The global financial crisis is increasingly blurring the boundaries between the public and private sectors. Finding common ground and reasons to dually invest in projects is never easy but if successful, and with a watertight contract, the rewards can be great.

The University of Canberra’s Faculty of Business and Government senior lecturer Cameron Gordon tells Paul French what public-private ownership means for the varying elements of the transport sector.

PF: How would you define what public-private ownership really is?

CG: The term you’ll most likely hear is public-private partnership [PPP], which encompasses a range of arrangements between the public and private sectors. A PPP can be defined as a contractual agreement between a public agency – federal, state or local – and a private sector entity. In addition to the sharing of resources, each party shares in the risk and reward potential in the delivery of the service or facility.

The term PPP can range from mostly public with a little private involvement, such as a fully publicly owned and operated transit system with the sanitation function outsourced by contract to a private company; to mostly private with a little public, for example, a toll road financed, built and operated by a private company but technically leased from the government. Ownership doesn’t have to be involved at all, at least not legally.

“The developing world has seen an explosion in the use of PPPs.”

PF: How prevalent is PPP in the world today?

CG: The developing world has seen an explosion in the use of PPPs. In 2005 and 2006, transport investment in low and middle-income countries rose to almost $30bn across 111 new projects. In the developed world Spain, France and England have privatised much of their long-distance rail and road sectors.

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Australia has privatised all of its major airports, many urban roads, its long-haul freight rail network and many urban transit systems. Airports generally are more likely to be at least privately operated if not privately leased or owned.

The US is a bit of a laggard in the privatisation of transport field. The US General Accountability Office claims that before 2005 only four states– Virginia, California, South Carolina and Nevada – had put in place significantly privatised transportation investments and only one of these – the Las Vegas Monorail – is a transit investment.

These projects cover only 63 miles and account for a total investment of approximately $2.2bn, which isn’t much when you consider that approximately $66bn was spent on highway capital projects by the US in 2001. However, these figures do not account for the two major privatisations that took place in 2005/6 – the long-term leasing of the Chicago Skyway and the Indiana Toll Roads, in separate deals, to private consortia. These toll roads were landmark events at the time but political resistance – mainly due to rising tolls – has so far militated against repeat deals.

PF: Why do you think PPP is becoming more prevalent, especially in the transportation sector?

“Transportation lends itself naturally to privatisation because it is a tangible service, easily priced and has a definite market for its consumers.”

CG: Transportation lends itself naturally to privatisation because it is a tangible service, easily priced and has a definite market for its consumers. As a service it is a field that a private operator will find attractive because of its potential profit opportunities.

Many early large transportation investments were built by the private sector, sometimes with public inducements or subsidies. An example in the US would be the intercontinental railroads of the late 19th century, where the US government provided land grants to private companies, which then built the railroads, provided and ran the trains, and managed their overall networks.

The trend towards private ownership and operation of transportation is in some ways a reversion to earlier historical form.

PF: What does PPP need to really work?

CG: The answer depends on what you mean by “to work”. Private companies will be keen to get assets that deliver steady and growing returns on investment with very little competition from other companies and with minimal restrictions on operations. However, the public sector will want a reliable service provided cheaply and effectively and will want maximum control over the system.

If the goal is to have a transportation investment such as a toll road that combines something attractive to private investors yet meets public objectives, then an informed and engaged public sector is fundamental. Only then can good deals be identified and negotiated to everyone’s satisfaction.

PF: What are the benefits of PPPs to public bodies?

CG: The big attraction of PPPs to the public sector is private capital. Greenfield assets take a lot of money upfront to build and do not yield returns until many years later. Cash-strapped governments would of course want that money to be provided by someone else if it can be. The same dynamic works for brownfield assets, though perhaps a little less dramatically.

“Private operators are potentially better and more efficient managers than public bodies and this is often cited as a key advantage to privatisation.”

Another benefit is that private operators are potentially better and more efficient managers than public bodies and this is often cited as a key advantage to privatisation. A third and related benefit is political: elected officials often have trouble raising taxes and tolls and a turnover to a private company can get around these obstacles. Finally, especially with greenfields, PPPs offer the prospect of shifting risk away from the public sector.

PF: What benefits are there for the private rail, air and road companies involved?

CG: Transportation investments are most like utilities in that they are potentially annuity investments that offer steady, predictable and healthy cash flows over long periods of time. They can be quite profitable and even if profits are modest, they tend to be stable in terms of the profits they generate.

There are risks though. If a greenfield is involved, the company has to put lots of its own money into the project and hope that enough people will use it to repay the capital investment and generate an adequate return. This is the sort of risk that the public sector likes to offload to the private sector in a PPP and some argue that private entities are generally better able to manage risks such as these, though certainly private companies are capable of making mistakes.

The risks in a brownfield are less pronounced since the asset is already built and its usage patterns are better known and more predictable into the future. These assets are often attractive to private companies for just these reasons. But even here usage can fall off, as the financial crisis demonstrates. Airports a little while ago were seen as sure bets from an investment point of view. The dramatic fall-off in air travel has made them look like money pits for now.

PF: What are the benefits to the public at large?

CG: Essentially the public wants good service at fair cost. If a PPP can deliver that better than purely public or purely private arrangements, it is all to the good from the public’s perspective.

PF: What are the pitfalls of PPPs that companies and public bodies need to be aware of?

“The basic pitfall that covers a multitude of sins is the negotiation of a public-private deal that short changes one entity or the other.”

CG: The basic pitfall that covers a multitude of sins is the negotiation of a public-private deal that short changes one entity or the other. The problem comes with deals where one party unintentionally sacrifices too much out of ignorance or lack of sophistication.

An example is long leases such as 99-year or 75-year leases, which are typical of many airport and toll road transactions. Spain’s policy is to limit brownfield leases to 20 years and greenfield leases to 40 years, with the notion that a shorter lease allows more influence by the government to hold private operators accountable.

With a 99-year lease the private company can basically forget about the government since renegotiation of a lease is practically nonexistent, being so far off in the future. Meanwhile, private companies have to watch the risks of traffic not meeting expectations.

PF: Do PPP projects suffer in terms of a lack of competition?

CG: This is the biggest issue with most transportation investments. Private companies like these investments because many of them operate in monopoly markets, being the only, or at least the best, alternative for travel. They search for assets with the greatest monopoly position and are willing to pay the greatest sums for these.

Of course, the public sector wants to be careful about ceding such monopoly assets to private control. It is not necessarily bad to do so but the deal negotiated must be carefully done and post-deal regulation may be necessary.

PF: How can we be sure that public money is spent in the way it was intended within a PPP project?

CG: One can be sure of this in only two ways – sufficient protections offered in the initial contract that initiates and governs the PPP, combined with good oversight of the contract once it is in operation. This is easier said than done but the tendency has often been to negotiate poorly designed contracts and combine that with lacklustre or uninformed oversight. This combination almost guarantees trouble for one party or the other, or both.

“There is little inherent reason why the public sector must offer transportation since it is similar to most private goods and services.”

PF: As the aims of public and private bodies are intrinsically different, how can PPP projects deliver value for the public and private sector clients involved?

CG: There is little inherent reason why the public sector must offer transportation since it is essentially similar to most private goods and services. The public dimension comes in with the need to limit monopoly profits and also because transportation is an essential service that has larger societal effects.

This is where the clash between public and private exists, but it need not be fatal. The first step from a public perspective is to identify those potential or actual assets that the public sector believes should not be private at all, like a military facility.

The second step is to determine which of the remaining assets might have private sector interest. Some potential or actual investments may be deemed socially desirable, such as rural roads, but will have little private interest because they are loss-makers. The third step is to design PPPs that offer advantage to both parties and genuinely move private interest and public interest forward. The key is to do only those deals. Again, it’s easier said than done but not impossible.