Ppps), Which Bundle Fi Nance, Construction, and Operation Into a Long-Term Contract with a Private Fi Rm
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Cambridge University Press 978-1-107-03591-1 - Th e Economics of Public-Private Partnerships: A Basic Guide Eduardo Engel, Ronald D. Fischer and Alexander Galetovic Frontmatter More information THE ECONOMICS OF PUBLICPRIVATE PARTNERSHIPS In the past 25 years, many developing and advanced economies have introduced public-private partnerships (PPPs), which bundle fi nance, construction, and operation into a long-term contract with a private fi rm. In this book, the authors provide a summary of what, they believe, are the main lessons learned from the interplay of experience and the academic literature on PPPs, addressing such key issues as when governments should choose a PPP instead of a conventional provision, how PPPs should be implemented, and the appropriate governance structures for PPPs. Th e authors argue that the fi scal impact of PPPs is similar to that of conventional provisions and that they do not liberate public funds. Th e case for PPPs rests on effi ciency gains and service improvements, which oft en prove elusive. Indeed, pervasive renegotiations, faulty fi scal accounting, and poor governance threaten the PPP model. Eduardo Engel is professor of economics at the University of Chile and visiting professor at Yale University. He is a Fellow of the Econometric Society and was awarded the society’s Frisch Medal in 2002. He has published in leading academic journals, such as the American Economic Review , Econometrica , the Journal of Political Economy , and the Quarterly Journal of Economics . He holds a PhD in economics from Massachusetts Institute of Technology, a PhD in statistics from Stanford University, and an engineering degree from the University of Chile. Ronald D. Fischer is professor of economics in the industrial engineering depart- ment of Universidad de Chile in Santiago. His research is on the economics of public-private partnerships; the link between fi nancial market ineffi ciencies and economic performance; and the economics of regulated industries, especially seaports. He has published widely in leading academic journals, including the Journal of Political Economy and the Quarterly Journal of Economics . He holds a PhD in economics from the University of Pennsylvania. Alexander Galetovic is professor of economics at Universidad de los Andes in Santiago, Chile. His research is on the economics of public-private partner- ships, the determinants of equilibrium industry structure, and the economics of electricity. He has published in leading economics journals, including the Journal of Political Economy , the Review of Economics and Statistics , the Journal of the European Economic Association , and the Harvard Business Review . He holds a PhD in economics from Princeton University. © in this web service Cambridge University Press www.cambridge.org Cambridge University Press 978-1-107-03591-1 - Th e Economics of Public-Private Partnerships: A Basic Guide Eduardo Engel, Ronald D. Fischer and Alexander Galetovic Frontmatter More information © in this web service Cambridge University Press www.cambridge.org Cambridge University Press 978-1-107-03591-1 - Th e Economics of Public-Private Partnerships: A Basic Guide Eduardo Engel, Ronald D. Fischer and Alexander Galetovic Frontmatter More information Th e Economics of Public-Private Partnerships A Basic Guide EDUARDO ENGEL University of Chile RONALD D. FISCHER University of Chile ALEXANDER GALETOVIC Universidad de los Andes, Santiago, Chile © in this web service Cambridge University Press www.cambridge.org Cambridge University Press 978-1-107-03591-1 - Th e Economics of Public-Private Partnerships: A Basic Guide Eduardo Engel, Ronald D. Fischer and Alexander Galetovic Frontmatter More information 32 Avenue of the Americas, New York, NY 10013-2473, USA Cambridge University Press is part of the University of Cambridge. It furthers the University’s mission by disseminating knowledge in the pursuit of education, learning, and research at the highest international levels of excellence. www.cambridge.org Information on this title: www.cambridge.org/9781107632783 © Eduardo Engel, Ronald D. Fischer, and Alexander Galetovic 2014 Th is publication is in copyright. Subject to statutory exception and to the provisions of relevant collective licensing agreements, no reproduction of any part may take place without the written permission of Cambridge University Press. First published 2014 Printed in the United States of America A catalog record for this publication is available from the British Library. Library of Congress Cataloging in Publication data Engel, Eduardo. Th e Economics of public-private partnerships : a basic guide / Eduardo Engel, University of Chile, Ronald D. Fischer, University of Chile, Alexander Galetovic, Universidad de Los Andes, Santiago, Chile. pages cm Includes bibliographical references and index. ISBN 978-1-107-03591-1 (hardback) – ISBN 978-1-107-63278-3 (paperback) 1. Public-private sector cooperation. I. Fischer, Ronald D. II. Galetovic, Alexander. III. Title. HD3871.E54 2014 338.8′7–dc23 2014011189 ISBN 978-1-107-03591-1 Hardback ISBN 978-1-107-63278-3 Paperback Cambridge University Press has no responsibility for the persistence or accuracy of URLs for external or third-party Internet Web sites referred to in this publication and does not guarantee that any content on such Web sites is, or will remain, accurate or appropriate. © in this web service Cambridge University Press www.cambridge.org Cambridge University Press 978-1-107-03591-1 - Th e Economics of Public-Private Partnerships: A Basic Guide Eduardo Engel, Ronald D. Fischer and Alexander Galetovic Frontmatter More information Contents L i s t o f T a b l e s p a g e viii List of Figures ix P r e f a c e xi A c k n o w l e d g m e n t s xv 1 I n t r o d u c t i o n 1 1.1 Th e Scope of Th i s B o o k 2 1.2 Trends 4 1.3 Problems with Public Provision 8 1.4 Promises 11 1.5 Practice 17 1.6 Book Outline 20 Bibliographic Notes 21 2 Country Studies 23 2.1 United Kingdom 23 2.2 Chile 30 2.3 United States 41 2.4 China 50 2.5 Conclusion 60 3 Highways 62 3.1 Physical and Economic Characteristics 62 3.2 When Are PPPs Appropriate for Highways? 63 3.3 How to Implement PPPs 65 3.4 Conclusion 70 Bibliographic Notes 71 v © in this web service Cambridge University Press www.cambridge.org Cambridge University Press 978-1-107-03591-1 - Th e Economics of Public-Private Partnerships: A Basic Guide Eduardo Engel, Ronald D. Fischer and Alexander Galetovic Frontmatter More information vi Contents 4 Incentives 72 4.1 When Do PPPs Work? 73 4.2 Risk Allocation and Incentives in PPPs 76 4.3 Unsolicited Proposals 79 4.4 Conclusion 80 Bibliographic Notes 81 5 Private Finance 83 5.1 Financial Arrangements in PPPs 84 5.2 Th e PPP Premium 94 5.3 Conclusion 102 Bibliographic Notes 103 6 Public Finance 104 6.1 Fiscal Accounting 104 6.2 Relieving Government Budgets 110 6.3 Th e Optimal Contract 113 6.4 Conclusion 120 Bibliographic Notes 120 7 Renegotiations 122 7.1 Accounting and Spending Anticipation 124 7.2 Adverse Selection and Moral Hazard 125 7.3 Flexibility and Renegotiation 126 7.4 Renegotiation and Contracting 129 7.5 Conclusion 130 Bibliographic Notes 131 8 Governance 132 8.1 Why PPPs Need Good Governance 132 8.2 PPPs and Governance: Practice 134 8.3 A Proposal for PPP Governance 136 8.4 Conclusion 138 Bibliographic Notes 138 9 When and How to Implement PPPs 139 9.1 When to Use PPPs 139 9.2 How to Design and Implement PPPs 143 9.3 Th e Future of PPPs 146 Appendix: Formal Model 149 A.1 Basic Setup 150 A.2 An Irrelevance Result 153 A.3 Implementation 154 © in this web service Cambridge University Press www.cambridge.org Cambridge University Press 978-1-107-03591-1 - Th e Economics of Public-Private Partnerships: A Basic Guide Eduardo Engel, Ronald D. Fischer and Alexander Galetovic Frontmatter More information Contents vii A.4 Effi ciency Gains: Cost of Disbursing Funds 155 A.5 Effi ciency Gains: Noncontractible Innovations 156 A.6 Relaxing Assumptions 160 R e f e r e n c e s 163 I n d e x 173 © in this web service Cambridge University Press www.cambridge.org Cambridge University Press 978-1-107-03591-1 - Th e Economics of Public-Private Partnerships: A Basic Guide Eduardo Engel, Ronald D. Fischer and Alexander Galetovic Frontmatter More information Tables 1.1 PPP investment in Europe page 5 1.2 Toll type for PPP roads, bridges, and tunnels in Europe, 1990–2007 6 1.3 PPP investment in developing countries, 1990–2011 7 2.1 Th e Main characteristics of the Chilean PPP system 31 2.2 PVR highway concessions in Chile and winning bids 34 2.3 Investments and renegotiations in Chilean PPPs, 1997–2007 39 2.4 Transport PPPs in the United States, 1996–2010 42 2.5 Investment in transport infrastructure in China 52 2.6 Road infrastructure investment in China 53 2.7 Characteristics of Chinese PPPs in the transport sector, 2000–2010 54 3.1 Demand uncertainty in Chilean toll roads: Percentage increase 66 4.1 Th e economic environment and the choice of organizational f o r m 7 4 5.1 Risk allocation, source of revenues, and contractual form 97 5.2 PFI lead times by sector 101 5.3 Percentage of projects that were on time and on budget 102 viii © in this web service Cambridge University Press www.cambridge.org Cambridge University Press 978-1-107-03591-1 - Th e Economics of Public-Private Partnerships: A Basic Guide Eduardo Engel, Ronald D. Fischer and Alexander Galetovic Frontmatter More information Figures 1.1 PPP investment in Europe, 1990–2011 page 5 1.2 PPP investment in low- and middle-income countries, 1990–2011 6 1.3 Growth of PPP investment in the U.S.