Privatising Railroads: The Problematic Involvement of the Private Sector in Two Dutch Railway Projects

Transcription

1 THE ASIA PACIFIC JOURNAL OF PUBLIC ADMINISTRATION VOL 27, NO 2 (DECEMBER 2005): Privatising Railroads: The Problematic Involvement of the Private Sector in Two Dutch Railway Projects Joop Koppenjan and Martijn Leijten This article provides a comparative analysis of the Dutch government's attempts to involve private parties in two national railroad mega-projects: the Betuwe Line (a transit line for goods connecting the Rotterdam harbour to the German rail network costing 4.8 billion euros) and the HSL-Zuid (a high speed line between the Belgian border and Amsterdam costing 6.8 billion euros). These projects are currently under construction. To date, the government has not succeeded in privatising the Betuwe Line. Although the privatisation of the HSL-Zuid has been realised, it has proven difficult to keep under control. The two projects are compared in terms of the motives for privatisation, the strategies adopted, and the results achieved. Explanations are sought for the extent to which the strategies were successful. Generic lessons are drawn from the two projects. Introduction Until recently, railways in the Netherlands were considered to be lossmaking businesses, to be placed in the hands of a state-owned monopolist, The Nederlandse Spoorwegen (NS: Dutch Railways). Construction was publicly financed and operation was heavily subsidised (Ten Heuvelhof 2003; Teulings & Koopmans 2005; Pickrell 1992). When in the 1980s the Dutch government planned to construct two mega railway projects for which huge investments were needed, it was decided to break with this tradition. At that time, the Betuwe Line, a freight-transit line connecting the port of Rotterdam to the German rail network, was estimated to cost 1.7 billion euros. The HSL-Zuid (HSL-South), a high speed line that would connect Amsterdam to Brussels, Paris and London was assumed in 1994 to cost 2.7 billion euros. Since it was thought that these projects would be profit-making, it was decided that they would be privatised in terms of their financing, construction and operation. Presently, both projects are in the construction phase, with the Dutch government experiencing great difficulties in realising its privatisation ambitions. In fact the privatisation of the Betuwe Line has been a complete failure. Although the government claims success so far in the case of the HSL-South, this success has been questioned by a parliamentary research committee that looked into the causes of the major cost overruns in both projects (Tweede Kamer ). 181

2 The Asia Pacific Journal of Public Administration The discussion here presents a secondary analysis of the findings of the parliamentary research committee, with the committee's unique empirical material being used to examine the way privatisation was organised and the factors that can help to explain its results. The analysis may add to the generic knowledge about the success and failure conditions that underlie attempts to realise private involvement in public projects. The discussion begins by addressing the central theoretical notions and practical experiences that underlie the comparative analysis of the two projects. It then sketches the main features of the railway sector in the Netherlands that formed the context within which the two projects evolved. Next, it describes the most important privatisation experiences from the two projects. It provides a comparison of the projects in an attempt to arrive at explanations, before reaching an overall conclusion. Large Infrastructural Projects: Public Decision-Making and Private Involvement The reasons why governments engage in privatisation and public-private partnerships include the need (Savas 2000; Osborne 2000; van Ham & Koppenjan 2001; Akintoye 2003; Lobina & Hall 2003): to mobilise private investments when public funds are scarce; to increase efficiency and value for money due to the assumed superior project management capacities of private parties; to realise optimisation in design and innovation in project content due to the early involvement of private expertise. Although the terms "privatisation" and "public-private partnership" are in common usage, they refer to a wide variety of forms of public-private relations. They can be considered to be positions on a scale that runs from projects that are completely publicly owned and managed to those that are completely private initiatives. Often even publicly owned projects are not without private involvement. Some activities may be outsourced, and private building companies often do the construction on the basis of traditional contracts. Four broad forms of innovative public-private collaboration can be distinguished: innovative tendering, concessions, the establishment of special-purpose vehicles, and full-fledged privatisation (Moore 1994; Wettenhall 2003; Bennet, et al 2000; Ghobadian, et al 2004; Koppenjan 2005). The four can be outlined as follows. Innovative tendering differs from traditional contracting, as various project activities (e.g. design, construction, maintenance and operation) are 182

3 Privatising Railroads: The Problematic Involvement of the Private Sector in Two Dutch Railways Projects tendered together. Combining the design and construction phases brings together the expertise for both phases. This allows the contractor to anticipate the impact of design choices on the construction phase, thereby realising design optimisations and efficiency gains. "Design and construct", "design, construct and maintain" and "design, construct and operate" contracts may offer more value for money. These types of contracts transfer the risks that result from the interface between project phases to the contractor, and they change the role of government in public projects. Instead of realising projects themselves, governments procure products or services and govern from a distance, using a programme of functional requirements rather than detailed requirements. Although innovative tendering implies the increased involvement of private parties in public projects, the concepts of privatisation and publicprivate partnership are reserved for forms of collaboration in which private parties carry financial risks, as in the case of "build, operate and transfer" contracts or "design, build, finance, maintain and operate" contracts. Outside the Netherlands, public transport infrastructure is often realised by "build, operate and transfer" contracts (Walker & Smith 1995). In such cases, the entire project-development process rests in the hands of private parties, who must recover their investments by demanding user fees (eg, the Herrentunnel in Lüeck and the Warnowtunnel in Rostock, Germany). When the concession period ends, the project is transferred to the government. The combination of innovative tendering and private investments increases the ability of private parties to realise design efficiencies. This is the goal of "design, build, finance, maintain and operate" contracting, which was developed in the UK in the 1990s in the context of the private finance initiative. Projects using this form of contracting are publicly defined. Also, private parties must recover their investments by requesting user fees. When this is not possible, they receive government payments according to their level of performance. Private involvement in the provision of public infrastructure can also be realised through the establishment of special-purpose vehicles (SPVs). Government and private sectors may both participate in SPVs, and they may thus share the benefits, costs and risks. This arrangement is especially suited for the realisation of complex, innovative projects that are initially difficult to define, whereby the risks are not easily divided amongst parties. This form of collaboration is often referred to as the "alliance model" (van Ham & Koppenjan 2002; Akintoye 2003). Not all SPVs are joint ventures. In the Netherlands, the tunnel under the westerschelde in the province of Zeeland was realised and is operated by a state-owned company, financed by government. Full-fledged privatisation implies that the whole project is privately developed, financed and managed. The role of government is restricted at most to providing subsidies or regulations. These types of projects are quite 183

4 The Asia Pacific Journal of Public Administration common in, for instance, the ICT sector. With regard to the two rail projects, the Dutch government started out with the idea that full privatisation might be possible. Very soon, forecasts of incomes showed that, by commercial operation, the investment could only partly be recovered. So it was decided to settle for partial privatisation. Notions of privatisation and public-private partnership thus encompass quite different forms of relations between the government and private sectors compared to traditional public project realisation and service provision. The common denominator is that all of these forms increase, or at least change, the involvement of private parties in public projects. They do not end the role of the government in public projects, but they do imply a drastic redefinition of that role in the realisation and operation of public infrastructure. Experiences with privatisation and public-private cooperation are widely divergent. The ideological content of any discussion about privatisation or public-private partnership in both practice and in the academic community poses an additional difficulty. Advocates and opponents of private involvement often consider various (side) effects when determining the success of such ventures. Even when there is consensus that a project has failed, whether the failure resulted from the principle of private involvement or from the manner in which it was designed remains unclear (Akintoye, et al 2003; Osborne 2000; Ghobadian, et al 2004; Highway Agency & Private Finance Panel, no year). What is more, the length of the contracts that are closed in these projects often makes it difficult to predict whether such forms of collaboration are likely to be successful (cf Johnstone & Wood 2001; Ghobadian, et al 2004; Koppenjan & Enserink 2005). What is known, however, is that it is quite difficult for the government to find suitable approaches for involving private parties in these types of projects. It is difficult to build partnerships or develop projects that are suitable for tendering (Berg, et al 2002; van Ham & Koppenjan 2001, 2002). "Public" and "Private" in the Dutch Railway Sector Until 1995, all functions regarding Dutch rail transport were integrated in the state-owned enterprise, NV Nederlandse Spoorwegen, including the economic ownership of the infrastructure. Although government owned most of the shares in this limited liability company, its influence was restricted. According to Dutch law, the rights of shareholders are transferred to the board of directors, which has the legal task to serve the interests of the company. In addition, the financial accountability obligations of the company towards the state are limited. However, because of the growing financial contributions to the construction and operation of railways, the government increasingly felt the need to increase its control over the company. 184

5 Privatising Railroads: The Problematic Involvement of the Private Sector in Two Dutch Railways Projects In 1991, the Council of the European Union decided on new regulations, stipulating that national railway companies should be placed at arm's length from governments and that competition should be introduced in the railway sector. Since this regulation fits Dutch ambitions to reduce the everincreasing subsidies for the railway sector, the Dutch government has embraced the EU policy. The intention was to split NV Nederlandse Spoorwegen into market organisations and task organisations. Task organisations perform tasks commissioned and paid for by the government. Market organisations perform commercial activities under competition and without special ties to task organisations. The negotiations with NV Nederlandse Spoorwegen resulted in 1995 in the establishment of four market organisations (NS Reizigers for public passenger transportation, NS Cargo for freight transportation, NS Stations for the operation of railway stations, and NS Vastgoed for the development of real estate) and three task organisations (NS Verkeersleiding for traffic control, NS Railinfrabeheer for the maintenance and operation of infrastructure, and Railned for capacity management). Since 2001, NS Railinfrabeher has been part of the overarching public task organisation ProRail. But all these organisations remain part of the also overarching NV Nederlandse Spoorwegen holding (Koolstra 2001; Ten Heuvelhof 2003). Although politicians and media have spoken of the privatisation of NV Nederlandse Spoorwegen, the property structure of the company did not change. In so far as privatisation took place, it concerned the outplacement of certain activities. Especially notable was the takeover of NS Cargo by Deutsche Bahn. This resulted in the introduction of competition in the freight railway sector. In addition to Railion, the company in which NS Cargo was integrated by Deutsche Bahn, there are currently six other carriers active in the Dutch freight railway market. As far as passenger transportation is concerned, the government has tried to increase its grip on the operational subsidies by asking NV Nederlandse Spoorwegen to indicate which railway services are unprofitable and to put such services out to public tender. At present, a few new transport companies have received concessions for these services (eg Syntus and Noordned). Thus, some liberalisation has been realised in the passenger market, although NV Nederlandse Spoorwegen is one of the main shareholders of these new companies. The operation of the major part of the Dutch railway system, especially the lines connecting the major cities, is considered to be profitable and is referred to as the "core network". NS Reizigers has received a concession for the core network until So the largest part of the rail passenger market still has not been liberalised. In the mid-1990s, a really independent newcomer (Lovers Rail) had ambitions to compete with NV Nederlandse Spoorwegen on the core network, but it was not successful because of a lack of cooperation by the NS task organisations. In 2001, because the 185

6 The Asia Pacific Journal of Public Administration splitting of the market and non-market activities was still incomplete and restricted the proper functioning of the railway market, the task organisations were separated from NV Nederlandse Spoorwegen and the shares were transferred to the state. The planning and construction of new railway lines in the Netherlands is a task of NV Nederlandse Spoorwegen, which possesses a knowledge monopoly in this field. These investments traditionally have been publicly funded. So, despite the ambitions to finance the Betuwe Line and HSL- South by private investment, it is NV Nederlandse Spoorwegen that drafts the reports and plans that have to be drawn up in the context of the existing public procedures. During the preparation of these projects in the late 1980s and first half of the 1990s, there was no hierarchical relationship between the government and NV Nederlandse Spoorwegen. The Minister of Transportation and Water Management and the Minister of Housing, Spatial Planning and the Environment, who are responsible for these projects, had to realise their preferences by negotiations with the company. After the decision in 1995 to start construction of the Betuwe Line despite the lack of private investors, the responsibility for coordinating the construction has rested with NS Railinfrabeheer, but with NV Nederlandse Spoorwegen also being actively involved. In 1997, in an attempt to increase the government's control over the project and to limit cost overruns, the Ministry of Transportation and Water Management signed a protocol with NV Nederlandse Spoorwegen that formalises their relationship. Part of this protocol is the agreement that the property of the Betuwe Line will be transferred to the state as soon as a concession is granted or an operating company is established. As long as the privatisation has not been realised, NS Railinfrabeheer remains responsible for preparing and implementing the operation of the infrastructure. When the decision was taken to construct the HSL-South in 1997, the Ministry of Transportation and Water Management decided not to use the Betuwe Line model. The project is to be coordinated by a project organisation within the ministry. As a result, the state will own the infrastructure directly. Accordingly, NS Railinfrabeheer and NV Nederlandse Spoorwegen will not automatically have a role in the construction and operation of the line. Privatisation and the Betuwe Line 1 The Project In the late 1980s, a lobby of Rotterdam public officials and companies urged the Dutch government to construct a transport railroad line to the German border. This new connection to the European hinterland would strengthen the international competitiveness of the port of Rotterdam. In 1993, the decision was made to construct the Betuwe Line. A cabinet change in

7 Privatising Railroads: The Problematic Involvement of the Private Sector in Two Dutch Railways Projects required reconsideration, but it did not muddy the waters. The decision was reconfirmed, and construction could begin. At this point, the troubles began. Over time, the Betuwe Line became more and more contested. Societal protest during the decision-making process resulted in expensive adjustments that increased the costs, fuelling doubts about the cost-effectiveness of the project. The call to reconsider, however, was firmly rejected by the cabinet, which maintained that the project had passed the point of no return. This did not silence the critics. Support for the project dwindled, and it had to be realised within a politicised context. It had been initially hoped that the rail line would be ready in 2000, but that eventually became the end of Privatisation Objectives and Strategy Privatisation had been an important goal since the beginning of the Betuwe Line project. Because the government budget could not cover all of the project's costs, a private contribution of approximately 830 million euros was sought, within a total budget of approximately 2.5 billion euros (now over 4.8 billion). Privatisation became a major issue during the 1993 decisionmaking process. In Parliament, Maij-Weggen, the Minister of Transport, claimed that no shovel would go into the ground until private financing had been secured. Although the idea of a private contribution was upheld in the 1995 reconsideration, the privatisation strategy changed, such that there would be no delay while waiting for "up-front" private contributions, and construction began. The privatisation model also changed. Private financing had been the earlier objective, and it had been discussed with financial institutions. The new Minister of Finance advised against this on the grounds that public financing is less costly than private financing, as the government can borrow on the capital market at a lower interest rate. Privatisation was considered useful only if this difference could be compensated by gains in efficiency. Private operation therefore became the new objective. Allowing future operators, service providers and clients to invest in the project would give them an interest in furthering the use of the railroad. These strategic investors could influence and reduce risks and costs, unlike financial institutions which must calculate high rates of interest. Implementation of the Privatisation Strategy By 1998, privatisation had not yet been achieved. Because construction could not wait, the cabinet opted for prior public financing. The construction of the physical foundation for the railroad, the substructure (foundation, tunnels, viaducts), was contracted out in the traditional manner. Based on recommendations from a market exploration, the superstructure (support 187

8 The Asia Pacific Journal of Public Administration bed, rail line, overhead wiring, security and management systems, noise barriers and telecommunication systems) and the operation were tendered in The ministry decided not to use the originally preferred "design, build, finance and maintain" contract or "design, build and maintain" contract for the superstructure. The various component systems were contracted out in the usual way. Officially, it was stated that the preferred, innovative contracts were a new way of working and thus were not advisable, as this mega-project would come with difficult risks to be managed. In reality, the ministry feared that the combined contracting out of the realisation and the maintenance of the superstructure would reveal that the total cost of the contract had exceeded the available budget. Until that point, the maintenance budget had remained outside the project budget. Combined contracting out would necessitate adding that budget to the construction budget. This apparent budget increase was considered undesirable because of the negative image it would create. Thus, for budgetary and political reasons, contracts with potential cost savings and innovative solutions were not pursued (Tweede Kamer : ). The market exploration also showed that the private parties were unwilling to participate as risk takers in the operation, and the tender procedure was postponed. The government would operate the line. Nonetheless, a development trajectory was initiated in which the government would work with private companies on the improvement of the transport facilities, after which contracting out would again be considered, possibly after Meanwhile, users would pay for the line through user fees. It was believed that this plan could eventually generate 830 million euros in private contributions. Research in 2002 showed that the user fees would be insufficient to cover the costs of operation. Not only were these funds unavailable for construction, but the government would also have to cover operation deficits for years. Based on this information, Parliament adopted the "Hofstra motion" which called on the cabinet to negotiate with the private sector in order to prevent operational deficits for the government. The Minister of Transport asked two public agencies, the Port of Rotterdam Authority and ProRail, to develop a business plan for the operation that would cover the costs. The business case that was designed by ProRail and the Port of Rotterdam Authority in 2004 assumed losses in the tens of millions of euros in the first few years of the operation of the line. The privatisation objectives of the Betuwe Line have not been achieved. The project has been completely prepared, built and financed in the public realm. Maintenance and operation are also in public hands. The desired private contributions were not secured, nor were the possible advantages of contracts with innovative solutions and efficiency advantages. 188

9 Privatising Railroads: The Problematic Involvement of the Private Sector in Two Dutch Railways Projects Privatisation and the HSL-South 2 The Project In 1986, the European ministers agreed upon the further development of the European High Speed Line (HSL) network. The plan included the construction of a line from Paris to Amsterdam. From that moment on, preparation for the HSL-South was underway. The government presented its plans for the project in By the end of 1996, a decision was made to lay the new track on the shortest and quickest route between the Belgian border and Amsterdam. This route, however, cut across "het Groene Hart" (the Green Heart), a protected open area between the urban conglomerations in the western part of the Netherlands. This problem was resolved by including a nine-kilometre long tunnel under the Green Heart at a cost of 414 million euros. The total project budget in 1994 was 2.7 billion. By the time of the cabinet decision in 1996, the figure had risen to 3.4 billion. It is currently expected to cost 6.8 billion. The construction will be finished by Privatisation Objectives and Strategy As with the Betuwe Line project, private involvement had been one of the objectives of the HSL-South project from the beginning. The size of the private contributions was based on the availability of public means and amounted to 830 million euros, about the same as what was expected for the Betuwe Line. Calculations by the Steering Group for the Privatisation of Rail Infrastructure (SPRI) confirmed that this amount was feasible and that even more could be available. The privatisation strategy was not formed until 1998, after decisionmaking had been concluded and the programme of requirements had become available. Until then, it had been assumed that traditional contracting out would be pursued by means of 21 separate contracts. Because Parliament and the Ministry of Finance had asked for results in the area of public-private partnerships in 1999 after a market consultation, a decision was made to pursue maximum privatisation for the HSL-South. The idea of a single contract was rejected, as such a contract would be difficult to manage and competition would be limited by the fact that few private companies could handle such a large contract. Eight "design and construct" contracts were decided on for the foundation structures of the rail line, including one for the tunnel under the Green Heart. The superstructure (the infrastructure provider) and the transport service delivery would be tendered in the form of concession contracts. The government would be responsible for coordinating the contracts. The "design and construct" contracts for the foundational structure were 189

10 The Asia Pacific Journal of Public Administration intended to give the contractors maximum flexibility for completing the foundation more quickly, at a lower cost, and at better quality. The "design, build, finance and maintain" contract for the superstructure provided more room for far-reaching optimisations. The transport service delivery contract would generate payments to the government, thus realising the private contribution to the project. Implementation of the Privatisation Strategy In 1999, the government started the tender procedures for all of the HSL- South contracts at the same time. Contracting out the tunnel under the Green Heart proved relatively easy. Foreign companies participated, and innovative proposals led to significant cost reductions. Offers for the other contracts, however, created a panic on the part of the government. The total costs based on the offers amounted to 2.54 billion euros, which was 43 percent higher than the allowable budget of 1.78 billion. It was later revealed that private consortia had made a number of illegal agreements, but these agreements were not the main cause of the exorbitant figures. More important factors were the lack of competition due to the simultaneous contracting-out of a number of large government projects and the high-risk insurance that the companies wanted. Informal, secret consultations with all bidders together in the hope of persuading them to lower their bids turned out to be fruitless, and the government stopped the tender procedure. The Arbitration Council, however, deemed this decision unlawful, as the government had not formally negotiated with the bidders. The government then attempted to lower the bids by agreeing to cutbacks and the transfer of risks back to the government. The contracts, which were valued at 2 billion euros, were eventually signed in July The final version reflected cutbacks (euphemistically called "optimisations") of approximately 540 million euros from the original private bids. The ultimate bid was 265 million higher than the expected contract value. The 265 million comprised 220 million euros plus an amount of 45 million euros, as parts of the substructure contract had been shifted onto the infrastructure provider contract. The contracts were so complex that no one within the Ministry really knew what the consequences would be. At the urging of the Departmental Accounting Agency of the Ministry and the Directorate of Financial and Economic Affairs, Lloyds conducted a risk analysis. The analysis concluded that only 200 of the approximately 540 million euros in realised optimisations were certain. Furthermore, there was a loss of quality, and the government had reduced important risks for the private parties by abolishing a penalty clause for contractors in the case of late delivery. During the subsequent execution of the substructure contracts, it appeared that the calculated optimisations were not achieved, and there 190

11 Privatising Railroads: The Problematic Involvement of the Private Sector in Two Dutch Railways Projects was much unexpected additional work. Meanwhile, the costs of the substructure remained close to the original bid of the companies. The cutbacks that had been achieved during negotiations either had not been realised or had been rendered irrelevant because of the risks that materialised during implementation. The contract for the superstructure was based on the outcome of a public sector comparator model (PSC). This calculation concluded that the private implementation of the contract would cost less than public implementation. In retrospect, however, the General Accounting Office stated that the calculations were too soft and that the PSC had been used to legitimise a choice for a "design, build, finance and maintain" contract. As with the foundational structure contracts, the three bids that were received for this contract were disappointing. The bids were between 50 and 80 percent higher than the budget that had been used in the PSC for private execution. Various negotiations were held in an attempt to decrease the bids. In November 2001, this resulted in a contract with a consortium named Infraspeed. This consortium would deliver the superstructure on 1 January 2006 and would then receive an annual compensation of approximately 100 million euros for 25 years in exchange for 99 percent availability. Translated over the total period, this involved a sum of 1.08 billion euros. For the transport contract, the government tried to persuade NV Nederlandse Spoorwegen to cooperate in an international bid for the bordercrossing transport on the HSL-South by allowing it to submit the first bid for domestic transport. In September 1999, NV Nederlandse Spoorwegen offered an unacceptable total bid on HSL-South transport. The government decided to give it a final chance to submit an appropriate bid, but the company refused to respond on its own. An open tender procedure thus followed in mid By early 2001, there were three bids. Whereas the other consortiums had wanted to pay an annual user fee of about 100 million euros, the Dutch High Speed Alliance consortium of NV Nederlandse Spoorwegen, KLM (Royal Dutch Airlines) and Schiphol Airport offered 160 million euros. The contract was signed in late The High Speed Alliance acquired the transport rights for a period of 15 years, in exchange for an annual user fee of million. This amount was higher than the availability fee that the government had paid to the infrastructure provider. The surplus made 450 million euros available for the period. Together with the 450 million euros that had been provided through the contract with the infrastructure provider, private contributions to the rail infrastructure exceeded the budgeted 830 million. The contract included an agreement that allowed the government to approve a tariff restriction combined with a reduction of 47 million euros in the annual user fee. As a consequence of this clause, a discussion emerged 191

12 The Asia Pacific Journal of Public Administration in Parliament about how the savings should be used. Remarkably, NV Nederlandse Spoorwegen and KLM lobbied for the tariff restriction in order to reduce the user fee. In order to secure its monopoly, NV Nederlandse Spoorwegen had apparently offered a very high bid that it now wanted to see reduced. The government regards the privatisation of the HSL-South, and especially the infrastructure provider and transport contracts, to be a major success (Kenniscentrum PPS 2004a, 2004b). This claim of success, however, can be disputed quite substantially. First, it is based on expected future income. Attempts by the High Speed Alliance to lower the user fee reveal that the race is not over yet. In addition, in the contracts various risks are taken back by the government, which may have negatively influenced the ultimate result. Most visible is the delivery risk. Under the infrastructure provider and transport contracts, the government obligated itself to pay 23 million euro a month in case of late delivery. Since the penalty clause for contractors was removed from the foundation contract, this could result in significant costs. Furthermore, this risk had already resulted in suboptimisations in the foundation structure. When conflicts with the contractor arise about implementation alternatives, as happened regarding the installation of a protective firewall in the Green Heart tunnel, government may have to accept more expensive or qualitatively inferior alternatives, since getting through these conflicts in court leads to delay and even higher costs. With the exception of the Green Heart tunnel, the "design and construct" philosophy for the foundation structure was a failure. The contracting-out strategy failed completely and it was necessary for the government to salvage whatever was possible by improvising. Competition was eliminated almost completely. The entire debate focused on shifting the risks and lowering the bids instead of looking creatively for innovative design optimisations. Most alarming appears to be the fact that for a long time the government did not exactly know the consequences of the contract. Thus, the results of the HSL-South privatisation are at least mixed. Against the realised private contributions, there are extreme budget overruns, a loss of quality, remaining uncertainties, damaged private trust, and a loss of political legitimacy. Explaining the Privatisation Results: A Comparative Analysis of the Two Projects The comparison here is directed at both differences and similarities in the two projects. The differences are that the Betuwe Line privatisation was a complete failure, while the results in the HSL-South project were mixed. The similarities are that in both projects government experienced major difficulties in implementing its privatisation strategies. Possible explanations 192

13 Privatising Railroads: The Problematic Involvement of the Private Sector in Two Dutch Railways Projects relate to a number of conditions that influenced the course of affairs in the two projects. If the presence of a clear business case is a prerequisite for private involvement, the Betuwe Line was not a very suitable project. It was contested and ill-defined, the profitability was uncertain, and there were major uncertainties. It was unclear whether the operation would involve only the Betuwe Line or the entire Dutch transport network, whether international rail routes were available, when the line would be operational, and whether construction could be halted. In addition, the entire rail sector faced an uncertain liberalisation context as the EU policy was in flux; and the issue of connection to the German rail network and the availability of international rail routes was not taken care of. Transport policy (eg, with regard to the pricing of road transport) had yet to be made. In contrast, the HSL-South project was not contentious, was prestigious, and was better defined. The market for mass public transport was more favourable and the liberalisation process had less drastic impacts. The profitability of the project was estimated favourably by those involved. It is questionable, however, whether the estimate was not too optimistic. In the 1980s, experts and railroad companies had estimated the profitability of the Paris-Amsterdam link unfavourably as a peripheral extension of the HSL-network. This may still jeopardise the realisation of the expected private contribution in the coming years. In both projects, ex ante risk analyses and adequate cost distributions were lacking. The prognosis about 830 million euros in private contributions was based on arbitrary assumptions. Initially, the SPRI, which conducted the cost investigations, arrived at an estimate of 225 million euros as a private contribution to the Betuwe Line. But when this figure did not match with political expectations, research was carried out to see under what conditions an 830 million euro budget was possible. With this type of reversed reasoning, any figure could have come out of these calculations (cf Flyvbjerg et al 2003, 2005). However, the government never seriously committed itself to the policy performance that was presumed (eg, pricing road transport) and eventually these conditions were far from met. In the case of the HSL-South project, market explorations fell short in that, although researchers did nuance their results (referring to the limited time available for analysis and the broad margins of uncertainty), the privatisation strategy was still based on the incomplete analyses provided. The public sector comparator was manipulated in order to justify privatisation. Risk analyses were not done prior to contract conclusion, but ex-post in an attempt to reduce the damage. The motto appeared to be "act first, think later". Although much time since 1990 had been spent in the Betuwe Line project on calculating the profitability of the project and the development of operational models, by 2004 there was still no certainty about either issue. 193

14 The Asia Pacific Journal of Public Administration In contrast, in the HSL-South project, by 1999 a clear privatisation strategy was available. The difference in success had to do with the characteristics of both projects, but also with the commitment to privatisation and the available know-how. Nevertheless, the privatisation strategy for the HSL- South was far from perfect. To start with, there was a lack of consistently. The "design and construct" contracts for the foundation structure of the HSL-South used a detailed reference design for traditional contracting out. The splitting of contracts limited opportunities for integrated design solutions. It also limited competition, with all large Dutch contractors being involved in one of the contracts. In addition, the adjacent risks between the foundation structure contracts and between the superstructure contracts, the infrastructure provider contract and the transport contract were placed with the government. This resulted in a complex and non-transparent web of transactions and responsibilities that went way beyond the government s capacity and capability. For a long time, it was unclear who the private parties would be in the Betuwe Line project. Financial institutions were initially involved rather than the Rotterdam companies that had insisted on constructing the line, as they were not prepared to invest in public infrastructure. Market consultations indicating that private parties were eager to invest proved to be unreliable; eventually it became clear that they were not willing to carry any risks regarding the operation of the project. Later on, the partners proved mainly to be public agencies, such as the Rotterdam Port Authority and ProRail. Also, in the HSL-South project, the government expected favourable market conditions and interested private parties. These expectations were based on market research and market consultations that apparently were inadequate. In addition, all competition was eliminated by the splitting of the HSL-South contracts, by the parallel contracting out of many infrastructure projects (including the Betuwe Line), by the collusion between market parties, and by the combined consultation about the foundation structure contracts. The nature and size of the contracts excluded foreign consortiums and small and middle-size companies. Policy preparation of the privatisation process in the Betuwe Line project was characterised by a tendency on the part of the Ministry of Transportation to quickly apply standard methods of procedure, to involve known experts, and to prepare as much as possible in-house. International experts, private companies and other ministries were kept at bay. In the HSL-South project, the responsible organisation initially had insufficient capacity and authority to realise privatisation. It was modeled on working with traditional types of contracts. Only after 2000 was it adapted to meet the tasks involved. International experts in the area of privatisation were hired at a price of about 45 million euros. Since this could not prevent the problems that arose immediately after the start of the tendering processes, there must have been problems with the way the experts were used in the project. 194

15 Privatising Railroads: The Problematic Involvement of the Private Sector in Two Dutch Railways Projects The privatisation objectives of the two projects originated with the cabinet and ministers. Civil servants in the Ministry of Transportation and officials in NV Nederlandse Spoorwegen (which initially was responsible for the planning of both projects) did not believe in the objectives. After the final decision to realise the Betuwe Line in 1995, ministers hardly bothered with privatisation. Steering also was weak within the ministry. The SPRI that was responsible for the preparation of the privatisation was not part of the line organisation. It met infrequently, lacked authority, and was paralysed by bureau-political strife. The stagnation of the project as a whole, and the decrease in time pressure that resulted from the de-linking of construction and financing due to the decision to advance public money in 1998, further eroded the sense of urgency. Contrary to the Betuwe Line, the project organisation for the HSL-South project was highly committed to the privatisation objectives. However, the steering strategy of the Ministry of Transportation, based on the principle of steering by budget, did hinder the pursuit of the objectives. Thus, the cost estimations of the project were adapted to the available lower budget. The government consciously entered negotiations with too low a budget. As a result, the entire negotiation track was dominated by cost-reduction considerations. Also, in the execution of contracts, the steering by budget resulted in a denial of problems until the tide turned. The budget overruns resulted anyway, but early decisions to deal with problems head-on were impossible. The virtual reality, from which the Ministry of Transportation steered the project, resulted in a deterioration of relations and growing distrust between the public and private parties. This had a negative impact on the realisation, content and execution of contracts. The Directorate of Financial and Economic Affairs and the Departmental Accounting Agency of the Ministry of Transportation did not succeed in monitoring and controlling the quality of the privatisation trajectories. For instance, they had no influence on the HSL-South contracts, nor did they understand the nature of the agreements at that time. Civil servants in the Ministry of Finance noted the bad quality of prognosis and the lack of expertise. The Ministry of Finance was committed to the privatisation of the two projects, but it operated insufficiently as a countervailing power. Regarding the HSL-South contracts, Parliament was informed after the fact and had no influence on contracts prior to that. Furthermore, it was left in the dark about the risks and budget overruns. As far as the Betuwe Line was concerned, it did not address the government's claim that privatisation would be possible, despite the fact that contradictory evidence was pilling up. The lack of control by Parliament was not only due to misinformation by the cabinet. Members of Parliament postured as advocates of the project, not as controllers. Overall, the control function was limited by the need to support the cabinet. 195

16 The Asia Pacific Journal of Public Administration Lessons From the Two Projects The analyses of the Betuwe Line and the HSL-South show that the government had great difficulty in organising the involvement of private parties in an adequate way. According to the cabinet, the privatisation of the Betuwe Line failed because of a lack of private party commitment. Our analysis shows that other factors were at least as important, including the lack of support from the executive branch, the lack of expertise and experience with professional procurement practices, and the absence of attention and steering from the bureaucratic and political echelon. The conditions for privatising the HSL-South project were more favourable. The project itself was not contested. The government proclaimed the project profitable, at least partly. There was political will and private interest. So the most likely explanation for the problems that arose in the attempts to involve private parties was the lack of skill and expertise on the side of the government. The government expected to maintain complete control over the project through contracting out. Having committed to a task-oriented budget, the discussion mainly concerned the reduction of costs and risks, allowing no leeway for seeking optimising design solutions. The discussion became a zero-sum rather than a zero-plus game. Because the government simply wanted the project and felt committed to its own planning, its negotiating position was weak. The situation became a pressure-cooker, forcing the government to accept the results of negotiation even though it did not quite understand the implications. The lack of expertise and the over-estimation of its abilities trapped the government in a complex web of contractual relations that far exceeded its own competency and capacity. These Dutch experiences with privatisation are not unique. For instance, one of the characteristic issues mentioned in evaluations of PFI projects in the UK, as in reports on the privatisation of the London Underground, is the problematic nature of contract negotiations and the tendency of the government to take back risk, which originally was supposed to be transferred to private parties (Pollit 2002; National Audit Office 1998, 2004; Joosten 2005; Koppenjan 2005). More generally, governments often lack the insight and skills to organise and manage the process of privatisation adequately, resulting in contracts that are claimed to be a success, while the implications of the contract agreements only become clear at a later date (Jonestone & Wood 2001; Koppenjan & Enserink 2005). The two projects examined here show how easily governments overestimate the possibilities of private involvement in public projects, and how poorly they understand the conditions that determine the success or failure of these endeavours. Gaining more insight into these conditions and the ways in which they can be improved seems to be the first challenge in the further development of private involvement in public infrastructural projects. 196

17 Privatising Railroads: The Problematic Involvement of the Private Sector in Two Dutch Railways Projects Notes 1. Based on the following reports published by the Dutch Parliament: Tweede Kamer , 28070, nr 2; , nr Based on the following reports published by the Dutch Parliament: Tweede Kamer, , 22926, nr 85; , nr nr 2; , nr 8. References Akintoye, A & Beck M (eds) 2003, Public-Private Partnerships: Managing Risks and Opportunities, London: Blackwell Publishers. Bennet, E & Grohmann, P 2000, Joint Venture Public Partnerships for Urban Environmental Services. Report on UNDP/PPPUE's Project Development Facility , NewYork: UNDP & Yale University. Berg, S V, Pollit, M G & Tsuji, M 2002, Private Initiatives in Infrastructure. Priorities, Incentives and Performance, Cheltenham: Edward Elgar. Borys, B & Jemison, D B 1989, "Hybrid Arrangements as Strategic Alliances: Theoretical Issues in Organisational Combinations", Academy of Management Review, 14(2). Flyvbjerg, B M, Skamris Holm, M & Buhl, S 2002," Underestimating Costs in Public Works Projects; Error or Lie?", Journal of the American Planning Association, 68(3) , "How (In)accurate Are Demand Forecasts in Public Works Projects? The Case of Transportation", Journal of the American Planning Association. 71(2). Ghobadian, A, Gallear, D, O'Regan, N & Viney, H (eds) 2004, Public-Private Partnerships. Policy and Experience, London: Palgrave Macmillan. Johnstone, N & Wood, L 2001, Private Firms and Public Water. Realising Social and Enoironmental Objectives in Development Countries, Cheltenham: Edward Egar. Joosten, W 2005, "London Underground Limited. Een casusstudie van de grootste PPS van het Verenigd Koninkrijk" (A case study on the largest PPP of the UK), Delft Thesis, Faculty of Technology, Policy and Management, Deft University of Technology. Kenniscentrum PPS 2002, Voortgangsrapportage, evaluatie PPS, mei, a, Voortgangsrapportage, b, 5-jarig jubuleum PPS, Speech Zalm, dd. 29 juni 2004, Koppenjan, J F M 2005, "The Formation of Public-Private Partnerships: Lessons from 197

18 The Asia Pacific Journal of Public Administration Nine Transport Infrastructure Projects in The Netherlands", Public Administration, 83(1) & Enserink, B 2005, International Best Practices in Private Sector Participation in Sustainable Urban Infrastructure. Thematic report and policy recommendations, Delft/ Stockholm/Beijing: CCICED Taskforce on Sustainable Urbanisation Strategies. Moore, J 1994, "Private Funding for Roads in the United Kingdon", in OECD, New Ways of Managing Infrastructure Provision, Paris: OECD. National Audit Office 1998, "The Private Finance Initiative: The First Four Design, Finance and Operate Roads Contracts", 28 January , London Underground PPPs: Were They Good Deals? Report by the Comptroller and Auditor-General (HC 645 Session ), London: The Stationery Office. Osborne, S (ed) 2000, Public-Private Partnerships: Theory and Practice in International Perspective, London: Routledge. Pickrell, D H 1992, "A Desire Named Streetcar: Fantasy and Fact in Rail Transit Planning", Journal of the American Planning Association, 58(2). Pollit, M G 2002, "The Declining Role of the State in Infrastructure Investments in the UK", in S V Berg, M G Pollit & M Tsuji, Private Initiatives in Infrastructure: Priorities, Incentives and Performance, Cheltenham: Edward Elgar. Savas, E S 2000, Privatization and Public-Private Partnerships, New York: Chatham House Publishers/Seven Bridges Press. Teulings C N & Koopmans, C C 2004, Rendement en publieke belangen. De besluitvorming bij de Betuweroute en de HSL-Zuid, Notitie ten behoeve van de Tijdelijke Commissie Infrastructuurprojecten (TCI), Amsterdam: SEO. Tweede Kamer , 22926, nr 85, Privatiseringsnotitie HSL-Zuid , 28472, nr 2, Nieuwe financiële instrumenten in publiek-private samenwerking , 28724, nr 8, Risico-reservering voor de Betuweroute en de HSL-Zuid, Algemene Rekenkamer , 28070, nr 2, Aanleg Betuweroute. Projectbeheersing en Financiering, Algemene Rekenkamer , 29283, nr 5-6, Grote projecten uitvergroot; Hoofdrapport , 29283, nr 7, Reconstructie Betuweroute , 29283, nr 8, Reconstructie HSL-Zuid. 198