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Reforming Transport: Maximizing Synergy between Public and Private Sectors
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| Background Paper |
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| | Reforming Transport: Maximizing Synergy between Public and Private Sectors | 
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The public and private sectors are intrinsically involved in the provision of both transport infrastructure and services, but the dividing line between public and private varies significantly from country to country and among the different modes of transport. These variations reflect a wide range of factors, such as the technologies available, the scale of their capital requirements, changing views of the relative importance of systemwide planning and management (as against customer responsiveness in improving performance), the stock of managerial and technical skills, government finances, and—last but not least—each country’s historical experience and inherited institutions.
The Bank's 1994 World Development Report (WDR) (World Bank 1994b) reviewed the performance of infrastructure support and delivery globally; it concluded that in many developing countries greater reliance should be placed on the private sector for direct provision of infrastructure and services. Governments, it proposed, should concentrate more on creating and maintaining legal and regulatory frameworks to attract private providers but, at the same time, safeguard the interests of the poor, improve environmental conditions, and coordinate cross-sector interactions. This IEG summary of international trends in private sector participation in transport uses as a point of departure both the Organisation for Economic Co-operation and Development (OECD) and Latin American performance. OECD has taken the lead in private sector development in transport, and Latin America has shown the most progress in the developing world. The summary gives a brief account of developments in the other Regions and reaches some tentative conclusions.
OECD Leaders in Reform
Recent OECD research concluded that, at the end of the 20th century, the transport sector was most liberalized in four of its member countries: Australia, New Zealand, Britain, and the United States. But the past 10 years have seen significant differences among them in the degree of private participation in the provision of infrastructure and services, as well as the extent to which it has changed. The best available figures suggest that the private share of total annual investment in transport (excluding vehicles for personal use) may have risen slightly in the United States through the 1990s to about 20 percent and strongly in Australia, to as much as 40 percent in the early 2000s.
The biggest change in the volume of private investment going into transport has been with regard to trunk road construction and maintenance. Starting from the mid-1980s, Australia has successfully completed nearly 10 urban motorway build, operate, and transfer projects (BOTs), with traffic risk taken by the private investors. Britain has had one project of this type, more than a dozen design, build, finance, and operate (DBFO) projects for upgrading the national core network, and a number of smaller projects along similar lines offered by local government bodies. A few American states, including California, Texas, and Virginia, have also been active participants in federal programs to support state public-private partnership (PPP) initiatives for the construction/ operation of toll roads and lanes. The transport mode that has seen the largest shift from government to private sector responsibility is mainline rail. Government-owned railway facilities were sold to the private sector, virtually in their entirety, by New Zealand in 1993 and the United Kingdom in 1995–97. The Australian government and four Australian states sold their railways in major part between 1997 and 2002. Numerous follow-on mergers—as were also important over the last decade in the traditionally private U.S. railways—meant that by 2004, main freight rail services in Australasia were provided by two major private transport/logistics groups. In Britain and New Zealand, however, the intended extent of government withdrawal was rolled back in the early 2000s, with the public sector again taking larger responsibility for track infrastructure.
In air transport, the main airlines have been privately owned at least since the late 1980s in all four countries, as have most of the principal airports in Britain. Major trends of the past decade have been the rise of privately owned low-cost carriers and the sale of all main airports in New Zealand and Australia. Low-cost carriers have been an important counterweight to the concentration of U.S. airlines through mergers and now account for nearly 25 percent of scheduled air traffic in the United States. They have also enjoyed very rapid traffic increases in the United Kingdom, particularly since deregulation of the European Union (EU) internal traffic market in 1997, and in Australasia since Virgin Blue was established in 2000. The resultant collapse of Australia’s second conventional airline, Ansett, led to the resumption of majority government ownership of Air New Zealand (its principal owner at the time).
The past decade has also seen important changes in the organization of urban public transport in three of the four countries—but not in the United States, despite increasing concern there about high costs and low efficiency of public sector operators. Less than 10 percent of U.S. regular bus services are competitively tendered and fewer than 30 percent of school bus services. Dominant trends in Australia and New Zealand, in contrast, have been toward competitive contracting of route or area franchises, following the pattern initiated with London bus services in the middle 1980s.1 Increasing use has been made in all three countries of "quality contracts," under which the private operators commit to deliver agreed standards of service in return for government commitments to improve infrastructure. Experience with new fixed-rail systems, for which significant capital subsidies have been provided to publicprivate partnerships, particularly in the United States, has often been disappointing in terms of traffic attracted.
Other Main OECD Countries
OECD analysis of other main member economies beyond the four just discussed concluded that they too had considerably liberalized their transport markets in the last two decades of the 20th century. Those countries’ progress was at a somewhat lower level, and some EU countries lagged behind others. Private participation in the provision of transport has also grown over the past 10 years in the same three ways—opening of markets previously served by public monopolies, sale of government-owned infrastructure, and formation of PPPs to develop new infrastructure. But the pace of change has been slower, and less attention has sometimes been given to the accompanying increased private sector role with measures to ensure sustained competition among private providers.
The most widespread involvement of the private sector in the operation of transport infrastructure, and the provision of some of it, in these countries is probably in ports. Government initiatives in many European countries and Canada in the late 1980s and early 1990s modified the privileged position of dockworkers, decentralized port management, and made ports more financially autonomous. These changes opened the way for much increased private investment. Major ports have largely adopted the landlord port model, and a reasonable degree of competitive pressures on private operators appears to have been maintained. Japan, in contrast, has retained strong centralized regulation, with resultant high port charges. The obstacles that traditional rules and practices pose to effective competition in the small ports of Europe also remain a serious concern. Private sector involvement in the management and financing of roads has varied greatly among these countries, but it has been increasing over the past decade. In continental Western Europe some 10,500 kilometers (km) of tolled motorways (about half the area’s tolled network and one-fifth of all its motorways) are now under private management, mainly in Italy, Portugal, and Spain. Some untolled sections, especially in Portugal and Spain, have also been built under DBFO concessions. France has awarded a number of major new BOT contracts on an open competitive basis in the past 5 years.
The past decade has also seen considerable movement in arrangements for the provision of urban transport services, with important further effects expected in coming years. Aside from Japan, the Scandinavian countries, and, to a lesser extent, Portugal and Spain, virtually all the other continental European countries had their public transport almost entirely provided in the early 1990s by public sector agencies; the same was the case, and remains so, in Canada. Promoted by the European Commission, change spread first to the Netherlands and then to increasing numbers of towns in Germany and Italy. Local rail services have been increasingly offered as concessions to independent operators in some German states. Experiments have been under way in Norway with better targeted performance-based bus contracts. French towns have been transferring more risks to concessionaires for bus services, and foreign companies have for the first time won some of the contracts.
Japan's railways were successfully restructured and privatized in 1987, and Canadian National was sold on the stock exchange in 1995. Although the continental European railways remain in the public sector, most of them have been undergoing important reforms and reorganizations to strengthen aspects of their commercialization and to reduce costs. The European Commission has strongly emphasized the separation of infrastructure and operations, initially in accounting terms and subsequently organizationally. Independent operators, besides providing urban passenger services, as in some areas of Germany, have also begun to develop long-distance freight services, as in Germany, Italy, Sweden, and Switzerland. Major PPP projects, supported by substantial public capital contributions, have been initiated for improving intercountry rail links, such as the high-speed lines in the Netherlands and across the Pyrenees between France and Spain.
Low-cost scheduled air services began to develop in continental Europe following the 1997 deregulation of the EU internal market. Market pressures have led to some important mergers among the previously excessive number of national flag carriers, and most of the major airlines are now traded on the stock exchange. About a dozen of the more important European airports have been partially privatized, principally those in Austria, Denmark, Germany, Italy, and Switzerland. Athens’ new airport was built under a 30-year DBFO concession signed in 1995 with large capital support from the EU and the Greek government.
Latin America and the Caribbean
The past decade has seen a larger increase in the relative role of the private sector in transport infrastructure in this Region than in any other. All the large countries except Venezuela have increased private participation in most of the main transport modes, and more than half of the medium-size countries have been almost equally active. Some estimates, based on figures for the Region’s larger economies, suggest that the private share of total investment in transport in the 1990s averaged as much as 50 percent. This figure mainly reflects a sharp reduction from earlier years in the volume of public investment in the sector.
Roadways
The largest volume of private investment has been in maintenance, rehabilitation, or construction of roads that were tolled on completion. Some are motorways, but most are relatively high-grade trunk roads. A survey undertaken by the United Nations (UN) Economic Commission for Latin America and the Caribbean indicated that by early 2003 Latin America had a total of some 35,000 km of roads under concessions to private operators, including nearly 11,000 km in Argentina, 10,000 km in Brazil, 6,000 km in Mexico, and about 2,400 km each in Chile and Colombia, as well as short stretches in many of the smaller countries.
Besides these changes at the management level, Latin America has also been at the forefront of experimentation with improved methods for involving the private sector at the execution level, especially for standard rehabilitation and maintenance. For main roads with traffic insufficient to warrant conventional tolls, Argentina introduced in the middle 1990s multiyear rehabilitation and maintenance contracts. Payment was awarded to the contractor according to the road standard attained rather than for the individual maintenance interventions undertaken. Such performancebased contracting rapidly attracted international interest, and similar programs were started by the highway departments of several other Latin American countries, as well as in other Regions.
Railways
Over the 1990s almost all railways in the Region were concessioned to private operators, starting with Argentina’s freight services in 1991–93 and its more substantial Buenos Aires passenger operations in 1994–95. Direct public sector management of railways is now limited principally to passenger services in a few metropolitan areas and the overall network in two or three smaller countries such as Cuba and Uruguay.
The facilities were normally concessioned as integrated operations, including track as well as services (predominantly freight). The main focus was on devising viable regional packages of the existing assets—and access rights for adjoining concessionaires— that would at the same time facilitate the offer of alternative services to shippers, especially at major traffic nodes. As in Australia, the initial concessions have been followed by some important mergers (in this Region, mostly international), which were considered consistent with market potentials and not inimical to competition.
Ports
Whereas railway reform was often motivated by the desire to reduce the fiscal burden of operating subsidies, the main object of port reform has been to enable countries to draw the full benefit from international trading possibilities. Latin America has a long tradition of privately built and owned industrial ports, largely for export of bulk commodities. They have continued to expand in number and generally to function well. The focus of the reforms has been rather on the commonuser ports, which, in the early 1990s, typically still suffered from highly centralized management, public monopoly in the provision of all services, and restrictive labor practices.
In countries such as Argentina, Colombia, and Mexico, the main common-user ports have been transformed into landlord operations. Under this model, major terminals are provided and run by global or Latin American port-operating companies, and the full range of minor services are offered by local private enterprises. But in some small countries, as in Central America, commonuser ports and port services remain largely public monopolies. Most countries lie between these extremes and are still in the process of transition.
Public Transport
In Latin America, as in most developing regions, public transport continues to account for a high proportion of urban residents’ movements (typically upward of 50 percent in major cities) compared with OECD countries. The service is provided mainly by privately owned and operated bus companies, loosely regulated.
Among efforts to cope with increasing traffic congestion resulting from the growth of population and private cars, several Latin American countries have been leading busway developers. An important recent initiative in this direction is the start of a citywide network (more than 50 km now of an eventual 400 km completed) in Bogota. The higher and more reliable service standards required by the private bus companies under stricter franchises, combined with public sector action to improve traffic regulation and build and operate the dedicated infrastructure, are yielding major improvements.
Airways
In air transport, liberalization has continued, and markets, both domestic and international, have shown strong (though fluctuating) growth. Most carriers are now in the private sector. Various experiments have been made with increased private participation in management and financing of airports, and they have shown some tendency to accelerate. Main airports in Chile were concessioned individually in the second half of the 1990s and those in Argentina, Bolivia, and Mexico in multiairport groups. BOT contracts for upgrading of individual airports have also been made in 10 other countries.
Other Regions
In the five Bank operating Regions covering Africa, Asia, Europe, and the Middle East, private participation in provision of transport infrastructure has so far been more limited than in Latin America and the Caribbean. In each of the five Regions, about one-third of the countries undertook one or more transport projects involving private capital over the course of the past 10 years. With few exceptions, the breadth of private involvement across different modes within each country has also been more limited than in Latin America and the Caribbean.
In the wake of the Asian financial crisis of 1996–97 and following an earlier initiative that had yielded limited results, the Republic of Korea revised legislation governing private participation in the management and financing of infrastructure. Procedures for bid awards were made more transparent, and tax incentives and generous revenue guarantees were introduced. In 1998 a port container terminal was offered for the first time for foreign investment.
Since then, projects aggregating some $25 billion–$ 30 billion (including government grant contributions averaging 25 percent) have been initiated, most of them transport works, including toll tunnels and highways, port developments, and rail access to Incheon airport. The revenue guarantees proved costly and were revised sharply downward in 2003. Financing of most of the projects has been managed by the government-owned Korean Development Bank. The volume of private financing involved is unclear but has probably been increasing from domestic sources, benefiting from simultaneous efforts to develop the domestic capital market. But further container terminal investments have also been attracted from international port operators.
Private capital has made a marginal but significant contribution to China's recent large investments in roads (including creation of a tolled network of trunk roads of at least 20,000 km), but it is unclear whether it has contributed significantly to their efficiency. Two principal sources were tapped. The first was equity contributions from overseas (mainly Hong Kong) financial partners, which made joint ventures with provincial communication departments for construction of toll roads but played little part in operational decisions. From the mid-1990s, and especially after clarification of the law in 1997, funds were also raised from China's own stock markets; shares in packages of completed toll roads were offered (securitization). Some of the companies formed for this purpose were also able to float revenue bonds and raise bank loans against the security of their revenue streams.
Concerned about port capacity/efficiency obstacles to the country’s rising international trade aspirations, the government of India finally decided in 1995 to experiment with foreign private participation. It offered a concession for construction and operation of a new container terminal at Nhava Sheva, adjacent to the modern public sector facility run by the Jawaharlal Nehru Port (JNP) Trust near Mumbai. The tender for a 30-year concession was won by P&O Ports (Australia) and signed in 1997. Following its completion in mid- 1999, Nhava Sheva attracted increasing amounts of traffic from JNP. The latter responded by improving on its previous efficiency, though not to the level achieved by its competitor. The experiment was considered successful and led to a series of investments by P&O and other international operators in different Indian ports.
Confronted with the addition of some 5,000 km of international borders as a result of the breakup of the Yugoslav Federation and the obstacles these posed to international trade, the eight core countries of southeastern Europe gradually came together in the second half of the 1990s to launch a public-private initiative, essentially at the oversight level, to reduce border-crossing problems (see box B.1). The central focus chosen was modernization and simplification of customs procedures. Related computer applications were introduced as instruments toward gradual change of customs officers’ attitudes and performance. Agreed-on performance indicators, and much other trade-related information, are regularly published on the Internet and discussed in intercountry meetings. Delays have been substantially reduced at the targeted border points, and there is an indication of a possible reduction in the number and/or size of bribes that transporters have to pay to cross borders in some countries.
In Africa, following a partially successful initiative in the early 1990s to create a road fund and strengthen road maintenance, Tanzania more formally established a road fund, along with a public-private board to run it, in 1999. Then, in 2000, a semiautonomous executive agency to manage the primary network (TANROADS) was established. The board’s extensive monitoring and auditing oversight helps significantly ensure that user charges to support maintenance are duly collected and devoted to the intended purpose. Local contractors have benefited from long-term efforts to support their development; they now handle most of the maintenance work. In line with the legislation establishing it, the board is also helping address the previously neglected weak capacities of district and urban councils to maintain the extensive networks for which they are formally responsible.
South Africa has long experimented with toll roads, initially as public sector undertakings, but in the late 1990s also as concessioned operations. The South African National Roads Agency Limited (SANRAL) was created in 1998 as a government corporation responsible for the country’s national roads. From the start SANRAL has put a strong emphasis on mobilizing the energy and resources of the private sector for road development and to strengthening local enterprises. Three major roads, each about 400 km total length, have been concessioned to joint foreign/national consortia, with transfer of existing assets, requirement to build/rebuild certain sections and improve the remainder, and full transfer of construction and revenue risks. All nonconcessioned national roads are now covered by routine road maintenance contracts, tendered competitively to consulting engineering firms against performance specifications that require 80 percent of the work to be subcontracted to small contractors that have low entry barriers and that are supported by training.
A more in-depth, global coverage of private sector transport initiatives is covered in a Bank working paper intended as a companion paper to the evaluation (Willoughby 2007) and published simultaneously.
Results to Date
At the broadest level, this review suggests that the management improvements highlighted in the 1994 WDR have stood the test of time in the OECD countries. It also suggests that they have been quite widely pursued by developing countries and have often made a significant difference to transport sector performance. Major weaknesses that emerged in some of the earlier privatization efforts—such as Chile's urban public transport reforms, Argentina’s freight railway concessions, and Mexico's toll-road development— have been largely avoided in the reform initiatives introduced in the last decade.
Pursuit of the WDR theses through an increased private sector role in trade-related port and railway infrastructure has generally had significantly positive effects on technical and allocative efficiency. This has been the case even where modifications have had to be made to the structures first chosen for increased private participation, as with railways in the United Kingdom. Positive impact has quite often been further enhanced by follow-on effects on other institutions and by postprivatization restructurings and mergers. Efficiency and service indicators have typically shown sustained improvement following the introduction of private participation, and traffic growth has tended to exceed that of the regional economy, reflecting in part the attraction of types of traffic previously handled by other modes and facilities.
The effects have tended to be more significant when the privatization was preceded or accompanied by measures to reduce nontechnical regulation of the mode concerned and its competitors, when the structures offered to private bidders were designed to sustain competition, and when appropriate measures were taken to ensure access of competing providers to any facilities with local monopoly characteristics.
In the roads field, the most clearly positive effects of the WDR principles on technical and allocative efficiency have been through their application to the management of road networks generally: clarification of road department accountability and greater management autonomy; establishment of supervisory and consultative bodies that represent users better; and transparently competitive contracting of works to the private sector, increasingly against performance-based specifications. It is probably fair to characterize the combination of these and related elements as a revolution in road management that has been under way since the late 1980s and early 1990s. So far, however, that revolution is concentrated in only a few countries in each Region. Road funds have also been able to make a useful contribution in some countries’ public expenditure management systems, but the main emphasis in the majority of countries needs to remain on improving the allocation of roads spending and its technical efficiency.
Growth of partially privately financed toll roads has clearly been an important phenomenon of the decade since the WDR, especially in developing countries. Although such roads represent tiny proportions of the network, they often carry significant proportions of overall traffic. They have also accounted for the largest share of the total investment for transport projects recorded in the Bank’s public-private infrastructure (PPI) database, although that share has been steadily declining, from 72 percent in the 5 years immediately preceding the WDR to 38 percent in the period 1999–2003.
The net effects of toll roads, or the private financing of them, on the technical and allocative efficiency of the transport sector are nonetheless complex, and convincing assessment of the facts is comparatively rare. In Latin America, which accounted for more than half of PPI toll-road investments throughout the decade, it may be concluded that most of the programs had positive effects on technical and allocative efficiency. Bidding appears to have been more transparently competitive than under traditional government contracting.
Second, despite important exceptions, tolls were normally held to 1–2 U.S. cents per car-km in maintenance concessions and to 2–4 U.S. cents on concessions involving major upgrades and new construction. Third, the huge reductions in public investment in transport that resulted from macroeconomic considerations increased the marginal value of resources raised from elsewhere.
Greater doubt surrounds some of the Asian programs, including China, which alone accounted for nearly one-fifth of PPI toll-road investments in all developing countries during the period. There is no evidence of private investment in China having introduced new or additional technical efficiency. Tolls were typically higher than in Latin America, and much higher relative to the country’s lower income levels. Traffic diversion, especially of trucks, has been a significant problem. More ample public resources were available, although the private funds nonetheless constituted a useful supplement.
Not directly stemming from the management emphases in the 1994 WDR but important for their future application have been advances in charging road users for the costs that their activity imposes on society—particularly the cost of congestion, pollution, and accidents. Whereas pricing and taxing structures to deal with these externalities were largely limited at the start of the 1990s to Singapore and some experiments in Norway, a few roads (mostly privately financed) have since been developed specifically with time-varying electronic charging systems that help reduce congestion. A notable new trend has been construction of largescale urban motorways (largely privately financed) with sophisticated tolling systems, as in Australia and Chile. London has very successfully introduced a central city access charge, and Switzerland, Austria, and Germany have all created electronic systems to charge trucks for the costs that their movements impose.
Overly centralized government-owned urban passenger services, torn between conflicting objectives, still exist in some cities of transition economies and a few developing and OECD countries. They can often benefit from a direct application of the WDR principles in their rationalization and restructuring. A more common problem in the developing countries is development of better-regulated competition among existing private providers. They could generate a more reliable and safer set of services that link appropriately. There is stronger recognition than there was 10 years ago, in OECD and developing countries alike, of the need for integrated efforts between public managers responsible for road infrastructure, traffic flow, and parking regulations, and the normally private bus companies, with interdependent performance targets jointly set.
Finally, the pressures of increasingly open competition in the provision of international air services, and in many countries domestic air services, too, have brought improvements in the technical efficiency of air transport over the last 10 years. The rise of low-cost carriers, now extending to many of the larger developing countries, has made a significant contribution to transport’s allocative efficiency. Private management of public airports is largely an innovation of the past decade, but how far this has contributed to these efficiency improvements is not yet clear. |
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