Framework for structuring public private partnerships in railways

Abstract

Structuring Public Private Partnerships (PPPs) in railways is a challenge, given its specific technology base, and obligation as a public and affordable mode of transportation. The sector provides strong incentives for vertical integration due to economies of scope. However, it is evident from the literature that integrated projects in large railways systems are not feasible due to higher commercial risks. Integrated projects also suffer from implicit cross subsidization since the railway infrastructures are highly capital intensive, are typically common to multiple revenue sources, and fare box revenues are generally not sufficient to recover these investments. This is being addressed by various unbundling approaches in recent PPPs. The common unbundling is between infrastructure, operations, and services. This research explores the potential of unbundling the railway system into over 40 ‘elements’ wherein an element is the smallest unit that can principally be given to a party for execution. Examples of elements are superstructure, signalling and telecommunications, control centers etc. There would then be significant horizontal and vertical interfaces between these elements, based on their functionalities. Since a sustainable PPP would limit the number of interfaces due to transaction costs and risks, there would need to be ‘entities’ wherein an entity is a set of elements bundled together horizontally and/or vertically to extract the best value in a PPP. The governing principles for bundling of elements into an entity would be scale economies (horizontal integration), scope economies (vertical integration), need for competition (horizontal disaggregation), level playing field, transactional transparency, and need for specialization (vertical disaggregation). Additional drivers would be accountability and synergy between entities. The findings of the research indicate that the entity formation is one of the most crucial aspects of a PPP. The extent of horizontal and vertical bundling/unbundling in a project should be determined by the appetite of the private sector, specialization requirements, consequent availability of competence, and need for competition. The contracting authority needs to make a fair assessment of these aspects. Most of the current PPPs suffer from inappropriate formation of entities. A consequential critical area is managing the interfaces between entities, which are subject to various risks. These should be carefully identified and addressed by well-designed contractual agreements and independent regulation. In addition to vertical interfaces, horizontal interfaces need to be identified and addressed. Keywords: Public Private Partnerships, Railway Infrastructure, Unbundling, Vertical Integration