Managing PPP for budget sustainability

See article published in the Latin Infrastructure Quarterly, 3rd issue, March 2012 
http://www.liquarterly.com/issue3.htm


Public private partnerhips are an important instrument for financing public investment, but only if implemented with rigor to ensure long-term budget sustainability. The critical issue is getting and maintaining good Value for Money for the taxpayers over the 20-30 year duration of a PPP-concession contract, not just at the time of the tender. But the FIDIC and other public procurement rules focus mostly on the procurement phase, and the contract management post-adjudication may be overlooked.

It is useful to see the work of S. Ping HO on managing incomplete contracts mentioned elsewhere in the PPP Lusofonia blog, http://ppplusofonia.blogspot.com/2009/01/teoria-de-jogos-e-renegociao-de-ppp.html. To summarize, PPP contracts are very long-term, ultra-complex, incomplete by nature and therefore subject to frequent renegotiations, with continuing risk of loss of Value-for-Money for the public partner due to lack of competitive pressure, asymmetries of information and negotiation skills and experience, etc.

So bidders may have an incentive to engage in strategic behaviour, where they bid aggressively, price opaquely and then go into one-on-one direct renegotiations and/or arbitration immediately after adjudication, hoping to recover some of the profitability they gave away in the competitive tender. This could represent “capture of the public partner”, (captura do Concedente), a concept similar to “regulatory capture” which is a well known phenomenon.

The first line of defence against the negative consequences of such “Concedent capture” over the life of the contract is to train and sustain public sector PPP officers and PPP units in the various ministries. This is difficult to do, because the public sector often underestimates the complexity of PPP, there is a scarcity of PPP contract management skills, and PPP units often face resistance from within the public sector as well as from other Stakeholders.

Public sector organizations, such as the IFI, can be instrumental in helping to promote PPP management capacity in the public sector and in propping up Government PPP units, in order to prevent PPP distortions that individual small Governments may be unable to foresee and avoid.

This is why the work of UNECE, WB, EIB, EPEC and EBRD and PPP associations on promoting PPP training and institutional arrangements is so important.

PPP are no panacea for public investment problems. If a country has good investment management skills and insufficient resources, it can gain a lot from doing a few PPP-concession contracts in addition to traditional public works contracting. If a smallish country also has a shortage of contract management skills, the Government is taking on considerable fiscal and budget risks if it undertakes too many PPP-concession contracts without first building the necessary PPP management skills and organisational infrastructure such as PPP units in the Finance and public service ministries.

Good PPP units and well trained PPP officers are probaly more important than PPP legislation in securing and maintaining good Value for Money in long term PPP-concession contracts. As in a commercial bank, it is more critical to have a good credit committee, than a good credit policy guide, though good banks will certainly have both.
Mariana Abrantes de Sousa, former commercial banker and former financial controller
PPP Lusofonia

Prieto on PPP and regulation
See also Cheung, Chan, Kajewski on Enhancing Value for Money