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ter>Sam Vaknin's Psychology, Philosophy, Economics and Foreign Affairs Web Sites The role of government in facilitating transport projects is inevitable. But governments are monopolists and largely cannot be trusted with the efficient allocation of resources, not to mention the problem of corruption. So, the less the state is involved the better off everyone is. Transport has gone a full circle. Until the beginning of the 17 th century it was largely privately financed. The state took over until the last two decades of the twentieth century.
And now there is a revival of the involvement of the private sector in financing infrastructure. Additionally, transport has become a commodity and is securities, as we shall see. All social (or public) goods carry social costs and bring on negative externalities (such as environmental damage). Embedded in every public good there is a moral hazard - others bear a disproportionate part of the costs while the perpetrators go "free." This is why accurate statistics, forecasting and cost benefit analysis systems are a must. I am not talking only about cost coverage calculations but also about finding ways to impose on the users of transport infrastructure the real costs of their actions. This is known today as "user pays" charging schemes.
But to do so, the state needs to know what ARE these costs. This is one way of forcing the private sector to participate in the financing of infrastructure. But we are digressing. Allow me to return to more conventional methods. Transport infrastructure is financed today mostly by the state. Governments usually assume bilateral or multilateral debt from commercial banks, through the international bond markets - but, most often, from institutions such as the World Bank and regional development banks through the EBRD.
I have already indicated my aversion to this method of financing. The money is sure to be spent either inefficiently or corruptly or both. Yet hitherto both the financial scope of most of these projects, their regional and international repercussions and the need to adhere to state planning - inhibited most forms of alternative financing. Recent developments in private sector financing allow for reasonable solutions to this age-old dilemma.
These solutions are widely experimented with in dozens of countries, many of them poorer and less stable than Macedonia. The most widespread and accepted private sector financing method is the Build-Operate-Transfer (BOT) system. The state grants a 15 - 35 years concession to a private construction and engineering consortium of firms backed by ample financial resources (the contractors). The private firms build the infrastructure project, operate it for the concession period at the end of which they transfer it to the state without compensation. All the income during the operating period goes to the contractors. If the period of concession is sufficiently long - the contractors have an interest to observe high standards of quality in order to minimize maintenance costs.
The state (sometimes through "golden shares") maintains a say in certain operational aspects (such as tariffs of usage). The BOT approach has spawned off a host of variants. There is BOO - the Build, Own and Operate (classic) version. Then there is Build, sell to a financial institution or an investor, Lease it back from the new owner and Operate (BLO). There is also BLOT - like BLO but with a transfer of the asset to the state at the end of a long, pre-determined period. The Song Airport in Malaysia was constructed on a Build-Sell (to a group of banks) -Lease-Operate basis.
Lately, private entrepreneurs have begun to tap the international equity and debt markets to raise financing for transport projects. A case in point is the financing of the M 2 Motorway in Australia. Both shares representing ownership in the assets and bonds representing an interest in its future stream of income are sold to investors through investment banks, portfolio managers and then through the international stock and bond markets. This approach is a remote off-shoot of MUNIS. These are municipal bonds issued by local authorities to finances specific transport infrastructure, such as a toll-way. The income from the project goes to cover the interest and principal payments of the bonds.
Such bonds are issued either directly to investors and portfolio managers or through the stock exchange were they are freely traded. The interests of the investors are (supposed to be) protected by custodian banks and trustees. Most of these bonds are backed by long term letters of credit and the interest income is tax free. State Route 91, the Riverside Freeway in California, was fully financed by municipal bonds.
Munis have caught on with many countries, including countries in transition. Last but not least, private enterprises are allowed to own their own infrastructure. Firms can own a railway section and even trains ("Own Your Wagons" schemes) providing they finance them. In many countries, construction licences are conditioned on participation in infrastructure costs. Transport infrastructure all over the world is decrepit. Maintenance is bad.
Planning is absent. Corruption is rampant. The only hope is to remove as much as we can from the process of planning and constructing transport infrastructure from the hands of the state. Maybe this will even attract the billions dollars under mattresses and carpets in the informal economy.
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Research essay sample on Private Sector Financing Transport Infrastructure State
