Private participation in public infrastructure (PPI)

Private participation in public infrastructure (PPI) Taiwan’s experience in international perspective

Presentation based on results of joint research projectfunded by British Academy UK and National Science Council Taiwan FACTORS PROMOTING AND HINDERING PUBLIC PRIVATE PARTICIPATION IN PUBLIC INVESTMENTS IN TAIWAN Chun-Sung Liao, Department of Public Policy and Administration, National Chi Nan University, TaiwanMichael Hubbard, School of Public Policy, University of Birmingham assisted by: Cheng Chen (PhD Candidate, University of Birmingham) and by Lin Chang Tsung (Masters candidate, National Chi Nan University)

Public-private: a shifting boundary • Massive expansion of govt in 20th century: • 1900: govt approx 10% of GDP • 1980: govt approx 40% of GDP • Coincided with rising ideology of state ownership & control (1920s-1970s) • Current ideological shift to privatisation

Private participation is not new • Infrastructure investments were mainly carried out by private investment until the 20th century

What are public investments & services ? • Definition: investments & services which require public involvement, because private sector alone will not supply them adequately • Public involvement takes the form of - Information eg. policies & promotion • Regulation eg. planning permission for a new building • Ownership, finance and operation eg. criminal justice system, national defence, managing the currency, planning infrastructure, state hospitals, state schools

Who delivers the “public involvement”? • Central govt ministries and agencies • Local govts and agencies • Community associations • Sector associations (eg. farmers, consumers)

Cycle of producing public assets and public services • Design • Finance • Build • Operate • Maintain • Renew

The varying extent of private participation in public infrastructure & services Private participation ranges from • minor involvement of private firms in a public service (eg. outsourcing routine services, such as building maintenance) • to major involvement of private firms in public services (eg.design, build, finance, operate, maintain, renew, as in the case of some UK prisons)

‘Models’ of PPI ‘Models’ of PPI consist of different combinations of components: design, build, finance, operate, own, lease to government, transfer to government Common models include: BOT build, operate, transfer (eg. after 30 years) DBFO design, build, finance, operate

Theoretical benefits of greater private participation • Skills of private sector and public sector combined produce better assets and services • This more than compensates for the higher cost of borrowed funds (govts can usually borrow more cheaply than private firms can) • Investments in infrastructure and public services can increase more rapidly than if public finance alone is relied on (since there are limits on govt borrowing)

Reality of PPI • PPP has proved popular with governments • But 3. above appears often to be the attraction rather than 1. and 2. • There is great variation in performance of PPI cases • But I know of no comprehensive study of PPI performance yet from which general observations can be made

Uses of PPI • PPI has been most common in facilities for which users can be charged, such as highways eg. toll roads, airports, freight terminals, rail links. BOT is a common model • But PPI has been extended to producing assets which are leased to government eg. prisons, hospitals, schools, notably in the UK’s Public Finance Initiative (PFI). DBFO is a common model for this type, with government guaranteeing to lease the asset for a long period (eg. 25 years)

Private participation is becoming established in more routine public investments and & services…. • Some investments have more predictable technology and costs and there is more competition among suppliers • In support services in government private participation has become established, mainly via outsourcing: eg. building maintenance and security through to financial services and staff recruitment

….But is controversial in more complex uses • Accurate cost estimation is difficult in complex projects with much uncertainty • Designing customised new technology can be very difficult: major UK PFI contracts for new computer systems in government failed eg. for passport office. PFI is no longer used for IT projects.

PPI in Taiwan • Taiwan has been using PPI since the mid-1990s • A law enabling PPI enacted and financial incentives provided for local governments to use PPi • The BOT model is the one most widely used • Difficulties occurred in some, most prominently in the high speed rail link to CKS international airport, which apparently suffered planning problems and inability of the parties to agree on risk sharing; some tourism PPIs are said to have had difficulties and also a water & sewage PPI project

Our research project • Examines factors promoting and hindering public private participation in public investments in Taiwan • Studied two cases: electronic toll collection and high speed rail link • The main conclusion is that conflicts were experienced between the PPI and the existing political legal, judiciary and social institutions. • Therefore illustrates how the use of PPI can be hindered by institutional limitations. • An important question for further research is whether such conflicts are leading to institutional change which will enable PPI to be used more easily in future.

ETC case The Electronic Toll Collection project, which encountered problems in the procurement process, was finally ordered by the court to return to the tender stage. It has been marked by disputes and poor public relations The preliminary findings are that the difficulties in using BOT in this case result from: • government treating PPI as a “free lunch”, assuming that all risks could be transferred to the private sector; • insufficient government action to prevent PPI becoming the channel of collusion; • the strong public opposition; • the incomplete judicial framework for resolving PPP disputes.

High speed rail • THSRC won the contract with the attractive promise that government zero investment and the finance will be collected by the private side. However, the initial stockholder hesitated to invest further while earned huge profit from the sub contract projects. The financial risk was left to the government. When the risk happened, the government provided low-interest funds; guarantee for the bank debt; and the investment from state owned enterprises. • There appears to be post-contract lock in in this case. First; the government had to bear the reputation risk if the project fails, namely, it is the government rather than the private side to be responsible for the result of the project when they face the public enquiry. Second, the compulsory purchase clause in the BOT law and the tripartite bank contract required that the government had to purchase the project and pay for the bank debt in the first place. • The government appear not have designed the contract with appropriate incentive for the private side to keep their financial promise: the financial promise for example in this case. Therefore, when the financial crisis arrived , the private side could rely on the government to rescue and the government had to do it.

THSR • In the bidding stage, Taiwan High Speed Railway Enterprises Consortium promised that the government does not need to pay for the project, namely, government zero investment, while its competitor, China High Speed Railway required government invest 149.5 billion. This promise helped THSR defeated China High Speed Railway and won the contract. In 1998, MOTC signed the formal contract with THSRC: Taiwan High Speed Railway Construction and Operation Contract, with 35 years period. THSRC also won the contract: Taiwan High Speed Railway Station Area Development Contract for 50 years concession.

Reforms of PPI policy in Taiwan? • What reforms are needed to PPI policy in Taiwan in the light of PPI experience?

“0 cost to govt” principle in Taiwan PPI Government zero investment appears to be important in Taiwan’s PPI framework. APPPIP, the BOT law in Taiwan, describes PPI as ‘government zero investment’, ie. only those projects which the private sector is willing to carry out, and for which the public sector does not need to spend money will be done by PPI

But “0 cost to govt” principle is not viable “0 cost to govt” principle has not worked in Taiwan or in other countries

Alternative to “0 cost to govt” stance • Accurate assessment of costs, of what private sector should bear and what govt should bear • This requireshigh quality design, procurement process and contract management • These are essential for preventing strategic behaviour: • eg.if govt reckons “0 cost to govt” is the lowest cost option for govt, even if govt ends up having to pay some cost • eg. if contractors bidding are able to win by undercosting and using post-contract lock-in to raise costs

Government procurement reform • PPI was introduced into Taiwan at the same time as Taiwan’s adaptation to WTO’s government procurement guidelines (GPA). These set out standard procedures to be used by governments of WTO member countries. They emphasise providing a ‘level playing field’ for local and international firms competing for government contracts. • There are reports that previously foreign companies in Taiwan had complained of exclusion of foreign suppliers and demands for counter-trade offsets (ie purchase of Taiwanese goods in return for allowing foreign company involvement).

Where will the public-private boundary shift to in future? • Will we return to 19th century when private sector dominated? • Or 20th century? • Or something new?

Private participation in public infrastructure (PPI)