Overview
The increasing involvement of the private sector - mostly in Public-Private Partnerships (PPP) - in the provision of assets and/or services previously provided directly by the states raises significant questions about the application of socially optimal pricing schemes such as Social Marginal Cost (SMC) pricing. Private engagement entails allowing adequate rates of return in a purely financial perspective, which is too often incompatible with SMC pricing principles.
The aim of the ENACT project is two-fold:
- to assess the extent to which the introduction of SMC pricing obligations may hinder or not the further development of PPP schemes in the transport sector;
- to devise ways to incorporate such obligations in PPP schemes while, at the same time, taking advantage of the positive aspects that such partnerships can have.
In a first step, the ENACT project will leverage on existing research on the issues of SMC pricing and Second-Best alternatives (optimal mark-ups for cost recovery).
The second step will consist of analysing the PPP phenomenon under the light of Incentive and Contract Theory, and the impacts that SMC pricing might have in terms of the informational and incentive structures of PPP contracts.
The third step will be to focus on financial markets, and on the impacts that SMC calculation and pricing have on the perception of risk and the demanded rates of return.
From this theoretical framework, the development of a simulation tool will permit to assess the following six case studies:
- Case Study A: Italian motorways;
- Case Study B: Tagus river rail crossing;
- Case Study C: Varna and Burgas airports;
- Case Study D: Munich airport;
- Case Study E: Lisbon Area motorway concessions;
- Case Study F: Orkdalsvegen.
The primary objective of the case studies is to identify and analyse the implications of the possible application of SMCP in PPP’s and to discuss available alternatives of PPP design for a successful introduction of SMCP in the transport undertakings. The diversity of the case studies will permit to capture a fairly wide variety of PPP types and contexts, covering roads, railways and airports.
The results of the project will serve as the basis of a set of Guidelines to establish a Common European Policy/Regulatory Framework for socially optimal SMC pricing obligations in Public-Private Partnerships in the provision of transport infrastructure and/or services.
Funding
Results
This research has permitted to acquire a substantial amount of new knowledge and insights into the use, advantages and limitations of PPP in transport infrastructure. The results of the case studies and their comparison and interpretation, have generally shown that problems and appropriate solutions for integrating SMCP with PPP’s vary with mode and context.
The main results and conclusions of this research can be grouped into five topics:
- Social marginal cost pricing principles: first and second best conditions;
- Social marginal cost pricing and cost recovery;
- Contractual design for a better PPP performance;
- Risk evaluation;
- Requirements for SMCP implementation in PPPs.
1) Social marginal cost pricing principles: first and second best conditions
One of the best-known policy prescriptions from economic theory is that, to reach an efficient allocation of resources, prices should be set equal to marginal costs (first best optimum). However, this postulate raises some difficulties because costs of transport include both cost for the operator or infrastructure manager and external cost (marginal external cost of congestion, pollution and accidents).
This project has confirmed the results from previous research that practical constraints to SMCP implementation (technical, organisational and institutional) lead to second best alternatives, namely:
- highly differentiated pricing systems in time and space;
- users’ perception and transparency and acceptability constraints;
- imperfect pricing of substitute or complementary goods;
- existence of transaction costs;
- public deficit and debt, equity issues (users pay).
It is to be noted that second-best pricing actually entails deviations from SMC (for example, mark-ups can be added to the marginal costs in order to achieve cost coverage, but a good control over costs is necessary to avoid overcharging).
2) Social marginal cost pricing and cost recovery
A major problem in the adoption of SMCP within PPPs relates to the contrast arising when simultaneously considering the use of SMCP (welfare objective) and the necessity of cost recovery (private objective).
The limitations observed in previous research and in the case studies analysed by this project suggest that:
- second best solutions, taking into account the need of cost recovery, seem to be more appr
Policy implications
This project has provided significant new knowledge useful to politicians and other decision makers dealing with transport infrastructure.
PPPs may – with an enhanced contract design – contribute very much to the efficiency of the whole package of building, maintenance and operating of infrastructure projects.
PPP contracts should be formulated to stimulate risk taking according to ability and willingness to manage risks, taking into account asymmetric information.
Transferring too much risk to concessionaires would result in the charging of too high risk premiums.
A good contracting of the role of banks and financing institutions can enhance the efficiency of PPPs.
The wish to combine payment to infrastructure providers with Social Marginal Cost Pricing (SMCP) from infrastructure users is understandable and desirable, but in general not feasible. Logically, these two purposes do not fit very well. But they may be combined in some ways creating different scenarios:
- if (in the rare case) incomes from infrastructure users cover costs and there are no perverse incentives, SMCP from users may be applied;
- if (in the most common case) there is no cost coverage:
- if the price of public funds is high and there are no perverse incentives, a combination of SMCP and an additional subsidy (with a defined maximum and minimum amount) to secure cost coverage and avoid too high payment to the provider may be used;
- if the price of public funds is low and/or there is danger of perverse incentives, a two part model with SMCP from users to government and performance based payment from government to providers may give good incentives to all actors.