The Routledge Companion to Public-Private Partnerships

Piet de Vries, Etienne B. Yehoue, Piet de Vries, Etienne B. Yehoue

• Publisher: Routledge
• Year: 2013
• ISBN:
  9781136163296
• Edition: 1
• Topic: Commerce
• Subtopic: Commerce Général

A public-private partnership (PPP) is a contractual arrangement with appropriate risk sharing between public and private partners for the delivery of public infrastructure or services, which is intended to create value-for-money to the taxpayer. The Routledge Companion to Public-Private Partnerships provides a cutting-edge survey of the field.

PPPs remain a highly controversial subject matter globally and this comprehensive and authoritative volume provides a terrific compendium of information for students and scholars charged with understanding, critiquing and advancing this model. With sections devoted to legal aspects, institutional economics perspectives, finance and accountability - the editors draw together an impressive range of contributors from around the world.

Part I

General introduction to public–private partnerships

1

The modern public–private demarcation

History and trends in PPP

Piet de Vries¹

1.1 Introduction

Public–private partnership (PPP) relates to risk-transferring and long-term cooperation between the State and a private institution to realize a public facility and/or service. Two main forms profile the history of this goal-oriented cooperation; the concession (charter) and the project agreement. Public authorities make use of private-sector skills to provide facilities that the market would have less incentive to provide; for instance, to exploit an infrastructural facility, or to revitalize an urban area. It is a widespread phenomenon, and has a long history. This chapter deals with the origin and the nature of PPP, and presents some historical patterns in the vicissitudes of the phenomenon. It focuses on addressing two themes: the societal turn enabling the rise of PPPs, and a history of PPPs through examples and reflecting their patterns.

The chapter is organized as follows. In a historical perspective, section 1.2 presents PPP as straightforwardly related to the rise of the modern society: the modern economy. This societal turn results from a basic change in the relation between ‘public’ and ‘private’. Simultaneously, PPPs emerge as a manifestation of the modern economy. The modern economy offers unprecedented opportunities for mutually beneficial cooperation between public authorities and (private) individuals. The Dutch Republic during the seventeenth century is seen as the first full-blown modern economy, succeeded by Britain and the USA in the eighteenth and nineteenth centuries. Section 1.3 presents the early PPP history. The historical sequence of modern economies structures this section furnishing several early examples of PPP. It discusses seventeenth-century PPPs in forerunner Holland, eighteenth-to nineteenth-century examples in Britain, and early nineteenth-century PPPs in the USA. Section 1.4 reflects on the early trends and key features of the traditional PPPs. Section 1.5 presents recent developments and modern characteristics of PPPs. A final section concludes.

1.2 The modern public–private dichotomy

Private is the counterpart of public. In a common-sense meaning the concepts will refer to intimacy versus openness. In the PPP context they refer to the public and the private sector, i.e. sectors of societal (economic) activity. During the sixteenth and seventeenth centuries Western-European societies showed a gradual change in societal relations and in organizing activities. Increasingly, it was the commoner, a civilian without social rank, who thanks to his economic success acquired a certain position in the society. Civilians’ economic merits replaced birth privilege or family prestige as a decisive variable in social relations and organizing social activities. Gradually, a society was emerging, in which individuals driven by self-interest traded and exchanged with others, who were likewise self-interested.

In such a society, mutually beneficial relations constitute the social fabric. It is the modern economy obviously emerging during the seventeenth century. This modern economy brings about another modern phenomenon. In the pre-market society ‘court rationality’ prevails (Elias 1969: 111). Station, prestige and clientelism form instruments of societal power; public and private interests are intermingled. Contrariwise, in the modern economy it is definitely not done to mix personal relations with calculating self-interest. Commercial, and in the same manner, bureaucratic relations ought to be freed of friendship and other personal ties. It follows that personal feelings and in particular friendship in the modern commercial society is an entirely separate domain (Silver 1997). Calculating friendship isn’t friendship at all. The modern economy gives the concepts ‘public’ and ‘private’ an instrumental and normative feature. The public interest government bears responsibility for, should not be mixed with private interests of the public authorities. In the same manner, the private commercial relations should be based on impersonal, unprivileged calculation. It results in a new, modern public–private dichotomy. On the one hand, a private sector profiles the society in which the individual and his commercial self-interest play a pivotal role. On the other, in the public sector, government protects the public interest, in a manner removed from private windfalls.

A few references to Adam Smith may recap the emergence of the modern economy and the corresponding public–private dichotomy. ‘Every man thus lives by exchanging, or becomes in some measure, a merchant, and the society itself grows to be what is properly a commercial society’ (Adam Smith 1776: 25). At the same time, the evolution of a private sector makes clear that for some goods the mutually beneficial commerce does not function. Smith refers to protecting the society from violence, public works, educational institutions, and protection from injustice, as ‘tasks the Sovereign should take care of’ (Smith 1776: 459–61).

It is this commercial society that constitutes the breeding ground for PPPs. Inevitably, the merchant will see beneficial opportunities for which he might require some help or admittance from the public authorities. On the other hand, the public authorities may observe opportunities to make the private self-interest subservient to the public interest. PPP is a natural consequence of the modern economy, an equally modern phenomenon. In the same way, PPP entails the normative implications, underlining the normative feature of the modern public–private dichotomy.

1 PPP is a device to foster the public interest, e.g. value-for-money for the taxpayer, using private self-interest to organize the social activity, i.e. tasks the sovereign should take care of.

2 The modern dichotomy makes clear that economic relations should be based on mutual self-interest; impersonal, unprivileged calculation results in commercial relations. It follows from this that PPPs should not be contaminated with clientelism and favouritism. A PPP ought to be based on contractual relationships defining ‘tit-for-tat’ arrangements; instruments to meet a well-defined public interest by means of partnerships with private agents fuelled by self-interest.

3 Public access to information concerning a PPP project, accountability, is aimed at demonstrating that the private interests are subordinated to the public interest of the project.

These normative notions of the public–private dichotomy will repeatedly emerge in any historic overview of the PPP. And these norms turn out to be valid to this very day. This overview starts with the rise of the commercial society.

1.3 The emergence of the modern economy and PPP

Frequently, Adam Smith in his Wealth of Nations refers to Holland as the model commercial society he was analysing. Even a hundred years after its Golden Age, Smith described the state of the Dutch economy of his day as a kind of general equilibrium, with normal (‘clear’) profits and low interest rates; ‘a country which had acquired its full complement of riches’ (Adam Smith 1776: 107–8). On the other hand, prominent students of economic history such as Joel Mokyr and David Landes consider the Dutch Golden Age as an interesting period of merely accidental economic growth; a curious phenomenon that will disappear in the same unexpected manner as it appeared (Landes 1998: 408; Mokyr 2002: 31). According to these and many other authors, it is the French political and the English industrial revolution that constitute the real dividing line between the traditional and the modern; before this line a society with social stratification that rules social action and relations, and behind that line a meritocracy with social action and relations based on tit-for-tat. A recent example of this position is Douglas Allen’s The Institutional Revolution, claiming that before the British Industrial Revolution (1760–1850) the society, throughout Europe, was grounded on ‘pre-modern institutions based on patronage, purchase, and personal ties’ (Allen 2012: jacket text).

At the same time, Douglass North, for example, assesses the Low Countries economy of those days of ‘unparalleled importance of industry and commerce’. North concludes: ‘The Netherlands as a result [of enforcing property rights] became the first country to achieve sustained economic growth’ (North 1980: 152, 154). And, Immanuel Wallerstein sees (the Dutch Republic of) ‘the United Provinces in the mid-seventeenth century as the first of the only three instances of hegemony’; succeeded by ‘the United Kingdom in the mid-nineteenth, and the United States in the mid-twentieth’ (Wallerstein 1984: 39–40).

The Dutch Republic of the seventeenth century exhibits the ‘genetic features’ of a modern economy; reasonably free and pervasive markets, for both commodities and production factors; agricultural productivity supporting far-reaching division of labour; a State attentive to property rights; and technology and organization capable of sustained development (De Vries and Van der Woude 1997: 693). These genetic features are applicable to all modern economies ever since. During the seventeenth century these features result in an unprecedented sustained economic growth of the Dutch economy. And these features constitute the seed-bed for all kinds of PPP.

For that matter, it must be stressed that the focus on the Dutch republic as a modern-economy paragon definitely does not imply that similar modern genetic features are absent in other European countries or regions, such as England, France, Portugal or Scandinavia. Moreover, earlier urban economies such as Florence and Venice exhibited modern, commercial genes. At the same time, it is hegemony on the world market that may justify seeing Holland as the area where modern public–private demarcation emerged clearly. It is Wallerstein’s position regarding instances of hegemony that is followed in presenting a historical view of PPP in trendsetting modern economies; in succession: Holland, Britain and the USA. Subsection 1.3.1 presents some early Dutch PPP examples. Subsections 1.3.2 and 1.3.3 deal with early British and US examples respectively.

1.3.1 PPP in the modern economy of the Dutch Republic

The modern-economic development of the Dutch society brings about PPP as a natural consequence. For instance, the conspicuous economic growth of Amsterdam during the seventeenth century posed the urban authorities some challenging town-planning issues. On a limited scale the authorities succeeded in organizing financial participation of the civilians who benefited from the new urban extensions. For instance, in January 1613 the Amsterdam urban authorities organized an auction of canal lots to be issued. In the city hall the project documents had been available for inspection. The new area was parcelled out in uniform lots, and all conditions made public preceding the auction. In these conditions some PPP elements may be found. In this respect, part of the obligation of the new lot owners was to co-finance infrastructural facilities such as bridges, quay walls and parts of the canal-digging activities (Abrahamse 2010: 97). However, full-blown Dutch PPP examples during the seventeenth century may be found in land-reclamation projects, dealt with in the rest of this section.

‘God created the world, Holland is created by the Dutch themselves’, immigrant René Descartes observed. The Dutch crusade against the water knows many forms, with dikes and polders as main weapons. These infrastructural works form a rich source of PPP examples referring to a period that spans from the sixteenth till the twentieth century. Water works exhibit prominent collective-good aspects that all but inevitably result in public authorities’ involvement. It is in particular the regional authorities of the water-board district and the provincial State that played a dominant role in the dramatic change of the landscape and the map of Holland during those past four centuries. At the same time, private initiatives, and involvement in construction and exploitation by the private sector at its own risk profile this history. The land reclamation history shows the evolution of interaction between private actors and public authorities to full-fledged forms of PPP. The projects develop to more complex systems, both in the technical and in the institutional respect. It refers to three phases that may be discerned (Stol 2002: 109–34).

1 Diking-up of mud flats. This refers to the first type of land reclamation. The first successful diking-up, of 6,500 ha, was in North-Holland (Zijpe). It was a State initiative, in particular as a protection against storm tides. Consequently, it initiated private requests for concessions to dike-up adjacent mud flats, resulting in the Wieringerwaard (a 1,600 ha polder), finally in 1611. It concerned a mutually beneficial project; the private investors acquired new farmland to be leased out, and a period of tax exemption; the public authorities future fiscal opportunities. The restricted period of tax exemption formed an incentive to complete the project as soon as possible. For that matter, several setbacks, such as a weak base to the dikes, led to several renewals of the concession. Moreover, two episodes of gale damage to the dikes brought new patents for the private investor and new fiscal privileges for a limited period of time (Stol 2002: 110). This may be interpreted as an example of risk-sharing between the public and the private partners.

2 Pumping dry of (natural) lakes and expanses of water. Technically more challenging than diking-up sea-clay flats above normal sea level is a polder below sea level, outside the dike or natural lakes inside. It requires the pumping-dry of the lake and permanent drainage of the new polder. The first examples of pumping dry of lakes happened in 1533 (35 ha) and 1564 (686 ha) in North Holland; small-scale experiments initiated by the local nobility (Stol 2002: 111). In the seventeenth century it became the domain of enterprising merchants. The new windmill technology offered up-scaling opportunities. As a consequence, in the course of the seventeenth century the size of projects started exceeding the financial strength of a small group of individual investors. The solution was found in project financing by a kind of Special Purpose Vehicle, an ‘opportunity combination’ (gelegenheidscombinatie) (Stol 2002: 111). Actually, it involves a company that provides financing in the investment and the dispersion of the entrepreneurial risks. In particular in the seventeenth century the polder was an attractive long-term investment for surplus capital of the urban Dutch civilians. The North-Holland Beemster polder (7,100 ha) is the first commercial example. The polder turned out to be an interesting business case for a concession company; it finances the investment of land reclamation, partitions the lots in proportion to the financial participation in the initial investment, and finally aims to succeed in achieving a positive financial result of its funding by leasing out the new lots and premises. The public side firstly concerns the concession granted, and secondly a water board district that takes care of the collective-good features of the project, i.e. drainage and maintenance of the drainage system, empowered to charge the new landowners. In the short period of 1610 to 1640 the map of North Holland changed radically. Prominent Amsterdam merchants and other urban investors invested at least ten million guilders in concession projects for 26,000 ha land reclamation in the northern quarter of Holland – rather risky enterprises as the financial returns were straightforwardly dependent on variables such as economic growth and food prices (De Vries and Van der Woude 1997: 29).

3 Pumping dry of lakes created by the digging-out of peat. Peat was the main fuel in the Dutch Republic and economic growth and population growth caused strong increase in demand for this energy source. A side effect was the undesirable creation of lakes and sheets of water. This induced, for instance, in 168...

Table of contents

• Front Cover
• The Routledge Companion to Public–Private Partnerships
• Routledge Companions in Business, Management and Accounting
• Title Page
• Copyright
• Contents
• List of figures
• List of tables
• Contributors
• Acknowledgements
• Introduction
• PART I General introduction to public–private partnerships
• PART II Law and public–private partnerships
• PART III Institutional economics and public–private partnerships
• PART IV Financing of public–private partnerships
• PART V Public sector economics and public–private partnerships
• PART VI Recent financial crises and public–private partnerships
• PART VII Governance of public–private partnerships
• PART VIII Accountability, auditing and assessment of public–private partnerships
• Index