To the end

EI speaks with Andy Goodwin, President of Transportation, Infrastructure and Environment Group, Poyry, to get his views on some of the key issues impacting European transport infrastructure today?

Characterised by a strong trend toward intermodal solutions, involvement of private financing, and international cooperation, players in the global transportation market will require both a global outlook and an in-depth local know-how in order to succeed.

With extensive and diverse expertise ranging from railbound systems, tunneling and bridge projects to services in the field of traffic and community planning, Poyry is well placed to provide an insight into the challenges and necessities of the evolving transport sector in an enlarged Europe.

INFRA. Now that the EU’s borders are shifting further, it must consider the needs of the newly acceded nations. What kind of infrastructure requirements do the new EU countries have and what problems does that present?
It is always difficult to quantify the needs of such a diverse and large region. Studies that have been undertaken by the European Commission and ERBD have estimated that if the new EU countries were to attain the infrastructure levels of the existing 15 EU countries by the year 2010, then about €500 billion in material infrastructure alone would be needed. This would cover the infrastructure requirements in the key areas of roads, railways, telecommunications, water and sewage, energy and environment. Of the estimated €140 billion that has been spent in these countries up until 2003, the bulkl has gone into the energy and telecommunication sectors, while the transport sector has been somewhat neglected with only about nine percent of this amount.

INFRA. So what challenges do these countries face in improving that infrastructure?
The biggest challenge facing these countries is funding. Most, if not all governments, have infrastructural development plans that outline the key infrastructural projects required to meet the ambitious targets set down in the infrastructural standards of the existing 15 EU countries. However, very few have been able to harness sufficient funding to be able to deliver these projects.

INFRA. Can Public Private Participation (PPP) offer a solution to these funding difficulties?
PPP certainly offers a solution to the funding difficulties, and also provides other advantages such as bringing the operating efficiencies of the private sector to these large projects, improving quality of service, and providing better risk management through improved risk allocation and more incentives to perform.

The key element of a PPP is that it is a partnership between the public sector and the private sector to deliver projects or services that are traditionally provided by the public sector. It makes it easier to place risks with the player in the best position to manage them. However, in a survey published on public works financing, only 55 percent of proposed projects reach financing. The main reasons behind this figure are insufficient or unclear legislation, unrealistic and aggressive bids that lead to a large number of projects being re-negotiated, forecasting errors from poor data, or incorrect assumptions leading to a failed bid and finally the vulnerability of PPP projects to changing political and economic views.

INFRA. And once the project does go ahead, what are the risks?
The main risks facing the concessionaire/investor once the project goes ahead are associated with completion of the project, performance risk due to poor technical and operational know-how, and demand risk as a result of the demand for the service not meeting that predicted.

INFRA. Can the concessionaires turn to international expertise to assist them in reducing the risks, and if so in what areas?
In all three of the risk categories mentioned above – completion risk, performance risk and demand risk – making use of the correct expertise can reduce, and in some cases eliminate, the risk. Minimising completion risk is about the management of the project prior to and during the construction phase. In most instances, the project is contracted out on a lump sum or turnkey basis to an EPC contractor. The services of an ‘owners engineer’ from the outset of the project up until it is handed over by the EPC contractor can dramatically reduce this risk.

Vital elements of the project are the models used for demand forecasting, management of the engineering and supervision of the actual construction project. The risks associated with both these elements can be reduced with the support of expert services.

INFRA. How does your company’s experience support the concessionaires?
The Pöyry Group is has been involved with these types of projects as far back as 1993. We have typically worked for all parties involved in PPP projects, from the lending institutes through to the concessionaires. The kind of services that we have performed include business models and technical advisory services for the lenders, traffic and revenue studies for the concessionaire, design services and construction supervision services for the contractors and overall management of BOT schemes for the owner.

INFRA. Lastly what do you believe are the critical success factors in implementing successful PPP projects?
In my opinion, there are six basic factors that, when taken into account correctly, will greatly enhance the successful outcome of a PPP project. These are outlined below:

• The entire lifecycle of the project must be considered, including feasibility, construction, financing and operation.
• The project is a long-term contract model of upwards of 20 years with at least one public and one private partner.
• The project is defined by output specifications (functional specifications.
• The project risks are transferred to the partner who is able to best manage these risks in the most appropriate and cost efficient way.
• The participating partners must resource up the project with the best available resources (includes personnel, capital and know-how).
• Performance standards of the project should be maintained over the full life cycle, through appropriate use of performance contracts.