Stéphane Saussier · Julie de Brux Editors The Economics of Public-Private Partnerships Theoretical and Empirical Developments The Economics of Public-Private Partnerships Ste´phane Saussier • Julie de Brux Editors The Economics of Public-Private Partnerships Theoretical and Empirical Developments Editors Ste´phane Saussier Julie de Brux IAE Sorbonne Business School IAE Sorbonne Business School Paris, France Paris, France CITIZING Paris, France ISBN 978-3-319-68049-1 ISBN 978-3-319-68050-7 (eBook) https://doi.org/10.1007/978-3-319-68050-7 Library of Congress Control Number: 2017959881 Translation from the French language edition: E´ conomie des partenariats public-prive´, © De Boeck 2015. All Rights Reserved. © Springer International Publishing AG 2018 This work is subject to copyright. All rights are reserved by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, express or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. Printed on acid-free paper This Springer imprint is published by Springer Nature The registered company is Springer International Publishing AG The registered company address is: Gewerbestrasse 11, 6330 Cham, Switzerland Foreword The history of partnerships between the public and private sectors for providing public services goes as far back as the history of the public sector itself. Broadly speaking, the first experiences of public–private partnerships on record date back to antiquity. Ever since then, and at every stage of a country’s, a region’s, or a city’s history, when the choice of such a partnership has been made, it has been the result of various factors which are now well documented. Such a choice has ensued from expected constraints (most often financing constraints, either private or public. But often they have also been the result of constraints associated with public access to certain technologies or skills), from preferences (out of political or operational pragmatism, or as a result of ideology), from the rejection of the most extreme production methods (either purely private or purely public) blamed for quantity or quality rationing or by higher costs of service, or from a reaction to governance choices (in some cases to fight corruption, collusion, or political capture but in others to facilitate such perversions of public choice mechanisms). However, our conceptual and analytical understanding of how important the origin of this decision-making process really is, and of the sheer diversity of the scope the partnership can take, has a much shorter history. It is arguably not much longer than 30 years. It all started with a generation of outstanding researchers whose names and contributions are crucial to any theoretical or applied research focusing on those public–private partnerships. The generation in question includes Akerlof, Baron, Hart, Klemperer, Laffont, Maskin, McAfee, McMillan, Meyerson, Milgrom, Riley, Sappington, Stiglitz, Tirole, Vogelsang, and Williamson (to name but a few). To this day, their 1980s’ research still serves as a framework for our collective understanding of the incentives underlying the various stages of any interaction between the public and private sectors in this type of contractual agreement. If these stages are better known today, it is to a large extent thanks to this initial body of work, but also to developments in the fields of game theory and contract theory, as well as to a long series of subsequent empirical contributions which have come to refine, expand, clarify, and test the theoretical analyses of the 1980s and v vi Foreword early 1990s. This research highlights the efficiency conditions at each recurring stages in the timeline of partnerships, from the moment when the decision to start a collaboration is made by a politician or civil servant to the point when the service, asset, or investment the public administration is seeking to procure is delivered. Once the decision to collaborate has been made, the first stage of its implemen- tation consists in detailing specifically what will be the subject of a contract between the two parties and estimating how consistent these specifications are with the demand side. This initial estimate aims to provide a first assessment of the consistency between the total costs of the various possible specifications and the expected financing structure, particularly its distribution between the taxpayers and the direct beneficiaries of the public service (the two obvious contributors to public finance). Then comes the time to organize a call for tenders and to draw up the regulations to which all involved parties will be subject, as well as their respective rights and obligations. At this point, decisions must be made about implementing the various commitments and about oversight and penalty imposition in case of noncompliance with regulations, and the efforts necessary to ensure a successful collaboration—particularly its consistency with the initial decision—must be antic- ipated. This stage also involves carrying out a more precise assessment of the financial and economic consistency between the cost of the rights and obligations specified under the final contract and their financing, including financing costs for both the public and private sectors. The next stage consists in implementing the decision and overseeing the process, generally through regulatory mechanisms that often leave significant room for subjectivity, as not everything can be provided for under the contract, which is necessarily incomplete. It also involves taking into account the possibility of a necessity—or at least a desire—on the part of one of the parties to renegotiate certain provisions of the contract. And this series of predict- able stages occurs within an institutional context that can be delineated and set up prior to, during, or after partnership preparation and implementation. As a whole, the theoretical and empirical literature that has allowed for a deeper understanding of each of these stages constitutes what Professor Saussier has called the economics of public–private partnerships. Although rich and fruitful, this literature suffers from a major problem. It is largely perceived as too difficult to understand by stakeholders outside of academia and/or the field of economics. This perception is not unreasonable given that this is an incredibly extensive, heteroge- neous, somewhat fragmented, and often very complex literature. The main conse- quence of this is that at best, the results of this research filter in via interviews or less technical articles published in the general press, which can sometimes be reductive. But among the operators of public–private collaborations—the group which could benefit most from lessons drawn from this research, the most widespread reaction is simply one of rejection. The book you are reading makes it unacceptable to reject such knowledge on account of it being too difficult to grasp for anyone with a true interest in PPPs who is eager to make sure that expertise furthers the interests of the community instead of serving mere ideological choices or needs arising from political, financial, or institutional constraints. What this book accomplishes is no small feat, as it Foreword vii manages simultaneously to synthetize an extensive literature in a rigorous manner and to “translate” it into a language made simpler by the absence of a jargon which otherwise so often characterizes it. This book perfectly illustrates how to dissem- inate technical academic knowledge in such a way that it can be put to direct use (if possible) and submitted to informed criticism (as opposed to blind and dogmatic) when necessary. There is no doubt that it will have a major operational impact, both among experts in charge of preparing the legal material for contracts and among civil servants responsible for making key decisions at each stage of partnership implementation. This book is also a small gem from an academic point of view (although not actually small per se, as it is rather long), in that it covers every essential aspect of the subject to which economists have contributed. Each chapter provides a thorough literature review, thus allowing academic readers to get quickly up to date in the key dimensions of the subject. It will most likely be adopted by many professors as a reference book for courses in the economics of regulation and competition, public economics, or contract theory. All in all, very few books manage to target such a large audience in such a technical field. The authors of this book have risen brilliantly to the challenge. Public service users and taxpayers will undoubtedly be its main beneficiaries. Indeed, one cannot read it without considering how much is still left to do in order to adjust our use of an instrument that has the potential to be immensely useful but is also far more sensitive to manipulation, incompetence, and ignorance than politicians and economic operators are willing to admit, in Europe or else- where. ECARES, Universite´ Libre de Antonio Estache Bruxelles Brussels, Belgium Contents Introduction: The Economics of Public–Private Partnerships .......