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Transport Infrastructure Funding Systems
– a Review of European Experience
Author(s): Astrid Gühnemann*, Anthony Whiteing, Peter Mackie, Nigel Smith
Institute for Transport Studies, University of Leeds
*Corresponding Author:
Dr. Astrid Gühnemann
Institute for Transport Studies
University of Leeds
LEEDS, LS2 9JT
United Kingdom
phone +44(0) 113 343 5342
fax +44(0) 113 343 5334
mailto: a.guehnemann@its.leeds.ac.uk
URL: http://www.its.leeds.ac.uk
Abstract
Transport infrastructure funding in Europe currently takes place against the background of a variety of
national institutional arrangements as well as planning and procurement procedures. This paper
provides a review of different European national transport infrastructure funding systems in terms of
the institutional frameworks in which they operate, the fund raising methods employed, types of
projects funded and project selection methodologies. It also explores the issues relating to the
performance of these funding systems. The paper deals more particularly with experiences with
infrastructure financing agencies such as those which have been established in Austria, France and
Germany. From these experiences in different European countries, success factors will be identified
for stable and efficient systems of infrastructure procurement. This review is based on work that has
been undertaken as part of the European research project FUNDING, which is investigating optimal
mechanisms for the funding of major transport infrastructure investments at the European Union level.
Keywords: infrastructure, financing, procurement, transport, investments
JEL-Code : H57
1
1 INTRODUCTION
Against a background of fiscal consolidation, most OECD countries have been forced to reduce their
government investments in recent years (see Figure 1). This has not only led to a decline in national
transport infrastructure investments but has also affected investments into the Trans-European
transport networks - despite growing transport demand. This has led to an interest in developing new
mechanisms for the funding of large transport infrastructure investments in the European Union. To
this end, the project FUNDING started in 2005 with the aim to develop a scientifically sound approach
for such funding mechanisms. As an input into the development and formulation of appropriate
scenarios for funding European transport infrastructure in the future, a number of different existing
systems of transport infrastructure procurement in the Member States have been reviewed.
This paper summarizes the results in terms of the institutional frameworks within which national
transport infrastructure funding systems operate, the fund raising methods employed, types of projects
funded, and project selection methodologies. Finally, lessons learnt for the development of a European
system are summarized. In view of the relevance for the European Union level, the emphasis of our
review lies on experiences with infrastructure funding in federal systems, with infrastructure funding
agencies (funds), and private sector involvement in financing of transport infrastructure.
Figure 1: General government gross fixed investment
(Period averages, in per cent of GDP), Source OECD, 2005b
2
2 INSTITUTIONAL FRAMEWORKS
2.1 Principal considerations
Transport infrastructure ranges from the provision of international ports, airports and cross-border land
transport to local roads and public transport. Due to considerations of efficiency and democratic
accountability, a range of levels of Government from local to European assume primary responsibility.
A crucial question is how the different levels of Government interact with each other and how the
funding arrangements support this interaction. We can broadly distinguish between two models: legal
separation of powers and competition between levels.
Legal separation of powers model – here the federal government or national government has legal
responsibility for federal/national infrastructure while local government has responsibility for local
infrastructure. In addition, central government may make grants towards local infrastructure provision
which may incentivise local government in particular ways. The advantages of this system are clarity
and accountability; its disadvantages can be disputes between levels of government, difficulties of
transferring responsibilities between levels, and difficulty in treating the network as a single entity
(road user charging, quality of provision etc.).
Competition between levels model – This recognises that transport infrastructure has a range of
externalities and network effects (see Laird et al., 2003) which means that the value of the project to
any one level in the hierarchy is not equal to the total system value of the project. Therefore some
form of co-operative model is needed with suitable grant arrangements which incentivise the delivery
of such projects. This has the advantage of realism, but requires the designation of a lead level in the
hierarchy. The biggest problem is the power of veto of one institution over the whole project. It is
difficult to incentivise agencies who do not wish to do anything.
Depending on the political systems in the Member States as well as on historical developments,
transport infrastructure financing and planning in Europe takes place within a multitude of different
institutional setups which have evolved from these two basic models. Farrell (1999) distinguishes four
basic organisation models of sharing transport infrastructure responsibilities between central govern-
ment and regional or local authorities in Euope: the Scandinavian (strong agencies and consensus),
3
German (federal and co-operative), Mediterranean (centralised power and legislative decision making)
and Anglo-Saxon (central funding and executive government) models. In the following, the German
and UK systems as examples of federally and centrally organized systems are examined in more
detail.
Table 1: Organisation models for infrastructure procurement in European Countries
Model Mediterranean Anglo-Saxon Scandinavian German
Characteristics centralised power
and legislative
decision making
central funding
and executive
government
strong agencies
and consensus federal and co-
operative, co-
financing
Example
countries France, Spain,
Italy UK, Ireland, The
Netherlands Sweden,
Denmark,
Finland
Germany,
Austria,
Switzerland,
based on Farrell (1999)
2.2 Infrastructure procurement responsibilities in a federal system
(Germany)
As a federally organised nation Germany has a vertically tiered system of responsibilities. The
legislative, executive and jurisdictional powers are separated between the federal level (Bund), the
federal states (Bundesländer), and communities (Gemeinden), following two principles. The first is the
principle of subsidiarity: decisions are generally taken on a decentralised basis, with federal
competences defined in the constitution. The second important principle is that of a cooperative
federalism or division of power, which means that a major part of legislation is decided on the federal
level, while the states are responsible for the implementation. The reduced self-determination of states
in the cooperative system is compensated by strong participatory rights in federal decision-making
(Börzel, 2002).
According to this structure, the federal government in Germany is responsible for providing federal
motorways and trunk roads (Bundesfernstraßen: Autobahnen and Bundesstraßen), federal railways
(Deutsche Bahn Netz AG), and inland waterways. Airports and sea ports fall under the responsibility
of the states (Bundesländer). The main instrument of federal infrastructure planning is the federal
infrastructure master plan. This contains a list of priority projects for investments, ranked according to
the results of a project appraisal. A quota system is then applied for the distribution of investments
4
between the states. The states among other bodies issue lists of potential projects as an input to the
transport master planning process, and they are consulted in the planning process after a first list of
priority projects for transport infrastructure investments has been developed by the federal Ministry of
Transport (see Rothengatter, 2005b).
The states administer the federal roads, i.e. they carry out the project planning, construction, and
operation on behalf of the federal level through their administrative bodies (see Figure 2).
Regional Councils
e.g. Freiburg, Karlsruhe, Stuttgart,
Tübingen
Lower Administrative Bodies, Regional Highway
Authorities / Agencies, Road Transport Administration
*Federal Ministry of Transport, Building and Housing
BMVBW
State Department
for Transport
e.g. UVMBW Baden-
Württemberg
Figure 2: The “Pyramid of Authorities” -
General division of responsibilities between authorities for road planning and construction
in Germany (Source: Grandjot, 2002, translated)
The division of powers between federal and state level in the road sector has raised several issues of
criticism, including delayed planning processes, inefficiencies in the planning, and an excessive
number of projects that have to be decided and financed at the federal level (see e.g. Beckers et al.,
2005). Additional issues are the lack of synchronisation of infrastructure investments between the
states and problems in cross-national planning (see e.g. Fabian, 2005). Potential solutions are to limit
the responsibility of the federal level to the motorways with a parallel strengthening of federal
administrative capabilities (Engels, 2004) and to establish a strategic planning approach at the federal
level focussing on the federal planning objectives (see e.g. Wissenchaftlicher Beirat, 2000;
Gühnemann et al., 1999).
A more complex procedure applies to national railway infrastructure projects, where investments are
negotiated between the Federal government and the infrastructure company of the German railways,
5
DB Netz AG, a subsidiary of the German railway company, DB AG. The participation of the
deregulated company has led to an improvement in efficiency of investments due to the profitability
interest of DB AG (KCW et al., 2005), though part of investment costs is still paid for by the
government at present as a result of heavy cost overruns on some projects (Rothengatter, 2005b). A
further point of criticism is the vertical integration, introducing the potential danger of discrimination
in favour of investment decisions which would primarily benefit DB AG transport services. The
government is consulting on a potential stock market flotation of the DB AG with or without vertical
integration. In recent studies, the impacts on competitiveness of the company and on the federal
budget are considered to be not significantly different between those two alternatives (Booz Allen
Hamilton, 2006). While an integrated stock listed company is regarded critical with regard to its
impact on network maintenance and competition as well as distributional effects (see e.g. KCW et. al,
2005), an integration model is superior in terms of incentives to invest in railways (Ehrmann et al.,
2006).
Regional rail services have been transferred along with corresponding funds into the responsibility of
the states and are tendered, which has led to a considerable increase in competition and transport
volume in that market. However, DB Netz AG requested “infrastructure securing contracts” with the
federal states, securing the provision of services and funding of reinvestments (see Booz Allen
Hamilton, 2006).
Investments into inland waterways are entirely the responsibility of the federal level, which is also in
charge of their administration. Because airports in Germany are mainly owned and regulated by the
federal states and local communities and partly privatised, a general coherent investment strategy is
lacking.
2.3 Infrastructure procurement responsibilities in a centralised system
(UK/England)
The overall responsibility for the transport infrastructure planning and financing in the United
Kingdom is divided between four separate legislative areas (Home Countries) which means that the
responsibility for transport issues in Scotland, Wales and Northern Ireland is transferred to their
legislative and executive bodies (Scottish Executive Enterprise, Transport and Lifelong Learning
6
Department and Transport Scotland, Welsh Assembly Transport Directorate, Northern Ireland
Executive – Department for Regional Development). In the following, we will describe the
institutional framework for transport funding in England as an example of a system with central
funding. The overall responsibility for transport policy lies with the Department for Transport (DfT),
supported by executive agencies such as the Highways Agency and non-departmental public bodies.
Since tax revenues are almost completely generated through central government taxes, the allocation
of funding for the majority of transport infrastructure projects is decided by the DfT. The general
framework for investments has been laid out in the Ten Year Plan for Transport 2000 (DETR, 2000).
In recent years, however, the government has initiated a process of devolution, transferring some
authority for decisions on infrastructure investments to quasi-autonomous units of local government.
On the regional level, a consultation process is currently on the way enabling regional assemblies and
their local authority partners to submit regional preferences to the central government on indicative
regional funding allocations including major transport projects, in particular for the strategic road
network. The institutional framework for local transport infrastructure planning and funding differs
between the regions. The responsibility for decisions on transport investments in London lies with the
Mayor of London through Transport for London (TfL). In other regions, five year local transport plans
are developed either by Passenger Transport Authorities (PTA) and Passenger Transport Executives
(PTE) in metropolitan areas, and by the unitary (or two-tier) authorities in the counties and shires.
These local transport plans are submitted to the DfT for approval and as a basis for the allocation of
local funding for minor road schemes and local public transport investments.
The organisation of the railway sector has changed several times in the UK in the last decade. In 1994,
the formerly state owned British Rail was vertically separated and divided into about 80 different
companies. Among these the network company Railtrack was set up and the privatised by flotation in
1996. In 2001, Railtrack collapsed into bankruptcy and was taken into administration. Its successor is
Network Rail, a public interest company limited by guarantee who took over responsibility for
Britain’s rail network. Following a government White Paper on the future of railways (DfT, 2004)
summarising the state of the privatised railway as “An inefficient and dysfunctional organisation
coupled with a failure to control costs”, the former Strategic Rail Authority has been dissolved in 2005
7
and the responsibility for strategic decisions in the rail sector since lies again with the Department for
Transport. Figure 3 shows the current institutional framework for the railway sector.
Figure 3: Organisation of the railway sector in the UK
General division of responsibilities between authorities for the operation of railways
(Source: DfT, 2004)
The Department for Transport also has the general responsibility for airports, inland waterways and
sea ports. After the privatisation of airports and seaports, though, the role of the DfT is restricted to
setting strategic guidelines and requirements for planning applications in these sectors.
Although decisions on transport infrastructure funding in the UK and England are generally
characterised by a higher degree of centralization than in federal systems, the process of ‘devolution’
has led to a higher involvement of regional and local administrations. Furthermore, the process of
privatisation has led to less state control and more liberalised transport markets than in many
continental European countries. This initially drastically reduced the influence of the national
government on infrastructure investment decisions in the public transport sector markets though in the
case of railways this has now been taken back into the responsibility of the DfT.
8
2.4 Comparison of Centralised and Decentralised Systems
Drawing on the experiences from the comparison of the more centralised system of infrastructure
funding in England and the more decentralised system in Germany, similar conclusions can be
observed in both systems (see also Farrell, 1999):
• concentration of national decision making on the strategic networks and
• higher responsibilities of federal, regional and local levels for lower level networks.
In the TIPP project (Peter at al., 2005), hypotheses about the strengths of decision making in transport
policy in a decentralised versus a centralised system have been tested in a survey of case studies. For
infrastructure funding, the most relevant advantages that could be confirmed for the decentralised
system are a stronger identification of local and regional preferences and higher levels of information
generation. In contrast, the strengths of the centralised system are the co-ordination between diverging
local/regional interests, the consolidation of information, and (partly confirmed) the professionalism of
public decision makers.
3 FUNDING METHODS
Broadly speaking, infrastructure projects can be funded by users or taxpayers. They can be financed by
some mixture of grants and loans, the latter to be repaid by some mixture of user revenues and
Government debt. The intended funding mix is very likely to affect the way in which the governance
of projects is organised.
• Strong grant schemes give a high weight to Government (EU or national) in the organisation
and delivery of projects. This is the case with investment in UK national highways where the
Highways Agency is used as the planning and delivery agency, but the UK Department for
Transport has strong control of the programme and prioritisation.
• Loan schemes are likely to be organised through intermediary organisations such as the
European Investment Bank. Such organisations can also be useful as co-ordinators of national
and supranational sources of funding, i.e. putting a package together. World Bank, ADB etc.
perform this role elsewhere in the world.
9
• User-pays schemes are more likely to be organised through semi-autonomous bodies such as
COFIROUTE in France or through project-specific franchises such as the M6 Toll in the UK.
However, in practice, any organisation is likely to contain elements of all three, such as grant
contributions from Government, a funding package organised by a Bank, and a franchise or
concession to a company with responsibility for delivering the project. The clear assignment of the
powers and responsibilities of the parties within the model is crucial to efficient delivery. In the
following, examples of national funding mechanisms through national public budgets and experiences
with private sector involvement are reviewed in more detail.
3.1 Public Sector Funding of Infrastructure
Germany
Infrastructure funding in Germany mainly occurs in the form of public budget funding and user
charges. An initial earmarking of part of fuel taxes for road transport purposes has been broadened
since 1973 to wider transport system uses. Motorways and federal trunk roads are completely funded
from the federal budgets, while the states and communes receive tax transfers and can apply for
special funds for transport infrastructure investments. Laaser and Rosenschoon (2001) analysed
income from and expenditure in the transport sector. Overall, (excluding external costs) revenues from
the transport sector exceed expenditure. However, even after transfer of funds between federal levels,
there is a negative balance between revenues and expenditure on the state and community level.
Furthermore, Germany, together with many other European countries, has been experiencing tight
restraints to its general fiscal budget. Therefore, new instruments, specifically the heavy goods
vehicles motorway toll and two PPP models for federal road projects, were introduced in the late
1990s in order to sustain transport investments into the long term. The revenues of the distance based
HGV motorway toll (net approximately 2.4 billion Euro in 2005) contribute to the total federal budget
for transport infrastructure investments (about 12.2 billion Euro in 2005). They are not earmarked for
investments in the motorways but will be used for general transport infrastructure investments. An
issue of concern for local communities and states is the partial diversion of heavy traffic onto the
10
minor road networks. The inclusion of these roads in the charging regime would require negotiations
on the division of revenues between the political tiers.
Refunding of rail infrastructure investments is achieved through track charges, which are supposed to
allow DB Netz AG to recover the annual depreciation of infrastructure investments. However, there is
still strong public sector involvement in the rail sector through financial grants towards construction
costs and to cover the losses of DB Netz AG. Furthermore, the federal states receive a transfer of
funds from the federal general budget for the subsidisation of regional rail services (2002: 6.745
billion Euros; increased by 1.5% p.a. from 2003 on) which include track charges. The Scientific
Advisory Board to the Ministry of Transport cites an estimated gap in the cost recovery of 2.5 billion
Euro which DB AG demands as state contribution (45%) (Wissenschaftlicher Beirat, 2005).
Refunding of investments in inland waterways is partly through tolls and fees (e.g. for using locks),
but mainly from the general federal budget. The refunding of airport investments is mainly through
user costs (landing charges etc.) and airport services (rents from retail etc.). Hopf et al. (2003) estimate
for the 17 international airports in Germany that for the year 2001 the infrastructure related costs of air
traffic was recovered in total from user costs.
These experiences from federal infrastructure planning and financing in Germany reveal the
challenges that lie in the co-ordination of investment decisions between different tiers of political
decision making and state institutions plus private actors such as the rail network companies and
private investors. Therefore, clear rules are necessary in the selection of projects for investments and
there is also a need for a clear division of responsibilities. Co-ordination between different
organisations is essential. Following the subsidiarity principle, as many decisions as possible should
be taken at the regional level, with the federal level restricting itself to more strategic goals leading to
coherent investment frameworks and a selection of projects of strategic interest for financing. In the
road sector in particular, this principle needs to be re-established, including a revised division of
funding sources. A second major challenge is the shift from general public procurement to a user
charging oriented system. First steps have been taken with the introduction of the HGV motorway toll
and the separation of railway network management and train operation, but there is still a heavy
involvement of funding from public budgets.
11
UK
Transport infrastructure financing in the UK has traditionally been through the general public budget
with the main sources of taxation from the transport sector being fuel duty and vehicle excise duty.
Until the 1920s, taxes had been earmarked for use on roads. Since then however there has only been a
loose principle that each category of road users should in aggregate cover the cost of their road use. A
study by Sansom et al. (2002) showed that if considering only infrastructure costs, all user classes
more than cover their costs, but this comparison between costs and revenues looks very different if
environmental and congestion costs are included.
Until the end of the 1980s private finance occurred only exceptionally with some large road schemes
franchised to private sector consortia and developer contributions to local road improvements. In
1992, the government introduced the Private Finance Initiative (PFI) in order to promote investments
into new transport infrastructure. In parallel, due to heavy constraints on public funds, public
investment in transport infrastructure fell during the 1990s. For example in the road sector, the roads
programme had been significantly reduced from over 500 schemes at a cost of £17 billion in the early
1990s to 147 schemes at a capital cost of £6 billion in 1997 (Marsden, 2002). In 2000, the New Labour
Government introduced its Ten Year Plan for Transport (DETR, 2000) which among other goals
aimed at overcoming the underinvestment in the transport infrastructure. Figure 4 shows the
development of investments according to this plan with a high focus on rail investments. However, a
large proportion of the planned investments were intended to come from the private sector making it
doubtful whether all these investments could be realized (see e.g. Glaister, 2002). Furthermore, the use
of private finance became unfavourable after 2001, and so the UK has reverted to a binary model with
few toll roads and public finance for the majority of the strategic and local transport networks.
12
Historic and Ten Year Plan Investments
0
5
10
15
20
25
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Year
billion
£
Private: - London
- Loca l trans port
- Rail
- Strateg ic road s
Public - Unallocated
- Other tra nspo rt areas
- Lond on
- Loca l trans port
- Rail
- Strateg ic road s
Ten Year Plan
Figure 4: Historic and Ten Year Plan Investments
Data Source: DETR (2000)
Although all transport investments have to undergo an appraisal before investment decisions are taken,
there have been no explicit criteria for the inclusion of projects into the Ten Year Plan, leaving
uncertainties whether an economically efficient mix of rail and road investments was established
(Glaister, 2002).
Funding of transport projects on the regional and local level is divided into major schemes (exceeding
an investment volume of £ 5 million) to be decided individually by the DfT and smaller schemes
which need to be included in multi-modal Local Transport Plans (LTPs). Currently, the second round
of LTPs has been submitted by the local authorities and is under consideration for funding by the DfT.
Besides the national grants, local authorities have little scope to finance transport investments and
maintenance from council taxes.
3.2 Funding with private sector involvement
PPP models
After initial enthusiasm a slowdown of private funding of new transport infrastructure can be observed
internationally since the late 1990s (Molnar, 2003). Among the reasons for this development have
13
been cost overruns, unfavourable risk sharing arrangements, lower willingness to pay for infrastructure
use than expected and traffic developments falling short of expectations. Some lessons to be learnt
from European experience (see e.g. Ragazzi and Rothengatter, 2005; Debande, 2002, Molnar, 2003)
are
• The private sector requires an appropriate return on the capital it invests and borrows to invest.
• The main question is therefore whether the efficiency/cost gains outweigh the private capital
risk premium which has to be paid.
• Private financing should not be used to overcome a public funding constraint.
Despite this, there is scope for private involvement in financing and in the procurement of transport
infrastructure. Empirical experience from Great Britain, where PPP models for road procurement have
been experienced more widely, suggests that private sector involvement is of greatest benefit for the
management rather than the financing of road procurement (Mackie and Smith, 2005).
Presently, the involvement of private sector capital in financing cross-border transport infrastructures
is constrained by organisational and legal problems that result from the application of many and varied
pieces of national legislation. Some of these restrictions could be overcome by the recent possibility to
establish a European Public Limited Company or 'Societas Europaea' (SE).1 This offers the advantage
of a uniform accounting system and legislative structure, reduces administrative and legal costs and
the necessity to establish subsidiary companies in the countries concerned (Fabian, 2005).
Full private financing
There are few examples of transport infrastructure investments in Europe which have been fully
financed by the private sector. One of these examples is the M1/M15 project in Hungary, which was
the first privately financed toll motorway project in Central and Eastern Europe and motivated by a
lack of public money available for financing transport infrastructure in 1989 in Hungary. The
awarding process was carried out in two phases: a prequalification and a tendering phase and was
completed within two years. A concession company named SPV Elmka was created shortly after. The
participation of EBRD was crucial in the finalisation of the concession contract to securing the foreign
1 Statutory Instrument No. 2326/2004, Council Regulation (EC) No 2157/2001, Council Directive 2001/86/EC
14
financed debt. Notwithstanding economic difficulties during this transition period, the construction
then progressed and was finished according to programme and budget. At that time the M1/M15
project was considered a major success in achieving the goal of financing and building this motorway
section in such a short time with virtually no cost overruns. However, during its operation, the
development of traffic on the motorway section fell significantly short of previous expectations, partly
due to over-optimistic forecasts of border traffic. Furthermore, in setting the toll rate, the SPV Elmka
applied a revenue maximisation policy with a view towards revenue from the richer West European
drivers. After a court judgement on a case initiated by the Hungarian Automobile Club, Elmka was
obliged to pay back about one third of the toll, and the lenders reacted by declaring an event of default.
Negotiations on restructuring the company finances were unsuccessful, and after three years of
operation Elmka was superseded by a fully state owned company, leading to substantial financial
losses to the shareholders of Elmka without compensation.
The fact that traffic is substantially below expectations does not mean that the project has become a
“white elephant” – in fact it continues to form an integral element of the Hungarian motorway system.
Indeed it is hard to see how this project might have been delivered if private finance had not been
used. It is interesting to speculate whether the fact that the project had been 100% financed with
private funds without any recourse to the State allowed the Client to take a slightly ambivalent attitude
towards the project. Although it is natural to focus on the differences between the traffic consultants’
forecasts and the over optimistic projections prepared by the macro economists, neither of these
discrepancies would invalidate the viability of the concession. As it was the financial structure put up
by the lenders and promoters proved to be relatively robust. It would even have allowed sufficient
time to put a financial rescue package in place in the form of new cash from the shareholders and
reductions in margins and increases in grace and maturity periods by the lenders. This case
demonstrates that the most important success factor is the commitment and full and sustained support
of the Client/Principal.
Privatisation is an increasing source of financing of investments in airports. Fully privately owned
airports are mainly found in the UK. Generally, the chances for success of privatisation are regarded as
greatest for larger airports. However, there is felt to be some danger because larger airports can
15
exercise their market power against the interests of their customers (airlines) (von Hirschhausen, 2004)
and hence some form of price regulation seems necessary. Infrastructure developments at airports are
still subsidised, however. This is in particular critical in the development and expansion of smaller
regional airports competing for low-cost airlines. Heymann and Vollenkemper (2005) suggest that
most regional airports lack the critical mass to become profitable and will therefore swallow up
subsidies in competition to attract airlines.
4 TRANSPORT INFRASTRUCTURE FUNDS
Several member states of the European Union have established transport infrastructure funds via
financing agencies as a means of managing and providing infrastructure financing independent of
public budgets and to provide for investment continuity. Prominent examples for such agencies have
been established in Germany, Austria and France.
In Germany, a state owned multi-modal transport infrastructure financing agency VFIG
(Verkehrsinfrastrukturfinanzierungsgesellschaft) was established in 2003. The major motivation for
founding the VFIG was to create institutional structures that support transport infrastructure
investments independent of the public accounting system. Its tasks are the financing and financial
management of those aspects of transport infrastructure procurement that are the responsibility of the
federal level, and the preparation and carrying out of PPP projects. VFIG receives the user charges
from the HGV toll on motorways and inland waterway tolls which are collected by federal institutions.
Three major issues are the subjects of current debate (e.g. BDI, 2005):
• the multi-modal character of the agency, allowing for transfers between modes according to
political willpower, reducing public acceptance of user charging;
• whether the agency should be able to make recourse to the capital market to raise funds; this
issue is to be examined according to the coalition contract of the current government (CDU et
al., 2005)
• whether the agency should have direct access to earmarked transport user charges.
However, there is little empirical evidence to date to assess the performance of the agency. More
experiences exist with the established Austrian agency, ASFINAG (Autobahnen- und Schnellstraßen-
Finanzierungs-AG), a privately organised but state owned company with the right to collect tolls and
16
the obligation to invest into the maintenance and enhancement of the Austrian motorway system.
Investment decisions are taken via a consensus process between the federal government, the federal
states and the company. ASFINAG obtains capital from the capital market, with the loans being
guaranteed by the Austrian state. The refunding of the investments is done via user charges (a distance
dependent HGV toll and a time dependent vignette for cars). In general the organisational structure of
the Austrian fund and the earmarking of user charges for the road sector are regarded as the basis of an
efficient and reliable system. An open issue is whether to grant ASFINAG the right to determine the
rates of user charges, which are currently determined by the federal government (Beckers et al., 2006).
In France, the transport infrastructure financing agency AFITF (L’Agence de financement des
infrastructure de transport de France) was established based on a decision by decree of the council of
ministers in 2004 and has been in operation since January 2005. The main motivation for its
implementation was to foster the completion of a plan for 50 large infrastructure projects determined
in 2003. The agency is multimodal and covers (large) road, (high-speed) rail, coastal and inland
waterway shipping, seaport, combined transport and local transport infrastructure projects. It is not
involved in either the selection or planning process of projects to be financed, these are determined by
three major initiatives:
1. a list of 50 large projects by the Comité interministériel d’aménagement et de développement
du territoire (CIADT) (Inter-ministerial committee for regional development) as of Dec 2003.
The selection of projects has been based on a strategic development vision;
2. regional infrastructure projects according to the Contrat de Plan État-Région (CPER) and the
special investment programme for Corsica; these are agreements negotiated between the
Government and each regional authority setting out a multi-annual (currently 2000-2006)
spending programme to be financed on a 50:50 basis;
3. local transport infrastructures projects according to the decision of the Comité Interministériel
d’Aménagement et de Compétitivité des Territoires (CIACT).
The agency receives the revenues from state owned motorway tolls, regional planning tax, 40% of
revenues from radar controls, and subsidies from public budgets. In 2005, the CIACT decided to
accelerate the realisation of projects by providing an exceptional infusion in capital of € 4 billion from
the privatisation of motorway companies.
17
Table 2 on the following page summarises the main characteristics of the three models for
infrastructure funds in European countries. Various critical issues relating to the construction and
operation of infrastructure funding agencies can already be identified, despite the fact that the French
and German agencies have only been in existence for a short time:
- political autonomy: a high degree of political influence may lead to an inefficient management of
the fund; on the other hand, some political control mechanisms are necessary to avoid a monopoly
situation and socially inadequate procurement of infrastructure (see Beckers et al. 2006); to
increase social acceptance, Heggie (1999) suggests including representatives of road users and the
business community in managing boards;
- monitoring and control: an effective control system has to be established to avoid mismanagement
of the fund and the risk of future writing off of debts at public expense (see also Molnar, 2003);
usually, funds are subject to regular audits;
- multi-modal or uni-modal character: the multi-modal character of the German agency has been
heavily criticised by industrial organisations due to its lack of user transparency and acceptability.
In the Austrian example, a clear relation is established between user charges and investments in
the sense of a collective club good (Beckers et al, 2006); cross-subsidisation of other modes for
social benefits is still established via fuel taxation and public budgets;
- the possibility to borrow external capital, which offers the funds greater financial independence
and multi-annual predictability, but requires financial sovereignty and efficient management,
monitoring and control of the fund;
- involvement in the project selection: since commercial viability plays an increasingly important
role in infrastructure procurement, the involvement of expertise from the infrastructure financing
agency in the project selection process is essential. Beckers et al. (2006), however, point out two
factors that could lead to the agency proposing too many projects: (monopoly) access to toll
revenues and the risk of pressure on the agency by lobby groups, e.g. construction industry;
- the right to propose toll levels: in order to achieve commercial sustainability of the fund, charges
might need to be adjusted regularly to repay debts and meet expenditure targets. However, this
needs to be controlled by a regulating institution to comply with given charging rules (Heggie,
1999, Beckers et al., 2006).
- their financial autonomy: on the one hand, the off-budget status of the funds might lead to a loss of
government interest to provide for transport infrastructure as public goods (Molnar, 2003), on the
other hand financial autonomy and direct accessibility of user charges for the fund are crucial if
external funds are borrowed and for multi-annual predictability and planning.
18
Table 2: Infrastructure financing agencies
Germany Austria France
In operation since 2004 1982;
1997 in current form; 2005
Legal basis and
termination rules financing law VIFGG;
parliament decision; no
specific termination rules
contractual arrangement
between company and
federal government
based on federal law
(parliament decision)
decree by council of
ministers
Organisational form state owned, privately
organised as limited
liability company by
capital (GmbH);
state owned, privately
organised as private
limited company by
shares (AG)
public administration
institution
Level of autonomy legal entity; supervisory
board with members
from ministry of
transport; one managing
director from ministry
legal entity, independent
board of directors and
managing directors; state
is shareholder
legal entity, financial
autonomy; under
supervision of transport
ministry, administered by
council with one half
state representatives
Monitoring and Control annual report to
parliament annual business report through administrative
council
Modes covered Multimodal;
federal projects; federal roads multimodal; federal and
regional / local
Tasks financing and financial
management of con-
struction, maintenance
and operation of federal
transport infrastructure;
preparation and carrying
out of PPP projects
planning, financing,
construction and
operation of the federal
road network
financing of transport
projects of national and
international importance,
in particular in public
private partnership
arrangements
Project selection
process federal transport
infrastructure master
plan, formal appraisal
and ranking method;
state quota; parliament
decision
consensus system
between federal
government, states,
ASFINAG and other
institutions; no formal
consistent appraisal
method
CIADT list of 50 grand
projects; CPER
arrangements; CIACT
decision on inclusion of
projects
Criteria for project
selection social cost benefit
analysis plus additional
criteria on environment,
regional development,
European interconnec-
tivity, and intermodal
integration
transport demand, project
realisation costs,
intermodal integration,
regional development
strategic development
goals
Agency involved in
project selection no yes no
Sources of finance HGV tolls, inland
waterway charges; funds
are cleared though public
budget
HGV tolls; car vignette,
direct from operating
companies; external
capital
tolls, pubic budget,
privatisation funds
External capital no yes yes
Right to propose toll
levels no no no
Annual Budget 2005: € 2.4 billion
planned, (net revenue
from HGV tolls);
2004: maintenance and
operation € 480 mill.,
investments € 650 mill.,
interest € 300 mill.
2006: € 2 billion
19
5 CONCLUSIONS
The main objective of this review has been to identify success factors and potential barriers for stable
and efficient systems of infrastructure procurement.
In terms of the institutional framework, there needs to be a clear diversion of powers between the
decision making hierarchy levels with strategic investments to be decided at the central level, but
under consultation of regional authorities. On the other hand, the devolution of powers for investment
into the subordinate networks and for income generation to regional and local authorities could lead to
shorter planning processes and more efficient resource allocation according to regional necessities.
In the countries studied in detail, there is only limited earmarking of taxation for use in the transport
sector. With the prospect of user charging, however, a new discussion of the use of revenues has
emerged. From a fiscal point of view, hypothecation of taxation for the transport sector could lead to a
sub-optimal allocation of public funds. On the other hand, e.g. Farrell (1999) points out some
advantages: a higher stability in investment budgets, avoidance of political interference, and increased
acceptability, transparency and accountability. One alternative way to establish these principles is the
creation of an infrastructure funding agency with a certain degree of political autonomy. As in the
French and German case, such a fund can be used to manage investment budgets fed from public
funding as well as user charging. It could also gain access to finances from the capital markets as in
the Austrian case. If carefully implemented, such a fund could also be promising for securing funding
for major transport infrastructures of European interest.
The optimism regarding the generation of funds for transport infrastructure investments through
private sector involvement has been replaced by a more realistic view on the benefits and risks of
private financing. With it, the role of the public sector changes from owner and provider to that of a
purchaser of services and legal partner in long-term contractual arrangements (Debande, 2002). This
not only requires different knowledge of the public administration, but also changes the accounting for
infrastructure provision in the public budgets and might shift the burden to future generations. This
can be particularly critical in countries where a decline in population is expected.
20
One of the aims of our review was to consider transferability of procurement systems, in particular
investment funding agencies, to the European level. The experience with infrastructure funding in the
Member States has revealed salient issues that will need to be tackled when introducing new schemes
for funding the Trans-European Transport Infrastructures:
• Clear rules are necessary to determine whether transport infrastructure is eligible for funding,
and the involvement should be restricted to projects that clearly fulfil trans-boundary transport
functions benefiting European Union objectives in order to avoid over-subsidisation and
excessive involvement in regional transport infrastructure investments.
• There needs to be a clear division of responsibilities between the European and the Member
State level with control mechanisms installed over the whole procurement process to protect the
interests of the financing actors.
• An infrastructure fund promises more flexibility and higher stability of the investment budget
than funding from general budgets. Currently there is no autonomous funding mechanism for
cross-border infrastructures of European interest.
• A future funding organisation is likely to contain elements of grant contributions from
Government as well as funding from user charges and private sector involvement in financing
and project delivery. The clear assignment of the powers and responsibilities of the parties
within the model is crucial to efficient delivery.
• There is a need not only for financial but also for organisational co-ordination of cross-border
infrastructure procurement. First steps towards this have been taken by the introduction of
European co-ordinators for the TEN priority axes.
• The setup of an infrastructure fund needs to consider carefully whether a multi-modal approach
is taken, revenues from user charges are earmarked and directly transferred to the fund, and
whether the fund can borrow money from the capital market.
• In the case of the private participation, rules are necessary to determine who bears the risk of
cost overruns; experience shows that privately owned companies (and in particular railway
21
network companies) need planning security and this issue must be considered in the financing
rules of a fund.
• Private involvement in infrastructure provision requires support in the form of long-term
commitment of the public partner.
6 ACKNOWLEDGEMENTS
We thank the European Commission for providing financial support to carry out this research within
the FUNDING project. Further thanks to the partners of the FUNDING consortium and Prof. Emile
Quinet for providing valuable feedback and information on national experiences for our review.
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