Thursday, July 3, 2014

What do we know about PPPs

An interesting academic article:  
Iossa, E.; Martimort, D. (2013), “The simple microeconomics of public-private partnerships”, CEIS Tor Vergata Research Paper Series, 6 (12), 139. 
This article presents a basic theoretical framework that is extended to analyze a variety of important topics in PPPs. The basic theory and its extensions are used to examine stylized facts and empirical evidence on the topic.
A PPP is defined in the context of this article as a long term project (15 to 30 years) for which the public sector contracts with a private consortium, bundling construction of the infrastructure and provision of the service in the same contract.
The basic model merges the literature on PPPs based in incentive theory with more than one dimensions of effort, and the literature based on property rights. In the basic model a key issue is the complementarity or substitutability of tasks. For example, if an investment effort in the quality of the infrastructure contributes to reducing the costs of operating the service, then providing incentives for this effort in a bundling contract contributes to less costly operation. However, if the externality of quality investment on operation costs is negative, then bundling is counterproductive.
The insights from the basic model can be used to analyze what proportion of the revenue risk should be transferred to contractors. If the contractor cannot influence demand (like with prisons), then the contractor should not bear demand risk at all. In cases where the contractor can influence demand risk, this should be borne accordingly by this contractor. This happens with leisure centres, with transportation projects being in-between.
Each section presents either the basic model or an extension of it, and finishes with how the existing theoretical literature has covered this particular issue and what is the empirical evidence about it. In this way, the paper is a good survey of the empirical literature as well, although it reveals an excessive variety of empirical approaches and a lack of strong conclusions as to the impact of PPPs on costs and quality.
The extensions cover quality issues, uncertainty and renegotiations, cost overruns and political problems concerning lack of commitment. In all these cases, it is shown that PPPs have the potential to increase efficiency, but their success depends always on the details of contractual conditions and execution.
This is the paper that provides a more comprehensive review of the existing theoretical literature on PPPs and at the same time of the existing empirical evidence. (The full note can be read here, in the second PPPs newsletter of the Public-Private Sector Research Center at IESE).

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