Street works completed faster, but how?
The investment needs of public transport are enormous. What funding options are there for projects?
In mid-October, a project company formed by YIT and investment company Meridiam II won a tender for new daycare centres and schools in Espoo. In the tendering process, a service provider was sought for a service package implemented using the PPP (public private partnership) model.
Our project company will be responsible for the design, construction, financing and 20-year maintenance of the buildings to be completed in the next four years. This is YIT’s fourth PPP project and, at the same time, a project in its own category, as our previous PPP projects have been motorways and the client has been the state.
The projects are very different in nature but, as PPP implementations, they share the same multiple benefits: risk diversification, fast implementation of the construction phase, guarantee for the buyer for continued responsible maintenance, and funding by the project company. It is the latter on which I will be focusing in this blog.
Large infrastructure projects such as railways and motorways are not feasible without major funding. In its programme, the current government has promised to explore funding models outside the budget framework, such as the use of project companies in, for example, so-called one-hour train links. The introduction of new funding models is essential if we want to meet the carbon neutrality targets. Naturally, there are many different ways of getting the necessary funding. Road tolls, for example, are very common in the EU, especially in southern and central Europe.
In Austria, with a population slightly larger than Finland, the state-owned ASFINAG toll company sells digital toll stickers to generate a free cash flow of one billion euros a year after expenses, to be used for improving the road network. In Finland, the state collects a large amount in taxes and other statutory charges from road users, but the problem, as far as the transport system is concerned, is that the government refuses to earmark these funds for the development of the transport network.
Road tolls and congestion charges have long been discussed in Finland, but so far there has been consensus against them. Road tolls are an efficient way of financing large projects but, fortunately, there are other ways as well. One funding method suitable for Finland is included in the above-mentioned PPP model. In it, equity typically comes from the contractor and from a venture capitalist willing to take a risk, while debt comes from publicly owned lenders such as the European Investment Bank, the Nordic Investment Bank and, to some extent, commercial banks.
The challenge with PPP road projects in Finland is that the service fees are paid from the state budget framework, which of course reduces the funds available for other development projects. If some or all of the service fees were collected through road tolls, the situation would be different.
In 2018, there were changes in the legislation, which resulted in the relevant provisions of the Business Tax Act and the Value Added Tax Act being applied to all PPP road projects, not just to those that are commissioned by the state. So, today, municipalities and other actors can have projects implemented using a life cycle model that includes funding (PPP). The above-mentioned project in Espoo is the first non-state-commissioned project to take advantage of the changes in legislation.
The advantages of the PPP model are obvious, but the model involves challenges, too. The PPP is a complex model that requires a great deal of financial, legal and technical expertise from the parties involved – including the client. The tendering process is also quite lengthy due to the extensive service portfolio and requires many advisors, which often results in high transaction costs. However, the challenges will be significantly reduced through standardisation of the PPP set of contracts and once the parties gain more experience with PPP. The people who work on the projects play the most important role. A genuine spirit of partnership is essential for all parties to succeed in their goals.
The key word is continuity: the PPP model will become more and more efficient when the expertise acquired through hard work is applied to more and more projects. If the idea is to use the model in one project only, it is better to choose some other method. The PPP is not ideal for minor projects (well below EUR 100 million), due to the complexity of the tendering process and contract structure. However, this challenge can be overcome by combining smaller projects into a single implementation package, possibly by multiple clients.
The repair backlog of the Finnish transport network continues to grow, and funds for development investments are lacking. Funding through the state budget framework is unlikely to reverse this trend. Although the PPP model has provided the solution for some projects, a candid discussion about new funding models is necessary.
Some have advocated the “user pays” principle. Congestion charges and the earmarking of charges and fees already collected for the improvement of the transport network would be in line with this principle. According to YIT’s Sustainable Urban Environments Barometer, congestion charges and road tolls are fairly negatively perceived by ordinary citizens, while experts’ views are divided.
New ideas are needed because of the huge investment needs in public transport – and in particular rail transport – both to improve accessibility on the main lines and to ensure mobility in developing urban environments through urban rail links and tramways. Sufficient private funding for projects is available, we just need the political will to use it.