IATSS Research 36 (2013) 8387

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IATSS Research

Public private partnerships in transportation: Some insights from the

European experience
Francesca Romana Medda a,, Gianni Carbonaro b, 1, Susan L. Davis a
a
b

UCL QASER Lab, University College London, Gower Street, London WC1E 6BT, United Kingdom
European Investment Bank, 100 Bvd K. Adenauer, L-2950 Luxembourg

a r t i c l e

i n f o

Article history:
Received 28 June 2012
Received in revised form 9 November 2012
Accepted 12 November 2012
Keywords:
Public private partnership
Transportation

a b s t r a c t
Most EU member states and the European Commission regard the PPP as an important tool to attract additional
nancial resources for high priority investments such as transport. The objective of this paper is to delineate the
EU panorama of PPP markets and investigate the impacts of EU institutions in the development and success of
this type of nancial arrangement for the transport sector in Europe. We examine how the scope of the PPP in
Europe is based on the exibility and adaptability of the contract to the features of the project and to the economic and institutional environment. These issues are illustrated through a number of examples in the transport
sector. We conclude by observing that the market for PPPs, although still fragmented nationally, is developing
a European dimension and attracting resources from a variety of players.
2012 International Association of Trafc and Safety Sciences. Production and hosting by Elsevier Ltd.
All rights reserved.

1. Introduction
Europe is at present confronted by the increasing necessity to invest in its infrastructure stocks; such investments will be directed to
infrastructure renewal and rehabilitation, above all in the original
member states of the EU, and to construction and development of
new infrastructure in the most recent member states. Two strong
concerns characterize European infrastructure investment; on the
one hand are the population trends such as the advance of population
aging due to increased life expectancy and decline of birth rates and
the migration trends. On the other hand lay the environmental concerns, which include the need to reduce energy consumption and invest in smart city solutions. The development of critical infrastructure
such as transport is therefore part of the investment portfolio, not
only of European public authorities, but also of the private sector.
Given the current economic crisis, however, many European countries
are contending with two divergent policies, the rst of which is that countries are confronted by the necessity to improve competitiveness by

Corresponding author. Tel.: +44 20 7679 1557.

E-mail addresses: f.medda@ucl.ac.uk (F.R. Medda), g.carbonaro@eib.org
(G. Carbonaro).
Peer review under responsibility of International Association of Trafc and Safety Sciences.

Tel.: +352 4379 2761.

investing in transport infrastructure (see, for instance, the debate on

high-speed rail investment in the UK). Secondly, several member states
are compelled to contain their public budgets. These two divergent policy
streams provide countries with a powerful incentive to explore alternative funding approaches to build transport infrastructure and provide
service delivery. As a result, there is a widespread interest in various
forms of private and public involvements that have been developed and
applied widely in the transport sector under Public and Private Partnership (PPP) approaches [13].
Notwithstanding that the 27 EU member states differ substantially
in their social and economic structures and infrastructure endowment,
this should prepare us for the variety of approaches to infrastructure
investment strategy and nancing already in use [4,5]. Within this
context we need to keep in mind that member state governments are
characterized by strongly diverse administrative cultures and capabilities and distinct legal and planning traditions. For instance, institutional
diversity in the transport sector is considerable, with countries adopting
different approaches with respect to user charges and ownership structures. But despite the differences, a framework for what are now referred
to as PPPs has emerged within the European Union. The approach is
certainly well established in the European Union; in fact, from 2002 to
2006 an average annual value of approximately 30 billion euros was
signed under PPP contracts.
Most EU member states and the European Commission regard the
PPP as an important tool for attracting additional nancial resources
for high priority investments such as transport. Many denitions of a
PPP are present in the literature, but we deem the most suitable overarching denition selected by the European Commission, where PPP refers to
forms of cooperation between public authorities and businesses, with
the aim of carrying out infrastructure projects or providing services to

0386-1112/$ see front matter 2012 International Association of Trafc and Safety Sciences. Production and hosting by Elsevier Ltd. All rights reserved.
http://dx.doi.org/10.1016/j.iatssr.2012.11.002

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F.R. Medda et al. / IATSS Research 36 (2013) 8387

the public [3]. Although it is difcult to provide a clear-cut characterization of the evolution of public works nancing methods, given the
variety of initial conditions, we can nevertheless observe a shift away
from conventional traditional models of transportation service delivery
(distinguished by hierarchical decision structures, vertical integration
in delivery, and relatively undiversied funding tools), to a more diversied nancial landscape. The objective of our paper is thus to delineate
the EU panorama of PPP markets, and to investigate the impacts of EU
institutions in the development and success of this type of nancial
arrangement for the transport sector in Europe.
2. Institutional diversity in Europe
Starting from the 1990s, the European Union had two principal
objectives: the achievement of the Single Market and of market
integration; and the preparation for the European Monetary Union
(EMU) (Fig. 1). To achieve these two objectives it was of prime importance to improve the physical integration among European countries,
and increase the accessibility of the peripheral regions by targeting
the network infrastructures energy, telecommunications and transport. In this context the construction of transport Trans-European networks (TENs) assumes a critical role for European integration.
The TEN policy identies 30 transnational transport corridors on the
basis of proposals from member states. The European Union must aim
to promote the development of Trans-European Networks as a key
element for the creation of the Internal Market and the reinforcement
of Economic and Social Cohesion. This development includes the interconnection and interoperability of national networks as well as access
to such networks [3]. However, by 2003 only one-third of the network
had been built, and only three of the 14 specic projects endorsed by
the European Council at Essen in 1994, had been completed. Total
investment in the Trans-European Network Transport (TEN-T) during
the period of 20002006 was 859 billion. At present, the completion
of the TEN-T is estimated at 550 billion until 2020 [6]; it is for this
reason that private sector nance and the implementation of a common
PPP framework is now considered to be essential to the success of
TEN-T development.
Although nearly all the countries in the EU use PPP arrangements,
as we have observed, there are different ways of adopting this policy

due to different cultures and traditions in planning and management

of public works, deciencies in legal and institutional structures, and
political awareness and acceptance of the PPP concept. The UK has the
longest and most substantial experience in PPP agreements; other
countries have followed the British framework and developed pilot
procurements for many years. The two main institutional frameworks
are (1) PPP unit at a central government level, and (2) the promotion
of PPP legislation. In relation to the PPP units, in certain cases these
units have only a consultative capacity, for example, Sweden, France
and Luxembourg; whereas PPP units have a more active role in promoting and facilitating PPPs, for example, Ireland and the Netherlands (Table 1).
Table 1 depicts the different experiences among European member
states. Among transport investments, road is the most common under
PPP agreements, however, only in the UK and Portugal do road PPP
agreements have sufcient breadth and scope to enable them to determine structural changes in the procurement procedure. In new member
states, especially for highway networks, additional investment is necessary due to the transition process, i.e. in order to satisfy EU standards.
The World Bank [7] has estimated a gure of 65 billion over the next
15 years for infrastructure investment in new member states, where
Poland has the highest need for infrastructure investment (21.4 billion).
There are several determinants related to each country's PPP approach. One is the planning determinant, through which transport investment planning is implemented according to the different approaches
which are, in various degrees, systematic. For instance, in some countries
such as Italy, investment decisions are seldom supported by master plans
or cost-benet analyses. Conversely, in the EU there are countries with a
strong transportation planning tradition which is either projectfocussed on CBA, as in the United Kingdom or emphasizes strategic
network development, as in France and the Netherlands. The different
approaches often contribute to the structure of the private intervention
and thus to the feasibility of a PPP framework and institutional arrangement in transport investment.
Fig. 2 species the various institutional arrangements in the European
road sector. The gure presents two columns dividing the different
projects in relation to approach chosen for the user charges (with tolls
and toll-free). The projects are listed in relation to the ownership of the
transport infrastructure (at the top, private ownership and at the bottom,

The Single Market & EMU

Need for increased action in favor of
physical integration and peripheral regions

Need to implement strict budgetary policy

to meet Maastricht criteria

Reduced investment by and increased

efficiency of the Public sector

Critical role of TENs

New Roles for

the Private and
the Public
Sectors
* Increased Commercialization and Competition
* Increased Deregulation & Third Party Access
* Privatization

* Public / Private Partnerships & Risk sharing

Fig. 1. The relationship between Single Market, European Monetary Union (EMU) and PPPs.
Source: European Investment Bank.

F.R. Medda et al. / IATSS Research 36 (2013) 8387

85

Table 1. A summary of PPP experiences in European Union member states.

Member states

PPP unit

Austria
Belgium/anders
Czech Republic
Denmark
France
Finland
Germany
Greece
Hungary
Ireland
Italy
Latvia
Luxembourg
Netherlands
Poland
Portugal
Spain
Sweden
UK

O
X
X
X
X
O
X
X
X
X
X
X
O
X
X
X
O
O
X

Year

Location

PPP law

2002
2004
2006
2005

Ministry of nance
Independent
Line ministry
Ministry of nance

2009
2006
2003
2003
1999
2002

Independent
Ministry of nance
Ministry of nance
Ministry of nance
Ministry of nance
Ministry of nance

1999
2001
2003

Ministry of nance
Line ministry
Independent

1997

Ministry of nance

____
X (2003)
___
X (2010)
___
____
___
X (2005)
X
X
X
X (2009)
___
___
X (2005)
X (2003)
X
___
X

Airport

Ports/canals

Heavy railway

/#

#
#

/#

Light railway/bus

Road

#
#

/#

#
#

#
#

/#
!
!
#

#
#
#
#
#

#
#

/#
#
#
#
#

/#
#

!
!
#
!

Legend
X: PPP unit existing/PPP legislation in place.
O: no dedicated PPP unit.
: In some sectors specic legislation is in place.
__: Legislation being proposed.
#: Some experiences.
!: Substantial number of closed projects.
: Projects in procurement.
Sources: [16] PricewaterhouseCoopers (2004), OECD (2010), UCL QASER elaboration.

public ownership). As shown in the gure, several funding strategies have

been applied in some cases within the same country; for example, in the
UK tradition, public nancing has been implemented alongside BOT concessions. But we can conclude that certainly since the 1990s the trend of
infrastructure nancing has shifted from traditional public provision
to increasing private participation.
3. PPPs in transport some key features
Despite national differences, the rationale for developing a PPP
approach from the vantage point of the public sector is based on
the opportunity to attract additional nancial resources through the

involvement of the private sector, thereby reducing pressure on public sector borrowing and facilitating closer control of capital-spending
budgets. According to various researches [810] efciency gains are
another important main rational for the use of private nance and
private sector skills. Linked to these gains is the possibility of inducing
an efcient service management throughout the whole project life and
achieving design optimality to ensure minimum life cycle costing
contract design is essential. Therefore, a paramount consideration over
the course of the contract is the strategy of transferring risk from the
public sector to the private sector. Risk is allocated to the partner best
able to manage it, and who is best equipped to minimize its costs. This
aspect assumes relevance, particularly in light of contract renegotiation,

Fig. 2. Institutional diversity in Europe.

Source: Luigi Marcon, European Investment Bank.

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F.R. Medda et al. / IATSS Research 36 (2013) 8387

which is often brought about by the strategic behavior of the private sector during the contractual bids, and also by systematic optimistic overestimation of the transport demand [9,11].
The PPP approach can induce indirect effects related to improvements in public sector management. In the partnership the public
sector needs to correctly evaluate transport demand, road capacity
and safety levels; and by so doing it prompts the private sector to
achieve best practice in terms of project design, management and
technical innovation. The public sector therefore benets from the
addition of new operators for instance, specialists in construction
and management in transport infrastructure and also new markets,
such as the emergence of a bond market for transport infrastructure.
The possible benets in a PPP agreement must nevertheless be
weighed against possible disadvantages. In particular is the risk that in
the case of uncongested transport infrastructure, the user charges necessary to achieve nancial sustainability may diverge substantially
from the economically optimal price, which can represent a fraction of
the price necessary for cost recovery. The approaches to user charges
in Europe have been various. In some cases the decision has been to
adopt shadow tolls (as in the SCUTs project in Portugal); others have
adopted a targeted approach in applying real tolls.
Another issue of concern is the funding cost and thus the PPP applicability. Some scholars have indicated that the ex-ante premium on
private nance in road projects is signicant and in line with the cost
overruns in road projects often observed empirically [12]. However, this
observed increase in costs generally indicates that a higher funding cost
is needed in order to compensate private investors for taking nancial
risks, which however, may be structured within an incentive mechanism
in the PPP contractual agreement [9]. Nonetheless, the judgment ultimately depends on whether a reasonable and efcient evaluation along
with allocation of risks to the private sector is achievable in the PPP,
and whether this risk allocation is appropriate from a welfare point of
view [8].
Finally, it is well-recognized that the transaction cost of transport PPP
agreements is higher compared to the transport projects supported by
traditional nancing mechanisms. This situation is due to the high costs
of negotiation and contracting and additional costs for monitoring and
regulatory systems. However, standardization has advanced considerably
in EU countries, in particular countries with long experience of PPP projects, as in the UK, where the transaction costs have decreased over
time [13].
4. Strategic aspects of transport PPPs some illustrations
After the experience of a few toll-based estuary road crossing
schemes, the DBFO model (Design Build Finance and Operate) was
launched in the early 1990s in the United Kingdom as part of the Private
Finance Initiative (PFI). Key features of the DBFO are the application of
shadow rather than real tolls and that the private party normally a
special purpose company is responsible for the nancing, design and
construction of the project and its operation for a number of years. The
solution of the shadow tolls was at that time very innovative. The Highway Agency, which is responsible for transportation planning, project
prioritization, and the selection of the company through a competitive
tender, secures debt repayment and any return on shareholders' funds.
The decision to use shadow rather than real tolls was justied on economic grounds so that users would not be discouraged by the need to
pay for road access, but also by the fact that imposing road tolls in the
UK would have been excessively controversial and politically risky.
The risk transfer to the private sector was very high in the early examples, including not only trafc risk but also delay and civil unrest risks
related to the environmental and planning obligations. The so-called
banding mechanism was devised essentially to facilitate nancial engineering. The mechanism allows bidders to address trafc-related revenue
risks by structuring their offers through variable unit payments the
trafc band in order to achieve the revenue to match foreseen capital

costs and maintenance costs. In a typical DBFO there can be four trafc
bands with the lower band (applying when trafc falls below a certain
capacity), priced at some amount as an availability payment, thereby
guaranteeing that the private sector covers the cost partly at least. More
recently, the payment mechanism has changed in ways that give more
weight to availability than trafc capacity, particularly in infrastructures
subject to intense competition, such as projects in urban road networks.
The DBFO approach has evolved in various concession models in
other European countries. The German road concession model was
conceived in 1994 in order to allow off-balance sheet nancing of transport infrastructure. The approach was essentially a pre-nancing device
with very limited risk transfer, where the main risk transferred to the
private party was a construction risk, i.e. cost and time of completion,
without any trafc risk. Apart from the possibility of off-balance sheet
nancing, the main advantage of this approach was that public payments would be easily tradable on the nancial market and provide
an easy exit for the builder after construction, as well as additional
liquidity to the road construction market.
In 2005 new nancing models were introduced in Germany by
successive legislative amendments similar in substance to a private nance approach; these were the A-model and F-model of PPP. Under
the A-model, a private party can take the construction, operation
and maintenance of a federal trunk road section for a period up to
30 years. The private investor receives funds from the public sector,
part of which can be raised through the revenue from the HVG federal
tolling system. Under the F-model, which has been applied thus far to
schemes like tunnels and xed crossings, real tolls can be applied. In
both cases the maximum amount of public subsidy is limited to a percentage of the overall project cost.
A further example of an application of the DBFO model to the transport sector is in Portugal, where an impressive massive shadow toll program, the SCUT, was launched in the late 1990s. However, by 2004 it
became clear that shadow toll obligations for the public sector, estimated at 660m per year by 2008, were becoming overbearing and thus the
government now plans to convert shadow tolls to real tolls.
Interesting applications of the PPP contracts in the European Union
have been and continue to be projects where the public sector is able
to confer an existing asset to the private sector in order to optimize
risk allocation and achieve the success of the contract by fostering the
private sector capacity in efcient provision, management skills and
entrepreneurship ability. Two examples can better clarify this concept.
The Vasco de Gama Bridge on the Tagus River is one the main projects of its kind recently implemented in Europe; its length is 12 km
(18 km with the connecting links to the trunk road network), 140 m
high central pylons, and 47 m vertical water clearance across the central span. As a key infrastructure for the Lisbon metropolitan area, it
was built according to schedule and within the cost, and opened to trafc in March 1998, in time for the Expo 98 universal exhibition (this was
a key requirement in the concession agreement). Despite the complexity of the project and the long preparation period, the need for a second
river crossing had been apparent since the mid-1970s; the execution of
the concession proceeded smoothly with the international tender in
1992, the selection of the concessionaire in 1994, contract signature in
1995, and works completed in 1998.
The cost was approximately 900 m, covered by shareholder funds
for 12%, the Cohesion Fund for 36%, revenues from the existing bridge
during construction for 7%, a loan from the European Investment Bank
for 35%, and other sources for 10%. The strategic objectives of the PPP
contract were to stimulate development in northern Lisbon and to the
west of the metropolitan region (Montijo) in order to attract inward
infrastructure investment to the city, but above all to reduce the congestion on the existing 25th April Bridge. The Portuguese public sector in
this case has conferred to the private partner the rights not only of the
new bridge but also of the existing asset with consolidated revenue
streams in this case the existing 25th April Bridge for the length of
the concession period. And indeed, the adoption of a unied concession

F.R. Medda et al. / IATSS Research 36 (2013) 8387

of the two bridges is certainly the key to the success of the Vasco de
Gama Bridge project, since this strategy was able to signicantly reduce
the revenue risk of this PPP project.
Another remarkable example of early European project nance is
the Prado Carenage tunnel in Marseille, which is especially interesting
because here again we have a successful PPP example of the public
sector conferring an existing asset to the private party. The project is
an opportunistic project which has exploited an existing unused
former rail tunnel which was converted for light vehicle use and fully
funded through private resources. This was the rst PPP project of its
type in France and the rst example of toll paying infrastructure within
a city. The Marseille municipality was the conceding authority and
the special purpose company was the Societe Marseillaise du Tunnel
Prado-Carenage (SMTPC), comprised by construction companies and
banks. Investment cost was approximately 175m, funded 15% by
shares and subordinated convertible debt and 85% by long-term loans.
Work began in 1991 and the tunnel was in operation by 1993,
ve months earlier than expected. Public reaction, however, was
unenthusiastic and despite a 25% decrease in initial tolls, trafc
remained well below the forecast (22,000 vehicles per day vs 35,000).
However, through a systematic marketing policy and diversied tariff
policy by the private agent in accordance with the Marseille local authority, the trafc target was achieved in year 2000. The Prado Carenage
tunnel is another interesting example of how problems assessing trafc
risks, which are particularly troublesome in cities where users have
access to alternative non-tolled routes, can be overcome by using the
strengths and capacities of the public and private partners towards
the same goal: the success of the PPP contract.
At this point we can conclude by observing that, in the transport
sector in the European Union, the logic of pure project nance, with
project revenues associated to user charges as the only support for investment, is not always easy to apply. It is well known that project benets
only partly translate into the willingness to pay by nal end users. In
fact, project benets can spill into network benets which may be difcult
to capture through revenue streams accruing to a conventional project
vehicle. In addition, trafc and revenues can easily be vulnerable to substantial competition.
For these reasons, the intransigent approach to project nance typical of the early generation of PFI projects in the United Kingdom, with its
radical transfer of risks to the private sector and a negotiating attitude
perceived as excessively antagonistic by private sector operators, has
been replaced by a softer approach with a more realistic assignment
of risk to the private partners. But more importantly, the prevailing attitude is to regard partnership as a long-term cooperative relationship for
which renegotiation of contract terms is acceptable, and where the nature of the public sector contribution ranges from conferring assets to
providing guarantees, to contractual and regulatory measures.
5. Conclusions
It is interesting to recall how a senior speaker from the English National Audit Ofce compared the preparation of project nance operations in the Private Finance Initiative to the art of preparing a fugu
or moon sh, a very well known delicacy in Japan. Apparently, the sh
is a true delight but it contains a powerful poison, and if it is not accurately prepared it will kill the unfortunate gourmand. The message
here is that although PFI and in general PPP deals do not kill, if they
are not well-structured they can cause considerable pain to careless
public promoters. Several European transport PPPs have encountered
problems, from the notorious Eurotunnel mega-project, to failures
such as the VAL-Orly urban rail connection, the Rostock tunnel, the
northern orbital in Lyon, and the Shefeld Supertram, to mention a few.
The main potential benet of the PPP approach in transport as well
as in other sectors is its exibility in adapting the structure of incentives
and risk-sharing to the features of the project and to the economic and
institutional environments. But because of this exibility, it is perhaps

87

unwise to seek a unique model of PPP that can be easily replicated

across sectors and across countries. The choice context PPP or conventional approach is a multi-objective decision. And in practice, the public sector agency has to achieve a judgment about the trade-offs
between the various, and sometimes conicting, objectives.
For public sector promoters the difcult task is to avoid PPP transactions that end up as zero-sum games. An intelligent value for money
analysis should be an essential step in reducing the probability of negative outcomes. Unfortunately, systematic value for money analysis is
not part of the administrative practice in all European countries. However, particularly in the early phases of the process of creating a PPP
market, where price signals for PPP transactions, e.g., cost and credit
pricing signals, are not yet available, value for money should be seen
as an essential step of good practice [14,15].
Against these general conclusions, we can observe that the growth
and structure of the European PPP market in the transport sector has
been determined by several interlinked and mutually reinforcing factors that fall into two broad categories. The rst relates to trends in
the market for transport infrastructure services towards increasing
integration on a continental scale. Not only have construction companies been consolidating into larger companies active in several countries, but transport operators too have extended their operations
geographically. The second category involves the policy and institutional environment, which has facilitated, stimulated and directed
the European PPP approach.
The impacts of the European Union have therefore been threefold,
of which the rst are institutional and regulatory changes such as procurement directives aimed at harmonizing the European market for
concessions. Secondly, the EU has developed and disseminated soft
instruments such as guidelines for PPPs and promoted cross-national
networks of PPP authorities. And thirdly, the EU has promoted the
Trans-European transport networks (TENs) and a number of large-scale
cross-border projects. The EU Commission's proposal to partly guarantee
the debt incurred by private parties to fund cross-border sections of priority TEN projects may indeed encourage private investment through PPP
agreements. The result is a market for PPPs that, although still fragmented
nationally, is developing a European dimension and attracting resources
from a variety of players. The European transport PPP market thus far
can be regarded as an example of how integration may be pursued. It is
a learning process in which the results are controversial but the essential
objectives and advantages are very clear.

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