Transport Logistics

4.4. Minimising costs of infrastructure projects

In financing logistics infrastructure, the objective is to maximise return from investment in

infrastructure while minimising cost by creating an efficient well-managed project. The returns

expected from investment reflect the level of risk. The appropriate identification, allocation and

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management of risk therefore become critical to creating the most cost effective and efficient

financing structure.

Failure to properly identify risks may lead to underestimation of particular costs. For example,

public finance seems cheaper only because the taxpayer is underwriting the associated risk.

Effective risk management is a crucial element in the creation of a fundable proposition. Whilst

attempts may be made to cover every foreseeable risk in contracts, the nature of infrastructure projects

is such that they are inevitably exposed to change. This is inherent in the nature of the long time scale

for their planning, completion and operation. There is constructional and operational risk in that

logistics infrastructure will need to change throughout both the development and operational stages of

its life. Supply and demand variations, macroeconomic change, and changes in policies including

threat of expropriation may also occur.

Efforts have been made to manage projects to accommodate changing circumstances. For

example, policy adjustments on privatised highway projects include: a) rescheduling the construction

programme to allow staggered construction of priority stretches first and lengthening the construction

period, b) staging construction of carriageways, to be upgraded only if warranted by traffic demand,

and c) deferring the construction of interchanges which have low traffic demand.

Those responsible for risk allocation need to be responsive to problems in order to maximise the

speed with which they are rectified, minimise risk associated with delays and in particular identify and

resolve serious problems quickly. Re-negotiation must be feasible in order to accommodate changes

with minimum costs and delays. Control clearly affects renegotiations. Parties who are in control and

are best positioned for efficient renegotiations should therefore provide financing.

Parties most capable of managing risk should be given incentives to do so. Incentive-based

performance will ensure that proper reward is provided to the parties who make the scheme a success

and manage risk. The equity partners in the project should not have their equity merely capped, but

should share the benefits of success in a true public-private partnership arrangement. The extent to

which returns are shared should relate to the original allocation of risk. Risks that cannot be allocated

appropriately to any one partner should be spread as widely as possible.

Many transportation projects involve considerable commercial and policy risks that call for

government guarantees. Government guarantees against risks are a major issue in private financing

and public/private partnerships. On the one hand, if a government shoulders most of the risks, the

private sector loses its incentive to minimise costs. On the other hand, if government does not share

the risks, the project may appear too risky to attract private sector investment. This arrangement

requires maintaining a delicate balance.

It is especially important to synchronise guarantees with major environmental protection efforts.

For instance, private toll road operators should not be offered guarantees of traffic volume level that

would counter competition from other modes or from public transit. This could be counter-productive

as it could encourage increased use of passenger cars and create problems for public transit operations.