Should Public Private Partnerships (PPP) be preferred over public provision or privatization?

By Shan Yahampath

shan@shanyahampath.org

Building and maintaining public goods and property such as highways, bridges & tunnels, air and sea ports are some of the main responsibilities of a government. Selecting and prioritizing infrastructure development projects, hiring competent private contractors and making decisions on funding these projects are some critical functions a government should perform in this regard. Public debts or taxes, privatization and PPTs are the three basic ways in which public goods and property can be made accessible for citizens of a particular country.

The concept of PPP came into being when some countries such as the United Kingdom, and the USA started to encourage private sector participation in public service areas that were not conventionally easy to privatize such as highways, schools and hospitals. This created a new opportunity for long term contracts between the state and private companies to provide infrastructure through bundling financing, construction, and operation (and maintenance) within a single firm. The development of PPP introduced a new approach whereby a single private firm finances and builds a project and then becomes responsible for the operation and maintenance of the installations on par with agreed service/performance standards.

A PPP can be considered as an agreement through which the government contracts a private company to build or improve, maintain and operate infrastructure for an extended length of time (e.g. 25 to 30 years) in exchange for revenue during the period of the contract. In the case of highways, revenue mainly comes from users whereas in investments such as public hospitals the government makes periodic payments as users are not charged. But in most cases the concessionaire is remunerated with a combination of user fees and government periodic payments, such as shadow tolls in the case of highways. At the end of the contract period the assets are handed over to the government. Privatization of a government property or service is different from PPPs as the infrastructure is permanently transferred to a private entity.

Figure 1- The basic structure and the flow of work of a PPP project.

PPP in Europe

PPSs in Europe had a steady fivefold growth on an annual basis from 1990 till 2007.

Figure 2 – The PPP investments in Europe (1990 – 2011) in billion euros

Figure 3- The 10 countries in Europe with the most PPP investments.

Country Total Investment

1990 – 2006 (In Million Euros)

Belgium 2,112
France 7,670
Germany 5,658
Greece 7,600
Hungary 5,294
Italy 7,269
Netherlands 3,339
Portugal 11,254
Spain 24,886
United Kingdom 11,2429

Source: Blanc – Brude, Goldsmith and Valila (2007)

Figure 4- Toll type for PPP roads, bridges, and tunnels in Europe, 1990 – 2007

Country Contract

Availability

Real Toll Shadow Toll Total
Austria 0 2 0 2
Finland 2 0 0 2
France 0 8 0 8
Germany 0 8 0 8
Greece 0 6 0 6
Hungary 0 5 0 5
Ireland 0 8 0 8
Italy 0 7 0 7
Latvia 1 0 0 1
Netherlands 2 0 1 3
Norway 0 3 0 3
Poland 0 1 1 2
Portugal 0 6 11 17
Spain 0 31 14 45
United Kingdom 4 3 20 27
Total 9 88 47 144

Source: Kappeler, A. and Nemoz, M., (2010)

The United States has been lagging behind many European and developing countries in terms of PPP investments. However, they have achieved a remarkable growth on an annual basis between 1998 and 2007 and during the three-year period of 2008-2010. The majority of investments are in transport sector as per the available data. The entire PPP sector has attracted approximately $23 billion USD between 1998 and 2011.

PPP investments in low and middle-income countries

As it is shown in the figure given below the investments in PPP grew at an annual rate of about 28 percent between 1990 and 1997. This growth however, was negatively impacted by the East Asian crisis and up until 2003 the investments were very low. Between 2003 and 2010 the investments had a steady upward growth reaching $180 billion USD in 2010. Surprisingly the global financial crisis of 2009 hardly made an impact on the upward trend in middle and low-income countries.

Figure 5- PPP Investments (Billion USD)

Figure 6- PPP Investment in Developing Countries, 1990 – 2008

U. S. dollars (In Millions)
Country Energy Telecommunications Transport Water & Sewage Total
Argentina 29,540 29,328 14094 8,176 81,137
Brazil 75,993 107,554 32142 4576 220,265
China 37339 14,518 47449 8427 107,732
India 45,868 52,898 24766 331 123,864
Indonesia 15492 24,972 3743 1020 45,228
Malaysia 14313 9596 16552 10441 50,605
Mexico 10753 54068 25374 1675 91,869
Philippines 19268 14280 3478 8071 45,096
Russia 30484 48813 706 2225 82,228
Turkey 12,678 24293 8170 942 46,082

Source: World Bank – PPIAF PPI database

Problems with Public Provision

Governments usually face multiple challenges when providing infrastructure services in any country, be it developed or developing. The challenges range from immediate ones like prioritizing projects among many competitors, ensuring completed projects fulfill their service and performance obligations, maintenance of the infrastructure built, financing the projects to more dire challenges like ensuring neither the public nor the government is overcharged especially in a fee for service model. These challenges are at times made more critical due to sectorial capture by certain leading companies through political connections and corruption. Poor design of government institutions and their employee incompetence leading to cost overruns and delays take an extra toll on public provision.    

Why PPP?

There are both theoretical and pragmatic arguments as to why PPP can be considered favorably by governments to provide infrastructure effectively and efficiently. The Financial Times once claimed that “The boom in PPP is good news for governments with overstretched public finances: many local and national authorities have found themselves siting on toll roads, ports, and airports that they can sell for billions of dollars to fund other public services”.

  1. The most feasible arguments are that PPP can relive budgetary restrictions and release public funds.
  2. Since project financing is private it brings much needed financial discipline with prudence which can lead to gains in efficiency.
  3. PPP bundles construction with operation and maintenance and this can lessen the deterioration of infrastructure such as roads and highways.
  4. PPPs can mimic a competitive market because they are often adjudicated in competitive auctions/bids.
  5. Since the private party is interested in making profits the user fees have to reflect a market price and this may discourage lower fees due to political pressure, overconsumption and wastage of infrastructure.
  6. According to Adam Smith when infrastructure is privately provided and sustained with user fees, a market test filters white elephants.  Smith A (1937)

Good Governance

A mixture of good and bad experiences are present with regard to the real impact of PPP infrastructure projects in the world. Countries such as China, Chile, Brazil and the UK provide ample examples of such experiences. With a sufficient learning curve these countries have learned that getting a single state institution to manage all aspects of the production and delivery cycle: the planning, tendering, construction, maintenance, supervision, contract enforcement and conflict resolution can lead to possible conflict of interest. Because, when every aspect is within the same scope inefficiency and corruption become inevitable. This is also due to an inherent issue in the government sector as to how departments and ministries are organized. Usually these are organized by products and not by functions. For instance, building schools and educating children fall under the same ministry. There should be an independent central body to carry out cost benefit analysis and this may reduce the undue political interference. Ensuring concessionaire’s adherence to compliances throughout the lifecycle is also a must. The experiences of the countries mentioned above are such that, the terms and conditions of most of their projects had to be renegotiated as a result of oversights of the government and the private firms. The government can always impose regulatory framework while the concessionaire has no choice due to a sunk investment. These kinds of issues can be avoided through proper planning during the initial negotiation period. It is vital to have a proper mechanism and a central body to handle conflict resolution as well. This may lead to project delays but the ultimate benefits will be passed on to the society and its people whose user fee payments and tax rupees are financing these projects.

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