“When Politics and Lobbyism Combine to Promote White Elephants by Using Ppps”

Institut de Recerca en Economia Aplicada Regional i Pública Document de Treball 2018/23 1/25 pág. Research Institute of Applied Economics Working Paper 2018/23 1/25 pág. “When politics and lobbyism combine to promote white elephants by using PPPs” Albalate D, Bel G & Gragera A 4 WEBSITE: www.ub.edu/irea/ • CONTACT: [email protected] The Research Institute of Applied Economics (IREA) in Barcelona was founded in 2005, as a research institute in applied economics. Three consolidated research groups make up the institute: AQR, RISK and GiM, and a large number of members are involved in the Institute. IREA focuses on four priority lines of investigation: (i) the quantitative study of regional and urban economic activity and analysis of regional and local economic policies, (ii) study of public economic activity in markets, particularly in the fields of empirical evaluation of privatization, the regulation and competition in the markets of public services using state of industrial economy, (iii) risk analysis in finance and insurance, and (iv) the development of micro and macro econometrics applied for the analysis of economic activity, particularly for quantitative evaluation of public policies. IREA Working Papers often represent preliminary work and are circulated to encourage discussion. Citation of such a paper should account for its provisional character. For that reason, IREA Working Papers may not be reproduced or distributed without the written consent of the author. A revised version may be available directly from the author. Any opinions expressed here are those of the author(s) and not those of IREA. Research published in this series may include views on policy, but the institute itself takes no institutional policy positions. Abstract Theoretical insights into the cooperation between public and private partners (PPPs) suggest that they can be an effective tool for preventing ‘white elephant’ type projects. However, various case studies have shown that this belief is largely dependent on the effective transfer of operational risk to the private partner, and on the application of user-pay funding. This paper goes one step further and explores the idea that private partners that participate in PPPs with no substantial risk transfer – and under heavily subsidized schemes – can act as lobbies, exerting pressure to develop white elephants. JEL classification: L14, L33, L51. Keywords: PPP; political favoritism; infrastructure; Daniel Albalate: Universitat de Barcelona, Departament d’Estadística, Econometria i Economia Aplicada, Avda. Diagonal 690, 08034 (Barcelona), Telf: +34.93.4031131, E-mail: [email protected] Germà Bel: Department of Econometrics, Statistics and Applied Economics & GiM-IREA University of Barcelona. C/ John Keynes 1-11, 08034 Barcelona. Tel: 34.93.4031131 Fax: 34.93.4024573 E-mail: [email protected] Albert Gragera: Technical University of Denmark, Produktionstorvet Building 426, 2800 Kgs. Lyngby, Denmark. Acknowledgements This research has enjoyed financial support from the Spanish Ministry of Economy and Competitiveness (ECO2016- 76866-R) and from the Government of Catalonia (2017 SGR644). No sponsor has been involved in the design and implementation of the research. We are thankful for useful comments and suggestions received in the 7th Conference of the International PPP Scholars Network (Toronto, September 2018). 1 Introduction White elephants are considered sacred in Thailand and, as such, cannot be put to work like other elephants despite the high cost of their maintenance. From here, the figurative use of the term ‘white elephant’ to designate a facility with very little activity and high maintenance costs. The first documented use can be traced to the Illustrated Times (London) of 1863 (Tréguer, 2017) in a reference to the Drury Lane Theatre. Ten years later, the New York Times corroborated this usage (Bullen, 2001), and explained that the kings of Siam used to give a white elephant to those courtiers that had fallen into disgrace, given that maintaining the gift would have the effect of ruining the receiver. This story has, however, been denied by Thai historians.1 Are white elephants, in practice, useless elements that are expensive to keep? Or are they a sign of possession conferring authority and legitimacy on their owner? Or are they simultaneously both things, according to different traditions of governance? Perhaps the best interpretation was provided by Mariano Rajoy, Prime Minister of Spain from December 2011 to June 2018. In an interview on Spanish TV (Salvados, SextaTV, April 4, 2016), Mr. Rajoy boasted that “We have good trains and freeways”. When the interviewer interrupted him by saying “But empty”, Mr. Rajoy responded “Yes, empty, but we have them”. Indeed, two traditions in one. Little wonder that Spain stands very high - if not first - in the ranking of countries in which white elephants have been promoted and implemented by different governments of different ideological orientation (Bel, 2010; Albalate, Bel, and Fageda, 2015; Bel, Bel-Piñana, and Rosell, 2017; Rodríguez-Pose, Crescenci, and Casaldo, 2018). 1 For example, Ringis (1996) claims that a Siamese king would never give away a white elephant because, far from considering it a burden, he would have seen it as a sign of virtue, a possession that conferred on him authority and legitimacy. 0 In the field of the social sciences, a ‘white elephant’ has been defined by Robinson and Torvik (2005) as an investment project that has a negative social outcome, and one that represents a special form of inefficient redistribution. Such projects are politically attractive when politicians find it difficult to make credible promises to their supporters. In fact, it is the very inefficiency of these projects that makes them attractive politically, an interpretation that is gaining increasing attention in the economics literature (i.e. Ganuza and Llobet, 2018) Although public-private partnerships (PPPs) have long been seen as a filter for white elephants, warnings regarding the strict conditions for this filter to work have been increasingly voiced in the literature. For example, Engel, Fischer, and Galetovic (2011:16) warn that “PPPs will not filter such projects out if they are financed with subsidies or if there is an implicit guarantee that the government will bail out a troubled concessionaire” (see also Iossa and Martimort, 2013:208). In this regard, Bel, Bel-Piñaña, and Rosell (2017) actually show that Spanish governments have used PPPs to promote white elephants, using them to avoid short-term budgetary restrictions. The authors show that governments provide wide guarantees in case of concession failure, and illustrate the mechanism employed in cases involving toll motorways, high-speed rail lines and natural gas storage facilities. Several studies for other countries have shown how PPPs have been primarily used for financial motivations, and have frequently delivered unsatisfactory results: for instance, Shaoul, Stafford and Stapleton (2006, 2010) for the United Kingdom, and Reeves (2013, 2015) for Ireland. While papers studying financial motivations and disappointing results are increasingly available in the literature, there is lack of in-depth analysis on how and why political processes and lobbyism combine to promote wrong projects. In this paper, we contribute to the literature by showing that private partners in PPPs can actually lobby governments and the media to promote white elephants. Indeed, this is merely a logical consequence of PPPs not 1 being able to filter out white elephants. If PPPs are financed with subsidies and/or the government provides a bail-out guarantee in case of trouble, obtaining such contracts can only yield profits. We illustrate this claim by undertaking a study of the light rail (or fast tram) project implemented in the city of Barcelona. Barcelona’s light rail system is arguably the infrastructure project that has generated most technical studies and attracted most media coverage in the metropolitan area in recent decades. It arouses considerable feelings both in favor and against its implementation, while confronting substantially different ideological views on just how the city should address the mobility challenges it faces. It is a project that has mobilized all major interest groups concerned with lobbying for a specific future vision of urban mobility and for transport investment decisions that favor their interests, while at the same time it holds up a mirror to all the dysfunctions that characterize policy evaluation and the decision-making process. The remainder of the paper is organized as follows. Next, we briefly review the literature on institutional PPPs, the organizational form taken by the public private partnership of Barcelona’s light rail system. We then document the context and implementation of the systems first lines. Following on from that, we analyze the planning of the ‘connection project’ (Tram-Diagonal) to link up these lines, and discuss the roles, incentives and actions of the relevant actors in this process. Finally, we draw our main conclusions and policy implications. 2 Institutional PPPs. Related literature There is much scholarly debate as to whether a collaborative partnership between the government and private actors can be considered a PPP or not. For instance, in the domain of industrial organization the bundling of construction and operation phases and a substantial risk transfer to the private partner are quite frequent (see Albalate, Bel, and Geddes, 2017). 2 One

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