The use of Public Private Partnerships for infrastructure projects

In a previous article, I highlighted the importance of the institutional quality as a main driver for economic growth. I explained that the performance of institutions is undermined by political polarization, which weakens democracy, jeopardizes the rule of law, fuels corruption, culminating in the total destruction of public trust. Thus, our economic resistance should start by restoring a healthy democracy through early elections. Otherwise, none of the proposed reforms for an economic recovery would work since it would be in the alleged reformers’ interest to fake a commitment to change, while in reality they will be pouring water into a bucket full of holes. The ministerial statement is a case in point!

The most obvious flaw in the ministerial statement is its failure to propose a solution to Lebanon’s electricity crisis, which has been a drain on the budget for the last ten years. To the contrary, the new government is pledging to adopt the same ineffective plan, while for the World Bank, the International Monetary Fund and the international community electricity reform is vital for the economy.

The public private partnership model (PPP) has been proposed to finance infrastructure investments in the energy sector. It can also be used for transport, telecommunications, water and sewerage and other infrastructure projects. While it falls under the measures that can be applied to respect a Golden rule government spending approach, as described in my previous article, its success depends on our institutions performance. I describe hereafter what a PPP is, the birth of the concept, and its weaknesses in unstable environments.

The term “public-private partnership” is vague as it may designate in its widest meaning any activity conducted jointly by the public and the private sectors. However, cooperation between governments and private enterprises is not a recent phenomenon. Throughout history, it has taken many forms and has produced mixed results, which has always fueled the economic and ideological debates about its spectrum, its consequences and even its necessity.

For classical and neo-classical economists who favor free markets, government intervention is only justified when markets fail. For instance, because of their characteristics, namely non-rivalry and non-excludability (meaning respectively that their consumption by an individual does not reduce their availability to others and that it is not possible to prevent individuals from their use), public goods and services raise issues such as the “free rider” problem. Therefore, private firms seeking maximum profit are hardly interested in producing such goods. For socialists who promote social ownership of the means of production, the role of the public sector is to control, to a more or lesser degree, the production and distribution of goods and services for the common good.

Yet, since the collapse of communist regimes, the vision of the welfare state is losing its popularity. On the other hand, the inefficiency of governments and the failure of privatizations in capitalist economies led to a reorientation of the debate. Now the controversy is no longer about who should be exclusively responsible for the delivery of all public services, but how to organize the delivery and management of a particular service, given its complexity, such as to maximize the difference between social benefits and social costs. The PPP concept is in line with this new trend in public economics focusing on efficiency and the search for an optimal social welfare, treading over the ideological “quarrel” around private or public property rights. In more simple terms, it is no longer about left and right, it is about an efficient allocation of tasks between both sectors, the one that would guarantee a more effective and efficient provision of public services with the objective of maximizing social welfare under budgetary constraints.

When used in its narrowest sense, the term “PPP” refers to a new form of arrangement between the public and the private sector, designed such as to optimize the projects’ risks since each partner will be responsible of executing the task that he is best capable of. The private partner’s involvement includes the construction of the infrastructure and the operation of the service and is remunerated by the public authority and not by the users of the service. The rationale behind the use of PPPs is that the private partner will be motivated to make the best investment choices during the construction phase such as to optimize costs during the operation phase, while the public partner retains control over the quality and the quantity of the services delivered to users. A broader definition encompasses a variety of long term contractual arrangement where the public and private sectors share the design, the financing, the provision and the management of a public service or an infrastructure project. (For more information on types and data on PPP infrastructure projects: https://ppi.worldbank.org/en/ppi)

The results of empirical studies do not lead to the same conclusions when it comes to consider whether PPP experiments have really delivered value for money or have succeeded to meet the expectations and promises for which they were adopted, namely: easing the budgetary pressures, satisfying the increasing demand for quality services by users, increasing transparency in project implementation, guaranteeing on time and within budget delivery, implementing innovative processes and improving productivity and boosting economic growth.

Given the complexity and duration of PPP projects, the ex-ante costs of preparing, awarding and executing the contracts, and the ex-post costs generated by the behavior of partners and by unforeseen events are often cited as their main weakness. The danger of opportunistic behavior is all the more menacing when the transaction is complex.

In PPP markets, the institutional quality influences the behavior of partners at each stage of the project. Indeed, empirical studies suggest that the institutional dimension affects the efficiency of PPPs through five channels: (1) the estimation of the demand for the service, (2) the quality of procurement procedures, (3) the selection of projects, (4) the sustainability of the gains that would guarantee good governance and (5) the legal and regulatory framework for PPP markets. Thus, additional costs, due to the overestimation of the size of the project, to corruption in the procurement practices and to the lack of transparency, democracy and accountability, would jeopardize the efficiency of PPPs, shake the trust between partners and hinder the expansion of PPP markets.

The implications of this analysis are structural by nature and in line with the recommendations of the OECD for the public governance of PPPs. They involve establishing a regulatory framework through the creation of an independent authority in charge of formulating sound transparent regulations for monitoring PPP arrangements, controlling their enforcement by all parties and securing the rationality of selecting a PPP for each project, the integrity of the procurement process and the fairness of the ruling in the settlement of disputes. This authority will act as a coordinator among stakeholders, ensuring that the allocation of responsibilities and performance expectations are well defined and clearly understood. The enactment of the PPP law was a good step in this direction despite some missing elements such as the stabilization clauses protecting the private partner against the discriminatory power of the government acting as a partner, a regulator and an arbitrator. In our polarized political system, the absence of independent courts and corruption threatens the efficiency of PPPs.

Once trust between citizens, investors and public authorities is rebuilt, the causality between institutional quality and the expansion of PPP markets might be reversed as spillovers from a bigger number of successful PPPs will further improve public management and governance in general at the national level.

Nicole Ballouz Baker

مصلحة الأساتذة الجامعيين في حزب القوات اللبنانيّة

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