Case Studies: Helsinki-Lahti Main Road 4 / E75, Finland

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Project Overview
Lahti.png
Figure 1: Helsinki-Lahti motorway in operation, Finland
Helsinki-Lahti Main Road 4 / E75, Finland
Project Type: Both
Type of Project Financing: Public-Private Partnership (PPP)
Contract duration: 15 years
Budget: 240 M€
Project Time Line
1996-1997: Political and administrative decisions
1997-1999: Construction period
1998: First section opened to traffic
1999 : Second section completion and opened to traffic
2012: Concession period completed and handover back to the state


Introduction

A working group set up by the Ministry of Transport and Communications recommended in its final report, 26th of March 1996, that private finance would be implemented to road construction and maintenance by the shadow toll option. The concession contract was to cover the upgrading of the Järvenpää-Joutjärvi stretch of semi-motorway into motorway as well as the maintenance of this stretch (both the old and the new carriageway) for 15 years. The cost estimates excluding VAT were between 550-590 MFIM (ca. 100 M€) for the construction and 10 MFIM annually for the maintenance. The same parliamentary decisions for this were made.

The Contracting Authority (Public Party)

The task of organizing the call for tenders was allocated to the national road authority, Finnish Road Administration (later Finnish Transport Agency). The Administration was the state infrastructure manager responsible for the entire public (state) network in the country.

The Concessioner (Private Party)

The concessioner was a consortium of private investors and construction business actors. Figure 2 below shows the synthesis of actors and their contribution.

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Figure 2: Concession actors and roles (Source: KPMG 2013)

Sources of Financing

The first set of equity invested by the project company shareholders was in fact minimal, to fulfil the letter of corporate laws. Other arrangements were made to ensure equity financing. The largest debt investor was the Nordic Investment Bank.

Users

The road is a public state road. A large share is heavy transport and commuting.

Key Purpose for PPP Model Selection

Helsinki-Lahti was the first PPP project in Finland. Therefore, its nature was partly experimental. However, the actual link improvement was necessary, so the only novelty for the project was the financing. An awareness of state budget limits with regard to infrastructure investments that were deemed needed was clearly one motivational factor. The other one was the general trend in PPPs and liberalizationin Europe.

Project Timing

In November 1998, the first sections of the road were opened to traffic, while the remaining sections in September 1999. The handover to the state and termination of the concession was in August 2012.

Project Locality and Market Geography

The road links the city of Lahti to the capital Helsinki. There are old roads that can be used in case of disruptions, but immediately after the opening to traffic, the road was fully utilized by road users. A railway line, also one of the busiest in the country, runs alongside the road, and there is a natural competition between modes. The new road seems to have strengthened the road transports’ competitiveness.

Procurement& Contractual Structure

The project company Nelostie Ltd. representing the consortium and assuming the concession was the signing party. The other side was the Finnish Road Administration.

Tendering

After the political decisions were made, the public announcement for call for tenders was made in May 1996. The first actual call for tenders was issued in July 1996. Bids were received in November 1996. The contract was signed in March 1997.

Contract Structure

The contract covered the construction and operation of the road.

The state owner paid a shadow toll to the concessioner according to traffic performance (vehicle kilometres of travel) on the road. The traffic was measured at two sites. The first site represented an assumed homogenous traffic volume on a 30,2km stretch and the second site, 39,0 km. In case of exceptional situations, when traffic volumes were not recorded or traffic was blocked, the traffic counts of the previous year for the same period applied. Certain clauses had been included for traffic days in exceptional circumstances.

The cash flow from shadow tolls was received in four payments: end of March, end of July, end of September and end of December. The first three payments were based on the total payment of the previous year. At the end of December, the payments were balanced according to real traffic volumes. Different types of vehicles are not distinguished, but each vehicle, or rather vehicle kilometre, was equally worth.

The owner had a right to withdraw the liabilities of the concessioner to a third party, as long as these liabilities were due to operations connected to the concession contract.

The construction costs were not indexed except for the paving works, where the market price of bitumen could have an impact on contract payments.

The operating costs were indexed totally throughout the concession period using civil engineering works cost index.

The re-paving works were also included in the operating costs.

Any possible changes to these contracts were not publicized.

Risk Allocation

The risk allocation is depicted in Figure 3.

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Figure 3: Risk allocation (author’s own estimate)

Performance

With regard to construction quality, the owner was eligible to claim compensation when bad quality, workmanship or engineering was detected. Special emphasis was laid on the quality assurance procedures and quality control documents. The evaluation of quality was done mainly on the basis of contractor’s/concessioner’s quality control documentation supplemented with inspections and sampling. If inspections or sampling showed deviations from the accepted quality level and the contractor’s own reports did not conform to the sampling or inspection results, the contractor paid a 50.000 FIM sanction for each event of non-conformance.

As with construction, the operating quality was based on the concessioner’s own reports supplemented with inspections by sampling. The sanctions were the same as above. There are sanctions concerning blocked lanes due to repair works or similar issues.

Project Outcomes

According to an interview study carried out by KPMG for the Finnish Road Administration, Helsinki-Lahti is by and large considered to be a success story. The active role the PPP company has played in collaborating with the local authorities to revitalise the local economy was highlighted by the interviewees (KPMG 2013).

One academic study on the project concluded that from the taxpayer point of view, the benefits of the road were not fiscal, but mainly related to local economy boosting and externalities, such as improved traffic safety (Leviäkangas 2007).

References