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are already subject to the tax. Proposals to increase PUBLIC-PRIVATE PARTNERSHIPS rates and/or extend the tax to smaller employers are under consideration. With interest growing in the United States for In Oslo, transit capital needs are funded by a public-private partnerships (PPPs) and other pri- combination of fares (the fare recovery rate is an vatization options for transit services, the study impressive 55%); local government subsidies; and mission had a particular interest in learning how these tools have been implemented in Europe. Pri- toll revenues from a series of toll packages. Since vate-sector service contracts and PPPs are used the 1980s, Oslo has implemented three toll packages. extensively in the United Kingdom and, to a lesser Package 1 introduced tolls on the ring road around extent, in Oslo to finance, design, build, operate the city to generate NOK 11 billion ($1.7 billion) for and maintain, and rehabilitate transit systems, with road and tunnel projects. Package 2 increased tolls and a varying range of results. U.S. transit managers added a NOK 0.75 ($0.12) surcharge to transit fares, considering PPPs for their state-of-good-repair pro- which raised NOK 15.6 billion ($2.5 billion) for tran- grams would benefit from studying the European sit expansion projects. Package 3 will provide NOK experiences. 58 billion ($9.2 billion) for a combination of road and Most private-sector involvement in transit is transit expansion projects (including the costs for through operating contracts similar to those widely unfinished projects from Package 2) over 20 years used in the United States, particularly by smaller (20082027). Tolls will generate NOK 45 billion, operators. In London, Nottingham, and Oslo, buses with the remainder coming from central and local are operated and maintained by private operators who governments. About half of the funding in Package 3 generally receive fare revenues and a subsidy from will be dedicated to transit projects. the responsible government agency based on the The toll packages, in addition to raising funds performance of measures spelled out in the contract for infrastructure improvements, have several other such as ridership, on-time performance, and clean- objectives, as follows: liness of buses. The buses may be owned by either Reduce congestion; the government agency or the private operator, but the Increase use of transit, bicycling, and walking; operator is typically responsible for maintaining the Reduce greenhouse gas emissions, air pollu- vehicles to standards set in the contracts. None of tion, and noise pollution; the transit agency staff with whom the study team Reduce fatalities and injuries from traffic acci- met with reported any serious issues with this type dents; and of contract. Increase access and mobility. Nottingham undertook a unique approach to secure a PFI to finance the design, construction, and The goal of reducing congestion presents a maintenance of NET Line One. The Nottingham City paradox--the more successful the tolls are at reduc- Council and Nottinghamshire County Council jointly ing automobile use, the less revenue they generate. awarded a concession to a consortium of compa- The current economic downturn has further reduced nies operating as Arrow Light Rail, Ltd., for a period traffic and toll revenues, leading to a need for of 30.5 years--3.5 years to construct the line and increased support from the city government. 27 years to operate the service. Unlike most PPP proj- Finally, it is worth noting that while the tram- ects that are solicited after preliminary engineering, train model in Karlsruhe is not a financing scheme the final design right-of-way acquisition and permits per se, this German innovation does allow for lower were completed and approved before seeking the infrastructure costs since one set of tracks and contract. This method eliminated risk of the project related infrastructure are shared by two modes, the stalling due to community discontent. tram and the train. Not only does this lower infra- Arrow issued private debt and contributed structure costs, but it also reduces the cost of acquir- investor equity that covered 90% of the 200 million ing rolling stock, since these specially designed capital cost of constructing the 14.5 km Line One vehicles can operate in dual modes. This model also route. The debt received credit support from the cen- has encouraged development in smaller cities and tral government through the PFI--the largest PFI towns and has provided direct connections to these ever employed for a local project in the United jurisdictions. Kingdom. 14

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Arrow also let a contract to the Nottingham Tram mance while limiting the city's liability and elim- Consortium (NTC) to operate and maintain the sys- inating most of the uncertainty inherent in capital tem for 27 years. NTC is a partnership of Transdev, planning by shifting most of the risk of unantici- a private company, and Nottingham City Transport, pated costs to the private sector. However, results a city governmental agency. NTC receives all fare were not positive. revenues as well as performance payments from the Metronet, the infraco for two of the PPP con- city to repay Arrow's debt and investors. NTC also tracts, went bankrupt in 2007. When attempts to sets the fares. The performance payments are based sell the company failed, it was bought by Trans- on the amount of service provided. port for London, and the work that was to have The contract with NTC also specifies mainte- been performed under the contracts was brought nance standards for the system. While it is too early back in house, with responsibility given to London to assess the effectiveness of the contract in keeping Underground. the tram in a state of good repair--Line One opened The remaining contract, with Tube Lines, was ter- for service in 2004--the city staff who met with the minated at the first renewal point. London Under- study team expressed satisfaction with the results to ground and Tube Lines were h2 billion apart in the date. Two additional lines for the system are in the negotiations over costs for the second 7.5 years. The planning stages. dispute went to arbitration, where the arbitrator split The attempt by London Underground to manage the difference and ruled that h1 billion of the cost its state-of-good-repair program through PPPs pro- increase sought by Tube Lines was justified. How- vides a more cautionary tale. The city agency issued ever, the total was still h1 billion more than the city three PPP contracts in 2002 and 2003 to two private was willing to pay and h1 billion less than the infraco infrastructure companies (infracos) for maintenance was willing to accept. The decision to terminate the and renewal of the entire underground system. Each contract was a mutual one. contract covered a bundle of routes in a geographic London Underground is currently working to sector of the city. London Underground staff contin- absorb the work that had been assigned to Tube ued to operate the system. Lines, as it did with the Metronet work, which is The contracts were issued for 30-year terms, with resulting in major costs for the city. The agency had renewal options for both the city and the contractor completely reorganized itself to manage the PPP every 7.5 years. At each renewal point, costs and per- contracts instead of performing the maintenance and formance measures for the next 7.5 years could be renewal work, and it is now having to reverse itself. renegotiated. The infracos received fixed payments Engineering and maintenance staff that had left the from the city with bonuses or penalties for perfor- city to work for the infracos are being rehired. The mance on several measures including improving Tube Lines contract also included a 310 million the reliability, capacity, travel time, cleanliness, termination charge. and quality of underground services. The contract London Underground staff attributed the failure specified targets for each measure. If an infraco of the PPPs in part to the inability of the infracos to exceeded the target, it would receive a bonus on top accurately project the costs of meeting the perfor- of the fixed payment; if it failed to meet the target, mance measures and to manage their costs to keep it would be penalized with a deduction from the them within budget. Metronet waited until it was base payment. h1 billion over budget before seeking additional The means of meeting the performance targets funding through a change-order process known as was left up to the infracos. The contract did not spec- "extraordinary review," at which point it was too late ify what work needed to be done. For example, to for the company to recover. meet a target to reduce travel time on a particular line, From the city's perspective, the extraordinary the infraco could elect to replace the rolling stock, review process was intended for truly unforeseen and upgrade the power or signaling systems, or perform unforeseeable costs. By agreeing to retain some of the rehabilitation work on the tracks. risk for unknown costs, the city hoped to limit the The completely performance-based nature and amount of risk premium that was included in the per- sheer scale of the contracts was unprecedented in the formance payments, but it became apparent in the transit industry. For London Underground, the PPPs negotiations that the infracos' business plans relied on offered the promise of improved system perfor- extraordinary review to recover costs that they could 15