPP Activity in Mexico ..38 3.1 Major Toll Road Developments ..38 3.1.1 Early Toll Road Strategies ..38 3.1.2 President Salinas Private Toll Road Plan ...39 3.1.3 Early Problems and Continued Expansion ..40 3.1.4 Restructuring Before and After 1994 42 3.2 Major Toll Road Issues and Implications for Best Practices ..44 3.2.1 Need for Adequate Program Preparations and Planning ..44 3.2.2 Cost Estimates and Construction Issues .45 3.2.3 Traffic and Revenue Forecasts, Tariff Rates, and Operations Issues ..45 3.2.4 Financial and Economic Issues .46 3.2.5 Importance of Well-Designed Legal, Regulatory, and Institutional Frameworks ....47 3.3 Current Situation of Roads in Mexico ....48 3.3.1 Highway Concession ...49 3.3.2 Service Provision Contracts ...53 3.3.3 Asset Utilization 57 4. Mexico Transportation PPP Case Studies ..60 4.1 Background 60 4.2 Transportation Project Case Studies in Mexico ...61 4.2.1 Matehuala Bypass Toll Road .62 4.2.1.1 Funding and Finance .....63
_______________________________________________________________________________________________________
4.2.2 Morelia-Salamanca Toll Road 64 4.2.2.1 Funding and Finance .....67 4.2.3 Northern Bypass of Mexico City Toll Road .....67 4.2.3.1 Economic Benefits ..69 4.2.4 Asset Utilization ....70 4.2.4.1 Maravato-Zapotlanejo and Guadalajara-Aguascalientes-Len Toll Roads 71 4.2.4.2 Reynosa-Matamoros and Reynosa-Pharr International Bridge .73 4.2.5 Irapuato-La Piedad Toll-Free Road ..74 4.2.6 Tepic-Villa Union Toll Road ....77 4.2.7 Monterrey-Saltillo and Saltillo Bypass Toll Roads ..80 4.2.7.1 Impediments ....81 4.2.8 Anzalduas International Bridge ..82 4.2.8.1 Impediments ....84 5. Results and Conclusions ....85 5.1 Issues and Strategies to Address Them ...85 5.2 Lessons from Mexico Transportation PPP Case Studies ..85 5.3 Conclusions ...86 6. 7. References ...98 Annexes ..102
_______________________________________________________________________________________________________
List of Figures Figure 2.1 Mayor Types of Transportation PPPs .....16 Figure 3.1 Mexico Highway Network ..48 Figure 3.2 Mexico Main Highway Corridors ...49 Figure 3.3 New Highway Concession Model Construction Stage ..51 Figure 3.4 Comparison of PPP and Concession Models ....53 Figure 3.5 Main Risks in PPS Projects ...55 Figure 3.6 Legal and Document Structure in Mexican PPP Project ..55 Figure 3.7 Utilization of Highway Assets ....58 Figure 4.1 Matehuala Bypass Project Site Map 62 Figure 4.2 Ribbon Cutting for the Matehuala Bypass ..63 Figure 4.3 Morelia-Salamanca Toll Road Project Site .65 Figure 4.4 Morelia-Salamanca Toll Road Crossing Lake Cuitzeo .66 Figure 4.5 Arco Norte Bypass of Mexico City Project Site Map ...68 Figure 4.6 Jilotepec-Tula: First part of the Northern Bypass of Mexico City 70 Figure 4.7 Maravatio-Zapotlanejo and Guadalajara-Aguascalientes-Leon Toll Roads (the project) in west-central Mexico ..72 Figure 4.8 Site Map of the Reynosa-Matamoros Toll Road and Reynosa-Pharr International Bridge (exixting) and the Reynosa Bypass and the Rio Bravo Donna International Bridge (to build) ...74 Figure 4.9 PPS La Piedad-Irapuato Toll Free Road Site Map ....75 Figure 4.10 La Piedad-Irapuato under construction .76 Figure 4.11 La Piedad-Irapuato Modernization Completed in July 2007 ..76 Figure 4.12 Tepic-Villa Union Toll Road Project Site ...78 Figure 4.13 San Pedro Bridge on the Tepic-Villa Union Highway ..79 Figure 4.14 Monterrey-Saltillo and Saltillo Bypass Toll Road Site Map 80 Figure 4.15 Monterrey-Saltillo Toll Road under construction ..82 Figure 4.16 Anzalduas Bridge Connector Site Map .83
_______________________________________________________________________________________________________
List of Tables Table 2.1 Public and Private Sector Benefits and Risk of Transit-Oriented Development .22 Table 2.2 Types of Risks Associated with Transportation Infrastructure Project PPPs .....30 Table 2.3 Consequences and Mitigation Strategies for Mayor Types of PPP Project Risks .....32 Table 2.4 Legal Issues Associated with Transportation Infrastructure Project PPPs .....36 Table 3.1 Average Daily Traffic as % of Guaranteed Traffic ...42 Table 3.2 Highway Concession Program (2007) ..52 Table 3.3 Public-Private Partnership Model (2007) ..56 Table 4.1 Summary of Bid Tender in Maravatio-Zapotlanejo and Guadalajara-Aguascalientes-Leon Toll Roads ..73 Table 4.2 Tepic-Villa Union Toll Road Concession Summary ....79 Table 4.3 Key Dates in the Construction of Monterrey-Saltillo Toll Road .81 Table 4.4 Summary of Investment of the Anzalduas International Bridge ....84 Table 5.1 Legal and Technological Issues and Strategies Used to Address Them for Mexico Transportation PPP Projects ..89 Table 5.2 Funding/Financial Issues and Strategies Used to Address Them for Mexico Transportation PPP Projects ..90 Table 5.3 Environmental Issues and Strategies Used to Address Them for Mexico Transportation PPP Projects ..93 Table 5.4 Administrative Issues and Strategies Used to Address Them for Mexico Transportation PPP Projects..95 Table 5.5 Key Lessons from Mexico Transportation PPP Projects ...96 Table 5.6 Critical Success Factors for PPP Transportation Projects ....97
List of Annexes Annex A Glossary of Terms ...102 Annex B List of Acronyms ..105
_______________________________________________________________________________________________________
Acknowledgements
The thesis has been an inspiring, very challenging, but always interesting and exciting experience. I am very grateful to my advisers, Dr. Christoph Winter and Dr. Jan C. Bongaerts, for the patience and encouragement.
Many thanks and heartfelt appreciation to my friends in Germany and in Mexico, for the constant prodding to finish my MBA, for helping me hold my ground, and for believing I could soar high.
Finally, I wish to thank my family for their continuous love and encouragement, for always believing in me, and for never failing to provide all the support.
_______________________________________________________________________________________________________
1. Introduction
Since the late 1980s, public-private partnerships (PPP) have come to the fore in various countries around the world in the provision of infrastructure. PPPs provide an opportunity for governments to provide social capital infrastructure in the form of schools, hospitals and roads while benefiting from greater cost-efficiency that may be achieved from private sector involvement. It is argued that alignment of incentives drives the efficiencies that are derived from PPP arrangements. Private sector participation in asset and service provision can maximize value for money for government by expediting financing, facilitating innovation, providing better risk management, and integrating life-cycle management (Miller, 2000).
Internationally PPPs have become increasingly attractive for governments seeking fiscal discipline. PPPs provide public agencies opportunities to deliver transportation facilities using private sector resources without necessarily committing public debt or equity. In the face of increasing gaps between infrastructure financing requirements and revenues, public agencies often view PPPs as a way to expedite critical infrastructure that may otherwise not be built.
In Mexico, the trend towards PPPs in the provision and maintenance of highway infrastructure has been gradual due to the strength of the funding (Mexican peso crisis in 1994) and institutional arrangements (Mexicos political crisis in the 1990s) that supported the nations traditional roadway development program. This included a dedicated transportation trust fund supported by oil revenues, federal transportation agencies to provide administrative oversight of the program, and state transportation agencies which delivered the program through project planning, financing, development, and maintenance activities. However, as Mexico highway system matured, the needs for repairing and expanding the Nations network of roads, bridges, and tunnels have escalated beyond the fiscal capabilities of traditional funding sources to pay for them at both the federal and state levels of government (World Bank, 2003). This has resulted from a number of causes, including: The rapid pace of facility deterioration and functional as well as structural obsolescence due to the advanced age of many of these facilities and in some cases deferred maintenance of facilities by states which lacked the resources to perform normalized maintenance to better preserve these infrastructure assets. The growth in the nations economy and its position in the global economy (North American Free Trade Agreement) which has led to increasing movement of freight over the nations highway system.
_______________________________________________________________________________________________________
Escalating growth in personal travel that is congesting the highway system which has grown little over the past 20 years. Rapidly rising costs of building and maintaining highway infrastructure as the price of construction materials has increased substantially in recent years due to greater competition from countries experiencing accelerated growth, particularly China, India, and Eastern Europe.
The general unwillingness of elected officials at both federal and state levels to raise the motor fuel tax or institute an alternative funding strategy that will sustain the condition and capability of the nations highway system to support economic growth, interstate and international commerce and public mobility.
The culmination of these interrelated conditions has led to an increasing willingness by transportation infrastructure agencies at both the federal and state levels to consider and in some cases apply alternative funding, financing, contract delivery, and life-cycle preservation methods to leverage the scarce public resources. The Federal government through the Secretariat of Communications and Transportation (SCT) has promoted greater innovation in the ways highways are planned, financed, procured, and administered through workshops and sponsored research, which are aimed at promoting innovative ways that encourage the use of PPPs in the national highway development and preservation program (World Bank, 2003).
1.1 Purpose and Objectives
The purpose of this thesis is to promote greater understanding of the role institutional factors (including statutory, regulatory, financial, organizational, procedural, and cultural) play in facilitating or impeding the formation and successfully implementation of public-private partnerships and to identify effective strategies for overcoming institutional impediments and facilitating successful PPP development and implementation, based on the experience of a number of successful domestic transportation PPPs. To accomplish this purpose, the study performed the following activities: Conduct a literature review to characterize the types and implications of various institutional factors that significantly impact the potential for successful implementation of transportation PPPs; Develop and execute a study plan to collect secondary and direct information on the major institutional issues that confronted successfully implemented PPPs for
transportation projects in Mexico;
_______________________________________________________________________________________________________
Develop a series of case studies of domestic PPPs that characterize transportation project PPPs by facility type and contract type, describe their institutional challenges and how these issues and their implications compare and contrast between projects, and identify strategies to effectively overcome these impediments to successful PPP implementation; and
Synthesize and document the study findings in a guidebook to help prospective sponsors and participants in PPPs understand the institutional context for transportation projects, the institutional issues that can undermine formation or implementation of these PPPs, and ways to deal with or overcome these impediments based on best practices cited from PPPs successfully implemented in Mexico and elsewhere.
1.2 Scope and Methodology
The study reviewed and summarized the available literature on the application and management of PPPs for transportation infrastructure in Mexico and overseas. This provided a summary of benefits, risks and critical success factors arising from PPP arrangements in Mexico and elsewhere. The study then assembled a list of candidate transportation PPPs in Mexico, from which a group would be selected for developing the individual case studies. From this group of projects, a finite set was chosen for investigation using project documentation available from the literature, including that provided by relevant project websites, annual reports and local knowledge. While general information is available about many PPP transportation projects around the world, there are relatively few such projects in Mexico to choose from.
It should be noted that given the commercial and political nature of PPP arrangements, information required to provide a comprehensive evaluation of PPP projects is often incomplete, not available, or restricted. Furthermore, personnel from the private sector concession teams generally disperse at various junctures of the concession. For example financial and legal personnel involved in PPP projects disperse at financial closure of each project. Design and construction personnel often disperse after the project is opened to traffic. This further inhibited information that could be derived at either the consultation or development stages.
As a consequence of this, the study found that project partners whom attempted to contact were often either not available or reluctant to respond, particularly those in the private sector. When the author was able to make contact, many were reluctant to answer questions regarding issues that arose during the project and the strategies used to overcome them. The public sector sources were more forthcoming and candid in their discussion of the rationale for using a particular PPP
10
_______________________________________________________________________________________________________
arrangement to develop needed projects, as well as the key issues confronting their PPP projects and how they were addressed. As such, information presented in this thesis is based on the best available public information on each PPP project. This information is reflected in the domestic case studies.
11
_______________________________________________________________________________________________________
2. Public-Private Partnerships in Transportation Projects
This chapter provides an overview of public-private partnership (PPP) approaches to delivering surface transportation infrastructure projects and services. This includes presenting background information on the evolution of PPPs, defining transportation PPPs and the various types of approaches to involving the private sector in public-sponsored transportation projects, the benefits and risks associated with PPPs, and critical factors for successful development and implementation of a PPP project. The benefits, risks, and critical success factors are relevant to PPP projects worldwide.
2.1 Background
Private sector involvement in the provision of transportation infrastructure and services has been evolving for the last twenty-five years by nations overseas which realized early on that the lack of a dedicated transportation funding source required different approaches to financing and delivering transportation infrastructure, both highway and passenger rail. Hence there were early attempts at PPP arrangements in the late 1970s with highway concessions in France and the mid-to-late 1980s in places like Spain and England. The strongest impetus for transportation PPPs overseas occurred in England, where economic reforms encouraged a number of efforts to privatize major elements of the nations transportation systems. These early efforts focused primarily on the most developed transportation systems, including railroads, public transportation, and aviation. These initiatives included to efforts to more significantly involve private sector resources to help finance and deliver projects in various sectors of the economy, including health care, accommodations, defense, and transportation.
The major impetus for using PPPs in infrastructure projects occurred in England in 1992 when legislative and regulatory reforms were put in place under the name of Private Finance Initiative (PFI). PFI are a subset of PPPs typically referred to as concessions or franchises, whereby the private sector assumes responsibility for the public asset through a long-term contract. Since that time, other countries in the British Commonwealth of nations have instituted their own PPP initiatives, including Australia, New Zealand, Scotland, and Canada. With the creation of the European Union, its expansion after the collapse of the Soviet Union, and the revitalization of the European economy in the last decade, the interest and application of PPP approaches to transportation infrastructure delivery has spread across the world, with countries in Central and Eastern Europe, Asia, and Latin America seeking private partners to expedite the
12
_______________________________________________________________________________________________________
financing and delivery of major transportation projects aimed at addressing the opportunities presented by global changes in trade, mobility, and standards of living (Miller, 2000).
Since the mid 1980s, both public and private sectors in countries around the world have gained significant experience and confidence in using PPPs to get particularly large and complex infrastructure projects built. In addition, local urban governments are outsourcing maintenance of their road networks to lower costs and improve performance. Growing from a cottage industry to just under $0.5 trillion dollar mega-industry investing in all kinds of infrastructure worldwide, including roads, railroads, airports, seaports, water/wastewater, and building, with almost $0.8 trillion dollars in PPP financing for planned project yet to be completed.
The predominant types of infrastructure financed or delivered through some form of PPP arrangement varies by global region based on the level of development and relative modal share of travel in each region. The largest proportion of funding is generally for road projects, with rail passenger projects the second largest user of PPP-based financing or project delivery. This is true for each region of the world, except for Africa and the Middle East, where water projects dominate. Countries in this region are generally less developed economically and in greater need of basic water delivery and treatment resources. However, even in Africa and the Middle East, road projects are the second largest proportion of PPP-financed or delivered infrastructure projects.
The use of PPPs for road infrastructure projects support continued economic growth in the more developed parts of the world while fostering economic development in the less developed parts of the world. In the latter case, various international funding organizations like the World Bank, the Asian Development Bank, or the Inter-American Development Bank, stimulate the use of various financial and asset management tools and techniques to promote the development of needed infrastructure projects around the world, particularly road and rail projects.
Over the last 20 years, Europe has had the largest PPP infrastructure program in terms of road and rail project costs. Asia has had the second largest road and rail programs, although in recent years Asian countries have added significantly to their highway PPP projects. North America (Canada, Mexico, and the United States) have been third in terms of the cost of road and rail projects financed or delivered through some form of PPP arrangement. This may change as more project sponsors seek to leverage and expedite their capital improvement programs through the use of PPPs, innovative financing, and innovative project delivery (Spiering et al, 2007).
13
_______________________________________________________________________________________________________
2.2 Definition and Types of Public-Private Partnerships
Public-private partnerships are defined by the US DOT as follows: A public-private partnership is a contractual agreement formed between public and private sector partners, which allows more private sector participation than is traditional. The agreements usually involve a government agency contracting with a private company to renovate, construct, operate, maintain, and/or manage a facility or system. While the public sector usually retains ownership in the facility or system, the private party will be given additional decision rights in determining how the project or task will be completed 1
This definition emphasizes that with a PPP the public and private sectors share responsibility for the delivery of the project and/or its services. By expanding the private sector role, the public sector is better able to avail itself of the technological, managerial, and financial resources to leverage scarce public funds and expedite the delivery of a project and/or services in a more cost-effective manner and with reduced risk to the public agency sponsor. As noted above, the public sector bore most project delivery, financial, and operational risks. By sharing responsibility and resources for the delivery of a PPP project, both public and private sectors share in the potential risks and rewards from the delivery of the facility or service relative to what they retain responsibility for. 2
PPPs come in a wide variety of arrangements, representing a broad spectrum of private and public sector involvement in the various phases of project development, finance, implementation, operations, maintenance, and preservation. The five major types of PPP arrangements are listed below.
2.2.1 Private Contract Fee Services
For both highway and transit modes, private contract services represent the most common form of private sector involvement in surface transportation project and service delivery. For the highway mode this includes contract planning and environmental studies, facility and right-of way maintenance, and operations, including the operation of transportation management centers and various ITS services. Transit agencies have long contracted for the operation of some or all of its modal services with the private sector, especially paratransit services for senior and persons with
US DOT. Report to Congress on Public-Private Partnerships, December 2004, p.10. Retrieved Nov 24, 2007, from US DOT: http://www.fhwa.dot.gov/reports/pppdec2004/ 2 National Council for Public-Private Partnerships. Public Private Partnerships Defined. . Retrieved Nov 24, 2007, from NCPPP: http://www.ncppp.org/howpart/index.shtml#define
1
14
_______________________________________________________________________________________________________
disabilities. In addition, many transit agencies contract for maintenance services on some or all of their vehicles, facilities, and infrastructure (Spiering et al, 2007).
2.2.2 Alternative Project Delivery Approaches
In recent years surface transportation agencies have increasingly turned to PPP project delivery approaches (such as design-build or DB) in order to procure new or expanded facilities. Agencies use PPP delivery approaches in an attempt to obtain time savings, cost savings, new technology, and more innovative, higher quality projects with reduced risks (Spiering et al, 2007).
2.2.3 Multimodal Partnerships
Multimodal partnerships include transportation projects that involve more than one mode, such as park and ride lots, High Occupancy/Toll (HOT) Lanes with Bus Rapid Transit (BRT) services, airport transit extensions, or truck/rail transfer facilities. Multimodal partnerships may or may not be PPPs, depending on whether the private sector is involved in the design, construction, operation, maintenance, finance, and/or management of the multimodal project (Spiering et al, 2007).
2.2.4 Joint Development
Surface transportation agencies are partnering with private developers to capture a portion of the increased value resulting from enhanced accessibility provided by proposed or recent transportation projects, often referred to as joint development or transit-oriented development (in the case of transit). Economic development-based partnerships provide access to additional capital and operating revenues for surface transportation agencies through the receipt of tax increment financing, special assessment or business improvement district fees, access fees, and increased toll or fare revenues, as well direct private sector funding of capital facilities that promote access between transportation facilities and private development (Spiering et al, 2007).
2.2.5 Long-Term Lease or Concession Agreements
Concession agreements typically involve the long-term lease of publicly financed transportation facilities (such as toll roads or parking garages or air rights over transit stations or highways) to a private sector concessionaire for a specified time period in return for the right to collect the revenues generated by the facility. During the concession period, the concessionaire may be
15
_______________________________________________________________________________________________________
responsible for financing, developing, and delivering the project, as well as facility operation, maintenance, and preservation.
These five categories of transportation PPP arrangements in the U.S., their components, and the benefits of each are described in more detail below. Figure 2.1 illustrates the hierarchy of major types of PPPs discussed in this chapter, starting at the bottom with PPPs that have the least private sector role and ending on the top with PPPs with the greatest private sector role.
Figure 2.1 Major Types of Transportation PPPs
Asset Sale Full Service Long-Term Concession or Lease Multimodal Agreement (Public-Private Partnership) Joint Development Agreement (JDA pre-development) Transit-Oriented Development (TOD post-development) Build-Own-Operate (BOO) Build-Transfer-Operate (BTO) Build-Operate-Transfer (BOT) Design-Build-Finance-Operate (DBFO) Design-Build-Operate-Maintain (DBOM) Design-Build with Warranty (DB-W) Design-Build (DB) Construction Manager at Risk (CM@Risk) Contract Maintenance Fee-Based Contract Services
Source: Spiering et al. (2006, p.66)
High Degree of Private Sector Responsibility and Risk Low
Project Delivery Approaches
2.3 Public-Private Partnerships Arrangements
The following pages describe each of the five major types of PPP arrangements for delivering surface transportation projects, including variations where developed and applied.
2.3.1 Private Contract Fee Services, including Contract Maintenance
Private contract fee services are contracts between public agencies and the private sector for services that are typically performed in-house, such as planning and environmental studies, program and financial management, and/or operations and maintenance. These contracts generally are awarded on a competitive bid process to the contractor offering the best price and qualifications. The potential benefits of private contract fee services include:
16
_______________________________________________________________________________________________________
Reduced work load for agency staff; Potential for reduced costs; and Opportunities to apply innovative technologies, efficiencies, and private sector expertise.
2.3.2 Alternative Project Delivery Approaches
Different project delivery approaches can be developed by combining various phases together that the private sector takes responsibility for. The primary combinations are discussed below. Design-Bid-Build. Design-bid-build (DBB) is the traditional form of project delivery where the design and construction of the facility are awarded separately to private sector engineering and contracting firms. As a result, the DBB process is divided into a two-step delivery process involving separate phases for design and construction. In the design phase, the project sponsor either performs the work in-house or contracts with an engineering and design firm to prepare the preliminary engineering plans and environmental clearance, which results in a project plan at the 30 percent completion stage, and the final drawings and specifications for the project. Once the design phase is complete, the project sponsor separately contracts with a private construction firm through a competitive bidding process. Under a DBB contract, the project sponsor, not the construction contractor, is solely responsible for the financing, operation, and maintenance of the facility and assumes the risk that the drawings and specifications are complete and free from error. The DBB selection process is based on negotiated terms with the most qualified firm for the design phase; while, the award of the construction contract typically is based on the lowest responsible bid price. Design-Build. Unlike DBB where the design and construction of projects is procured in two separate contracts with little or no overlap in the respective project work phases, the DB delivery approach combines the design and construction phases into one, fixed-fee contract. Under a DB contract, the design-builder, not the project sponsor, assumes the risk that the drawings and specifications are free from error. While the design and construction phases are performed under one contract, it is important to note that the design-builder may be one company or a team of companies working together. The DB selection process may be based on a negotiation with one or more contractors or a competitive process based on some combination of price, duration, and qualifications. Increasingly DB contracts are being awarded on the basis of best value, considering each of these factors. DB is a successful, well-established process for delivering major capital projects by both the public and private sectors in many countries overseas. DB offers
17
_______________________________________________________________________________________________________
cost-effective project delivery in terms of schedule, cost, and quality. The primary benefits that have been associated with DB delivery approaches compared to traditional DBB delivery include the following. 3 o Time savings - The potential for time savings results from early contractor involvement in the design phase, which increases the constructability of the design plans; the ability to work concurrently on the design and construction phases for portions of the project; and the elimination of the bidding process between the design and construction phases that is required of traditional DBB project delivery. o Cost savings - The potential for cost savings results from continued communication between design, engineering, and construction team members throughout the delivery; reduced inspection requirements by the project sponsor since the design-builder is responsibility for these activities, reduced change orders due to early contractor involvement in the design phase; and shortened project timeline. o Shared risks - Since the potential project risks are shared among the public and private sectors, the risks may be assigned to the party best able to handle them. For example, the private sector may be better equipped to handle the risks associated with design quality, construction costs, and delivery schedule adherence since they are responsible for both the design and construction of the facility; while, the public sector may be better able to manage the public risks of environmental clearance, permitting, and right-of-way acquisition. o Improved quality - The potential for improved quality results from the involvement of the design team through the project development and opportunities to incorporate project innovations and new technology that may arise based on project needs and contractor capabilities.
DB project delivery may include a variety of structures and combinations that result in private participation only in the design and construction phases or may extend into operations, maintenance, and project financing. These variations of the DB delivery approach are discussed in greater detail below.
Design-Build with a Warranty. Under the DB with a warranty approach, the designbuilder guarantees to meet material, workmanship, and/or performance measures for
Pakkala, Pekka Innovative Project Delivery Methods for Infrastructure: An International Perspective, Finnish Road Enterprise, 2002. Retrieved November 29, 2007, from http://alk.tiehallinto.fi/julkaisut/pdf/pakkalae5.pdf
18
_______________________________________________________________________________________________________
a specified period after the project has been delivered. The warranties may last five to 20 years. The potential benefits of the DB with a warranty approach include the assigning of additional risk to the design-builder and reducing the project sponsors need for inspections and testing during project delivery. Design-Build-Operate-Maintain. Under a design-build-operate-maintain (DBOM) delivery approach, the selected contractor is responsible for the design, construction, operation, and maintenance of the facility for a specified time. The contractor must meet all agreed upon performance standards relating to physical condition, capacity, congestion, and/or ride quality. The potential benefits of the DBOM approach are the increased incentives for the delivery of a higher quality plan and project because the design-builder is responsible for the performance of the facility for a specified period of time after construction is completed. Design-Build-Finance-Operate. The design-build-finance-operate (DBFO) delivery approach is a variation of the DBOM approach. The major difference is that in addition to the design, construction, and operation of the project, the contractor is also responsible for all or a major part of the projects financing. The potential benefits for the DBFO approach are the same as those under the DBOM approach and also include the transfer of the financial risks to the design-builder during the contract period. While the project sponsor retains ownership of the facility, the DBFO approach attracts private financing for the project that can be repaid with revenues generated during the facilitys operation. Build-Operate-Transfer. Build-operate-transfer (BOT) is similar to the DBFO approach whereby the contract team is responsible for the design, construction, and operation of the facility for a specified time, after which the ownership and operation of the project is returned to the project sponsor. Under a BOT approach, the project sponsor retains ownership of the facility as well as the operating revenue risk and any surplus operating revenues. The potential benefits of using a BOT approach are similar to the benefits associated with using a DBOM contract: increased incentives for the delivery of a higher quality plan and project because the contractor is responsible for the operation of the facility for a specified time period after construction. Build-Own-Operate. Under a build-own-operate (BOO) delivery approach, the design, construction, operation, and maintenance of a facility is the responsibility of the contractor. The major difference between BOO and DBOM, DBFO, or BOT approaches is that ownership of the facility remains with the private contractor. As a result, the potential benefits associated with a BOO approach are that the contractor
19
_______________________________________________________________________________________________________
is assigned all operating revenue risk and any surplus revenues for the life of the facility.
2.3.3 Full Delivery or Program Management
With a full delivery approach, the construction contractor provides a wide variety of services beyond construction to the project sponsor. These services generally begin during the design phase and may continue through the operation and maintenance of the facility. The potential benefit of the Full Delivery approach is that it allows the project sponsor to leverage its resources throughout the design, construction, and operation of the facility. A primary form of full-service delivery is the Long-Term Concession or Lease Agreement.
Long term lease agreements involve the lease of publicly financed facilities to a private sector concessionaire for a specified time period. Under the lease, the private sector concessionaire agrees to pay an upfront fee to the public agency in order to obtain the rights to collect the revenue generated by the facility for a defined period of time (usually from 25 to 99 years). In addition to the concession fee, the concessionaire agrees to operate and maintain the facility, which may include capital improvements in some instances. Long term lease agreements are awarded based on a competitive process to a qualified bidder with the best bid price. Recent long term lease agreements in Mexico include the Northern Bypass of Mexico City, Monterrey-Saltillo and Saltillo Bypass and the Reynosa-McAllen Anzalduas International Bridge. The potential benefits of long term lease agreements include: 4 Transferring responsibility for increases in user fees to the private sector; Generating large up-front revenues for the public agency; Transferring operations, maintenance, and capital improvement responsibilities to the private sector; Transferring most project, financial, operational and other risks to the private concessionaire; and Taking advantage private sector efficiencies in operations and maintenance activities.
2.3.4 Transit Related Development Approaches
The U.S. Federal Highway Administration PPP website presents an overview on his web page about the potential benefits of long term leases. Retrieved November 29 , 2007, from http://www.fhwa.dot.gov/ppp/ltla.htm
20
_______________________________________________________________________________________________________
Transit related development is viewed differently by different agencies and regions depending on the status of the transit facility when the development is committed. However, the common thread between all of these definitions is that transit related development involves pedestrian-friendly, higher-density development near transit facilities. Within the transit industry, transit related development is generally defined as a pattern of dense, diverse, pedestrian-friendly land uses near transit nodes that, under the right conditions, translates into higher patronage. 5 Transit related development typically includes higher density residential, commercial, and/or retail developments within a - to -mile radius (0.4 km to 0.8 km) of transit stations and stops. Mixed use development is a common element of transit related development (Miller, 2000).
Transit related development can provide financial support for transportation infrastructure through four formalized development opportunities: Transit-Oriented Development; Joint Development; Business Improvement Districts; and Tax Increment Financing.
These opportunities are discussed in greater detail below. Transit-Oriented Development. Transit-oriented development (TOD) is commercial and residential development that is a consequence of proximity to an existing or recently opened transit station or terminal. TODs may involve the partnership of private developers with local governments, development agencies, and transit agencies in order to enhance the land use surrounding a transit facility. Transit agencies or local governments frequently own land located near existing or future transit facilities that is not being used, or could be put to a higher use. Developers are continuously looking for new development opportunities, and the location of available land with good access to transit is attractive for new development or re-development. With TOD, the private developer is solely responsible for the financing and risks associated with constructing the development on publicly owned land. Local governments may also play a role beyond that of land owner; they can provide incentives to developers in the form of density bonuses, rezoning, relaxing parking requirements, and streamlining regulatory
requirements. It takes the commitment, communication, and coordination of all these public and private groups to make TOD successful.
Cervero, Robert (Principal Investigator). TCRP Report 102: Transit-Oriented Development in the United States: Experiences, Challenges, and Prospects. Transportation Research Board, 2004, p.7. Retrieved November 29 , 2007, from http://www.mapc.org/transportation/trans_alternatives/transit_PDFs/3b_TOD_TransCoopResearchProg.pdf
21
_______________________________________________________________________________________________________
The benefits of TOD are quite varied and extend well beyond transit usage. Table 2.1 summarizes the primary and secondary benefits from the perspective of the public and private sectors.
Joint Development. Joint development is a type of TOD involving transit agencies working with private developers in planning and executing a project. Joint development is project specific, dealing with the development on, above, or adjacent to land owned by a transit agency.
Table 2.1 Public and Private Sector Benefits and Risks of Transit-Oriented Development
Public Sector - Primary Benefits/Risks Increased ridership and fare revenues Joint sharing of costs for mixed-use stations Potential for dedicated property/sales tax revenue Potential for lease payments or other developmentrelated revenues Risk that private development revenues fail to accrue due to delays in development activity Public Sector - Secondary Benefits/Risks Revitalized neighborhoods and commercial zones Reduced traffic congestion and suburban sprawl Reduced need for roads and other infrastructure Reduced crime and increased safety resulting from rejuvenated urban landscape Risk of development requirements requiring costly changes to transit facility designs and operations Private Sector - Primary Benefits/Risks Higher land values Higher rental/lease rates and sales prices More affordable housing opportunities Risk of development market decline negating value of developer investment in transit project Risk of commercial development delays caused by transit project delays Private Sector - Secondary Benefits/Risks Higher retail sales from greater customer exposure Increased access to labor Reduced parking costs in suburban locations Risk that transit service levels do not match needs of development lessees, patrons, or residents Risk of mismatch between transit patrons and retail or residential customers of related development
Source: Robert Cervero, TCRP Report 102: Transit-Oriented Development in the United States, TRB, 2004, pp.120-131. Retrieved November 29 , 2007, from http://www.mapc.org/transportation/trans_alternatives/transit_PDFs/3b_TOD_TransCoopResearchProg.pdf Adapted by the author
With joint development, the transit agency provides developers with the right to design and construct a residential, commercial, retail, or mixed use building on or above transit property in return for a negotiated payment. Developer payments to transit agencies vary significantly and may include an annual lease payment for a specified period of time as well as the construction of transit facilities, such as portals to transit facilities, parking facilities, and station facility improvements. The form of joint developer payments are
22
_______________________________________________________________________________________________________
project specific and depend on the benefits and needs of the developer and transit agency. The primary forms of joint development payment arrangements include: 6
Ground Lease. A ground lease involves an annual rent payment to the transit agency for the right to develop property owned by the transit agency. The length of the lease agreement must be long enough for the developer to receive an acceptable return on investment from the rents it charges to the occupants of the development. When the lease expires, ownership returns to the transit agency.
Air-rights Lease. An air-rights lease is similar to a ground lease in that it involves an annual rent payment to the transit agency for an agreed upon period of time; however, the lease is for the right to build the development above the transit station. The length of the lease agreement must be long enough for the developer to receive an acceptable return on investment from the rents it charges to the occupants of the development. When the lease expires, ownership returns to the transit agency.
Operations Cost Sharing. Operations cost sharing involves the sharing of certain operations costs between the transit agency and the development. Common examples include ventilation systems, parking, and utilities.
Construction Cost Sharing. Construction cost sharing involves the developer paying for portions of the transit agencies construction costs, such as parking facilities, building foundations, access portals, transit centers, and bus shelters. Construction cost sharing is one type of joint development that is easily applied to bus service as well as rail.
Station Connection Fee. A fee (may be one-time or annual) charged by transit agencies to a developer for the right to connect its development directly to the transit station. The connection allows riders direct access to properties without having to go outside the transit station.
Negotiated Private Contribution. Transit agencies negotiate directly with developers to receive private contributions to transit facility improvements. The value of the contributions is based on the benefits received by the private developer from the transit investment. These contributions are generally a onetime fee or payment.
Benefit Assessment District. A geographic benefit district is established around a transit station. Property owners within the benefit district are then assessed a
Cervero, Robert (Principal Investigator). TCRP Report 102: Transit-Oriented Development in the United States: Experiences, Challenges, and Prospects. Transportation Research Board, 2004, pp.25-32. Retrieved November 29 , 2007, from http://www.mapc.org/transportation/trans_alternatives/transit_PDFs/3b_TOD_TransCoopResearchProg.pdf
23
_______________________________________________________________________________________________________
fee based on the benefits they receive from the transit facility or improvement to help finance its construction. Residential properties are frequently exempted from the assessment. o Equity Partnership. Equity partnerships involve the exchange of certain assets between the transit agency and the developer, such as a land sale. o Incentive Agreement. Incentive agreements involve the developer contributing or sharing the costs of transit investments, such as station connections or improvements, in return for density bonuses that allow the developer to add additional floors or space to their development, rezoning of property, or relaxing parking requirements. The primary benefit of joint development for transit agencies is increasing agency revenues through increases in ridership, the generation of lease payments, capital or operating contributions, or one-time fees, as described below. o The mixed use development at transit stations attracts additional riders to the transit system, thereby increasing fare revenues. o JDAs 7 may generate private sector capital and operating contributions as well as annual lease payments for transit agencies. These additional annual revenues and capital and operating contributions diversify transit agency funding and help offset some of the agencys on-going capital and operating expenses.
In US, for instance, the Washington Metropolitan Area Transportation Authority (WMATA) has been using joint development projects successfully for over 30 years to subsidize its capital and operating expenses. Some of WMATAs joint development activities include air-rights leases at two stations (Ballston and Bethesda), ground leases as 22 stations (including Silver Spring and Friendship Heights), operating cost sharing at eight stations (including Farragut West and Bethesda), capital cost sharing at 10 stations (including Bethesda), and station connector fees at seven stations (including Friendship Heights and Clarendon).
In addition to the revenue benefits, joint development offers other secondary benefits or societal improvements, including: Increased economic activity and vitality of station areas; A safer environment around transit stations; and A more aesthetically pleasing place to live, work, and visit near transit stations and terminals.
JDA: Joint Development Agreement
24
_______________________________________________________________________________________________________
These benefits may be secondary for transit agencies, but they are the primary benefits for private developers. Without these economic, safety, and attractiveness benefits, the private developers would not be interested in participating in joint development activities because the developer would not be able to attract the residential, commercial, and retail tenants necessary to make their investment profitable.
Business Improvement Districts. Business Improvement Districts (BIDs) assess properties located within a defined geographic area to finance a variety of enhanced services in the area including security, maintenance, marketing, economic development, parking, transportation, and special events. BIDs usually are managed by a quasi-public agency or a nonprofit organization under the direction of a board composed of representatives from the various business and property interests within the district. Historically, BID transportation projects have focused on pedestrian facilities and movement within the district; however, as accessibility and congestion levels increase and impact economic development, BIDs have started to take on a greater role in transportation planning and initiatives. In some areas, BIDs have contributed to the financing of new or expanded transportation services in order to enhance the economic activity and growth in the district, such as a free trolley or circulator services in Tampa and Washington D.C. In addition, some BIDs have sponsored transportation enhancements or improvements to take advantage of the Federal and state transportation grants available to fund the majority of the project costs.
If the businesses and property owners within BIDs understand the benefits of transportation programs on economic activity and property values in the district, BIDs are more likely to contribute funding to transportation projects. In new developments, transportation initiatives offer the ability to provide better access to the district, generating more traffic and economic activity. Additionally, as congestion levels increase in existing districts, transportation improvement initiatives can move more people more efficiently through the district and increase economic activity. From the public transportation agency perspective, the potential benefits of including BIDs in transportation infrastructure projects include access to property tax assessment revenues; revenue diversification; creating partnerships with the businesses and property owners within the district; and coordination of transportation services with other services provided by the BID.
Tax Increment Financing. Tax Increment Financing (TIF) is a tool used by municipalities to help finance the redevelopment of areas within a community through increased
25
_______________________________________________________________________________________________________
property taxes from the enhanced value of property (both developed and undeveloped) resulting from the implementation of infrastructure and service improvements. Localities may establish TIFs with the approval of property owners in the district. A TIF district is usually administered by local government officials or a quasi-public agency with the direction of a board or commission that makes the decisions on how and where the revenues will be applied. Tax increment financing uses the future increases in property tax revenues to finance current infrastructure investments (including transit and other transportation facilities). The idea behind the TIF is that the infrastructure investments will increase the value of existing property within the district as well as encourage new development that expands the tax base. As a result, private investors are willing to provide upfront capital for these investments because the debt service will be repaid through the increase in future property tax revenues. As an example, in Portland (US) has used TIF revenues to support extension to its Metropolitan Area Express (MAX) light rail transit system, including the Airport Extension (Spiering et al., 2007).
A TIF does not increase the property tax rate in the district; rather, it dedicates a portion of future growth in the districts property tax revenues due to an expanded tax base for a specified time period (usually 20 to 25 years) to meet the debt service payments for the infrastructure investment. The primary benefits associated with using TIF to fund transportation investments include: - Providing access to capital financing markets with a dedicated stream for debt repayment; and - Providing access to new revenues without increasing taxes. revenue
2.3.5 Multimodal Partnerships
Multimodal partnerships provide opportunities to combine the development, financing, and/or operation of facilities that serve more than one transportation mode, including transit, passenger rail, highway, and airports. With the passage scarcity of public funding, there has been increasing interest in multimodal development and the coordination of projects across modes.
As transportation needs and connectivity requirements continue to increase in the places like the European Union, China, and South America, successful multimodal partnerships will be essential components in improving transportation efficiency, market competitiveness, service quality, responsiveness to public needs, aesthetic appeal, and financial feasibility.
26
_______________________________________________________________________________________________________
Multimodal partnership projects do not have to be PPPs. Some may be PPPs involving several public and quasi-public agencies. However, the opportunities for private sector involvement in multimodal partnerships are an area of potential growth for transit-related PPPs, particularly when toll roads and airports are involved due to the ability to leverage toll and airport revenues for transportation investments (Perrot et al., 2000).
The primary results of multimodal partnerships include the ability to combine the strengths of each partner. By involving other public transportation agencies as well as private sector partners, multimodal projects have improved access to: More diverse revenues and financial markets to fund transportation investments; Increased economic development opportunities; Increased ridership; Commuter time savings; and Efficiencies in the operation of all involved modes.
2.4 Benefits of PPPs
PPPs have the potential to offer benefits that may not otherwise be achievable through traditional public procurement procedures or through privatization. PPPs offer an opportunity for the public sector to reap the benefits of private sector involvement in infrastructure procurement while meeting community obligations and retaining control over potentially important public assets. These and other potential benefits of PPPs are described below.
2.4.1 Stronger Working Relations
In comparison to shorter-term procurements methods, PPPs provide the opportunity for public sector agencies and private sector providers to develop long-term, high trust relationships. With the need to concentrate on long-term objectives, there is greater incentive for public sponsors and private providers to understand goals and share information to develop better long-term solutions. Further, the opportunity to develop strong long-term relationships provides a better forum in which to resolve problems and issues.
With transportation assets typically having long effective lives, a need exists for the public sector to develop a long term relationship with a provider to assist the development of transportation infrastructure, guide capital expenditure decisions and ensure that assets are maintained, safe and are of high quality upon transfer (Guasch, 2004).
27
_______________________________________________________________________________________________________
However, the development of a long-term relationship will need to account for the possibility that there may be a reduced desire on a providers part to seek the best solution due to the security of the relationship. Public sponsors will also need to be mindful of the partnership proposing and selecting options that minimize damage to the relationship, but may not maximize community benefits (Lawther, 2000).
2.4.2 Reduction of Financial Constraints
Many projects proposed by public entities are postponed or do not proceed due to limited financial resources, and in particular, the provision of upfront capital. PPPs provide an advantage with respect to financing by allowing the private sector to finance projects using private funds, in effect providing a form of off-balance sheet financing for public agencies. In turn, financing commitments from the private sector often bring forward the development of projects that may otherwise not proceed due to a lack of capital (Guasch, 2004).
2.4.3 Faster Delivery
PPPs can expedite the financing and delivery of transportation projects through the involvement of the private sector in these phases of a project, that lower project costs by avoiding inflationary cost increases, applying best practices and new technology, and transferring more technical and other risks to the private sector which is often better able to manage these risks. The private sector has an incentive to minimize construction delays in order to minimize costs and bring forward their revenue stream. Contract conditions including early completion bonus payments and the inclusion of the construction period within the concession period can provide further incentives to bring forward delivery (Guasch, 2004).
2.4.4 Innovation and Expertise
Private sector involvement encourages the development of new and creative approaches to financing, economies of scale, development, implementation and operation/maintenance. The private sector can also offer expertise in project, operational and risk management. In particular, financial markets have become savvy in the methods that they use to structure finance to suit infrastructure projects through the use of stepped margin and indexed bonds (Guasch, 2004).
28
_______________________________________________________________________________________________________
2.4.5 Greater Cost Efficiency and Productivity
The private sector has an incentive to ensure its operations are as cost efficient as possible. In particular, the private sector is often better at managing third-party usage of facilities, thus reducing the net cost of a facility to transportation agencies. A private operator would also be motivated to increase the productivity and return from assets, with greater interest in implementing practices such as yield management and demand management when limited capacity exists and is expensive to create (Guasch, 2004).
2.4.6 Integration
The potential integration of design, construction, maintenance, and operation provides incentives for the private sector to optimize expenditure and maximize innovation to achieve the greatest level of cost efficiency over the life of the asset through a life-cycle approach to asset delivery rather than minimizing the cost of a specific part of the asset lifecycle e.g. construction costs (Guasch, 2004).
2.4.7 Greater Choices
Project sponsors can match specific types of PPPs to individual projects based on their characteristics and the capabilities and needs of public sector sponsors and private sector providers. This model was successfully used in Hong Kong before being incorporated into China when a number of transportation infrastructure projects were developed, each using a different project delivery approach (DB, DBOM, DFOM, BTO, etc.), based on the nature of each project and the interests and risk tolerance of the participating members of the partnerships (Guasch, 2004).
2.4.8 Increased Competition
PPPs also can enhance competition in how highway facilities and services are provided from a functional, organizational, technological, and process perspective by engaging the private sector through properly transparent contracting procedures that can leverage public sector capabilities (Guasch, 2004).
29
_______________________________________________________________________________________________________
2.4.9 Risk Management
PPPs allow public sponsors to share the risk of a project with the private sector. In the risk sharing process, public sponsors have the opportunity to pass risks that may be more effectively managed by the private sector while retaining risks where it is in a better position to manage them or deal with their consequences. For instance, the private sector may be more effective in managing the variance in construction, operating, and maintenance costs while public agencies may be more effective in managing public liability, environmental clearance, and permitting risks (Guasch, 2004).
2.5 Risks of PPPs
While providing a variety of advantages, there are also risks to consider when using public-private partnerships for transportation projects. The various categories of project risks associated with the use of PPPs in transportation infrastructure development are listed below in Table 2.2.
Table 2.2 Types of Risks Associated with Transportation Infrastructure Project PPPs
Dem and/volum e Revenue Environm ental/archeological Regulatory/contractual Paym ent structure/m echanism Transaction cost Construction cost M aintenance cost Life-cycle cost Liability/latent defects Source: Perrot et al. (2000, p.56-67) Com pensation and term ination clauses Changes of law Econom ical shifts Currency/foreign exchange Taxation constraints M oral hazard Loss of control of assets Political stability Protectionism Public acceptance
At the end of the next page, Table 2.3 indicates potential consequences of a number of these key risk factors for members of a PPP and suggests ways to mitigate these results. Several of the major risk categories are discussed in more detail below.
30
_______________________________________________________________________________________________________
2.5.1 Transaction Costs
Significant transaction costs can be incurred by public entities procuring a PPP, with PPP arrangements tending to be highly complex. Transaction costs are incurred by both public sponsors and potential private sector providers at the procuring stage while preparing and negotiating a PPP. When a PPP is awarded, additional costs maybe incurred to monitor performance to ensure that a PPP agreement is being adhered to.
The impact of transaction costs can be reduced by providing the private sector opportunities to participate in projects that have scale, in terms of time and expenditure. For example, recent transportation funding legislation in the U.S. (SAFETEA-LU) reduced the project size thresholds for certain innovative financing and project delivery mechanisms to promote the use of PPPs for highway projects. For example, SAFETEA-LU lowered the threshold for using the credit support and low-cost loan features of the Transportation Infrastructure Finance and Innovation Act (TIFIA) from $100 million to $50 million per project. In contrast, public agencies in Australia have a variety of opinions on the appropriate minimum project value required before a PPP becomes worth pursuing (Seltzer, 2000). The Victorian Treasury recommends a project value of at least A$10 million while New South Wales Treasury recommends a project value of at least A$20 million. On the other hand, the Queensland Government considers A$250 million as a minimum (Miller, 2000).
The impact of transaction costs can be mitigated through a variety of methods: decreasing administration complexity, standardizing PPP procurement procedures, combining a series of smaller scale projects, and increasing the lease period of a contract.
31
_______________________________________________________________________________________________________
Table 2.3 Consequences and Mitigation Strategies for Major Types of PPP Project Risks
Risk Category Description Existing structures may be inadequate. Contamination of site. Necessary approvals may not be obtained. Consequence Additional construction costs and time delays. Clean up costs. Mitigation Commission studies to investigate suitability of site and structures Private sector to incorporate risk through refurbishment during construction phase Seek reputable constructors with strong financial credentials. Private party may pass risk to builder/architects while maintaining primary liability Link payments to progress Interest rate hedging. Financial due diligence Bank/capital guarantees from companies and directors. Long-term supply contracts where quality/quantity can be assured. Upfront specification by public sponsoring agency.
Site Conditions
Design, Construction and Implementation Risk
Facility incapable of delivering at the anticipated costs. Physical or operational implementation tests cannot be completed interest rate risk. Financing unavailable Contingent funding requirements Inputs, maintenance may yield higher costs. Changes to government requirements with respect to facility operations. Fluctuations in economic activity on demand Competition, demographic change and inflation. Additional approvals required during the course of the project cannot be obtained. Changes in laws and regulation Loss of the facility upon premature termination of lease or other project contracts upon breach and adequate payment. Different residual value to that originally calculated
Increase in recurrent costs, delays Delayed/lost revenue.
Financial
Increased project cost Non-completion of construction.
Operating
Increase in operating costs. Adverse effects on quality and service delivery.
Lower revenues. Diminution in real returns to private party
Market
Private operator to seek an availability payment element to minimize impact on risk premium. Review likely competition for service and barriers to entry Private sector to anticipate requirements Public sponsor may mitigate such change by monitoring and limiting changes which may yield adverse consequences. Private party will be given cure rights to remedy defaults. Public sponsor may make payment for value in the projects on a cost to complete basis if termination occurs pre-completion. Impose on the private party maintenance and refurbishment obligations. Secure services of a reputable maintenance contractor, with strong financial credentials.
Legislative
Further development or change in business operation may be prevented Increase in operating costs with regards to complying with new laws Loss of investment of private party Possible service disruption as additional capital costs incurred to upgrade the asset to the agreed value and useful life.
Asset Ownership
Source: Perrot et al. (2000, p.56-67)
32
_______________________________________________________________________________________________________
2.5.2 Potential Higher Life-Cycle Costs
The private sector provider may require a higher rate of return than the public sector sponsor to cover the uncertainty of longer-term life-cycle cost risks, particularly when it is unable to diversify its risk across a portfolio of projects. The premise of lower overall costs, which is a key benefit of PPPs, is highly dependent on the innovation, scale, and expertise of the private sector, with cost savings outweighing the risk premium required by the private sector.
2.5.3 Taxation Constraints
In the U.S., local governments generally exempt concessions from property taxes due to the public service nature of the asset. However, the federal government has strict criteria for granting private concession leaseholders the ability to take accelerated depreciation credits against income on a 15-year straight-line basis, amortization of early concession payments and capital expenditures to upgrade facilities under concession lease, and annual deduction of revenue sharing payments (Guasch, 2004). These conditions include:
A lease term sufficiently long (at least 50 years) to indicate operational ownership of the infrastructure asset, even if the public sponsoring agency retains title to the asset; and The concession uses only taxable debt and equity and no tax-exempt debt financing.
2.5.4 Moral Hazard
Governments have an incentive to minimize political fallout from a PPP that is failing by covering some of the losses of the private partner in order to ensure that the project is delivered. Private sector proponents awareness of this propensity of governments to avoid political fallout may result in them under costing risks with the knowledge that the public sector may provide financial support (Guasch, 2004).
2.5.5 Loss of Control over Assets
PPPs potentially transfer control of assets to the private sector, limiting the ability of the public sector to provide community service obligations for the duration of the PPP arrangement. Government entities will need to ensure community service obligations are explicitly noted in PPP contract arrangements to ensure that community service obligations are met. The loss of control over assets to the provider is a considerable concern if the sponsoring agency wishes to develop
33
_______________________________________________________________________________________________________
competing infrastructure in the future. The example of the toll road concessions in Mexico in the 1990s in which the public sponsor bought out the interest of the private concessionaire.
2.6 Critical Success Factors
A PPP will need to improve service quality as well as promote social and economic development if it is to have the best chance of succeeding. The following indicates what is considered to be the critical success factors of PPPs.
2.6.1 Stakeholder Consultation and Support
Stakeholder consultation increases in importance if the potential impacts affect employees and the community. Experience with respect to PPPs has shown that there are misconceptions of PPPs, in particular, the perception that PPPs seek to privatize public assets. Stakeholder consultation should be used to understand opinions and address misconceptions about the proposed PPP and its value to the public. There may be a need to commit to ongoing stakeholder consultation, particularly if the duration of the PPP proposed is long. This includes on-going public outreach and communication (Spiering et al., 2007).
2.6.2 Public Sector Involvement
Once a partnership has been established, the public agency sponsoring the project must remain actively involved in the project. Ongoing monitoring of the performance of the partnership is important in assuring its success, particularly with respect to safety and maintenance. The nature and frequency of monitoring should be stipulated in the contract (Spiering et al., 2007).
2.6.3 Political Leadership
A successful partnership requires strong political leadership. Senior public officials must be willing to be actively involved in supporting the concept of PPPs. Officials need to be well-informed with respect to potential benefits. A political leader can play a critical role in minimizing misperceptions about the value to the public of a PPP and serving as a highly visible champion for the project. Lack of senior political support can doom a PPP project even if otherwise justified (Spiering et al., 2007).
34
_______________________________________________________________________________________________________
2.6.4 Secure Public Control
In a situation where contracts are not complete, Government should ensure that it has some recourse rights to maximize the opportunity to resolve and take control if the private partner defaults on its obligations to ensure the continued delivery of services to the community. Recourse rights are particularly important where contract arrangements are incomplete (Spiering et al., 2007).
2.6.5 Limited Complexity and Appropriate Risk Sharing and Rewards
PPP arrangements should be kept as simple as possible. Complexity of a PPP may result in higher transaction and monitoring costs and fewer bidders. Furthermore, as noted above, one major attribute of PPPs is the opportunity to share risks between the public and private sectors. However, it is imperative that the risks are shared appropriately with associated rewards. There is a need to identify the types of risks, the party best addressed to mitigate the risk and the premium required to compensate for the risk. An inappropriate transfer of risks potentially will result in a significant increase in the premium demanded by the private sector and the probability of provider default, as noted earlier in Table 2.2.
Over the course of a PPP, the various kinds of risks will need to be considered by all parties to the PPP with a clear understanding of the extent to which partnership members are responsible for particular risk factors. Flexibility or risk-sharing in the PPP contract can have a significant impact on the bid prices provided by private sector teams, with both approaches likely to result in a lowering of the bid prices received (Spiering et al., 2007).
2.6.6 Effective Working Relationships among Partners During/After Contract Negotiations
New business relationships are required when PPP approaches are used to deliver projects, often with larger national or international firms that can handle the increased risk and responsibility of a PPP contract. This, in turn generates competition and fairness concerns, both for the government (which must worry about attracting a sufficient number of bids for the contract) and for smaller contractors (who may feel unable to compete in the new environment). In addition, the scope and complexity of negotiations between the government and its contractors can increase significantly, as the allocation of risk, the acceptable rate of return, and the contract incentives must be carefully defined (Spiering et al., 2007).
35
_______________________________________________________________________________________________________
2.6.7 Legal Authority
A number of legal issues must be considered when deciding whether and how to proceed with a transportation infrastructure PPP. The legal authority to use PPPs to expedite delivery of a needed transportation project is based on statutes and regulations established by the responsible legislative bodies and regulatory agencies.
Table 2.4 lists some of the many legal issues that can be resolved through flexible legislative and regulatory actions, giving the sponsoring agency and private provider the legal authority to advance the project in a timely manner, free of significant legal challenge.
Table 2.4 Legal Issues Associated with Transportation Infrastructure Project PPPs
Legal capacity of parties and legal requirement of the sponsor to provide services Ability of the private sector to be involved in infrastructure development, particularly foreign companies. Ability of the private sector to acquire and own publicuse infrastructure, especially foreign firms Existence and legal basis of cost recovery and tolling Competition and anti-trust regulations
Currency and profit repatriation rules
Public sector borrowing restrictions Tax and accounting liabilities Adequacy of procurement and selection procedures
Ability to provide performance guarantees Property issues of land acquisition condemnation, use, and disposal Administrative coordination Dispute resolution and liability provisions Special provisions associated with the use of public funds. Authority to regulate services Source: Guasch (2004, p.32-38)
Contracts provisions Property and intelligent property laws regarding proprietary technologies and transfer of know-how Adequacy of oversight and monitoring procedures Authority of other public entities over infrastructure assets and access to them Ability and restrictions over transfer of private sector contract responsibilities to other parties
2.6.8 Other Key Success Factors for Transportation Project PPPs
In addition to the factors cited above, other critical factors include the following: Demonstrated transportation need (congestion relief, safety improvement, accessibility, travel time reliability, etc.); Willing public and private sector partners with mutually complementary interests; and
36
_______________________________________________________________________________________________________
Adequate funding or revenues dedicated to the project to make it financially viable relative to the criteria of rate of return on investment for the public partner(s) and a reasonable sharing of scarce public funding if available.
Each of these features must be present for a transportation project PPP to be successfully developed and implemented (Spiering et al., 2007).
37
_______________________________________________________________________________________________________
3. Transportation PPP Activity in Mexico 8
In this chapter, it resumes the history of the first type of transportation PPP in Mexico: Toll Road Concession. Furthermore, identify the key areas were had been improving in credit finance, review the actual activity in the road sector in Mexico and appraise the next step for develop one of the biggest toll highways in America. As a final point, it describes new strategies to extend new forms of PPP to spread out the highways in Mexico.
3.1 Major Toll Road Developments
After several decades of limited results building state-run tolled and free highways, Mexico embarked upon the worlds most extensive program of private concessioned toll roads between 1989 and 1995. The ambitious concession program resulted in the awarding of 52 concessions for 5,500 km of road, of which 44 concessions and 5,120 km were open to traffic by 1995. More than US$13 billion had been raised to build these roads, over 80 percent by the concessionaires and domestic commercial banks. However, financial instability due to unexpectedly high construction costs and low traffic, coupled with the December 1994 devaluation of the peso, brought the concession program to a standstill in 1995. A comprehensive restructuring of the entire program in 1997 ended up costing the Mexican Government an estimated US$8 billion. The progress of toll road development in Mexico is described in more detail in the following sections.
3.1.1 Early Toll Road Strategies
About 1,000 km of publicly owned toll roads were built by the Mexican Government between 1950 and 1970. Most of these roads were operated by the federal toll road authority, Caminos y Puentes Federales de Ingreso y Servicios Conexos (CAPUFE) and were concentrated in highvolume traffic corridors near Mexico City. Another 3,000 km of untolled four-lane divided highways were subsequently added by propublic sector governments of the 1970s and early 1980s. However, the oil glut of the 1980s put an end to the robust Mexican economic growth of the 1970s, and the Government began searching for ways to reduce the size of the public sector. Roads became a low priority since the recession had cut traffic growth. But as the economy began to pick up by the end of the decade, the newly elected President Carlos Salinas de Gotari (1988-94) identified high-quality infrastructure as critical to the Mexicos long-term growth. He
A complete list of the sources for this paper is presented in Chapter 6. However, this Chapter 3 draws most extensively from two excellent sources: (i) Ruster (1997) ; and (ii) World Bank (2003)
38
_______________________________________________________________________________________________________
proposed a massive new program to build 4,000 km of private sector toll roads and seven new international bridge crossings, funded largely (if not entirely) by private capital. The plan would also provide an immediate stimulus to the countrys moribund construction industry, while helping to reinvigorate the economy overall.
3.1.2 President Salinas Private Toll Road Plan
President Salinas charged the Secretariat of Communications and Transportation (SCT) with administering the new private toll road plan. The toll roads were to be developed under the following conditions: SCT would select the routes to be offered for concession. A parallel free route must be available as an alternate for all concessioned routes. SCT would specify the allowable range for tolls, subject to twice-yearly adjustments reflecting the consumer price index. SCT would supply the bidders with preliminary designs, cost estimates, and traffic projections. The concession would be awarded to the bidder that offered the shortest concession period (as originally planned, not to exceed 15 years).
The concessionaires were to be consortia of construction companies and banks, wherein the banks would finance 70 to 75 percent of project costs, and the construction companies were to contribute the remaining 25 to 30 percent by discounting their construction costs (sweat equity). An independent trustee would be appointed to review bills, disburse bank financing, and distribute toll proceeds to the investors.
Direct government assistance under the original plan was to have come only in the form of rightof-way assemblage (to be leased to the concessionaire for a nominal fee), and extensions of the concession period (of a duration suitable for recovering the relevant costs).
Concession extensions were to be authorized in the case of: Traffic levels falling below the SCT forecast; Cost overruns resulting from government-imposed delays or design modifications; and Cost overruns in excess of 15 percent of the original project budget.
Both the single bidding criterion (shortest proposed concession duration) and an open prequalification process were utilized by the Government in order to promote a fair and
39
_______________________________________________________________________________________________________
competitive tendering process that was highly transparent to all bidders. The single bidding criterion also both assuaged populist legislators who were eager to see the roads return to public control and satisfied domestic financiers who had no access to long-term debt facilities in that inflation-prone era.
3.1.3 Early Problems and Continued Expansion
In 1992, just three years after the programs inception, 3,600 km worth of concessions had been awarded (90 percent of the original plan), and 1,500 km of toll roads had been opened to traffic (38 percent). In spite of the impressive pace, four basic problems had already become apparent:
(i)
The program included many highways that were not financially viable by themselves. Once the most profitable highway segments were built, the Government was called upon to participate in the financing of roads with less traffic or more difficult construction, but not to exceed 25 percent of costs.
(ii)
The shortest-length concession criterion encouraged the concessionaires to charge the maximum allowable toll with the goal of reducing the payback time. The high tolls and free parallel routes discouraged travel on the toll roads.
(iii)
The designs, cost estimates, and traffic forecasts provided by SCT were often of very poor quality and highly inaccurate. The scale and pace of the project completely overwhelmed the staff resources of SCT, and the effect of high tolls was not known to the planners in any event.
(iv)
Some highway contractors were thought to be taking advantage of the program by both underbidding and exaggerating the sweat equity that they were providing. The bill auditors were not adept at catching such actions, while the concession rules described earlier allowed for contract extensions in the case of cost overruns.
Nonetheless, the Mexican Government decided to expand the scope of the program by another 2,000 km during this period. The new roads were to fill in the gaps of five priority corridors three from Mexico City north to the United States border, one from the Atlantic to the Pacific coast via the capital city, and a final one from Mexico City southeast through Veracruz and on to the Guatemalan border. The expansion plans were bolstered by a growing domestic economy and by political pressure from regions not yet served by the new toll highways.
40
_______________________________________________________________________________________________________
By 1995, a total of 58 concessions had been awarded for 5,486 km of roads. Twenty three of the concession contracts were won by Mexicos three largest construction companies, while the remainder went to smaller construction companies and a few to state governments. A total of US$13 billion had been raised by December 1994, of which 29 percent was concessionaire equity, 52 percent was domestic bank loans, and the remaining 19 percent represented federal or state government equity investments 9 . Nevertheless, cost and traffic issues continued to dog most of the toll facilities. The average construction cost overrun was percent of the original SCT estimate, while the average traffic level was only 68 percent of the original SCT guarantee.
These difficulties notwithstanding, the Mexican financial sector was at first quick to try to adapt to the financing opportunities presented by the toll road programparticularly with respect to the highways that were financially successful. The process that gained popularity before 1995 might be idealized as follows:
(i)
Initial toll road financing would be provided by short-term construction or commercial loans (from general bank savings, guaranteed by the issuing bank).
(ii)
The toll road would be refinanced subsequently through the issuance of medium-term infrastructure bonds (sold on the domestic bond market, but guaranteed by the issuing bank because of the toll road revenue uncertainties).
(iii)
Once a toll road had been operating for a few years, construction costs and traffic/toll revenues would be predictable, and the more highly traveled routes would be in a position to attract foreign capitalfreeing up domestic resources for other investments.
In fact, between 1992 and 1994 four Mexican toll roads had sufficient revenue streams to be able to successfully complete all three of the steps above and ultimately secure debt and equity refinancing on the international markets. A similar refinancing of a fourth road fell through at the last minute as a result of the Mexican currency crisis in December 1994.
Federal funding also included contributions by Petroleos Mexicanos (Pemex) and by Caminos y Puente Federales de Ingreso y Servicio Conexo (CAPUFE), the federal highways and bridge operator, for more than 1,100 km of public toll roads.
41
_______________________________________________________________________________________________________
3.1.4 Restructuring Before and After 1994
In the early stages of the Mexican toll road initiative, a small team of analysts was charged with responsibility for making adjustments to contracts and overall policies with respect to the highway development program. A part of SCT, this team initially consulted directly with senior officials of the finance ministry. By 1994, however, the team had grown and was formally established as the Toll Road Office (Unidad de Autopistas de Cuota), reporting to the Sub-secretary. As of 1997 the staff of this office numbered 65, with the office responsible for all federal toll road and bridge concessions. About 20 state-sponsored concessions faced problems similar to those of the federal roads, but they were dealt with at the state level.
The toll road restructuring efforts of the Mexican Government may be divided into two rounds. The first round included efforts undertaken to resolve problematic issues with toll road concessions from the outset of the program in 1990 until the end of 1994, when the Mexican currency was devalued, throwing the entire domestic economy into disarray. These initial efforts allowed case-by-case relief from SCT for toll roads with traffic shortfalls or cost overruns so severe that they could not be recovered even if the contract length was extended to the maximum 30 years. Table 3.1 illustrates traffic shortfalls with traffic expectation.
Table 3.1 Average daily traffic as % of guaranteed traffic

Number of roads Above 100 75 to 100 50 to 74 25 to 49 6 to 24 5 2 8 8 9
Source: Ruster, Jeff. A Retrospective on The Mexican Toll Road Program (1989-94), September 1997. World Bank. Retrieved November 29 , 2007, from http://rru.worldbank.org/Documents/PublicPolicyJournal/125ruste.pdf Adapted by the author
They involved tripartite support from the Government, the toll road builders, and the toll road lenders, as follows: The Government provided various direct contributions to the faltering concessions in the form of loans from the national development bank, and/or the assignment of toll receipts from an existing CAPUFE toll road.
42
_______________________________________________________________________________________________________
The toll road builders (equity owners) provided support in the form of limits on their return on investment (7-10 percent maximum). The toll road lenders provided support in the form of reduced interest rates on their loans.
In December 1994, the new administration of President Ernesto Zedillo devalued the Mexican peso, precipitating an economic recession that dramatically worsened the financial standing of the toll roads themselves, and compounded the fiscal woes of their owners and investors. This environment brought about a second round of toll road restructuring efforts by the Mexican Government. The initial response attempted to go beyond providing cash to the concessionaires, by addressing the fundamental issue of excessively high tolls. Through a combination of a tax cut on commercial toll road users (trucks and buses), and an agreement among concessionaires to lower their toll rates below the maximum level permitted, an effective rate decrease of 28 percent was achieved.
However, the slow pace of the subsequent economic recovery rendered these efforts insufficient to increase revenues. It was estimated that the present value of toll revenues for the 38 federal concessions that requested restructuring as of March 1997 amounted to only less than half of the investments made. In April 1997 the Mexican Government announced that it would prepare a new comprehensive toll road restructuring plan, which was finally unveiled in August of that year. This plan proposed that SCT would take over 25 failing toll roads, and assume their bad debts. Two-thirds of the debts relieved were from domestic banks (which were also being bailed out by the Government at the same time), and one third came from the construction companies who were equity investors in the concessions. The construction companies received long-term government bonds in lieu of their toll road debt, while their shareholder equity was entirely forfeited by the bailout. Twenty-three concessions were financially healthy enough to not need a bailout, while four additional concessions that required a bailout involved foreign capital and were dealt with individually.
The Government plan also called for reducing toll rates for all classes of vehicles by 17 to 39 percent. Future toll revenues were expected to pay back two-thirds of the Governments 60 billion peso (approximately US$8 billion) bailout, and after a two-year adjustment period, it was planned that the toll roads would be re-privatized based upon actual traffic and cost data. Critics charged that the Zedillo administration should have made the construction companies and banks pay a greater portion of their debts, but the Government prevailed, countering that it was acting to save the countrys infrastructure, not to rescue a few private companies.
43
_______________________________________________________________________________________________________
3.2 Major Toll Road Issues and Implications for Best Practices
Despite its primary successthe completion of over 5,000 km of toll road in just five yearsthe shortcomings of the Mexican private toll road program were many and varied. As such, the Mexican toll road experience raises a number of issues with respect to concessioned toll road development programs, many with important implications for best practices elsewhere. These include:
The need for adequate program preparation and planning; Issues related to cost estimates and construction; Issues related to traffic and revenue forecasts, tariff rates, and toll road operations; The importance of well-designed legal, regulatory, and institutional frameworks; and Issues related to project finance and economics.
3.2.1 Need for Adequate Program Preparations and Planning
It was apparent from the ensuing problems faced by the concessionaires that the project selection, prequalification, and award criteria were too vague. Mexico had no intermodal transportation development strategy, and as such it was impossible to design the projects to fit in with long-term regional development plans. This was particularly problematic with respect to the Governments concurrent rail, port, and airport privatization plans. In terms of highway development alone, planning was also highly inadequate. For instance, some key segments of the five priority corridor roads were never concessioned, while other toll roads lacked important links to other highways in the network. The tendering process lacked strict prequalification procedures and did not require the bidders to submit detailed financing plans. Consequently, many small to medium sized concessionaires relied upon commercial bank loans for their equity commitments, which became problematic as soon as project revenues began to falter. Potential concessionaires also faced challenges during the bid preparation process, as there was insufficient time between the release of bidding documents and their due date. This precluded independent consultants from being able to perform effective field survey work on behalf of the project investors.
It was also apparent that in many cases both the public and private sector organizations involved lacked sufficient technical, organizational, staff, and financial resources to plan for and implement the proposed projects successfully. SCT was understaffed and had inadequate overall institutional capabilities to take on the commitments demanded by the scale and nature of
44
_______________________________________________________________________________________________________
Mexicos private toll road program. Compounding this problem, a lack of proper discipline within the financial institutions also contributed to the over-reliance on non-recourse financing. In the early stage of the toll road program the project loans were often provided by government-owned commercial banks, with little or no due diligence performed. Not only were the banks technically incapable of performing such reviews at the time, but some also say that it was implicitly understood that the ultimate recourse would in fact be to the Government.
3.2.2 Cost Estimates and Construction Issues
During the design and construction stages of project implementation, the private concessionaires had their hands full with a wide range of problems. Inadequate plans, insufficient information, right-of-way conflicts, ineffective turnkey construction arrangements, unanticipated design changes, community resistance, and permitting problems all contributed to frequent cost overruns and delays. Construction often started with only preliminary engineering and design work completed, and very little right of way obtained. Compounding matters, poorly defined procedures and bureaucratic delays with permits often brought construction to a standstill. Throughout the implementation period, SCT supervision was poor, and the Secretariat became known for often mandating universal change orders. Construction financing was also insecure, often based upon poorly structured cost-plus contracts if any at all.
3.2.3 Traffic and Revenue Forecasts, Tariff Rates, and Operations Issues
For many concessionaires, cash flow has been significantly below expectations. Reasons for this include: insufficient information coupled with flawed traffic analysis and forecasting
methodologies; prohibitively high tolls; and the free parallel route requirement. In general, the traffic studies did not consider travel variations by time, day, or season, nor by type of vehicle or trip. In addition, demographic and economic conditions and trends influencing travel demand were typically not identified. In several cases, traffic growth rate assumptions were unrealistic and often data from SCT were inadequate or unavailable. These traffic study shortcomings have generally been attributed to a lack of expertise on the part of the concessionaires, financiers, and their consultants.
Significantly lower than expected truck traffic magnified revenue problems because of the higher toll revenues that were expected from these vehicles, while counterfeit toll tickets made matters
45
_______________________________________________________________________________________________________
even worse. General road users also shied away from the toll highways due to the high tariffs 10 . Most concessionaires also did little or no marketing to increase public awareness of their roads and the travel benefits provided over the parallel free routes, and they have given minimal attention to the development of auxiliary services such as gas stations, rest areas, restaurants, and emergency towing. The tariff adjustment procedures have also been highly uncertain for the concessionaires. Both toll increases and decreases typically required SCT approval, which restricted most concessionaires abilities to responsively adjust pricing to optimize revenues once the roads were open to traffic. In the end, the concession agreements required the Government to specify toll rates and guaranteed traffic volumes by category of vehicleeffectively putting all revenue risk on the Government.
3.2.4 Financial and Economic Issues
Longer-term concession periods are in general beneficial to the private sector concessionaires, and support the financial and operational stability of the projects. Long term concessions allow the project sponsors to spread their debts over a longer period, and reduce the annual cash flow (revenue) needs to levels that may be met with more reasonable toll rates. The Mexican Government did eventually allow various financially troubled concessionaires to extend their concession periods, but some were already so bad off that even this was insufficient to make their finances sound.
There is a pronounced need for mature domestic financial markets, able to provide long-term financing, in order to support successful private sector toll road development. In the case of Mexico, underdeveloped local financial markets were incapable of providing long-term fixed rate financing. A lack of liquidity in local financial markets, and local debt instruments that were limited to short-term high-cost floating-rate notes (often 10 percent above the local market reference rate) severely limited the conditions under which the toll roads could be operated profitably (or even break even). Once toll road revenue (and debt service) problems became apparent, local and international investor interest in most projects dried up. Consequently, the idealized scheme of refinancing the toll roads under better terms once construction was complete became difficult if not impossible for most concessionaires.
A stable macroeconomic environment, supportive of international investment, is also of paramount importance for effective private sector participation in toll road development. The
Average cost of tolls: US$0.12-0.50 per km in Mexico (1995). It is in marked contrast with Brazil for example, a country of comparable GDP per capita but where the tolls have been in the US$0.04 per km (1995). (World Bank, 2003)
10
46
_______________________________________________________________________________________________________
December 1994 peso crisis and subsequent recession, which reduced road usage, had a severe impact on project revenues and cash flow for nearly all of the toll road projects eventually requiring the US$8 billion government bailout of nearly half of the concessions in 1997. International investors also faced significant currency devaluation and convertibility risks in Mexican toll roads, and indeed only three of the most profitable projects were able to successfully attract foreign investment before the financial crisis. Prior to the crisis, the Government also provided dollar-based funding to certain lenders in order to help them lower their interest rates. However as the value of the peso dropped, the cost of these obligations ended up increasing by 70 to 80 percent.
3.2.5 Importance of Well-Designed Legal, Regulatory, and Institutional Frameworks
A well-structured legal, regulatory, and institutional framework ought to be formulated well in advance of the awarding of concessions. In the case of Mexico, it has been suggested that the lack of legal and regulatory institutional arrangements discouraged lenders and builders from respecting their agreements. There were no formal mechanisms for the Government to obtain and address requests or inquiries from the private sector parties before, during, or after the bidding process. This situation led to an often adversarial and less than transparent relationship between the parties. The independent regulatory authority for supervising contractual arrangements was insufficient, and contracts were subject to the local court system, which represented a significant risk to international investors who were unfamiliar with the domestic legal system. With projects that needed direct government support, SCTs dual role as government regulator as well as concession partner sent somewhat conflicting signals to the private concessionaires. In particular, the extent to which the Government would retain managerial control over such projects was uncertain.
In order to keep private sector projects financially viable, and in the private sector, there is a need to provide the private sector with incentives and room to maneuver in order to face their associated commercial and financial risks. Successful arrangements also protect the Government and taxpayers from ultimately being responsible for the financial condition of the private sector entities. It has been concluded that while contractual arrangements alone may be sufficient for encouraging the commencement of private sector participation in infrastructure development, a broader regulatory and legal framework (for both the concessionaires and financiers) is perhaps necessary to sustain private sector involvement in infrastructure operation and management.
47
_______________________________________________________________________________________________________
3.3 Current Situation of Roads in Mexico
Today, Mexicos road system consists of more than 342 thousand kilometers of highways which have all kinds of needs, including modernization and expansion of the highway network (see Figure 3.1). To satisfy those needs, Mexico requires about 5 billon US dollars per year for road construction and maintenance. As stated above, the available public funds allow the federal government to annually invest less than half the required amounts. To close this gap, the Secretariat of Communications and Transportation (SCT) has designed and implemented two public-private partnership (PPP) models that seek to attract private capitals to highway investments. Concessions and public private partnership projects (PPP) 11
Figure 3.1 Mexico Highway Network
Federal Road State Road Toll Highway Project
Source: SCT, 2007 http://uac.sct.gob.mx/fileadmin/ingles/presentations/public.pdf
These new models were established in 2005 by the SCT and Banobras (National Bank of Public Works and Services), during the Presidency of Vicente Fox.
11
48
_______________________________________________________________________________________________________
Through its public-private partnership models, SCT seeks to allow an earlier development of Mexicos road system, increase the amount of highway investments with private participation, and add value to services offered to users. Moreover, to better distribute and manage highway project risks. SCT plan to link the highway corridors can be illustrated in the Figure 3.2. Figure 3.2. Mexico Main Highway Corridors
Source: SCT. Public-Private Partnerships for Highways in Mexico, 2007. http://uac.sct.gob.mx/fileadmin/ingles/presentations/public.pdf 3.3.1 Highway Concession
The new model of highway concession has been designed by the SCT and the National Bank of Public Works and Services (Banobras) to allow private participation in road infrastructure development through a combination of private equity, banks loans and public funds based on the specific characteristics of each project. This combination seeks to offer reasonable returns on equity to private participants and a more efficient use of public funds.
Under this new model, the concessions had several characteristics that are described as follows: Concessions are granted through public bids
49
_______________________________________________________________________________________________________
SCT provides final designs and rights of way SCT sets maximum average tolls and rule for updating them The time of concession is the maximum allowed by Mexican law (thirty years) The government provides an initial contributions with public funds paid through Finfra 12 , a trust in Banobras The government offers a minimum revenue guarantee (CAS) to facilitate involvement by private banks The concession is awarded to the bidder who requests the lowest amount of public funds, measured as the sum of the initial contribution an the net present value of the minimum revenue guarantee
The construction stage of the new concession is summarized in Figure 3.3. SCT implemented a number of changes to the original version of the concession model. Some of those differences include the following: Additional construction works are paid with funds provided by the concession, up to a certain amount. If exceed, SCT provides the additional funds required The condition that requested the winning bidder to share responsibility with the concessionaire was eliminated The time available to acquire bidding documents has been extended Cure periods for events related to non-compliance by the concessionaire with respect to its obligations have been introduced The condition to withhold the guaranty of the offer in second place until the concessionaire complies with his obligations has been eliminated The amount and the management of the letter of credit that guarantees the availability of equity have been eased The winning bidder may constitute the concessionaire company after the bid is awarded The terms and conditions for delivery of the right of way to the concessionaire have been clarified, as well as the management of related contingencies Excess revenues will be shared in terms more favorable to the investor Insurance provisions within the bidding documents have been improved Acts of god and force majeure events are managed with insurance and a contingency fund established in Finfra In case of early termination due to causes related to the concessionaire, sanctions will be applied and the amount of equity not yet recovered will be repaid
12
Fondo de Inversin en Infraestructura (FINFRA): Infrastructure Investment Fund
50
_______________________________________________________________________________________________________
Adaptation to the title of concession and the trust contract for cases when public funds from Finfra are not requested Improvement of terms of the letter of credit to reduce its cost
Figure 3.3 New Highway Concession Model Construction Stage
Source: SCT http://uac.sct.gob.mx/fileadmin/ingles/presentations/newmodel.pdf
The Matehuala Bypass was the first concession to be awarded under the new concession program. This 30-year concession was awarded to DECOMSA on May 9, 2003, for the construction, maintenance, and operation of 14.2 km of highway (see case study). Until 2007, the awarded new concessions have allowed investments of about 1.60 billion US dollars on 721.2 kilometers of roads. Highways currently in the New Concession Program are summarized in Table 3.2.
51
_______________________________________________________________________________________________________
Table 3.2 Highway Concession Program (2007)

Type of Work Awarded concessions Project Length (kms) 721.2
Matehuala Bypass Mexicali Bypass Amozoc-Perote Tepic-Villa Union Morelia-Salamanca Northern Bypass of Mexico City Tecpan Bypass Monterrey-Saltillo and Saltillo Bypass Reynosa-McAllen Anzalduas International Bridge Bids in progress Perote-Banderillas and Xalapa Bypass Arriaga-Ocozocoautla Irapuato Bypass San Luis Ro Colorado II International Bridge Bids in progress La Piedad Bypass and access to MexicoGuadalajara highway Compostela-Puerto Vallarta Chihuahua Bypass
14.2 41.0 103.0 152.0 83.0 222.0 4.0 92.0 10.0
183.4 60.0 93.0 30.0 0.4 183.4 50.0
104.0 41.0
Source: General Directorate of Road Development (2007)
52
_______________________________________________________________________________________________________
3.3.2 Service Provision Contracts
In Mexico Service Provision Contracts (PPS, its Spanish acronym) are being applied mostly to projects that improve the characteristics and level of service of toll-free roads. The first service contract, to modernize the Irapuato- La Piedad fereral road (see case study), was successfully awarded by SCT on August 26, 2005. PPS is different from the concession model. To better understand the main differences between PPP and concession models, Figure 3.4 illustrates those differences.
Figure 3.4 Comparison of PPP and Concession Models
Source: SCT. General Directorate of Road Development http://dc.sct.gob.mx/fileadmin/ingles/presentations/ppp.pdf
SCT applies the following main criteria to select the road sections to be improved with this model: Number of users who benefit Regional and state relevance of the road Availability of alternative sources of funds Potential to support development in specific regions (for example, in southeastern Mexico)
53
_______________________________________________________________________________________________________
The characteristics of this type of PPP (PPS model) for highways might be described as follows: A concession is awarded through a public bidding process which at the same time gives the concessionaire the exclusive right to sign the service provision contract The contract establishes an association between SCT and a private firm to design, finance, build, maintain and operate a highway The duration of the service contract is fixed, from 15 to 30 years The private firm provides services in exchange for periodic payments which are based on the availability of the road and its traffic Each bidder requests a periodic payment determined as a function of : o o o o Construction, maintenance and operating costs Rate of return on equity, including financial costs Estimated annual traffic Duration of contract
The Net Present Value of the stream of periodic payments is the decision criterion used to award the concession provided that the winner complies with technical, legal and financial requirements
After construction, the modernized road continues operation as a toll-free road
The PPP usually lead to a faster implementation of projects, since they often provide incentives for the private sector to deliver capital projects within short construction timeframes. Because a core principle of any PPP is the allocation of risk to the party that is best suited to manage risk at the less cost, there is a better control of the complete range of project risks throughout the life of the project. The Figure 3.5 shows the risk in PPP projects in the case of the Mexican legal framework. In addition, Figure 3.6 explains the legal and document structure of PPS model.
54
_______________________________________________________________________________________________________
Figure 3.5 Main Risks in PPS Projects
Source: SCT. General Directorate of Road Development http://dc.sct.gob.mx/fileadmin/ingles/presentations/ppp.pdf
Figure 3.6 Legal and Document Structure in Mexican PPP Project
Source: SCT. General Directorate of Road Developm ent http://dc.sct.gob.m x/fileadm in/ingles/presentations/ppp.pdf
55
_______________________________________________________________________________________________________
Until 2006, PPS projects are generating investments of 2.4 billions US dollars to improve, operate and maintain 410 kilometers of toll-free roads. The current status of this program is shown in Table 3.3:
Table 3.3 Public-Private Partnership Model (2007)

Type of Work Awarded contracts Irapuato-La Piedad Quertaro-Irapuato Nuevo Necaxa-Tihuatln Rioverde-Ciudad Valles Tapachula-Talismn with Branch to Hidalgo City Bids in progress Nuevo Italia-Apatzingn Upcoming bids Mitla-Tehuantepec Zacatecas-Saltillo Under preparation Acayucan-La Ventosa Apizaco-Calpulapan Macuspana-State limit Campeche/Quintana Roo Arriaga-La Ventosa Salina Cruz-Huatulco Project Length (kms) 410 75 93 85 112 45
229 32 376 163 213 938 170 51 434
137 146
Source: General Directorate of Road Development (2007)
The experience of PPP deals in other countries constitutes evidence that, when properly implemented, the PPP approach constitutes a viable method for developing infrastructure projects. The interest of the Mexican Government in considering alternative methods for the
56
_______________________________________________________________________________________________________
development of infrastructure projects (such as the PPP scheme) will lead to new business opportunities for the private sector in Mexico. While it will be necessary for the Mexican Government to provide the legal framework for the implementation of said scheme, private companies that may be interested in participating in such projects should become prepared to take advantage of the learning experiences of the first pilot projects being currently implemented. The experience of other countries and the participation of international sponsors with experience in PPP deals will also be essential.
3.3.3 Asset Utilization In this new scheme, the SCT terminates the concession of highway assets to FARAC 13 in exchange for compensation. In this manner, SCT prepares concessions formed by existing highways with more than 10 years of continuous operation, and new highways to be constructed. In order to do that, the Secretariat grants the concessions to the private sector through public bids and pays FARAC. The concessionaire is responsible to operate, maintain and exploit the existing toll roads, as well as to build and later operate the new highways in the concession. Figure 3.7 describes the actual projects of this program.
Highway Concession Rescue Trust (Fideicomiso de Apoyo para el Rescate de Autopistas Concesionadas in Spanish) : The network of FARAC constitutes all of the operating roads bailed out in 1997 plus those that were completed and began operations in 1998.
13
57
_______________________________________________________________________________________________________
Figure 3.7 U tilizationof H ay Assets ighw
S ource: S T. C http://adm insitios.sct.gob.m x:8090/uac/fileadm in/ingles/presentations/public.pd f
58
_______________________________________________________________________________________________________
Figure 3.7 C U ont. tilization of H ay Assets ighw
Source: SC T. http://adm insitios.sct.gob.m x:8090/uac/fileadm in/ingles/presentations/public.pd f
59
_______________________________________________________________________________________________________
4. Mexico Transportation PPP Case Studies
This chapter presents a series of briefer case studies of major highway projects undertaken or still in progress that demonstrate the types of public-private partnerships being used to leverage scarce public resources and expedite needed transportation projects in Mexico. Each case study provides insights into the issues encountered and strategies used to advance the project, at times in the face of determined opposition. Some of the case studies also provide lessons that can assist agencies and their private sector partners beginning to consider and develop PPP arrangements to avoid or address impediments to PPP contracts and facilitate their successful implementation.
4.1 Background
The rationale for partnerships between government agencies and private firms for the delivery of public services such as transportation (as well as water and sanitation) is strong. Especially in recent times, public investment budgets have flattened or been reduced, while at the same time the needs for both new investment and maintenance of older infrastructure have continued to grow. Increased taxation is politically unpopular, yet the public also demands continued improvements in the capacity, safety, and efficiency of its public services. Although they are not a panacea, public-private partnerships (PPPs) offer one to approach to solving this dilemma. The advantages of PPP project delivery methods include: The Access to new private capital to supplement public funds. More rapid development of infrastructure assets under a PPP project structure. Higher quality and customer satisfaction due to focus on performance standards and enhanced quality control. Improved efficiency in construction, operation, and maintenance of the infrastructure should arise from innovations in service delivery, incentives in the PPP contract, and better institutional integration throughout the life of the project. Public agencies focus on their strengths of long-term service planning and management, having turned over financing and/or day-to-day operating responsibility to their private partners.
Despite these apparent advantages, PPPs in surface transportation have been relatively slow to develop in Mexico, especially when compared to other nations around the world, especially in Europe, Asia, and some developed countries in South America. The notable feature of a PPP is a genuine sharing of the risks and rewards that accompany the project. This sharing of risk and
60
_______________________________________________________________________________________________________
reward is foreign to most public agencies in this country which are more accustomed to a strict delineation of public and private sector roles and responsibilities. In addition, numerous impediments confronted the early adopters of PPPs, particularly overseas and more recently in Mexico. In most cases, enabling legislation has been required to allow state 14 transportation agencies to enter into PPPs for surface transportation projects and use alternative project delivery approaches to improve the viability of proposed PPPs for these projects.
4.2 Transportation Project Case Studies in Mexico
The following pages provide detailed information about several highway or multi-modal projects that were or are being developed using some form of PPP. This includes seven case studies of transportation PPP projects in Mexico as listed below.
Case Studies Matehuala Bypass Toll Road Morelia-Salamanca Toll Road Northern Bypass of Mexico City Toll Road, central Mexico Asset Utilization Irapuato-La Piedad Rehabilitation Project, Center Mexico Tepic-Villa Union Project Monterrey-Saltillo and Saltillo Bypass Toll Roads, Northeast Mexico Reynosa Anzaldas International Bridge, Tamaulipas and Texas
Together these eight PPP projects represent a cross-section of surface transportation projects that involve a variety of infrastructure types, funding and financing arrangements, and delivery approaches in various parts of the country. Each of these PPPs encountered a wide variety of challenges and opportunities and together they demonstrate how public agencies and their private sector partners either worked together to produce a successful project or reverted to traditional approaches that produced less favorable results.
The State of Nuevo Leon (Mexico) has been a pioneer to implement PPP projects of their own without help of federal agencies. In 2007 they announced the construction of a 180 meters State Office Tower in the center of their capital, Monterrey. Retrieved December 21, 2007 from: http://www.nl.gob.mx/?P=plazacivica
14
61
_______________________________________________________________________________________________________
4.2.1 Matehuala Bypass Toll Road
Matehuala bypass is part of the San Luis Potos-Saltillo Highway, as shown in Figure 4.1. It is located in the most important main corridors of the Mexican federal highway system, Mexico CityNuevo Laredo. The main objective of this bypass was to avoid heavy traffic vehicles thru Matehuala city.
Figure 4.1 Matehuala Bypass Project Site Map
Federal Road Toll Highway Project
Source: SCT http://adminsitios.sct.gob.mx:8090/uac/fileadmin/espanol/esquema_concesion es/libroasociaciones/fichascap2.pdf
On March 31, 2003, the SCT, on behalf of the Federal government, granted a 30-year concession title to Desarrolladora de Concesiones Omega S.A. de C.V. (DECOMSA) for the construction, operation, exploitation, management, and maintenance of the Matehuala bypass. The concession title included an upgrade and 8.4 km expansion of the Matehuala City Boulevard (free alternative).
62
_______________________________________________________________________________________________________
4.2.1.1 Funding and Finance
In September of the same year, Omega signed a Simple Credit Opening Contract with BANOBRAS to perform the bypass construction for up to Mexican pesos (MxP) 85 million (US$ 7.91 Million) 15 , which was dedicated to partially cover the construction of the road, including, among other concepts, the cost of works with its corresponding upgrades, right of way, studies, permits, taxes, and controlling equipment (the Credito Banobras). In November 2004, the road initiated its operations. Figure 4.2 shows the ribbon cutting for the Matehuala Bypass made by former Mexican president, Vicente Fox.
Figure 4.2 Ribbon Cutting for the Matehuala Bypass
Source: Presidency of the Republic http://fox.presidencia.gob.mx/actividades/?contenido=16533
A year later, the concessionaire issued notes for an amount equivalent to 151,549,600 UDIS 16 , that is, around US$51.21 million, which was used to settle the debt with BANOBRAS, and to pay
15
Mexico has had a floating exchange-rate regime since the December 1994 peso devaluation. Under this system, Banco de Mxico makes no commitment to the level of the peso exchange rate, although it does employ an automatic mechanism to accumulate foreign reserves. It also possesses tools aimed at smoothing out volatility. The Exchange Rate Commission sets policy; it is made up of six members - three each from the Ministry of Finance and Public Credit (Secretara de Hacienda y Crdito Publico-SHCP) and the central bank, with the SHCP holding the deciding vote. Since 2003, it has been certain exchange-rate stability in Mexican Peso. This study uses last 5 years average data to fix the Mx-US$ exchange rate ($10.74 Mexican Pesos per US$1 Dollar). Current exchange-rate is of $10.92 Mexican Pesos per US$1 Dollar (December 2007). Retrieved January 2, 2008 from: http://finance.yahoo.com/currency/convert?from=USD&to=MXN&amt=1&t=5y 16 UDIs: Inflation-linked units (Unidad de Inversin in Spanish), which protect loans from inflation volatility. The loans denominated in UDIs have their monthly payment calculated as a multiple of the minimum wage ("salario mnimo," or SM)
63
_______________________________________________________________________________________________________
the expenditure generated by the issuance, the funding constitution that brings liquidity to the trust and others in terms of the same trust.
In addition, the concessionaire reached an agreement with Operacion y Conservacion de Autopistas Concesionadas S.A. de C.V. to operate and manage the bypass.
The financial structure considers as an alternative income source a debt service fund having 12 months of resources from the issuance, and will keep 7.65% of the outstanding debt or 12 months of payments of the debt service. Also, the notes have been granted by XL Capital Assurance Inc. by means of the issue of the financial guarantee insurance policy, which guarantees the principal and interest scheduled payments that, according to trust, the trustee must pay to its bondholders according to the terms established in said policy.
On the other hand, the concessionaire will not receive any distribution after debt service, as it is expected that any flow surplus would be designated to prepay the debt, as long as the debt coverage rate is greater than 1.15x. The prepayment mechanism avoids debt concentration and builds in growing payments in the last years.
4.2.2 Morelia-Salamanca Toll Road
Located in the states of Michoacan and Guanajuato and 83 km long, this highway belongs to the project that will connect the Pacific and Atlantic Ocean thru several motorways, as shown in Figure 4.3 below.
in Mexico City, and the Sociedad Hipotecaria Federal (SHF) covers any potential mismatch between a rise in the minimum wage and the increase in the value of the UDI through an SM-UDI swap. Retrieved on 23 December, 2007 from: http://www2.standardandpoors.com/portal/site/sp/en/us/page.article/3,1,1,0,1148442756124.html
64
_______________________________________________________________________________________________________
Figure 4.3 Morelia-Salamanca Toll Road Project Site
The concession for the Morelia-Salamanca toll road includes two road tranches: Road Stretch 1 of 51.2 km that must be constructed by the concessionaire, and Road Stretch 2 of 31.8 km that must be constructed by SCT, which would be handed the concession for its operation, exploitation, and maintenance. Figure 4.4 provides a view of one of the bridges that cross Lake Cuitzeo in Michoacan.
65
_______________________________________________________________________________________________________
Figure 4.4 Morelia-Salamanca Toll Road crossing lake Cuitzeo
The concession estimates a term of 30 years and would be granted by public bid, which allows the participation of individuals and companies, national and international. Originally, the bid program was planned to last seven months (from June 2004 to January 2005), but during the procurement process, several delays arrived, so the bid was not granted until June 3, 2005, five months after the original term.
In the Bid General, it was established that the concession would be granted to the bidder that, besides meeting technical, financial, economic, and legal requirements, needed the minimum public subsidy, taking into account the sum of initial contribution and CAS net current value, calculating an annual discount rate of 10%.
There were proposals from several companies and consortiums, such as: the consortium integrated by Obrascon Huarte Lain S.A. 17 (OHL) and Compaa Contratista Nacional S.A. de C.V., Grupo Mexicano de Desarrollo S.A., Promotora Inbursa S.A. de C.V., Omega Corp. S.A. de C.V., and Consorcio de La Peninsular integrated by La Peninsular Compaia Constructora S.A. de C.V., Consorcio de Obras y Dragados Maritimos S.A. de C.V., Operadora y Administracion Tecnica S.A. de C.V., Pavimentos de la Laguna S.A. de C.V., and Grupo Profrezac S.A. de C.V.
Obrascon Huarte Lain : is a Spanish Construction Group, which principal activities are construction, infrastructure concessions and services. The construction activity includes the construction of highways, bridges, tunnels, and residential properties.
17
66
_______________________________________________________________________________________________________
A tie was determined, since OMEGA and Consorcio de La Peninsular didnt ask for Initial Contribution or CAS. Therefore, according to the tie agreements the concession was granted to the company that offered the lower cost of construction: Consorcio La Peninsular 18 .
The road is currently under construction, and, as of today, it has been entirely financed by risk capital.
4.2.2.1 Funding and Finance
In addition to mentioned laws, once financing is involved, it will be regulated by Ley de Instituciones de Crdito, Ley del Mercado de Valores y Ley de Ttulos y Operaciones de Crdito, and its corresponding rules and dispositions.
Generally, the concessionaire will create a trust (Administration Trust) to conduct the construction process. In Mexico, the figure of a Trust is legally considered bankruptcy remote, if properly set up. Ideally, debt holders act as beneficiaries of such trusts and have controlled the regulatory board, known as the technical committee. The concessionaire will be solely responsible of the construction of the road; however, three additional supervisors will be designated for the supervision of the works: one designated by the SCT, one by the Technical committee, and one by the concessionaire.
The concessionaire will have the option to securitize the flows derived from the project, and have the option of refinancing through future securitizations if the financial cost conditions improve and if the SCT authorizes it. So far in Mexico, securitization of toll roads has been for postconstruction projects. In most cases, the concessionaire has created a new trust (Issuance Trust) to administrate the resources generated from the operation of the toll road. The debt issued by the trust could be guaranteed to give additional protection to the bondholders. On termination of the concession, the rights to operate the toll road and to collect revenues revert to the government.
4.2.3 Northern Bypass of Mexico City Toll Road
Northern bypass of Mexico City (Arco Norte, in Spanish) toll road starting in Atlacomulco, Mexico State and ends in San Martin Texmelucan, Puebla State. It crosses the States of Mexico, Hidalgo and Tlaxcala, and in way it pass through two toll highways: Mexico-Queretaro and Mexico18
Consorcio La Peninsular is part of La Nacional Group, a Mexican construction company with investments in different assets in Mexico. The owner of this corporation is Carlos Hank Rhon, son of Carlos Hank Gonzlez, former distinguish Mexican politician.
67
_______________________________________________________________________________________________________
Pachuca, as shown in Figure 4.5 below. The bypass is part of the Altiplano corridor which provides a faster communication between east and west of Mexico and would avoid heavy traffic thru Metropolitan Mexico City area.
Figure 4.5 Arco Norte Bypass of Mexico City Project Site Map
The Arco Norte bypass transit would oscillate in an average of 6,400 vehicles (daily). Due to the fact that almost a third part of that vehicular flow will be heavy traffic; each year, the bypass would contribute to eliminate the circulation of almost a million of trucks thru Metropolitan Mexico City area, with consequential benefits such as: improvement of Mexico city environment, traffic security and savings in travel time.
On December 15, 2005, the SCT, on behalf of the Federal government, granted a 30-year concession title to Promotora del Desarrollo de Amrica Latina 19 , S. A. de C. V. and Promotora Inbursa, S. A. de C. V. for the construction, operation, exploitation, management, and maintenance of the 223 kms length Northern Mexico City Bypass. The winning bid was selected by the Secretariat (SCT) because the offer didnt solicit any public funds. Moreover, the amount of
19
Promotora del Desarrollo de Amrica Latina, S. A. de C. V. and Promotora Inbursa, S. A. de C. V. are part of Carso Group, a conglomerate of companies owned by the Mexican tycoon Carlos Slim.
68
_______________________________________________________________________________________________________
the project construction was lower than the other offers. The total cost of the project is of $5,881.2 Millions Pesos, around US$543 Million.
There were proposals from several companies and consortiums integrated by : 1. Promotora del Desarrollo de Amrica Latina, S. A. de C. V. and Promotora Constructora Norberto Odebrecht 20 , S. A., Autoroutes du Sud de la France 21 and
Inbursa, S. A. de C. V., 2.
Omega Corp, S. A. de C. V. 3. Ingenieros Civiles Asociados, S. A. de C. V., Controladora de Operaciones de Infraestructura, S. A. de C. V., Constructoras ICA 22 , S. A. de C. V. and Itinere Infraestructuras 23 , S. A. 4. Empresa Obrascn Huarte Lain, S. A.
4.2.3.1 Economic Benefits
The regions of this Project not only include Mexico City and the States of Mxico, Hidalgo, Tlaxcala and Puebla, but also indirectly embrace all south of Mexico 24 . South of Mexico finally would have a fast and reliable route to export to USA without passing through Metropolitan Mexico City. Figure 4.6 shows the first part of the Arco Norte in the states of Mexico and Hidalgo.
Furthermore, the States of Hidalgo and Mexico are betting everything on the Arco Norte. The project will connect with four of the main highways and will be linked to the National System of Multimodal Transport. With the project, the states of Tlaxcala and Puebla will also be benefited, although as it was stated above, it is a well planned project that will positively affect the entire country. Moreover, the Arco Norte is an important and good opportunity for real estate investors. The challenge for the states is to create regional policies that are driven through common legislation that is easy for real estate developers to understand. The
Constructora Norberto Odebrecht is part of Odebrecht Group, a Brazilian business conglomerate ASF is France's leading motorway network in France 22 ICA is Mexicos largest engineering, procurement and construction company. Founded in 1947, initially it was focused on the construction of public sector infrastructure. ICA is a wholly-owned subsidiary of Empresas ICA, S.A. de C.V., ICA Groups holding company. 23 Itinere Infraestructuras, S.A. is the Infrastructure concessionaire within Sacyr Vallehermoso group (Spain). It is present in six countries (Spain, Chile, Portugal, Brazil, Costa Rica and Bulgaria) through the operation of different motorways which comprise a total of 3,640.21 Kilometers and 33 concessions. 24 Regional disparities and income inequality continue to be a problem in Mexico. While all constituent states of the federation have a Human Development Index (HDI) superior to 0.70 (medium to high development), northern and central states have higher levels of HDI than the southern states. Nuevo Len and the Federal District have HDI levels similar to European countries, whereas that of Oaxaca and Chiapas is similar to that of Syria or Egypt. Programa de las Naciones Unidas para el Desarrollo (2005). "Informe sobre desarrollo humano, Mxico, 2004" (PDF). United Nations. Retrieved on 23 December, 2007 from: http://hdr.undp.org/en/reports/nationalreports/latinamericathecaribbean/mexico/mexico_2004_sp.pdf
21 20
69
_______________________________________________________________________________________________________
meaning of the Arco Norte in the sense of participation from the states must be oriented towards a regional orientation in the design of public policy and legislative and economic systems that make growth towards this area easy concluded the panel guests.
Figure 4.6 Jilotepec-Tula : First part of the Northern Bypass of Mexico City. Opened in 2006
Source: Presidency of the Republic http://fox.presidencia.gob.mx/actividades/crecimiento/?contenido=23762
4.2.4 Asset Utilization
The following section explains two examples of asset utilization that as it has been shown above (in chapter 3) is the way the SCT is using existing highway assets to support new project development in Mexico. The two projects clarified in this section are: 1. The package formed by four highways covering 558km in the states of Michoacn, Jalisco, Guanajuato and Aguascalientes. 2. The package formed by the Reynosa-Matamoros highway and the Reynosa-Pharr International Bridge
70
_______________________________________________________________________________________________________
4.2.4.1 Maravato-Zapotlanejo and Guadalajara-Aguascalientes-Len Toll Roads
This toll highway package represents the largest and most important highway network of the Occidente-Bajo-Centro region in Mexico, as shown in Figure 4.7 below. The toll highways connect major Mexican cities, such as Guadalajara, the second largest in Mexico, Morelia, Zamora, Len, and Aguascalientes, among others. This is one of the most dynamic regions in the country, representing 15.7% of Mexicos Gross Domestic Product. The regions GDP has grown at an average annual rate of 2.3% from 2000 to 2005, which is 0.5% more than the national average in the same period. In addition, this highway network serves to link important cities like Colima, Puerto Vallarta, Tepic, Zacatecas, Irapuato, Toluca, and Mexico City.
The road sections are summarized as follows: Maravato-Zapotlanejo: This highway started operations in October 1993. It is a four lane, divided highway with a total length of 309.7 km of length; and provides an east-west axis across the Occidente-Bajo-Centro region and connects important cities in the states of Michoacn and Jalisco. It is part of the most direct route between Mxico City and Guadalajara, the two largest cities in the country. This highway has four tollbooths. Guadalajara-Zapotlanejo: This highway was constructed in the 60s as a two-lane toll road, and two additional lanes were added in 1994. It has a total length of 26 km with asphalt pavement. It is one of the most important access roads to the city of Guadalajara, since it connects the toll roads of Maravatio-Zapotlanejo and Zapotlanejo-Lagos de Moreno. This toll highway is the main access road that connects the Occidente-BajoCentro region to Guadalajara. It has one tollbooth. Zapotlanejo-Lagos de Moreno: This toll highway started operations in May 1991 and has a total length of 118.5 km. It is a four-lane divided highway with asphalt pavement, and provides direct communication to the region known as Altos de Jalisco, with many medium-sized towns, which have strong economic with Guadalajara. This toll highway is very important for freight transportation between the industrial cities of Guanajuato, Aguascalientes, San Luis Potosi, and Jalisco. It has two tollbooths. Len-Lagos-Aguascalientes: This toll highway started operations in September 1992 and has a total length of 104 km. It is a four-lane divided road with asphalt pavement. This toll highway connects the States of Guanajuato, north of Jalisco and Aguascalientes. Guanajuato lies in the center of the Mexico and plays a key strategic role in freight and passenger transportation across Mexico. The toll highway has two tollbooths located at Len and Encarnacin de Daz.
71
_______________________________________________________________________________________________________
Figure 4.7 Maravato-Zapotlanejo and Guadalajara-Aguascalientes-Len toll roads (the Project) in west-central Mexico.
Source: SCT http://tti.tamu.edu/conferences/ftoa/program/presentations/athie.pdf
It is the first package of roads ICA and Goldman Sachs Infrastructure Partners won against five other bids for the 30-year concession to operate the highways illustrated above. As is shown in Figure 4.7, the concession also calls for the construction of connecting roads between the highways, which link the cities of Guadalajara, Aguascalientes and Leon, and upgrades on various stretches of the toll roads. The toll roads that ICA and Goldman Sachs will take over had revenue from quotas last year of about US$185 million.
The SCT stated that 40% of the funds would go to paying down the debt of other governmentheld highways; just fewer than 40 percent will be used to finish a public works highway between Durango and Mazatlan in northern Mexico 25 , with the rest spent on other road projects.
Durango-Mazatlan is a public funded highway. The project cost is estimated at US$950 Million. It will provide landlocked Durango State with an exit through the Sierra Madre mountain range to the Pacific Ocean via Sinaloa port city Mazatln. The 232km highway could benefit as many as 21 million people, and will have 56 tunnels and 62 bridges,
25
72
_______________________________________________________________________________________________________
Losing bids included ones made by IDEAL, Spanish toll road firm Abertis; a consortium of Spain's FCC and private savings bank Caja Madrid; and Spanish building firm Obrascon Huarte Lain. The table 4.1 shows the tender competitors for the package of highways and the amount offered.
Table 4.1 Summary of Bid Tender in Maravato-Zapotlanejo and GuadalajaraAguascalientes-Len toll roads (August, 2007)
Partnership
Contructora ICA (Mexico) / Goldman Sachs Infrastructure Partners (US) Promotora del Desarrollo de America Latina (Mexico) / Macquarie Mexico Holdings (Australia) Abertis Infraestructuras (Spain) / Banco Invex (Mexico) FCC Contruccion (Spain) / Caja de Madrid (Spain) / Globalvia (Spain) Obrascon Huarte Lain (Spain) Compaia de Concessoes Rodoviarias (Brazil) / Brisa International (Portugal) / Grupo Hermes (Mexico)
Amount Offered (US$ Million)

4,100 4,043
3,910 3,901 3,644 2,706
Source: SCT http://www.capufe.gob.mx:81/statics/web_internet/Sala%20de%20Prensa/Con ferencias/conf-20070806/Licita_de_4_autopistas_6ago.pdf
4.2.4.2 Reynosa-Matamoros and Reynosa-Pharr International Bridge 26
Another example of asset utilization is the upcoming bid of the package formed by the ReynosaMatamoros highway and the Reynosa-Pharr International Bridge. With the amount gained with the re-privatization of those highways, the Federal Government will have the public fund necessary to build the Reynosa bypass and the Rio Bravo Donna International Bridge. The identified highways and future projects are mapped in Figure 4.8 below.
including the 1,120m long, 500m high El Baluarte bridge, which would be Latin America's longest and highest. Once accomplished (in 2010), it will be offer as a concession to the private sector. Retrieved December, 27, 2007 from: http://dc.sct.gob.mx/fileadmin/espanol/esquema_concesiones/libroasociaciones/cap4.pdf 26 The highway and future projects are located in Tamaulipas, a provincial state in the northeast of Mexico.
73
_______________________________________________________________________________________________________
Figure 4.8 Site Map of the Reynosa-Matamoros Toll Road and Reynosa-Pharr International Bridge (existing) and the Reynosa bypass and the Rio Bravo Donna International Bridge (to build).
Source: SCT. http://adminsitios.sct.gob.mx:8090/uac/fileadmin/ingles/presentations/public.pdf
4.2.5 Irapuato-La Piedad Toll-Free Road
The Irapuato-La Piedad road is the first project awarded to the private sector under PPS program. The project is the first investment in the road sector where the PPS model of concessions is tested. As such, the Project is expected to create a positive demonstration effect of the PPS program for future concessions, both in the highway sector and other sectors.
The 74.3 kilometer IrapuatoLa Piedad highway will be a toll-free road under the PPS mechanism, and consists of the expansion, upgrading, operation and maintenance of a 74.3 km long road beginning in the junction of the Quertaro-Irapuato highway with the Irapuato-La Piedad road, and ending at km. 77 of the junction with the future bypass of La Piedad de Cabadas in the State of Guanajuato, in the Central part of Mexico, as shown in Figure 4.9 below.
74
_______________________________________________________________________________________________________
Figure 4.9 PPS Irapuato-La Piedad Toll Free Road Site Map
Source: SCT. http://tti.tamu.edu/conferences/ftoa/program/presentations/athie.pdf
The project will be developed pursuant to a 20-year Concession and a 20-year Services Contract entered into by and between the Mexican Secretariat of Communications and Transportation (SCT) and Concesionaria Irapuato La Piedad, S.A. de C.V. (the Company) on September 12, 2005. The Company is a wholly-owned subsidiary of Ingenieros Civiles Asociados S.A. de C.V. (ICA).
The total project costs are estimated US$72 million and the recovery of the investment will be accomplished through an integrated quarterly payment made directly by the SCT. The payment is made up by two parts:
1. Payment for highway availability, based on achieving minimum performance standards, established in the concession and the services agreements; and 2. Payment based on traffic volume pursuant to the concession agreement, which provides that the SCT will pay a shadow tariff.
75
_______________________________________________________________________________________________________
The modernization of the highway was completed in July 2007, as it is shown in Figure 4.10 and Figure 4.11.
Figure 4.10 La Piedad-Irapuato under Construction
Source: ICA http://www.ica.com.mx
Figure 4.11 La Piedad-Irapuato Modernization Completed in July 2007
Source: ICA http://www.ica.com.mx
76
_______________________________________________________________________________________________________
ICA has established a special purpose company that will be the concessionaire and will contract for the operation and construction of the highway. The SCT has divided the highway into 16 sections. It will pay the concessionaire the availability payment for completion of each section. The second payment based on traffic volume will be charged to SCT by the concessionaire once the entire highway is modernized and fully operational.
The project was financed principally by a project finance loan that has been approved by an international financial institution with operations in Mexico. The balance was provided by ICA as an equity contribution to the concessionaire using a portion of the proceeds from the equity offering in August of 2005. The transfer of resources to the concessionaire was made in the form of a capital contribution. The integrated quarterly payment from the SCT provides the resources for both the return on the investment and the repayment of the financing.
It is important to mention that the road is part of the East-West corridor linking the Bajo Region (State of Guanajuato) in the center part of the country, with the cities of Guadalajara (second largest city in Mexico) in the West, and Quertaro and Mexico City in the East and Center-South, respectively. The road is located in a zone of rich agricultural production, and is connected with the important Bajo industrial corridor. As such, it is an important road for the transportation of agricultural and industrial products to several major cities in the country and to the United States. The expansion and upgrading of the road would contribute to promote the regional exchange of products and regional economic growth. Also, the project will contribute to improve traffic conditions along the road, reduce congestion and increase safety.
4.2.6 Tepic-Villa Union Toll Road
Located in the states of Nayarit and Sinaloa and 238 km long, this highway belongs to the Pacific Highway Artery (Eje Carretero del Pacfico) which goes from Guadalajara to Nogales and Tijuana on the northern border of the country, as shown in Figure 4.12 below.
77
_______________________________________________________________________________________________________
Figure 4.12 Tepic Villa Union Toll Road Project Site Map
On April 2005, the SCT, on behalf of the Federal government, granted a 30-year concession title to Concesionaria de Carreteras, Autopistas y Libramientos de la Republica Mexicana, S.A de C.V (subsidiary of IDEAL 27 ) for the construction, operation, exploitation, management, and maintenance of the Tepic-Villa Union highway. There were proposals from several companies and consortiums from Mexico and Spain, integrated by: 1. 2. Promotora Inbursa, S. A. de C. V. La Peninsular Ca. Constructora, S. A. de C. V., Pavimentos de la Laguna, S. A. de C. V.,
Grupo Profrezac, S. A. de C. V., Consorcio de Obras y Dragados Martimos, S.A. de C.V. y Operadora y Administracin Tcnica, S. A. de C. V. 3. 4. Obrascon Huarte Lain, S. A Ingenieros Civiles Asociados, S.A. de C.V. e Itinere Infraestructura, S. A.
A summary of the Tepic-Villa Union Toll Road is illustrated in the Table 4.2 below.
27
In June of 2005, a split in Financial Group Inbursa of approximately $9 billion pesos was destined to found IDEAL and an action of it was given to each shareholder of Inbursa Financial Group.
78
_______________________________________________________________________________________________________
Table 4.2 Tepic-Villa Union Toll Road Concession Summary

Construction length Investment Bidding Sponsors Winning Bid Award Concessionaire 152Km US$ 281.1 Million 4 Feb 25, 2005 INBURSA
Toll Road Objectives
Stimulate Western an Northern regions economic development Improve infrastructure competitiveness in the Western logistics corridor Provide a 30% reduction in transit time (savings of 53 minutes)
Source: SCT http://uac.sct.gob.mx/fileadmin/espanol/seminariocct/resultados/sesi on_3/S3_FO.pdf
It is important to realize that this freeway will not only increases security and rapidity of the routes throughout the coast of the Pacific, but also detonates the agro-industrial and tourist potential. Furthermore, facilitates the transit of one of the freeways of the Free Trade Agreement (NAFTA).
Figure 4.13 San Pedro Bridge on the Tepic-Villa Union Highway
Source: IDEAL http://www.ideal.com.mx/pdf/IDEAL06-english.pdf
79
_______________________________________________________________________________________________________
4.2.7 Monterrey-Saltillo and Saltillo Bypass Toll Roads
The Monterrey-Saltillo and Saltillo toll road project is located in the states of Nuevo Leon and Coahuila. The highway consists of 50km of toll road (35.2 km in Nuevo Leon and 14.8km in Coahuila) and 42km of a bypass (located in Saltillo, Coahuila), as shown in Figure 4.14 below.
Figure 4.14 Monterrey-Saltillo and Saltillo Bypass Toll Roads Site Map
Monterrey-Saltillo Toll Road Saltillo Bypass
Source: SCT. http://uac.sct.gob.mx/fileadmin/espanol/seminariocct/resultados/sesion_3/S3_PC.pdf
On November 1, 2006, the SCT, on behalf of the Federal government, granted a 30-year concession title to Coconal, S.A de C.V, Isolux Corroan Concesiones, S.A. and Elsamex, S.A. for the construction, operation, exploitation, management, and maintenance of the 95 kms length Saltillo-Monterrey toll motorway. The project also includes the construction of 3 toll plazas. The Spanish Isolux Corsn 28 leads the consortium awarded the contract with a majority holding. It is important to mention that this is the first time that a non-Mexican company has been awarded a concession for Federal roads.
There were proposals from several companies and consortiums integrated by :
Grupo Isolux-Corsan S.A., along with its subsidiaries, operates as an engineering and construction company in Spain and internationally.
28
80
_______________________________________________________________________________________________________
1. 2.
Coconal, S.A de C.V, Isolux Corsan Concesiones, S.A. and Elsamex, S.A., La Peninsular Compaa Contructora, S.A de C.V, Contructora Andrade
Gutierrez, S.A de C.V 29 , Operadora Administracin Tecnica, S.A de C.V and Compaa de Concessoes Rodoviarias. 3. Ingenieros Civiles Asociados, S. A. de C. V., Controladora de Operaciones de
Infraestructura, S. A. de C. V. 4. 5. Empresa Obrascn Huarte Lain, S. A. Pavimentos de la Laguna, S.A de C.V, Grupo Profrezac, S.A de C.V and Autopistas del Altiplano, FCC Contruccion, S.A, Desarrollo y
Operadora de
Contrucciones Urbanas, S.A de C.V and Impulsa Infraestructura, S.A de C.V
4.2.7.1 Impediments
The Monterrey-Saltillo is the project of the new model of highway concession that has been more problematic. It is so far the most polemic of all the new concessions projects. The project will be finished one year after the original dateline. The construction delay was induced by a suspension of the Secretariat for Environment and Natural Resources (SEMARNAT). The SEMARNAT detected that the SCT didnt have the Land Use Permit on May 11, 2007. Subsequently, on October 4, 2007, five months later, the Mexican environmental office releases the permit for reactivation of the construction. Table 4.3 below shows the key dates of this highway project.
Table 4.3 Key Dates in the Construction of Monterrey-Saltillo Toll Road

Begin of Construction March 1, 2007 Construction Delay 7 Months Original Finishing Date September, 2008 New Finishing Date September, 2009
Source: SCT http://uac.sct.gob.mx/fileadmin/espanol/convocatorias/nueva_infra/fallos/saltill o.pdf
It is important to notice that the SCT was fined US$23,277 by the Mexico's Attorney General for Environmental Protection (PROFEPA) for authorized the concessionaire to start the construction without the Land Use Permit. Figure 4.15 provides a view of the construction site.
29
The Andrade Gutierrez Group (AG group or the company) is one of Brazil's premier industrial conglomerates. AG currently won a US$97.8 Million PPP project (PPS project type) to build, operate and maintain for 24 years a State Government Tower in Monterrey (Nuevo Leon). The tower will be finished in June of 2009. Retrieved December 21, 2007 from: http://www.nl.gob.mx/?P=plazacivica
81
_______________________________________________________________________________________________________
Figure 4.15 Monterrey-Saltillo Toll Road under Construction
Source: SCT http://saltmont.net/
4.2.8 Anzalduas International Bridge
The Anzalduas International Bridge is an international bridge that will connect the city of Mission, Texas with the western outskirts of Reynosa, Tamaulipas (Mexico). It will provide cross-border commuters with two southbound and northbound lanes, as well as a pedestrian crossing. The bridge project will cost a total of about US$157.8 million for both sides (US$99 million on the U.S. side and US$58.8 million in Mexico). The U.S. side of the bridge will be paid for by the US federal government, from the International Bridge Board (cities of Hidalgo, McAllen and Mission city of McAllen,) and the Texas Department of Transportation. On the other hand, in Mexican side of the bridge construction capital will come from a Public Private Finance initiative granted as a concession. Figure 4.16 below illustrates the extent of the project within Reynosa.
82
_______________________________________________________________________________________________________
Figure 4.16 Anzalduas Bridge Connector Site Map U.S.A
Anzalduas International Bridge Mexican Border Customs
Bypass
Access to MonterreyReynosa Toll Road
Mexico
Source: SCT, adapted by the author. http://uac.sct.gob.mx/fileadmin/espanol/seminariocct/resultados/sesion_3/S3_VS.pdf
It is important to point out that Anzalduas International Bridge open the westside of Reynosa for direct access to the U.S. without having to cross town (Reynosa), but may also take some of truck traffic away from Nuevo Laredo as it will connect directly with the highway to Monterrey and the NAFTA Highway leading to Mexico City. Furthermore, the bridge will connect the South McAllen (Texas) and Mission (Texas) international trade areas to the west end of Reynosa, where many maquiladoras and other cross-border businesses are located. This will help to facilitate just-in-time delivery, allowing companies to keep inventory costs down, progress trade with Monterrey (Nuevo Leon), (because it is a quicker and safer route), and it will be the most efficient way for business traffic from northern Mexico to reach the United States. According to US and Mexican authorities, the bridge will be completed in June 2009. Table 4.4 below shows the summary of investments in Mexican side.
83
_______________________________________________________________________________________________________
Table 4.4 Summary of Investments of the Anzalduas International Bridge

Concept Cost (US Million) $7.44 Sources of Capital Tamaulipas State
Right-of-way
Bypass
$9.31
Mexican Federal Government
Border Customs Viaduct (international bridge) Total Investment
$11.35
Private Sector (Concession)
$30.72
Private Sector (Concession)
$58.82
$16.75 Total of Public Investment
$42.08 Total of Private Investment
Source: SCT http://uac.sct.gob.mx/fileadmin/espanol/convocatorias/nueva_infra/fallos/saltill o.pdf
4.2.8.1 Impediments
On June 2007, the SCT, on behalf of the Federal government, granted a 30-year concession title to Group Marhnos 30 for the construction, operation, exploitation, management, and maintenance of the 2.55km (Mexican side) Anzalduas International Bridge and the construction of the Mexican border customs. This company came under criticism, for construction delays and problems when it built the Mexican side of the Pharr-Reynosa International Bridge in the mid-1990s. But Alfredo Gonzlez Fernndez, Tamaulipas secretary of economic and employment development, said Marhnos and the Mexican government (thru SCT) have developed a master plan that will better coordinate the development of the Anzalduas bridge project to eliminate quality problems. The governor is asking that all new projects have a master plan to avoid those types of problems, he said. Tamaulipas State and Federal Governments affirmed that they are optimistic the plan will eliminate any construction problems with the Mexican side and that U.S. and Mexican engineers have met weekly throughout the project to ensure both sides stay on the same page as building progresses. However, Mexican builders ran into a snag when the government realized it had not acquired enough property for the project. Government officials acquired an additional 12.19 meters of property for the bridge, which likely set the project back about three weeks. Nevertheless, the SCT and State officials affirm that with more than a year left before the bridge is set to open; workers have plenty of time to catch up.
30
Founded in 1954, Marhnos is a 51 year old Mexican private firm.
84
_______________________________________________________________________________________________________
5.
Results and Conclusions
This chapter summarizes the key insights provided by Mexico transportation PPP project case studies presented in Chapter 4 of this thesis and the information shown in Chapter 3. This includes issues that often confront agency sponsors and private providers of PPP projects and strategies used to address and overcome these potential impediments. The chapter also contains summaries of the lessons learned from the PPP case studies and the transportation PPP activity in Mexico. It concludes with remarks regarding the use of this thesis.
5.1 Issues and Strategies to Address Them
Based on the PPP transportation projects documented as case studies in Chapter 4 and the transportation PPP activity in Mexico of Chapter 3, Table 5.1 through 5.4 provide summaries of the major issues and impediments faced by these projects and the strategies used to address them by Mexico sponsoring agencies and their respective private sector partners. The summary information is organized into four categories: Legal and Technological Funding and Finance Environmental Administrative These issues and strategies illustrate how certain members of the PPP project teams (including both public and private partners) dealt with problems that arose during project development, financing, and implementation. In few cases were the partners unable to fully overcome the impediments they faced in applying the PPP approach to surface transportation project delivery. Even in these cases, the strategies suggest courses of action for resolving these issues in the future. These summaries are not intended to suggest the full spectrum of possible impediments that transportation PPPs might encounter or all possible ways to address them. However, they provide a sampling of what sponsoring agencies and provider teams might encounter in pursuing transportation project delivery as a PPP.
5.2 Lessons from Mexico Transportation PPP Case Studies
The key lessons from Mexico transportation PPP projects described in this thesis are summarized in Table 5.5. The lessons noted in the exhibit are instructive for any sponsor or provider actively involved in or considering participation in a transportation PPP project. Table 5.6
85
_______________________________________________________________________________________________________
summarizes the critical success factors for transportation PPPs based on the case studies presented in Chapter 4 and the transportation PPP activity in Mexico of Chapter 3.
5.3 Conclusions
Public-Private Partnerships (PPPs) represent a wide variety of project financing and delivery approaches whose common element is that the public sector sponsor of infrastructure projects engages the private sector to varying degrees in the performance of certain functions previously handled by the public sector. This can range from contracted services like maintenance to full financing, development, operations, and preservation over a long term. The variety of PPP approaches continues to evolve and offer increasing choices to state and local transportation agencies to fulfill their missions. Though not appropriate for all projects, PPPs are likely to benefit a number of projects, particularly large-scale projects, which would not otherwise be to move forward for many yeas or even decades under traditional financing and delivery approaches (ADB, 2000).
The public sectors interest in PPPs has been stimulated by the widening gap between the needs for improving and expanding Mexicos aging transportation systems and the available public funding to address these needs. Facing increasing congestion, declining accessibility, unreliable freight delivery, and obsolete facilities, the Mexican public sector has begun to realize it cannot address these needs by relying solely on traditional financing, delivery, and operating practices. PPPs enable public sponsors of transportation projects the potential to expedite their transportation infrastructure programs and leverage their scarce public resources by accessing private sector best practices, new technology, and capital markets more quickly to deliver and operate transportation facilities in a more timely and cost-effective manner. With the Secretariat of Communications and Transportation (SCT) and its surface transportation administrations encouraging state and local transportation agencies to consider the selective use of PPP approaches to expedite urgent transportation projects, there is significant opportunity for these agencies to add PPP approaches to their means of accomplishing their missions.
Interest in the use of PPPs to expedite surface transportation is growing as state and local jurisdictions face the combined challenges of rehabilitating their aging and often outdated surface transportation infrastructure and adding necessary facilities and expanding services to support an ever-growing economy and population whose requirements for mobility, reliable accessibility, and safety continue to expand. Experience from other countries which have used PPPs for
86
_______________________________________________________________________________________________________
transportation infrastructure projects shows that the structure and delivery methods selected are highly dependent on the following features: Enabling statutes and regulations; The capabilities of all members of the PPP to execute their roles and responsibilities; Flexibility and a proactive approach to identifying and resolving issues that arise during the project planning, development, and implementation phases; Underlying taxation arrangements that may lower the cost of the project; and The ability of capital markets to deliver financing structured to suit each PPP project.
The case studies and the information of transportation PPP activity in Mexico contained in this thesis illustrate how these issues can vary and therefore should be addressed on a project-byproject basis. Particularly important are potential risks arising when state or local transportation agencies attempt to implement PPPs for the first time where legal authority to use PPP approaches are not clearly defined or there is strong political, local, or institutional opposition.
The many challenges facing state and local transportation officials and agencies, as noted above, require a broader array of tools to improve the cost-effectiveness of project delivery and the operational efficiency of transportation facilities. While not a panacea for the fiscal, staffing, and technological shortages facing state and local transportation agencies, PPPs can provide additional resources to the provision of transportation infrastructure and services. The number of state and local agencies participating in project PPPs is rapidly growing, while the domestic financial investment community has begun to realize the opportunities associated with this emerging market for transportation infrastructure financing.
Because PPPs represent new ways of performing their traditional responsibilities, there is considerable uncertainty about using alternative approaches that rely more heavily on the private sector than in the past, when there was a clear distinction in responsibilities between the sponsor/owner agency and the private firms that performed such services as highway final design and construction. Therefore it is important to emphasize that PPPs involve a sharing of project responsibilities, as well as risks and returns on investment associated with these responsibilities, between public owners of transportation facilities and their private sector partners. Arriving at a balanced and acceptable sharing of responsibilities, risks, and rewards with the private sector through a contractual partnership poses the greatest challenge and opportunity for public agencies seeking to rebuild and expedite their transportation programs. Effectively administering PPPs can help state and local transportation agencies be assured that their expectations for
87
_______________________________________________________________________________________________________
project performance are being met, consistent with the terms of the PPP contract (Spiering et al., 2007).
While PPPs represent change for officials and staff of many of these agencies, the uncertainty associated with introducing PPP approaches can be reduced through the experience of other agencies which have successfully developed and implemented PPP projects. The case studies presented in this thesis highlight various PPP approaches and the strategies used to address impediments that arose as the projects evolved. This information is intended to inform those officials and agencies considering the use of PPP approaches or interested in learning more about what peer agencies (SCT, SCHP) in Mexico are doing to develop and implement successful PPP projects. Armed with this information, it is the intent of this study to encourage broader application of PPP approaches to leverage scarce public resources and expedite financing and delivery of essential transportation projects in Mexico.
88
_______________________________________________________________________________________________________
Table 5.1 Legal and Technological Issues and Strategies Used to Address Them for Mexico Transportation PPP Projects Issues Strategies
Lack of state or local statutory authority to enter into PPPs or DB project delivery for surface transportation projects
Created special legislation for a single project to allow the application of innovative financing and project delivery approaches as part of a PPP. Established as a matter of public policy state statutes that provide legal authority to transportation agencies to enter into PPPs to deliver projects and services. The legislation provided wide flexibility to apply innovative project financing and delivery approaches for surface transportation projects as PPPs.
Sponsoring agency and private partners sought legal opinion from transportation agency (SCT) chief financial officer and state attorney general (Spanish: Procuradura General del Estado) to confirm statutory basis and legal authority to proceed with project as a PPP.
Legal challenges to projects as eligible PPPs under existing PPP statutes
Risks of introducing and applying new technologies in the PPP project
Build into implementation schedule of project scheduled service downtime to permit conversion and de-bugging of the new systems for PPP projects that are built under continuing transportation service. Used Design-Build-Operator (DBO) approach to PPP project for a specified period after the construction phase is completed (2 years minimum for operating systems) to ensure the operating service and control systems work properly without jeopardizing public safety.
Source: Spiering et al. (2007, p.176-187) and SHCP (2007) Adapted by the author
89
_______________________________________________________________________________________________________
Table 5.2 Funding/Financial Issues and Strategies Used to Address Them for Mexico Transportation PPP Projects
Issues
Strategies
Uncertainty regarding adequacy of available funding
Combined federal, state, local, and toll revenues to provide adequate project funding. Used innovative funding and project delivery approaches, including PPPs and Design-Build, authorized by state statutes. Used PPP project delivery, tolling, innovative financing approaches involving private sector access to private capital markets, and tolling to expedite project delivery. Leveraged available federal transportation funding with state and local matching funds augmented with a 20 percent contribution from economic development group whose project would benefit from the accessibility provided by a new bridge overpass. Used tax increment financing (TIF) to pay for the debt service costs associated with low cost municipal bonds sold to finance two bridges and access ramps to provide access to two proposed economic developments, backstopped by special assessment district fees and transportation impact fees if the developments did not materialize in a timely manner to generate expected increases in local property taxes, thereby placing the financial risk of the projects on the private developers. Contract agreement stipulated criteria to allow for annual toll rate adjustments.
Public or political opposition to tolls or rising toll rates
Source: Spiering et al. (2007, p.176-187) Adapted by the author
90
_______________________________________________________________________________________________________
Continued
Issues
Strategies
High cost of obtaining additional right-of-way
Project sponsor retains land acquisition responsibility using cost-effective and timely eminent domain authority. Project sponsor separately funds right-of-way acquisition costs to eliminate cost risk for land acquisition to provider team, thereby reducing uncertainty in costing fixed-price design-build project. Value engineering to lower soil remediation costs by focusing on exposed areas Public sponsors incorporated contingency funds into contract to cover possible escalation in right of way and utility relocation costs; while private providers accepted financial risks of material costs, which increased significantly in recent years. Obtained long-term commitment of financial backing for project from major investment partner with patient capital. Lease agreement provides ample remedies to private concession team if project sponsor seeks to terminate the contract agreement prematurely and without merit, or interfere with ability of project to generate revenues from facility under terms of contract agreement.
High cost of site remediation and other project elements
Escalating costs
project
Funding jeopardized by early project delays caused by external economic forces Political tampering by efforts to cancel or change contract terms of agreement
91
_______________________________________________________________________________________________________
Continued
Issues
Strategies
Potential threat to project revenues due to competition from nearby
Recognition of very high cost of adding capacity to nearby congested facilities mitigates against traffic diversion and revenue loss. Captive market with no reasonable alternative highway facility. High growth of region served by facility provides more than enough latent demand to compensate for potential traffic diversion. Long-term concession agreement mitigates against traffic and revenue risks due to continued economic and demographic growth. Improvements to patron service through interoperable electronic toll collection systems along connected facilities, including open road tolling. Reduced project scope by 40 percent to match lower expected cash flow from local Transportation Improvement District fees full project scope restored later when actual development growth increased to levels needed to fully fund the project. Apply innovative funding, financing, and asset management techniques and incorporate future revenues and costs. Use private-sector financing approaches that include short-term taxable bank loan and taxable equity convertible to institutional debt instruments with patient capital and modest rates of return. Incorporate a prescribed toll rate schedule that allows increases on a defined timetable based on agreed to indices or minimum percentages as part of the PPP contract agreement. Use toll rates to manage traffic and provide free-flow conditions to optimize throughput volume. Public sponsor agency agrees to share costs of unusual site risks, such as hazardous materials discovered on project site during construction.
Slowdown in population growth in primary market served by facility
Maximizing net present values of long-term concession contracts
Traffic and revenue risks
Unusual site condition risks
92
_______________________________________________________________________________________________________
Table 5.3 Environmental Issues and Strategies Used to Address Them for Mexico Transportation PPP Projects
Issues
Strategies
High costs of environmental challenges and environmental clearance process
Have public agency partners retain responsibility for obtaining environmental clearance, permits, and right-ofway early in the project development process (MonterreySaltillo Toll Road Study Case). Have public agency partners conduct the environmental clearance process using a transparent and phased approach to ensure environmental issues are recognized and addressed in a timely manner in the early phases of the PPP process. Establish a flexible DB delivery approach and contract performance criteria. Incorporate on the PPP team several technical specialty subcontractors to address certain types of special conditions relating to the environment.
Site location risks that may cause environmental delays and costly mitigation requirements, such as hazardous materials, buried ordinance, brownfield sites, and non-attainment area restrictions
Restrictions on developing transportation facilities in non-attainment area
Obtain exemptions to restrictions from federal and state environmental protection agencies (SEMARNAT) by demonstrating environmental advantages of the project versus the status quo by classifying the facility as a Traffic Control Measure where regional environmental benefits outweighed the impacts of the new transportation facility. Foster strong political and local community champions for the project, at the federal, state, and local levels. Created special legislation for a single project to allow the application of innovative financing and project delivery approaches as part of a PPP. Established state statutes that provide legal authority to transportation agencies to enter into PPPs to deliver projects. The legislation provided flexibility to apply innovative project financing and delivery approaches for transportation projects as PPPs.
Lack of state or local authority to use PPPs or DB to deliver transportation projects
93
_______________________________________________________________________________________________________
Table 5.3 Environmental Issues and Strategies Used to Address Them for Mexico Transportation PPP Projects
Issues
Strategies
Legal challenges to projects as eligible PPPs under existing PPP statutes
Sponsoring agency and private partners sought legal opinion from transportation agency chief financial officer and state attorney general to confirm statutory basis and legal authority to proceed with project as a PPP. Developer partners asked city to annex sites from the municipality to allow TIF-based PPPs, backed by transportation impact fees and transportation improvement district fees. This minimized the financial risk to the city and placed it primarily on the developers to expedite site development once annexed. The municipality agreed since it retained its property tax rights to the sites and could also benefit from the enhanced property and sales tax proceeds resulting from the resulting development made accessible by the PPP bridge projects. Build into implementation schedule of project scheduled service downtime to permit conversion and de-bugging of the new systems for PPP projects that are built under continuing transportation service. Use Design-Build-Operator (DBO) approach to PPP project for a specified period after the construction phase is completed (2 years minimum for operating systems) to ensure the operating service and control systems work properly without jeopardizing public safety.
Willingness of multiple jurisdictions to cooperate in helping local economic development groups establish PPP involving innovative financing approaches, including Tax Increment Financing (TIF)
Risks of introducing new technologies in a PPP project
Source: Perrot et al. (2000, p.81-91) Adapted by the author
94
_______________________________________________________________________________________________________
Table 5.4 Administrative Issues and Strategies Used to Address Them for Mexico Transportation PPP Projects Issues Strategies
Risk of using new project delivery and financing approaches that result in differences in understanding and expectations between
Promote on a pro-active basis public outreach and communication with the public early in the PPP project concept planning to obtain inputs regarding project issues and ways to address these issues and continue the process throughout the project development process. Promote two-way communication with project stakeholders throughout project development process to expose and resolve issues before they become impediments to the project that slow progress and threaten successful completion within budget and schedule terms of the PPP contract agreement. Employ experts on the alternative project delivery and financing approaches and what makes for a successful PPP relationship throughout the project t assist public sector agency managers and staff involved in the PPP project understand their roles and responsibilities and how to handle the partnering process. Bring in a noted specialist in partnering early in the project development process to conduct workshops that familiarize the partners to the PPP project of how the partnership arrangement should work and methods of communication, coordination, and dispute resolution without resorting to claims and counter-claims. Assign experienced staff to the PPP project that are familiar with the project delivery and financing approaches and are experienced in managing PPP-type contracts. Apply partnering techniques that facilitate the PPP project development process and build a productive and trustful working relationship between the public and private partners. These include: (1) use facilitated services on partnering techniques; (2) hold periodic executive partnering meetings from the beginning of the PPP project that include senior members of the PPP project management team; (3) hold weekly project status meetings among internal staff assigned to the PPP project; (4) hold bi-weekly meetings among project supervisors from public sponsor agency and private provider team to obtain briefings on project status, issues, and solution strategies; and (5) encourage field-based decision-making by public sponsor agency supervisors.
Source: SHCP (2007) Adapted by the author
95
_______________________________________________________________________________________________________
Table 5.5 Key Lessons from Mexico Transportation PPP Projects
Unique situations often require unique solutions. Differences in projects and their institutional environments make each project unique in certain ways and this needs to be taken into consideration when structuring a PPP contract agreement. Allow a flexible project development approach for projects that have demanding design requirements to enable the private partner team to introduce innovative design and construction techniques that control the cost and timing of the project. This suggests the public agency partner not over design the project before bringing the PPP team on board but instead take the preliminary design process to the point where the basic requirements of the project are defined so the PPP design team can take it from there. It also suggests that the PPP partners should work collaboratively and constructively in confronting obstacles that invariably arise during project development with creative solutions, instead of playing the "blame game". This requires trust among the members of the PPP. Having champions for a PPP project among top elected and appointed officials is essential to moving PPP projects forward in a timely and cost-effective manner, especially in the early stages of environmental clearance, permitting, and financing
Members of the PPP team should maintain a spirit of openness (transparency) and cooperation throughout the project development and implementation processes, soliciting inputs from and communicating with each other and key stakeholders, including the general public. This will help keep the project moving as the parties work out issues in a collaborative manner.
PPPs can benefit by combining multiple objectives that benefit numerous stakeholders, beyond just the PPP members, such as economic development, remediation of brownfield sites, congestion relief, and safety that provide a "win-win" solution set that enhances the chances of the project proceeding. PPPs can bring together various stakeholders in a project, some of which might ordinarily serve as an adversary to a project but by being a party to the PPP or the PPP development process from an early stage, might become advocates of the project or at least have their opposition neutralized by having their concerns addressed for the full term of the PPP agreement. Transportation PPPs are more likely to survive the stresses of development and implementation if the partners share a common vision of the project that provides continuity and mutual commitment throughout these phases of project delivery. Successful PPPs begin with a clear understanding of the respective roles, responsibilities, risks, and returns each partner will assume during the terms of the project contract agreements with each party held accountable for delivering according to the terms of the contract. Risk management can be optimized by retaining a private sector project delivery team with extensive experience and capabilities in delivering PPP projects that meet the full terms of the contract.
Source: ADB (2000, p.118-132) and Spiering et al. (2007, p.176-182) Adapted by the author
96
_______________________________________________________________________________________________________
Table 5.6 Critical Success Factors for PPP Transportation Projects
Stakeholder consultation through regular meetings at both the managerial and technical levels Active public involvement through public outreach and on-going communication between project partners and stakeholders
Political leadership that supports the project and serves as a champion for its successful implementation Secure public control of the infrastructure assets through continued public ownership and PPP team accountable for project results consistent with the contract terms
Limited complexity of the PPP arrangement and contract agreement to ensure stakeholder understanding and compliance Well defined legal authority for the public sector to enter into PPP arrangements and apply alternative methods of funding, financing, and delivering transportation infrastructure
Clear delineation and balance of project roles, responsibilities, and risks among the PPP partners commensurate with their potential returns
Financial viability under a wide range of risk factors
Demonstrated transportation need (congestion relief, safety improvement, better accessibility, and travel time reliability) and public support among numerous stakeholder groups Capable public and private sector partners with mutually complementary interests in the project and a willingness to accommodate changing conditions and opportunities consistent with the desired project outcomes and performance requirements
Environmental constructability to ensure the project can be cost-effectively constructed without serious damage to the environment through environmental and context-sensitive design and value engineering
Adequate dedicated funding sources for the full term of the PPP contract
Ample number of capable private sector firms and teams to ensure a competitive procurement and selection process
Source: ADB (2000, p.118-132) and Spiering et al. (2007, p.176-182) Adapted by the author
97
_______________________________________________________________________________________________________
6.
References
ADB (2000) ADB (2000). Developing Best Practices for Promoting Private Sector Investment in Infrastructure. Manila, Philippines: Asian Development Bank Cervero (2004) Cervero, Robert (2004). TCRP Report 102: Transit-Oriented Development in the United States: Experiences, Challenges, and Prospects. Retrieved Nov 29 , 2007, from Metropolitan Area Planning Council: http://www.mapc.org/transportation/trans_alternatives/transit_PDFs/3b_TOD_TransCoopResearc hProg.pdf FHAa (2007) FHAa (2007). Long Term Lease Agreements. Retrieved Nov 29, 2007, from Federal Highway Administration: http://www.fhwa.dot.gov/ppp/ltla.htm FHAb (1999) FHAb (1999). Shadow Tolls Chapter 1. Retrieved Nov 29, 2007, from Federal Highway Administration: http://www.fhwa.dot.gov/innovativefinance/stchap1.htm GAO (1999) GAO (1999). Public-Private Partnerships: Terms Related to Building and Facility Partnerships. Retrieved Dec 27, 2007, from U.S. General Accounting Office: http://www.gao.gov/archive/1999/gg99071.pdf General Directorate of Road Development (2007) General Directorate of Road Development (2007). Private Service Contracts in Highways. Retrieved Nov 22, 2007, from SCT: http://dc.sct.gob.mx/fileadmin/ingles/presentations/ppp.pdf Gobierno de Nuevo Leon (2007) Gobierno de Nuevo Leon (2007). Centro de Gobierno Plaza Cvica. Retrieved Dec 21, 2007 from Gobierno de Nuevo Leon: http://www.nl.gob.mx/?P=plazacivica Guasch (2004) Guasch, J.Luis (2004). Granting and Negotiating Infrastructure Concessions. USA: World Bank Institute. ICA (2007) ICA (2007). PPS (Prestacin de Servicios). Retrieved Dec 11, 2007, from ICA: http://www.ica.com.mx IDEAL (2006) IDEAL (2006). Annual Report 2006. Retrieved Nov 15, 2007, from IDEAL: http://www.ideal.com.mx/pdf/IDEAL06-english.pdf Lawther (2000) Lawther, Wendell C. (2000). Privatizing toll roads: a public-private partnership. USA: Greenwood Publishing Group Miller (2000)
98
_______________________________________________________________________________________________________
Miller, John B. (2000). Principles of Public and Private Infrastructure Delivery. Cambridge, USA: Massachusetts Institute of Technology.
NCPPP (2007) NCPPP (2007). National Council for Public-Private Partnerships. Public Private Partnerships Defined. Retrieved Nov 24, 2007, from NCPPP: http://www.ncppp.org/howpart/index.shtml#define Perrot et al. (2000) Perrot, Jean-Yves / Chatelus, Gautier. (2000): Financing of major infrastructure and public service projects: Public Private Partnership, Lessons from French experience throughout the world., France: Presses Ecole Nationale Ponts Chaussees. Presidency of the Republic (2005) Presidency of the Republic (2005). Inauguracin del Libramiento y Boulevard Matehuala en San Luis Potos. Retrieved Dec 22, 2007, from Presidency of the Republic: http://fox.presidencia.gob.mx/actividades/?contenido=16533 Presidency of the Republic (2006) Presidency of the Republic (2006). Inauguracin del Arco Norte, Tramo Jilotepec-Tula e inauguracin del Tramo Jorobas-Tula. Retrieved Nov 15, 2007, from Presidency of the Republic: http://fox.presidencia.gob.mx/actividades/crecimiento/?contenido=23762 Pakkala (2002) Pakkala, Pekka (2002). Innovative Project Delivery Methods for Infrastructure: An International Perspective. Retrieved Nov 29, 2007, from Finnish Road Enterprise: http://alk.tiehallinto.fi/julkaisut/pdf/pakkalae5.pdf Ruster (1997) Ruster, Jeff (1997). A Retrospective on The Mexican Toll Road Program (1989-94). Retrieved Nov 29 , 2007, from World Bank: http://rru.worldbank.org/Documents/PublicPolicyJournal/125ruste.pdf Seltzer (2000) Seltzer, David (2000). Recent Developments in Federal Project Finance. Retrieved Nov 29 , 2007, from FHA: http://www.tfhrc.gov/pubrds/jan00/finance.htm SCTa (2008) SCTa (2008). New Concession Model for Toll Road Development in Mexico. Retrieved Jan 28, 2008, from SCT: http://uac.sct.gob.mx/fileadmin/ingles/presentations/newmodel.pdf SCTb (2008) SCTb (2008). Public-Private Partnerships for Highways in Mexico. Retrieved Jan 8, 2008, from SCT: http://uac.sct.gob.mx/fileadmin/ingles/presentations/public.pdf SCTc (2008) SCTc (2008). Public-Private Partnerships for Highways in Mexico. Retrieved Jan 11, 2008, from SCT: http://adminsitios.sct.gob.mx:8090/uac/fileadmin/ingles/presentations/public.pdf SCTd (2007)
99
_______________________________________________________________________________________________________
SCTd (2007). Public-Private Partnerships for Highways in Mexico: Federal Perspectives. Retrieved Nov 18, 2007, from SCT: http://tti.tamu.edu/conferences/ftoa/program/presentations/athie.pdf SCTe (2007) SCTe (2007). Primera Licitacin de Autopistas del FARAC. Retrieved Dec 11, 2007, from SCT: http://www.capufe.gob.mx:81/statics/web_internet/Sala%20de%20Prensa/Conferencias/conf20070806/Licita_de_4_autopistas_6ago.pdf SCTf (2006) SCTf (2006). Nuevo Esquema de Concesiones de Autopista de Cuota. Retrieved Dec 5, 2007, from SCT: http://adminsitios.sct.gob.mx:8090/uac/fileadmin/espanol/esquema_concesiones/libroasociacione s/fichascap2.pdf SCTg (2006) SCTg (2006). Esquemas especiales aplicados al desarrollo de dos proyectos estratgicos para la red carretera. Retrieved Dec, 27, 2007 from SCT: http://dc.sct.gob.mx/fileadmin/espanol/esquema_concesiones/libroasociaciones/cap4.pdf SCTh (2006) SCTh (2006). Autopista Saltillo-Monterrey y Libramiento Norponiente de Saltillo. Retrieved Nov 18, 2007, from SCT: http://uac.sct.gob.mx/fileadmin/espanol/seminariocct/resultados/sesion_3/S3_PC.pdf SCTi (2005) SCTi (2005). Fallo del Concurso Pblico Internacional: Libramiento norponiente de Saltillo y la Autopista Saltillo-Monterrey. Retrieved Nov 29 , 2007, from SCT: http://uac.sct.gob.mx/fileadmin/espanol/convocatorias/nueva_infra/fallos/saltillo.pdf SCTj (2005) SCTj(2005). Tepic-Villa Union Toll Road Project. Retrieved Dec 5, 2007, from SCT: http://uac.sct.gob.mx/fileadmin/espanol/seminariocct/resultados/sesion_3/S3_FO.pdf SCTk (2005) SCTk (2005). Puente Internacional Reynosa Anzalduas. Retrieved Nov 24, 2007, from SCT: http://uac.sct.gob.mx/fileadmin/espanol/seminariocct/resultados/sesion_3/S3_VS.pdf SHCP (2007) SHCP (2007). Presentacin sobre Proyectos para Prestacin de Servicios (PPS). Retrieved Jan 10, 2008, from SHCP: http://www.pps.sse.gob.mx/docs/pps_febrero_2007.pdf Spiering et al. (2007) Spiering, Mirjam Bult / Dewulf, Geert. (2007). Strategic Issues in Public-Private Partnerships: An International Perspective. Oxford, UK: Wiley-Blackwell. Standard & Poor's (2007) Standard & Poor's (2007): Will The U.S. Subprime Downturn Spread To Mexican RMBS?. Retrieved on 23 Dec, 2007 from Standard & Poor's : http://www2.standardandpoors.com/portal/site/sp/en/us/page.article/3,1,1,0,1148442756124.html United Nations (2005) United Nations (2005). Informe sobre desarrollo humano, Mxico, 2004. Retrieved on 23 Dec, 2007 from United Nations:
100
_______________________________________________________________________________________________________
http://hdr.undp.org/en/reports/nationalreports/latinamericathecaribbean/mexico/mexico_2004_sp. pdf US DOT (2004) US DOT (2004). Report to Congress on Public-Private Partnerships, December 2004, p.10. United States Department of Transportation. Retrieved Nov 24, 2007, from US DOT: http://www.fhwa.dot.gov/reports/pppdec2004/ World Bank (2003) World Bank (2003). Private Solutions for Infrastructure in Mexico. Washington, USA: World Bank.
101
_______________________________________________________________________________________________________
7.
Annexes
Annex A Glossary of Terms Build-Own-Operate: a private contractor constructs and operates a facility while retaining ownership. The private sector is under no obligation to the government to purchase the facility or take title (GAO, 1999). Concession Benefits: rights to receive revenues and other benefits (often from tolling) for a fixed period of time. Construction Manager at Risk: hired construction manager (CM) begins work on the project during the design phase to provide constructability, pricing, and sequencing analysis of the design. The CM becomes the design-build contractor when a guaranteed maximum price is agreed upon by the project sponsor and CM. Design-Bid-Build: the traditional project delivery method where design and construction are sequential steps in the project development process. Design-Build: an agreement that provides for design and construction of improvements by a contractor or private developer. The term encompasses design-build-maintain, design-build-operate, design-build-finance and other contracts that include services in addition to design and construction. Franchise and concession agreements are included in the term if they provide for the franchisee or concessionaire to develop the project which is the subject of the agreement. Developer Financing: a type of financing where a private party finances the construction or expansion of a public facility in exchange for the right to build residential housing, commercial stores, and/or industrial facilities on the site. This type of financing often takes the form of capacity credits, impact fees, or exactions (GAO, 1999). Electronic Toll Collection: the use of electronic devices such as transponders, cameras, and photo-recognition technology to identify, classify, and toll vehicles entering and/or leaving a toll highway, bridge, or tunnel without the need for direct human involvement in the process or the handling of cash. Innovative Contracting: innovative contracting practices meant to improve the efficiency and quality of roadway construction, maintenance, or operation. Examples of innovative contracting include: A+B contracting, lane rental, the use of warranties, design-build, design-build-operate, design-build-finance-operate-maintain. Innovative Finance: innovative methods of financing construction, maintenance, or operation of transportation facilities. The term innovative finance covers a broad variety of non-traditional financing, including the use of private funds or the use of public funds in a new way, e.g., GARVEE bonds or special tax districts.
102
_______________________________________________________________________________________________________
Life-Cycle Costs: the costs of a project over its entire life: from project inception to the end of a transportation facility's design life. Public-Private Partnership: a contractual agreement formed between public and private sector partners, which allows more private sector participation than is traditional. The agreements usually involve a government agency contracting with a private company to renovate, construct, operate, maintain, and/or manage a facility or system. While the public sector usually retains ownership in the facility or system, the private party will be given additional decision rights in determining how the project or task will be completed. The term public-private partnership defines an expansive set of relationships from relatively simple contracts (e.g., A+B contracting), to development agreements that can be very complicated and technical (e.g., design-build-finance-operate-maintain). In the context of this report, the term public-private-partnership is used for any scenario under which the private sector would be more of a partner than they are under the traditional method of procurement. Further, the broad definition used for public-private partnerships includes many elements that are applied fairly regularly on appropriate projects (GAO, 1999).
Revenue Bonds: instruments of indebtedness issued by the public sector to finance the construction or maintenance of a transportation facility. Revenue bonds, unlike general obligation bonds, are not backed by the full faith and credit of the government, but are instead dependent on revenues from the roadway they finance (GAO, 1999).
Shadow Tolling: Shadow tolls are per vehicle amounts paid to a facility operator by a third party such as a sponsoring governmental entity. Shadow tolls are not paid by facility users. Shadow toll amounts paid to a facility operator vary by contract and are typically based upon the type of vehicle and distance traveled (FHA, 1999).
Toll Credits: toll credits are earned when a State, a toll authority, or a private entity funds a capital highway investment with toll revenues from existing facilities. States may increase the use of available eligible Federal funding on a project, up to the normal State/local matching amount, and debit the sum of the toll credits that have been earned by that same amount.
Tolling: the process of collecting revenue whereby road users are charged a fee per roadway use. Tolls may be collected on a flat-fee basis, time basis, or distance basis and may vary by type of vehicle.
Warranty: when used in public-private partnerships for the construction of roads, warranty clauses guarantee that the roadway will meet a certain level of quality or else repairs will be made at the private contractors expense. There are currently two types of warranties used in highway construction: (1) materials and workmanship warranties and
103
_______________________________________________________________________________________________________
(2) performance warranties. Under the first type, the contractor is responsible only for defects caused by poor materials and workmanship. Under the latter, the contractor is responsible for the product meeting certain agreed upon performance thresholds, regardless of whether materials and workmanship met State standards.
104
_______________________________________________________________________________________________________
Annex B List of Acronyms
ADB BANOBRAS BLT BOO BOT CAPUFE DB DBB DBF DBOM DBOM-F DGCF DGCC EIS ETC FARAC FHA FINFRA GAO HOV ICA IDEAL IFB JDA NCPPP PDC PPP PPS SCT SHCP SEMARNAT UDIs USDOT
Asian Development Bank Banco Nacional de Obras y Servicios Build Lease Transfer Build-Own-Operate Build Operate Transfer Caminos y Puentes Federales Design-Build Design-Bid-Build Design-Build-Finance Design-Build-Operate-Maintain Design-Build-Operate-Maintain-Finance Directorate General of Federal Roads Directorate General of Road Maintenance Environmental Impact Statement Electronic Toll Collection Fideicomiso de Apoyo al Rescate de Autopistas Concesionadas Federal Highway Administration Fondo de Inversin en Infraestructura General Accounting Office High Occupancy Vehicle Ingenieros Civiles Asociados Impulsora del Desarrollo Econmico de Amrica Latina Invitation for Bid Joint Development Agreement National Council for Public-Private Partnerships Project Development Contractor Public-Private Partnership Proyectos para Prestacin de Servicios Secretara de Comunicaciones y Transportes Secretara de Hacienda y Crdito Pblico Secretara del Medio Ambiente y Recursos Naturales Unidad de Inversin United States Department of Transportation
105
_______________________________________________________________________________________________________
Affidavit
I hereby verify that the work written in these pages is solely that of own and that use of any dishonest, deceitful and unscrupulous methods have been in no means, mode or manner used in the creation of this Masters Thesis. The ideas herein, other than my own, have been referred to and quoted to according to recognized citation standards.
Jose Andres Pea Gonzalez
Freiberg, 18.02.2008
106

Master Thesis Jose Andres Peña IMRE 2005

Transféré par

Informations du document

Copyright

Formats disponibles

Partager ce document

Partager ou intégrer le document

Options de partage

Avez-vous trouvé ce document utile ?

Ce contenu est-il inapproprié ?

Droits d'auteur :

Formats disponibles

Master Thesis Jose Andres Peña IMRE 2005

Transféré par

Droits d'auteur :

Formats disponibles

FREIBERG UNIVERSITY OF MINING AND TECHNOLOGY International Management of Resources and Environment

Prepared by: Jose Andres Pea Gonzalez Code: 47935

1.1 Purpose and Objectives

transportation projects in Mexico;

1.2 Scope and Methodology

2. Public-Private Partnerships in Transportation Projects

2.2 Definition and Types of Public-Private Partnerships

2.2.1 Private Contract Fee Services

2.2.2 Alternative Project Delivery Approaches

2.2.3 Multimodal Partnerships

2.2.4 Joint Development

2.2.5 Long-Term Lease or Concession Agreements

Figure 2.1 Major Types of Transportation PPPs

High Degree of Private Sector Responsibility and Risk Low

Project Delivery Approaches

2.3 Public-Private Partnerships Arrangements

2.3.1 Private Contract Fee Services, including Contract Maintenance

2.3.2 Alternative Project Delivery Approaches

2.3.3 Full Delivery or Program Management

2.3.4 Transit Related Development Approaches

JDA: Joint Development Agreement

2.3.5 Multimodal Partnerships

2.4 Benefits of PPPs

2.4.1 Stronger Working Relations

2.4.2 Reduction of Financial Constraints

2.4.3 Faster Delivery

2.4.4 Innovation and Expertise

2.4.5 Greater Cost Efficiency and Productivity

2.4.7 Greater Choices

2.4.8 Increased Competition

2.4.9 Risk Management

2.5 Risks of PPPs

2.5.1 Transaction Costs

Design, Construction and Implementation Risk

Increase in recurrent costs, delays Delayed/lost revenue.

Increased project cost Non-completion of construction.

Increase in operating costs. Adverse effects on quality and service delivery.

Lower revenues. Diminution in real returns to private party

Source: Perrot et al. (2000, p.56-67)

2.5.2 Potential Higher Life-Cycle Costs

2.5.3 Taxation Constraints

2.5.4 Moral Hazard

2.5.5 Loss of Control over Assets

2.6 Critical Success Factors

2.6.1 Stakeholder Consultation and Support

2.6.2 Public Sector Involvement

2.6.3 Political Leadership

2.6.4 Secure Public Control

2.6.5 Limited Complexity and Appropriate Risk Sharing and Rewards

2.6.6 Effective Working Relationships among Partners During/After Contract Negotiations

2.6.7 Legal Authority

Currency and profit repatriation rules

2.6.8 Other Key Success Factors for Transportation Project PPPs

3. Transportation PPP Activity in Mexico 8

3.1 Major Toll Road Developments

3.1.1 Early Toll Road Strategies

3.1.2 President Salinas Private Toll Road Plan

3.1.3 Early Problems and Continued Expansion

3.1.4 Restructuring Before and After 1994

Table 3.1 Average daily traffic as % of guaranteed traffic

3.2.1 Need for Adequate Program Preparations and Planning

3.2.2 Cost Estimates and Construction Issues

3.2.4 Financial and Economic Issues

3.2.5 Importance of Well-Designed Legal, Regulatory, and Institutional Frameworks