WSJ: PPPs faster, but cost more
Public-Private Road Projects Are Faster but Exceed Budgets by More
December 22, 2010, 6:17 PM
Wall Street Journal
According to a yet-to-be published study, which looked at delays and cost over-runs in public-private highway projects, when the private sector gets involved, roads are ready sooner but costs escalate more frequently.
In projects that exceeded initial spending estimates, costs escalated by 21% where there was private participation compared to 6% for projects carried out by the government alone.
The findings come from a follow-up research conducted by Delhi School of Economics associate professor Ram Singh, whose earlier work on infrastructure delays we wrote about in May.
In the previous study, Mr. Singh looked at data on around 900 projects from 17 infrastructure areas, including power, roads and railways. He found that all together, these projects experienced cost increases that amounted to 54% of the total initial budget for these works. One reason for delays and cost over-runs: “contractual incompleteness.”
This paper looked more closely at roads and railways projects, and also compared the performance of 50 highways built with private participation to 145 built without it.
A similar percentage of both types of highway projects saw time over-runs—about three-fourths of them. But public-private projects required comparatively less additional time, exceeding the initial estimate by 17% rather than 49% on average.
Mr. Singh said the reason private contractors get projects to completion faster is probably very simple: The contracts for these projects are often structured so that contractors won’t begin earning toll or annuity revenue till the project are up and running.
“It incentivizes the contractor to avoid delays,” he said.
But costs for public-private highway projects were more likely to come in higher than estimated. This applied to roughly three quarters of such projects, compared to 55% of regular, government-run projects.
For projects with cost over-runs, additional costs amounted to 21% of the initially estimated cost for private participation projects, versus 6% for the public ones.
However, the cost over-runs in the private projects are not necessarily negative, said Mr. Singh. He believes the use of better quality materials could be one of the factors driving up costs, at least for projects where the private contractor is responsible for both construction and maintenance.
“It makes better sense to provide better quality roads” to reduce the frequency of repairs which they would have to pay for themselves, he said. “It will disrupt traffic flow and revenue flows so they want to minimize that. In a public road, if you are a contractor you provide the minimum acceptable quality. Maintenance costs are not your headache.”
Mr. Singh said government audit reports appeared to back this hypothesis, noting more quality problems in public projects than in public-private ones. But he said he plans to carry out further research to assess what other factors could also be driving up costs.
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