The analysis also derives lessons on ways to structure contracts for better results by examining the PPP highway sector in India, for which rich data are available. PPPs for national highways are more likely to terminate early if, through their contractual obligations, they put the private sponsor under larger financial commitments—namely, higher payments to the government and a larger share of debt financing. The pattern of higher payments to the government might reflect a perverse incentive structure that encourages private partners to make overoptimistic bids on payments to the government in order to win tenders on PPP contracts, which have been financed largely by public banks.
Balancing the Efficiency Gains from PPPs against Their Risks and Liabilities A PPP is an organizational arrangement that enables public and private institutions to cooperate in providing a public project— which in the context of this chapter is an infrastructure project. As Grimsey and Lewis (2017) point out, a PPP is an enduring and relational partnership, with each partner bringing something of value (money, property, authority, reputation) to the partnership.3 A key defining feature of a PPP is the sharing of responsibilities and risks of outcomes between the partners. Underpinning the partnership is a framework contract that sets out the “rules of the game” delineating each partner’s rights and obligations. Because of uncertainties inherent in long-term projects, PPP contracts are incomplete: that is, they do not cover all possible scenarios, and they leave room for renegotiation (Guasch 2004). PPPs can offer numerous efficiency gains. Well-structured PPPs have the potential to provide infrastructure services at a relatively low cost to society. This can increase a country’s capacity to invest in infrastructure, given that some investments would potentially be feasible only under a PPP arrangement (Iossa and Martimort 2012). PPPs aim to efficiently allocate among the partners the risks
P UBLI C - P RIV A TE P A RTNERS H I P S IN SOUT H A SI A
and responsibilities associated with different stages of the project to maximize the value for money. Outsourcing of responsibilities to the private sector and bundling of investment and service provision can yield efficiency gains. Outsourcing allows the public sector to leverage private sector expertise and gain organizational efficiency in service provision. The potential of knowledge and technology spillovers from foreign sponsors may be better harnessed by the host country within a PPP relationship (ITF 2018). Competitive procurement to select the private partner can also drive the cost down compared to in-house public sector provision. PPPs bundle investment and service provision—that is, financing, design, construction, rehabilitation, operation, and maintenance—into a single long-term contract. This contrasts with traditional procurement practices, in which the government separates the contractual relationships for each phase of the infrastructure investment and operation. The idea behind bundling is to combine the two major stages of a typical infrastructure project (investment and service provision) to achieve efficiency gains. When these two stages are bundled, the private party has the incentive to adopt improvements during the design and construction stages that reduce operation and maintenance costs or increase the quality of services and revenues during operation, as long as the additional construction costs are offset by higher returns in the latter stage.4 Efficiency gains from PPPs may also arise from mobilizing private finance. Private finance may provide outside expertise in valuing risks and monitoring effort that public finance lacks. Hence, when private creditors that are specialized in project finance are involved in financing, private finance may resolve uncertainty and agency problems faced by the government (Iossa and Martimort 2012, 2015).5 By providing incentives for efficient termination, private finance may also resolve soft budget constraints (privileged access to additional financing due to the implicit guarantee of unconditional government support) through which governments can keep bad projects alive (de Bettignies and Ross 2009).6
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