The World Bank Ministry of Construction, Japan
Seminar on Asian Toll Road Development in an Era of Financial Crisis
Tokyo International Forum: March 9 – 11, 1999
Proceedings of the Seminar Volume I: Main Text
March 1999
PADECO Co., Ltd. in association with Highway Planning Inc., and Value Management Institute, Inc.
“Exchange of Knowledge” Panel Discussion on the third day of the Seminar
Seminar Venue Tokyo International Forum (Photo courtesy of the Tokyo International Foundation)
Proceedings of the Seminar Table of Contents
Table of Contents
Volume I: Main Text
1 INTRODUCTION...... 1-1
2 OPENING ADDRESS, Session 1-1 ...... 2-1 • Mr. Kei-ichi Inoue, Ministry of Construction, Japan ...... 2-1
3 KEYNOTE SPEECH, Session 1-2...... 3-1 • Prof. Yataro Fujii, Keio University, Japan...... 3-1
4 MAJOR TOLL ROAD ISSUES AND LESSONS LEARNED, Session 1-3 (Text of Speech and Selected Discussion) ...... 4-1 • Dr. Chiaki Kuranami, PADECO Co., Ltd., Japan ...... 4-1
5. ROAD DEVELOPMENT UNDER THE CURRENT ECONOMIC SITUATION IN ASIA, Session 1-4 (Summary of Presentations and Selected Discussion) ...... 5-1 • Ir. Sumaryanto Widayatin, Bina Marga, Indonesia ...... 5-1 • Ms. Hanifah Hassan, Economic Planning Unit, Malaysia ...... 5-3 • Engr. Augusto B. Santos, NEDA and Mr. Godofredo Z. Galano, DPWH, Philippines ...... 5-4 • Dr. Suwat Wanisubut, NESDB, Thailand...... 5-6
6. TOLL ROAD EXPERIENCES IN VARIOUS COUNTRIES, Session 2-1 (Summary of Presentations and Selected Discussion) ...... 6-1 • Mr. Nazir Alli, National Roads Agency, South Africa ...... 6-1 • Prof. Alain Fayard, Lille University, France ...... 6-2 • Mr. Miklós Murányi, State Motorway Company, Hungary ...... 6-4 • Mr. Jun-ichi Matoba, Ministry of Construction, Japan ...... 6-6
7. FINANCIAL PERSPECTIVE, Session 2-2 (Summary of Presentations and Selected Discussion) ...... 7-1 • Mr. Mitchel Stanfield, MSA Infrastructure Consultants, USA ...... 7-1 • Mr. Bertrand Marçais, Groupe EGIS, France...... 7-2 • Mr. Alfred Nickesen, World Bank, USA...... 7-5 • Mr. Jose Luis Irigoyen, World Bank, USA ...... 7-6 • Mr. Michael M. McNeill, Baker & McKenzie, Singapore...... 7-8 • Mr. Thomas A. Doud, Standard & Poor’s, Hong Kong SAR, China ...... 7-9
8. EXCHANGE OF KNOWLEDGE, Session 3-1 (Summary of the Panel Discussion)...... 8-1 • Moderated by Mr. Alfred Nickesen and Mr. Jose Luis Irigoyen, World Bank, USA...... 8-1
9. CONCLUSION OF THE SEMINAR, Session 3-2 ...... 9-1 • Dr. Anthony J. Pellegrini, World Bank, USA...... 9-1
i Proceedings of the Seminar Table of Contents
Volume II: Appendices A through F
A. OFFICIAL PROGRAM OF THE SEMINAR...... A-1 B. BIOGRAPHIES OF THE SPEAKERS...... B-1 C. MATERIALS PRESENTED (Papers and Slides) ...... C-1 D. QUESTIONS SUBMITTED FOR PANEL DISCUSSION ...... D-1 E. LIST OF SEMINAR REGISTRANTS AND INVITEES ...... E-1 F. PHOTOGRAPHS ...... F-1
Volume III: Appendix G
G. SEMINAR RESOURCE REPORT: “Review of Recent Toll Road Experience in Selected Countries”
ii Volume I: Main Text Introduction
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INTRODUCTION
1.1. A Seminar entitled “Asian Toll Road Development in an Era of Financial Crisis” was held from 9-11 March 1999 at the Tokyo International Forum in Tokyo, Japan. It was jointly sponsored by the World Bank (the Bank) and the Ministry of Construction, Japan (MOCJ), and represented one component of the ongoing Asian Toll Road Development Program, Global Toll Road Study, also jointly sponsored by the Bank and MOCJ.
1.2. Over the three days, the Seminar brought together a wide range of leaders, decision-makers, academics, and other influential people related to toll road development, totaling 340 persons from 17 countries.1 The Seminar featured 18 individual speeches and presentations, as well as a comprehensive panel discussion on the last day. Seminar speakers and panelists included MOCJ and World Bank officials, foreign government representatives, academic experts from Japan and abroad, public and private sector toll road developers and operators, and specialists in the areas of toll road finance, regulation, and legal issues.
1.3. These Seminar Proceedings comprise three volumes. Volume I contains this introductory Section and eight others, one for each of the Seminar Sessions. The Official Program of the Seminar is presented in Appendix A. Biographies for all Seminar speakers are given in Appendix B, while all of the papers and slides that were presented at the Seminar are reproduced in Appendix C. The complete list of questions submitted by Seminar attendees for the Panel Discussion is included in Appendix D, and a list of all Seminar registrants comprises Appendix E. Appendix F features photographs taken at the Seminar. Appendices A through F comprise Volume II of the Seminar Proceedings, while Volume III contains Appendix G, a report entitled “Review of Recent Toll Road Experience in Selected Countries,” which served as the Seminar Resource Report and was given to all Seminar attendees.
1.4. Day One: Tuesday 9 March 1999. The morning of the first day of the Seminar featured three brief Sessions. In the first Session, Mr. Kei-ichi Inoue, Director General of the Road Bureau, MOCJ, delivered an Opening Address. He explained that the current Asian economic crisis has brought about a need for discussion on the development of toll roads in the surrounding region, and that the Government of Japan hopes to support these efforts with this Seminar. The second Session featured a Keynote Speech by Professor Yataro Fujii of Keio University, Chairperson of the Global Toll Road Study Advisory Committee. Professor Fujii described how while each country’s experiences and needs are in many respects unique, every country may nonetheless still learn a great deal from the lessons of each other. In this spirit, he went
1 Visitors to Japan for the Seminar came from France, Germany, Hong Kong SAR, Hungary, Indonesia, Malaysia, the Philippines, Singapore, South Africa, Thailand, the United States, and Viet Nam. In addition, embassy staff attended representing China, Colombia, France, Germany, Hungary, India, Indonesia, Malaysia, Pakistan, the Philippines, South Africa, South Korea, and Thailand.
1-1 Volume I: Main Text Introduction on to describe several critical issues that have confronted Japanese toll road planners in the past, as well as those that are currently receiving great attention. Complete English translations of both Mr. Inoue’s address and Professor Fujii’s speech are presented in Sections 2 and 3 of these Proceedings, respectively.
1.5. “Major Toll Road Issues and Lessons Learned” was the topic of the third Session. Dr. Chiaki Kuranami, a Director of PADECO Co., Ltd. and Leader of the World Bank’s consultant team for the Global Toll Road Study, presented the findings of his firm’s eight-month long comprehensive worldwide review of recent toll road experience in 17 selected countries and one region. He identified several key roles for the public and private sectors in each of the countries examined, as well as indicating the extent of the impact of the Asian economic crisis on toll road development in Indonesia, Malaysia, the Philippines, and Thailand. Dr. Kuranami’s speech and the discussion that followed are summarized in Section 4 of these Proceedings. The consultant team’s findings were distributed to all Seminar attendees in the form of a Seminar Resource Report which, as mentioned above, also serves as Appendix G of these Proceedings.
1.6. The entire afternoon of the first day was devoted to presentations on Toll Road Development Under the Current Economic Situation by representatives from four rapidly developing countries in the Asia-Pacific region. Ir. Sumaryanto Widayatin, Toll Road Division Chief for Bina Marga of Indonesia, discussed the extensive toll road reform efforts that are underway currently in his country in the wake of the economic crisis. Ms. Hanifah Hassan, Director of the Privatization Section of Malaysia’s Economic Planning Unit, explained the Malaysian Government’s goals for structuring and supporting the private sector development of toll roads. From the Philippines, Engr. Augusto B. Santos, Assistant Director General of the National Economic and Development Authority (NEDA), and Mr. Godofredo Z. Galano, Director of the Department of Public Works and Highways (DPWH), described the status of toll highway development in the Manila area and related issues. To conclude the day’s presentations, Dr. Suwat Wanisubut, National Transport Planner of the National Economic and Social Development Board of Thailand (NESDB), gave an explanation of the dual agencies in charge of developing toll roads there. Summaries of each of these Country Representatives’ speeches and the ensuing discussions are given in Section 5 of these Proceedings.
1.7. Day Two: Wednesday 10 March 1999. The second day of the Seminar began with a morning-long Session on Toll Road Experiences in Various Countries including South Africa, France, Hungary, and Japan. The first speech centered on the flexible BOT strategy used for toll road development in South Africa and was given by Mr. Nazir Alli, Chief Executive Officer of that country’s National Roads Agency. Prof. Alain Fayard of Lille University in France then reviewed the history and present status of French toll road development. Mr. Miklós Murányi, Development Director for the State Motorway Managing Company of the Hungarian Ministry of Transport, explained the challenges faced by Hungary’s toll road program in its first ten years. The Session concluded with a speech by Mr. Jun-ichi Matoba, Director for Toll Road Coordination in the Road Bureau of the Ministry of Construction, Japan and Chairperson of the MOCJ Steering Committee for the Global Toll Road Study, that detailed the circumstances and policies which have made possible Japan’s extensive and expanding
1-2 Volume I: Main Text Introduction toll road system. Section 6 of these Proceedings contains a summary of these presentations and selected discussion items.
1.8. The afternoon Session on the second day focused on Financial Perspectives related to toll road development. Mr. Mitchel Stanfield, President of MSA Infrastructure Consultants in the United States, began the Session with an overview of innovative financing techniques and issues from around the world. Then Mr. Bertrand Marçais, Senior Executive Vice President for International Affiliates & Development in the Far East for Groupe EGIS of France detailed the myriad of factors that concern private sector toll road developers and operators. From the World Bank, Mr. Alfred Nickesen, Principal Transport Specialist in the East Asia and Pacific Region and Chairperson of the World Bank Steering Committee for the Global Toll Road Study, spoke about Toll Highway Financing and Development in China, while Mr. Jose Luis Irigoyen, Principal Highway Engineer in the Latin America and Caribbean Region, addressed similar topics related to toll roads in Latin America. The final two speakers were Mr. Michael M. McNeill, a Partner with the law office of Baker & McKenzie in Singapore, and Mr. Thomas A. Doud, Associate Director of Standard & Poor’s Ratings in Hong Kong SAR, China. Mr. McNeill examined current issues related to risk allocation in Asian toll road projects, while Mr. Doud explained performance issues and trends in capital market financing for Asian toll roads. A summary of these presentations and selected discussion items are presented in Section 7 of these Proceedings.
1.9. Day Three: Thursday 11 March 1999. At the start of the third day, the penultimate Session of the Seminar brought together a panel of 12 experts for a wide- ranging discussion of toll road issues. The basis for the discussion was a compilation of 39 written questions submitted by Seminar attendees during the first two days. The questions centered upon five main themes: (i) planning and institutional issues; (ii) legal and regulatory frameworks, government support, and public acceptance; (iii) toll rate setting and adjustment; (iv) funding and financing; and (v) electronic toll collection. The Session was moderated my Mr. Nickesen and Mr. Irigoyen of the World Bank, while panelists included: Dr. Bambang Bintoro Soedjito, Deputy Chairman for Infrastructure of Badan Perencanaan Pembangunan Nasional (“Bappenas,” the National Development Planning Agency of Indonesia); Ir. Ghazali B. Md. Nor, Deputy Director General of the Malaysian Highway Authority; Mr. Likhit Khaodhiar, Chief Engineer for Maintenance of the Department of Highways in Thailand; Mr. Asao Yamakawa, Deputy Director General for Engineering Affairs, Economic Affairs Bureau and Deputy Director General of Ministry’s Secretariat, MOCJ; and Prof. Hirotaka Yamauchi of Hitotsubashi University in Japan; as well as Engr. Santos, Mr. Alli, Prof. Fayard, Mr. Muranyi, Mr. Stanfield, Mr. McNeill, and Mr. Doud who were introduced in previous Sessions. A summary of the panel discussion, including remarks and questions from the audience, is given in Section 8 of these Proceedings.
1.10. At noon on the third and final day, the Seminar concluded with a Closing Speech by Dr. Anthony Pellegrini, Director of the World Bank’s Transportation, Water, and Urban Development Department. Dr. Pellegrini first made a few general observations on the long-term nature of infrastructure investments, their concomitant investment risks, and the need for further progress both at the macroeconomic level and within the road sector in terms of institutional and regulatory structures. He went on to identify several areas upon which the Seminar shed some light, both in terms of best practices
1-3 Volume I: Main Text Introduction and needs for improvement. These areas included sector structure, legal frameworks, public sector enhancements and subsidies, and public involvement. His remarks concluded with a summary of possible roles for the World Bank and other multilateral institutions in helping to address these issues. An edited transcript of Dr. Pellegrini’s remarks is presented in Section 9 of these Proceedings.
1-4 Volume I: Main Text Opening Address, Session 1-1
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OPENING ADDRESS SESSION 1-1 MR. KEI-ICHI INOUE, MINISTRY OF CONSTRUCTION, JAPAN
2.1. Good morning ladies and gentlemen, and thank you very much, Professor Koshi, for the kind introduction.
2.2. First of all, I would like to extend my sincere welcome to all of the participants, especially those who have traveled a long way to participate in this Joint Seminar of the World Bank and the Ministry of Construction on “Asian Toll Road Development in an Era of Financial Crisis.” This Seminar is indeed a timely one, and it is a great honor to give you this Opening Address on behalf of the organizers.
2.3. The toll road systems in Japan started in the 1950s. It was the time when the signs of recovery from the devastation of World War II had finally emerged, and rapid social and economic developments had created a strong demand for road network improvements along with a great need for the development of other infrastructure. Gasoline taxes and other earmarked taxes were introduced in order to finance general road development. The toll road method was also adopted in order to develop the expressway network.
2.4. In order to finance expressway development the government decided to seek loans from the World Bank, and in 1956 it requested the World Bank to conduct a feasibility study. This study, the “Watkins Report,” is well-known here in Japan and begins with a famous phrase stating that “the roads of Japan are incredibly bad and no other industrial nation has so completely neglected its highway system.”
2.5. This statement had a great impact on the development of road systems in Japan. A World Bank loan was granted for the Nagoya-Kobe Expressway as the first step to develop Japan’s expressway network plan, which now extends 14,000 km. Currently toll expressways are constructed utilizing road bonds, treasury investments, and loans along with subsidies from central and local governments. The loans are then repaid with toll fees.
2.6. Seven thousand kilometers of inter- and intra-urban toll expressways are now in operation, accounting for approximately 10 percent of the national road system in length. More than six million vehicles use the expressways on a daily basis.1 At present, about 2,300 km of expressways are under construction.
2.7. In fiscal year 1998, approximately 22 percent of the total road investment of 13 trillion yen (US$110 billion) was allocated to toll road development. However, our toll road system is also confronted with some problems such as difficulties in raising toll
1 This is the total of both national and metropolitan expressways.
2-1 Volume I: Main Text Opening Address, Session 1-1 rates or construction of expressway sections with far less traffic, which calls for broad discussions about the toll road system in Japan.
2.8. Until 1997, East Asian countries had enjoyed rapid economic growth called the “Asian Miracle.” However, the currency crises in 1997 triggered the current economic recession. As basic economic infrastructure, toll road development needs financial and institutional restructuring. I sincerely hope that this Seminar will provide us with a good platform for the exchange of information to further promote the future development of toll roads in Asia.
2.9. The Ministry of Construction will continue to cooperate with the World Bank and other international institutions as well as Asian countries. We hope that this Seminar will be the first step towards further mutual cooperation.
2.10. Thank you very much.
2-2 Volume I: Main Text Keynote Speech, Session 1-2
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KEYNOTE SPEECH SESSION 1-2
Economic Development Stages and Toll Road Systems Professor Yataro Fujii, Keio University, Chairperson of the Global Toll Road Study Advisory Committee
3.1. Preface. The topic of this seminar is the development of toll roads under the Asian economic crisis. Different countries have different issues related to toll roads depending on the status quo of each and every country. The countermeasures will vary from one country to another. Even in a particular country, for example in Japan, we are currently facing some toll road issues and the nature of the problems is different from 10 years ago during the bubble economy age. Japan has also common issues that it shares with other Asian, European and African countries as well as the U.S. That being the case in my keynote address, I would like to talk about the evolution of toll road depending on what stage of economic development each country is at. Through this discussion, I hope that we will be able to shed light on the toll road issues to be resolved in the future. Under the toll road system, Japan has developed her expressway networks. Using Japan as a model, I would like to elaborate on some of the patterns. In the country profile, other details about the system in Japan will be provided by the Japanese representatives. So there might be some duplication, but firstly I would like to briefly touch upon the situation of this country.
3.2. Economic Development and Roads. It is needless to state that there is a close relationship between the economic growth and the development of transportation infrastructure. The availability of efficient transport system is essential to foster economic development and as the growth rate of the economy increases, higher quality of transportation service is demanded. The importance of highway transportation is commonly increasing in the world.
3.3. I'll mention about the Japanese situation. Please take a look at this chart which shows trends in transportation by mode (Fig. 1 [please refer to Appendix C of these Proceedings for all Figures]). The left figure is for cargo and the right for the passenger volume. As you can see, Japanese transportation system depends on the geographical situation, a long archipelago nation. In terms of passenger volume, as domestic airlines have developed for long distance trips and highway transportation has taken passengers of short and middle distance market, the railway passenger volume has decreased. However, Japan still maintains some volume in railways due to commuter trips in large urban areas and long trips on intercity trunk routes. As for freight, we can see that 50 percent of cargo traffic in ton-km unit is registered by coastal shipping. Of course ships carry only bulky cargo. The share of railways has decreased less than 5 percent in cargo traffic. Road transportation is the supporting mechanism of economic growth, which is the commonality Japan shares with many countries. As mentioned by the Director
3-1 Volume I: Main Text Keynote Speech, Session 1-2
General of the Bureau of Roads, after World War II. Japan has developed the expressway networks and there has been much improvement in the field of ordinary roads. However, Japan has achieved the development level a little behind of that in highway developed countries and still has some challenges ahead.
3.4. Expressway and Toll Systems. Next, I would like to talk about toll roads. Please take a look at Fig. 2. With the increase of traffic volume after economic growth, high quality road services are being demanded by the consumers. This chart shows the relationship between GDP and roads; the bar graph shows GDP trend and the blue line on the top shows the ordinary road length and the green one shows the increase of the expressways. When you look at the Japanese road networks, the increase of expressways is roughly comparable to the economic growth. That means that the expressways are necessary in fostering economic growth, and in line with it, there is further development of networking of expressways. If there had not been any development of expressways, Japan would not have been able to develop economically under international competition as it did in the past.
3.5. Needless to say in order to construct expressways we need a lot of funds and also we need a long period for construction. We have other social infrastructure items that must be handled, for example the flood control, soil enrichment of agricultural land, metropolitan infrastructure and so on. Therefore, Japan could not just concentrate on the expressways but also in other fields including the ordinary roads as well. The ordinary roads are also important as the access routes to the expressways. If there is insufficient access, the expressways will not be fully utilized. Thus we have to secure a great deal of funds but there is a limit to public funds. If we wait for the availability of public funds, we might not be able to survive in the international competitive environment. And so, Japan decided that it should secure some sources added to public funds to come up with capital required to construct expressways.
3.6. By providing high service in terms of the quality to the customers and by imposing toll fees, we will be able to come up with a good expressway system and we can be fair to the users and the taxpayers. On the expressways the access points are controlled, so there will be rational cost in collecting toll fees. Under the shortage of funds in the developing stage, the toll system is a good alternative to evolve expressways rapidly which was the decision set by the Japanese government. There are some measures of funding ; BOT financed by domestic and foreign private capitals or partial/full participation of public agencies and so on. Which measure will be implemented depends on the development stage of the country concerned. In Japan, the core is the finance system of borrowing the government investment reserves and by developing toll expressways, we have been able to provide services and configure the necessary infrastructure.
3.7. Stages of Development and Toll Systems. Now, I'll explain about the development stage and toll road advancement relationship. As mentioned before, in this country, by 1950 the coverage of roads was rather vast. However, in terms of the quality, it was hopelessly low. This is a picture (Photo 1) taken about 50 years ago. Such scene was not an exception. This kind of event occurred from day to day. As the Director General of Roads referred to, in the "Watkins Report", it was stated that there were no roads in Japan but only "would-be-roads" . In the metropolitan area, this picture (Photo 2) shows status quo back then. We had tramcars in the past as you can see their
3-2 Volume I: Main Text Keynote Speech, Session 1-2 tracks in the forefront of this picture. In order to put an end to this kind of situation and increase the capacity, the Japanese government implemented earmarked fund of fuel tax for public roads. In terms of the expressways, they introduced the toll system, so Japan could have rapid development in this field. That was a mixture of high-level and low- level road development strategies and by adopting such two-fold system we were able to foster economic growth. This high/low mix has been effective for the improvement of public roads and the development of expressways.
3.8. Japan had rapid growth up until the first half of the 1970's, thereafter we experienced the oil crises. It was also recognized that there was a problem of excessive concentration to the Tokyo metropolitan area. Then after, from the first half of the 1990's, we have again encountered stagnant economic growth and we are currently facing environmental issues, which require sustainable development. Due to those changes in the market conditions, the toll road policy and management must be reviewed as well.
3.9. As mentioned before, the role of the toll road varies depending on the development stage of each and every country. Therefore, the strategy will be different from one stage to another. That must be well understood by the government and so that effective policies can be selected by the government in promoting the evolution of their own toll roads.
3.10. The toll road development could be divided into three stages. I would like you to see Fig. 3. The first stage is the individually planned projects and the second one is the networking stage. The third stage is a shift in focus from construction to management of the networks. In the third stage, we will move from the quantity-expansion to the quality-oriented phase. Again, I would like to use Japan as a model to explain those stages.
3.11. Stage 1: Individually Planned Projects. Let's start with Stage 1, "individually planned projects". The first toll expressway in this country, Meishin Expressway, was opened in 1963 between Nagoya and Kobe which extended for about 190 km. Back then we had to work in developing infrastructure in various fields as mentioned before. We borrowed $80 million from the World Bank for that route. That was about 25percent of the its total construction cost.
3.12. At the beginning of the plan, we invested in the areas where we could have a return of investment via toll fees. So we just concentrated on the areas with heavy traffic. In 1963, the national income per capita of Japan was about $ 570 considering the exchange rate at that time. After that, the number of vehicles increased quickly. It is true that in the expressway planning much emphasis was placed on long haul trucks. Traffic of trucks were often overestimated and private cars underestimated. However, when you look at ton-km base, a large share of road cargo is bore by the expressways.
3.13. When you look at Stage 1 of Fig. 4, the dark black lines, they were the planned routes back then. Tokyo was the key and then several radial expressways were extended in linear pattern. They were managed on a route by route basis and the toll rates were varied depending on the profitability of each route. The toll rate was set based on the redemption principle. Under this principle, revenue and expenditure of a route should be balanced over the redemption period (30 years at that time) as a whole regardless of
3-3 Volume I: Main Text Keynote Speech, Session 1-2 annual balance. At the early years, we have less traffic, so under this principle, we can reduce the burden on those years. As the traffic volume increases and settles down, we can raise the rate to be born by the users. This will be an appropriate pricing rule for long term investment such as transport infrastructure, but it is essential to secure sufficient funds during the redemption period.
3.14. Fig. 5 shows the cash flow of Meishin Expressway. On the top, you see the revenue and at the bottom you see the outstanding debt. In the middle, the annual repayment is drawn. The figure shows that the all the debts of the route have already been repaid. But the route is still imposed toll fees.
3.15. In terms of the BOT system using private funding, depending on the span of redemption period, and also the risk related business including country risks, whether private funds will invest or not is decided.
3.16. Stage 2: Formation of Network. Next, I would like to explain about Stage 2 "formation of network". Please refer to the right hand side of the chart (Fig. 4). As the economy grows, the expressways will be inter-connected with each other to form networks. So that, the road networks will become more efficient. From the social point of view, individually planned projects in Stage 1 have two problems. First, we can't expect to realize full network effects, and second, there may leave many regions that can't get any direct access to expressways.
3.17. What I mean by the first point is that when the transport infrastructure is developed based on the network concept, the benefit could be larger than the total of summing up the benefits of the individually planned projects. If the convenience increases then we can expect an greater increase of traffic. However, the benefits to the other route are the external effects, so that the investment incentive may not be sufficient. When two routes are connected with each other, the traffic of each route can increase and total project as a whole could be valuable. However, when the route is independently managed without the connections, then it may not be profitable enough.
3.18. The second problem concerns the gap of development in two groups of regions, one with highly advanced expressway networks and the other without expressways. There are two cases that we need to consider. The first case is that even in the region which has a growth potential, provided that an expressway is constructed, such an investment could be risky, especially for the private sector to participate. The second case is more controversial one that we need to consider equity as well as efficiency. It may be argued that the government has to provide equal opportunities to use expressways for any region. From the social point of view, that is to say, the merit wants must be considered.
3.19. In 1966, in Japan, the government determined the plan for 7,600 km expressway networks covering the nation, which is shown on the Fig.4 and most of them have already completed. The standard or criteria behind the plan will be explain tomorrow under the country profile presentation. In short two basic principles were there ; firstly the expressway systems should be developed for cities with a population of over 100,000 nationwide to be directly linked with them. Secondly, from anywhere in Japan, the nearest expressway interchange must be accessed within 2 hours. In other words, the basic concepts of the criteria were efficiency and equity. Thereafter in 1987, 7,600 km
3-4 Volume I: Main Text Keynote Speech, Session 1-2 plan was revised, when the government decided to develop a multi-centered economy with the new plan of a high standard trunk road network program stretching 14,000 km (Fig.4, at the bottom of the left hand side). One of the reasons why the former plan was revised was because time became more valuable for people due to high incomes. In 1966, the national income per capita was about $ 840 at exchange rate back then, and in 1987 about $ 16,800. Therefore, they decided to replace the 2-hour access to the nearest interchange with one hour access. This again reflects the fact that toll road plans have changed according to the growth stage of the economy.
3.20. In order to realize such conceptual design of the nationwide networks of expressways, it is required to construct them even in light traffic areas, which is rather risky for investment. To construct such routes, we need to secure a sufficient amount of funds. Therefore, a two-fold institutional design was made. That is to say, a cross- subsidization system had to be established. The revenue out of the existing trunk routes would be utilized to cross-subsidize new projects. The second measure was an increase of public funds. The cross-subsidization system was realized in 1972 by replacing the individually managing system with the financially integrated one of the whole networks. For instance, in the case of Meishin Expressway, as you have seen, before 1990 all the loans and borrowings were repaid. Nevertheless, the same level of the fees is still applied to the route. That is argued partly because this system results in absorbing the fluctuation and the change in cost due to inflation depending on the timing of the construction of the roads. This means that the part of the capital gain accruing from the existing routes due to inflation should be recycled back to the whole society. With this so-called "pooling system", the revenues and expenses of all routes have been accumulated as a whole, and the same toll rate has been applied to all routes. Of 14,000 km plan, 11,520 km routes were designated to be constructed and operated under the pooling system.
3.21. Excessive cross-subsidization could lead to quite inefficient and could be unfairness among users. Sometimes people complain and point out the question of why users in Tokyo have to pay for the construction of routes in Hokkaido, the northern part of Japan. In order to avoid excessive cross-subsidization or excessive inefficiency, a limit or ceiling is applied to the cross-subsidization ratio, namely cross-subsidization for a deficit-ridden route is limited up to 1/2 of the total cost of the deficit route. The balance has to be covered by the toll revenue from the deficit route and if it is not sufficient to cover the deficit, then it has to be supplemented by the government money. On the other hand, the amount of the cross-subsidization fund from a profitable route is also applied with the ceiling that should be up to the reproduction cost of the profitable route. Thus, clearly defined ceilings have been applied to cross-subsidization for operation to make up for the disadvantages of inefficiency and inequality, while at the same time expanding expressways networks over the country as soon as possible. This is the rational motivation in making active use of cross-subsidization in Japan. There are other cases overseas like France. I am sure the speaker from France will give us a report including this topic.
3.22. In the meanwhile, however, for financing the networking projects of expressways, an advantageous condition has existed for this country. For the construction of toll roads we need to secure a stable supply of funds. To do that, as public funds, Japan has the treasury investment reserves or "zaitou" in short. The majority of construction funds other than toll fee revenue has been financed by "zaitou"
3-5 Volume I: Main Text Keynote Speech, Session 1-2 which comes from public reserves operated by the treasury based upon the postal saving and pension funds. One of the statutory uses of those reserves is the construction of expressways. With those secured funds, the financing of construction has been well stabilized, not substantially affected by business fluctuation. "Zaitou" has made a significant contribution to the development of various infrastructure projects, not just limited to roads. However, on the other hand, some point out that public projects may be expensive with such stable sources of funds which could result in less incentive for efficient construction and operation.
3.23. To respond to such criticism, we need to secure transparency and bidding process, and provide information about the projects operating toll roads. The other problem associated with "zaitou" is that, it is also expected, as a tool of macro economic policy, to function as the supplier of funds for the economy such as in the case of recession. Even when the market is going down, the public projects tend to be expanded to stimulate the economy. Therefore, there is the possibility that toll road construction is used for political purposes. Nowadays Japan is going through administrative and fiscal reforms, and the postal operation is planned for reorganizing to a public enterprise. So the future of "zaitou" or treasury investment reserves may be somewhat uncertain.
3.24. Stage 3: A Shift From Construction to Management—Addressing Bottlenecks. Turning to the third stage, in Japan, for the planned 11,520 km of toll expressway networks. Ever since its first opening in 1963, after 35 years, the total length of expressways has exceeded 7,000 km. In addition, by extending the redemption period (40-50 years) and by increasing public funds, another 2,000 km will be completed without raising toll rates. Thus, Japan is now coming into the later stage of the network formation. Would be construction progressed to this extent, the major focus is going toward the efficient management of the networks. "Management" is not just to the efficient operation of the projects alone, rather it has to ensure that the networks are effectively utilized that bottlenecks in the networks have to be removed. Such bottlenecks in the networks are unavoidable in some extent due to the growing traffic and the agglomeration of activities. At the same time, we need to prevent a worsening environment along the periphery of the roads and we also require to secure redundancy in case of disasters like big earthquakes.
3.25. Especially for the major trunk route between Tokyo and Kobe, which includes the Meishin Expressway, a second paralleled expressway is now in the course of construction. We also need to complete a ring expressway in the Tokyo area. I mentioned the pooling system as the instrument of cross-subsidization for construction of rural routes. However, nowadays, it is increasingly taking a role of providing the fund for removing bottlenecks in the highly concentrated regions.
3.26. If I put differently, the nature of the cross-subsidization system in Japan has been changing. For the construction of the routes in sparsely populated areas, there is a rational for investment of public money. In the case of densely populated areas for the elimination of bottlenecks, in the long run, such projects have to be paid by users as beneficiaries. However, in those areas that are prone to bottlenecks the cost of the sites and environment related expenses are high and the construction time is consuming. Thus the polling system is expected to take a new role.
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3.27. Investment into highly congested routes can take on less risk for forecasting demand. Therefore, this could be attractive to private investors. In the case of Dartford Bridge on M25 in U.K., the existing tunnels are financially connected with the new bridge constructed by private funds. It is subject to the integrated toll fees, in a way it is considered to be a kind of the pooling system.
3.28. In the short run, we also need to consider how to control the demand by adjusting the toll rate. For instance, different toll fees apply depending on the time of use. Nowadays, electronic toll collection systems are under testing for introduction into nationwide networks in Japan. With this system, it is possible to set the toll fee in a flexible manner as in the cases of the peak-load pricing in Singapore and other countries.
3.29. Conclusion. So far, I have explained the change in the system of the toll road development according to the stages of economic growth of the society and expansion of the networks.
3.30. Another aspect that I would like to add is that the construction of road infrastructure is for the investment to improve business environment that is not a direct productive activity in itself. Of course, when the road is constructed, the input effects (multiplier effects by inputs for road construction) can arise out of the investment. However, once the construction is over, such input effects would be discontinued. Challenge in the long run is to secure the utilization of the new high capacity and high quality road service. But those output effects (ones from using service of the constructed road) are not always guaranteed.
3.31. Suppose that there is city A and then 50 km away from it, there is town B which is sparsely populated (Fig. 6). Those two towns produce the same product. Suppose that product produced in city A costs $100 per unit through the scale economy and $130 per unit in town B. The transportation cost is $1/km. In town C which is 40 km apart from city A and 10km from town B, the cost of the product including transportation cost will be $140 come from city A or town B. Thus town C is a market border and the places between town B and C are in the market area of B. What would take place if the road is improved to stimulate the development of the rural town B, so that the transportation cost is now $50/km. In this case, the product from town B could be less expensive in town C than before the road improvement. However, even in town B, the product from city A would become $125. That means that eventually town B would lose all its market to city A, and also result in bankruptcy of its own manufacturers.
3.32. Therefore, investment for transportation infrastructure for local development could produce adverse effects, which are due to a failure to change the structure of the local economy according to road investment. In other words, in order for the expressway investment to be effective enough, there have to be other public investments such as access roads, industrial site betterment, water and sewage etc., that make the improved location attractive to private sectors. If those social infrastructures are not sufficiently developed, then the regions can not attract the private sector, so we can not expect output effects out of the road investment. Therefore, whether the toll road is profitable or not, and whether the traffic is sufficient or not also depends on the size of the package of other public investment projects.
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3.33. That indicates the need for public-private partnerships and on the part of the public, to be required to play a role of limiting investment risks for the sake of private partners. By pointing out the need for public-private partnerships for realization of the benefits out of toll road construction, I would like to conclude my presentation. Thank you.
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MAJOR TOLL ROAD ISSUES AND LESSONS LEARNED SESSION 1-3 (TEXT OF SPEECH AND SELECTED DISCUSSION)
Review of Recent Toll Road Experiences in Selected Countries Chiaki Kuranami, Director, PADECO Co., Ltd., and Leader of the World Bank’s consulting team for the Global Toll Road Study
4.1. Background of the Study. Many countries throughout the world have already turned to tolls as means of financing highway development. Developed and developing countries throughout the world have accumulated a diverse base of experience with respect to the building and operating of toll road systems. Some of these countries, however, do not yet have clear visions and strategies for the future development of their toll road networks. For this reason, the policymakers of these countries may wish to learn the lessons derived from the successes and failures of toll road development in other countries. Recognizing this, the World Bank, in collaboration with the Ministry of Construction of Japan, has launched an Asian Toll Road Development Program. This study is intended to be its first critical component.
4.2. The Consultant Team has spent the past eight months visiting selected Asian countries, talking to individuals in toll road related agencies, financial institutions, toll road operators, construction firms, law firms, credit rating organizations, and a variety of public sector agencies. We have reviewed 18 economies with specific emphasis on selected East Asian countries. The experience of toll road development in each of these 18 economies has been summarized in Part III of our Seminar Resource Report. The study identified issues and lessons in toll road development with specific emphasis on the areas of institutions, regulatory frameworks, and financing issues. It is anticipated that this Study will provide opportunities for individuals and organizations involved in toll road development to discuss the future progress of their systems and obtain clearer guidance from the experience of other countries.
4.3. Trends of Toll Road Development in the Case Study Countries. While some countries have historically avoided charging tolls for public roads, at present, nearly all have turned to tolls as a preferred means for financing highway infrastructure investment. One of the major reasons is budgetary constraints on the public sector. Over the last two decades the demand for high-standard highways increased substantially in East Asian countries such as China, Malaysia, Indonesia, Thailand, and the Philippines. This was a reflection of rapid economic growth and increasing levels of vehicle ownership and use. Each of these countries adopted private sector concessions as their main approach for designing, building, financing, and operating toll roads. For example, in 1966, Malaysia was one of the first countries in the region to introduce toll roads. China now has nearly 5,000 km of toll roads in service. In the last ten years the private sector has become increasingly involved in each of these countries, although
4-1 Volume I: Main Text Major Toll Road Issues and Lessons Learned, Session 1-3 public sector highway authorities were the main actors in the early stages of toll road development. At present, the majority of ongoing and planned toll roads in all of these countries involve the private sector.
4.4. East Asian Countries. The recent financial crisis in East Asia has had a variety of consequences for toll road programs. The degree of impact has so far been the highest in Indonesia, relatively high in Thailand and Malaysia, and relatively low in the Philippines and China. Traffic volumes are down in Indonesia, Thailand, and Malaysia, but have not changed significantly in China and the Philippines. Most of the countries are experiencing financial turmoil manifested by currency devaluation, rising interest rates, and a banking sector struggling with an increased volume of non-performing loans. In recent months, the Asian financial crisis has appeared to affect China as well. For example, in January of this year, the Guangdong International Trust and Investment Corporation went bankrupt, leaving 4.3 billion United States dollars in unpaid debts. This financial institution had provided a cash-flow deficiency guarantee for repayment of loans to the Guangzhou-Shenzhen Super Highway Project. In Indonesia, all toll road construction work has been suspended, and projects at the planning stages have been postponed or canceled completely. In Malaysia, work is continuing but the basic terms and conditions of many projects are now being re-negotiated and project specifications re-designed. In many ways, the financial crisis has brought forward new issues in terms of the role of government in toll road development.
4.5. Countries with Developed Toll Road Systems. France, Italy, and Spain have advanced, well-developed toll expressway networks, and they each provide valuable lessons. France initially made a commitment to using tolls for financing motorway construction by semi-public companies, but later moved towards a policy of more extensive private sector involvement. However, partly as a consequence of the energy crises of the time, the French motorway system was confronted with a serious cash deficit problem in the 1970s and 1980s. In response, the French government partially nationalized the private toll road companies in the early 1990s. France is also known for pioneering the technique of toll road development through cross-subsidization. Over time, the concession companies have been expected to subsidize new and more costly routes with operating surpluses derived from older, more heavily traveled segments that had been built at a lower cost. In return for developing new motorways, the operators have been granted extensions in the periods of their older and more profitable concessions. Italy has undertaken toll motorway development by granting of most concessions to companies controlled, at least in part, by public bodies. The toll road program in Spain has changed over time from the development of a private sector concession-based system, to a system of government-funded toll-free roads. However, in response to recent budgetary stringency, the Spanish government has again become more amenable to private involvement in toll road development.
4.6. Unlike France, Italy, and Spain, Japan has followed a consistent policy of toll expressway development through public corporations. A system of “toll revenue pooling” involving internal cross-subsidization for the entire national expressway network has made it possible for Japan to develop more than 9,000 km of toll roads throughout the country over 6,400 km of which are toll expressways.
4.7. In the United States toll roads played an important role in the early development of the country but particularly in latter half of this century most interstate highways and
4-2 Volume I: Main Text Major Toll Road Issues and Lessons Learned, Session 1-3 urban expressways have been developed as untolled facilities. Since the 1980s, however, there has been a renewed interest in toll financing for highways. Recent innovative financing initiatives have involved public-private partnerships between state governments and private sector highway development consortia.
4.8. Latin America and Other Countries. All of the Latin American countries reviewed in this study have been actively engaged in concessioning road infrastructure projects to the private sector. For example, since the early 1990s, the government of Argentina has granted private firms the right to collect tolls on some of the country’s main highways in return for the duty to carry out a program of maintenance, rehabilitation, and construction. But, the latest program there calls for the development of a new 10,000 km national highway network using public sector funding. In Brazil, a 15,000 km toll road concession program is being implemented at both the Federal and State levels, although the ongoing devaluation of their currency is likely to delay the ambitious development schedule. Chile has also been actively engaged in concessioning road improvement projects to the private sector, and it plans to build a modern toll-motorway network using BOT-style concessions. And in Colombia the Government has awarded a dozen concession contracts for the rehabilitation and construction of highways, and is currently targeting the modernization of 4,900 kilometers of national highways. Mexico initiated one of the world’s most extensive privately concessioned toll road programs in 1989. This followed several decades of limited results in building state-run tolled and free highways. After completing more than 5,000 km of new concessioned highways in only five years, financial instability brought the concession program to a standstill in 1995. A comprehensive restructuring of the program cost the Mexican Government about eight billion United States dollars. Current plans call for a re-privatization.
4.9. In Central Europe, Hungary adopted a BOT approach to develop a toll motorway network in the early 1990s. Hungary’s pioneering experience with BOT, however, has not been without difficulty, and the current plan is more along the lines of a public-private partnership approach.
4.10. China’s Hong Kong Special Administrative Region adopted a plan for the private development of public infrastructure at an earlier date than many of its neighbors. Its first privately built and operated toll tunnel opened in 1972. While the government utilized lease-type structures in their initial projects, they have lately been adopting a more standard BOT-style approach with more sophisticated mechanisms for toll adjustment.
4.11. In the United Kingdom, due to legal restrictions and strong public resistance, direct assessment of tolls has only been used for bridges and tunnels. All British motorways currently in operation have been funded from Central Government sources, but the Government is now promoting the use of the Design-Build-Finance-Operate or D-B-F-O mechanism to encourage increased private financing of roads. Similar to a BOT arrangement, the D-B-F-O strategy calls for the development and maintenance of a road segment to be transferred to the private sector for a specified period of time. The difference is that under a D-B-F-O arrangement, the concessionaire typically provides the facility and the services to the Government in return for the receipt of so called shadow tolls that are based on highway usage and the availability of the facility.
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4.12. Issues and Lessons. Each of the 18 selected economies reviewed in this study has its own unique institutional and regulatory frameworks reflecting their respective social, economic, and political environments. This in turn has influenced the form of toll-road investment decisions by the public and private sectors. This Study has interpreted both successful and unsuccessful examples in this context. Throughout our report, the term “best practice” has been used to suggest the following four points: first, the goal of delivering economic efficiency―that is cost-effectiveness and the best use of resources; second, optimal achievement of objectives; third, transparency and accountability of decisions and procedures; and fourth, adherence to the highest principles and ideals. The study identified the following nine key issue areas:
• planning and institutional; • legal and regulatory; • concession contracts; • government support; • traffic forecasting; • setting and adjusting of toll rates; • financing structure and sources; • public acceptance; and • the role of donor agencies.
Also there are a number of sub-issues identified under these nine main issues as presented in detail in the Seminar Resource Report.
4.13. The first issue relates to Planning and Institutional Issues. The countries with successful toll road network development usually have a well-established strategic planning framework. Less successful countries exhibit weakness in this area. France, Italy, Japan, and Spain, on the other hand, regularly update national toll road network development plans that are supported by appropriate legislation. A strategic planning framework incorporating network analysis is important to optimize the benefits and minimize the costs of toll road development. Components of such planning should include: (i) refining the strategic road network and the most appropriate alignments of the key links; (ii) firming up the appropriate timing of construction of individual links based on corridor studies; and (iii) establishing clear economic and financial viability.
4.14. Cross subsidization appears to be a useful mechanism for network expansion as demonstrated by the experience here in Japan, where a system for pooling toll revenues has been used to cross-subsidize unprofitable routes or segments. At the same time, the system allowed relatively consistent toll levels over the network. France constructed an extensive motorway system connecting all of its primary cities and many of its secondary urban centers using a system of cross-subsidies within companies in the 1970s and among companies in the 1980s. This strategy resulted in expansion of the toll road network and toll harmonization.
4.15. For toll road development, there are several possible different institutional forms. Toll roads may be developed and operated by a government agency, a public corporation, a private sector concessionaire, or a public-private partnership (or PPP). The existing arrangement of operating entities in each case study stems from particular political and historical backgrounds, and each approach presents certain advantages and disadvantages. A key challenge is how to offset the disadvantages inherent in each form
4-4 Volume I: Main Text Major Toll Road Issues and Lessons Learned, Session 1-3 of operating entity. Accountability of private sector involvement is also important. When a private sector approach is adopted, it is essential to assess whether the approach is able to assure maximum performance for taxpayer funds. In this context, the DBFO approach of the United Kingdom may present a best practice. The cost of the private sector approach and the cost of the public sector approach are officially compared to assure that less public money is used in the private sector approach while obtaining the same output.
4.16. The second issue relates to Legal and Regulatory Frameworks. There is a general need for well-drafted laws and regulations. As demonstrated, for example, in France, Japan, and the United States, well-drafted laws and regulations have proven necessary for successful toll road development. Here in Japan, public corporations have been established under well-drafted laws, and strategic nationwide toll road plans are also clearly defined every five years in the form of ministerial regulations. When the private sector is to be involved in toll road development, concession laws need to be well drafted. The host government must provide the basic legislative and regulatory authority in order for a given infrastructure project to be built and operated by the private sector. This includes designation of the individual ministries, government agencies, or local governments authorized to grant concessions. The enabling legislation may be general and enable different types of concessions to be granted. Or alternatively, it may be specific and provide for a particular concession. Either approach should be acceptable provided that, among other things, the right agency is designated as concession grantor and the concession term is sufficiently long so that the concessionaire will be able to build and operate the toll road in accordance with its business requirements. In toll road concessions, the bidding process should be formalized and transparent. Bidding should be competitive to minimize the level of government support and to reduce the bearing of residual risk by the government. Although no one hopes for disputes on a BOT project, the regulatory framework must also provide for adequate dispute-resolution procedures in the event that such disputes emerge.
4.17. The third issue relates to Concession Contracts. Except perhaps in the Philippines, in the East Asian countries studied concession contracts have been rather loosely negotiated and depend too much on amicable solutions between the parties involved. But, concession contracts between a grantor and a concessionaire should be unambiguous with respect to the risks involved. Preferably, a model concession contract should be prepared to enhance fairness and the clarity of negotiations between the parties involved.
4.18. The fourth issue is Government Support. There are a number of government support measures that can be provided to public corporations or private toll road concessionaires. Each has advantages and disadvantages. The countries that have been successful in toll road development have usually provided an appropriate combination of these measures. The extent of support that may reasonably be provided to particular toll road operators depends largely on the political and economic situation of the country. It is also important for a government to assess critically the possibility of a large contingent liability in the case of guarantees such as foreign exchange guarantees, loan/bond guarantees, or equity guarantees.
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4.19. The fifth issue is Traffic Forecasting. Throughout the case study countries, traffic has frequently been over-estimated during the planning stage. Of course, traffic forecasting is not an exact science. It involves a great deal of uncertainty and is highly susceptible to poor quality input data and incorrect or incomplete assumptions. Factors such as land use and population growth along the route, public acceptance and use of the highway, and various economic indicators used in traffic models all have inherent uncertainties that affect a traffic forecast. However, since project viability is directly related to expected traffic volume, toll road operators, grantors, concessionaires, financiers, and investors are all concerned with such estimates. There are many cases where analysts have used parameters calibrated elsewhere without evaluating their transferability to the countries in which they were to be applied. In other instances, grantors have used traffic volumes that were estimated by the project proponents without re-examining the figures during negotiations. These situations may be partly attributable to a lack of technical expertise and budgetary constraints. This also relates to an issue of institutional shortcomings. In other instances, the traffic forecasts did not accurately address the issue of toll sensitivity, and motorists appeared to be discouraged by toll charge, that were significantly greater than the level that they were used to paying. Accuracy can also be improved in the long term by refining methodologies and using empirically based equations for estimated traffic diversion. This has been done in Japan. But, it is still important that traffic forecasting be cross-checked by at least one independent consultant or institution.
4.20. The sixth issue relates to the Setting and Adjusting of Toll Rates. The profitability of a toll road project, especially in inflationary environments, depends a great deal on the toll level, or the increases achievable by the operators. Accumulated world experience suggests a number of general guidelines for setting and adjusting toll rates. For example, general principles suggested by one World Bank report indicate that tolling is feasible only when there is a minimum of 4,000 to 5,000 vehicles per day. And under certain conditions, toll rates can be set higher where there is no viable alternative. Another issue is whether toll rate adjustments should be left to a discretion of governmental authority or be based on a formula that is usually linked to changes in some price index. In either case, there is a need to follow specified toll adjustment procedures once they have been set. Uncertainty creates problems for toll road operators. The experience of the Hong Kong Special Administrative Region presents a possible “best practice” for private sector concessions. With the Western Harbour Crossing, the Government and the private franchisee established a straightforward, transparent, fair, and binding Toll Adjustment Mechanism. If traffic and therefore revenue falls below a forecast volume, the operator is allowed to advance the prespecified date of a toll increase. Conversely, if the amount of revenue received by the operator is above the forecast, a toll increase will be deferred. This approach gives the franchisee security in the project’s ability to achieve a minimum return on the equity investment. At the same time it gives financiers the assurance that the project will be able to service its debt requirements over the fixed concession period.
4.21. The seventh issue pertains to Financing Structure and Sources. An important issue here involves consideration of the relative advantages and disadvantages of toll financing of highways as compared to financing from tax revenues. The latter approach is found in Northern Europe, North America, and Australia. The decision of whether to toll or not to toll, is important where traffic levels are relatively low. But, it has not been adequately considered in many of the case study countries. Another sub-issue is
4-6 Volume I: Main Text Major Toll Road Issues and Lessons Learned, Session 1-3 that the costs of establishing a toll system can be high. For example, the case studies and other evidence indicate that, depending on whether an open or closed tolling system is employed, additional construction costs can range between 2 and 8 percent of initial costs and that operating expenses can range between 5 and 20 percent of toll revenue.
4.22. It is also very beneficial for a toll road project to obtain domestic financing in order to avoid currency exchange rate risks between local toll revenues and foreign currency debt. When the capital cost is small, it is relatively easy to attract domestic capital in the form of both debt and equity. However, in many countries, local capital markets are not sufficiently developed to provide the long-term capital required for toll road projects. The current financial crisis in Asia has worsened this situation. Procurement of long-term bank loans for privately financed toll road projects is critical in developing countries. The longest tenure that a toll road project company can obtain in a commercial bank loan is about five years in the East Asian countries studied, which is far too short a period in which to recoup an investment. In contrast, in many developed countries such as the United States and the United Kingdom, the tenure of commercial bank loans may extend 15 to 30 years to match the concession period. For developing countries, it may make sense to either establish a financing institution or a similar mechanism to provide long-term loans for privately financed infrastructure projects. It must also be noted that institutional investors can be a good source of financing for toll road projects since the long-term maturity of their funds matches the duration of a toll road concession. However, institutional investors in developing countries are not generally active in the infrastructure sector.
4.23. Initial public offerings (or IPOs) of a single asset company with a BOT arrangement can be difficult as the duration of future cash flow is limited by the fixed concession period. In addition, the enterprise is affected to a great extent by general stock market sentiment at the time of the IPO. On the other hand, an IPO based on multiple assets with a portfolio of toll road projects that generate stable cash flow may be an appropriate solution to fundraising issues in developing countries. Examples of this practice may already be found in China. One innovative approach is the leveraging of existing highway assets to raise new funds in capital markets. This approach is called Asset Securitization. It can be attractive to private investors, since they may assume only limited construction/completion risks, and the transactions offer the prospect of high returns. This approach is also attractive to governments, since it permits them to obtain additional financing with relative ease, including for financially less attractive but still economically desirable projects. For example, toll road projects in China have been able to raise large sums of additional capital from foreign investors by the securitization of existing highway assets including roads financed with World Bank assistance. A recent article in the Asian Wall Street Journal suggests that Asia’s financial crisis will accelerate the use of asset securitization across the region.
4.24. The eighth issue relates to Public Acceptance. Important concerns here pertain to relocation and resettlement; noise and air pollution; community severance; and public acceptance of tolls. Consider, for example, the Philippines, where public acceptance of both the highways and their tolls has been a major issue for all toll road operators and investors. Since toll rates on the original toll expressways had been extremely low for a long time, motorists were not accustomed to paying market-rate tolls. Consequently, one major concessionaire has initiated public awareness campaigns in their various highway corridors using print, broadcast, and outdoor media. This example
4-7 Volume I: Main Text Major Toll Road Issues and Lessons Learned, Session 1-3 demonstrates that effective public relations campaigns can foster public acceptance of well-conceived toll road projects.
4.25. The last major issue is the Role of Donor Agencies. Donor agencies can help address a variety of financing, institutional, and regulatory issues. One way in which donor agencies can provide assistance for toll road development is in providing long- term financing. As I mentioned earlier, in many developing countries, even ones that have large capital markets, it is difficult for domestic capital to cover infrastructure projects mainly because of the lack of long-term financing. For example, this issue has been addressed in Brazil and Colombia by the Inter-American Development Bank. Donor agencies can also provide interim financing as provided in Hungary by the European Bank for Reconstruction and Development or EBRD. Donor agencies can provide various measures of credit enhancement with respect to political risks, including political risk insurance, Export Credit Agency guarantee or so-called co- financing and guarantees, and Partial Credit and Risk Guarantees as were provided in Colombia by the World Bank. A donor agency can also play the role of financial arranger or to guarantee loans as was done in Hungary by EBRD. Donor agencies can add value by providing expertise and contributing to training in various areas related to toll road development as achieved in China and Chile by the World Bank; and in Malaysia, the Philippines, and Thailand by the Japan International Cooperation Agency.
4.26. Before concluding my presentation, I would like to express our deep gratitude to those individuals and organizations who have provided the consultant team with valuable assistance and comments during the study period. We understand that the issues and lessons presented in our report may require further refinement; but we strongly hope that our Study will provide opportunities for individuals and organizations involved in toll road development to learn from the experience of other countries, and to provide a useful platform for stimulating discussions during this seminar.
4.27. Questions and Discussion. A Seminar attendee from Pakistan commented that while local financing is preferred in this era of financial crisis, it is important not to forget the competing needs of highways and ring roads, and even railways. Coordinated advice is needed, rather than just one mode at a time.
4.28. An attendee from Hong Kong explained that while the toll adjustment mechanism used there may be “ideal” in the sense that it gives the government and concessionaires considerable flexibility, there is still a problem in the case of lower than expected tolls. The concessionaires are still hard-pressed to increase tolls (even if allowed) because demand elasticities are probably such that a toll increase will not necessarily generate more net revenue.
4.29. A Seminar attendee from Japan asked whether there have been any successful cases of using BOT strategies to develop an extensive part of an expressway network, on schedule. While this was accomplished in Mexico, many toll roads there needed to be bailed out by the government subsequently. Mr. Irigoyen of the World Bank commented that the problems in Mexico were not attributable so much to the BOT concept per se, as they were to network problems, high tolls, free alternative routes, and grossly inaccurate traffic forecasts. Dr. Kuranami added that one major BOT concessionaire in Malaysia, PLUS, successfully completed the major North-South
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Highway. Their recent difficulty likewise was not a product of the BOT concept, but rather a government decision to not permit a scheduled toll increase (due to the economic crisis).
4.30. Another Japanese attendee commented that while developing countries can use public and private financing from domestic or overseas sources, there are many different risks inherent to each and it is not clear when best to use BOT, or public sector financing. Dr. Kuranami replied that public and private financing have different merits, which are explained in the report. In short, public involvement tends to facilitate planning and network expansion, but it can foster inefficiencies. On the other hand, while the private sector may be more efficient and market-responsive, they tend to be highly risk-averse. So the challenge is how to reduce the disadvantages inherent in each. In addition, when viewed as public goods, it cannot realistically be expected that roads will be developed 100% by the private sector. It is also common for private sector endeavors to require public support or assistance.
4.31. Mr. Nickesen of the World Bank commented that when the study was designed, the Bank wanted a representation of developed and developing country experiences. From this presentation, it appears that the developed countries have generally followed a network approach to toll road development, with extensive government involvement. The emerging market countries have had heavy private involvement, but have had many problems. It is not certain that the “best practices” from the developed countries even relevant to the emerging countries. Mr. Kuranami concluded that the remainder of the seminar ought to offer a more complete picture of the relevance of each country’s experiences. It is definitely not obvious that all of the lessons are relevant, but the final judgement must ultimately be made by the countries themselves.
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ROAD DEVELOPMENT UNDER THE CURRENT ECONOMIC SITUATION IN ASIA SESSION 1-4 (SUMMARY OF PRESENTATIONS AND SELECTED DISCUSSION)
Toll Road Development Under the Current Economic Situation in Indonesia Ir. Sumaryanto Widayatin, Toll Road Division Chief, Bina Marga
5.1. During the ten years preceding the current economic crisis, the Indonesian Government has allocated more than 40 percent of its development budget to infrastructure development. However, this level of expenditure still struggled to keep pace with growing demand. Consequently, since the mid-eighties the Government has encouraged private sector toll road development to meet the backlog. The Government has chosen not to adopt a policy of subsidizing toll roads, so development has been limited to those projects that could be considered financially viable. Private partnerships in either a “BOT” or “Modified Turnkey” structure must be made with the state toll road agency, PT Jasa Marga.
5.2. Historically, network planning has been politically driven, and has suffered from technical inadequacies and poor institutional structure. Investor selection has been done both on solicited and unsolicited bases. While solicited projects were often poorly planned, unsolicited concessions were likewise uncoordinated and suffered from what is these days popularly referred to as “KKN,” or collusion, corruption, and nepotism.
5.3. The major risks for toll road developers in Indonesia have been identified as tariff setting and land acquisition. At the present time, with the onset of the economic crisis, all toll road construction has stopped due to lack of financing, and the completed roads are near bankruptcy.
5.4. The Government of Indonesia has therefore embarked upon a program of reforms including the following eight initiatives:
• a new arterial and toll road master plan; • a new regulatory framework, conducive to public-private partnerships; • a review of the current toll road program (including major perceived risks and financial and technical integrity, as 60% of existing program has been deemed inappropriate and government intervention is felt to be necessary); • an enhanced BOT and project implementation system (featuring improved competition, risk allocation, revenue subsidies, and tariff adjustment mechanisms); • identifying additional potential sources of finance (including alternative finance mechanisms, maximizing equity, improved debt/equity ratios, and identifying competitive debt resources);
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• an accountable BOT structure (one that is consistent, fair, and meets regulations); • the eventual privatization of Jasa Marga (a new ministry has been established to supervise state owned enterprises) and/or formation of strategic partnerships (under solicited procedures); and • operational improvements (including traffic management and surveillance systems, and improved tariff collection and revenue sharing procedures).
5.5. “Urgent needs” for multilateral or bilateral support were identified on map of the Jakarta area (included in Appendix C of these Proceedings). The Jakarta Outer Ring Road sections are in various stages of completion/operation, with most sections between zero and forty percent complete.
5.6. A slide show of Indonesian toll roads concluded the presentation.
5.7. Questions and Discussion. A Seminar attendee from Japan inquired as to who is responsible for land acquisition—the Government or the concessionaires? Ir. Sumaryanto replied that according to the road law, land acquisition is the government’s responsibility. However, the government allows the private sector to pay for the land cost using bridge financing for which the government is compensated later.
5.8. Mr. Marçais of Groupe EGIS in France inquired about the current status of privatization plans for Jasa Marga. Ir. Sumaryanto explained that whether to fully privatize or not is still a big undecided issue within the Government. Regardless of the final privatization decision, Indonesia would like to offer “combined packages” that feature both an operating contract for an existing road plus requirements for the construction of new toll roads. Mr. Marçais also commented that electronic tolling is not an effective tool for improving revenue “leakage,” but that it does improve traffic flow and motorist convenience.
5.9. Mr. Stanfield, an infrastructure consultant from the United States, asked about what lessons have been learned from Indonesia’s first toll road with foreign involvement, a 66 km section of the Jakarta Outer Ring Road to be developed by Trafalgar House (now Kværner) of Great Britain and financed by HSBC. Ir. Sumaryanto replied that it took eight years to successfully reach an operational agreement between the government and the developers. Under this agreement, the government agreed to provide financial recourse, revenue assurances, and 100 percent of the land. However, just after the deal had been reached, the economic crisis hit and made the project not financially viable. In addition, the government has run into problems with land acquisition. The government has learned from the experience, though, and would still like to work with the consortium to phase in the project.
5.10. An attendee from Japan inquired as to the immediate prospects for future toll road development (BOT or otherwise), noting that ODA loans would also still need to be paid back eventually. Ir. Sumaryanto explained that Indonesia’s current need for toll road-related ODA is in order to take over Jakarta area expressway projects, and then re- tender them to complete the system and return the loans. The government will continue to pursue its BOT strategy despite the economic downturn. They expect that the economy will turn around quickly once the government reforms are implemented.
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Toll Road Development Under the Current Economic Situation in Malaysia Ms. Hanifah Hassan, Director of Privatization Section, Economic Planning Unit, Prime Minister’s Department
5.11. The Government of Malaysia has been pursuing its privatization strategy since 1983. It is intended that privatized organizations will operate in a complimentary fashion to the public sector. Privatization of roads and highways has been implemented by means of a BOT system, and tolls may only be charged on roads developed through the private sector. Toll roads have been deemed necessary in order to expand the highway network, increase vehicular capacity, and open up land areas for development. This strategy has also provided skills development and economic development opportunities.
5.12. The overall plan for private toll roads in Malaysia envisions 25 highways totaling 1,800 km in length at a cost of 31.9 billion ringgit. To date, 13 highways have opened to traffic, totaling 1,200 km and 16.9 billion ringgit. This represents a 16.9 billion ringgit savings on capital expenditures for the Malaysian Government so far.
5.13. Factors taken into account when determining toll rates include construction costs and traffic volume. As a rule, it is intended that after privatization consumers will have to pay the market cost for any services that were previously provided by the government. However, in order to protect consumer interests, all tariff increases must obtain prior approval from the Government.
5.14. Project viability is a key concern. Concessionaires are able to receive assistance in the form of soft loans and advances for land acquisition from the government (initially they also received traffic volume guarantees). In addition, there are some cross-subsidization opportunities with commercial development. Direct government support is intended to be reduced gradually as the sector gains maturity and experience.
5.15. The regulatory framework will be strengthened to protect consumer interests in terms of price, quality, and availability of service. These regulations apply to all privatized government businesses, not just toll roads. Foreign equity participation is allowed up to 25 percent of share capital, and is considered when it will bring in needed expertise, promote export markets, or increase capital availability. At the present time however, most of the toll road development consortia are entirely Malaysian.
5.16. The financial crisis has reduced the availability of financial resources, and the government has responded by establishing an infrastructure development fund, engaging in policy reviews. The policy reviews have included reprioritizing projects based upon their economic significance, rescheduling construction and interchange openings, and re-staging highway upgrades.
5.17. Questions and Discussion. A Seminar attendee from Japan was interested in the status of the Eastern Corridor, and in Malaysia’s willingness to seek World Bank support in light of the current economic circumstances. Ms. Hanifah replied that the Eastern Corridor is supposed to start construction next month and is on schedule. Also, the Malaysian Government is talking to all potential donor agencies, but she could not comment right now on what is being talked about and with whom.
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5.18. Another Japanese attendee asked about whether recent project delays have changed procedures for land acquisition by the private sector. Ms. Hanifah clarified that the private sector just reimburses the government for the land acquisition costs (the government does the actual acquisition of land). For projects not yet started, no land has been acquired.
5.19. Mr. McNeill of Baker & McKenzie inquired as to how seriously the Malaysian government was trying to attract the international private sector? He mentioned for instance that termination compensation is no longer provided, nor is cash deficiency support. Ms Hassan explained that traffic guarantees were provided only in the first few contracts, but now the government intends that all projects must be viable on their own financial merits.
5.20. Mr. Stanfield of the United States asked if any details could be provided about the recapitalization of Renong/UEM/PLUS that has been reported in the media in recent days. Ms. Hanifah replied that the Renong/UEM/PLUS case is being looked at by the Corporate Debt Restructuring Committee, in order to restructure or reschedule its loans. As the discussions were still going on, she was not able to provide details.
Toll Roads in the Philippines Current Status and Future Development by Engr. Augusto B. Santos, Assistant Director General of NEDA and Mr. Godofredo Z. Galano, Director of DPWH
5.21. In the early 1990s, the “BOT Law” was among a series of measures enacted to rapidly improve water, power, and transport infrastructure. Significant progress has been made in the power sector, and increasingly in water, highways, and railways as well. However the sustained progress of these initiatives has been hampered by the onset of the Asian financial crisis.
5.22. Philippine toll roads are supervised and regulated by the Toll Regulatory Board (TRB), a government agency attached to the Office of the President. The Department of Public Works and Highways (DPWH) is responsible for the planning, design, construction and maintenance of infrastructure facilities, including national highways. It is authorized, under the BOT Law, to undertake the development of toll roads using private sector financing. TRB is in charge of the construction, operation, and maintenance of toll facilities and determining which roads will be constructed and/or operated as toll facilities. It was formerly attached to DPWH, and the DPWH Secretary continues to serve as the TRB Chair.
5.23. Three expressways are presently in operation in the Philippines:
• The North Luzon and South Luzon Expressways (the country’s oldest toll roads; developed and operated by the government-owned Philippines National Construction Corporation (PNCC) since 1966); • R-1 Manila-Cavite Expressway (developed by a BOT joint venture between the government-owned Public Estates Authority and Renong of Malaysia; in operation since May 1998); and
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• The Metro Manila Skyway (developed by a BOT joint venture between PNCC and Citra of Indonesia; in operation since December 1998).
5.24. The North and South Luzon Expressways have historically had extremely low tolls (and have not been profitable), but the new private tollways charge much more (in order to be financially feasible). The higher tolls have engendered much public protest, even though the revenues are being used to upgrade the existing facilities as well as finance new ones.
5.25. Only the Southern Tagalog Arterial Road (STAR), now under construction, has been “solicited” by DPWH and therefore able to receive government support. The support includes operating rights for the northern half of the facility which has already been constructed by the government (using an OECF loan). In addition, the government has agreed to pay for right-of way acquisition expenses above a certain limit.
5.26. Several other new private tollways are under development or have been proposed through “unsolicited” means, meaning that they cannot receive government financial support and must be subjected to a price challenge before final bid acceptance. Furthermore, BOT-style projects pursued through PNCC’s franchise (typically under a joint venture agreement) are entitled to government acquisition of land.
5.27. Several problems and issues have been identified with respect to project development and implementation. They include:
• Ambiguity in the roles of DPWH and TRB • A need for more expertise in DPWH (especially beyond engineering and construction) • Toll rate setting and adjustment procedures • Effective risk allocation • Limited government resources • Alternative financing for right-of-way acquisition (possibilities for private sector involvement)
5.28. Questions and Discussion. Mr. Stanfield commented that the Philippine plans are ambitious, and asked whether the Government has similar “fast-track” plans for making other improvements which are not necessarily big-ticket items. Mr. Santos replied that there are several urban initiatives currently underway, and that the Government is now also pursuing a World Bank loan to construct urban roads in Manila. He added that there are also several proposals and ongoing urban rail projects in Manila involving public private partnerships.
5.29. A Seminar attendee from Japan noted that compared with other Asian countries the Philippines seem to have fared better, and asked why is this so? Mr. Santos suggested that it may be that the Philippine economy and financial sector were not as “overextended” going into the crisis, as may have been the case elsewhere.
5.30. Mr. Kuranami asked about the procedure involved in conducting a price challenge for the unsolicited bids (officially called a “Swiss Challenge” by the Philippine Government). Mr. Santos said that the main purpose for the challenge is to maintain some element of competition and transparency, even if it is an unsolicited
5-5 Volume I: Main Text Road Development Under the Current Economic Situation in Asia, Session 1-4 proposal. The challenge is publicly advertised, and something akin to a “value for money” comparison is carried out.
Toll Road Policy in Thailand Dr. Suwat Wanisubut, National Transport Planner, NESDB
5.31. There were 36 years of economic growth from the time of the first national economic plan in 1961 until the economic crisis in 1997. But in the last two years, GDP has fallen by 0.5 percent in 1997 and again by a record 7.8 percent in 1998. However, the Thai Government expects the situation to turn around soon.
5.32. The economic downturn has affected toll roads. At present there are about one million vehicles using these roads. Growth in toll road use has historically paralleled that of GDP. The roads are now experiencing a slight decline in traffic, but it is expected to increase again soon. It is felt the road capacity is now “catching up” to the former demand.
5.33. About 90 percent of passenger and freight traffic is handled by roads in Thailand. There are 17.6 million vehicles and 11.6 million motorcycles (60 million population). The Bangkok area is home to 3.9 million vehicles and 1.6 million motorcycles. Bangkok accounts for 50 percent of Thai GDP but only one sixth of the population.
5.34. Two agencies have jurisdiction over toll roads, the Department of Highways (DOH, under the Ministry of Transport and Communications) and the Expressway and Rapid Transit Authority (ETA, under the Ministry of Interior). Unlike DOH, which builds and operates all of the free trunk roads in Thailand, ETA is a state-owned enterprise and as such is not entitled to an annual budget allocation from government revenues; hence, all ETA roads must be tolled.
5.35. Toll roads in Thailand have been developed by government agencies for many years, but only recently with private concessions. In the case of ETA’s First Stage Expressway, in Bangkok, the Government built the road while ETA handled operations, maintenance, and toll collection. ETA’s Second Stage Expressway project was the first to offer a private sector concession.
5.36. DOH meanwhile had collected tolls on some ordinary roads, but stopped the practice after 22 years under public protest in 1994. Their new policy is to toll only on government-built motorways (high-standard, controlled access highways), as well as some concessioned roads such as the urban Don Muang Tollway from central Bangkok to the airport. A key reason for making the new Bangkok-Chonburi Motorway tolled was to ensure that it would continue as a controlled-access road (and not devolve into a general access highway as the land alongside developed).
5.37. In 1992, following chronic problems with unsolicited proposals for concession projects, the “Private Participation Act” was passed in order to add government feasibility studies to project preparation, and to add transparency to the process (i.e. by specifying concession conditions). Private investors submit proposals according to the
5-6 Volume I: Main Text Road Development Under the Current Economic Situation in Asia, Session 1-4 conditions only after the feasibility studies are complete. However there remain problems with the concessions from before 1992.
5.38. Current policy issues include:
• To toll or not to toll? Road policy is dictated more by economic growth criteria—i.e. roads are built where growth is intended to occur, not necessarily where the traffic is. It is intended that tolls be charged for privately concessioned roads (of DOH and ETA), other ETA investments, and new motorways near Bangkok in order to maintain access control. Tolls are not to be charged on DOH’s ordinary highways. Tolling status is uncertain for new DOH motorways outside of Bangkok; tolls have been recommended, but this may be changed politically. • Toll rates. One problem is the currency; for collection purposes it is good for prices to be in even units, but that means toll increases must come in relatively steep 10 Baht (US$0.25) increments. • Institutional structure. Is the DOH/ETA duplicity desirable?
5.39. Questions & Discussion. A Seminar attendee from Japan asked Dr. Suwat to give his personal evaluation of the Second Stage Expressway project, in which the original private sector developer, led by Kumagai-Gumi of Japan, ended up terminating their contract with the Government due to a number of disagreements. Dr. Suwat stated that Kumagai-Gumi signed contract with ETA, but no one knew the conditions. As it turned out, these agreements included conditions such as increases in tolls for existing ETA toll roads. However this ran into political difficulties, creating uncertainty—which was not amenable to Kumagai-Gumi’s financial interests. Dr. Suwat explained that the Thai people think that increased tolls just mean extra profits for the operator, and the lack of transparency has worked as an impediment to educating the motorists that toll increases may actually be necessary.
5.40. Another Japanese Seminar attendee inquired as to whether there are any design standards that precisely identify the different types of highways in Thailand. He also wanted to know how are tolls determined for government-funded toll highways. Dr. Suwat answered that there are no firm standards, and even if there were, they would not necessarily be followed anyway. Things can always change. As for the toll rates, Dr. Suwat indicated that there is not much concern for the rate of return on government toll roads.
5.41. Another Seminar attendee from Japan wanted to know whether in the future will national expressway be developed by concessionaires. Dr. Suwat said that most of the national expressways would be built by the government, not by concessionaires. He explained that outside of Bangkok there is no market for concessioned toll roads.
5.42. A final question was asked by another Seminar attendee from Japan. This person stated that the Bangkok Outer Ring Road, Eastern Segment is not tolled at present, and wanted to know if it would be in the future. He also asked for an assessment of the current political opinion on tolled roads. Dr. Suwat replied that the entire Outer Ring Road would be tolled in the future, but that the status of other potentially tolled roads will most likely be decided on a case-by-case basis.
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5
ROAD DEVELOPMENT UNDER THE CURRENT ECONOMIC SITUATION IN ASIA SESSION 1-4 (SUMMARY OF PRESENTATIONS AND SELECTED DISCUSSION)
Toll Road Development Under the Current Economic Situation in Indonesia Ir. Sumaryanto Widayatin, Toll Road Division Chief, Bina Marga
5.1. During the ten years preceding the current economic crisis, the Indonesian Government has allocated more than 40 percent of its development budget to infrastructure development. However, this level of expenditure still struggled to keep pace with growing demand. Consequently, since the mid-eighties the Government has encouraged private sector toll road development to meet the backlog. The Government has chosen not to adopt a policy of subsidizing toll roads, so development has been limited to those projects that could be considered financially viable. Private partnerships in either a “BOT” or “Modified Turnkey” structure must be made with the state toll road agency, PT Jasa Marga.
5.2. Historically, network planning has been politically driven, and has suffered from technical inadequacies and poor institutional structure. Investor selection has been done both on solicited and unsolicited bases. While solicited projects were often poorly planned, unsolicited concessions were likewise uncoordinated and suffered from what is these days popularly referred to as “KKN,” or collusion, corruption, and nepotism.
5.3. The major risks for toll road developers in Indonesia have been identified as tariff setting and land acquisition. At the present time, with the onset of the economic crisis, all toll road construction has stopped due to lack of financing, and the completed roads are near bankruptcy.
5.4. The Government of Indonesia has therefore embarked upon a program of reforms including the following eight initiatives:
• a new arterial and toll road master plan; • a new regulatory framework, conducive to public-private partnerships; • a review of the current toll road program (including major perceived risks and financial and technical integrity, as 60% of existing program has been deemed inappropriate and government intervention is felt to be necessary); • an enhanced BOT and project implementation system (featuring improved competition, risk allocation, revenue subsidies, and tariff adjustment mechanisms); • identifying additional potential sources of finance (including alternative finance mechanisms, maximizing equity, improved debt/equity ratios, and identifying competitive debt resources);
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• an accountable BOT structure (one that is consistent, fair, and meets regulations); • the eventual privatization of Jasa Marga (a new ministry has been established to supervise state owned enterprises) and/or formation of strategic partnerships (under solicited procedures); and • operational improvements (including traffic management and surveillance systems, and improved tariff collection and revenue sharing procedures).
5.5. “Urgent needs” for multilateral or bilateral support were identified on map of the Jakarta area (included in Appendix C of these Proceedings). The Jakarta Outer Ring Road sections are in various stages of completion/operation, with most sections between zero and forty percent complete.
5.6. A slide show of Indonesian toll roads concluded the presentation.
5.7. Questions and Discussion. A Seminar attendee from Japan inquired as to who is responsible for land acquisition—the Government or the concessionaires? Ir. Sumaryanto replied that according to the road law, land acquisition is the government’s responsibility. However, the government allows the private sector to pay for the land cost using bridge financing for which the government is compensated later.
5.8. Mr. Marçais of Groupe EGIS in France inquired about the current status of privatization plans for Jasa Marga. Ir. Sumaryanto explained that whether to fully privatize or not is still a big undecided issue within the Government. Regardless of the final privatization decision, Indonesia would like to offer “combined packages” that feature both an operating contract for an existing road plus requirements for the construction of new toll roads. Mr. Marçais also commented that electronic tolling is not an effective tool for improving revenue “leakage,” but that it does improve traffic flow and motorist convenience.
5.9. Mr. Stanfield, an infrastructure consultant from the United States, asked about what lessons have been learned from Indonesia’s first toll road with foreign involvement, a 66 km section of the Jakarta Outer Ring Road to be developed by Trafalgar House (now Kværner) of Great Britain and financed by HSBC. Ir. Sumaryanto replied that it took eight years to successfully reach an operational agreement between the government and the developers. Under this agreement, the government agreed to provide financial recourse, revenue assurances, and 100 percent of the land. However, just after the deal had been reached, the economic crisis hit and made the project not financially viable. In addition, the government has run into problems with land acquisition. The government has learned from the experience, though, and would still like to work with the consortium to phase in the project.
5.10. An attendee from Japan inquired as to the immediate prospects for future toll road development (BOT or otherwise), noting that ODA loans would also still need to be paid back eventually. Ir. Sumaryanto explained that Indonesia’s current need for toll road-related ODA is in order to take over Jakarta area expressway projects, and then re- tender them to complete the system and return the loans. The government will continue to pursue its BOT strategy despite the economic downturn. They expect that the economy will turn around quickly once the government reforms are implemented.
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Toll Road Development Under the Current Economic Situation in Malaysia Ms. Hanifah Hassan, Director of Privatization Section, Economic Planning Unit, Prime Minister’s Department
5.11. The Government of Malaysia has been pursuing its privatization strategy since 1983. It is intended that privatized organizations will operate in a complimentary fashion to the public sector. Privatization of roads and highways has been implemented by means of a BOT system, and tolls may only be charged on roads developed through the private sector. Toll roads have been deemed necessary in order to expand the highway network, increase vehicular capacity, and open up land areas for development. This strategy has also provided skills development and economic development opportunities.
5.12. The overall plan for private toll roads in Malaysia envisions 25 highways totaling 1,800 km in length at a cost of 31.9 billion ringgit. To date, 13 highways have opened to traffic, totaling 1,200 km and 16.9 billion ringgit. This represents a 16.9 billion ringgit savings on capital expenditures for the Malaysian Government so far.
5.13. Factors taken into account when determining toll rates include construction costs and traffic volume. As a rule, it is intended that after privatization consumers will have to pay the market cost for any services that were previously provided by the government. However, in order to protect consumer interests, all tariff increases must obtain prior approval from the Government.
5.14. Project viability is a key concern. Concessionaires are able to receive assistance in the form of soft loans and advances for land acquisition from the government (initially they also received traffic volume guarantees). In addition, there are some cross-subsidization opportunities with commercial development. Direct government support is intended to be reduced gradually as the sector gains maturity and experience.
5.15. The regulatory framework will be strengthened to protect consumer interests in terms of price, quality, and availability of service. These regulations apply to all privatized government businesses, not just toll roads. Foreign equity participation is allowed up to 25 percent of share capital, and is considered when it will bring in needed expertise, promote export markets, or increase capital availability. At the present time however, most of the toll road development consortia are entirely Malaysian.
5.16. The financial crisis has reduced the availability of financial resources, and the government has responded by establishing an infrastructure development fund, engaging in policy reviews. The policy reviews have included reprioritizing projects based upon their economic significance, rescheduling construction and interchange openings, and re-staging highway upgrades.
5.17. Questions and Discussion. A Seminar attendee from Japan was interested in the status of the Eastern Corridor, and in Malaysia’s willingness to seek World Bank support in light of the current economic circumstances. Ms. Hanifah replied that the Eastern Corridor is supposed to start construction next month and is on schedule. Also, the Malaysian Government is talking to all potential donor agencies, but she could not comment right now on what is being talked about and with whom.
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5.18. Another Japanese attendee asked about whether recent project delays have changed procedures for land acquisition by the private sector. Ms. Hanifah clarified that the private sector just reimburses the government for the land acquisition costs (the government does the actual acquisition of land). For projects not yet started, no land has been acquired.
5.19. Mr. McNeill of Baker & McKenzie inquired as to how seriously the Malaysian government was trying to attract the international private sector? He mentioned for instance that termination compensation is no longer provided, nor is cash deficiency support. Ms Hassan explained that traffic guarantees were provided only in the first few contracts, but now the government intends that all projects must be viable on their own financial merits.
5.20. Mr. Stanfield of the United States asked if any details could be provided about the recapitalization of Renong/UEM/PLUS that has been reported in the media in recent days. Ms. Hanifah replied that the Renong/UEM/PLUS case is being looked at by the Corporate Debt Restructuring Committee, in order to restructure or reschedule its loans. As the discussions were still going on, she was not able to provide details.
Toll Roads in the Philippines Current Status and Future Development by Engr. Augusto B. Santos, Assistant Director General of NEDA and Mr. Godofredo Z. Galano, Director of DPWH
5.21. In the early 1990s, the “BOT Law” was among a series of measures enacted to rapidly improve water, power, and transport infrastructure. Significant progress has been made in the power sector, and increasingly in water, highways, and railways as well. However the sustained progress of these initiatives has been hampered by the onset of the Asian financial crisis.
5.22. Philippine toll roads are supervised and regulated by the Toll Regulatory Board (TRB), a government agency attached to the Office of the President. The Department of Public Works and Highways (DPWH) is responsible for the planning, design, construction and maintenance of infrastructure facilities, including national highways. It is authorized, under the BOT Law, to undertake the development of toll roads using private sector financing. TRB is in charge of the construction, operation, and maintenance of toll facilities and determining which roads will be constructed and/or operated as toll facilities. It was formerly attached to DPWH, and the DPWH Secretary continues to serve as the TRB Chair.
5.23. Three expressways are presently in operation in the Philippines:
• The North Luzon and South Luzon Expressways (the country’s oldest toll roads; developed and operated by the government-owned Philippines National Construction Corporation (PNCC) since 1966); • R-1 Manila-Cavite Expressway (developed by a BOT joint venture between the government-owned Public Estates Authority and Renong of Malaysia; in operation since May 1998); and
5-4 Volume I: Main Text Road Development Under the Current Economic Situation in Asia, Session 1-4
• The Metro Manila Skyway (developed by a BOT joint venture between PNCC and Citra of Indonesia; in operation since December 1998).
5.24. The North and South Luzon Expressways have historically had extremely low tolls (and have not been profitable), but the new private tollways charge much more (in order to be financially feasible). The higher tolls have engendered much public protest, even though the revenues are being used to upgrade the existing facilities as well as finance new ones.
5.25. Only the Southern Tagalog Arterial Road (STAR), now under construction, has been “solicited” by DPWH and therefore able to receive government support. The support includes operating rights for the northern half of the facility which has already been constructed by the government (using an OECF loan). In addition, the government has agreed to pay for right-of way acquisition expenses above a certain limit.
5.26. Several other new private tollways are under development or have been proposed through “unsolicited” means, meaning that they cannot receive government financial support and must be subjected to a price challenge before final bid acceptance. Furthermore, BOT-style projects pursued through PNCC’s franchise (typically under a joint venture agreement) are entitled to government acquisition of land.
5.27. Several problems and issues have been identified with respect to project development and implementation. They include:
• Ambiguity in the roles of DPWH and TRB • A need for more expertise in DPWH (especially beyond engineering and construction) • Toll rate setting and adjustment procedures • Effective risk allocation • Limited government resources • Alternative financing for right-of-way acquisition (possibilities for private sector involvement)
5.28. Questions and Discussion. Mr. Stanfield commented that the Philippine plans are ambitious, and asked whether the Government has similar “fast-track” plans for making other improvements which are not necessarily big-ticket items. Mr. Santos replied that there are several urban initiatives currently underway, and that the Government is now also pursuing a World Bank loan to construct urban roads in Manila. He added that there are also several proposals and ongoing urban rail projects in Manila involving public private partnerships.
5.29. A Seminar attendee from Japan noted that compared with other Asian countries the Philippines seem to have fared better, and asked why is this so? Mr. Santos suggested that it may be that the Philippine economy and financial sector were not as “overextended” going into the crisis, as may have been the case elsewhere.
5.30. Mr. Kuranami asked about the procedure involved in conducting a price challenge for the unsolicited bids (officially called a “Swiss Challenge” by the Philippine Government). Mr. Santos said that the main purpose for the challenge is to maintain some element of competition and transparency, even if it is an unsolicited
5-5 Volume I: Main Text Road Development Under the Current Economic Situation in Asia, Session 1-4 proposal. The challenge is publicly advertised, and something akin to a “value for money” comparison is carried out.
Toll Road Policy in Thailand Dr. Suwat Wanisubut, National Transport Planner, NESDB
5.31. There were 36 years of economic growth from the time of the first national economic plan in 1961 until the economic crisis in 1997. But in the last two years, GDP has fallen by 0.5 percent in 1997 and again by a record 7.8 percent in 1998. However, the Thai Government expects the situation to turn around soon.
5.32. The economic downturn has affected toll roads. At present there are about one million vehicles using these roads. Growth in toll road use has historically paralleled that of GDP. The roads are now experiencing a slight decline in traffic, but it is expected to increase again soon. It is felt the road capacity is now “catching up” to the former demand.
5.33. About 90 percent of passenger and freight traffic is handled by roads in Thailand. There are 17.6 million vehicles and 11.6 million motorcycles (60 million population). The Bangkok area is home to 3.9 million vehicles and 1.6 million motorcycles. Bangkok accounts for 50 percent of Thai GDP but only one sixth of the population.
5.34. Two agencies have jurisdiction over toll roads, the Department of Highways (DOH, under the Ministry of Transport and Communications) and the Expressway and Rapid Transit Authority (ETA, under the Ministry of Interior). Unlike DOH, which builds and operates all of the free trunk roads in Thailand, ETA is a state-owned enterprise and as such is not entitled to an annual budget allocation from government revenues; hence, all ETA roads must be tolled.
5.35. Toll roads in Thailand have been developed by government agencies for many years, but only recently with private concessions. In the case of ETA’s First Stage Expressway, in Bangkok, the Government built the road while ETA handled operations, maintenance, and toll collection. ETA’s Second Stage Expressway project was the first to offer a private sector concession.
5.36. DOH meanwhile had collected tolls on some ordinary roads, but stopped the practice after 22 years under public protest in 1994. Their new policy is to toll only on government-built motorways (high-standard, controlled access highways), as well as some concessioned roads such as the urban Don Muang Tollway from central Bangkok to the airport. A key reason for making the new Bangkok-Chonburi Motorway tolled was to ensure that it would continue as a controlled-access road (and not devolve into a general access highway as the land alongside developed).
5.37. In 1992, following chronic problems with unsolicited proposals for concession projects, the “Private Participation Act” was passed in order to add government feasibility studies to project preparation, and to add transparency to the process (i.e. by specifying concession conditions). Private investors submit proposals according to the
5-6 Volume I: Main Text Road Development Under the Current Economic Situation in Asia, Session 1-4 conditions only after the feasibility studies are complete. However there remain problems with the concessions from before 1992.
5.38. Current policy issues include:
• To toll or not to toll? Road policy is dictated more by economic growth criteria—i.e. roads are built where growth is intended to occur, not necessarily where the traffic is. It is intended that tolls be charged for privately concessioned roads (of DOH and ETA), other ETA investments, and new motorways near Bangkok in order to maintain access control. Tolls are not to be charged on DOH’s ordinary highways. Tolling status is uncertain for new DOH motorways outside of Bangkok; tolls have been recommended, but this may be changed politically. • Toll rates. One problem is the currency; for collection purposes it is good for prices to be in even units, but that means toll increases must come in relatively steep 10 Baht (US$0.25) increments. • Institutional structure. Is the DOH/ETA duplicity desirable?
5.39. Questions & Discussion. A Seminar attendee from Japan asked Dr. Suwat to give his personal evaluation of the Second Stage Expressway project, in which the original private sector developer, led by Kumagai-Gumi of Japan, ended up terminating their contract with the Government due to a number of disagreements. Dr. Suwat stated that Kumagai-Gumi signed contract with ETA, but no one knew the conditions. As it turned out, these agreements included conditions such as increases in tolls for existing ETA toll roads. However this ran into political difficulties, creating uncertainty—which was not amenable to Kumagai-Gumi’s financial interests. Dr. Suwat explained that the Thai people think that increased tolls just mean extra profits for the operator, and the lack of transparency has worked as an impediment to educating the motorists that toll increases may actually be necessary.
5.40. Another Japanese Seminar attendee inquired as to whether there are any design standards that precisely identify the different types of highways in Thailand. He also wanted to know how are tolls determined for government-funded toll highways. Dr. Suwat answered that there are no firm standards, and even if there were, they would not necessarily be followed anyway. Things can always change. As for the toll rates, Dr. Suwat indicated that there is not much concern for the rate of return on government toll roads.
5.41. Another Seminar attendee from Japan wanted to know whether in the future will national expressway be developed by concessionaires. Dr. Suwat said that most of the national expressways would be built by the government, not by concessionaires. He explained that outside of Bangkok there is no market for concessioned toll roads.
5.42. A final question was asked by another Seminar attendee from Japan. This person stated that the Bangkok Outer Ring Road, Eastern Segment is not tolled at present, and wanted to know if it would be in the future. He also asked for an assessment of the current political opinion on tolled roads. Dr. Suwat replied that the entire Outer Ring Road would be tolled in the future, but that the status of other potentially tolled roads will most likely be decided on a case-by-case basis.
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TOLL ROAD EXPERIENCES IN VARIOUS COUNTRIES SESSION 2-1 (SUMMARY OF PRESENTATIONS AND SELECTED DISCUSSION)
Toll Roads: South African Experience Mr. Nazir Alli, CEO, The South African National Roads Agency
6.1. Risk assessment comprises three parts:
• Lenders (risk averse) • Concessionaire (enthusiastic for profits) • Concession Grantor (needs to rein in the concessionaire and comfort the lender)
6.2. There is no one particular model for toll road development in South Africa, it changes from project to project. The history of toll roads in this country goes back 10- 12 years. It started with state-developed toll roads, then concessions were offered.
6.3. There are three major BOT toll road projects:
• N4 Gauteng-Maputo (cross-border with Mozambique; first stage operational) • N3 Heidelberg – Pietermaritzburg (tenderer selected; negotiations underway) • N4 Platinum Toll Road (being tendered)
6.4. There are six BOT Evaluation criteria:
• Legal; • Financial; • Technical; • Socio-Economic (address conflicts early); • Environmental; and • Traffic and Toll Strategy (reasonableness, acceptability).
6.5. South African toll roads are mostly improved existing roads (not greenfield). Toll roads operate on the “open system,” with some free sections, and therefore toll plaza locations are important. Tariffs are adjusted every year based upon inflation, and the government places importance upon validating concessionaires’ traffic forecasts. There is no electronic toll collection so far, but it is under study; user attitudes are being evaluated.
6.6. Tariffs are weighted by traveled kilometer in order to evaluate the proposed rates of the concessionaires. The tariff evaluation methodology weighs:
• general financial structure;
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• financial robustness; • revenue sharing, risk transfer, and toll; and • NPV of real toll revenues at 8%.
6.7. For state toll roads, the minimum acceptable EIRR is 15% p.a., But economic viability does not necessarily mean that the road will be fully self-funding.
6.8. Questions and Discussion. A Seminar attendee from Indonesia noted that Mr. Alli said that his agency would rather accept a concessionaire with a lower traffic estimate, if they felt it was more realistic. But he wanted to know what happens when the traffic exceeds projections. Mr. Alli replied that there is a revenue sharing scheme that may be used in this event, and that the Government also retains options for allowing or disallowing toll rate increases. Overall, they would rather end up with an excess revenue situation than underestimating traffic; so far the Government has agreed to no minimum revenue guarantees—they are too risky.
6.9. An attendee from Japan remarked that it seems that most toll road financing in South Africa is domestic, but while inflation is down, interest rates are high. How will this affect toll roads? Mr. Alli agreed that all funding so far has been domestic, except for one instance of support from the European Investment Bank. He stated that his agency was concerned with the effect of high interest rates, and that they were looking at all options.
6.10. Another attendee from Indonesia wanted to know how personal values of time or willingness to pay estimates were incorporated into the tariff determination process. Mr. Alli responded that such measures were difficult to estimate, as circumstances change. For instance, most of South Africa’s road freight travels internationally, so they may also be affected by other countries’ tariffs too. It is important for South Africa to stress the value that is being provided for the toll in order to increase motorists’ willingness to pay.
6.11. A Seminar attendee from Japan asked for typical figures on toll road usage, toll rates, and construction costs. Mr. Alli replied that his agency looks for corridors where there are 3,000 to 3,500 vehicles per day; toll rates are in the range of US$0.06 to US$0.08 per km; and construction costs average US$1 to 1.5 million per km.
The French Experience in Motorway Concession How to Meet the Needs Mr. Alain Fayard, Associate Professor, Lille University
6.12. Mr. Fayard opened by sharing his view that the French experience with motorways has been a process of trial and error, but that it has worked pretty well so far. The 8,000 km motorway network in France represents less than one percent of the country’s trunk roads by length, but it handles 20% of the total road traffic.
6.13. There have been four stages of toll road development in France:
• 1955-1969: Creation of a new system (weak public companies)
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• 1970-1981: Liberalization and privatization (strengthening the companies; granting private concessions; cross-subsidization within companies) • 1982-1994: Facing the crisis – nationwide consolidated network (insolvency of all but one private company; state take-over; national cross-subsidization) • Since 1994: Consolidation within the public sector, contracting of service
6.14. Some lessons that have been learned include the following:
• Most projects have needed public support (especially in the beginning – roughly 30%); • “Corporatization” may be more important than privatization (goals should include efficiency, discipline, innovation, and improved maintenance); • Not only public-private partnership, but also public-public partnership may be appropriate; • There are effectively only two options for road finance: taxes and/or user charges; • Private partners must be committed to the contract signed with public authorities; • Ear-marking of taxes has not been efficient in France; and • There have been two undesirable “spinoff” effects: (i) there have become two categories of motorways (toll and non-toll), and (ii) there is now a risk of over- investment in the toll highway network.
6.15. The role of the state has changed, but it has not weakened. It acts as regulator, protector of the public interest, planner, legal and administrative framework provider, and financial facilitator.
6.16. The effectiveness of public-private partnerships hinges on risks and profits. Some important factors include:
• Risks must be shared reasonably and determined beforehand (risks should be born by those who can control them, but this is a particularly open question when it comes to tariffs); • The public must accept that private profit is warranted due to the private exposure to risk; • The private sector must be actually abiding by the commitments made to the public sector; and • If the economic profitability exceeds the financial profitability, there is cause for public financial assistance.
6.17. There are three “key elements” of a concession mechanism: (i) package size; (ii) duration; and (iii) choice criteria. A balance must be reached between elements, particularly when they are in conflict.
6.18. Questions and Discussion. Mr. Yamakawa of MOCJ asked Mr. Fayard to please elaborate on the benchmarking process—i.e. who does the evaluation, what are the incentives, etc. Mr. Fayard replied that there are no incentives and that the concessionaires are asked to provide the indicators. The primary motivator is not a
6-3 Volume I: Main Text Toll Road Experiences in Various Countries, Session 2-1 formal system, but rather an informal competitiveness among the contractors to claim that they are the best.
6.19. A Seminar attendee from Japan inquired as to whether the urban motorways are tolled in France, and what the criteria are. Mr. Fayard responded that there have only been a few successful attempts to toll urban motorways—most remain untolled. For many reasons it is difficult to accommodate tolls in urban areas right now.
6.20. Another attendee from Japan asked whether there are plans to introduce tolls on urban expressways when ETC technology is more advanced. Mr. Fayard explained that while France is presently developing a unified ETC system, the urban toll issue is a social/political acceptance matter.
Motorway Financing in Hungary Experience of the Last Ten Years Mr. Miklós Murányi, Development Director, Head of Bureau for Arrangement and Concession, Hungarian State Motorway Company
6.21. Motorways for Eastern Europe have been outlined by a Pan-European plan, and Hungary’s facilities are part of this plan. Severe budgetary constraints dictated that BOT be used to attract private investment. An initial plan for six motorway concessions, a motorway directorate, and reliable legal and regulatory framework was established in 1990.
6.22. The original project tenders were awarded through international competitive bidding; the entire process took two years to complete. The result was a transfer of monopolistic rights to motorway service provision for a limited period to a private concessionaire. All facilities and land remain property of the Government.
6.23. The first concession was for the M1-M15 (Vienna-Budapest) motorway. This project secured foreign debt financing from 11 commercial banks and Hungarian financing from EBRD and two domestic banks. The fiscal benefit to the State comes in the form of a value added tax on toll revenues.
6.24. The primary lessons learned were that the minimum amount of equity needs to be determined early, reliable traffic forecasts must be established, and adequate dispute resolution mechanisms must be established.
6.25. In retrospect, the following points have been noted:
• Traffic was half of the estimate, 46% of traffic in corridor; • The highway was easy to avoid for most prospective travelers; • The time benefit of taking the toll highway was offset by a long wait at the border crossing; • Shopping trips to Vienna, expected to be a large traffic generator, have declined as new shopping centers have opened in Budapest; • The road is highly dependent on international transit traffic; • The starting toll level was too high; and
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• The discount toll policy was not clear.
6.26. In 1996 the toll on this highway was declared “invalid” (i.e not commensurate with the service provided). Consequently, the concession company went bankrupt in 1997, and entered renegotiations in 1998. A new Hungarian Government in mid-1998 decided to nationalize the project under a new contract to the state-owned toll road company.
6.27. The second project was the M9 Orbital motorway near the south border of Hungary. This 1993 concession with GTM received very little government support, and was beset by environmental and other issues. Project financing never reached closure, and the contract was terminated in 1998. At present the state is taking over, but there is still no financing.
6.28. In 1994 a private concession contract was signed for the M5 motorway from Budapest to Serbia and Romania. This project comprised several stages and included the upgrading and tolling of existing highway facilities, while the government contributed to land acquisition. Local people and road users protested the tolls, and a discount program was implemented. Traffic has reached 97 percent of the initial estimate, totaling 44 percent of overall corridor traffic.
6.29. A 1995 call for concession bids for the M3 motorway was not successful, and a state-owned company was established in 1996 to implement the project. There were civil actions against this project as well, and toll collection was not started until a compromise agreement was reached in January 1999. Under this agreement, all frequent users of the highway purchase an annual or monthly pass (for US$100 or US$10, respectively), while the regular toll is US$0.04 per km.
6.30. A 1997 call for concession bids for the M7 motorway was also unsuccessful, and significant government involvement is anticipated. A traditional public financing structure is envisaged, with toll collection to start upon project completion.
6.31. At this time, all future plans for Hungarian motorways are primarily based on state funding. The plan totals 600 km and is expected to cost about US$3 billion.
6.32. Questions and Discussion. A Seminar attendee from the World Bank inquired as to the nature of alternatives analysis conducted in Hungary. He wondered whether the expressway plans currently envisioned may be excessive for traffic of only 6,000 to 7,000 vehicles per day, and if there may be other more economical ways to provide capacity in the mid-term. Mr. Murányi clarified that traffic volumes in many of the toll road corridors indeed reach 30,000 vehicles per day, and that the lower figures were due to the high tolls. He stated that it is felt to be “inevitable” that Hungary needs motorway investment, and that this is a strict government policy.
6.33. Mr. Stanfield of the United States asked, given the difficulties that have been encountered over the past ten years, what would you have done differently in hindsight? Mr. Murányi had two immediate ideas: (i) a state contribution is necessary—for instance the lack of government participation initially handicapped the M1 project, while M5 fared better but had state contribution (including a standby subsidy); and (ii)
6-5 Volume I: Main Text Toll Road Experiences in Various Countries, Session 2-1 when setting the toll level, there should be a subsidized rate for certain users— for instance the M3 now serves some non-tolled traffic as well.
6.34. A Seminar attendee from Japan wanted to know whether there were any special toll rates for international freight transit traffic. Mr. Murányi replied that there were no across the board discounts, but rather that discounted rates are provided by the concessionaires to fleet owners on a negotiated basis. There is also a weight fee for commercial vehicle operators.
6.35. Another Japanese Seminar attendee explained that his experience indicated that it is crucial to conduct sensitivity analysis and estimate traffic a each toll level in order to set the most appropriate toll level per km. He wondered whether there has been such analysis in Hungary. Mr. Murányi explained that in the case of the M1 motorway, local traffic is not using the motorway because it is near the Austria border, and there is an adequate parallel road. Consequently, it is felt that lowering the toll would have no impact
Toll Road System in Japan Expressway Network Development Through Public Corporations Mr. Jun-ichi Matoba, Director for Toll Road Development, Road Bureau, MOCJ, and Chairperson of the MOCJ Steering Committee for the Global Toll Road Study
6.36. The presentation began with an overview of the background of toll road development in Japan. In order to sustain economic growth, emphasis has been given to road development, including using earmarked public revenues for general purpose roads and the development of a tolled expressway system. The share of domestic freight transport handled by the road network has increased steadily; at present it totals more than coastal shipping and freight railways combined.
6.37. The 1952 Law Concerning Special Measures for Highway Construction heralded the beginning of toll road development in Japan, while also introducing the “benefit principle” for road finance. A revision to this law in 1956 introduced toll road development through the Japan Highway Public Corporation (JHPC). The Highway Public Corporation system has been subsequently expanded to include the Metropolitan Expressway Public Corporation serving greater Tokyo (1959), the Hanshin Expressway Public Corporation serving greater Osaka (1962), the Honshu-Shikoku Bridge Authority (1970), and several local public corporations (since 1970).
6.38. The original 3,000 km national expressway network development plan was advanced by the National Development Arterial Expressway Construction Law of 1957. This plan was subsequently expanded to 7,600 km in 1966 in order to create a national system that would connect all cities with a population of 100,000 or more within a two- hour drive. In 1987 the law was again revised to bring the total to 11,520 km, this time with the goals of connecting the above cities within a one-hour drive, strengthening orbital expressways, strengthening the connections between major airports and seaports, constructing alternative routes, and reducing traffic congestion.
6.39. Road in Japan are funded in accordance with the “Benefit & Burden Relationship” whereby road users pay the burden of “earmarked” taxes for road
6-6 Volume I: Main Text Toll Road Experiences in Various Countries, Session 2-1 financing, from which the total revenues are allocated to road maintenance and improvement projects that benefit the road users in terms of reduced driving time, improved safety, etc.
6.40. There are three types of special earmarked funds for road works:
• National Taxes (gasoline tax, motor vehicle LPG tax, and motor vehicle tonnage tax); • Local Taxes (local road transfer tax, motor vehicle LPG transfer tax, motor vehicle tonnage transfer tax, diesel fuel transaction tax, and motor vehicle purchase tax); and • Treasury Investments and Loans (used only for toll roads)
6.41. In addition to the earmarked taxes, the Government also provides direct capital funds in order to promote toll road development and stabilize the financial status of public corporations, as well as reduce the cost of funds with an interest subsidy. “Government Guaranteed” bonds and “Government Accepted” bonds are the primary sources of funding for toll roads, aside from toll revenues. “Government Accepted” bonds are purchased by the government using funds from postal savings accounts, employee pension funds, national pension funds, and postal life insurance premiums. Government interest subsidies are used to reduce the risks from interest fluctuations (between 3.0 and 6.5 percent) and allow the toll roads to maintain appropriate toll rate levels.
6.42. The toll revenue “pooling” system was adopted in 1972 for the entire national expressway network, and functions as a form of (internal) cross-subsidization. It allows tolls to be set equivalent levels throughout the network while also permitting financial viability decisions to be made on a network-wide rather than a route or segment basis.
6.43. The pooling system was adopted based on the following principles:
• The expressway system will be most effective when the entire network is completed; • Cross-subsidization will facilitate network expansion; • Overall profitability will be improved by opening connecting routes; and • Confusion and unfairness among the routes in the network will be avoided.
6.44. Toll setting and debt redemption are based on the following three principles:
• Redemption Principle (the toll roads must pay off their debts); • Benefit Principle (toll rates must not exceed the benefit the users receive); and • Just-and-Fair Principle (the toll rates charged must be set at “just and fair” levels).
6.45. In terms of best practices, it has been a clear goal in Japan to foster political acceptance. This has been accomplished not through demand-led expressway development, but through demand-leading development. The results of this strategy are nationwide expressway coverage, a political consensus for network expansion, and uniform toll levels across the network.
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6.46. Another best practice has been the government assumption of interest rate risks through interest subsidies and capital funds. In addition, the revenue pooling system has been helpful for network expansion by facilitating the cross-subsidization of unprofitable routes and segments. Limits have been made on the extent of cross- subsidization allowable, however.
6.47. Finally, the “Redemption Principle” is now being reevaluated. There is some political opposition against increasing toll rates, and some calls for more direct government support. Additionally, the redemption period may be extended from 30 to 40 years in order to minimize the need for toll rate increases.
6.48. Questions and Discussion. Mr. Alli of South Africa wanted clarification on the difference between “Government Accepted” and “Government Guaranteed” bonds. He also asked whether there is an upper limit on toll revenue pooling? Mr. Matoba replied that “Government Accepted” are purchased directly by the Government, whereas “Government Guaranteed” bonds are issued by JHPC to institutional investors, but with a government guarantee. As for the limit on toll pooling, a maximum of 50 percent of the construction cost for a new expressway can come from the pooling mechanism—the remainder must be funded by tariff revenue (or by direct subsidies).
6.49. Mr. Irigoyen of the World Bank questioned how deferring the toll escalation would affect network development. Mr. Matoba stated that if a toll increase is deferred, that would hurt the profitability of the toll roads. So direct public subsidies for construction must be used to compensate in this case.
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FINANCIAL PERSPECTIVE SESSION 2-2 (SUMMARY OF PRESENTATIONS AND SELECTED DISCUSSION)
Innovative Financing Techniques for Toll Roads Mr. Mitchel Stanfield, President, MSA Inc. Infrastructure Consultants, USA
7.1. For the purposes of this presentation, “innovative” financing was defined as financing using some other entity’s capital. From Mr. Stanfield’s personal experience in Hungary and China, the following are apparent:
• Toll roads are not a substitute for well-funded and managed public highway program; • Commercial highways are only possible in corridors with commercial revenue potential; • Government support is needed to mitigate start-up risks; and • Private capital works best when leveraged with public funds.
7.2. Several “realities” of road financing in East Asia these days were identified. Foremost is that this is not the time for major new greenfield highways—they are not affordable. Instead, existing resources should be optimized. Appropriate traffic growth and population are present, but economic strength is not. In addition, investors are highly risk averse, and private capital is increasingly limited. The market for private investors at the present time is in existing road infrastructure, urban congestion relief, multimodal road links, and bridges.
7.3. Priorities for public sector highway agencies interested in encouraging private sector project development should include the following:
• a high level of project preparation, • stable government policies, • transparent procurement procedures, • a politically reliable legal and regulatory framework, and • institutional development systems that promote efficient highway development.
7.4. The financing experiences of three projects were highlighted:
• San Joaquin Transportation Corridors Agency (TCA), USA. This is a special purpose agency that was formed by Orange County, California and nine municipal jurisdictions. TCAs have special powers to develop individual toll road projects in California, as opposed to a network or system of roads which would be the responsibility of a toll road authority. The San Joaquin TCA was able to prepare its project well enough so that it did not need a government guarantee.
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• Zuhai Highway Company Ltd., China. This highway obtained the only offshore highway finance other than Hopewell’s Guangzhou-Shenzhen Superhighway. The project’s financing relies 80 percent on local vehicle registration fees and 20 percent on toll revenue. • M40 Highway PLC, UK. This project involved a 30-year DBFO concession, using “shadow tolls,” thereby providing minimal traffic risk and no construction risk to the developer and the lender. Hence, there was very little startup risk relative to other projects. It also uses an existing highway corridor, with added capacity. Four international banks have taken 90% of project debt without recourse.
7.5. Questions and Discussion. Mr. Alli of South Africa noted that while in the China example 80 percent of revenues come from vehicle registration, in other countries there is not such a captive market, and fees go to other uses as well. Mr. Stanfield agreed that in discussions he has had it is apparent that while there are vehicle licensing schemes virtually everywhere, they are seldom earmarked in developing countries, which makes it is difficult to use these revenues for dedicated purposes such as toll road development. However he stated that it seems some kind of dedicated revenue source (a fuel tax, licensing fee, special sales tax, etc.) is essential in order to sustain large scale toll road development and operation.
7.6. A Seminar attendee from Japan questioned whether shadow tolls were advisable for developing countries. He noted a potential problem in that the government must still pay in the long run, which may not be possible. Mr. Stanfield explained that every shadow toll proposal must have financial backing from the government by way of road user charges, and it is indeed possible that user charges may be easier to implement than direct tolls.
7.7. Another Seminar attendee from Japan remarked that if the government is aiming to limit the scale of its involvement in highway development, shadow tolling may be a useful tool. Mr. Stanfield added that shadow tolls do need to be applied selectively, but they may work to relieve complete dependence upon tolls in favor of indirect user charges.
7.8. Mr. Irigoyen of the World Bank commented that in the case of DBFO in England, one purpose has been to try to relieve traffic from other roads (so no toll charge is wanted on the new “alternate” route). But he explained that in the case of Latin America, long-term performance-based contracts have been more effective, and have been more in line with the needs in these countries. Mr. Stanfield concurred that many of the Latin American examples may be very useful to Asian countries, and that we should examine them more closely.
Developer/Operator’s View on Toll Road Development Mr. Bertrand Marçais, Senior Executive Vice President, International Affiliates and Development in Far East, Groupe EGIS, France
7.9. Groupe EGIS has extensive credentials in the private sector toll road development field. They are the international arm of a leading French toll road design, engineering, and management firm, and are involved in projects worldwide.
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7.10. Key lessons from the challenges faced in the development phase of toll road projects include:
• BOT is a complex process and needs tailor-made solutions (but differences in approach from one project sponsor to another make things difficult for the developer); • Developers need simple, clear, fast, and transparent decision processes; • BOT is not a “bonanza” that solves infrastructure bottlenecks; and • Non-recourse projects are high risk, so returns on private capital must be commensurately high.
7.11. Key features of a successful BOT include government involvement, a combination of expertise, effective risk allocation, and a standard framework. However there are actually very few opportunities for “pure” BOT; most projects ultimately require some form of public-private partnership (PPP). Nevertheless, the general logic for PPPs remains the same, only with government helping in the areas that make the project infeasible as a pure BOT.
7.12. It seems most difficult to reach a common understanding about conflict of interest, assessment of bids, value of contract, and the “thrust” (intents) of the foreigners.
7.13. Key issues and difficulties in the operational phase include the following:
• Effective operation is crucial, affecting 25 to 30 percent of revenues; • Secure toll collection and an optimal marketing policy will maximize revenues while also helping to minimize operating costs; • Appropriate maintenance is needed throughout the project; • The operator must strive to attract traffic through better services (fluidity and comfort, safety, time savings); and • The developer must guarantee the best use of the highway resource.
7.14. It is important to note that ETC problems are not in technology, but in the logistics of actually getting the money from the users. From the experience of EGIS, the main benefit of ETC is in alleviating congestion and increasing capacity. There is also strong need for good and reliable toll equipment. The lowest price is often not the best for system performance.
7.15. There are four key principles for a Developer/Operator:
• Clearly allocate risk/return; • Rely on good civil works contractors (turnkey); • Use an experienced operator; • Equip and maintain good fixed operating equipment.
7.16. These lessons and principles apply to all transport infrastructure. Not just greenfield projects, but increasingly brownfield and privatization as well. Smaller scale efforts appear to be more realistic in the future. In general, it seems to be better for civil
7-3 Volume I: Main Text Financial Perspective, Session 2-2 works to be built by the state, and for the private investor to take over aspects such as equipment supply, operation, and maintenance. Alternately, the state may privatize operations and maintenance in conjunction with a major capital improvement, or the state may build the project, start operation, and then put its operation to open tender.
7.17. Questions and Discussion. A Seminar attendee from Japan noted that French government had made a decision to allow the formerly state-owned Transroute/EGIS to participate in BOT abroad. But he went on to say that in Japan, public corporations are not allowed to compete overseas, despite having a great deal of accumulated experience. The attendee suggested that EGIS’s overseas participation must have benefited French corporations as well, and asked about what kind of information or expertise could be shared with the Japanese on this subject. Mr. Marçais clarified that Transroute/EGIS has been managed on a private basis for 10 years, and now is completely private. But for more detailed exchange of information, he said that the request must come at the Ministerial level.
7.18. A Seminar attendee from the World Bank brought up the issue of disputes between owners and concessionaires, and asked about what arbitration mechanisms are utilized in the case of EGIS’s contracts. Mr. Marçais emphasized that the best mechanism is always to have a good contract that covers all of the possible issues that can be raised. Then, if it comes to that, there must be a procedure for seeking international arbitration. But he stressed that in his opinion a poor compromise is better than a good court case.
7.19. Mr. Stanfield of the United States inquired as to how EGIS is reacting to opportunities for buyouts and restructuring of the toll roads that have been hit hard by the economic crisis. Mr. Marçais replied that there are not many opportunities for existing motorways, and when there are, most projects are very large, and the financial community is not eager to lend. It seems that US$30 million projects are perhaps okay, but US$200 to 300 million is much to big. In addition, EGIS does not have the impression that many countries are willing to open the books completely on their projects, particularly in terms of how much has been done and what is the value of existing assets.
7.20. A Seminar attendee from Japan asked about how the overseas financial performance of EGIS affects its domestic projects. Mr. Marçais clarified that EGIS is not involved in toll operations in France—it only does engineering work domestically). Some of its shareholders are toll road operators, but that is the only connection. There is no “cross-subsidization”; any money lost goes straight to balance sheet.
7.21. A seminar attendee from Thailand wondered how EGIS was dealing with “Year 2000” compatibility problems with its operations software, and Mr. Marçais said that the software suppliers were responsible for such matters.
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Toll Highway Financing in China Recent Experience and Future Directions Mr. Alfred Nickesen, Principal Transport Specialist, East Asia and Pacific Region, The World Bank, and Chairperson of the World Bank Steering Committee for the Global Toll Road Study
7.22. At the dawn of the Asian economic crisis in 1997, the international financial sector’s view of the highway sector in China was quite rosy. It was seen as the dominant infrastructure sector at a unique period of opportunity due to high road traffic growth and increasing tariffs.
7.23. There have been three important policy developments in the 1990s with respect to toll roads in China: (i) the development of a comprehensive system in next 15 to 20 years; (ii) the implementation of a decentralized planning system; and (iii) increasing levels of private investment.
7.24. China’s toll roads are overseen by the Ministry of Communication, but substantial power is vested with the provinces in order to encourage local commitment and “ownership.” Anticipated growth in demand for highways is significant, projected to increase by 70% from 1994-2000.
7.25. China’s proposed trunk highway system, to be completed by 2015, is similar in scale to the US Interstate Highway System. It features 12 high-priority corridors, linking the country’s 95 most important cities. Most of the projects receiving attention so far are joint venture concessions, where existing road assets are being sold. This is occurring primarily in the coastal provinces, where municipal and provincial entities are selling operating rights to the highways. The main risks for toll road developers/investors in China include toll rate approval, foreign exchange (value and convertibility risk), competition from other roads, and toll evasion.
7.26. Since 1985 the World Bank has been involved in 20 toll road projects in China totaling more than US$4 billion (no more than 30% each). The average implementation time for each project has been six years. The primary impact of this involvement is felt to be in integrating the national economy.
7.27. Increasingly, asset securitization is also being used for toll road development. It is thought that such financial structuring may serve as a catalyst for future debt financing. Through asset securitization, toll road developers have gained access to equity markets in Shenzhen and Hong Kong. Returns on investments have been based on traffic growth, toll rate increases, and asset expansion. The downside, however, is the low predictability of traffic flows and non-transparent toll adjustment procedures. Furthermore, highway company share prices have been highly volatile; lately these share prices are on average 30% below their IPO levels. In short, a strong policy framework is still necessary, and long term credit is needed. Asset securitization may be helpful now, but it is not sustainable.
7.28. In conclusion, a well-developed toll road system is on the way. Key issues right now relate to multimodal coordination, land use, and the environment. The World Bank is also prepared to assist with these issues.
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7.29. Questions and Discussion. Mr. Alli of South Africa asked about how the Chinese have gone about assessing the value of their existing roads. Mr. Nickesen reiterated that the Chinese local authorities have only been involved in selling operating rights to the highways, not the physical assets themselves. As for how the operating rights have been valued, Mr. Nickesen said that he has been given no documentation so it is very difficult to tell. All of the deals have been negotiated, and there has been no transparency. The usual process is for a Hong Kong developer to approach a highway agency and negotiate an “appropriate” value for a 30-year concession. The official national policy is not to encourage these kind of transactions, and the Central Government has tried to establish a more transparent BOT framework, but this initiative has not worked well so far.
7.30. A Seminar attendee from Japan commented that the securitization of projects depends on prospect of financial viability of the new project, and wondered how financially attractive these projects actually are. Mr. Nickesen said that asset securitization must be distinguished from the types of deals discussed in the preceding question (in which the Bank has had no assets involved so far). Bank-funded assets have however been securitized by public road agencies, and the Bank has received the relevant legal and underwriting documents. This type of securitization has been driven by the desire of road agencies at the municipal and provincial level to mobilize additional capital. These agencies may thereby immediately reinvest this capital in new assets, which are usually extensions of the securitized roads. Mr. Nickesen stated that the whole exercise is driven by traffic demand.
7.31. Another Japanese Seminar inquired about how the value of the securitization is determined in the last years of a concession, and how this is reflected in the price of the shares. Mr. Nickesen clarified that there is no concession period in the case of securitizations. Rather, there is just a provincial shareholding company. Shares are purchased in the company only; what is securitized is the company’s future revenue stream, not a particular road.
Toll Road Development in Latin American Countries Mr. Jose Luis Irigoyen, Principal Highway Engineer, Latin America Region, The World Bank
7.32. More than US$20 billion has been invested in toll road concessions in 11 Latin American Countries (LAC) during the 1990s. This accounts for between 5 and 31% of the roadway network in these countries. Approaches for involving the private sector vary; in some cases private involvement has been sought for new facilities, while in other instances the private sector has upgraded existing roads or provided feeder routes or capacity expansion. Each of the countries have different demands and expectations based upon their ongoing experiences.
7.33. The main toll road issues at the moment include high debt/equity ratios; short term, high cost financing; social/political vulnerability of tolls; and unpredictable traffic levels. Several strategic choices have had to be made by each of the countries:
• Traffic volumes are typically not high enough to warrant duplication of routes. Consequently highway policy makers are confronted with a politically difficult
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decision on whether to charge tolls to pay for improved existing routes with no alternatives. • The motorists’ willingness to pay tolls is difficult to forecast. • Toll rates are not uniform since the roads themselves are typically very open. Toll gates are placed between large long-distance traffic generators and where no alternate routes are present. Community sensitivity to the location of toll gates is also a key issue. • The “bankability” of greenfield projects is hindered by the low predictability of traffic demand. • Minimum Revenue Guarantees (MRG) are used, but must be structured carefully in order not to relieve all risks. Alternately, investment can be phased to follow revenues exactly (as in Argentina). No MRGs have been needed where market conditions were suitable and understood in advance (Colombia and Chile). • There is a strong need to avoid opportunistic behavior on behalf of the concessionaires through equitable risk/reward distribution.
7.34. The World Bank’s involvement with toll road development in LAC has included technical assistance, public-private partnership assistance, Bank guarantees, and instruments to extend debt maturities. IFC has also been active in LAC.
7.35. The steps taken in the case of a recent toll road development project in Colombia are illustrative. They included:
• select project parameters; • pool contiguous roads; • assign risks and benefits, and how to share; • design effective/necessary government support mechanisms (in order to reduce pressure for guarantees); • bring in Bank support where value added is greatest (such as partial risk guarantees); and • attract qualified sponsors (prequalification)
7.36. Low traffic, strained government budgets, and volatile interest rates have been the primary effects of the economic crisis on toll road development in LAC. So far things have not been severe, except in Brazil. Some lessons learned from the LAC experience may be useful for maintaining private concessions in an area of financial crisis. They include:
• promote more secure financing structures; • avoid broad guarantees; • improve management of contingent liabilities to maintain fiscal credibility; and • restore investor credibility.
7.37. Questions and Discussion. A Seminar attendee from Japan commented that the presentation was useful because information from LAC is not widely known in Japan. He then asked how was the discount rate (NPV) determined in Colombia, where the MRG was applied. Mr. Irigoyen replied that tariffs were set according to an economic analysis that used current toll rates as a benchmark. For existing roads, before
7-7 Volume I: Main Text Financial Perspective, Session 2-2 improvement, it was decided not to charge more than the national toll roads (although these rates could be increased to reflect improvements). Motorist willingness to pay was tested through surveys, and the locations of toll gates were subject to community review. A 15 percent discount rate was used, just for calculating the impacts of incurring a loss due to the guarantee.
Risk Allocation in Asian Toll Road Development Theory and Practice in a Time of Financial Crisis Mr. Michael M. McNeill, Baker & McKenzie, Singapore
7.38. This presentation centered on how to identify which risks are acceptable, and to whom. There are pluses and minuses to both public and private sector participation in infrastructure development. Ultimately there must be an economic rationale for the role of each, determined by an objective analysis of socio-economic benefits and the need for anticipated profits to cover development costs and provide an acceptable return.
7.39. Public sector sources of capital include sovereign loans, revenue bonds, and the private sector. Private sector sources of capital include grants or other contributions by public agencies, sponsors’ equity, senior commercial bank loans, mezzanine financing, loans/credits/guarantees from multilaterals or ECAs, and private placements or issues of securities to the public.
7.40. The financial crisis has resulted in increased competition for capital in Asia, and has made investors and lenders more risk averse. This has had a particularly severe impact in toll roads because infrastructure capital is categorically different than industrial (or other) foreign investment even under good economic conditions. These differences manifest themselves in terms of historical private involvement in the sector, market and traffic risks, foreign exchange risks (e.g. revenues and expenses may both be in local currency), pricing/tariff controls, construction risks, public acceptance, and the level of government involvement.
7.41. In terms of a framework for private sector participation, there needs to be (i) well-drafted laws and regulations; (ii) clear, binding, and enforceable identification of respective rights and obligations of each party; (iii) an open and transparent method of awarding projects; and (iv) an effort to minimize development costs (i.e. by “pre- packaging” approvals). Each structure for private sector participation (e.g. BOT variants, PPP, etc.) has strengths and weaknesses; decisions about which to use must be tailored to the individual project and circumstances.
7.42. While the risk allocation paradigm is to assign particular risks to those most suited to handle it, this ideal is compromised by the greed-fear behavior that accompanies boom-bust economic cycles. The key risks to identify include: political, construction, market and revenue, finance, legal, and operating.
7.43. In conclusion, private sector involvement requires: (i) proper socio-economic analysis (SEA) of pros/cons; (ii) well-drafted and enforceable laws, regulations and concession contracts; (iii) allocation of risks consistent with the SEA and the legitimate requirements of the private sector; and (iv) procedures that minimize the cost of the bidding and development stages.
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7.44. Question and Discussion. A Seminar attendee from Japan noted that project implementation decisions are influenced both by the estimated rate of return and by an evaluation of risk. He then asked what kind of methodology is used to make this decision. Mr. McNeill said that the lawyers are assisted by financial advisors to make their recommendations, and that the decisions typically involve incorporating both qualitative and quantitative factors into a risk analysis matrix. Often the methodology relies on “rules of thumb,” as professional prudence dictates that “it is better to be approximately right than precisely wrong!”
Capital Market Financing for Toll Roads Performance and Trends Mr. Thomas A. Doud, Associate Director, Standard & Poor’s Ratings, Hong Kong
7.45. In 1998 Standard & Poor’s rated more than US$40 billion in project debt, with roughly equal proportions inside and outside of the United States. The rated project debt is dominated by the power sector, but toll roads account for much of the remainder—many of which are in China. The rated debt has been secured by both entities dedicated to roads and diversified companies, as well as municipal bonds.
7.46. The framework for rating toll roads is similar to other infrastructure investments. It involves site visits and meetings with relevant project and government officials, and analyzing the following criteria:
• demand/supply fundamentals (traffic risk and service areas); • facility costs; • operating risks; • structure of finance and project ownership; • construction/technology risks; • the credit strength of backstop supporters; and • projected financial results.
7.47. Minimum return assurances are a key goal of all project proponents. Clear risk allocation reduces uncertainty for all parties involved. In China, traffic and traffic growth have both been below expectations, and two-thirds of the projects rated are not meeting their sponsors’ projections. However debt service performance may still meet the rating.
7.48. Details were given for several rated toll road companies, including: Greater Beijing First Expressways; Guanzhou-Shenzhen Superhighway; Traffic Stream Infrastructure; Cathay International; and Citra Marga Nusaphala Persada (CMNP).
7.49. Negative conclusions include the following:
• Traffic forecasts have been unreliable; • Exchange rate fluctuations add volatility; • Road traffic is subject to economic cycles; • Transactions that utilize third party backstops are vulnerable to the financial strength of those parties;
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• Toll collection system performance is critical to revenue (toll leakage can be a huge problem); and • Toll increase approvals are highly unpredictable.
7.50. However, there are several positive conclusions as well:
• The elasticity of demand for many roads may be modest; • The base traffic in existing corridors has been predictable; • Solving transport problems is still a public priority; and • Traffic levels and toll revenues do not always correlate directly with debt service performance.
7.51. Questions and Discussion. A Seminar attendee from Indonesia noted that Mr. Doud’s remarks on the Indonesian toll road developer CMNP did not characterize its debt as project financing, and he wanted clarification on why this was so. Mr. Doud explained that while CMNP’s toll roads contribute a large proportion of the company’s operating revenues, the company’s debt is more accurately characterized as a corporate bond with a substantial project development risk.
7.52. Dr. Kuranami from PADECO asked what was the reaction from investors when Cathay International’s minimum revenue guarantee was declared illegal by the government? Mr. Doud said that institutional investors have had an adverse reaction, and that they were taken by surprise even though it had been talked about before. Despite this reaction, there is no indication that there will be any grandfathering allowed in Cathay’s case.
7.53. A Seminar attendee from Japan wanted to know more about the cost and time involved in making a rating, as well as a guess at what the Japan Highway Public Corporation’s rating would be now. Mr. Doud replied that the criteria used to perform the ratings analysis are of course more detailed in practice than the brief list given in the presentation might imply. He said that the time required to perform a rating evaluation may vary substantially from one project to another, but that in general it takes six to eight weeks from the time that all information is received. As for a rating on JHPC, Mr. Doud said that would not be possible without performing a detailed analysis.
7.54. Another Japanese Seminar attendee questioned whether involvement by an Export-Import bank, for instance, would mitigate political risks and improve the rating. Mr. Doud said such involvement is called a “halo effect,” and that some issuers can achieve higher ratings by using “preferred creditor” status. However he indicated that this is a complex process that is difficult to explain briefly.
7.55. Another Seminar attendee from Japan commented that Standard & Poor’s ratings may take six to eight weeks, but they have much influence, and he wanted to know if political considerations were taken into account when credit ratings are released. Mr. Doud explained that six to eight weeks is just a guideline for project finance ratings that have complete documentation—some ratings take more than a year to complete. He said that while political considerations are indeed important, in the end S&P must be answerable first to institutional investors, as they are at the root of the S&P franchise. If S&P is not responsive in this manner, the value of their ratings will be lost. Mr. Doud further explained that S&P does not conduct unsolicited ratings
7-10 Volume I: Main Text Financial Perspective, Session 2-2 except in specific circumstances (called Public Information, or PI ratings), and that the process and rating are 100% confidential until involved parties want it to go public. Sometimes ratings are made solely on information available to the public (PI ratings), but they are less precise and are classified differently to reflect this. In short, he concluded, the framework is predictable, but it does not take political considerations into account if it means that investors will be deprived of timely information.
7.56. Another Japanese attendee asked about the effect of the closure of the Guangdong International Trust & Investment Corporation (GITIC) on the profitability of the Guangzhou-Shenzhen Superhighway. (GITIC had provided a cash flow deficiency guarantee for repayment of loans to the Superhighway project.) Mr. Doud explained that without a shortfall guarantee, the Superhighway project will have trouble servicing its subordinated bonds. But he said that the project’s developer, Hopewell Holdings of Hong Kong, is working on finding a replacement for GITIC quickly. Until then, Hopewell says that they will pay all debts that come due. While the project is technically in default, S&P still has confidence so it has not lowered their rating.
7.57. A Seminar attendee from Japan suggested that while there are due diligence obligations, but S&P might still have a problem judging traffic forecasts. He wanted to know whether the rating agency or the developer/operator bore any liability for inaccurate forecasts—and whether such issues caused a credibility problem for debt rating agencies in general. Mr. Doud explained that essentially a rating is an opinion about the ability to repay debts; it is not an expert opinion. He emphasized that if S&P loses credibility with its clients, the firm will go out of business. To debt ratings agencies, this represents is the “ultimate” regulation. Mr. Doud continued that while there has been litigation against S&P, the debt issuers and institutional investors are the ultimate judges. Furthermore, there is increasing competition for performing debt ratings around the world these days. He also explained that there has been a shift in S&P’s “corporate values” in recent years, and that the firm is quite sensitive to customer service-related issues now.
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8
EXCHANGE OF KNOWLEDGE SESSION 3-1 (SUMMARY OF THE PANEL DISCUSSION)
Panel Discussion: Lessons from World-Wide Experiences and Issues to be Addressed for Future Toll Road Development in Asian Countries
Moderated by: Mr. Alfred H. Nickesen, Principal Transport Specialist, East Asia and Pacific Region, The World Bank Mr. Jose Luis Irigoyen, Principal Highway Engineer, Latin America Region, The World Bank
Panelists: “Target Countries”: • Mr. Godofredo Z. Galano, Director, Department of Public Works and Highways, Philippines • Mr. Likhit Khaodhiar, Chief Engineer for Maintenance, Department of Highways, Ministry of Transport and Communications, Thailand • Ir. Ghazali b Md. Nor, Deputy Director General, Malaysian Highway Authority • Dr. Bambang Bintoro Soedjito, Deputy Chairman for Infrastructure, Badan Perencanaan Pembangunan Nasional (Bappenas, the National Development Planning Agency of Indonesia) “Resource Countries”: • Mr. Nazir Alli, Chief Executive Officer, National Roads Agency, South Africa • Mr. Alain Fayard, Associate Professor, University of Lille I, France • Mr. Miklós Murányi, Development Director, Head of Bureau for Arrangement and Concession, Hungarian State Motorway Company • Mr. Asao Yamakawa, Deputy Director General for Engineering Affairs, Economic Affairs Bureau and Deputy Director General of Ministry’s Secretariat, MOCJ “Specialists”: • Mr. Thomas A. Doud, Associate Director, Standard & Poor’s Ratings, Hong Kong SAR • Mr. Michael M. McNeill, Baker & McKenzie, Singapore • Mr. Mitchel Stanfield, President, MSA Inc., Infrastructure Consultants, USA • Prof. Hirotaka Yamauchi, Hitotsubashi University, Japan
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8.1. Just before the Panel Discussion began, the floor was opened to Mr. Vin Loc Nguyen, Deputy Director of the International Relations Department, Ministry of Transport of Viet Nam, for his brief comments.1 Then, Mr. Nickesen explained the “modus operandi” of the discussion. During the first two days of the Seminar, every attendee was asked to submit questions, and about 40 were received (the list of questions submitted is included in Appendix D of these Proceedings). The goal in organizing the discussion was to involve all 12 panelists, as well as the audience—not only as listeners but also as active participants in terms of following up on panelist comments and asking additional questions.
8.2. The 40 questions were grouped in to five “clusters.” The first one deals with Planning and Institutional Issues; the second one with Legal and Regulatory Frameworks, Government Support, and Public Acceptance Issues; the third one with Toll Rate Setting and Adjustment Issues; the fourth one on Funding and Finance Issues; and the fifth one contains rather specialized questions, on electronic toll collection (ETC). The panelists were assembled into three groups. The first one consisted of delegates from what have been called “target countries” under the Asian Toll Road Development Program: Indonesia, Malaysia, the Philippines, and Thailand. The second group comprised delegates from “resource countries” including France, Hungary, Japan, and South Africa. The final group were called “specialists.” They came from Hong Kong, Japan, Singapore, and the United States.
8.3. Mr. Irigoyen was to introduce each of the five categories of questions briefly. Then one or more representatives from each of the three panel groups would be asked to respond (after having had time to prepare during the previous evening). The questions were to be posed starting with the target country delegates, moving to the resource country delegates, and concluding with the specialists. Audience participation was encouraged.
8.4. Planning and Institutional Issues. Mr. Irigoyen stated that the first set of questions dealt with network development in an era of financial crisis. In particular, the questions asked about whether the ultimate goal of the roads agencies was just to build toll roads, or to develop a better road network as widely and swiftly as possible. What should be the rationale behind toll road development? What projects should be undertaken first? How relevant is the experience of Japan for other Asian countries (i.e. first building those roads that can generate excess revenues in order to finance further sections through a revenue pooling system)? Is the Japanese approach the best way to achieve the same network development goal, and under what circumstances can this approach be applied?
8.5. Mr. Galano stated that in the Philippines all toll roads must have a free alternative, so that the motorist has a choice. As for rest areas (another question in the
1 Mr. Nguyen stated that on behalf of the Government of Viet Nam, he was honored to be invited to attend the Seminar as an Observer. He said that he had received a great deal of information concerning the implementation of toll roads in many countries, and that he will convey this to his Ministry. So far Viet Nam has applied tolls to some highways, but he explained that they seek increased experience with toll road laws and regulations. He emphasized that the Vietnamese welcome foreign participation in building and operating toll roads, and that there is a foreign investment law for BOT projects including toll roads. In fact, one project is now undergoing a feasibility study and economic evaluation. Mr. Nguyen concluded his comments by announcing that Viet Nam would be eager to serve as a future toll road “case study country” for the World Bank and MOCJ.
8-2 Volume I: Main Text Exchange of Knowledge, Session 3-1 list), in the Philippines the toll road authority monitors and regulates them. If rest areas are to be developed, they need approval for development. These facilities are necessary for users, and will increase patronage. As for whether the Japanese-style pooling system is relevant to other countries, Mr. Galano explained that the Philippine tollways already practice cross-subsidization to an extent. All of the tollway proponents thus far have proposed to operate existing/improved highway sections and newly constructed sections as a system, with a combined balance sheet. For example, this applies to the improved South Luzon Expressway/new Metro Manila Skyway, the improved North Luzon Expressway/new extension to Subic and Clark, the improved Manila-Cavite Expressway/new extensions to the south and east, and to the STAR highway to Batangas, half of which was built by the Government, but all of which will be operated by the developer that completed the extension. Beyond these projects, however, a Japanese-style system-wide revenue pooling system may be a viable option for funding further extensions.
8.6. Mr. Yamakawa commented that it is important to distinguish between the development of a consistent national or regional network, and the introduction of toll roads in order to provide highway capacity where it is needed urgently. Japan, he continued, started with “urgent” stand-alone roads, and shifted gradually to network development. The key issue is establishing a master plan and a strategic implementation program with careful prioritization. Another issue is the ability to provide roads free of charge—in Japan there was no choice; no money was available for expressways without tolls. Government assistance therefore came indirectly through interest support and the revenue pooling system (allowing early profits to be used to expand the system). However, Mr. Yamakawa stressed that Japan’s experiences are not necessarily applicable directly to other countries nor to different economic and social conditions. Each system has its advantages and disadvantages, and there is no unique system that is best suited to all countries. What is important is to understand the merits and demerits of each system and learn from other countries’ experiences. Then when a particular system is applied, every effort may be made to minimize its negative aspects.
8.7. Mr. Fayard added that France has had a learning curve similar to that of Japan, and that they have tried to avoid having any dominant position among the toll road entities. They have a concessionaire policy that encourages benchmarking between the toll road operators, and they have gradually developed private companies. Mr. Fayard agreed that a pooling system is valuable, but stressed that there is also a need to address competition issues and avoid monopolies (France is particularly bound by European Union rules regarding competition). Finally, even if the toll roads are developed piecemeal, in the end they may only be managed effectively as a system.
8.8. Mr. Alli of South Africa made three points. (1) Regarding issues related to user acceptance of tolls, he explained that in South Africa they have tried to make the distinction between free road and tolled roads, based upon the standard of service provided by each. Essentially the motorist is “purchasing” speed—for a particular price, a highway is available and safe at a particular speed. The toll road users pay for the high quality of service, as well as access to emergency support; it is important to educate the users about this. (2) As for revenue pooling, since there are both state and privately operated toll roads in South Africa, there is an issue regarding to whom does the revenue accrue. The government’s tender operators put all of their money into a government account, but still there is a political issue with respect to people in one
8-3 Volume I: Main Text Exchange of Knowledge, Session 3-1 province not wanting to subsidize the other provinces. (3) Regarding earmarked funds, South Africa once had one, but then the Government decided to use the money in the fund for other purposes. It is important to remember that governments change their minds—and that it is their prerogative to do so. Instead, what South Africa does is to assign an amount of the proceeds from the fuel levy to the road budget for three years in advance (in order to remove uncertainties about near-term road funding). The fuel levy proceeds are only available for free roads, as toll roads must be self-funding by law. The law likewise prohibits the issuance of public debt for the construction of free roads. Mr. Alli’s recommendation was to not rely on earmarked funds for the construction of toll roads, but rather to find other ways to ensure funding.
8.9. Mr. Murányi explained that according to Hungarian legislation, the Government is obliged to provide a free route between the same destinations served by new toll roads. However, concessionaires may also improve existing road facilities through BOT. Many of the ongoing projects would not be feasible if they were not existing roads. Also, in the case of Hungary the question was not one of free roads versus toll roads, but rather it was toll roads or no roads due to budgetary constraints. Finally, regarding service areas, concessionaires may operate such facilities either directly or under contract—but the services provided must be directly related to motorist needs.
8.10. A Seminar attendee from Germany asked whether any of the panelists had comments about the impacts of distance-related charges on freight users of the toll roads—particularly with respect to using equipment more economically (reducing empty-loads). In Germany they are hoping to improve equipment utilization with the implementation of distance-related user charges in 2002.
8.11. Mr. Alli replied that South Africa has been considering distance-charges, but it is difficult to implement and monitor for freight users. There are technology problems and revenue leakage is a big issue. In addition, there are charges at the border—particularly from the north. He noted that New Zealand installs a “hubometer” instrument on commercial trucks in order to charge by distance, yet they also report some leakage problems. He expressed interest in the German program and stated that at some stage South Africa was likely to follow, but not for a while.
8.12. Prof. Yamauchi commented that cross-subsidization (through revenue pooling) is theoretically justified to the extent that there is a “network effect,” whereby network expansions provide added value to users of the initial facilities. There is a limitation on such cross subsidies, however, which he stressed must be determined by public acceptance. For example, there is little likelihood that many users of expressways on one side of Japan will use the network extensions on the other side. On account of issues such as this, Japan has instituted its 50 percent limit on expressway development costs that may be paid from revenue pooling cross-subsidies.
8.13. A Seminar attendee from Japan asked for opinions on revenue pooling from panelists Mr. McNeill and Mr. Doud. He suggested that project financing might be greatly simplified if revenue pooling was practiced more widely.
8.14. Mr. McNeill replied that it depends on how a revenue pooling system were actually implemented. If it is done as a part of an incremental plan by the public sector to develop an expressway network, that would clearly mean fewer complex BOT
8-4 Volume I: Main Text Exchange of Knowledge, Session 3-1 projects. However, as the Philippines cases indicate, existing roads (and their “pooled” revenues) can also be used to improve the cash flow of BOT concessions.
8.15. Mr. Doud added that if there were extensive state support, there may not be much demand for rating project debt. However over time it may develop more like the public finance bond market in the United States, where the credit of debt-issuing bodies is not the same as that of the “host” government.
8.16. Another Seminar attendee from Japan noted three other important questions that also ought to be addressed related to the financial crisis. (1) Can good examples of successfully restructured BOT projects be cited? (2) What lessons can be derived, and applied to other Asian projects in need of restructuring? (3) Which BOT approaches continue to be viable options for Asian countries, and should they explore other kinds of arrangements such as construction or maintenance schemes, etc.?
8.17. Mr. Soedjito responded that the economic crisis has paralyzed many of the Indonesian projects that were in the process of financial closure or construction. Also, the credit squeeze and interest rate hike has deepened the problems of his country’s existing (operating) toll road investments. He stated that there is an urgent need for project restructuring so that further investments in toll roads can be carried out. What is being looked at are various forms of public participation, not limited to just one scheme. Mr. Soedjito emphasized that credibility must first be reestablished. This will take all parties sitting together to try to find sensible solutions to the problems—including a re- optimization of the relationship between the Government and the state highway corporation, the investors, and the financiers in order to be proactive and assure that conflicts can be dealt with responsibly.
8.18. Mr. Stanfield wanted to know more information about the economic crisis- induced restructuring efforts in Malaysia, which he felt might set a tone for the region with respect to other current projects where the concession companies are in trouble. He added that the M1/M15 projects in Hungary were also restructured under very severe economic circumstances, and he suggested that the lessons learned there might also be helpful to the Asian context.
8.19. Mr. Murányi commented on Hungary first. With regards to the M1 motorway restructuring, he explained that this concession company has been bankrupt since the summer of 1998, and that they started working with the Government in good faith to resolve matters. The basic problem is that corridor traffic has been insufficient to turn a profit, and it was proposed that the Government provide an increased subsidy to the concessionaire. However, a new Government came in later in 1998 and cancelled these restructuring negotiations. The new government intends to create a state-owned holding company for the entire toll road system, which will take over all shares of the old companies. The lenders appear willing to deal with the Government directly, but the issue of what to do with the shareholders remains unresolved. The original concession agreement does not deal with these circumstances (there is no clause for termination if the shareholders do not wish to terminate, whereas the Government and lenders have this right explicitly). It could take years to solve this problem, which is good for neither the concession companies, the lenders, nor the Government.
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8.20. Ms. Hanifah Hassan then commented on the situation in Malaysia. She said that there are several issues pertaining to the North-South Highway project which was undertaken by the concessionaire PLUS. Under the concession agreement, PLUS is allowed to increase toll rates annually. However, as a result of objections from the public, the Government is renegotiating this arrangement with PLUS which would allow tariff review to be made once in every five years. In exercising this option, there is an element of compensation that has to be paid by the Government to the concessionaire. As an alternative, the Government is also considering the possibility of extending the concession period granted to the concessionaire without having to pay any compensation. As regards the issue of corporate restructuring, since the exercise is ongoing, it is inappropriate to comment on the issue at this juncture.
8.21. Mr. Ghazali of Malaysia clarified that it is not PLUS that is presently undergoing restructuring, but rather its parent company, Renong.
8.22. A Seminar attendee from the World Bank noted that he considered an important lesson from the financial crisis to be the importance of having very clear step-in and termination clauses, and clauses that address the issue of property reverting back to the Government. He added that the credit rating agencies ought to emphasize that this is one of the aspects that influences the way they look at the security package.
8.23. Mr. Doud replied that the credit rating agencies spend a significant portion of their time analyzing and evaluating the structure of the transaction. They also hire outside specialists (such as attorneys) as needed in order to understand these issues fully, and to obtain views that are independent of the lenders and project sponsors.
8.24. Mr. McNeill added that the difficulty in restructuring is in termination of the contract. Typically lenders are in a stronger position than the project sponsor when it comes to taking over assets. The government ultimately needs to decide whether it is more economical to bail out the concessionaire or to take over the project.
8.25. Mr. Stanfield noted that in Argentina the original highway maintenance and toll concessions were granted in 1990, but withdrawn and renegotiated in 1991, and implemented thereafter. Also, the Mexican Government has stepped-in and bought out several toll road concessionaires. He asked if Mr. Irigoyen could offer any lessons learned from those two Latin American experiences.
8.26. Mr. Irigoyen replied that in Argentina the concession negotiations aimed at maintaining the level of service on the highways as well as addressing issues of public acceptance. At the project acceptance stage there was a need to establish some guidance, but it was not very clear how to reach financial equilibrium for maintenance. These were typically long-term contracts with investments spread throughout the concession period. It was also not clear to some why subsidies were needed for maintenance not yet done. These issues, he explained, require a different kind of regulation and need to be clarified when entering into this kind of contract. The Mexican lessons, however, are largely project-specific. Where the project economics are generally sound and operations have continued, the lenders have been accepting of debt restructuring plans. The projects that were bad off lost equity however. The Government is still working on a strategy, which may involve pooling assets into a corporation and/or securitizing revenues. Now the Government is trying to determine the best way to go forward.
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They are operating the failed concessions under a temporary arrangement with CAPUFE (the state-owned toll road corporation), and they are facing the question of whether to terminate the other concessions so that they might be able to repackage them and try to securitize the revenues from the pool of concessions. Mr. Irigoyen suggested that this will be an interesting issue on which to follow up. When restructuring, it is also a opportunity to revisit the issue of the overall institutional model that has been adopted, and re-examine its advantages compared to other models.
8.27. Before moving on to the next group of issues, Mr. Nickesen asked whether any of the panelists would like to comment on Mr. Irigoyen’s remarks. In particular, is this a suitable time for rethinking the toll road development structures that have been used, and as a result of this crisis have other models been found to be more suitable?
8.28. Mr. Stanfield commented that it is evident that when times get tough, BOT companies struggle. It remains to be seen what they can do, but the situation seems to tend towards a downward spiral without any government support. He concluded that key public assistance when needed can prevent an even bigger crisis later on—it is much easier to keep an operation going than it is to shut it down, go the lenders, try to find a new equity investor, and start it up again.
8.29. Legal and Regulatory Framework/Government Support/Public Acceptance. Mr. Irigoyen introduced the second group of questions by noting that the need for clear and transparent rules has been emphasized. The questions to be addressed in this group deal with passing the right messages, restructuring projects to give correct incentives for each party to perform in the most efficient manner, and building public support. The questions have been organized around the following four topics: (i) “risk allocation” between the private developer and the Government; (ii) public-private partnerships (PPP)—what kind of support from the Government, how much support, what principles should be followed; (iii) how to best handle environmental and resettlement issues during project preparation and implementation, including when and for whom; and (iv) marketing—how to convince the public that they will be better off with the project.
8.30. Mr. Likhit of Thailand began this round of panelist comments by stating that risk allocation must involve calculating the economic internal rate of return (EIRR) and the net present value (NPV) for every project in order to prioritize them. Project preparation can be divided into two steps: (i) feasibility determination and (ii) risk identification. The risks should be stated in the Terms of Reference. When a project is evaluated, the Government and owner need to agree upon what the risks are and how to limit them. As for government support, he said that in Thailand, the Government is responsible for exchange rate and land acquisition risks, but does not provide traffic guarantees or revenue support.
8.31. Mr. Murányi brought up three topics related to these issues. The first was regarding the manner in which environmental risks and permitting should be handled in BOT projects. In Hungary, environmental analysis is performed over the course of one whole year (one vegetation cycle), and the environmental permit is issued as a part of the construction permit. But according to tradition the construction permit has been issued with concession contracts, so there has effectively been no risk of not receiving environmental permits. However, there was an exception to this in the case of one bridge that had harmful environmental effects. The second topic concerned what kind
8-7 Volume I: Main Text Exchange of Knowledge, Session 3-1 of subsidies are relevant and best support the projects. In the case of the M1 motorway, there were no subsidies—but now the concessionaire is bankrupt. For the M5 project, the Government realized that some form of support was needed, and an operating subsidy was provided by the state. It was not full coverage of the difference between revenues and expenses, but it was enough to satisfy the lenders. The third topic was the importance of effective communication with the public, particularly at the beginning of the process. There was no communication at all with the Hungarian public back in 1991, and this caused many problems later when formerly free sections became toll facilities, and the public protested against paying the tolls (both in the case of the privately operated M5 and the publicly operated M3 toll road).
8.32. Mr. Fayard commented next on the French perspective. He stated that they have had environmental assessment regulations for 25 years, and they now follow the EU legislation. There is public involvement early on, and follow-up later. As for subsidies, the Government never grants a deficiency payment; the subsidy should be fixed in advance. As for dealing with concessionaire failures, it is important to determine whether it is a short or long term crisis, or if it is an error in the balance of the project. The French motorway cash crisis of the 1970’s was a result of the oil crises, and was solved by way of consolidation and revenue pooling. In this manner, they were able to maintain more than one toll road operating company.
8.33. Mr. Galano explained the Philippine strategy for how and when to support the private sector. All risks should be incorporated in the bid documents. Issues related to unsolicited bids come out during negotiations. Environmental issues must receive government approval, and if a project changes then new approval is needed. Further government “support” includes an automatic tariff adjustment formula that takes into account currency exchange and material costs. Public participation is required by law as a part of environmental approval.
8.34. A Seminar attendee from Japan commented that the Japan Highway Public Corporation (JHPC) might be considered the “largest BOT company,” so to speak. He noted that previous speakers had elaborated on the toll road development philosophy of Japan, but that it does not seem to be reflected in the panel discussion so far. In Japan, he said, a Road Council comprised of citizen experts gives input into the design and development plans for toll and non-toll highways. The benefits and financing of highways are both considered, but they are different. It was the speaker’s understanding that the benefits accrue to the public, and these exceed the construction cost by a factor of 2.5. However, he said that when JHPC prepares a budget for a new highway, the financial internal rate of return (FIRR) is usually not that high. In addition, the social discount is about 1.5 to 2 percent. The FIRR must be as close as possible to the social discount, so JHPC will try to secure savings in this area as much as possible. They also try to get public acceptance in this area. Although financing is being talked about now, the attendee emphasized that the benefits should be thought about as well as the financing. The difference between the FIRR and the benefit over cost (2.5) is accruing to the national economy. For example crabs from Hokkaido can be delivered by tomorrow morning, or emergency medical supplies will reach Yamanashi on time. He stated that this is only feasible because of the nationwide expressway network, and that this sort of benefit must be enjoyed by the general public in this era in a developed country like Japan. The Ministry of Construction and JHPC work together in the area of FIRR and EIRR. The Seminar attendee concluded by requesting that the audience
8-8 Volume I: Main Text Exchange of Knowledge, Session 3-1 please understand that consideration to the general public is given in Japan, meaning that this philosophy is incorporated. “Benefit On Time” is the “BOT” that JHPC upholds as the most important BOT here in Japan.
8.35. A Seminar attendee from the World Bank wondered whether this question of “subsidies” was not a matter of semantics. For example, he said that in Hungary there were no subsidies, but that an existing section of highway was provided. He asked whether this was taken into account in the economic evaluation of total befits and costs, and how it was justified.
8.36. Mr. Murányi clarified that actually Hungary features both roads that had no subsidy (like M1) as well as roads in which existing segments were incorporated (such as M5). All other government-owned highway sections are still being operated by the Government. He added that an economic cost-benefit analysis was performed during the prefeasibility stage, before 1990.
8.37. Mr. Nickesen asked whether anyone from the group of “specialists” would like to comment on the issue of guidelines on measures for government support.
8.38. Mr. Doud replied that this was a difficult issue, as the “best practice” ultimately depends on what the host country is looking for and what they are willing to provide. In each case the priorities are different, so the strategies must also be different. If, for example, it is of critical importance for economic reasons that a particular road be built as quickly as possible, then perhaps a straight guarantee or some other form of support that comes quite close to a guarantee will be appropriate. In the case of China’s vast proposed network, for instance, just about every financial source and every financing model will probably be utilized in order to maximize the total funds that are available.
8.39. Mr. Stanfield added that in his experience developers are very sensitive to start- up and pre-construction risk and would like the Government to clear the right of way and handle the resettlement and environmental issues. Guarantees and financial incentives need to be tailored over a period of time to the requirements of the project and unique circumstances of the traffic. He also suggested that Mr. Juan Gaviria, a Seminar attendee from the World Bank, comment on a BOT bridge project in India that may have legal and regulatory lessons applicable elsewhere.
8.40. Mr. Gaviria explained that the World Bank has just completed providing assistance for financial closure of the first 100 percent project finance toll bridge project in Delhi. The model used for the project is quite specific to India, and involved a “special purpose vehicle”—a company that was responsible for acquiring land and obtaining all environmental clearances early in the project. That way, by the time the project came to financial closure, all of the environmental and land acquisition issues had already been completely dealt with. Reducing uncertainty and risks in this manner has been fundamental to securing private finance support, but it is too early to say that this represents a “model” for India. A model concession agreement has been created independently by the Department of Transport, but it has not yet been tested. The decision was made that the only leverage was through a contract, as legislation is not yet present for a regulatory framework. Each of the parties involved are hoping that based on this transaction and experience there will be an environment where a broad regulatory framework for concession agreements can be thought about.
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8.41. Mr. Gaviria then discussed the time period involved from initiation to financial closure. The toll bridge in Delhi had been discussed for a long time, but it took 18 months to reach financial closure from the time when the construction company was selected, the “special purpose vehicle” was formed, and governmental approval was obtained. In a similar financial arrangement involving a 36 km four-lane toll road (including existing facilities) in the Indian State of Gujarat, it took less than 12 months. This project had the help of a proactive state government, and clearances and support came quickly. Also, the first project “paved the way” by setting precedent both in the Government and in the financial community. All parties involved expect closure to come much more quickly on future projects.
8.42. Mr. Gaviria concluded by explaining that both of these projects have been competitively bid. The idea has been that once the “special purpose vehicle” is established, competitive bidding will be initiated not only for construction, operation, and maintenance, but also for the interested investors. India has been quite successful in attracting private interest in its toll road projects. Mr. Gaviria commented that with all the difficulties inherent in these types of undertakings, he finds it surprising to see how many groups are lining up to work in toll road projects. He believed that it is largely due to the current financial crisis in Southeast Asia, where conditions like this probably existed ten years ago.
8.43. Mr. Nickesen then introduced one final topic for this group of questions—Private Finance Initiative (PFI). He said that one question was specifically asked of Mr. Yamakawa of MOCJ: “To the extent (if and when) Japan develops their own version of a PFI program similar to that undertaken in the U.K., do you believe there may be opportunities for foreign parties in the area of highways and bridges for either new construction projects, or management of existing transportation infrastructure assets? If so, of what might those opportunities consist?”
8.44. Mr. Yamakawa reiterated the point that had been made before about the distinction between network development and stand-alone projects, and commented that there is some experience in Japan with the private development of stand-alone projects (but not to a large extent). At this time, a draft law to promote PFI has been submitted to the parliament and discussion on it will start soon. If the law passes, some positive actions are expected to follow to promote PFI, not only in terms of highways but also other infrastructure-related projects. Mr. Yamakawa expressed his opinion that under the current development situation in Japan, new toll road construction may be rather difficult to implement in a PFI structure. But he would not rule out any possibilities, and he welcomed positive proposals on future PFI projects from the private sector, including foreign companies. Furthermore he anticipated more possibilities for private sector participation at the level of toll road operations and management. In particular, the law for service facilities attached to toll roads was revised recently to accommodate more private sector participation.
8.45. Toll Rate Setting and Adjustment. Mr. Irigoyen noted that the questions in this group centered upon four main aspects: (1) toll setting; (2) toll adjustment; (3) user acceptance of toll rates and toll escalation; and (4) toll regulations, contractual, and legal issues.
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8.46. Mr. Ghazali began a detailed discussion of toll rate issues in Malaysia by explaining that in their experience there have been limitations on increasing tolls—it is quite a sensitive issue, both politically and socially. During the economic slowdown, there have even been small protests against toll rate increases. The last toll increase was 6 percent in 1997, just before financial crisis, and no one objected. Now there has been a delay in the increase to PLUS’s toll, and compensation has been granted from the Government. Efforts have been made to educate road users about the toll increase, including press releases. In the current climate, the public seems not to be against tolls per se, but rather that the rate of increase is too high. Mr. Ghazali recognized that the concerns of lenders are natural, but he said that there are options for compensation so they will not be deprived. Compensation is based on actual traffic volumes, verified by MHA on a monthly basis.
8.47. Mr. Ghazali then explained that toll increase decisions are made by the Cabinet, not the toll road regulator (although the regulator makes a recommendation). The toll rate increase varies between different concessionaires. In general, there are several methods for increasing toll rates, including once or thrice during the concession period or once in every five years. However, in the case of the PLUS concession, the Government is now reviewing the issue of tariff increases with the possibility of allowing an increase once in every five years. The latest toll road proposals call for five year increments only, so cash flow and profitability estimated will need to be reexamined. The rates of increase also depend on construction costs, the level of government support, and the length of the concession period. The overall philosophy guiding toll rate decisions is based primarily on the cost recovery concept, and only marginally on profitably. The cost recovery period varies from seven to 15 years. Mr. Ghazali added that in Malaysia toll increases are at this time purely a decision of the Government—there is no public consultation. In addition, the parallel routes in Malaysia are of very low quality and indirect, and therefore not much competition for the toll roads. Because of this and other factors, Mr. Ghazali indicated that the willingness to pay for toll roads seems to be much higher among Malaysian motorists than it is in Indonesia or Thailand. Mr. Ghazali concluded by presenting a table comparing toll rates within various countries around the world.
8.48. Mr. Nickesen commented that Mr. Ghazali’s presentation was quite comprehensive, and suggested that in the interest of time the discussion should move on to the final group of questions.
8.49. Funding and Finance. Mr. Irigoyen recognized that several funding and finance-related issues had already been addressed in the previous groups of questions, and proceeded to introduce another key matter related to toll road funding and finance, the conflicting requirements to maximize the use of local currency while also securing long-term fixed-rate financing in line with project revenues. He identified three sets of related questions: (1) what are the possible mechanisms for long term funds; (2) what are the most effective means for expanding current funding sources, i.e. infrastructure funds; and (3) what are the possibilities for pooling all of the financial sources (such as earmarked taxes, gasoline taxes, distance-related user charges, etc.) in order to avoid the perception of “duplicate” charges.
8.50. Mr. Nickesen suggested that comments from the financial sector “specialists” on the panel be heard first.
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8.51. Mr. Doud reported that New World Infrastructure of Hong Kong has in fact been able to finance one of their projects in renminbi at the joint venture level, although at most for a ten year maturity. When compared with the power sector, transportation financing might be more difficult, he said. For example power companies in China can often use local technology and cover about 70 percent of costs with renminbi financing. The time that it takes to develop a long term debt market is also a tough issue. It has a great deal to do with the maturity of the local debt market, regulations, local financial institutions, and the way in which institutional investors and pension funds are managed and how they invest their funds. Mr. Doud suggested that in this respect perhaps the representatives from Malaysia may have something to offer as there are more Malaysian examples of locally-financed infrastructure than in the other countries in the region.
8.52. Mr. McNeill agreed that this issue has been examined extensively, and that there are not any quick and simple answers. He noted that similar issues have also arisen in Latin America, where transport project financing has often involved an initial balloon maturity, guaranteed by some entity, to cover construction costs, followed by refinancing for the term of toll road operations. This structure is particularly difficult in the case of toll road projects, which are exposed to a high degree of risk—especially if there is not a strong level of government support behind the project. Then a key concern is what happens when it is time to refinance but the project itself is not viable in terms of cash flow. Mr. McNeill also thought that the Malaysian experience might be instructive.
8.53. Ms. Hanifah of Malaysia replied that indeed most Malaysian project financing has been through domestic banks (although a few foreign banks may have been in on the syndications). In addition, government loans are generally subordinated debt and as such do not need to be paid off until after the commercial loans. This provides another level of risk mitigation for the local financiers.
8.54. Mr. Nickesen reiterated the issue of infrastructure funds, and the role that they play. He asked if any of the “specialists” could comment on this.
8.55. Mr. Stanfield explained that the World Bank itself has been involved in the set up and implementation of private sector infrastructure development funds (PSIDFs) in Pakistan, Bangladesh, and Sri Lanka. All of these facilities have been intended to provide subordinated debt to projects that are commercially viable but which need to attract commercial debt financing on a long term basis, and have a gap that the subordinated debt can fill in the process. PSIDFs are organized by the Governments with funds that are on loan directly from the Bank. In this manner, the credit risk remains with the Government, but the project evaluation is done on a commercial basis. The advantage of subordinated debt is not necessarily the rate, which is set on a commercial basis, but rather it is the term. For example, in Sri Lanka the term is 22 years. Mr. Stanfield estimated that this type of facility could take up to 40 percent of the projects, but that the problem has been in finding good projects. He stated that one would think that the availability of subordinated debt in South Asia would be a boon to the emergence of port projects or road projects, but they have not seen much action yet. The other issue Mr. Stanfield raised was that of long term debt in the power sector. The Bank has been involved with two or three major projects in Pakistan, but the results have not been very good due to government instability and opposition to the tariffs that
8-12 Volume I: Main Text Exchange of Knowledge, Session 3-1 were negotiated under the guarantees. Several lessons have been learned in terms of how to work with the Governments in the process of helping to secure long term debt.
8.56. Mr. Gaviria of the World Bank added that the importance of the funds has been to extend the term of the debt, and make the lenders more comfortable. This is still something that is quite new for the Bank.
8.57. Mr. Pellegrini of the World Bank commented that the existence of these funds illustrates that money is not the main problem in many countries. He explained that even the availability of a relatively longer term tenure does not solve problems or create opportunities for project finance where the sectors themselves have not reformed to the point where the projects are viable from an operating point of view. Often there are situations where fundamental sector restructuring and reform are needed as a precondition to be able to make use of these funds.
8.58. Mr. Soedjito added that credit enhancement is felt to be a very important issue in Indonesia, especially when the country is facing a ratings problem for sovereign debt. There is a need to develop sound policies to compensate for mistakes of the past—to recover the “credibility” of the country.
8.59. Mr. Yamakawa then desired to convey a message from the Government of Japan regarding what they can do to support toll road development, particularly in Asian countries. The Japanese Government has so far extended support for the development of infrastructure including toll road facilities in these countries through various assistance programs. Just recently, in December 1998, Japanese Prime Minister Keizo Obuchi attended an Asian Summit Meeting held in Hanoi, Viet Nam. At this event, he expressed his intention to establish a special yen loan to support Asian countries during the financial crisis. Following his announcement, the Government now contemplates extending a maximum of 600 billion yen, or approximately US$5 billion, during the coming three years to help develop essential infrastructure in these countries. It is intended that this infrastructure would stimulate economic development and invite private investment, as well as bring about reforms in the economic structures of these countries. The applicable projects would include fundamental facilities such as roads and other transport, power plants, water supply, natural gas pipelines, and so on, as well as counter measures to large scale natural disasters. The soft loans would charge a one percent interest rate and have repayment periods of 40 years, with 10 year grace periods. Mr. Yamakawa expressed that he hoped these countries will consider the possibility of utilizing this special yen loan together with other means of assistance. He stated that the prioritization of the projects within each government is important, but that the Ministry of Construction would be happy to participate in any kind of dialog including sector structure issues and the selection of particular suitable projects.
8.60. Mr. Soedjito commented that in fact the Government of Indonesia is expecting a lot from the Government of Japan, and that the new yen loan facility is in line with their needs and expectations. He added that it is also extremely important for Indonesia that the Japanese economy recovers and grows, and that he looked forward to increased economic cooperation while Japan is also undergoing major economic reforms.
8.61. Mr. Nickesen suggested that Mr. Yamakawa and Mr. Soedjito had provided two appropriate closing statements. Then he and Mr. Irigoyen thanked all of panelists for
8-13 Volume I: Main Text Exchange of Knowledge, Session 3-1 being actively involved in a structured and balanced discussion, as well everybody in the audience for their lively discussion and worthwhile contributions.
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PHOTOGRAPHS FROM THE PANEL DISCUSSION
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9
CONCLUSION OF THE SEMINAR SESSION 3-2 DR. ANTHONY J. PELLEGRINI, WORLD BANK, USA
9.1. The seminar provided considerable information and opportunities for learning. I want to congratulate the consultants for putting together a report that offers a thorough description of recent global experience. I believe that the document will prove useful as a comprehensive reference, and will be valuable to many countries as a policy and technical resource. I would also like to congratulate the presenters from Asia and the resource persons for their presentations which gave life to the situation in their countries.
9.2. Let me make a few general observations and then list some of the remaining issues that require more thinking and analysis.
9.3. General Observations. We must keep in mind that Infrastructure investments involve long term commitment and long term perspective. The size of the market for infrastructure as well returns on it are determined by the long-term economic needs and trends. While the financial crisis has led to a short term cut back in demand, it is clear that the long term, economic demand for road infrastructure in the Region will be very large. Investments will have to be made to support future growth.
9.4. However the other side of the coin is that infrastructure investors are exposed to risks over a long period of time. In assessing these risks investors are differentiating between countries by evaluating the overall economic policies and prospects of each individual country. This seminar has given examples of countries now undertaking the reforms needed to create a more conducive environment for private business. Much has been done in Thailand, Malaysia, the Philippines, and Indonesia to improve project planning, preparation, and implementation.
9.5. A significant amount remains to be accomplished both at the macro economic level to produce the stable exchange rates and enhance the availability of long term capital, as well as within the roads sector on the institutional side and in the legal/regulatory area before foreign developers and the international financial community can be expected to accept long term commercial and political risks in road projects.
9.6. What is encouraging is the recognition of what needs to be done and the start that has been made.
9.7. Specific Issues. If we look more specifically at the toll roads sector there are a number of areas where the seminar has illuminated best practice as well as issues requiring more work.
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9.8. Sector Structure… There is a general feeling that toll road systems need to be planned and developed as Networks as is the case in Japan and the developed world. This allows pooling of tolls and pooling of risks. But there is a tension between managing the system as a network and the need for competition to avoid the creation of a powerful monopoly. Also there may be issues of social acceptability of cross subsidies if these are part of the scheme.
9.9. Legal/regulatory framework/ bidding procedures… There was remarkable agreement on the importance of transparency and competition in procurement for the right to be a concessionaire. Also for the need of certainty in government regulatory policies. Transparency, competition, and certainty of regulatory policies are all needed in order to revive investor interest in the highway sector. There seems to be a real change in attitudes on these points from two or three years ago. It is also clear that real problems, some perhaps intractable, still remain in satisfactorily addressing these issues in certain countries of the region.
9.10. Nature of public enhancement offered… Road investments have a very long payback period, normally exceeding 15 or 20 years. However financing is typically only available for shorter terms. Rolling over the shorter maturities is often difficult given the limited development of domestic capital markets. The availability of only short term capital means that tolls may have to be so high that projects that are economically justified would be unaffordable. This difference between the economic rate of return and the financial rate of return justifies public contribution to a project. It is clear from the seminar that alternative methods of capturing road user fees and converting them to development capital need to be explored. Revenues from tolls alone will simply not be enough to meet construction and maintenance requirements for most networks. Political leadership will be necessary to convince road users, legislators and others that new revenue sources ( ideally road user charges) must be employed for highway purposes. Past projects have involved very large, often unrecorded and unfunded contingent liabilities for governments. The financial crisis has brought out the dangers of these guarantees. The absolute need to quantify and limit future public guarantees seems to be now understood.
9.11. Need to involve road users, politicians and media… One of the universal themes in presentations over the past two days was the critical importance of public opinion and therefore, the importance of engaging the public and engaging the different stakeholders in program concepts at an early stage. Gaining political acceptance for tolls or for other user fees wont come automatically. The process needs to be carefully managed. The expected gains and loses of various sub groups need to be understood. The media is important. In the roads business, like other businesses, the value of marketing should not be underestimated.
9.12. Clearly, every country's political situation, sector development problems, and approach to financing are different. The experience and lessons in Japan, Europe, Latin America, the U.S., Africa and the rest of Asia generally have been quite useful for us to understand over the past three days, but it is likewise clear that there is no template or set of common fixes, that can be applied to every country situation.
9.13. Role of the World Bank. The Bank will try to continue to be a reliable traditional lender to the highway sector in the region, but in doing so will always look
9-2 Volume I: Main Text Conclusion of the Seminar, Session 3-2 for methods and opportunities to leverage our capital with external resources to help our clients do more.
9.14. One way that we can help is with policy-oriented technical assistance, often through partnerships with agencies like Ministry of Construction such as in this study and seminar. Policy advice may cover areas such as institutional development, system planning and preparation, and financing techniques for the highway sector and specifically toll roads.
9.15. The Bank will also look for areas in which we can help develop innovative approaches to project and sector lending, and the application of partial risk and credit guarantees when needed. The bank can also provide specialized help to develop domestic credit markets. In the end, large scale expansions of facilities will have to rely on domestic credit rather than international sources.
9.16. Finally, in the middle of the ongoing regional financial crisis, the study and this seminar are important steps in a joint effort between the Bank, our country borrowers, our partners (MOCJ, JH, OECF, JICA, ADB, bilaterals, etc.) and the private sector to try find innovative and workable solutions to financing infrastructure in a crisis environment.
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The World Bank Ministry of Construction, Japan
Seminar on Asian Toll Road Development in an Era of Financial Crisis
Tokyo International Forum: March 9 – 11, 1999
Proceedings of the Seminar Volume II: Appendices A through F
March 1999
PADECO Co., Ltd. in association with Highway Planning Inc., and Value Management Institute, Inc.