A view the Istanbul New Airport under construction

Economics

El concierto de las PPP

Apr 30, 2018 Ricardo Hausmann

CAMBRIDGE – Según lo cuenta una antigua parábola, hubo una vez una competencia entre dos pianistas. Después de escuchar al primero, el jurado otorgó el premio al segundo pianista. No había necesidad de escuchar más, ya que ¿quién podría ser peor?

Esta misma lógica parece aplicarse a las alianzas público-privadas (PPP, según su sigla en inglés) creadas para proporcionar infraestructura como vialidad, energía eléctrica, agua potable, aeropuertos, o el desarrollo de zonas turísticas importantes. De hecho, es esencial escuchar a los dos concursantes, y evaluar sus fortalezas y debilidades.

El primer pianista es la provisión pública, la cual enfrenta dos problemas: uno de incentivos (o de corrupción) y el otro presupuestario. El de incentivos obedece al hecho de que cuando un gobierno licita un proyecto vial, la empresa que gana la licitación puede escatimar esfuerzos porque se quedará con lo que ahorre. Es posible que hasta comparta esos ahorros con los funcionarios gubernamentales encargados de supervisar el contrato. El problema presupuestario se deriva de que hay un límite a la cantidad de deuda que un gobierno puede contraer de modo seguro, puesto que para repagar la deuda tendrá que imponer impuestos futuros. En consecuencia, muchos proyectos valiosos deben ser postergados.

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0 Comments on this paragraph, 11 Comments on this article

Fuad Huseynov Jul 6, 2018

Thank you for this article Professor Hausmann. Please allow me to disagree with some of your arguments:
1. Incentive/corruption problem strongly persists in your proposed modality [Government builds the road and sells for the O&M concession] whereas under conventional PPP procurement, involvement of private banks and MDBs in due diligence and appraisal could limit possibilities for malfeasance and provide for better transparency in transactions.
2. Budget/public debt problem should not be considered as an incentive for deciding to undertake PPPs as most PPPs require fiscal commitments, it is just those commitments are usually spread out for longer periods.
3. Higher cost of capital of private finance in PPPs [as opposed to Government borrowing] is largely debated issue as in most of the cases in Government borrowing the risks [and risk premiums] are not adequately priced.

I would be keen to learn more about your Center’s collaboration with the Government of Albania. As member state of the Islamic Development Bank (IsDB), Albania could benefit from our PPP advisory support, and I would be happy to explore how we can be of help.
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Diego Durango May 8, 2018

There is nothing wrong with government tendering an operating concession on existing infrastructure – financially easy, but often politically difficult. What’s intriguing about this article is the explanatory simplicity of the “cashing out” concept, and the link to newly developed infrastructure.

Clearly the private side in a PPP transaction would benefit from the resulting elimination of capitalised interest and planning & construction completion risks. The government can benefit from this shift of risks also – provided it has the institutional capacity and access to design and construction resources needed to deliver the traditionally developed project, and can resist the political pressures to build more/better than is required.

However, I agree with Mr. Kurkowski that the “cashing out” idea needs one qualification – there are natural limits to how much can be cashed out and exceeding those limits can cause the completed project to be considered a failure. There are numerous examples of the problem at this point – push up user fees to repay debt, drive down the number of users, stifle wider economic benefits, increasing the chance governmental revenue guarantees need be called on, perceived failure.

If one accepts this qualification, the modified concept becomes “cash out to the extent reasonable”. This concept can be used beneficially when undertaking a series of projects, or cutting a larger project into stages. The government must find the funds for the first project, but can then “cash out to the extent reasonable” and reinvest in a subsequent project/stage. It makes it simpler for government to consider what would reasonably constitute a public perception of project success.

Using the toll road example, the operating concession procurement can be designed around toll levels that generate reasonable revenue while still keeping the level of road usage high enough to ensure wider economic benefits to the public and government. The principle basis of the procurement then becomes the tendered concession payments, and these are a direct reflection of how much of the government’s investment in the development of the project can be “cashed out”.

There would likely still be a need for some governmental guarantees; Mr. Agarwal’s comments on latent construction defects are a good example, and toll revenue guarantees would also likely remain although mitigated by focusing the choice of toll levels on “willingness to pay” from the beginning.

An investment vehicle that focused on assisting governments with the institutional and funding problems associated with developing and “cashing out” of a series of projects in a pipeline of could be useful – so often in PPP’s the focus is on taking the biggest possible first step, rather than making steady progress on a successful longer journey. Good luck with that!
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2vellezerit May 7, 2018

The problem in Albania is not in the partnership, but in the corrupt governments that seems the PPP as just another cow to be milked. Whichever P you choose, the Socialist cronies will make sure it is milked appropriately.
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Andis Harasani May 6, 2018

You are loosing your touch Professor. Going from Liberia to Albania is like the second pianist wasnt even a pianist but a painter. Liberia electricity infrastructure was destroyed by civil war. And as for Albania this is the sixth year your Harvard team is working in Albania. Of course things have been going from bad to worst. Have you seen the concession the Albanian goverment have given? Who won those consession and what their experience was? Do you know how much weight they carry on the budget? Do you know that 90 % of those concessions are pure roalties to oligarchs? How will you feel Professor a few years from now, when the Albanian economy will have the same luck as the Venezuelian economy? Hope I am wrong, but I was expecting your team to have more impact, and if not listened enough to give up advising some govt that do not want to be adviced. I am sure you know how often the Albanian Govt have implied that your team have given the approval of those ridiculous PPP
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Nalin Agarwal May 5, 2018

On "The best option may be for the government to build the road and sell the concession for operation and maintenance."...
The problem of asset quality is a serious one that this solution may not address. In India for eg (where i have worked in the infra/power sector for many years), construction is a stage of constant negotiation for the project developer - with the primary contractor, the sub-contractors, labour leaders, the local community and lastly, with the government itself (separately at the local, state and central levels). Negotiations with the first set of stakeholders (primary contractor, the sub-contractors, labour leaders) is primarily around ensuring the requisite, contractually-defined technical and quality standards are being followed - infrastructure projects are so technically complex that post facto asset quality reviews may not bring forth any deficiencies, therefore the only solution is continuous monitoring and review during construction.
If the government is tasked with execution of the EPC phase, there is no end to the degree of corners they are likely to cut - and there will be no definitive way of knowing where quality deficiencies or inconsistencies exist. This will lead to a situation where no private developer will agree to taking over the project for long-term O&M.
I believe the better solutions to addressing the problems you have highlighted lie in
(1) quicker approvals (underpinned by a time-bound, deemed approval principle)
(2) debt guarantees by the government during construction (avoiding any need for budgetary outlays, and making do only with provisions for contingent liabilities)
(3) pre-execution land acquisition
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Gjergj Erebara May 3, 2018

As an Albanian, I am surprised that Professor Hausmann is working to create such vehicle for Albania at this time. As far as I am aware, Albania has already awarded all the concessionary agreements that it can and under heavy criticism from the International Monetary Fund and full of allegations of corruption. When the vehicle designed by Harvard’s Center for International Development will be ready, it will most probably be also useless since all the PPPs that Albania could give have already gone.
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David Figuera May 1, 2018

Building by the government does not eliminate the corruption problem. But much more important is that that government needs to develop road-building capacity (x the different types of projects it builds) and operate and maintain a builder organization (equipment and all) which gets all contracts /orders to build. That could be the role played by something like the Army Corps of Engineers. But at what cost?
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Per Kurowski Apr 30, 2018

“The best option may be for the government to build the road and sell the concession for operation and maintenance.” As long as the government does not then just maximize short-term fiscal revenue, leaving the need for impossibly high service tariffs. https://perkurowski.blogspot.com/1997/06/hidden-taxation-through-privatization.html
- Andis Harasani May 6, 2018
  
  Thanks for sharing this. Very interesting
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Marc Laventurier Apr 30, 2018

Ricardo seems to be playing with his PPPs... Liberia's 2016 per capita GNI is given as PPP USD 700 (current international $). Liberia's wired telephone infrastructure was destroyed by civil wars ending in 2003, and it's cell system is GSM 2G, the world standard for poor nations, and easy to erect. As to "roads, power, water, airports, or the development of major tourist areas", you can't get there from here...
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