ROAD INFRASTRUCTURE CONCESSION PRACTICE IN EUROPE FRANCK BOUSQUET ALAIN FAYARD September 2001 * THIS REPORT IS BASED ON A DOCUMENT OF 1999 ENTITLED “ANALYSIS OF HIGHWAY CONCESSIONS IN EUROPE”, FRENCH HIGHWAY DIRECTORATE. AS WAS THE CASE WITH THE PREVIOUS DOCUMENT, THIS REPORT DOES NOT ENGAGE THE RESPONSIBILITY OF ANY OF THE INSTITUTIONS MENTIONED. TABLE OF CONTENTS I. ROAD INFRASTRUCTURE CONCESSION PRACTICE IN EUROPE...............................3 I.1 Toll concessions......................................................................................................................6 I.1.1 Toll system advantages and disadvantages...................................................................6 I.1.2 Toll system functions.........................................................................................................10 I.1.3 Acceptability of toll systems in Europe...........................................................................10 I.2 Shadow toll concessions......................................................................................................13 I.2.1 Definition.............................................................................................................................13 I.2.2 Shadow toll practice in Europe........................................................................................14 I.2.3 Advantages and disadvantages of shadow tolls...........................................................14 I.3 Initial conclusions concerning Europe’s road infrastructure concession approach........16 I.3.1 Concession approach and remuneration of the concession company.....................16 I.3.2 Widely varying road infrastructure practice in Europe.................................................17 I.3.3 Concession contracts compared with other infrastructure funding systems.............19 I.3.4 Principal merits of concession contracts.......................................................................21 I.3.5 Integration of socio-economic and equity return in connection with the decision to set up a concession contract.................................................................................................23 I.3.6 Comparison of state-owned and private concession companies...............................25 II. KEY COMPONENTS OF A ROAD INFRASTRUCTURE CONCESSION.......................27 II.1 Concession lot size...............................................................................................................27 II.2 Road infrastructure concession period...............................................................................28 II.3 Definition of toll charges.......................................................................................................29 II.3.1 Setting toll charges...........................................................................................................29 II.3.2 Remuneration of concession companies on a DBFO type basis – the interesting “traffic band” concept.......................................................................................................30 II.4 Concession company selection procedures and criteria.................................................31 II.5 Concession company freedom...........................................................................................33 II.6 Sharing of risks between public authority and concession companies..........................34 II.6.1 Transfer of risks in the case of a toll concession.........................................................34 II.6.2 Transfer of risks in a shadow toll system.......................................................................36 II.7 Role of the concession authority..........................................................................................37 II.7.1 Financial support..............................................................................................................37 II.7.2 Watchdog for the interests of the community...............................................................38 II.7.3 Risk coverage...................................................................................................................38 III. SUMMARY..............................................................................................................................39 III.1 Summary of road infrastructure concession practices: Differences and similarities between European countries............................................................................................39 III.2 Role of concession authorities............................................................................................41 Appendix. EC Legislation relating to concessions.................................................................43 2 I. ROAD INFRASTRUCTURE CONCESSION PRACTICE IN EUROPE This part of the report reviews road infrastructure concession practices in Europe The purpose is not to analyse the subject from a purely legal point of view, but to review the experience with concessions in the road sector in light of examples of public authorities acting as concession authorities. A concession is generally identified as a system by which a public authority grants specific rights to an organization (whether private or semi-public) to construct, overhaul, maintain and operate an infrastructure for a given period. This corresponds to a contract, under the terms of which a public authority charges a company with making the investments required to create the service at its own cost and operated the service at its own risk. The company is remunerated in the form of a price paid by the users of the service and/or the public authority. Direct payment by the user (in the form of a toll) is used by one group of countries (Austria, Denmark, Spain, France, Greece, Italy, Norway and Portugal). Payment by the public authority is practised in Great Britain, Finland and the Netherlands under the name "shadow toll" or DBFO (Design, Build, Finance and Operate), where the Government remunerates the concession company, principally on the basis of the traffic observed on the motorway. Portugal and Greece are also currently considering the utilisation of this system. Two criteria appear to be intrinsically linked to concessions: • transfer of responsibility (risk) from the concession authority to the concession company. The latter must thus be responsible for managing the operation of the motorway; • notion of contract globality Part of a concession relates to the "operation of the infrastructure", which is subject to remuneration. Whereas a work contract merely concerns a construction task, a concession contract consequently involves both responsibility for a construction programme, and a long-term service as indicated in the following table (this does not exclude sub-contracting all or part of the operation of the infrastructure by the concession company). A second approach to concession arrangements is frequently mentioned. In this case the concession system is defined as a tool used to set up an autonomous legal vehicle and establish a certain competitive situation where one does not already exist (or is difficult to institute) for the same contract. In this sense, a concession does not necessarily involve the participation of a private enterprise, and can be accorded to a state-owned entity. We revert to this point in section I.3.4. 3 Principal differences between a concession and a work contract CONCESSION WORK CONTRACT Multi-purpose: responsible for construction Single objective: construction programme and provision of long-term service Duration: long (mean = 30 years) Duration: short Funding: concession company Funding: no interim funding, co-funding or funding of infrastructure by contractor Concession company investment No investment by contractor Long-term occupation of public domain No long-term occupation of public domain Some freedom concerning design of No freedom (or only limited freedom) in infrastructure design of infrastructure Sources: SNBATI report - Summary of prime contractor forum: Global construction contracts in Europe, 1997. Replies to DERD/WERD questionnaire on concessions An infrastructure concession is defined as a contract under the terms of which a public authority accords specific rights to a company to construct, maintain and/or operate a network for a given period. The following types of contracts are similar in nature to a concession: • BOT (Build, Operate and Transfer): a company funds, constructs, owns and operates an infrastructure for a limited period (approximately 30 years), at the end of which the infrastructure is transferred at no charge to the concession authority. • BTO (Build, Transfer and Operate): a company funds and constructs an infrastructure, but transfers ownership to the concession authority immediately after completion of the construction phase. Then the infrastructure is put at the company’s disposal by the government and is operate for a limited period, at the end of which all rights are restored to the concession authority. • BOO (Build, Own and Operate): a company funds and constructs an infrastructure, which it owns and operates for an unlimited period. A variation of this is the BOOT (Build, Own, Operate and Transfer) contract. • Lease contract: this differs from a conventional concession in that the infrastructure necessary for operation of the service is not constructed by the operator (lessee), but made available to the latter by the public authority, who is generally responsible for funding the project. The lessee, who thus has exclusive responsibility for operating the service, obtains remuneration from users, paying a fee to the public authority designed to contribute to the amortisation of that authority’s investments. 4 Thus, in the case of a concession, and in contrast to a simple management contract, the concession company selected by the concession authority bears the cost of the investment and some part of the risk. This is discussed in detail in section II.6. The following diagram offers a simplified illustration of the difference between a management contract and a concession. Management vs. concession contract Risk Incentive for greater efficiency Management Concession contract The following table illustrates concession system practices in the road sector in western Europe. Of a total of 51,242 km of motorways, 17,009 km are concessioned (33%), of which 16,356 km are toll roads and 653 km have shadow tolls. Practice of Highway Concession in Europe in 1998 (with or without toll) 12000 11200 10000 8923 8200 8000 km 6705 6500 6000 5600 4000 3300 2255 2300 2000 1800 1856 2000 1422 1437 580 180 1,5 830 39469 40075 130 550550 4 990 0 Germany U.K. Austria Belgium DenmarkSpain Finland France Greece Italy Norway Portugal Switzerland Luxembourg Netherlands Sweden Length of the motorway Length of the motorway network under concession 5 I.1 TOLL CONCESSIONS In countries such as Austria, Spain, France, Greece, Italy and Portugal, a concession is associated with direct payment by the user in the form of a toll. Also in this context, Denmark has used toll concessions for two crossings: the "Great Belt", which comprises two bridges with a total length of 18 km, opened on 14 June 1998, and the Oresund crossing, combining a bridge and tunnel with a total length of 16 km, scheduled to enter service in 2000. There are also 26 toll companies in Norway1 which are not, however, concession companies in the conventional sense of the term, since they are exclusively responsible for the collection of user payments. The Norwegian road administration is responsible for the design, construction and maintenance of toll projects. I.1.1 Toll system advantages and disadvantages Toll systems are in widespread use in eight European countries in inter- urban contexts, whether for roads, bridges or tunnels. These are Austria, Denmark, Spain, France, Greece, Italy, Norway and Portugal. The advantages of toll systems, as reported by European road administrations, can be classed in three categories. The first advantage of a toll system is that investments can be augmented. In numerous European countries, toll systems are increasingly recognised as the most efficient means of replacing taxpayer money with user money. The introduction of a toll system makes it possible to commission earlier than would have been possible with national funding. From 1973 to 1995, state budget contributions to the French national road system dropped from 56% to 22%, while toll revenue increased from 32% to 57% during the same period. In Norway, toll revenue represents 32% of the state budget for the national road system2. The equivalent figure for Spain is around 46%3. The second advantage of a toll system is that it serves as an application of the user-payer principle. In its recent white paper4 entitled "Equitable fees for the utilisation of infrastructures: a staged approach for establishing a common framework for transport infrastructure charges in the European Union", the European Commission indicated that fees should be linked directly to the costs that users impose on infrastructures and on other citizens, including the effects on the environment and other external impacts caused by users. In this document, the Commission sets out its vision of future changes to transport charges in Europe, particularly in the road sector. In the three proposed phases (see box), the EC recommends a move toward distance-based road charges, which will probably become generalised in Europe. EC proposals regarding the establishment of road infrastructure charges 1 Over 100 road projects are tolled (mostly bridges and tunnels over and under the Norwegian Fjords). 2 1993 toll revenues totaled NKr 1,500 million, compared to state budget expenditures of NKr4,700 million. 3 1996 toll revenues equaled Pta 144 billion, compared with a state budget figure of Pta 310 billion. 4 COM (98)466 final dated 22 July 1998. 6 During the initial phase (1998-2000), Member States will be encouraged to harmonise or adopt compatible road charge systems for heavy goods vehicles, either by means of existing systems based on tolls, the European road tax ("Eurovignette"), or preferably, by introducing distance-based fees related more closely to costs. The Commission takes the view that a for substantial number of Member States, this type of system will advantageously replace systems involving no user fee or time-related user fees and will contribute to the generalisation of distance-related fees throughout Europe. The Commission will also draft a proposal concerning the environmental classification of heavy goods vehicles, in order to facilitate the introduction of fees that more closely reflect the environmental impacts stemming from their utilisation. Member States are encouraged to develop urban road charge systems that account for the external costs of urban transport, including those associated with traffic congestion. It would not be appropriate for these systems to be organised at the EC level, but the Commission will continue to fund research and development projects connected with urban road charges. To remove potential obstacles, any EC legislation liable to impede the implementation of these measures should be revised. During the second phase (2001-2004), distance-related fees are extended to include external as well as infrastructure-related costs. The application of these fees in new road concessions makes it possible to introduce a charge system that guarantees cost recovery for new investments. Efforts should also be made to promote the implementation of urban road charge systems that are compatible with the charges for to heavy goods vehicles. During the third phase (after 2004), the common system becomes mandatory. For both heavy goods vehicles and commercial passenger transport, existing charge systems are replaced by harmonised fees based on marginal cost and founded on various instruments including tolls and user fees. Source: European Commission white paper COM (98)466 final dated 22 July 1998: "Equitable fees for the utilisation of infrastructures: a staged approach for establishing a common framework for transport infrastructure charges in the European Union“. A toll system also makes it possible to arbitrate between maintenance and investment. For example, in Italy and France, 27% and 25% of toll resources are respectively allocated to maintenance and operation, as illustrated in the figure below. A toll system therefore makes it possible to fund road maintenance, an frequently neglected aspect when conventional funding arrangements are established. Application of toll revenue in France and Italy (1996) France Italy Taxes and dues Personnel 16% 24% Financial Maintenance expenses operation Financial 49% and expenses personnel 59% Maintenance 25% and operation 27% 7 In this respect, it is appropriate to emphasise the "Norwegian exception", since the Norwegian road authority delegates responsibility for an infrastructure to an ad hoc company collecting toll revenues from users, where that revenue is not used solely to fund work on the concession section, but also provides funding for adjacent roads or public transport. In Norway the location where toll revenue is collected can differ from that of the infrastructure to be funded5. In terms of advantages, it should also be noted that a toll system complies with the principle of territoriality, since users of the infrastructure pay for its utilisation without differentiation according to nationality.6 Furthermore, a toll system can serve to optimise utilisation of the transport network (traffic spread, inter-modal sharing of traffic load, etc.). In this case however, charge systems must meet a number of different and sometimes contradictory objectives (marginal cost charging, cost recovery, maximised profit, etc.). Toll system disadvantages Apart from problems of acceptability (see below), it should also be noted that the introduction of a toll system generally results in reduced socio-economic return for the project (except when there is a congestion problem) since a certain proportion of users are dissuaded from continued utilisation of the infrastructure.7 Furthermore, the introduction of a toll system for an infrastructure induces additional costs related to the construction, maintenance and operation of toll collection facilities. For example, it is estimated that an average of about 10% of revenue is absorbed by toll collection. The frequently quoted problem of a toll system, which in more general terms raises the question of the application of a revenue source, could also be mentioned. Application of revenue frequently escapes any form of democratic control, and also represents an obstacle to the optimised distribution of funding resources. This can lead to a situation where financial (e.g. through backing by collateral)feasibility is emphasised to the detriment of the public interest. Application of toll revenue in Europe Toll revenue from European motorway infrastructures is substantial and represented about € 8.6 billion in 1996, as shown in the following table. 5 For example, in the case of Oslo the toll is collected where the ring-road is crossed and is used to fund adjacent tunnels. 6 See Council directive 93-89 of 25/10/1993 which establishes the legal basis for toll collection and utilization rights at the EC level, replaced with directive 99/62 of 17/06/1999 7 Under saturated conditions, tolls are used to spread demand and enhance the collective balance. 8 9000 8548 8000 7000 6000 5000 4000 4000 3100 3000 2000 1000 870 275 170 133 0 Austria Spain France Italy Norway Portugal Total Annual Toll Revenue in Europe (millions of Euros) It is nevertheless necessary to put these amounts in a proper perspective, insofar as they are substantially below actual needs, and only constitute a minority proportion of road investments. In an EC context, reference should be made to directive 99/62 (previously 93/89), which established a framework for rules concerning vehicle taxes, as well as tolls and fees for heavy goods vehicles exceeding twelve tonnes. Fees (other than tolls)are capped . Article 7.9 of the directive establishes that "toll rates are linked to the construction, operating and development costs of the infrastructure network concerned." However, directive 93/89 merely defines the principle for toll revenue calculation and contains no pointers regarding its eventual application. I.I.2 Toll system functions A distinction must be made between the different functions of a toll system. These principally concern funding and channelling of demand, functions which in themselves can be contradictory. An analysis of the replies to the questionnaire issued to all European road administrations shows that toll systems in all European countries, apart from the Netherlands, provide funding for the construction and maintenance of the road infrastructure in an inter-urban context, but do not have a traffic regulation function. In the Netherlands, the toll system is designed to direct road users toward other means of transport. This means that the primary objective in this country is to control road user behaviour, firstly in order to ease road traffic conditions, and secondly to encourage the use of means of transport such as the railways and inland waterways. Norway recently decided to allocate part of toll revenue collected in Oslo and Trondheim to fund public transport and cycle lanes. These experiments are limited to the urban context. I.1.3 Acceptability of toll systems in Europe 9 The problem of the social acceptability of toll systems must be examined with care whenever an infrastructure is to be placed under toll. The replies received from the European road administrations indicate that the acceptability of a toll system in an inter- urban context is, in practice, mainly dependent on five factors: a. Toll charges Toll charges vary throughout Europe because they are linked to both the socio- economic conditions in the countries concerned, and the extent of construction work required for the concession infrastructure. Toll charges for private vehicles for open country sections vary from about €0.05/km in Italy down to less than €0.02/km in Greece and average about € 0.06/km in France and Spain (since the law of 30/12/1996). Generally, heavy goods vehicle toll charges are two to three times higher than those for private cars. We should not consider an identical mean toll level for all segments of transport demand alone, since a toll system can be adopted where charges depend on the degree of usefulness to the user. Furthermore, reasoning along these lines leads to higher toll rates for long distances (for which the degree of elasticity is generally lower than for short distances). b. Toll collection methods Toll collection methods have an influence on the degree of acceptability of the toll by the user. Regarding electronic toll collection, the principal technologies under consideration in Europe are either dedicated short-range systems where an on-board unit communicates with equipment installed at the roadside or satellite positioning and navigation systems and GSM, where the on-board unit communicates with a satellite. In both cases, care should be taken to ensure that the user recognises the service provided by the electronic collection system, and that the cost of the toll and the technology applied do not create additional difficulties compared to manual collection (particularly with the constraints associated with the protection of privacy). The progressive introduction of electronic toll collection is also a factor that impacts user acceptability of a toll system. The generalised, simultaneous introduction of a toll system on a complete network represents a major political risk. In this case, any malfunction, whether technical (system failure) or "managerial" (commercial and management errors affecting user accounts) would have an insurmountable negative impact on the acceptability of the network toll system. From this point of view, progressive introduction, with the initial selection of certain infrastructures and/or user categories, substantially reduces this risk. It should also be noted that the introduction of a toll system for a road infrastructure can only be considered on the basis of an electronic toll collection system in certain countries. This is the case in Germany, where it is not possible to construct toll stations due to high motorway density and the fact that most motorways transit via densely populated areas, with the consequent necessity of using automatic payment systems for toll collection from the outset. The recommendations of the European Commission regarding electronic toll collection in Europe is perceived as one of the best solutions to the problems of charging road users. All Member States are encouraged to move toward this, as summarised in the following box. 10