The simple micro-economics of public-private partnerships

We build a unified theoretical framework to analyze the main incentive issues in Public Private Partnerships (PPPs) and the shape of optimal contracts in those contexts. We present a basic model of procurement in a multitask environment in which a risk-averse agent chooses unobservable efforts in cost reduction and quality improvement. We begin by studying the effect on incentives and risk transfer of bundling building and operation into a single contract, allowing for different assumptions on the contractual framework and the quality of the information held by the government. We then extend the basic model in several directions. We consider the factors that affect the optimal allocation of demand risk and their implications for the use of user charges and the choice of contract length. We study the relationship between the operator and its financiers and the impact of private finance. We discuss the trade-off between incentive and flexibility in long-term PPP agreements and the dynamics of PPP contracts, including cost overruns. We also consider how the institutional environment, and specifically the risk of regulatory opportunism, affects contract design and incentives. We conclude with some policy implications on the desirability of PPPs

The theory of incentives applied to the transport sector

Building upon Iossa and Martimort (2008), we study the main incentive issues and the form of optimal contracts for Public Private Partnerships (PPPs) in transports. We present a basic model of procurement in a multitask environment in which a risk-averse firm chooses unobservable efforts in infrastructure and service quality. We begin by analyzing the effect on incentives and risk transfer of bundling building and operation into a single contract. We consider the factors that affect the optimal allocation of demand risk and their implications for the choice of contract length. We discuss the dynamics of PPP contracts and how the risk of regulatory opportunism affects contract design and incentives

The Simple Micro-Economics of Public-Private Partnerships

We build a unified theoretical framework to analyze the main incentive issues in Public Private Partnerships (PPPs) and the shape of optimal contracts in those contexts. We present a basic model of procurement in a multitask environment in which a risk-averse agent chooses unobservable efforts in cost reduction and quality improvement. We begin by studying the effect on incentives and risk transfer of bundling building and operation into a single contract, allowing for different assumptions on the contractual framework and the quality of the information held by the government. We then extend the basic model in several directions. We consider the factors that affect the optimal allocation of demand risk and their implications for the use of user charges and the choice of contract length. We study the relationship between the operator and its financiers and the impact of private finance. We discuss the trade-off between incentive and flexibility in long-term PPP agreements and the dynamics of PPP contracts, including cost overruns. We also consider how the institutional environment, and specifically the risk of regulatory opportunism, affects contract design and incentives. We conclude with some policy implications on the desirability of PPPs.Contracting out, public-private partnerships, public-service provision

Incentive Regulation in Theory and Practice: Electricity Distribution and Transmission Networks

Modern theoretical principles to govern the design of incentive regulation mechanisms are reviewed and discussed. General issues associated with applying these principles in practice are identified. Examples of the actual application of incentive regulation mechanisms to the regulation of prices and service quality for 'unbundled' transmission and distribution networks are presented and discussed. Evidence regarding the performance of incentive regulation in practice for electric distribution and transmission networks is reviewed. Issues for future research are identified.

The Theory of Incentives Applied to the Transport Sector

Building upon Iossa and Martimort (2008), we study the main incentive issues and the form of optimal contracts for Public Private Partnerships (PPPs) in transports. We present a basic model of procurement in a multitask environment in which a risk-averse firm chooses unobservable efforts in infrastructure and service quality. We begin by analyzing the effect on incentives and risk transfer of bunding building and operation into a single contract. We consider the factors that affect the optimal allocation of demand risk and their implications for the choice of contract length. We discuss the dynamics of PPP contracts and how the risk of regulatory opportunism affects design and incentives.

A Typology of Strategic Behaviour in PPPs for Expressways: Lessons from China and Implications for Europe

In line with governance trends around the world, a growing number of expressways in the People’s Republic of China are managed as Public-Private Partnerships (PPPs). The tremendous growth in demand for mobility in newly emerging economies has led to a gap between investment needs and available public funding. Using private funds is potentially helpful in closing this gap and accommodating the social and economic needs of motorization. By some, it is also hoped that contracting-out and involvement of the private sector will lead to higher transparency and accountability. However, in line with what has been found in various transport infrastructure modes, during uncertain and hazy transition periods that arise after infrastructure reforms, many forms of potentially pernicious strategic behaviour can pop up. Strategic behaviour emerges from information a-symmetry between private and public players, where the former act as agents and the latter as principals. In this article, China’s evidence on various types of strategic behaviour in the management of expressways is found. Several PPP projects for expressways in China are investigated empirically. And conclusions are drawn as to what possible cures are effective countermeasures of strategic behaviour, and what are the implications for Europe

Managing guarantee programs in support of infrastructure investment

The author discusses the risks of infrastructure projects and the costs of capital, rationales for government support of private infrastructure ventures, and approaches to managing government guarantees of private infrastructure investments. Among his recommendations: 1) the decision to grant a guarantee for debts associated with infrastructure projects should be based on an explicit cost-benefit analysis for the project to be guaranteed, including an assessment of the likely cost to taxpayers and the impact of alternative forms of government support. 2) In principle, when the rationale for government support arises from the difference between effective willingness to pay and social benefits, the support should take the form of subsidies supplementing the price customers are willing to pay for a service. Such subsidies are contingent on the effective provision of the subsidized service. They allow the private provider to be guided by the full benefits of the project without reducing the incentives to perform (as would occur with risk sharing through cofinancing or guarantee). 3) Guarantees of policy risks should support a credible reform program but not substitute for it. In the medium term, policy reform should obviate the need for a guarantee. Beneficiaries of guarantees should bear a part of the risk, as with a deductible. In structuring guarantees, governments need to take care that performance incentives for private investors are nor undermined. Essentially, this means not covering normal business risk, including exchange rate and interest rate movements. 4) Governments should consider sharing normal business risks only as a last resort, if at all. To prevent excessive government exposure, decisions should be transparent and based on explicit cost-benefit analysis. Monetary limits should be placed on total government exposure, and there should be an exit strategy for the government wherever possible. 5) Governments should consider creating acentral office charged with managing guarantee exposure, to limit taxpayer exposure and to strengthen private performance incentives. 6) Governments should establish a system to update the valuation of its guarantee exposure periodically as well as mechanisms to adjust guarantees or to seize collateral when fees are not paid. The use to which guarantees can be put should be clearly limited, and policies for appropriate guarantee fees and coinsurance requirements should be established.Banks&Banking Reform,Payment Systems&Infrastructure,Environmental Economics&Policies,International Terrorism&Counterterrorism,Economic Theory&Research,Banks&Banking Reform,Economic Theory&Research,Environmental Economics&Policies,Public Sector Economics&Finance,Housing Finance

Playing in Invisible Markets: Innovations in the Market for Toilets to Harness the Economic Power of the Poor

Sanitation is at the heart of not only environmental security but also food security and health. Today about 41% of the global population or about 2.6 billion people do not have access to toilets and about 42,000 people die every week due to drinking water polluted with faecal matter. The problem is most acute in India, China, many countries of Africa and a few countries of Latin America. Why is there such a crisis in the toilets market? How much of the present problem is due to a lack of supply and how much is it due to a lack of demand? What is the optimal role of the State, the firms and the NPOs? The present paper attempts to give some insight on the above questions through the case study of the market for toilets for the poor in India. It examines the toilet history and achievements of India, the innovations in the market for toilets targeting the group at the bottom of the income pyramid and the factors that influence the adoption and usage of toilets in an Indian coastal village, in order to infer answers to the above questions.Toilets, Innovation, India, Health, Hygiene, Sanitation, BOP, Income Inequality, Empowerment, Entrepreneurship, Government Policy

Managing IT Outsourcing Risk: Lessons Learned

This document takes stock from several studies on outsourcing risk. A definition of risk is offered and illustration from many case studies is used to show how risk can be managed. Results show that an active risk management approach can reduce risk exposure subtantially while enabling the organizations to still reap the benefits associated with outsourcing. Cet article fait un constat des leçons tirées de récentes analyses du risque d'impartition. Une définition opérationnelle du risque d'impartition est donnée. Les mécanismes de gestion de risque sont également discutés. Les résultats de différentes études démontrent qu'une gestion active du risque permet de réduire sensiblement les niveaux d'exposition au risque, notamment dans le cas de contrats d'impartition des technologies de l'information.Outsourcing of IS, IS risk management, agency theory, transaction cost economics, decision making under risk and uncertainty, Impartition, gestion des risques, agence, coûts de transaction, décision, risque et incertitude