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Financing Aquapuncture projects through Public-Private

Partnerships

“A fictional case study”

Bachelor Thesis Economics

Rik Vegter 5872421

August 2014

Thesis supervisor:

Aaron Kamm MSc

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Abstract

The method of Aquapuncture seeks to improve the value of waterways and its surroundings by making smart adjustments in the physical environment. It tries to combine the goals of different interest groups in a complete project called a ‘water vision’. While the costs of these projects are very clear, the benefits are often not. Therefore it can be a problem to find financing for these projects. Public-Private

partnerships may be a solution for this. In this research, three different financing constructions are examined in a fictional case study: A joint venture with a Special Purpose Vehicle (SPV), a Build-Own-Transfer (BOT) construction and the government as area developer. PPPs in the form of joint ventures could possibly be an efficient way of developing waterway projects. Including private partners in the design phase of the project proves to be crucial to the success of PPPs.

1. Introduction

What is Aquapuncture?

“Aquapuncture is a method for adaptation of inland waterways and their waterfronts for their optimal economic and ecological use.” (Brouwer, 2013)

The method of Aquapuncture seeks to improve the value of waterways by making small adjustments to it. These adjustments are carefully selected so that a minor alteration on a specific location can have substantial effects on the waterway as a whole (hence the name Aquapuncture). For instance, by increasing the height of a bridge the waterway can be opened to larger ships that are then able to sail through it. This can attract more recreational boats that visit the area and tourists who spend money on the waterside. This is but one of the effects that an Aquapuncture adjustment can bring about.

The method of Aquapuncture is originally designed for the benefit of six different user groups on, in and along the waterways. All of them have their own interests and characteristics and use, manage or adapt

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the waterways and their waterfronts in a different way. The goal of this method is to combine these different interests to fully exploit the potential of a waterway. The user groups are divided as follows:

1. Commercial shipping 2. Tourism and recreation 3. Water related sports 4. Special nautical events

5. Waterfront users and developers 6. Aquatic/terrestrial flora and fauna

To improve the overall quality of the inland waterways and waterfronts there several types of adaptations that can be made: (a) physical adaptions, (b) enhancing spatial qualities along the

waterways, (c) nautical safety, (d) realization of facilities, (e) measures for improving the environment, (f) mitigating measures with regard to the negative effects of climate change (Brouwer, 2013). Most of these adaptations affect several, and in some cases all, actors. By proposing a ‘package’ of adjustments, the method of Aquapuncture can help the different user groups (1-6) reaching their goals.

Goal of this research

Policy makers and project developers would like to optimally exploit the economic potential in a region. While government agencies often focus on policy goals such as: “improving the living environment” or “improving the business climate” in a region, project developers have more concrete goals like:

“building x houses on a set area before a specified date”. Although at first the goals and targets of public and private actors seem to differ a lot, both are aiming at making an area more attractive to live and reside in. For project developers, a more attractive area means that the demand –and thus prices- for their houses is rising (Luttik, 2000). For government agencies it means that the living environment is improving and that policy goals are reached. At second sight, the goals of public and private actors may lie closer than we thought initially. Therefore, it is not a strange idea to let public and private actors work together to develop an area. Aquapuncture focuses on adjusting waterways to develop and improve an area. With the method of Aquapuncture, a ‘water vision’ of an area is created which describes the opportunities the area has for improving its waterways and the attractiveness of the area as a whole. A package of adjustments is presented where a number of concrete modifications are recommended. For policy makers and project developers this serves as a guideline on how to increase the added value of the waterways. Before these adjustments are undertaken they would like to know

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what the exact costs and benefits of these adjustments are for them so that good management decisions can be made. The costs of these adjustments most of the time are very clear. However, the same cannot be said about the benefits. While most of the costs of these adjustments occur locally, are direct and on the short term (as with increasing the height of a bridge). The benefits are often indirect, on a longer term and may even occur in a different region. While private actors often seek investment opportunities that will generate cash flows on the short term, public actors are prioritizing long term policy objectives that are not easily expressed in monetary terms. This difference in the time horizon of these actors can cause difficulties in the financing of the proposed adjustments. Aquapuncture tries to bring the objectives of public and private actors together in the form of Public-Private Partnerships (PPP’s). The goal of this thesis is to find out if PPPs could be a suitable financing form of Aquapuncture projects. The structure of this thesis is as follows: Firstly, the theoretical framework covers the most important literature about PPP’s and their main strengths and weaknesses. Also three financing forms are discussed that later will be used in the case study. Secondly, the methods consist of a case study where the different financing options will be applied to a (fictional) area. The outcome of this case study is presented in the research results. In the conclusion the main findings of this thesis are repeated and will be discussed.

2. Theoretical framework

2.1 Introduction

The adjustments to waterways as proposed by Aquapuncture have to be financed in some way. Government budgets are declining and municipalities on their own do not have sufficient resources to make all of the investments that are needed. Adding the fact that the benefits of the proposed

adjustments are most of the time not easily determined makes these projects not easy to finance. This means that other, non-conventional, ways of financing may be worth examining. Because so many different actors have something to gain from this project, it is interesting to involve them with the financing of the proposed adjustments. Jointly financing from public and private actors could be a way of realizing the adjustments.

Together it may be possible to find a way of financing these projects in a way that is beneficial to all of them. To find the most optimal financing structure for Aquapuncture projects it is first important to have clear what exactly is referred to when PPPs are mentioned. Also the conditions for a successful PPP

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need to be clear as well as the alternatives. This section covers some of the definitions as found in the existing literature. Furthermore, the strengths and weaknesses of PPPs in general are discussed as well as their practical use.

2.2 Public-private partnerships (PPPs)

What are Public-Private Partnerships?

Public-private partnerships are not a new phenomenon. Traditionally seen in the context of large infrastructural projects, PPP’s are now receiving an increased amount of attention in other fields too. Public-Private Partnerships (PPPs) are most commonly described as an agreement between the public sector and a private company to provide public assets or services (Hurst & Reeves, 2004), (Grimsey & Lewis, 2005). PPPs must be seen in relation to the Private Finance Initiative (PFI) which was a term used by the UK government in the early 90’s to describe social infrastructure projects that were financed by private companies. The ideology behind these initiatives was that the private sector would better be able to provide public services than the public sector itself. The structure of these DBFO (design, build, finance & operate) projects is that private funding is used to design and build the infrastructure, where after the government pays for the use of the asset. These DBFO projects involve contracts that typically have a time horizon of about 30 years in which the public sector purchaser pays a monthly fee to the private sector supplier (Broadbent & Laughin, 2003). Because the term PFI had received negative coverage in the late 90’s it was replaced by the term PPP, which is still used to describe these co-operations. In 2005, Grimsey & Lewis remark that Public-Private Partnerships often are seen as a new version of privatization, however they state that there is a clear distinction between these two. They argue that: “…with privatization the

government no longer has a direct role in on-going operations, whereas with a PPP the government retains ultimate responsibility” (p. 346). They add to it that PPPs do not involve the normal

commercial arrangement between a public actor and a private contractor to provide goods and services. As they put it: PPPs fill the gap between traditionally procured government projects and full privatisation (Grimset & Lewis, 2005). Various governments and organisations describe their definition of PPPs. It becomes clear that still a large variation exists in the definitions used. For example, The Government of India defines a PPP as: “A project based on a contract or concession agreement, between a government or statutory entity on the one side and a private sector company

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on the other side, for delivering an infrastructure service on payment of user charges.” (Government of India, 2010). This definition states that there must be some sort of payment related to the use of the infrastructure. In the definition the OECD uses these user chargers are not mentioned and PPPs are defined as: “an agreement between the government and one or more private partners (which may include the operators and the financers) according to which the private partners deliver the service in such a manner that the service delivery objectives of the government are aligned with the profit objectives of the private partners and where the effectiveness of the alignment depends on a sufficient transfer of risk to the private partners.” (OECD, 2008). In this definition the focus lies more on the mutual benefit that must be present. Also, the concept of risk transfer (from the public to the private sector) is mentioned. This concept is an important motivator for the public sector to engage in PPP constructions (Brinkerhoff & Brinkerhoff, 2011). In 2001, the Dutch researchers Van Ham & Koppejan studied the difficulties and risks that are involved with the building of Public-Private Partnerships. Using the expansion of the port of Rotterdam as an example they identify the most important risks and barriers. The definition they use in their study has in my opinion the most connection to the subject studied in this thesis. Therefore I will use their definition of a Public-Private project throughout this thesis. They define PPPs as:

“ …a co-operation of some durability between public and private actors in which they jointly develop products and services and share risks, costs and resources which are connected with these products or services”. (Van Ham & Koppejan, 2001, p. 598)

Why and when are PPPs useful?

The question why and when PPPs are useful can be viewed from two perspectives: it can be viewed from the perspective of the public actor but it can also be viewed from the perspective of the private actor. In this section both views will be discussed. The evolution of PPPs originates from several important motives of the private sector to co-operate with private partners. Brinkerhoff & Brinkerhoff (2011) identified three of these motives in their paper on PPPs. Firstly, the access to technical expertise and established networks was found to be one of the main drivers. Secondly, the sharing of risks between public and private actors showed to be an important aspect. Lastly, the import of business thinking and business practices proved to be one of the advantages of the engagement of public actors in PPPs. These motives connect to the ones found by Van Ham & Koppejan (2001) which can be seen in table 1.

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However, where Van Ham & Koppejan (2001) mention the increased efficiency as an argument (“...The involvement of private parties is desirable because on the one hand they operate more efficiently than public organisations...”) (p. 597), Brinkerhoff & Brinkerhoff (2011) reject this efficiency argument. They argue that the idea of the private sector being better and more efficient at management than the public sector is based on a normative belief. Still there are enough arguments for public parties to engage in PPPs. If we look at the other side of the partnership, the private parties have other reasons to jointly undertake projects with the public sector. The opening to new investment opportunities in markets which otherwise would have been not accessible is one example. Also, investments that without public contribution would be uneconomic can be undertaken. Lastly, one important argument for private parties is that the co-operation with public parties reduces the long-term uncertainties that large infrastructural projects possesses. The political risk such as the alteration of policies and regulations in an area can be harmful for some projects. For instance, if public and private parties undertake a project jointly, the public sector can guarantee favourable legislation. Although it seems as if society has a lot to gain from PPPs, they are far from being the norm when it comes to project financing. There are also risks that deserve to be mentioned when discussing the usefulness of PPPs. Bloomfield (2006) studied the difference between theory and practise in PPP performance. After reviewing several cases she states that: “long-term public-private partnerships that were reported and promoted as low-risk, cost-saving initiatives have saddled taxpayers with high-risk, costly obligations for decades to come.” (p. 401). There may be several reasons for the failure of PPPs. Forrer, Kee and Zhang (2002) state that a large share of PPPs in the United States actually uses the public sector to transfer risks from the private sector. Also, principal-agent problems (Robinson & Scott, 2010), moral hazard (opportunistic behavior) due to incomplete contracts (Hart, 2003) and Political risk (Li et. al, 2005) are likely to have influenced negative PPP outcomes.

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Critical success factors for PPPs

When finding the most appropriate finance structure for Aquapuncture projects it is important to know which factors are critical for a successful project. Li, Akintoye and Edwards (2007) studied the critical success factors for PPP/PFI projects in the UK construction industry. They observed that many successful PPP/PFI projects have been undertaken, but the reasons for their success are not yet entirely clear. Therefore they identified 18 critical success factors (CSF’s) based on previous literature. Using a

questionnaire which was distributed among directors and managers of public and private organisations they determined the most important CSF’s. With the help of factor analysis they grouped the 18 CSF’s and revealed that the appropriate factor groupings are: effective procurement, project

implementability, government guarantee, favourable economic conditions and available financial market. These are the factors that should be prioritized when developing PPP/PFI project policy. Of the 18 CSF’s, the 5 that were regarded as most important were: strong private consortium, appropriate risk allocation and risk sharing, easily access to a financial market, commitment/responsibility/thorough and realistic cost/benefit assessment. Van Ham & Koppejan studied PPPs in the context of port development and found another important success factor regarding PPPs. For a successful joint development of a product it is necessary that private partners are involved in the design phase of a project (Van Ham & Koppejan, 2001). This is because they possess the market experience and creativity that is needed for a successful project. Zhang (2005) concluded that economic viability of a project ultimately determines project success. Securing long-term demand for the products/services that are offered by the project is crucial in this. She added that an appropriate risk allocation via reliable contractual arrangements can also secure a better project outcome.

In the next section, two PPP forms that are relevant for this thesis will be discussed; a Special Purpose Vehicle (SPV) and a Build-Own-Transfer (BOT) construction. Also the government as a project developer will be covered. These are the three scenarios that are applied to the case study in order to find the most suitable form of financing Aquapuncture projects.

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Joint venture with a Special Purpose Vehicle (SPV)

One form of PPPs is a joint venture that uses a Special Purpose Vehicle for a specific project. In this kind of PPP, a firm or a consortium of firms that are undertaking a project establishes a specific project company, called a special purpose vehicle (SPV). A special purpose vehicle is a legal entity that is created to fulfil a specific objective and that operates outside the balance sheets of the companies that founded it (Turley & Semple, 2013). It is the most common form of financing PPPs because it reduces project risks to all parties involved. SPV’s that are part of a Public-Private construction are mostly seen in large infrastructural projects that require large upfront investments such as roads and tunnels For the public party it is a way of gaining access to the private capital that is needed to fund this projects. For private parties it is seen as a safe investment that will generate revenues over a long time span. The parties that work together on a project create a special purpose vehicle (SPV), which is a company established for a specific project. Once the SPV is created it signs a PPP contract with a public partner and gains the right to build, own and operate a project. Turley & Semple (2013) observe two advantages of establishing a SPV; firstly, a SPV is a useful mechanism because it delegates a specific entity to undertake negotiations and operations. Secondly, the SPV acts as a form of security. A project that is undertaken can be large enough to lead to insolvency for the private partners if it fails. In this case, the SPV acts as a legally distinct entity which reduces liability to the parent company. Thus a SPV is a way of financing large projects off the corporate balance sheet. Because the projects that are undertaken with the help of a SPV are often so large, financing outside of the company is used. The company itself provides a proportion as equity while the remainder is either borrowed from financial institutions or financed by placing debt securities in the capital market.

Grensmaas consortium (NL)

The consortium Grensmaas is one of the biggest Public-Private collaborations in the Netherlands. The project goal is to improve the safety of the area around the river Meuse against flooding. At the same time the projects wants to develop the area for nature and soil extraction. The public parties that are involved include a water board, two departments (Infrastructure & Water and Agriculture, Nature, Fishery), a province and a consortium of private partners. This private consortium consists of several contractors, gravel companies, an exploitation company and the society for the preservation of nature monuments. The consortium Grensmaas is responsible for the implementation, the project design, land acquisition, licenses and redesign of the area. The complete project, which will cost an estimated 500

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million euro’s, will be financed by the revenues generated by the soil extraction. On July 1st 2005 the

agreement between the parties was signed. On January 1st 2023 the soil extraction will be completed. This financing structure of this consortium can serve as an example for the financing of Aquapuncture projects.

Build-own-transfer (BOT)

A BOT construction is a construction where the government seeks a private partner to finance and build a public infrastructure project. A long term agreement (typically in the range of 20 to 30 years) is made where the government pays a monthly user fee to the private partner once the construction is

complete. After the end of the agreement the government becomes owner of the infrastructure. BOT’s are an attractive way for governments to complete projects that require large upfront investments.

Government as area developer

The government as the area developer can be seen as the standard situation. When changes are made in the physical environment they must be in accordance with the plans a government has for a specific area. Also the plans must fit within the budget that the government has made available. When the government has decided on the project it wants to develop it can decide to completely undertake the project itself, but it can also choose to outsource parts of it. For instance, when the government does not have the sufficient knowledge or skills to undertake part of a project. When it chooses to outsource a part, it is often the case that a private company is chosen through the process of contracting out. Companies have the chance to present their plans for a project in a bid and subsequently the government chooses one of these bids after which the project is undertaken by the private actor. Friese Meren

The Friese Meren project is an initiative by the Dutch province Friesland to improve the quality of the waterways in the province and to increase its attractiveness as a destination for tourists. The aim is to especially improve the conditions for water sport users. It has a goal to increase the employment in this sector with 30% by 2015 (Het Friese Merenproject, 2011). It is estimated that the total costs of the project will amount to 495 million euro’s. In its financing plan it is stated that the aim is to divide the costs evenly between the province, municipalities and third parties. In practice this means that funding

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outside the public sector will be sought, but when this is not found the province and municipalities will still be responsible for filling the gap.

2 Methods

This section covers the methods that have been used to find the most optimal financing structure for Aquapuncture projects. Firstly, the case that has been designed is presented. Hereafter, the three different scenarios based on the three selected financing structures are described. Then, the criteria on which each of the three cases is evaluated are presented.

Case description

The case that is studied is based on the existing village Voorschoten, which lies south of the larger city Leiden. This area has been chosen because it contains a lot of the elements that suit the method of Aquapuncture. It has a waterway that passes through the area, there is a lake nearby and while there is a residential area, there is still room for housing development. The area has been modified in such a way that the proposed adjustments of Aquapuncture can be clearly examined. One important aspect of Aquapuncture is that it seeks to combine the interests of actors that operate on different spatial scales (national, provincial, regional, municipal and local)

The case consists of 2 municipalities that are divided by a waterway. On the northern side of the municipal border lies municipality A and on the southern side lies municipality B. On the eastern side of municipality A lays a residential area and on the western side there is a small lake. Through the

residential area flows a stream that is currently not connected to the small lake. The area that lies within the borders of municipality B is sparsely populated and has some room for development, see old

situation. In this case three scale levels can be distinguished; regional, municipal, local. On the regional level there are two actors that are operating: the Province and the Water Boards. On the municipal level there are the two municipalities (X and Y). On the smallest scale there are the actual users of the area which are the inhabitants, the visitors and the entrepreneurs.

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Local government has decided that it wants to develop the area as a whole. Five different governmental departments have specified areas on which they want to see improvements.

- The department of infrastructure and environment wants to increase the accessibility of the municipalities.

- The water board wants to increase the ability to store water in the area.

- The department of economic affairs wants to increase the attractiveness of the area for recreation and tourism.

- The department of housing wants to increase the number of houses in the area.

- The department of infrastructure and environment wants to increase the area available for nature.

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New situation

To improve waterways and the surroundings in this area, Aquapuncture proposes ten adjustments that need to be made. These ten adjustments must be seen as a complete package. They are chosen in a way that each of them strengthens another adjustment. The adjustments in isolation do not add much value to the area; it is the total package of adjustments that improves the area as a whole. Some of the adjustments may not seem cost effective if looked at it in isolation. For example, restoring the canal in the old village centre is a costly project and it does not seem to add much value a first. However, when viewed in combination with other adjustments that complete the water network, such as building the sluice (4) it can be seen that they strengthen each other. People in the village centre will now be able to moor a boat in the canal and use it to sail through the whole area. This not only increases the value of the existing houses (Luttik, 2000) but also for the residential area that has yet to be built. For a real estate developer this means that helping with financing a sluice or a bridge can actually be a positive investment. These are the type of effects that Aquapuncture wants to achieve. It must also been said that there can exist negative relations to the adjustments in the area. For instance, building a catering with boat rent can have a negative impact on the value of nature in the surrounding area.

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The following ten adjustments are proposed by Aquapuncture: 1. Provincial road with bridge

2. Residential area with different housing types along the water 3. Water storage pool

4. Sluice

5. Cycling network with bridges

6. Area for nature with recreation possibilities 7. Catering with electrical boat rent

8. Increasing height of existing bridges 9. New residential area

10. Restoring canal in the old village centre

It can be seen that a lot has been changed in the new situation. The proposed adjustments have all been selected in accordance with the policy goals of the different government departments. The most

important change that the adjustments have brought about is that all of the water in the area is now connected. Boats are able to sail through the area and can be moored in the portage. Water flows through the residential area in municipality A and is no longer intermittent.

The provincial road with bridge (1), the sluice (4), the cycling network (5), the raising of the bridges (8) and restoring the canal (10) all improve the infrastructure in the area. Not only is this beneficial for the department of infrastructure, it also increases the attractiveness of the area for recreation which connects with the goal of the department of economic affairs. The two residential area’s (2) and (9) increase the number of houses in the area and accomplish the goal of the housing department. The water storage pool (3) fits the goal of the water board to increase water storage in the area and the plan for a nature reserve (6) is in accordance with the goals of the environmental department. The building of a catering with electrical boat rent (7) improves the area as a destination for tourists; this also benefits the goals of the department of economic affairs.

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Assessment of scenarios

Now that the adjustments are clear we assume that the costs and benefits of the new situation have been examined and a balanced budget can be realized. We would now like to know which of the three financing structures is most suitable for these adjustments. Li, Akintoye and Edwards (2007) bundled some of the critical success factors for PPPs, adding the findings of Van Ham & Koppejan (2001), (Qiao et. Al, 2001), Hart (2003), Zhang (2005) and Robinson & Scott (2010) table 3 was created to provide guidance on the assessment of the threats and opportunities in the different financing scenarios. The case study was used as a reference point and provided useful real world examples of these threats and opportunities. In the next section the assessment of the three scenarios is presented.

Table 3

Critical success factors

Possible threats

Involvement of private parties in design phase

(Van Ham & Koppejan, 2001)

Complexity of stakeholder interests (Van Ham

& Koppejan, 2001)

Thorough and realistic assessment of costs

and benefits (Qiao et. al, 2001)

Principal-agent problems (Robinson & Scott,

2010)

Appropriate risk allocation (Qiao et. al, 2001)

Distribution of risks (Li et. al, 2005)

Favorable legal framework (Li et. al, 2005)

Moral hazard (opportunistic behavior) due to

incomplete contracts (Hart, 2003)

Political support (Zhang, 2005)

Quality of services

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3. Results

In this section the results of the assessment for each of the three scenarios are presented. These are based on the critical success factors and possible threats in table 3 of the previous section. The strengths and weaknesses of these financing structures in our case are evaluated here.

Joint venture (Special Purpose Vehicle)

In this case a joint venture is created where partners from the public sector and the private sector jointly design, finance, build, operate and maintain the project. A special purpose vehicle (SPV) is created where each of the participating partners has a share in. The SPV is specifically created for the

development of this specific project. The fact that all partners are involved in the design phase of the project greatly improves the chances of success of the project. Van Ham & Koppejan (2001) explain that if authorities define the project design on beforehand, the market experience and creativity of the private parties would not have been used. They argue that combining the specific skills and knowledge of both sectors is crucial for the successful joint development of products. This claim can be related to the case study. For example: it can be assumed that real estate developers have more market

experience with deciding on which location and what type of houses should be build. Therefore it can be assumed that the decisions they make have more added value to the project than if these decisions were made without them. Another advantage of including all partners in the design phase is that the partner that has to operate and maintain a facility can influence its design and therefore the

implications the design has for operating effectiveness and cost of maintenance (Ng & Loosemore, 2007). To again relate this concept to the case; suppose in the design phase a decision must be made on the type of bridge that should be build. One option is a relatively inexpensive bridge with high

maintenance costs and one is a more expensive bridge with very low maintenance costs. If the design and operate phases were not integrated, there may be an incentive to opt for the inexpensive bridge although total costs may be higher in the case of the inexpensive bridge. Integration of these phases may thus decrease costs in some cases. Another factor that influences project success is a thorough and realistic assessment of costs and benefits. In the case of traditional procurement a private partner sometimes has an incentive to willingly underestimate project costs in order to win a bid. If a private partner underestimates project costs in this joint venture, the costs of underestimation lie with the joint venture itself, where the private partner is also part of. This will lead to a better assessment of costs and

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benefits. Having discussed the most important benefits of project development through a joint venture, there are also various threats to a successful project. Possibly the largest threat lies within the

distribution of risks. While this is one of the most important motives to undertake Public-Private

partnerships it can also be a huge threat to their success. Public partners engage in PPPs to decrease the amount of capital needed to undertake a project and therefore lower financial risk. But while doing this they may actually increase the financial risk they take. A private actor may see the partnership as a way of decreasing the risk of an otherwise risky project. Because now the government is involved in this project it may be forced to step in if bankruptcy is a threat. This may cause moral hazard on the side of the private partner. From the view of public partners, involving private partners in the design phase decreases the influence they have on the project design as opposed to developing the project themselves or using a BOT construction. This can make it more difficult for public partners to achieve policy goals that demand specific design characteristics. Another difficulty may be that public and private partners have other product quality requirements. Suppose in our case a bridge need to build for pedestrians. It may be that public partners require this bridge to be accessible for disabled persons too. From a perspective of private partners this is likely to be an investment that has a negative value. These kinds of examples can create friction between public and private partners.

BOT (Build-operate-transfer)

In this case the government gives the opportunity to private companies to prepare a bid in which they describe their building plans. Subsequently, the government decides on which of the plans has won the bid and gains the right to undertake the project. Once the project is built, the private partner operates and maintains the facilities. In our case this means that the private partner maintains and operates the roads, waterways, bridges and all the other facilities in the area for a specified period. This period typically lies between 20 and 30 years (Bloomfield, 2006). During this period the government pays a monthly fee to the private partner for the use of the services. At the end of the contract the government becomes owner of all the facilities in the area. One of the advantages for the government in this case is that it can completely decide on how the project is designed. It is not subject to pressure from private partners to exclude investments with a negative net present value. Another advantage is that the government does not have to make a large upfront investment for the project. In this case we have 2 small municipalities and a province that probably do not have the required funds to undertake a project of this size. Without the BOT construction the project would not have been realistic to undertake. Contracting out the building and operating of the project also means that the risks associated with these

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activities are (partly) transferred to the private sector. Any unexpected costs associated with

construction and maintenance lie with the private partner. The government only pays for the use of the services, not for the building. What the government can do to decrease risks for the private partners is provide favourable legal conditions. For instance, it can lower the taxes the private partner has to pay or accelerate permit procedures. A disadvantage of the BOT construction as opposed to the joint venture structure earlier discussed is the fact that private partners are not included in the design of the project. This can negatively influence project outcome because valuable knowledge and skills from the private sector is not used in the design phase. As was the case in the joint venture scenario, differing opinions on quality may lead to a situation where the public partner is not satisfied with the product delivered. This is a risk when projects are contracted out.

Government as project developer

The government as project developer can be seen as the ‘business as usual’ scenario. The government designs the project itself and also takes care of building and operating. It may choose to contract out different parts of the project but there are no public-private partnerships in this case. The main

advantage for the government is that it has complete control over all phases of the project. However, it also means that it has to fund the entire project itself and construction and operating risks are also for the government to bear. This makes it very likely that the project is too expensive to undertake. One of the main strengths of the case is that it involves the building of desirable housing along the waterside. Therefore it is desirable that a real estate developer is involved with the design of the project. Missing this important actor greatly reduces the value of the project.

4. Conclusions

Since the 1990’s Public-Private Partnerships have gained increased attention in the construction of public infrastructure. Build-Own-Transfer constructions are being used by governments to gain access to private capital for the development of infrastructure projects. Another important reason for public actors to engage in these partnerships is to transfer risks from the public to the private sector. However, there is no consensus on the question if PPPs are an effective way of reaching this desired risk

allocation. Importing business thinking and business practices (Van Ham & Koppejan, 2001) are yet another motive for public actors to seek partnerships with private actors. For private parties the

partnerships can open new investment opportunities and secure long term projects. The critical success factors for PPPs include economic viability (Zhang, 2005), a strong private consortium (Li, Akintoye and

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Edwards, 2007) and involving private partners in the designing phase (Van Ham & Koppejan, 2001). The case study where different financing options for Aquapuncture projects were assessed revealed that a joint venture could be successful in realizing a positive project outcome. Combining the strong points of public and private partners in the design phase proved to be crucial in project success. Also in a joint venture, the negative effects of principle-agent problems (such as the underestimation of costs) and moral hazard are internalized. The research in this thesis was of a qualitative and theoretical nature. To strengthen the claims that are made here, quantitative research on the successes and failures of PPPs could provide useful information.

Literature list

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