Public-Private Partnerships, Capital Infrastructure Project Investments and Infrastructure Finance

Public Policy for the 21st Century

Jane Beckett-Camarata

• Publisher: Emerald Publishing Limited
• Year: 2020
• ISBN:
  9781839096563
• Topic: Politics & International Relations
• Subtopic: Public Policy
• Index: Politics & International Relations

With the introduction of new market-oriented approaches to infrastructure finance policy decision-making in the national and subnational public sectors, there is a greater emphasis on the need for resource efficiency in the delivery of public services. There is also a critical need to evaluate and assess the effectiveness of infrastructure finance policy implementation. Public-Private Partnerships (PPPs) bring an agility and fresh perspective to the financing and delivery of public goods and services, and allow for a higher level of creativity, innovation, and flexibility during times of dynamic change and high demand for responsive solutions.
By introducing a comprehensive new lens through which to view infrastructure finance policy as an instrument capable of achieving long-term national and subnational policy objectives, this study offers a unique insight into the potential benefits of the adoption of PPPs within the context of long-term capital investment planning. Through the examination of case studies from the United States, Albania and Mauritius, the author presents a transparent and integrated analysis of the role of PPPs as a policy option within this context. By demonstrating how PPPs can be utilized as a means of efficiently financing and delivering capital infrastructure projects within unified and comprehensive capital management and budgeting systems, this book is essential reading for researchers, policy decision-makers and students of public policy, capital budgeting and infrastructure finance.

Part 1
Overview of Public–Private Partnerships as Public Policy

The role of capital infrastructure as a positive contribution to government economic growth and quality of life is a well-known fact. For a long time, many governments were able to adequately finance capital infrastructure, although they were not able to meet total need and demand. Beginning in the 1970s, escalating during the 1990s energy crises, and even more pronounced in the 2008 global financial crisis, many countries, and especially emerging economies, were not able to sufficiently finance new capital infrastructure and/or repair or replace existing capital infrastructure. Increasing demographic changes and demands for new capital infrastructure exacerbated the existing imbalance between demand and supply, especially in developing countries. Also, government responses to growing fiscal crises led to budget cuts, deferral of capital infrastructure maintenance, and under-investment in new capital infrastructure. The decrease in quality of capital infrastructure such as roads and bridges, are evidence of inadequate funding for maintenance of existing capital infrastructure, building new or replacing existing capital infrastructure, resulting in the stunting of economic growth and the deterioration of the quality of life. Consequently, few countries can adequately finance ongoing capital infrastructure needs and demands without private sector involvement through some form of PPP, as an infrastructure finance policy option. On its own, the private sector will either under invest in capital infrastructure or fail to invest in capital infrastructure that are not socially optimal (Helm, Wardlaw, & Caldecott 2009) or a clear, low-risk profit partner.

As a result of this greater government need for private sector partnership in delivering certain capital infrastructure, governments increasingly must now work ever more closely with the private sector (Silvestre & Arujo, 2012). Consequently, many governments are becoming even more dependent on the private sector in the implementation of public policies (Wang et al., 2018) such as Infrastructure Finance Policy. This is especially critical for capital infrastructure investment since it is the foundation of a government's economic activity (Kumari & Sharma, 2016). The basic functions of a country are dependent on adequate capital infrastructure to provide essential services.

Chapter 1

Overview of Public–Private Partnerships

Public–private partnerships (PPPs) are defined as a range of long-term, formal technical, operational, and financial contractual partnership arrangements between government and the private sector in which the private sector has more participation in capital asset delivery than traditional non-PPP Design-Bid-Build (DBB).

Traditional government capital infrastructure delivery involves the government contracting for and overseeing all aspects of design, construction, operation, and financing, with the private sector involved in a limited, defined manner. Traditional non-PPP government contracting approach to providing capital infrastructure such as highways is known as DBB. It is primarily a government capital asset delivery form, where the subnational government pays for the capital asset with some combination of its own funds, federal government funds, and financing (debt) that is ultimately repaid by revenue from taxes and/or user fees, such as toll revenue in the case of Concessions form of PPP (see page 4 for definition). When traditional capital infrastructure financing is available, a government entity either designs the capital infrastructure in-house or contracts with a private contractor to design it. If a private contractor is used, selection is normally based on the lowest-cost, private contractor bid. The private contractor then delivers the Design phase of the capital infrastructure project. A different private contractor is then secured in a separate bid to build the capital infrastructure such as a highway in the next phase, with the government delivering Operation and Maintenance or it may secure another contract for Operation and Maintenance. Under this type of DBB contract, private contractors have only a limited amount of risk. For example, they can pass-on to the government organization any increase in costs resulting from unforeseen changes in the contract scope. This characteristic of the traditional basic DBB contract increases probability that the private contractor will exceed the contract bid price since they can pass costs on to the government in the next phase of the infrastructure capital project. The government keeps a high degree of control over the capital infrastructure, such as the highway, during its useful life.

The use of a PPP form of capital infrastructure financing and delivery, such as a basic Design-Build (DB), provides for more private sector involvement in financing and delivering capital infrastructure and involves contract bid. Generally, the private sector finances, designs, and builds the capital asset in one contract bid in the case of a new capital infrastructure delivery. If it involves an existing capital infrastructure that requires construction, the private sector bids for the Operation and Maintenance under one contract, with government financing.

The PPP contractual arrangement to deliver the capital infrastructure can take many forms and different levels of private sector involvement in financing and constructing government-owned capital infrastructure. The long-term PPP contractual relationships are between the government and the private sector, usually a private contractor, may be up to 25–30 years (Hodge, 2014; Hodge & Greve, 2016) or longer in the case of Concession form of PPP (see page 13 for definition). The long-term contractual relationship may also be between a government and a nonprofit entity such as in the case of some service Concession form of PPP agreements, but these are not considered PPPs.

There are many definitions of PPPs (Roehrich, Lewis, & Michael, 2014), and there is variation in the contractual relationship and in the implementation of PPP contracts. This variation in contractual relationship and execution of PPP contracts is especially true in forms of PPP involving separation of capital infrastructure ownership and in identification and separation of risk between the public and private contractors (Roehrich et al., 2014), and depends on the PPP form and partnership contractual relationship. PPPs are defined based on a public–private capital infrastructure financing and delivery continuum (as discussed on page 10), with either more government involvement in delivery or more private contractor involvement in the financing and delivery of capital infrastructure or service based on the location on the continuum. One of the most basic PPP forms is one where the private partner agrees to design and build capital infrastructure on behalf of the public partner to provide capital goods or services for which the public partner is ultimately accountable.

In a PPP contractual arrangement, the public partner enters into the PPP agreement to (1) finance and deliver a capital infrastructure project for which taxpayer resources may not be available in the capital improvement plan (CIP)/current capital budget, (2) reduce construction or service costs through private sector efficiencies, (3) control the timing of capital expenditures, or (4) a combination of these purposes (DiNapoli, 2014).

1.1 Rationale for Public–Private Partnerships as Infrastructure Finance Policy Option

Government capital infrastructure is typically delivered within a standard government procurement process governed by law and regulation in all phases of capital infrastructure construction, such as design, construction, operation, and maintenance. In this standard procurement process, the government owns the infrastructure, but separately contracts for each phase of the capital project, often with different private contractors.

During a traditional capital infrastructure procurement process, government contracts with several private contractors: a private contractor to supply the infrastructure design, and then builds the infrastructure based on the design (which can come from a separate contractor), and then operates and maintains the infrastructure, or goes through a different government procurement process for the operation and maintenance phase. The unique characteristic of a capital infrastructure PPP is that the government enters into only one long-term contract with only one private contractor, as opposed to several different arrangements with multiple private contractors in a traditional non-PPP, government-financed capital infrastructure delivery. The partnership is more efficient for both the government and the private sector. The long-term nature of the PPP contractual relationship allows both partners to be able to plan, budget for, and commit long-term resources to deliver the capital infrastructure.

In a PPP contractual arrangement, the government normally retains ownership of the capital infrastructure. Still, the private contractor is given a much more significant role in capital infrastructure delivery and management, compared to the standard procurement process. In a PPP form of Build-Operate-Maintain, for example, the government contracts with one private contractor to build capital infrastructure and then to operate and maintain the infrastructure for a given number of years in exchange for a revenue stream during the life of the contract, using either user fees or availability payments. In the traditional capital procurement system, the government contracts with many different private contractors, whereas in the PPP, the government is directly contracting with one private contractor, who, in turn, is responsible for completing the capital project. Because the private contractor is fully responsible for delivering the capital infrastructure in PPP, including any cost overruns, the private contractor is more motivated to minimize costs than would the private contractor under the traditional procurement system (Vining & Boardman, 2008).

In addition to private contractor motivation to minimize costs, governments provide more varied core service activities than a private contractor. Governments may have less specialized capital infrastructure delivery expertise in the relevant capital infrastructure activity. The rationale for the government to use PPPs in capital infrastructure delivery is that the private contractor [depending on the private contractor, capital infrastructure delivery, and the financing arrangement] generally can deliver capital infrastructure more efficiently and at a lower cost (Vining & Boardman, 1999). Private contractors have more significant economies of scale and scope typically because the capital infrastructure construction activities private contractors perform are more narrowly focused than core general government activities, which are more complex and more extensive. Also, the private contractor may have more in-depth expertise in certain types of capital construction and operation than the government. The private partner, in some cases, maybe global in scope and thus able to deliver infrastructure internationally rather than only country specific. Governments can benefit by using the private partner's skills and thereby obtaining cost and efficiency gains by partnering with the private partner for the construction and/or management of capital infrastructure (OCED, 2015).

Private contractors, in general, and the PPP capital infrastructure private contractor–partner in particular, are more motivated to maximize profits, as noted above. The private contractor tends to have more efficient capital infrastructure operations and less bureaucratic rules and regulations in the process to deliver a capital infrastructure than the government, such as written, less complex procurement policies and highly skilled procurement expertise. The efficiencies are evident in such dynamic and fluid capital construction situations as there is greater flexibility in contract renegotiation (Vining & Boardman, 2005), for example. Also, the private contractor may have lower employee salary and benefit costs than the public sector (Dosi & Moretto, 2013). Large government capital infrastructure projects frequently cost more than originally budgeted because they are not able to duplicate private contractor efficiencies (Ansar, Flyvberg, Budzier, & Lunn, 2016).

The capital infrastructure cost difference is greater for small local governments [and for developing and emerging market economies], especially for design and construction (Vining & Boardman, 1992) forms of PPPs. As an example, in the case of developing and emerging market economies, such as Albania, securing increased capital infrastructure investment is critical to ensuring that economic growth is commensurate with social needs. The Organization for Economic Cooperation and Development (OECD) has estimated that total global capital infrastructure investment requirements will be 71 trillion USD or about 31.5% of annual world GDP from 2007 to 2030 (Klepsvik, Emery, Finn, & Bernhard, 2014). Governments in these developing and emerging economies cannot afford to finance the closing of these large and growing capital infrastructure gaps solely through tax revenues and grants (Klepsvik et al. 2014). Some mature economies also cannot afford to finance their significant capital infrastructure gaps as well, because of years of underinvestment and tight budgets. Long-term private participation in capital infrastructure provision can help reduce both short-term and long-term financial pressure on government operating and capital budgets.

Because of the need to fill large and growing capital infrastructure gaps, governments may choose to use PPPs for financing and delivery of new construction of physical and social capital infrastructure such as roads, bridges, tunnels, railways, harbors, airports, tramways, subways, irrigation networks, dams and canals, water pipelines, water purification and treatment plants, potable water supply, power lines, power plants, distribution networks, oil and gas pipelines, sanitation and sewage facilities, health and housing services, urban services, communications, and telecommunications networks. These large types of capital infrastructure typically require the involvement of some type of PPP contract arrangement. PPPs are also used by the government to modify, rehabilitate, or expand existing extensive government capital infrastructure or to monetize underperforming capital infrastructure and provide the government budget with additional capital. In that case, the revenue from the government's transferring its inherent right to operate a capital infrastructure (i.e., Concession) must be sufficient to justify the future loss of the infrastructure's ongoing user fee revenue (Uddin & Zack, 2016) to the contracting government.

The phases of a capital infrastructure project usually are comprised of large capital expenditures, often exceeding hundreds of millions of dollars (Newman & Perl, 2014), spread over several years. Depending on the form of PPP contractual arrangement, the government guar...

Table of contents

• Cover
• Title
• Copyright
• Table of Contents
• About the Author
• Introduction
• Part 1 Overview of Public–Private Partnerships as Public Policy
• Part 2 Public Sector and Private Sector Value Differences
• Part 3 Infrastructure Finance Policy and PPPs at the National, Subnational, and International Levels
• Part 4 Infrastructure Finance Policy Implementation Practices
• References
• Index