THE SIMPLE MICROECONOMICS OF PUBLIC-PRIVATE PARTNERSHIPS

 

Under a public-private partnership (hereafter abbreviated as PPP), a local authority or a central-government agency enters a long-term contract with a private supplier for the delivery of some services. The supplier takes responsibility for building infrastructure, financing the investment, and then managing and maintaining this facility.

Although PPPs are an ancient phenomenon, they were not studied seriously by scholars until the late 1980s, when they began to be adopted in public administration and management in both developed and developing countries. PPPs have been a topic of political controversy and scholarly debate, especially regarding the advantages and disadvantages of PPPs in comparison with traditional government-run services and the nature of the partnerships they bring about. PPPs embrace public-sector partnerships with both businesses and organizations in civil society, including community organizations,voluntary organizations, and nongovernmental organizations (NGOs). ISI MA Economics entrance coaching as imparted by one of the reputed institute of India, Deep School of Economics is today a leading name in the field of education for its innovative teaching methodology, impeccable quality and honesty that make it stand above the rest.

PPPs are being used across Europe, Canada, the United States, and a number of developing countries as part of a general trend seeing an increasing involvement of the private sector in the provision of public services, under the form of privatization, deregulation, outsourcing, and downsizing of government. PPPs have traditionally been employed in transportation, energy, and water but their use has recently been extended to IT services, accommodation, leisure facilities, prisons, military training, waste management, schools, and hospitals.

In Europe, the PPP approach was pioneered by the private finance initiative (PFI) launched in 1992 in the United Kingdom.By 2009, approximately 800 PFI projects had been signed for a capital value of 64 billion.

This paper aims to build on previous works so as to identify circumstances in which the main characteristics of PPPs are suitable to provide adequate incentives for private contractors in infrastructure and public service provision. We also extensively describe the empirical evidence on PPPs and use our insights to derive clear policy implications. For our purpose, we characterize PPPs by three main features: (i) tasks bundling, (ii) risk transfer, (iii) long-term contract.

(i)                 Bundling. A PPP typically involves bundling design, building, finance, and operation of the project, which are all contracted out to a consortium of private firms. The consortium includes a construction company and a facility-management company and it is responsible for all aspects of services.

(ii)               Risk transfer. Compared to traditional procurement, a PPP involves a greater transfer of risk and responsibility to the contractor. A system of output specifications is used: The government specifies the service and the basic standards, but leaves the consortium with control rights and responsibility over how to deliver the service and meet the pre-specified standards. So design, construction and operational risk are generally substantially transferred to the private-sector party.

(iii)              Long-term contracts. A PPP is a long-term contract lasting typically 20 to 35 years. The payments to the private-sector party for the use of the facility is made either by the government (as in the case of PFI projects) or by users of the facility (as in more standard concession contracts).

 

The General Framework

 A government (sometimes referred to as G) relies on a private contractor (a firm or consortium) to provide a public service for society. Examples of such delegation include of course transportation, water production and sanitation, waste disposal, and so forth. In such settings, providing the service requires that a good quality infrastructure has been first designed and built. This delegation must thus be modeled as a multitask problem.The main feature of a PPP can then be viewed as the bundling of various phases of contracting.

 

POTENTIAL BENEFITS OF PUBLIC PRIVATE PARTNERSHIPS

The financial crisis of 2008 onwards brought about renewed interest in PPP in both developed and developing countries. Facing constraints on public resources and fiscal space, while recognizing the importance of investment in infrastructure to help their economies grow, governments are increasingly turning to the private sector as an alternative additional source of funding to meet the funding gap. While recent attention has been focused on fiscal risk, governments look to the private sector for other reasons:

• Exploring PPPs as a way of introducing private sector technology and innovation in providing better public services through improved operational efficiency
• Incentivizing the private sector to deliver projects on time and within budget
• Imposing budgetary certainty by setting present and the future costs of infrastructure projects over time
• Utilizing PPPs as a way of developing local private sector capabilities through joint ventures with large international firms, as well as sub-contracting opportunities for local firms in areas such as civil works, electrical works, facilities management, security services, cleaning services, maintenance services
• Using PPPs as a way of gradually exposing state owned enterprises and government to increasing levels of private sector participation (especially foreign) and structuring PPPs in a way so as to ensure transfer of skills leading to national champions that can run their own operations professionally and eventually export their competencies by bidding for projects/ joint ventures
• Creating persification in the economy by making the country more competitive in terms of its facilitating infrastructure base as well as giving a boost to its business and industry associated with infrastructure development (such as construction, equipment, support services)
• Supplementing limited public sector capacities to meet the growing demand for infrastructure development
• Extracting long-term value-for-money through appropriate risk transfer to the private sector over the life of the project – from design/ construction to operations/ maintenance

IMPACT OF PRIVATE-PUBLIC PARTNERSHIPS ON ECONOMIC GROWTH

Economic growth is driven by investment and increases in productive output, making it possible for individual workers to command a higher value for their labor and to achieve a higher standard of living. Do PPPs allow resources to be used more efficiently and cause the marginal output to increase?

ADVANTAGES

Partnerships between private companies and the government provide advantages to both parties. Private-sector technology and innovation, for example, can help provide better public services through improved operational efficiency. The public sector, for its part, provides incentives for the private sector to deliver projects on time and within budget. In addition, creating economic diversification makes the country more competitive in facilitating its infrastructure base and boosting associated construction, equipment, support services, and other businesses. 

DISADVANTAGES

Some analysts contend that by diverting resources (money and labor) from market-driven ends to politically driven ends, PPPs harm growth. Proponents counter that the effective provision of public goods, such as education and roads, helps promote economic growth. In turn, critics of public-private alliances say that public goods could be provided much more effectively by the private sector alone if it weren't for the crowding-out effect of public distortions in the capital markets.