DBFO (Shadow Toll) Model

On balance, the most important aspects of BOTs are;

· The development of a new source of funds to solve the government budget constraints because contract-based relationships such as BOTs and concessions allow private entry without complete redesign of the regulatory framework.

· The application of the “users’ pay principal” from making users internalize the external costs of their travel by tolling.

· The profit motive, that is, the project cash flow covering debt service and investor returns, increases cost effectiveness and market awareness.

· Although the cost of private capital may be higher than the cost of capital raised by the public sector, this is probably offset by the private sector’s greater efficiency.

At the start of the 1990s the UK government acknowledged that the old methods of funding public sector projects through the ‘tax and spend’ regimes of the 1970s and 1980s had become unsustainable, and had resulted in systematic under-investment in infrastructure.

A better means of procurement was required and prioritization of projects was needed.

The PFI was therefore introduced by the Chancellor, Nigel Lawson, in his Autumn Statement of 1992 (SAPTE W., 1997).

The fundamental points behind the initiative were that:

· The private sector had genuinely to assume risk;

· There should be competition where the government facilitated a project or sought private sector partners, or where the government purchased services as a customer;

· The initiative would apply not only to infrastructure projects, but also to other capital investment which provided services to the public sector.

By April 1997 the number of signed PFI contracts had increased considerably and included 8 DBFO roads, 6 rail-related projects etc.

3.5.2.1 Principal of DBFO (Shadow Toll)

An example of PFI projects is DBFO roads for the Highways Agency.

Under these concessions the private sector has contracted to design, build, finance and operate new roads or upgrade existing roads in return for ‘shadow’ tolls.

No tolls are levied from road users under this approach. But government pays the shadow tolls to the operator, based on traffic counts on the road and an agreed rate per vehicle/vehicle type.

Actually, the band system enables a nonlinear toll tariff, which takes usually a form of piece-wise linear function.

Taking the UK example, four “traffic bands” have been defined (see figure 3.4 below), each with a specific company remuneration rate, as follows:

Figure 3.4 The Example of Traffic Bands and Payments of Shadow Toll

· 0 to 70 million veh.km: 9 p/veh.km (about US$ 0.129)

· 70 to 100 million veh.km: 6 p/veh.km (about US$ 0.086)

· 100 to 130 million veh.km: 3 p/veh.km (about US$ 0.043)

· Over 130 million veh.km: zero remuneration.

Remuneration of the concession company is thus capped, as there is no further payment (“price cap” system) above a certain level (130 million veh.km in the example examined).

It should be noted that the concession companies were free to establish their own traffic bands, and their own remuneration rates. These parameters were then negotiated with the Transport Department.

Candidate concession companies had access to traffic data recorded on the section in question, or traffic predictions established by the British Highway Agency in the case of new motorways.

The benefits of this system do not therefore stem from the development of a new source of funds, or from making users internalize the external costs of their travel, but rather from:

· The government commitment to continued financial support over several years

· The involvement of the private sector and their responsibility for efficient delivery of service.

3.5.2.2 Advantages and Disadvantages of DBFO (Shadow Toll)

The advantages and disadvantages of the shadow toll can be gauged by comparison with other types of funding, namely budgetary and toll concession funding.

The advantages of road funding by means of a shadow toll system, compared with toll concession funding are as follows:

Advantages:

· There is no tendency to shift traffic onto other roads. In the case of a motorway infrastructure under toll, a certain number of users avoid the motorway both because of the toll cost, and the distance between access points.

· The shadow toll approach does not require traffic to slow for toll collection.

·No expenses associated with toll collection are incurred. It is estimated that between 10 and 15% of revenue are absorbed by toll collection costs (For example, toll collection costs in Norway represent an average of 17% of toll revenue), while approximately 10% of the initial cost of the infrastructure represents construction of the toll stations (French Study for the DERD/WERD, 1998).

Disadvantages:

· A shadow toll system does not solve the funding problem, as the concession authority must pay shadow toll remuneration to the concession company in due course.

It does not therefore generate new funding sources. Such an arrangement makes it possible to shift responsibility for the financial package onto the concession company (so that the debt is non-public), but the final cost must be borne by the taxpayer (“delayed” budgetary funding), and not the user.

· It reduces the freedom of budgetary allocation of future government.

· The financial and legal costs, tendering cost of this type of arrangement can be high, and should not be underestimated.

This has led to significant criticism of the approach in the Netherlands.

· It requires the government and private sector to agree the vehicle counts so it is difficult to apply to the countries that do not have well-developed traffic data and traffic counting system.

· In case that country has significant volume of foreign traffic, it is difficulty to apply this method because of lack of taxpayer’s payment justification.