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David Finlay:

Paul Corrigan:

Ed Rendell:

Lessons from PFI and the future of infrastructure finance

A reformer’s view of the Coalition’s NHS reorganisation

Pennsylvania’s former governor on Building America’s Future

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D E L I V E R Y T H R O U G H PA R T N E R S H I P S

ISSUE 75 | December 2011

www.publicservice.co.uk

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Foreword

Robert Philpot Director Progress

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s all of the contributors to PPP ’s digest feature this month recognise, 12 months into the government’s growth review the picture for the UK economy remains highly unsettled, with new storm clouds gathering – whether you believe that is the result of the crisis in the eurozone, the Coalition’s own austerity measures or a mix of the two. While Matt Oakley from Policy Exchange is wrong to lay some of the blame at the door of the media and opposition who have been ‘downplaying the economy’ – I don’t remember either of the current governing parties adopting a vow of silence when the economy stood on the brink of depression after the collapse of Lehman Brothers – he is right that we also need to be realistic about what levels of growth the UK should expect. These are, as he suggests, ‘not ordinary times’ and to expect pre-recession levels of growth anytime soon would be foolhardy. At the same time, we also need to understand that cutting the deficit and restarting growth are two sides of the same coin; any strategy based on doing the former without the latter is doomed to failure. Across this month’s contributions, key themes emerge: an understanding that engagement with the private sector can help support growth and deliver more efficient and effective public services; the crucial role of public and private investment in infrastructure to meet the economy’s long-term needs, as well as providing an immediate stimulus to growth, employment, consumer confidence and tax revenues; and a recognition that partnerships – between the private and public sectors, national and local government, and new and innovative models of financing – are essential. But we shouldn’t ignore the crucial role that empowered citizens and communities can play, not only in helping sustain our public services through difficult times, but also in opening up and legitimising new ways of securing finance and providing the kind of leadership at a regional level that building these new partnerships requires. Take three examples from The Purple Book. First, why don’t we consider the use of time-limited levies for special capital expenditure such as investment in transport infrastructure, especially at the local level, where local referenda might be held to agree the specific proposal? These levies are removed when sufficient funds have been raised. PPP Journal: issue 75

Additionally, we need to consider the incentives for growth that local authorities have. We need to kick-start housing building. There should, therefore, be a significant council tax bonus for councils authorising sustainable and affordable development. The Coalition’s ‘new homes bonus’ matches extra council tax income from new housing developments for a six year period. This is not a strong enough incentive, especially given the associated infrastructure and amenities local authorities need to provide. We should extend that bonus over 15 to 20 years. Similarly, councils should get the business rate benefit accruing from new business developments to which they give planning consent, without losing the extra income to the national business rate pool and equalisation machinery. Again, this benefit needs to be extended from the Coalition’s six years to 20 to 25 years. Finally, whether it is the old regional development agencies or the new regional growth funds, the missing component is proper, democratically accountable regional leadership. The example of London, the only part of the country with it, is instructive. One of the country’s largest infrastructure projects, the £16bn Crossrail east to west London link, probably wouldn’t have happened without Boris Johnson and his predecessor Ken Livingstone. Not only did each lobby central government relentlessly, but they built impressive partnerships with the private sector, persuading central London businesses to pay a supplementary business rate that will finance a quarter of the cost. A regional growth strategy needs, therefore, directly elected mayors in the six big city conurbations beyond London – Greater Manchester, Leeds, Bristol, Newcastle, Birmingham and Liverpool – in which half of England’s population lives. These city region mayors would have powers over transport, planning, economic regeneration and policing akin to that of the mayor of London. With forecasters suggesting that growth may be as anaemic next year as this, we can expect to return to this topic many times in 2012. At least some of the solutions that the government should be considering are, however, contained in the pages that follow.


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Global Perspectives

All tolled up Philip Bates, a Director at LeighFisher, explores the changes facing toll roads in India, and the challenges and rewards that they present to investors…

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ndia’s National Highway network has undergone an impressive upgrade in recent years, but even greater changes are yet to come. This is because, when one looks around the world, there appears to be a fairly common four stage evolution of the toll road market: natural barriers, inter-urban network, congestion busters and road pricing. The drivers of these stages are traffic, technology and the ever-evolving balance of priorities between the economy on the one hand, and social and environmental objectives on the other. So, where is India in this evolutionary process?

Natural barriers Tolled crossings of natural barriers are probably the oldest forms of transport in the world. People want to cross natural barriers to expand the market of their goods and services; however, the solution to achieve this in anything other than a very rudimentary way is often too expensive for a government to fund. Consequently, whether the barrier is a river or a mountain, as trade grows and a country starts to motorise, the solution is usually a toll bridge or tunnel. The Delhi-Noida Toll Bridge is a good example of this. More than 30% of Delhi’s population resides across the river Yamuna. Noida, one of the largest sub-cities of Delhi, is inhabited by about one million people, 50% of whom commute daily to Delhi for work. The old river crossings at the ITO and Nizamuddin Bridge were facing severe traffic congestion, and consequently an additional bridge across the Yamuna was built and financed using tolls. While there does not seem to be many large river bridge or mountain tunnel projects in India at present, it is likely these will start appearing soon, as many major river

Economic success means that traffic levels start to rise: car ownership in India has increased threefold in just 10 years

bridges – often over 100 years old – are simply not capable of accommodating the growing volume and weight of traffic.

The inter-urban network This next type of toll road is far more common in India. As a country’s economy expands and travel becomes increasingly motorised, governments realise they can boost economic growth by improving the inter-urban road network. The benefits of this are clear: a World Bank report, for example, suggested that every rupee spent in India on roads created seven rupees in economic benefits. However, the demand to improve the highway network comes at exactly the same time as that for expanding other forms of economic infrastructure (power, water, health and education) is at its greatest. Public sector funding simply cannot meet all of this demand, and governments often turn to road tolling to ease the burden. India has followed this model, consequently launching the National Highway Development Program (NHDP) for upgrading and widening the core network (33,000 miles) in 1998. From a private investment point of view, the attractions of the NHDP are clear. Fairly simple construction and revenue growth closely correlated to economic growth and indexed

PPP Journal: issue 75


Global Perspectives

As a country’s economy expands and travel becomes increasingly motorised, governments realise they can boost economic growth by improving the inter-urban road network, declares Bates

to inflation makes these investments relatively low-risk (more akin to a utility than a commercial business). Also, given the relatively low cost of many of these projects (relative to the anticipated revenue stream), the concession periods can be short (between 10 and 20 years), reducing risks around long-term liabilities and minimising the need to undertake whole life costing analysis.

Congestion busters The development of the first two types of projects is driven by economic growth. However, that very economic success also means that traffic levels start to rise such that the barrier to movement increasingly becomes the traffic – and the resultant congestion – itself. Car ownership per head of population in India has been estimated to have increased threefold in just 10 years (from five to 15 vehicles per thousand people). However, this is simply the start, with levels of 500 or more not uncommon in developed economies. Congestion in India is going to get a lot worse, especially in urban or periurban locations where development density is greatest. Congestion buster toll roads have now arrived in the most affluent – and congested – cities in India. Perhaps the best example is the Bandra-Worli Sea Link (BWSL) in Mumbai, which opened March 2010. The BWSL connects Bandra and the western suburbs with Worli and the central area, and is the first phase of the proposed West Island Freeway system. Interestingly, the combination of high congestion and the fact that Mumbai sits on a peninsula means the highway has been built over the ocean. The Delhi Western and Eastern Peripheral Expressways are other examples. From an investor perspective, the characteristics of these schemes are very different from the NHDP programme. Construction is more complex and more expensive. Revenue growth is still broadly correlated to economic growth and inflation, but getting the opening year value correct becomes a major challenge and yield growth

(revenue per vehicle growth faster than inflation) becomes more important. However, sooner or later most governments realise that one simply cannot build enough road space in cities to meet unconstrained demand for travel by car. This heralds the arrival of the final phase in the evolution: road pricing.

Road pricing This has, even globally, been limited to date. Such schemes are often a product of increased social and environmental awareness, and only tend to be promoted when the economy is overheating such that restraint on growth is seen as a positive rather than a negative. However, road pricing is a very sensitive issue for politicians and gaining public acceptance is difficult. To date, such schemes have not been introduced in India, although they are being proposed for various central locations in large Indian cities.

New challenges for investors Indian investors have seen opportunities to invest on toll roads that are relatively low-risk. The next generation of toll roads will present new challenges, but these should come with opportunities for enhanced returns. This evolution of toll roads from lower risk, utility-like projects to higher risk, user service-based congestion busters will raise new challenges for Indian investors. However, it will also offer, to the well-prepared and informed investor, new opportunities and rewards, in what will remain a vibrant, active and, for many, financially rewarding market. Philip Bates Director LeighFisher Tel: +44 (0)20 7087 8777 philip.bates@LeighFisher.com www.leighfisher.com

PPP Journal: issue 75

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All tolled up  

Philip Bates, a Director at LeighFisher, explores the changes facing toll roads in India,and the challenges and rewards that they present to...

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