Interview with Wilfried Sand Zantman: Toulouse School of Economics; IDEI (Industrial Economic Institute).
Wilfried SAND ZANTMAN: There are many formal definitions of a PPP that differ from country to country. Nevertheless, one can say that it is a form of arrangement by which public authorities make use of the private sector to provide public services. This arrangement can take many forms as it can concern the design, the building, the management and even the financing of those public services. One of the major features of PPP is the fact that the private sector is in general responsible for a bundle of these tasks. It can be the design and building, or the building and management of the infrastructure, and most of the time part of the financing.
Even if PPPs have been increasingly popular, they are not the only way to think of cooperative agreements between public and private actors that existed well before the idea of PPP (or PFI) emerged. Historically, States have used private actors for the management of public services (taxes collection, road management), leading to a form of franchising. In this first case, the private actors bear part of the risk but the service to be delivered is precise and well defined ex-ante. In other cases, the private sector is asked to provide the good or the infrastructure following precise instructions given the State. In contrast with procurement contracts, PPP is a global relationship involving many dimensions of a project. As with PPPs, the firm has very often some leeway to organize production, it bears some risks not only on the demand side (as in a franchise contract) but also on the technical side.
What explains the increased interest and popularity of PPPs in various sectors?
I think many reasons explain the development of PPP in the last decades but, at a general level, there has been the belief that the State cannot do everything by itself. This general statement has some practical implications.
First, PPPs have appeared as a way to ease the State budget constraint. Indeed, the investments were made by the private actors and the payments (if any) postponed until the building was achieved the building was achieved and the consumers/voters could benefit from it. This aspect raised some debate as some people saw PPPs as an accounting trick to artificially minimize public spending.
Secondly, PPPs being more global than standard procurement methods, they allow a better coordination between the various dimensions of the project. When a firm knows that it will operate the infrastructure in the future, it adjusts the effort undertaken today on the building of this infrastructure. Bundling tasks may therefore be beneficial in terms of efficiency. To give a standard example, spending some time on the design of a prison is costly but may avoid some costs in the future as less people may be needed to manage it. Delegating both building and management to one firm will lead that firm to think properly of the design ex-ante for the benefit of that same firm.
Lastly, some projects are new and even if the State has a general idea of what it wishes to obtain, it lacks the ability to define the good precisely. The PPPs are flexible enough to allow a competitive tendering on undefined objects. The firm can therefore meet the demand with a good it is creating, on behalf of the State, and competition tends to force the firm to do it at the best price. In the case of network infrastructures, it is sometimes feasible to use the previous generation network or part of it, while in other cases it is better to start everything from scratch. To consider a telecommunication example, one can think of the amount of copper lines to be kept and the choice between FFTH, FFTB or FTTN. By setting clear objectives but leaving the firm some flexibility on the best way to reach them, PPPs are much more likely to be cost-efficient than the old command-and-control approach to public service provision.
Do you think that the economic theory of PPPs provides sufficiently robust and interesting insights for decision makers? What are success factors and policy requirements for successful PPP implementation?
The types of questions economists consider are studied at a quite general, and sometimes abstract, level. They look at the best way productive activities should be organized between the State and the market, how risk should be allocated between industrial partners, or whether different types of activities should be performed by the same firm or different ones. The answers given to those questions depend on the detail of the situation studied, which can sometimes be disappointing for decision-makers who tend to favour ready-to-use solutions. Nevertheless, economic theory is helpful to think in many real situations and provides useful insights.
Let us take for example the financial aspect and the debate on whether PPPs are more (or less) cost-effective than public management. Many large firms can borrow at better terms than governments of developing countries (or local governments of developed ones) but in general the States can better diversify their risk (both in the space and in the time, i.e. between different generations). So, for very large projects, one should not expect significant gains from using private actors to finance public infrastructures.
Consider now the technical aspects of PPP. Choosing this form of partnership, where all the tasks are bundled, can generate management overload but avoids both the coordination and communication problems when many different and independent actors must work for the project. It is then worth choosing a PPP, i.e. allocating all the tasks to a single unit (possibly through a Special Purpose Vehicle), when the different tasks display positive externality. In short, if a clever design allows saving significant management costs, a PPP bundling design and operation is the right option.
More generally, one way to maximize the chance of success of a PPP is to increase the congruence of interests between the State and the firm. The State has neither the time nor the ability to monitor all the actions chosen by the firm. But this can be done indirectly by making this firm as much as possible residual claimant of the success of the project. It means that the firms must accept to take some risks, and the State must accept to leave some success dependent rewards to this firm.
Are there some relevant specificities of PPPs in the telecommunications sector? What do you see as the key to a successful partnership in the telecommunications sector?
The telecommunications sector, and more particularly for the fibre roll-out, seems to be an adequate case to think about this sort of cooperation. First, many contracts are signed by local communities who lack financial means, in contrast to the large firms operating in this sector. It is therefore one case where using private actors for financing and a better risk allocation makes real sense. Second, rolling out and managing the telecommunication infrastructure are natural complementary activities. Bundling these two activities, as it is generally the case in PPPs, is totally in line with basic economic principles. As discussed earlier, designing and building an efficient network is costly but allows saving on cost later on. The firm designing the network is all the more likely to choose the long-term rather than the short term cost-efficient solution that it will be in charge of managing the network once in operation.
Lastly, the potential complexity for building telecommunication networks makes it difficult for the State to manage or control on a day-to-day basis. A system where some room is left for private initiative--together with some risk --fits the characteristics of this industry well.
Do you think partnership between public and private sectors is the best way to reach the digital agenda objectives?
In a world where the local authorities are generally responsible for reaching the digital agenda objective, I don't see how one could do without private actors. From a technical point of view, PPPs help in choosing a cost-efficient solution. From a financing point of view, at least when part of the area covered by the infrastructure has high enough density, the participation of private funds alleviates the constraints of the public budget. One big question is whether this cooperation should be done at the State level (like in Australia), or should it be done at the local level, and only for the areas where private initiative is very unlikely to emerge. When the partnership is organized at the global level, the society may benefit from economies of scale and from the ability national governments have to obtain good favourable contractual terms. Nevertheless, such a solution does not seem relevant for countries with heterogeneous density. Indeed, some regions of those countries already benefit from the service provided by pure private players. A national partnership will distort competition and deter further private investment. Moreover, local partnerships are more likely to attract bids from medium-size firms whereas only big players can compete at the national level. Finally, the technical solutions, and the cost associated with these solutions, are different from one area to another. Adjusting the contractual conditions to the local features is more likely to lead to cost-efficient outcomes.
In Europe several PPPs projects have been developed using different investment models, how would you explain these different ways to organize cooperation between public and private actors?
When you look at different European project projects (Cornwall, Auvergne, Milan or Asturias), it is fascinating to see the variability in the way cooperation between public and private actors is organized. One key dimension explaining these differences is the density of those areas, and therefore the private profitability of the projects. In the region of Milan (Metroweb), there is no need for public funding but public participation is helpful both to use some public infrastructure and having good support from the administration. In contrast, the Auvergne region--a mountainous area with very low population density--is not profitable for a private firm. Ownership is then totally public, even though part of the risk is born by the operator, who pays part of the investment cost and receives some annual transfer from the regional body. But other dimensions must be considered, some of them probably related to national preferences for public or private control. For example, one can see that while Cornwall and Asturias could both be considered as areas with poor private profitability, the private sector has been welcomed in the British case while the Asturias region chose to keep the total control and ownership of the project. One can also consider that those two regions had different attitudes towards risk-taking, and that the different models of partnership only reflect this taste heterogeneity.
But at a global level, all those projects were originally very clear on the objectives, the duties of all contracting parties and the intermediate targets to be reached by all the actors. This transparency and the long-term commitment of public and private actors are probably the most important elements to achieve socially efficient and economically profitable results.
Conducted by Edmond BARANES
Montpellier University, France
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|Publication:||Communications & Strategies|
|Date:||Jul 1, 2013|
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