Free «The Role of the Government in Market oriented Economy» Essay Sample


Currently, it’s uncountable that Qatar as one of fastest developing country will soon enjoy one of the best transport system globally. However it must meet the economic credential as required by Qatar National vision 2030.In the document, Qatar has to develop one of the world best railway integrated transport system connecting people, Places, goods and services and thus enable economic prosperity and quality of life for all. In the vision 2030, Qatar government, private sector and other economic stakeholders are required to provide and operate a world class, sustainable passengers and freight rail system integrated into the national and regional transportation networks and thus deliver best value to the people and the whole state of Qatar.

Under the economy pillar within the Qatar National Vision 2030, Qatar rail will be required to implement 4 mega projects which include;

  • 4 lines of Metro : Red , Green , Gold and Blue
  • Long Distance: which will be connected Qatar to GCC countries.
  • Freight Rail : for industrial goods transportations
  • Light Rail transit: it will be in West Bay and Lusail City.

These huge economic infrastructural projects under the railway sector are required to have great influence not only in infrastructural sector but also in other sectors. It will affect the potential use of Public Private Partnership schemes greatly. Thus the main aim of this research paper is to address;

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The relationships between concession and Public Private Partnership (PPP).Under this section we shall address the meaning of concession, concessionaire and lastly the Public Private Partnership. Moreover, the paper will instrumentally analyze critically various thoughts advanced on Qatar rails based on international experience. Lastly, the essay will address potential Public Private Partnership models for prosperity of Qatar rails before providing conclusion remarks on the future of Qatar railway system and the way it has enabled the country to achieve growth economically.

Discussion: Concession and Public Private Partnership (PPP)

The relationship between concession and public private partnership can be addressed first by looking at the definitions of concession, concessionaire and then later the relationship as provided below;

What is a Concession?

This refers to granting of exclusive privileges for instance; one can be a sole seller of a given asset owned by government or an individual such as, railway station and hotel. Monthly, the renter pays the owner a certain amount of rent. A concession gives an operator of a railway the long term right to use the various assets available within the premises. Asset ownership remains with the public party (Hamad,2012).

What is a Concessionaire?

What is Public Private Partnership (PPP)

On the other hand, PPP broadly refers to a long-term contractual collaboration between public and private sector agencies, specifically targeting financing, designing, implementing and operating infrastructural facilities and services that were initially provided by non private sector. This involves the private party granted right to sell a public asset and assumes substantial financial, technical and operational risk in the project that normally would have to be taken by the public sector (Hansen,2010).

What is the difference between a Concession and a PPP?

There are considerable differences between concession and PPP as explained below. The differences cut across the legal and contractual requirements as per the period taken to implement;

From the definitions provided above we observe that concession gives any operator of a railway the long-term right to ensure there are utilities of assets conferred to the operator. This includes the responsibility for all operation and investment activities. However, asset ownership remains solely with the public party.

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Moreover, a concession can just be another form of contract between the public and private sector. It’s comparable to a Design & Build of an asset, an EPC or even a Lease contract. There is no necessity to create a Special Purpose Company (SPC) to finance, design, implement and operate the infrastructural facilities. In most cases, a concession may be granted in relation to existing assets, existing utilities or even rehabilitation of various existing asset within the society (World Bank,2012). For instance, a private party can be awarded a concession to exclusively operate a mini shop in a railway station or even provide catering services to train passengers. At this concession situation, the private party has to pay a concession fee to the railway company equivalent to a lease or rent of the asset.

Furthermore, PPP requires an extensive legal framework in establishing a Special Purpose based Company (SPC) to finance, design, implement and operate the infrastructural facilities which is not the case with concession. At this difference, it was found that the legal frameworks for operating PPP projects are provided according to lengthy and cumbersome and previous experience processes. This may take a lead-time of at least 2 years. In addition to that, the drawing up of a PPP contract must be accompanied by highly qualified and experienced engineering technocrats because of the typical contract period such as BOT and DBFOMT projects. The BOT requires a period of at least 20 years and while in DBFOM projects the ownership of the private party is permanent (Global Review,2002).

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Lastly on the differences, the SPC is characterized by owning the assets either on temporary bases under a BOT scheme or permanently under a BOO scheme. Under the BOT scheme the transfer process back to the public sector will usually take place after refinancing of the investment. Under this situation, an agreed profit margin will be given under a BOO scheme while the facilities will remain with the SPC. However the case is different from PPP as its only characterized by permanency of the contract.

Analysis and critical thoughts about Rails from international experience

Based on international experiences, most of the rails have succeeded where the government has fully collaborated with the private sector under the PPP programs. The success and failure of the rails projects depends on certain factors as discussed below;

First, Many Rail projects succeed on the ground or are cancelled due to the political support will exist in the country. A positive example of a rail project progress due to better political will was in South Africa on the Gautrain Rapid Rail Link project during the financial closing phase this project succeeded because of the vision and leadership of Gauteng Premier. The project succeeded because of the visionary leadership and good political will of Gauteng Premier. On the other hand, The Florida High Speed Rail project failed, despite the popularity it had with the population of Florida. The project was cancelled twice by the government. Thus political courage is needed to steer through the decision making process and enable designing of appropriate legal framework for PPP. The Qatar regime needs to embrace good political will so as to succeed just like South Africa (Rondinelli,1983).

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Secondly, the success of the Qatar rail projects depend on the other mode of transports provided by the private sector. This explains only through demand analysis experience. In most cases the road PPP succeed because the potential users are not required to change their mode of transportation to alternative routes. However, on rail PPP the potential will try to change their mode of transportation from a car, bus or taxi to a train or vice-versa. This is difficult to predict and it adds sometimes a level of complexity. The international experience was proved through the Bangkok BTS (green line) traffic studies where the government predicted demand of 650,000 passengers per day in the initial years of operation. Only less than 150,000 turned out and the project went into default. Thus, the Qatar government must predict the demand of rails in the country with certainty (Jurgen, 2012).

Lastly, the succession of any current railway infrastructure project globally requires concession and more so in daily operations of the trains. Operations of trains are dealt well mainly under concession where the operation & maintenance activities agreements are entered into with a private party. It is a given fact that PPP railway projects cannot generally refinance themselves from daily ticket revenues, since initial maintained and investment costs for building up the infrastructure are very high. In most of the cases the expected transport demand is limited and thus in some cases the operation expenditures and costs are not covered. This would require a considerable subsidy from the respective Government. The Qatar government must understand that they cannot operate well in installing the railway project without private sectors and vice versa. The project requires heavy capital investment. Most likely, this will not apply to Qatar railway projects since there is no shortage of public funding. As a result, shortage of funds will not be a driving factor for Qatar to introduce PPP for the construction of the railway (Hamad,2012).

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Potential PPP models for Qatar Railways

There are several potential PPP models that the Qatar government can use to execute the Qatar railway projects.They includes;

DBOM or combination of DBOM / DBFOMT

Currently the Qatar railway projects are “revenue negative,” This means that the fare charges and freight revenues fund only a percentage of operating costs and making  little or no contribution to the capital investments and cost of design and construction (Jurgen,2012). There are two general models potentially advanced to build and operate the Railway under this category. The models are;

Model 1

This refers to A DBFOMT model and where Qatar Government is providing an almost 100% Investment Grant for the railway infrastructure. The private party finances a little part of the railway infrastructure and the rolling stock structures. The Special Purpose Company will arrange, Design, Build the contracts for railway infrastructure and procurement the rolling stock as well as performing operation and maintenance for railway as outlined under the DBFOMT contract.

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Payment for the Special Purpose Company will be made from the fares and freight rates or by an “Availability Fee” regime. First, the revenue will come out of demand and resulting ridership. This manifest that these are the only revenue bases for the rail operator. Unfortunately these figures can generally be not controllable by the operator. This can cause all that operators worldwide reluctance to accept the demand risk, unless Government issues an appropriate “Revenue Guarantee” (Hamad, 2012). 

Furthermore, on availability fee, Qatar Railway two “Availability Fee” Options would be possible; In option one, the Government is providing an “Investment Grant” of around 90% of the cost for the rail infrastructure and the Special Purpose Company meaning it’s a majority shareholder. The private sector will finance the remaining 10% of the infrastructure cost before covering 100% of the rolling stock. The costs of services provided by the Special Purpose Company will  be covered through an “Availability Fee” Although the availability fee is fixed, it relates rotates as mentioned before on the achievement of the KPIs, However, this be  will be controlled by an independent Government Authority (e.g. Qatar Railway).

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In option two of the model, no investment grant considered or provided by the government hence it’s in contrast to  option 1 where the government services the cost of investment through investment grants. The Special Purpose Company has therefore to finance the whole project, which implies a massive risk, which will be reflected in a considerable high “Availability Fee” paid by the consumers. However, in most cases, where such a huge financing amount is asked for from the private party, the Government has to provide guarantees. Although both options are theoretically possible, the final decision regarding option 1 or 2 depends on the “Appetite” of the private party (Hamad,2012).

Model 2

This involves both the private and government combining efforts. It involves both DBOM and DBFOMT models (Figure 2), where Qatar Government is providing the “Project Financing” only for the railway infrastructure, whereas the private party will provide finance for the Rolling Stock. This means that Qatar Government owns only the railway infrastructure and the private party (SPC) owns the rolling stock. The SPC will arrange, supervise the Design and build the contracts for the railway infrastructure Moreover; it will perform Financing, Procurement, Operation and Maintenance of Rolling Stock under a DBFOMT contract and will lastly the operation and maintenance of the railway infrastructure.

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Lastly SPC will also be responsible for signaling the services to the public, provide safety, good working network, extension of the existing network, maintenance of the network and development of train schedules. The Railway Operating Company (SPC) can either be established under a DBFOMT contract that procures the rolling stock and maintains the operation activities. Since the private party has equal share in the Railway Operation Company, it’s expected to create highest quality and efficiency of the train services. Payment for the SPC could either be based on actual fares and tariffs. This means that regardless of the actual demand (passengers and/or goods transported), the SPC is get some money.

However, it should be understood that track access fees and charges would not provide any considerable contribution to the operation cost of designing and constructing the railway infrastructure, hence Government subsidies will be required. To assist the government in financing the infrastructure, the metro lines can also be privatized under a PPP scheme (Hamad, 2012).

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