Comparative Analyses of Infrastructure Public-Private Partnerships

Infrastructure public–private partnerships, also known as PPPs or P3s, continue to be a fascinating aspect of public policy around the globe. It has been more than two decades since John Major’s government in the UK adopted the idea of privately funding and delivering infrastructure services using long-term contracts. In fact, PPPs shifted from being simply an option for governments towards being a policy preference at the heart of the government’s consciousness (Smith 1999).

Internationally, there is increased interest in PPPs. The UK presented a renewed “PF2” policy in late 2012 (HM Treasury 2012). The OECD (2012) issued guidelines for how governments should proceed with PPPs. ASEAN (2014) countries, which received assistance from the OECD, developed a new framework for PPPs. Many Asian countries are looking to the PPP policy option in their infrastructure policy. The new president of the European Commission, Mr. Jean-Claude Juncker, has launched an ambitious “Investment Plan for Europe” that will be presented in full in the next few years (European Commission 2014). This plan will entail encouraging private financing of public infrastructure programmes on a grand scale. In the USA, the Obama administration is considering different policy options, including a new tax proposal and administrative action that will attract private finance to help address the huge infrastructure investment challenges that the federal government faces (New York Times 2015). All of these initiatives will inject private finance into programmes and projects that governments want to be delivered.

And yet, like their policy cousins, privatization and outsourcing, PPPs remain controversial today. They are both widely praised and loudly criticized. Debates continue over fundamental matters such as what defines a PPP, the resulting value-for-money (VfM) of PPPs, as well as the legitimacy and policy lessons learned to date. And it is difficult to sort the cheap advertising bluster and ideological criticism from the rational policy commentary and solid technical advances.

Some of this confusion is due to the fact that PPPs constitute not a single technique for infrastructure delivery, but a phenomenon which covers many meanings. Hodge and Greve (2013) argue that the language of PPPs is adopted at four levels: when we discuss a specific project; when we refer to a specific infrastructure delivery technique; when we speak of a policy preference; or when we debate it as a governing mechanism. In practice, whilst we may all use the same words, these can carry very different meanings. It also means that the PPP phenomenon is a big target in debates. If a commentator does not support a particular project, the arrangement used to deliver the project, the policy of using the particular delivery arrangements or the long-term governing effects of contracts, then PPP is criticized. Alternatively, if any of these are supported, then PPP is praised. Little wonder that there is so much contestation noise.

Another reason for the contest, though, is the breadth of the PPP delivery options available. Whilst some governments refer to PPPs as a very particular type of long-term (design, build, finance, operate and maintain - DBFOM) infrastructure contract type, the reality is that there are many possible different contractual arrangements. Contracts may differ in terms of whether the public or private sectors complete a particular task or activity from initial planning through to the final maintenance operations, the extent of finance from each sector, the specific project to be delivered, which party bears which risks, the strength of incentives for performance, as well as issues of transparency. The fabric to be applied to accountability and governance matters as well and adds to this long list of fundamental dimensions. Even so-called “leading PPP jurisdictions”, such as Canada and Australia, employ a variety of different arrangements, rather than having one national PPP model (Hodge 2013; Siemiatycki 2013). So, in a scientific sense, we ought to acknowledge up front that there is no such thing as “the” PPP model. Of course researchers will no doubt continue to use the PPP label as shorthand when discussing long-term bundled infrastructure contract arrangements. But the ambiguity is palpable.

What this means for public policy scholars is that careful learning is required in the international PPP arena. Detailed specification of the PPP arrangement under discussion is required, and its context and jurisdictional characteristics acknowledged. Importantly, too, analysts need to be willing to deal not solely with the formal numerical engineering, economic or financial details, but also with ideas from other disciplines such as political science, sociology and public policy which study more ambiguous, fluid and rhetorical tools of persuasion and power in society (Hodge et al. 2010).

The five articles in this special issue of the Journal of Comparative Policy Analysis were initially presented at an international conference conducted in Vancouver, Canada. Organized by the Sauder School of Business (University of British Columbia), the Copenhagen Business School and Monash University, the conference was part of the ongoing International PPP Scholars Network.

Each article contributes to comparative policy analysis in a different way using a different methodology. Briefly, Ross and Yan compare PPPs to traditional public procurement using economic theory; Reeves compares the goals of PPPs in Ireland before and after the global financial crisis (GFC), and draws comparisons to the UK; Albalate, Bel, Bel-Piñana and Geddes compare the transfer of different types of risk in transportation PPPs in many South American and European countries; Acerete, Gasca, Stafford and Stapleton compare the organizational and financial arrangements of healthcare PPPs in two regions of Spain; and Hellowell and Vecchi compare the agency problems that lead to budgetary problems with PPP hospitals in the UK and Spain. Each article has important policy implications. For example, Ross and Yan provide conditions under which government should choose PPPs over traditional procurement, which is of fundamental importance given the billions of dollars that will be spent on new infrastructure; Reeves finds that there has been a fundamental shift in the Irish government’s motives for PPPs following the GFC towards levering private funds for investment and job creation; Albalate, Bel, Bel-Piñana and Geddes highlight the importance of risk-mitigation strategies and of institutional quality and stability; although focussed on healthcare rather than transportation, Acerete, Gasca, Stafford and Stapleton find significant differences in institutional quality across regions within the same country and conclude that great care is needed when making inferences about the transferability of policies to different regions; Hellowell and Vecchi’s research suggests that government should consider carefully the political and organizational pressures on state employees during the financial appraisal process. Ross and Yan contribute to comparative theory development and derive practical implications from theory-based research. Acerete, Gasca, Stafford and Stapleton present theory-based empirical research, taking a critical analysis approach. The other articles draw on theory and empirical observation of comparative situations to derive important policy lessons. We now discuss each article in more detail.

A major debate around PPPs is the issue of the initial choice of infrastructure delivery method – when should a government choose a PPP arrangement in preference to a “traditional arrangement”? Ross and Yan acknowledge that one of the longstanding potential problems with PPPs is “the loss of flexibility that comes with the long lived contractual obligations governments must respect when changing circumstances may require significant change in the way the public service is provided”. They develop the first formal model that considers analytically the trade-off between loss of flexibility to adapt to changing needs and the potential productive efficiencies available through a PPP. Importantly, Ross and Yan show that PPPs will be superior to government provision (in terms of VfM or social surplus) when the potential efficiencies of a PPP are large, the probability that there will need to be changes to the project is small, the gains to project redesign are small and when the government’s bargaining power in renegotiation is greater. They suggest that PPPs ought to be more attractive for roads or bridge projects, where there is little chance that a redesign will be needed, and less attractive for more dynamic projects such as healthcare or information technology projects. These results, whilst theoretical, have a certain pragmatic sense to them. Furthermore, Ross and Yan show that the choice between a PPP or traditional delivery can depend on whether government’s main aim is to maximize total social surplus or VfM.

Reeves reminds us that there is much to be learned from countries that have gone down the PPP road (pardon the pun). Examining the motivations for PPPs and their performance in Ireland, he describes the origins of the policy prior to the GFC and points to the government’s desire to alleviate infrastructure delivery capacity constraints, to effect “speedy delivery” of infrastructure, and to achieve VfM. He concludes that, in contrast to the UK and prior to the GFC, PPPs did make a contribution to infrastructure investments over and above that which would have occurred anyway. However, the stock of Ireland’s infrastructure initially lagged that of many other EU countries. Furthermore, the procurement process was slow and relatively few PPPs have been completed. Reeves’ VfM analysis was hampered by the lack of a formal requirement for public agencies to put details in the public domain and other factors. Nonetheless, his analysis provides reasonable grounds for scepticism of official VfM estimates. He nominates the principal lesson from the Irish experience as being that “PPP does not represent a quick fix for the problems of infrastructure deficits or difficulties with traditional procurement methods”.

In a fascinating account of the post-GFC experience, Reeves outlines how the Irish economy took a dramatic downturn and government debt more than doubled to 91 per cent of GDP. The government launched an economic stimulus plan in 2012, which included a renewed wave of PPPs. Unlike the policy prior to the GFC, the new objectives were to add economic stimulus and create employment in a stagnant economy. In addition, PPPs continued to provide off-balance sheet financing of public capital investment and neatly circumvented formal European fiscal constraints. Finally, with ongoing concerns around the scarcity of critical performance information (even to government ministers and parliamentary committees!), Reeves concludes that “greater transparency is possibly the most important challenge to be addressed if PPP is to succeed in meeting the objectives set by its advocates”.

One of the most powerful rationales for PPPs is the potential to transfer risk to the party most able to bear it – that is, the party that can best manage it or mitigate it. Albalate, Bel, Bel-Piñana and Geddes directly examine the distribution of various risks in motorway concession PPP contracts in many countries and draw lessons on the use of different contractual options and mitigation strategies. Spain suffered from strong instability of PPP regulation; many early PPPs bore significant risks and became bankrupt while, later, the government bore most of the financial risks. Early French concessions in the 1970s were subsequently renationalized in the 1980s, largely due to poor demand forecasting and the oil crises. More recently, in a stable regulatory environment, the French government was able to successfully transfer risks to the private partners. Chile is posited as a successful example of a well-functioning institutional and regulatory design with the reward of successfully attracting international private capital for PPP projects. Widespread renegotiations at the end of the 1990s, however, saw the pioneering use of variable term demand mitigation strategies. The stability of Brazil’s experience is contrasted with Argentina’s “widespread renegotiations and civil protests” with PPPs. Interestingly, in Argentina, cost overrun risks and demand risk were shared, while maintenance and operational risks were borne by the state. The Polish experience provides a further contrast, given the heavy influence of its communist past. Here, financing challenges along with weak legal protections have inhibited private participation in PPPs. The article infers, perhaps predictably, that “countries with higher institutional quality and stability are able to engage in PPPs with fewer guarantees or less need for sharing the risks associated with the demand, cost overrun and maintenance and operation”.

Albalate, Bel, Bel-Piñana and Geddes provide some important policy conclusions. First, they point out that diversifiable risks are likely to be “more tolerable” to private investors than other risks, such as regulatory and environmental permitting risks. They suggest that construction risks should be transferred to the private partner, while other risks are “idiosyncratic” – that is, their allocation may depend on the governing legal framework. While they suggest risk sharing of variation in traffic level, they also propose variable-term contracts as a way to share demand risk and reduce the likelihood of renegotiations. Finally, they stress the importance of institutional quality (i.e. an independent special purpose regulatory agency) and careful assessment of VfM, not simply at the time of the initial project construction stage, but also during the ongoing operation of the project as well as for extensions or later proposed projects.

Acerete, Gasca, Stafford and Stapleton undertake a critical analysis approach to examine healthcare PPPs in Spain, an acknowledged international leader in using PPPs for healthcare. Spain pioneered the “Alzira model” in which the PPP provides clinical services, with potentially attractive revenue streams, as well as physical infrastructure. The regional government has been extremely pleased with the performance of the Alzira Hospital and it has attracted considerable international interest. However, Acerete et al. tell a rather different story. They analyse and compare the organizational and financial arrangements of healthcare PPPs in two regions of Spain, Valencia and Madrid. The authors highlight the complex nature of PPP organizational structures and the inability of the public to access relevant information. Further, in Spain, there is lack of public accountability. Despite extensive searches, the authors were unable to find any information about any Valencian PPP contracts (except the Alzira hospital, 1999–2004). Key financial information was difficult to procure for various reasons: often, it is consolidated or is simply not available to the public. Thus, private sector partners can obscure the effect of any opportunism. One of the particularly interesting and unique characteristics of Spanish PPPs is that regional savings banks are shareholders in many contracts, with the consequence that some PPPs are closer to public–public partnerships than public–private partnerships. In terms of financial performance, they find some evidence that PPPs provide cheaper healthcare in Valencia, but they argue that it is due to special circumstances. Importantly, it is not transferred to other regions in Spain. For example, in Vademoro, which is part of Madrid, the PPP continues to make losses. They note that integrated contracts, where primary and specialist healthcare are included in the capitation model, have performed best. However, they caution that the longer term financial success of some of the Spanish healthcare arrangements may not be transferable internationally given the unique and highly specific characteristics of these arrangements and of the institutional environments. They conclude that “care is needed to avoid unwarranted inferences about claimed benefits of lower costs while maintaining sustainable quality … these projects continue to carry ongoing risks for all governments”. Such cautionary experiences ought to be taken seriously and regarded as relevant to all western jurisdictions rather than as quaint and esoteric news from afar.

In the final article, Hellowell and Vecchi investigate the reasons PPPs tend to create budgetary problems for the state (i.e. government) partner. They note that PPPs have long been advocated on the grounds that they reduce the extent to which “strategic misrepresentation” occurs with public projects, with costs being deliberately underestimated and benefits deliberately overestimated in order to ensure favoured projects gain approval for funding. Since governments impose hard(er) budget constraint on PPPs, the actual outcomes should be closer to estimated outcomes, and evidence supports this theory. However, there is also considerable evidence that governments often find that PPP projects are unaffordable and impact on their capacity to provide socially-defined objectives. Importantly, then, Hellowell and Vecchi ask a simple question: why would a public authority agree to sign a contract at a price which is unaffordable? Based on English and Italian evidence, they find that there is strategic behaviour by government employees during the appraisal process which focuses on whether the government agency has the capacity to pay the forecast price. In particular, they highlight the over-indexation of payments (where the proportion of the payment indexed to inflation is larger than the inflation-sensitive element of the operator’s costs – enabling private sector bidders to offer a lower initial price, and recoup payments later in the contract period). Such behaviour may promote managerial utility (e.g. the career objectives of local politicians and bureaucrats), but is unlikely to serve the public interest.

Several themes arise through this collection of articles. Differing definitions of PPPs clearly exist with distinct legal environments and policy contexts in different jurisdictions. Vastly different arrangements for financing and risk sharing exist. Perhaps most importantly, there are significant cross-national differences in institutional arrangements and the extent of public accountability. This collection emphasizes that PPP scholars need to consider carefully the institutional arrangements in each region or state and should drill down to understand the incentives faced by individual players (see also van den Hurk et al. 2015). Policy makers should understand the incentives of individuals during the negotiation phase as well as during the post-contractual stage.

Another theme from this collection is that accurate, relevant data on PPPs are often hard for researchers to obtain. Particular problems arise with obtaining performance and cost data as well as institutional arrangements. The lack of such data limits our ability to draw cross-national policy lessons. It also opens up the opportunity for lazy advocates or critics to cherry-pick PPP successes or failures and hold them up in support of their opinions.

Another theme is the existence of multiple stakeholders with multiple objectives that shift over time. Whilst this phenomenon has been noted previously (Hodge 2010), it is nonetheless salient to see new empirical evidence coming to the fore illustrating the inherently political nature of PPP projects around the globe and the importance of a political economy perspective (Boardman and Vining 2012). A continuing theme from past research is the contrast between the sophisticated theorizing and formal number crunching calculus on the potential advantages expected from PPPs and the actual reality of poorly calibrated economic and financial models and the visible lack of reliable VfM findings as well as other crucial performance information. These observations occur in the midst of the continuing political attractiveness of PPPs as a policy option and evidence-based suggestions that strategic misrepresentation continues with privately funded PPP projects, contrary to current mythology. All of this suggests that PPPs will remain a major challenge for scholars and public servants alike. And whilst these five articles extend previous work and provide exciting new results and insights, there is equally no doubt that wide debate around the worth and value of PPPs will continue. In this light, there is much research still to be done.

Acknowledgement

We would like to thank the reviewers of the submitted articles.

Additional information

Funding

We would like to thank the Social Sciences and Humanities Research Council of Canada [grant number 646-2012-0305], which provided funds for a Conference on Public–Private Partnerships held at the University of British Columbia, June 2013. The articles in this special issue were initially presented at this conference. We would also like to thank the Sauder–CBS Partnership fund for its support of some participants at this conference and of the International PPP Scholars Network.

Notes on contributors

Anthony E. Boardman

Anthony Boardman is the Van Dusen Professor of Business Administration in the Sauder School of Business at the University of British Columbia. His research interests include public–private partnerships, privatization and cost–benefit analysis.

Carsten Greve

Carsten Greve is Professor of Public Management and Governance in the Department of Business and Politics at Copenhagen Business School and Academic Director of the CBS Public–Private Platform. His research interests are public–private partnerships and public management reform.

Graeme A. Hodge

Graeme Hodge is a Professor of Law at Monash University, Australia. He attributes his research interests of P3s, privatization, regulation and public policy to an enduring sense of humour and continuing administrative errors.