Who Should Bear the Risk in Infrastructure Projects?

The answer to the question is the public sector, always. It’s okay to have private-sector involvement in construction, but the risk must be borne by the public sector, or else the private sector will just want more money to compensate for the extra risk.

The biggest piece of evidence for this is emerging out of our construction costs project, so it will appear in the report and not in a blog post. But for now, I’d like to point out examples from media, the academic literature, and one interview of particular interest.

PPP, Gangnam style

A transportation planner in Korea named Abdirashid Dahir has been giving Eric and me a lot of detailed information about Korean construction costs. We were already aware that Line 9 in Seoul had been built as a PPP, but what we learned was more complicated.

Line 9 is a partnership – the last P in PPP. This means, part of the construction is done by the private sector, and part by the public sector, namely the Seoul Metropolitan Government. The private consortium, led by Hyundai, was responsible for the design and for the construction of the systems, including the tracks, signaling, and rolling stock. SMG was responsible for the civil infrastructure. The total cost of the first phase was 1,167.7 billion won for 25.5 km, split as 492.2 billion in municipal construction and 675.8 billion in private investment.

The importance of this split is that civil infrastructure is the least certain part of underground construction. There are always geotechnical surprises, most small, a few potentially leading to large cost and schedule overruns. These are especially likely during station construction – the tunnels in between tend to be simpler with modern TBMs. Systems, in contrast, are relatively straightforward. Installing rail tracks is the same task regardless of whether it’s in solid rock in an exurban area that has no significant archeology, or through sand that had to be frozen, partly underwater, in the oldest parts of Berlin.

The upshot here is that while low-cost countries do use PPPs, this project keeps the riskiest aspects of construction public and not private. Privatization is fine for less risky, more commoditized situations.

How private bidders respond to risk

Two examples come to mind, both from the United States.

First, in New York, Brian Rosenthal’s seminal New York Times article cited Denise Richardson of the General Contractors’ Association saying that the contractors are barely making any profit and are bidding high because of risks imposed on them by the public sector. I don’t think this is a very high-quality source – it’s extremely biased, for one – but in context, it makes some sense.

Second, we do have more quantifiable data on this, thanks to the work of the Stanford Graduate School of Business economist Shosh Vasserman and Hoover Institute economist Valentin Bolotnyy. They look at highway maintenance contracts in Massachusetts and compare scaling auctions, in which the contracts are itemized, with lump sum auctions, in which they are not. Based on actual differences in price and estimates of contractor risk-aversion, they estimate that itemizing saves 10% of the cost through lower risk.

Supporting structures for public-sector risk assumption

There’s always the problem of moral hazard. Of note, even with this problem, costs are lower with itemized contracts in Massachusetts than with lump-sum contracts. But this does suggest a number of ways to reduce costs through better risk management:

  • Itemized contracts, in enough detail that changes do not need litigation.
  • Fixed profit rates – Spanish contracts are done with a fixed profit rate over the items named in the bid.
  • Public oversight – there needs to be tighter supervision of risky things, which most likely means no PPPs for civil infrastructure.

It is unfortunate that American trends in the last 20 years have been away from those principles and toward greater privatization of the state, and equally unfortunate that American (and British) soft power has led to similar reforms in the wrong direction in the rest of the Anglosphere. But it’s possible to do better and imitate Korean practices to get Korean costs.

47 comments

  1. Gregory Homatas

    The problems with imitating the South Korean method of letting private companies fund the civil infrastructure is the following:
    1) who will bid these jobs if there is nothing in it for them? Why bother? Sounds like a lot of risk for little reward .

    2) Will there be or is there overnight by the public sector of quality and safety to guard against shoddy work practices or unsafe work sites?

    • Alon Levy

      The subway in Seoul is profitable, which helps with PPPs a lot; but New York too would be making profits on the subway if its unit operating costs were the same as Seoul’s. I didn’t really address the current operational practice of American PPPs, which is pretty bad, for example the Purple Line in Maryland; the European practice isn’t great either, with a Maryland-like situation in Germany now that Abellio is literally saying “wages are higher than we expected so pay us more money or we’re walking away from our private regional rail operating contract.” Without profits this is done with guaranteed state subsidies, which by itself isn’t bad, as long as you’re not incentivizing brinkmanship like either of these two cases.

      • Herbert

        There is a public transit crisis in the making with the severe lack of both bus and train operators…

        DB has taken to recruiting in Vietnam to alleviate the shortage…

  2. Martin Kolk

    This is very much in line with the evidence for Sweden. The stronger the in-house planning, and the more involved the government has been in all aspects of construction, the lower the overall costs. And attempts to invite private partners to share risk have been a total disaster (Arlandabanan, or hospital projects in Stockholm). It ought to be obvious, that except for all but the weakest of states, the cost of borrowing and managing risk should be lower for the state. This also suggests that the risk should be born as high up in the administrative pyramid as possible (central/federal government) as they have the lowest borrowing costs and ability to take a hit from unexpected circumstances.

    • Alon Levy

      Yes, and in Italy there were problems during the post-Financial Crisis austerity with the central government not paying 100% of metro construction but only, IIRC, 70%, which forced cash-strapped local governments to enter cost-raising PPPs since not even Milan had the ability (or perhaps will) to fund this from taxes.

      • Herbert

        In Germany “not getting federal funds” (predicated on the benefit cost quotient above 1) is usually the death knell for public transit projects no matter how locally popular. Even toying with the idea of funding such a project locally alone is usually seen as extraordinary news

        • Sascha Claus

          Given that cities and counties don’t have any taxing authority besides water rates, corporate tax and dog tax (and some stuff that must be dedicated to purposes like street cleaning and gabrage collection), one wonders where the money to fund it locally is supposed to come from?
          Some cities aren’t even rebuilding a playground without looking for possible funding from a higher authority, be it a general stimulus package, an urban renewal programme or a special playground renewal fund.

  3. Henry

    The American justification for PPP is that it shifts risks to the private sector and achieves lower prices. The problem with this is that investors aren’t stupid, so they charge a risk premium. And it’s not even clear that they’re willing to absorb any risk at all, since it usually ends in litigation. The Purple Line in DC was almost cancelled because of this, and was only salvaged due to a cash injection from the state: https://www.baltimoresun.com/politics/bs-md-pol-purple-line-settlement-20201124-cdmdcshqe5b7hhn56t54m3bjcu-story.html

  4. Gok (@Gok)

    Is fixed profit different from cost plus?

    The Madrid Line 8 airport extension PPP had a very different responsibility split. The private contractor built all the infrastructure, including the risky tunnels. The municipal transportation operator took on mundane low risk responsibilities like fare collection. So I’m not sure we can extrapolate much from one Seoul PPP about how all PPPs in cheap construction companies operate.

    • Alon Levy

      I think it’s just cost-plus.

      Airport lines are generally weird, with a lot more privatization even in places that don’t do that. Paris doesn’t do PPPs, but the CDG Express is private. The Arlanda Express is on a different system from the rest of the trains in Stockholm County, without fare integration and with a PPP (as Martin notes farther up in comments). Seoul, too, has the AREX disaster, which for a while was an order of magnitude off ridership projections, and nowadays is up to a full 1/3 of projections if I’m understanding Wikipedia correctly.

      • df1982

        I guess because it’s considered acceptable to levy a surcharge for trips to the airport and this can be used as a direct source of profit for a private constructor. But as you note the surcharge often ends up decimating patronage (Toronto is another example of this). Which is why it’s a bad idea. And as far as I know German cities don’t do this to any significant degree (e.g. BER, which is still in the regular C zone in Berlin). If user pays should be adopted for airport lines, it should come out of a ticket tax on plane travellers, not a surcharge on train users (especially since they can often be airport workers who should not be charged exorbitant amounts for going to their place of employment).

        Sydney is again an illustrative example. The airport line there was a PPP, with the government taking care of the line and rolling stock, and the private contractor responsible for four of the stations. It was an AU$900m project in 1999 money, with the privately-funded stations representing $200m of this. It was criticised at the time for cost overruns, but from today’s perspective it seems quite cheap, although the stations were admittedly underbuilt for the patronage they ended up receiving (and the platforms were also curved, making any later installation of PSDs for an automation of the line difficult).

        But the real killer has been the station surcharge that was levied on the stations: $2 for the non-airport stations and $10+ for the two airport stations. Initially it severely dampened patronage, but now there’s the opposite problem (partly because the government absorbed the surcharge for the non-airport stations): the line is so popular that the public has ended up paying many multiples of the cost of what the project would have been if it was fully publicly funded.

    • Mikel

      Coincidentally, someone with domain knowledge just did an excellent, and sad, write-up on the botomless pit that Barcelona’s L9 project has become. It’s a great read (in Catalan), so I’ll excerpt and translate some tweets that I think are relevant to the topic of this post and to construction costs more generally.

      Another very important issue: the construction project and the execution were awarded jointly for the sections of L9. A fact practically unheard of in works of this magnitude, which showed a certain improvisation and haste to finish the line as soon as possible.

      Uh, so basically a design-build contract. Not off to a good start…

      Besides, taking advantage of the modification [of the alignment through El Prat de Llobregat], it was decided that the stations have their own personality, and are designed by renowned architects, which made the budget dedicated to the stations even more expensive.

      Starchitects and place-making, now. This is starting to feel like they wanted Alon to get mad at them. At least the stations are pretty cool, though.

      2008: the final project of the L9 that we know today is approved, after all the studies and modifications. In total: 47.8 km (5 km more than the initial one) and 52 stations (11 more than at the beginning). […] But not all is good news. All these modifications to the project caused a stratospheric increase in the initial budget. From an initial 2,464 million, the figure almost tripled to 6,507 million (6,856 if we count the [La Pau-La Sagrera] stretch of the L4).

      Initially, the plan by Jordi Pujol’s [conservative] government was by the German method: to pay at once once the works are finished. It is a system that already bears heavy costs in the end in the form of interest, but aims to speed up construction deadlines while seeking financing.

      The system changed with the entry of the [progressive] Tripartite, and moved to the system of monthly certifications: partial payments according to the progress of the works. The goal was to reduce financial costs (interest); work was beginning to be expected to be long-lasting.

      The situation changed completely in 2008, when the administration had already exhausted the money from all loans and did not have the resources to take on the increase in the investment budget, which already amounted to more than 6.5 billion euros with the new estimates.

      So the large cost increase from initial to final design caused the Generalitat’s financial plan to collapse (twice). This is where PPPs come in…

      The Department of Territorial Policy and Public Works, with Councilor Joaquim Nadal, devised a new financing system, through public-private partnerships, completely unheard of in projects of this magnitude, and which has ended up financially ruining the project. What did it consist of? The contractor would be in charge of the construction, maintenance and operation of the stations and ventilation wells for a period of 30 years, during which the Generalitat would pay them a previously fixed annual fee. In return, the contractors would make an initial payment for the work already executed at the time of awarding. The goal was basically to get immediate liquidity. It was a controversial point, as the contractors would be acting as a financial institution to the public administration.

      Okay, so the idea might have been worthwhile if the project could be completed in time and achieved a high farebox recovery. But instead…

      A system that would condition the economic future until 2040. In total, absent the central section, the forecast is that the entire project could climb to more than 16 billion: 6,500 budgeted for construction, and more than 9,500 derived from the disastrous method of financing by concessions. This is so absurd that right now we are paying fees to private companies for stations that simply do not exist (such as Polígon Pratenc), or others which are not expected to be put into operation in decades (such as Motors or La Ribera).

      March 2011: Artur Mas’ [conservative] new government decides to stop works on the central section indefinitely, before tendering its concession. The two TBMs (of the five that have been part of the whole project) remain buried underground, in Manuel Girona and Lesseps, respectively. […] And so we are at the present date. With a line completed at the ends, where up to 5 different TBMs have come to work at the same time, but without the most important section, which would provide users with the concept for which it was designed.

      At least it’s not an unmitigated disaster — the branches are already in operation, providing connections to the existing radial lines.
      The author’s personal take is, I think, easy to agree with:

      And now, opinion. As you can see, the L9 is the big headache of Catalan public works. A lack of initial studies, planning errors, oversized construction and a ruinous financing method have led us to the current situation. This project has sought to solve a need for mobility, really very necessary, through a very expensive work, absolutely oversized in many respects, which will end up costing us more for financial costs than for the civil work itself, and by far. All due to a lack of planning and ignorance of the administration, nor detailed previous studies, nor an accurate estimate of real costs. A project that could have been the spearhead of 21st century metropolitan mobility has ended up being a bottomless pit.

      TL;DR: The Catalan government embarked on a massive infrastructure project without the financial resources to face a cost increase from rushed planning, so instead of the usual fixed-profit design-bid-build process it turned to design-build-mantain PPPs. It blew up spectacularly.

        • Mikel

          His party was indeed a cesspit of corruption, but I’m not sure whether it had a big role in L9’s case. On the one hand, all contractors on infrastructure contracts had to (allegedly) pay a 3% kickback to the party, but that does not explain the massive cost increase. On the other hand, there have been claims that the evaluation of technical scores on the bids was very lacking in detail, but I don’t know if they intentionally fudged the numbers to favor certain contractors or just due to the rushed timeline of the early stages of the project. Perhaps both?

  5. df1982

    I feel like the Sydney experience was that both models have been bad. Keeping the risk on the side of the public sector, as was done by the ALP government in the 1990s and 2000s, led to “dodgy mechanic” problems with the contractors: they would bid low and then subsequently “find” problems with the build which would necessitate increased compensation, by which point the government had no ability to back out of the project (at most they could scale down, but this led to half-finished or aborted projects).

    Then in the 2010s the Liberal state government tried the opposite tack. But this was a disaster on the CBD light rail line, since the contractor successfully sued on the basis of withheld information, blowing an already inflated $2b project to nearly $3b.

    I guess the bigger question is: if the public sector is to take on all the risk of a project, what is the benefit of the private sector being involved at all? This seems particularly the case if you have a fixed profit rate. I thought the main argument for private sector involvement was to produce an incentive structure for finding cost savings, but a fixed profit rate negates this, and even, it seems, encourages the opposite tendency (since at a fixed profit margin a greater total cost would produce more revenue for the private entity). Under these conditions, why not just bring it all in-house?

    • Henry Miller

      Should the public take on the work? Depends on how much will be done over time and how badly labor costs. (private contractors that might not have a union force the union to more reasonable costs even if the union contractor wins, but if union work is required it can be too expensive because of labor costs. Public only is probably union and doesn’t even have a good comparison for competitive labor rates which can brings labor costs out of control. A lot of can in there, different areas do differently.

      If you budget for many years you should buy 4 TBMs, one soft ground, one hard rock, 1 anged bore for escalators, one vertical for elevators. (note that I’m no TBM expert, you will have to see why fits your local geology and buy appropriately). The idea is you crew the above and keep slowly digging more tunnels to keep your crews busy until the TBMs wear out. The amortized costs over the years plus lessons learned mean your tunnels keep getting built for cheap.

      Most cities think of getting one line done fast. In this case you pay the contractors because they can go elsewhere when you are done with the work. You hope that they can use the TBMs again (or reuse one in house), and they have experienced people in house to do the work you are not expert in, and shouldn’t have the experts since you won’t need them long. Laying off unneed experts is bad for moral.

    • michaelrjames

      I’ve commented on the Sydney Randwick-CBD LRT debacle, mostly from the point of view that what went “wrong” remains entirely opaque–despite the nebulous stuff about relocating utilities etc under George Street. Huge lumps of the final settlement were in extra contingency fees, ie. straight-thru payments to the contractors bottom line. I can only presume that the contractor (lead= Acciona with Alstom, Capella Capital & Transdev) simply didn’t meet their own expectations of profit margin and held the government to ransom (hence all the opacity about exactly what the ‘problem’ was, and the threat of lawsuits etc). This surely has killed the notion that, no matter the contracts or upfront contingency fees, at the end of the day it will always be the government who pays for any failures (in design, see below) or ‘risk’ (which includes the risk of the companies not making a big enough profit).

      Here (below) is another thing I have posted before, concerning the Sydney LRT, and I believe gets to the heart of the issue and the problems in the Anglosphere. AFAIK, in France all the construction is done by private companies but this excerpt describes what isn’t allowed to happen. France may not have the lowest cost infrastructure but they are reasonably priced (for a rich country) and appear to run relatively smoothly and finish reasonably on time and budget, in great contrast to NYC’s SAS, various US bridges (SF’s East Bay), CaHSR, or London CrossRail and UKs HS2.

      https://www.smh.com.au/national/nsw/how-did-gladys-make-such-heavy-work-of-light-rail-20180629-p4zohz.html
      Making heavy work of the light rail task
      Jacob Saulwick, 30 June 2018
      One theory about what went wrong relates to the way in which the project was contracted. Faruqi [Green member of NSW parliament], who has a doctorate in engineering, has argued extensively there has been a hollowing out of technical know-how in the public service. The end result is more time and money trying to fix design changes. “I am hugely concerned about the deliberate de-engineering and politicisation of the public sector and the immense over-reliance on outsourcing,” says Faruqi. “This has led to a diminished capability to establish accurate scope and cost in the first place, followed by a lack of capacity to properly scrutinise design, procurement and delivery from private contractors and consultants.”

      FYI, the project: 12.8 km, $2.9bn ≈A$226m/km [US$156m/km]. Perhaps not totally outrageous but then that might point to the inadequacy of the initial plans or analysis by the responsible public authority as per Faruqi. This is also the project that, at the last possible moment–bypassing the years of public enquiries and comments–switched the route to the other side of Anzac Parade so that instead of going thru the edge of the SCG (Sydney Cricket Ground) with its board of movers and shakers who had other plans for “their” land (that involves commercial developments, neo-privatisation). It was shifted to Moore Park which necessitated removing hundreds (they say 500 but that seems incredible …) of magnificent centenarian Moreton Bay fig trees whose grace and shade from their huge canopies would be greatly missed in times like yesterday where 42.6°C was registered at Sydney Airport just down the road a bit. Both the SCG grounds (plus much undeveloped open park) and Moore Park are public land but this shows how things really operate.

    • Alon Levy

      I guess the bigger question is: if the public sector is to take on all the risk of a project, what is the benefit of the private sector being involved at all? This seems particularly the case if you have a fixed profit rate.

      Excellent question! There is one advantage to contracting out building, which is that builders can still compete on technical proposals. But this requires a healthy competitive construction market. It exists in some countries, like Turkey, but not others, like Italy. In Italy the construction firms have been merging recently, to the point that the state is taking partial ownership stake, approaching the postwar system of a state construction firm, though still with far more private investment and control than in that era.

      • michaelrjames

        In Italy the construction firms have been merging recently, to the point that the state is taking partial ownership stake, approaching the postwar system of a state construction firm, though still with far more private investment and control than in that era.

        Is there the same revolving doors in Italy as in the Anglospshere, between government senior management and the corporates who they formerly oversaw?

      • Eric2

        You don’t see any advantage to different private contractors competing with each other to perform a given task? If there is only one contractor (the public one) they can be incompetent and corrupt and face no pressure to improve.

        • Alon Levy

          There is a big advantage! Italy is moving toward renationalization (very slowly and with ample private involvement) only because the construction firms are merging to the point of not having enough competition.

          • Eric2

            Hmm – so Italy doesn’t want to nationalize construction, but is forced to by the mergers.

            Seems it would be easier just to block the mergers though.

        • Sascha Claus

          Hard to see any advantages of competition if there is no competition and only one contractor which can perform a given task. If the task is too big (like “build me a subway”) you might end in such a situation. If there is only one contractor (even a private one) they can be incompetent and corrupt and face no pressure to improve.
          If that is the case, it might be better for the government to take the risk of splitting this into a lot of small cut-and-dried commodity contracts.

    • Nathanael

      It seems like the private sector should only be involved in cut-and-dried commodity contracts. So, you want to order some concrete ties. Go to the private sector. You want to buy some structural steel. Go to the private sector. Heck, you want some concrete, hire a private-sector concrete truck rather than building a public-sector concrete factory.

      Anything bespoke, custom, unique to the project, unique to site conditions seems like it needs to be done in-house.

  6. Tunnelvision

    The biggest risk on any construction project especially underground work is time. On East Side Access the biggest cost driver has been the delays caused by the never ending litany of delays caused by the complexities of working in the busiest rail interlocking in the US, the other cost drivers are the elongated schedule due to the multiple interfaces, lack of access, desire by railroad to have the latest shiny item, lack of fully funded Capital Plan by MTA….. ground conditions were not really a factor. However MTA’s change management process and claims resolution process was so slow and convoluted that Contractors simply added money to the bids to cover the cost of money to cover pay roll and suppliers pending resolution of such items. Some contracts were lump sum low bid but the three major underground contracts were negotiated contracts meaning they were a blend of lump sum together with some unit rates to cover high risk items in an attempt to remove some of the risk money and control things, and generally they worked out as intended. As for capping profit, the weird thing is that many agency contracts will cap OH and profit for change orders at 10 and 10% respectively meaning blended 21% on top of direct labor costs BUT they don’t cap the profit that the Conrtactor includes in his lump sum bids.

    For underground work I’ve generally been a proponent of “unit rate” remeasured contracts where you get paid according to the ground conditions encountered as they can have wildly different levels of effort to deal with them and hence costs and schedule impacts. This was the old style Bill of Quantity type contracts, that also included a Changed Ground Condition clause for when you encountered stuff that was unforeseen.. Relied on clear definition of ground, clear mechanism for determining the ground type and clear mechanism for payment. I believe the Scandinavians have this kind of language built into their underground works contracts so the initial prices are lower as risk is clearly allocated with the Owner carrying the ultimate risk for ground conditions. You can also work in so called Target Cost contracts which reimburse actual costs together with a negotiated fee (Profit) and these exist in many forms such as Cost Plus etc. This is also where the Geotechnical Baseline Report was introduced to establish the risk allocation and what the contractor should price. I have to say I don’t believe you need a GBR on every underground project especially where soft ground TBM’s are involved as you rarely get to see the ground so you have difficulty comparing actual to baseline and there you need to find another metric to baseline.

    In essence contract language should be simple and straightforward and contain clear risk allocation and mechanisms to reimburse the contractor when issues arise that deviate from the baseline the owner asked the contractor to price. Do that and you will be better able to control costs. The harder you make it to cover the costs and make a normal profit the more contentious and confrontational the work is and the higher, ultimately the prices will be,

  7. Frederick

    Alon, there is a large piece of the puzzle still missing in your article: How many real estate projects does Hyundai own along the Line 9?

    • Alon Levy

      I don’t think Hyundai Motor owns any real estate? And Transdev, which owns 80% of that venture (Hyundai owns the other 20%), doesn’t do real estate development either.

      • Luke

        Hyundai Motor doesn’t do much with real estate, no. However, Hyundai Motor Group is still part of the Hyundai chaebol, and the Hyundai chaebol very definitely has real estate operations. They go under a number of different brand names–such is the vitality of Korea’s real estate market that residential property developments are done almost like chain establishments–but many of Korea’s larger chaebol with major construction or engineering operations have real estate components. In this way, Korea’s TOD is similar to Japan’s, in that many large construction projects generate their own users through synergy with transportation projects carried out by the same companies, but Japan’s are often based around established private railways and their operators or those companies’ parent entities–like Tokyu, Odakyu, and Hankyu–where that relationship is much weaker in Korea, which has very few and fairly small private railway companies.

        I’m curious to see where Korea’s drive for more affordable, primarily government-led real estate development takes it, especially as the 4th national rail plan to be released in the spring is expected to pivot far more heavily to rail transport.

          • Luke

            Technically yes, but as in most chaebol, control of the various affiliate enterprises remains with the founding Chung family through intentionally complicated cross-shareholding arrangements, if not directly through family relations.

  8. Brendan Dawe

    I am here reminded of how part of the Broadway subway contract required that the winning bidders bring partial financing of the project to the table, which seems and seemed nutty when superior-access-to-finance is entirely the clearest, most obvious advantage a non-Argentinian government has over any private entity.

    The Evergreen Line managed to shift risk successfully to the private sector only in so far as there were unexpected sinkholes that SNC-Lavalin ended up having to pay for, but knowing that no one was going to take that gamble again Translink/BC MOTI had to do considerably more geotechnical work on Broadway before the contract was tendered

      • Brendan Dawe

        Would certainly make sense along with the tight local construction market, low productivity of local construction workforce, reduced competition from various procurement policies and surely more

    • Rico

      I don’t think the sink holes were unexpected. The preliminary geo work clearly identified the area as a concern…SNC gambled it was OK and lost. Causing them to lose money on the Evergreen line. Because of this I don’t think it is a large part of the cost increase on Broadway… although several areas of poor soil are identified where creeks and gullies were just filled in.

  9. SHAM

    Sao Paulo metro’s Line-4 is also a good example for PPP, similar to Seoul metro’s Line-9.

  10. Andrew in Ezo

    A recent example from Japan and one I’m personally familiar with would be apropos here: Just almost a year ago the 2.7km long tunnelled Sotetsu-JR link was opened in Yokohama City, at a cost of 78.2 billion yen, or 28.96 billion yen/km, so approx. $277 million/km, which places it in the same range as some of the more expensive N. European projects. The construction was done by the Japan Railway Construction, Transport, and Technology Agency or JRTT (a govt. entity),which is also the owner of the infrastructure. The railways (Sagami Rwy. and later Tokyu Rwy. in this case) will pay JRTT a rail access charge to use the line. Financing was through grants from the national govt (1/3), local goverments of Kanagawa Pref. and Yokohama City (1/3) and the remaining 1/3 from private sector loans procured by JRTT.
    See page 16:

    Click to access Summary03.pdf


    more detailed report in Japanese:

    Click to access jk25-05-1.pdf

    • borners

      Another one to consider is Hokuso/Narita Sky Access line which is has a complicated birth of failed Shinkansen projects, shifty Chiba real estate politicos and Tokyo class discrimination. The result is a line with different owners of different bits, relatively high fares* and low frequency, in particular on the suburban bits where it goes as low as 3 times on hour off peak which is bad for Greater Tokyo. Its difficult gestation meant high cost overruns and like many of these 1980-2010 projects they were supposed to pay back their debts so Hokuso** has had to keep fares high to pay down the debt. Add to that as one of the two airport lines it has a lot of special expresses going straight from Keisei Ueno plus Asakusa subway through running trains between Haneda and Narita airports.

      Cost problems led to cheaping out on platform, most notably at Keisei Takasago, which is the Keisei group’s main node so the Keisei main line, Oshiage line and Hokuso line are sharing 4 platforms, its such a problem that the special express doesn’t stop there but at Aoto which a station before. There are also places between Narita and Takasago where they missed good places (at Shiroi where the absent green spaces are clearly meant for never built track/platform and Higashi-Matsudo where it intersects with the Musashino). Takasago is the poorer part of Tokyo-to (look at the station exterior its working class Japan), but most of the line is in Chiba, and with both not an expansionary mindset and Hokuso holding a debt load*** its probably going to stay that way to the detriment of the locals and mode share beyond Shim-Kamagaya. 

      The thing relevant to the debate here is that this thread is that most other newer heavy rail was initially all government back loans with their basic design requirement then put into the quasi-public “third sector”  companies (I say quasi-public because local governments still own most of the stock). Hokuso on the other hand was from the start dependent on integration into the Keisei system which is now majority shareholder. Its main focus is on the hyper profitable airport business yet in origin this whole line was made possible by Chiba prefecture supported by the relevant localities it underserves (disclaimer I am a Matsudo taxpayer). It’s not design-build-levels of principal agent problems, that play neither to advantages of the public sector/quasi-public sector nor the best of Japan’s legacy private railways. By Anglosphere standards it’s pretty neat, but like it could be better.

      *Its prices are not dissimilar from Tsukuba Express, the darling of Kanto suburban heavy rail projects, but given the quality of service difference for most people high fares is all they know about the Hokuso line.  

      ** Oh yeah Keisei technically owns most of it, but the rest of stock is owned by Chiba, some municipalities, and Narita airport plus help with Toei on Asakusa through-running,  this has led to private/public fighting over fares. Its a good example of the more difficult side of Japanese private/public railway companies.

      ***People talk here talk a lot about how the Oedo line’s expense and underperformance left a bad taste in Tokyo’s mouth to not undertake major line construction, what not mentioned is Japanese deflation has made the debts onerous plus reduced household formation and so suburbanites. Another case of austerity being stupid and counterproductive, Hokuso is no zombie company.

  11. myb6

    When it comes to private contractors doing government work, there’s just so much more fail than success.

    When it comes to risk management, however, I think there’s a fairly positive modern history in government finance via public markets. It’s amazing to me that muni, state etc financing works as well as it does. I think there’s room for a govt agency (taking a more active role in execution, as Alon advocates) to use such private capital as a sanity-check on individual projects. Offer a minority of the project risk to public markets at the same terms as the agency.

    I recognize that would ignore non-financial benefits. Those should be accounted for, of course, but with cognizance that there’s a lot of voodoo in those figures and such subsidies ought to go through a highly democratic political process that itself can be expensive (in a broad, not-just-financial meaning). In that case, I like the Swiss referenda.

    Side note: the contrast between 19th C govt finance (which at least at the national level was dominated by a couple of private family firms, and had a lot of the same problems as govt contracting) and modern govts tapping public markets is an informative example of bringing more expertise in-house.

  12. Mike

    American contractors talking among themselves say that profit margins of 20% are normal for heavy civil public works projects versus 3%-5% for CMGC commercial construction.

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