Abstract
Given the paucity of public resources, it is important to consider relying on the private sector for financing public investments and infrastructure. There are considerable expectations concerning Public–Private-Partnerships (PPPs) in supplementing public resources, but also risk sharing with the public sector. However, these contracts are subject to abuse, given asymmetric information, and game-play across levels of government that lead to the risks being borne by the central government or subsequent administrations. Specialized agencies can play a useful role in supporting subnational governments with the complex contracting arrangements needed for PPPs. We see that strengthened Public Financial Management is needed, to track the build-up of liabilities at the subnational level, and also own-source revenues to ensure accountability. Uncertainty, including with climate change, may require different arrangements—and the options are addressed in a subsequent paper Ahmad, Vinella and Xiao (2017), but the risk-sharing aspects of PPPs may be relevant in many cases.
An earlier version of this paper was prepared at the request of the G24 group of countries (Ahmad et al. 2015) and this paper has been prepared with the permission of the G24.
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Notes
- 1.
Gatti (2014) reports that, according to a study conducted by Moody’s in 2010, infrastructure projects in the construction phase tend to default earlier, to recover more slowly, and to emerge later from bankruptcy, as compared to infrastructure projects in the operation phase.
- 2.
- 3.
Infrastructure Policy Unit 2012 Global PPI Data Update at http://ppi.worldbank.org/features/August-2013/PPI%202012%20Globa%20Update%20Note%20Final.pdf.
- 4.
For detailed report, see (World Bank Infrastructure Policy Unit 2012) Global PPI Data Update.
- 5.
Financial closure in the PPI Project Database varies among types of private participation. For greenfield projects and concessions, financial closure is defined as the existence of a legally binding commitment of equity holders or debt financiers to provide or mobilize funding for the project. The funding must account for a significant part of the project cost, securing the construction of the facility. For management and lease contracts, a contract authorizing the commencement of management or lease service must exist. For divestitures, the equity holders must have a legally binding commitment to acquire the assets of the facility. The Database includes only projects that have reached financial closure. Source: http://ppi.worldbank.org/resources/ppi_faq.aspx.
- 6.
See sector report: http://ppi.worldbank.org/features/December-2013/Energy-Note-2013.pdf.
- 7.
- 8.
- 9.
- 10.
- 11.
- 12.
- 13.
- 14.
- 15.
- 16.
Please consult regional report: http://ppi.worldbank.org/features/December-2013/2012-AFR-Regional-Note-Final.pdf.
- 17.
Municipalities, however, are subjected to strict control by provinces, but there are no national standards, which make it difficult to report to the GFS Yearbook on general government operations.
- 18.
A rich discussion on this subject is proposed in Iossa and Antellini Russo (2008), who refer widely to the Italian PPP experience.
- 19.
We should, however, mention that, in some countries such as the UK, highway contractors receive payments directly from the budgets, or like shadow tolls from the government.
- 20.
A broad overview of the financial perspectives for the European energy infrastructure is found in Tagliapietra (2013).
- 21.
Translation from Italian by the authors.
- 22.
Private observation by the firm of the operating costs is, perhaps, the most common root of adverse selection issues in delegation problems. However, this is not a feature of all types of projects. A word of caution is, thus, needed. For instance, according to Engel, Fischer and Galetovic (1997, 2001), private information on costs is not an issue in highways franchise contracts. The authors argue that, once the infrastructure is built, the costs of operating and maintaining highways are known to be close to zero and, hence, there is little room for firms to cheat. This is instructive. It means that, although some problems are very widespread and can thus be legitimately accounted for in a general discussion, a more appropriate approach to PPP issues should pay attention to the different characteristics that the various sectors and activities display. This leads us to the sectoral analysis developed in this paper.
- 23.
To be more precise, effort provision by the firm is desirable as long as the expected additional benefit that it induces, as compared to a situation in which no effort is exerted, exceeds the cost that providing effort entails for the firm. When effort has a probabilistic impact, the possibility of an additional benefit follows from the fact that the operating conditions are more likely to become favourable.
- 24.
- 25.
Risk neutrality of the firm is not an irrelevant aspect. When the firm is risk averse, it is necessary to insure it against the possibility of facing unfavourable operating conditions and, hence, a low return from the activity. In that case, a trade-off arises between provision of incentives and provision of insurance. The power of incentives that the government can provide to the firm is weakened. Note, however, that not only the attitude to risk of the firm but also that of the government is relevant. With ex-ante contracting, a risk-averse government may want to rely on a sell-out contract, under which the firm makes a payment up-front in order to have the right to produce. Thus, the government obtains a fixed payoff, regardless of the state of nature. This insurance may be interesting for small local governments, for which the project represents a significant share of the budget. Outside investors may be better diversified and, hence, they may be prone to insure small governments that privatize crucial infrastructures and services for insurance reasons (see Martimort 2006).
- 26.
In this case, the contract is bound to be efficient ex post.
- 27.
- 28.
Allain-Dupré (2011) reports that, in OECD countries, sub-national governments are in charge of nearly half of total capital expenditures. The reason is that regions and municipalities are considered to “better spend,” i.e., to identify the most appropriate paths for promoting the territorial development and competitiveness (Charbit 2011). It is thus clear that sub-national governments play a core role in public investment. Although the general strategies are designed at the national level, the implementation and completion of investment projects and the subsequent management of the activity depend crucially on the regional and local levels. For instance, even in federal countries like Germany, local governments provide utilities and manage local infrastructure, and have a claim to state funding, up to a level that is sufficient for a correct functioning (Fink and Stratmann 2011).
- 29.
For further examples, see, for instance, the Reference Guide on PPPs published by the World Bank in 2012.
- 30.
See IASB (2011), IPSAS 32. This standard is also likely to affect the guidelines of Eurostat that are not so tightly defined.
- 31.
In Italy, under the 2002 Stability Law, ISpa was created with the task of involving the private sector in the construction and management of important infrastructures, requiring significant long-run investments. However, being an off-budget agency, ISpa serves an important budgetary purpose as well. It can issue state-guaranteed bonds to raise capital for the new infrastructure projects, while allowing the government to comply with the European Stability and Growth Pact. See, for instance, Maskin and Tirole (2008) on the practice, often adopted by governments, to push debt finance off their own books to quasi-public agencies not consolidated in the national budgets.
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Ahmad, E., Bhattacharya, A., Vinella, A., Xiao, K. (2018). Involving the Private Sector and PPPs in Financing Public Investments: Some Opportunities and Challenges. In: Ahmad, E., Niu, M., Xiao, K. (eds) Fiscal Underpinnings for Sustainable Development in China. Springer, Singapore. https://doi.org/10.1007/978-981-10-6286-5_6
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