Governance

There are severaldifferent forms of public-private partnerships (PPPs)in vogue, reporting varying degrees of success. Yet, the potential use of PPPs in e-governance, health and education sectors remains largely untapped

PPP and Infrastructure

Bibek Debroy

Apublic private p a r t n e r s h i p (PPP) involves p a r t n e r s h i p between the private sector and the government. Public need not necessarily mean the government, but let’s leave that debate aside. The private party provides a good or a service, or undertakes a project. Having said this, there are alternative PPP schemes and despite PPP being a buzzword, one must realize there can be significant differences across projects. Why bring the government into it? Why doesn’t the private sector deliver the good or the service on its own? The perception is that one is talking about a public good. The classic definition of a public good (or service) is that it is nonrivalrous and non-excludable. Non-rivalrous means that one person’s consumption does
not reduce what is available to others. Non-excludable means no one can be prevented from consumption. If a good (or service) is nonrivalrous and non-excludable, the market cannot charge a price and the market will not be able to deliver it. Rare is the case of a classic public good. Most goods or services we talk about in the PPP context are not public goods. They are collective private goods. At best, they are what are called merit goods, that is, goods that deserve to be subsidised. Consequently, the public good argument for market failure is less plausible than one might think a priori. The externality argument for market failure is more plausible.

Stated simply, in the presence of externalities, private costs or benefits might not adequately reflect social costs or benefits. One must also remember that technological progress and possibilities of unbundling have rendered many market failure arguments of the 1950s now untenable. Indeed, market failure and natural monopolies often occur now because of governmental licensing restrictions, or because administered pricing renders private delivery commercially unviable. If such an identified good or service is to be provided by the government, why bring the private sector into it? The traditional answer has often been fiscal. Because right prices aren’t being charged, or cannot be charged, fiscally- constrained governments have been unable to provide the good or the service. But a different kind of answer is also equally relevant. The private sector is far more efficient at delivering and this is the efficiency argument. Different PPP models then float around. At one end of the spectrum, the private sector
provides the good or the service and assumes all the risks – financial, technical, operational. If this is the case, why call it PPP, especially if the price paid for the good or the service is completely marketdetermined and the government has no role to play, certainly not through the budget. The problem is the world isn’t competitive and competition policy instruments alone may not be enough. There may be local monopolies, even if there is competition, nationally or globally. The licensing contract is therefore for a limited period and performance requirements may be imposed. In that sense,this becomes a PPP.

Alternatively, the government may decide that the price is subject to a ceiling. In that case, the private sector needs to ensure that the project is commercially viable, especially if large capital investments are made. There may therefore be capital subsidies from the government, or annual tax holidays for a limited period of time. The government may also guarantee a rate of return, or reimburse the private sector the difference between the cost of producing and the price that can be charged. That is, there can be a revenue subsidy in addition to a capital subsidy. These types of PPPs are fairly common.

At the other end of the spectrum, there are PPPs where the government takes an equity stake. The stake can be in the form of assets, rather than in the form of cash. And especially for infrastructure, there may be differences between building, maintaining and financing. There can, therefore, be a special purpose vehicle with a consortium from the private sector and the government can also take an equity stake in it. One should also mention possibilities of BOOT (build, own, operate, transfer), BOT (build, operate, transfer), BOLT (build, operate, lease, transfer) and so on.

One often thinks PPP is about infrastructure. That’s not the case at all. Globally, and in India, there are PPP examples in social sectors too, such as health and education.